JIMMA UNIVERSITY

CONTINUING AND DISTANCE EDUCATION

STRATEGIC MANAGEMENT (MGMT 462)

A DISTANCE EDUCATION MODULE

Prepared By:

CHALCHISSA AMENTIE (Ph.D)

Edited by:
zerihun ayenew birbirsa (Ph.D)

NOVEMBER/2018

JIMMA, ETHIOPIA

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 Module Introduction
Dear student, first and for most you are warmly welcome to the course ‘strategic
management’. This module tries to look into the different aspects of strategic management
and its process. When we talk about the functions of management, we find that strategy is
only one of the functions of management but is also one of the most significant areas of
decision-making in any organization. All the management functions, therefore, depend on
strategic management. In short it can be said that strategic management is an art as well as
science of formulating, implementing and evaluating the decisions so as to enable the
organization to achieve its goals.

There are forces of different kinds and complexities, which influence organizations and
their business. The basic aim of strategic management is that a manager must adjust
strategies to reflect the environment in which the business operates. This is understood by
considering the various layers of influence ranging from macro influence to specific forces
affecting completion.

This module consists of eight units with respective sections and subsections. The first unit
will introduce you to the concepts of strategy. In this unit, you will learn the meaning,
model of strategic management, business ethics, nature and essence of strategy. The second
unit deals with the different types of strategy and Porter’s three generic strategy. Unit three
discusses in detail the different aspects of strategic intent, which includes vision, mission
and business objectives. Unit four and five focuses on environmental analysis which helps
you to understand the environmental (both internal and external) factors affecting
organization’s strategy . Unit six will present the strategic analysis and choices based on
the environmental analysis. In this unit, the portfolio analysis of the organization and the
choice of strategy based on the portfolio analysis is described. Unit seven deals with
strategic implementation in which the evaluation of structural dimension is made.
Likewise, the final unit will discuss issues in strategic evaluation and control.

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Unit- One: The Nature of Strategic Management
UNIT OBJECTIVES

After reading this unit, you will be able to:

Define strategy and understand its meaning
Explain the Concepts of Strategy in Different Terms
Describe the Stages of Strategic Management
Understand Key Terms in Strategic Management
Discuss the Essence and Benefits of Strategic Management
Know Business Ethics and Strategic Management in Terms Organizational
Context

Unit Introduction
A typical dictionary will define the word strategy as something that has to do with war and
deception of an enemy. In business organizational context the term is not much different.
Businesses have to respond to a dynamic and often hostile environment for pursuit of their
mission. Strategy seeks to relate the goals of the organization to the means of achieving
them. A company’s strategy is the game plan management is using to stake out market
position, conduct its operations, attract and please customers, compete successfully, and
achieve organizational objectives. Strategy is consciously considered and flexibly designed
scheme of corporate intent and action to achieve effectiveness, to mobilize resources, to
direct effort and behavior, to handle events and problems, to perceive and utilize
opportunities, and to meet challenges and threats to corporate survival and success. In
corporate strategy, the set of goals has a system of priorities; the combination, the sequence
and the timing of the moves, means and approaches are determined in advance, the
initiative and responses have a cogent rationale behind them, are highly integrated and
pragmatic; the implications of decisions and action programmes are corporate wide,
flexible and contingent. Hence this unit deals with concepts of management, stages of
strategic management, essence of strategy, benefit of strategic management, and business
ethics and strategic management.

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1.1 Concepts of Strategy

Pretest
Dear student! What does strategic management mean? Would you define strategy
before going through the unit?

Well! A company’s strategy consists of the combination of competitive moves and

business approaches that managers employ to please customers compete successfully and
achieve organizational objectives. We may define ‘strategy’ as a long range blueprint of
an organization's desired image, direction and destination what it wants to be, what it wants
to do and where it wants to go. The top management of an organization is concerned with
selection of a course of action from among different alternatives to meet the organizational
objectives. The process by which objectives are formulated and achieved is known as a
strategic management and strategy acts as the means to achieve the objective.

Strategy is the grand design or an overall ‘plan’ which an organization chooses in order
to move or react towards the set of objectives by using its resource. It is the pathway along
which the organizations move towards its objectives.

What Is Strategic Management?

Strategic Management can be defined as “the art and science of formulating,

implementing and evaluating cross-functional decisions that enable an organization to
achieve its objective.”

Definitions:
“The on-going process of formulating, implementing and controlling broad plans
guide the organizational in achieving the strategic goods given its internal and external
environment”.

Interpretation

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 1. On-going process:
Strategic management is a on-going process which is in existence throughout the life of
organization.
2. Shaping broad plans:
First, it is an on-going process in which broad plans are firstly formulated than
implementing and finally controlled.
3. Strategic goals:
Strategic goals are those which are set by top management. The broad plans are made in
achieving the goals.
4. Internal and external environment:
Internal and external environment generally set the goals. Simply external
environment forced internal environment to set the goals and guide them that how to
achieve the goals.

It is the process of specifying the organization’s objectives, developing policies, and plan
to achieve these objectives, and allocating resources to implement the policies and plans to
achieve the organization’s objectives.

Strategic management –A route to success

The study of strategic management integrates different topics. Different courses are
integrated due to the study of this course so that businesses become successful in every
sector. It integrates the following:
 Marketing
 Management
 production/operations
 Finance
 Research and development and
 Computer information systems to achieve organizational success.
The management and marketing are essential part of a business sectors. They should be
integrated. Just like other sections of the business are integrated under this study. This
term is mostly used by academia but this is also used in media.
History of strategic management:
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 This course develops in 1950’s. Due to the detailed planning of the business
circumstances, the importance of this increased rapidly.
In 1960; s and 70 it was considering to be panacea for problems. But in 1980’s two
important revolutions occur in business world.
1) Computers
2) Mobiles
The invention of these things has decreased the importance of strategic management.
But at the end of 1980, the business involves in computers and mobiles business
realized that they still need to adopt the policies for strategic management.
1. In early time the management takes institution decisions. But now the management
has to take decision by a specific process.
2. Organizational layers become more complex now a days and management divided
into layers.
3. Environment change also evaluates the strategic management.

Strategy is meant to fill in the need of organizations for a sense of dynamic direction, focus
and cohesiveness. Objectives and goals alone do not fill in the need. Strategy provides an
integrated framework for the top management to search for, evaluate and exploit beneficial
opportunities, to perceive and meet potential threats and crises, to make full use of
resources and strengths, to offset corporate weaknesses and to make major decisions in
general.

Managers at all companies face three basic critical questions in thinking strategically about
their company’s present circumstances and prospects:-
Where are we now? Must consider the company’s market position and the competitive
pressures it confronts, its resources strengths and capabilities, its competitive
shortcomings, the appeal its products and services have to customers, and its current
performance.
Where do we want to go? Deals with the direction of in which management believes the
company should be headed in light of the company’s present situation and the winds of
market change – new markets and customer groups that the company should be adding, the

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improvements in competitive market position the company is aiming for, and the
geographic scope and product line makeup of the company’s business in the years to come.
How will we get there? Concerns the ins and outs of crafting and executing a strategy to
get the company from where it is to where it wants to go.
An organization is considered efficient and operationally effective if it is characterized by
coordination between objectives and strategies. “Without strategy, the organization is like
a ship without a rudder.” It is like a tramp, which has no particular destination to go to.
Without an appropriate strategy effectively formulated and implemented, the future is
always dark and hence, more are the chances of business failure.
According to Glueck, “strategy is the unified, comprehensive and integrated plan that
relates the strategic advantage of the firm to the challenges of the environment and is
designed to ensure that basic objectives of the enterprise are achieved through proper
implementation process.”
According to Michael Porter strategy is “Creation of a unique and valued position
involving a different set of activities.’ The company that is strategically positioned
performs different activities from rivals or performs similar activities in different ways.”
However, strategy is no substitute for sound, alert and responsible management. Strategy
can never be perfect, flawless and optimal. It is in the very nature of strategy that it is
flexible and pragmatic; it is art of the possible; it does not preclude second-best choices,
trade-offs, sudden emergencies, pervasive pressures, failures and frustrations. However, in
a sound strategy, allowances are made for possible miscalculations and unanticipated
events.

1.2 Stages of Strategic Management

Pretest
Dear student! Would you describe the stages of strategic management?

Well! The strategic management process consists of three stages:

Strategic Formulation: includes developing a business mission, identifying an
organization’s external opportunities and threats, determining internal strengths and
weaknesses, establishing long-term objectives, generating alternatives strategies, and

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choosing particular strategies to pursue. Strategic-formulation issues include deciding what
new business to enter, what business to abandon, how to allocate resources, whether to
expand operations or diversify, whether to enter international markets, whether to merge
or form a joint venture, and how to avoid a hostile takeover. Since no organization has
unlimited resources, strategists must decide which alternative strategies will benefit the
firm most.

Strategy Implementation: requires a firm to establish annual objectives, devise policies,

motivate employees, and allocate resources so that formulated strategies can be executed;
strategy implementation includes developing a strategy supportive culture, creating an
effective organizational structure, redirecting marketing efforts, preparing budgets,
developing and utilizing information systems, and linking employee compensation to
organization to organizational performance. Implementing means mobilizing employees
and managers to put formulated strategies into action. It is often considered to the most
difficult stage in management, it requires personal discipline, commitment, and sacrifice.
The challenge of implementation is to stimulate managers and employee’s through-out an
organization to work with pride and enthusiasm toward achieving stated objectives.
Strategy Evaluation: is the final stage in strategic management. Managers desperately
need to know when particular strategies are not working well. All strategies are subject to
future modification because external and internal factors are constantly changing. Three
fundamental strategy evaluation activities are (1) reviewing external and internal factors
that are the bases for current strategies, (2) measuring performance, and (3) taking
corrective actions.
1.3 Key Terms in Strategic Management
The following are some of the critical key terms in strategic management:
1. Strategists :are individuals who are most responsible for the success or failure of an
organization. Strategists are individuals who form strategies. Strategists have various job
titles, such as chief executive officer, president, and owner, chair of the board, executive
director, chancellor, dean, or entrepreneur.
Strategists help an organization gather, analyze, and organize information. They track
industry and competitive trends, develop forecasting models and scenario analyses,

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 evaluate corporate and divisional performance, spot emerging market opportunities,
identify business threats, and develop creative action plans. Strategic planners usually
serve in a support or staff role. Usually found in higher levels of management, they
typically have considerable authority for decision making in the firm. The CEO is the
most visible and critical strategic manager. Any manager who has responsibility for a
unit or division, responsibility for profit and loss outcomes, or direct authority over
a major piece of the business is a strategic manager (strategist).

Strategists differ as much as organizations themselves and these differences must be

considered in the formulation, implementation, and evaluation of strategies. Some
strategists will not consider some types of strategies because of their personal
philosophies. Strategists differ in their attitudes, values, ethics, willingness to take
risks, concern for social responsibility, concern for profitability, concern for short-run
versus long-run aims and management style.

2. Mission Statements: are “enduring statements of purpose that distinguish one business
from other similar firms. A mission statement identifies the scope a firms operations in
product and market terms”. “What is our business?” a clear mission statement describes
the values and priorities of an organization.
3. External Opportunities and Threats: refers to economic, social, cultural,
demographic, environmental, political, legal, governmental, technological, and
competitive trends and events that could significantly benefit or harm an organization in
the future. It is largely beyond the control of a single organization.
4. Internal Strengths and Weaknesses: are controllable activities within an organization
that are performed especially well or poorly. The process of identifying and evaluating
organizational strengths and weaknesses in the functional areas of a business is an essential
strategic management activity. Organizations strive to pursue strategies that capitalize on
internal strengths and improve on internal weaknesses.
5. Long-term (more than one year) objectives: Are specific results that an organization
seeks to achieve in pursuing its basic mission. Objectives are essential for organizational
success because they provide direction, aid in evaluation, create synergy, reveal priorities,
allow coordination, and provide a basis for effective planning, organizing, motivating, and

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controlling activities. It should be challenging, measurable, consistent, reasonable, and
clear.
6. Strategies: are the means by which long-term objectives will be achieved. Business
strategies may include geographical expansion, diversification, acquisition, product
development, market penetration…
7. Annual Objectives: are short-term milestones that organizations must achieve to reach
long-term objectives. It should be stated in terms of functional areas and is important in
strategy implementation while long-term objectives are particularly important in strategy
formulation.
8. Policies: is the means by which annual objectives will be achieved. It includes
guidelines, rules, and procedures established to support efforts to achieve stated objectives.
It is guide to decision making and stated in terms of functional areas.

1.4 The Strategic Management Model

The strategic management process can best be studied and applied using a model. Every
model represents some kind of process. The model illustrated in the Figure: Strategic
management model is a widely accepted, comprehensive model. This model like any other
modal of management does not guarantee sure-shot success, but it does represent a clear
and practical approach for formulating, implementing, and evaluating strategies.
Relationships among major components of the strategic management process are shown in
the model.
Identifying an organization's existing vision, mission, objectives, and strategies is the
starting point for any strategic management process because an organization present
situation and condition may preclude certain strategies and may even dictate a particular
course of action. Every organization has a vision, mission, objectives, and strategy, even if
these elements are not consciously designed, written, or communicated. The answer to
where an organization is going can be determined largely by where the organization has
been.
The strategic management process is dynamic and continuous. A change in any one of the
major components in the model can necessitate a change in any or all of the other
components. For instance, a shift in the economy could represent a major opportunity and

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require a change in long-term objectives and strategies; a failure to accomplish annual
objectives could require a change in policy; or a major competitor's change in strategy
could require a change in the firm's mission. Therefore, strategy formulation,
implementation, and evaluation activities should be performed on a continual basis, not
just at the end of the year or semi-annually. The strategic management process never really
ends.
Feedback

Perform
External
Audit

Develop Establish Generate Establish Allocate Measure &

Mission Long-term Evaluate, Policies & Resources evaluate
Statement Objectives & Select Annual Performance
Strategies Objectives
Perform
Internal
Audit

Strategy Formulation Strategy Implementation Strategy

Evaluation

Fig. 1.1. A comprehensive Strategic Management Model

The strategic management process is not as cleanly divided and neatly performed in practice as the
strategic management model suggests. Strategists do not go through the process in lockstep fashion.
Generally, there is give-and-take among hierarchical levels of an organization. Many organizations
conduct formal meetings semi-annually to discuss and update the firm's vision/mission,
opportunities/threats, strengths/weaknesses, strategies, objectives, policies, and performance.
Creativity and honesty from participants are encouraged in meeting. Good communication
and feedback are needed throughout the strategic management process.
Application of the strategic management process is typically more formal in larger and
well-established organizations. Formality refers to the extent that participants,
responsibilities, authority, duties, and approach are specified. Smaller businesses tend to
be less formal. Firms that compete in complex, rapidly changing environments, such as

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technology companies, tend to be more formal in strategic planning. Firms that have many
divisions, products, markets, and technologies also tend to be more formal in applying
strategic-management concepts. Greater formality in applying the strategic management
process is usually positively associated with the cost, comprehensiveness, accuracy, and
success of planning across all types and sizes of organizations.

1.5 Essence of Strategy

Pretest
Dear student! What is the essence of strategy? Could you mention the important
element of the strategic essence?

Well! The major essences of corporate strategy are purpose and objectives, vector,
competitive advantage, synergy, personal values and aspirations and social obligations.
1. Purpose: - Ansoff has used the term “common thread” for the purpose. According to
him, the common thread is a statement of relationship between present and future product
market postures.
2. Objectives: - corporate objectives should be stated in such a way so that they may provide
a clear idea about the scope of the enterprise’s business. Strategy is future oriented and
therefore concerned with the objectives which have long term perspective. For having
clarity in objectives, the business domain is defined specifically in terms of a product class,
technology, customer group, market need or some other combination.
3. Vector: - Vector gives the directions within an industry and across industry boundaries
which the firm proposes to pursue. If an organization has the objective to maximize sales,
the series of decisions will be to enhance salesmen commission, release nationwide
advertisement, introduce total quality management and introduce new product range.
Vector signifies that a series of decisions are taken in the same direction to accomplish the
objectives.
4. Competitive Advantage: - corporate strategy is relative by nature. In the formulation of
corporate strategy, the management should isolate unique features of the organization. The
steps to be taken must be competitively superior. While making plans, competitors may be

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ignored. However, when we formulate corporate strategies, we can not ignore competitors.
If an organization does not look at competitive advantage, it can not survive in a dynamic
environment. This aspect builds internal strength of the organization, and enhances the
quality of corporate strategy
5. Synergy: - Synergy means measurement of the firm’s capability to take advantage of a
new product market move. If decisions are made in the same direction to accomplish the
objectives there will be synergic impacts.
Self-Test Exercise
Activity 1.1
1. Discuss the concept of strategy in your own terms.
2. What are the stages of strategic management?
3. What are the major essences of corporate strategy? Briefly describe each elements
of the essence of strategy

1.6. Benefits of Strategy

Pretest
Dear student! Would you describe the benefits of strategy?

Well! Strategic management allows an organization to be more proactive than reactive in

shaping its own future; it allows an organization to initiate and influence (rather than just
responding to) activities, and thus to exert control over its own destiny. With the increase
in the pressure of external threats, companies have to make clear strategies and implement
them effectively so as to survive. There have been companies that have completely become
extinct and some companies which did not exist before they became the market leaders.
The basic factor responsible for differentiation has not been governmental policies,
infrastructure, or labor relations but the type of strategic thinking that different companies
have shown in conducting the business. Strategy provides various benefits to its users:
 Strategy helps an organization to take decisions on long range forecasts. Corporate
strategy is a powerful tool to management to deal with the future, which is
uncertain and hazy in all respects. With the help of strategy, the management
becomes flexible to meet unanticipated changes.

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  It allows the firm to deal with a new trend and meet competition in an effective
manner. Corporate strategy improves the capability of management in coping with
the volatile external environmental forces.
 Efficient strategy formulation and implementation result into financial benefits to
the organization in the form of increased profits. It rationalizes allocation of scarce
resources. So organizational effectiveness is insured with effective implementation
and evaluation of the strategy.
 Corporate strategy motivates employees, for example, to shape their work in the
context of shared corporate goals. It also encourages the management to choose
the best course of action to realize the objectives.
 Strategy provides focus in terms of organizational objectives and thus provides
clarity of direction for achieving the objectives. It provides an objective basis for
measuring performance.
 Strategy formulation and implementation gives an opportunity to the management
to involve different levels of management in the process. It gets managers into the
habit of thinking and thus makes them, proactive and more conscious of their
environment.
 It provides a cooperative, integrated, and enthusiastic approach to tackling
problems and opportunities.

Strategic management provides the framework for all the major business decisions of an
enterprise such as decisions on businesses, products and markets, manufacturing facilities,
investments and organizational structure. In a successful corporation, strategic planning
works as the pathfinder to various business opportunities; simultaneously, it also serves as
a corporate defense mechanism, helping the firm avoid costly mistakes in product market
choices or investments. Strategic management has the ultimate burden of providing a
business organization with certain core competencies and competitive advantages in its
fight for survival and growth. It is not just a matter of projecting the future. It is not just a
forecasting job; it is concerned with ensuring a good future for the firm. It seeks to prepare
the corporation to face the future and even shape the future in its favor. Its ultimate burden
is influencing the environmental forces in its favor, working into the environs and shaping

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it, instead of getting carried away by its turbulence or uncertainties. It is environmental
uncertainty that makes strategy and strategic conduct essential in a business. The more
intense the environmental uncertainty, more critical is the need for strategic management.
Quite naturally, considerable thought, expertise and effort goes into the process of strategic
management. The success of the efforts and activities of the enterprise depends heavily on
the quality of strategic management, i.e. the vision, insight, experience, quality of judgment
and the perfection of methods and measures.

Benefits of strategic management

Following are the major benefits of Strategic management:

 Proactive in shaping firm’s future
 Initiate and influence actions
 Formulate better strategies (Systematic, logical, rational approach)
Financial benefits:
 Improved productivity
 Improved sales
 Improved profitability
Financial Benefits
Research indicates that organizations using strategic-management concepts are more
profitable and successful than those that do not. Businesses using strategic-management
concepts show significant improvement in sales, profitability, and productivity
compared to firms without systematic planning activities. High-performing firms tend
to do systematic planning to prepare for future fluctuations in their external and internal
environments. Firms with planning systems more closely resembling strategic-
management theory generally exhibit superior long-term financial performance relative to
their industry. High-performing firms seem to make more informed decisions with good
anticipation of both short- and long-term consequences. On the other hand, firms that
perform poorly often engage in activities that are shortsighted and do not reflect good
forecasting of future conditions. Strategists of low performing organizations are often
preoccupied with solving internal problems and meeting paperwork deadlines. They
typically underestimate their competitors' strengths and overestimate their own firm's

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strengths. They often attribute weak performance to uncontrollable factors such as poor
economy, technological change, or foreign competition.

Non-Financial benefits:
 Increased employee productivity
 Improved understanding of competitors’ strategies
 Greater awareness of external threats
 Understanding of performance reward relationships
 Better problem-avoidance
 Lesser resistance to change
Besides helping firms avoid financial demise, strategic management offers other tangible
benefits, such as an enhanced awareness of external threats, an improved
understanding of competitors' strategies, increased employee productivity, reduced
resistance to change, and a clearer understanding of performance-reward relationships.
Strategic management enhances the problem-prevention capabilities of organizations
because it promotes interaction among manager’s at all divisional and functional levels.
Interaction can enable firms to turn on their managers and employees by nurturing them,
sharing organizational objectives with them, empowering them to help improve the
product or service, and recognizing their contributions.

In addition to empowering managers and employees, strategic management often

brings order and discipline to an otherwise floundering firm. It can be the beginning
of an efficient and effective managerial system. Strategic management may renew
confidence in the current business strategy or point to the need for corrective actions.
The strategic-management process provides a basis for identifying and rationalizing the
need for change to all managers and employees of a firm; it helps them view change as
an opportunity rather than a threat.

Generally stated that strategic management offers the following benefits

1. It allows for identification, prioritization, and exploitation of opportunities.
2. It provides an objective view of management problems.

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 3. It represents a framework for improved coordination and control of activities.
4. It minimizes the effects of adverse conditions and changes.
5. It allows major decisions to better support established objectives.
6. It allows more effective allocation of time and resources to identified
opportunities.
7. It allows fewer resources and less time to be devoted to correcting erroneous or
ad hoc decisions.
8. It creates a framework for internal communication among personnel.
9. It helps integrate the behavior of individuals into a total effort.
10. It provides a basis for clarifying individual responsibilities.
11. It encourages forward thinking.
12. It provides a cooperative, integrated, and enthusiastic approach to tackling
problems and opportunities.
13. It encourages a favorable attitude toward change.
14. It gives a degree of discipline and formality to the management of a business.

Why some firms do not engage in strategic planning?

Some firms do not engage in strategic planning and some firms do strategic planning but receive
no support from managers and employees. Some reasons for poor or no strategic planning are as
follows:
1. Poor Reward Structures—when an organization assumes success, it often fails to
reward success. Where failure occurs, then the firm may punish. In this situation, it is
better for an individual to do nothing (and not draw attention) than risk trying to achieve
something, fail, and be punished.

2. Fire-fighting—an organization can be so deeply embroiled in crisis

management and fire-fighting that it does not have time to plan.
3. Waste of Time—some firms see planning as a waste of time since no
marketable product is produced. Time spent on planning is an investment.
4. Too Expensive—some organizations are culturally opposed to spending resources.
5. Laziness—People may not want to put forth the effort needed to formulate a plan.

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 6. Content with Success—particularly if a firm is successful, individuals may feel
there is no need to plan because things are fine as they stand. But success today does
not guarantee success tomorrow.
7. Fear of Failure—by not taking action, there is little risk of failure unless a
problem is urgent and pressing. Whenever something worthwhile is attempted, there
is some risk of failure.
8. Overconfidence—as individuals amass experience, they may rely less on
formalized planning. Rarely, however, is this appropriate. Being overconfident or
overestimating experience can bring demise. Forethought is rarely wasted and is often
the mark of professionalism.
9. Prior Bad Experience—People may have had a previous bad experience with
planning, where plans have been long, cumbersome, impractical, or inflexible.
Planning, like anything, can be done badly.
10. Self-Interest—when someone has achieved status, privilege, or self-esteem
through effectively using an old system, they often see a new plan as a threat.
11. Fear of the Unknown—People may be uncertain of their abilities to learn new
skills, their aptitude with new systems, or their ability to take on new roles.
12. Honest Difference of Opinion—People may sincerely believe the plan is wrong.
They may view the situation from a different viewpoint, or may have aspirations for
themselves or the organization that are different from the plan. Different people in
different jobs have different perceptions of a situation.
13. Suspicion—Employees may not trust management.

1.7 Business Ethics and Strategy

Pretest
Dear student! What does business ethics mean? Would you mention some of the
ethical act of the organization?

Well! Every business has an ethical duty to each of its associates namely, owners, or
stockholders, employees, customers, suppliers and the community at large. Business is a
cooperative activity whose very existence requires ethical behavior. Business ethics is

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applied ethics. It is an application of our understanding of what is good and right to that
assortment of institutions, technologies, transactions, activities and pursuits that we call
business. Strategy means merely that over the long run and for most of the part, ethical
behavior can give a company significant competitive advantages over companies that are
not ethical.
Business ethics can be defined as principles of conduct within organizations that guide
decision-making-and-behavior.
Good business ethics is a prerequisite for good strategic management; good ethics is just
good business.

Corporate social responsibility is generally seen as the business contribution to sustainable

development which has been defined as “development that meets the present needs without
compromising the ability of future generations to meet their own needs”, and is generally
understood as focusing on how to achieve the integration of economic, environmental, and
social imperatives. Today it is generally accepted that business firms have social
responsibilities that extend well beyond what in the past was commonly referred to simply
as the ‘business economic function.’ In earlier times managers in most cases had only to
concern themselves with the economic results of their decisions. Today, managers must
also consider and weigh the legal, ethical, moral and social impact of each of their decision.
Stakeholders and Ethics
Organization has moral duties and morally responsible for its acts to stakeholders.
 A company’s duty to employees arises out of respect for the worth and dignity of
individuals who devote their energies to the business and who depend on the
business for their economic well being. Principled strategy making requires that
employee related decisions be made equitably and compassionately with concern
for due process and for the impact that strategic change has on employee’s lives.
At best the chosen strategy should promote employee interests and concerns such
as compensation, career opportunities, job security and overall working conditions.
At worst the chosen strategy should not disadvantage employees. Even in crisis
situations, businesses have an ethical duty to minimize whatever hardship have to
be imposed in the form of workforce reductions, plant closing, job transfers,
relocations, retraining and loss of income.
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  The duty to the customer arises out of expectations that attend the purchase of a
good /services. However, the question which still about are should a seller
voluntarily inform consumers that its products contain ingredients that though
officially approved for use are suspected of having potentially harmful effect? Is it
ethical for cigarette manufacturers to advertise at all?
 A company’s ethical duty to suppliers arises out of the market relationship that
exists between them. They are both partners b/c the quality of suppliers’ affects the
quality of a firm’s own product and in the sense that their business is connected.
they are adversaries in the sense that the suppliers wants the highest price and profit
it can get while the buyer wants a cheaper price, better quality and speeder service.
A company confronts several ethical issues in its supplies relationship. “Is it ethical
to threaten to cease doing business with a supplier unless supplier agrees not to do
business with key competitors?
 A company’s ethical duty to the community at large stems from its status as a
member of the community and as an institution of society. Communities and society
are reasonable in expecting businesses to be good citizens- to pay their fair share of
taxes, for fire, and police protection, waste removal, streets and high ways and so
on, and to exercise care in the impact their activities have on their environment, on
society, and on the communities in which they operate. E.g. advertisement.

1.8. Important Concepts which are related to Strategy

Strategy Vs Policy
Business policy, as defined by Christensen and others, is "the study of the functions and
responsibilities of senior management, the crucial problems that affect success in the total
enterprise, and the decisions that determine the direction of the organization and shape its
future. The problems of policy in business, like those of policy in public affairs, have to do
with the choice of purposes, the molding of organizational identity and character, the
continuous definition of what needs to be done, and the mobilization of resources for the
attainment of goals in the face of competition or adverse circumstance.
Business Policy tends to emphasize on the rational-analytical aspect of strategic
management. It presents a framework for understanding strategic decision making. Such a

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framework enables a person to make preparations for handling general management
responsibilities.
Corporate policy is the guide post decision making. It helps in the managerial thinking
process and thus leads to the efficient and effective attainment of the objectives of any
organization. It is often defined as “management’s expressed or implied intent to govern
action in the pursuit of the company’s objectives.” Corporate policy clarifies the intention
of management in dealing with the various problems faced. It gives the managers a
transparent guideline to take their decisions by being on the safe side. It helps the manager
in identification of the solution to the problem. I.e. it provides the framework in which he
has to take the decisions. There are different views regarding policies:
i) The first category holds the opinion that policy and Strategy are often been used as a
synonymous. William Glueck supports this by defining “management policy is long-range
planning. For all practical purposes management policy, long-range planning and
strategic management mean the same thing.” However, this view is quite controversial as
strategy and corporate policy do not mean the same thing. Strategies are concerned with
the direction in which human and physical resources are deployed and applied in order to
maximize the chances of achieving organizational objectives in the face of environmental
variable. It includes awareness of the mission, purposes, and objectives. It has been defined
as, “the determination of basic long term goals and objectives of an enterprise, and the
allocation of resources necessary to carry out these goals,” while policies are statements or
a commonly accepted understandings of decision making (contingent decision) and are
thought oriented guidelines. Therefore, strategy (a rule for making decision) and corporate
policy cannot be used interchangeably.
ii) The second group of experts views corporate policy as the process of implementing
strategy. In the words of Frank I. Paine and William Naumes, “policies guide and channel
the implementation of strategy and prescribe how processes within the organization will
function and be administered. Thus, the term policy refers to organization procedures,
practices and structures, concerned with implementing and executing strategy.”
However, this view also has limitation in that:-
 It is restrictive
 It laid stress only on the tactical side and ignoring the strategic dimension.

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iii) The third view considers corporate policy to be decisions regarding the future of an
organization. In this view, Robert. J. mockler defines corporate policy as “strategic
guidelines for action. They spell out what can and what can not be done in all areas of a
company’s operation.”
The view of different management scholars differ b/c of following reasons:
 There is no clear differentiation of policy from other elements of planning
 There are different policies made at different levels of management for directing
executives.
 Corporate policy encompasses and relates to the entire process of planning
Thus, for our study purpose, corporate policy focuses on the guidelines used for decision
making and putting them into actions. It consists of principles along with rules of action
that provides for successful achievement of corporate objectives.
Strategy Vs Tactics
Strategies are on one end of the organizational decisions spectrum while tactics lie on the
other end. A few point of distinction between the two are:-
i. Strategy determines the major plans to be undertaken while tactics is the means
by which previously determined plans are executed.
ii. Tactical decisions can be delegated to all the levels of an organization while
strategic decisions can not be delegated too low in the organization. The
authority is not delegated below the levels than those which possess the
perspective required for taking decisions effectively.
iii. Strategy has a long term perspective and occasionally it may have short term
duration. Thus, the time horizon in terms of strategy is flexible but in case of
tactics, it is short run and definite.
iv. The decisions taken as part of strategy formulation and implementation have a
high element of uncertainty and are taken under the conditions of partial
ignorance. In contrast tactical decisions are more certain as they work upon the
framework set by the strategy. So the evaluation of strategy is difficult than the
evaluation of tactics.

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 v. Since an attempt is made in strategy to relate the organization with its
environment, the requirement of information is more than that required in
tactics. Tactics use information available internally in an organization.
vi. The formulation of strategy is affected considerably by the personal values of
the person involved in the process but the same is not the case in tactics
implementation.
vii. Strategies are the most important factors of organization because they decide
the future course of action for organization as a whole. On the other hand tactics
are of less importance b/c they are concerned with specific part of the
organization.
Strategy Vs Programmes, Procedure and Rules
A programme is a single use comprehensive plan laying down the principal steps for
accomplishing specific objectives and sets an approximate time limit for each stage. It is
basically concerned with providing answers to questions like: By whom will the actions be
taken up? When will the actions be taken? Where will the actions be taken? It is guided
by organization’s objectives and strategies and covers many of the other types of plans.
Procedure can be defined as “A series of functions or steps performed to accomplish a
specific task or undertaking.” A procedure is a precise means of making a step by step
guide to action that operates within a policy framework. Most companies have hundreds of
procedures like selection, promotion, transfer …etc.
Procedures are more rigid and allow no freedom as against strategies which are flexible
and are not concerned with fixed steps.
Rule is principle to which an action or a procedure conforms or is intended to conform. It
is a standard or a norm to be followed in the conduct of a business in a particular situation.
It is more rigid and demands a specific action with respect to particular situation. It does
not mention any kind of time estimate or sequence as in the case of procedures. It is much
more specific than a policy. It allows no liberty or leniency and does not tolerate much
deviation. Rules have to be strictly followed and non compliance may entail penalty or
punishment. E.g. “No smoking” is a rule which has to be adhered to, by all the levels of
management.

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Self-Test Exercise Activity 1.2
1. Define strategic management.
2. What are the benefits of strategy?
3. Discuss strategy vs tactics
4. Discuss the corporate social responsibility and discuss the central theme of the
business ethics

Unit summary
Strategy seeks to relate the goals of the organization to the means of achieving them. A
company’s strategy is the game plan management is using to stake out market position,
conduct its operations, attract and please customers, compete successfully, and achieve
organizational objectives. Strategy is consciously considered and flexibly designed scheme
of corporate intent and action to achieve effectiveness, to mobilize resources, to direct
effort and behavior, to handle events and problems, to perceive and utilize opportunities,
and to meet challenges and threats to corporate survival and success. The major essences
of corporate strategy are purpose and objectives, vector, competitive advantage, synergy,
personal values and aspirations and social obligations. Every business has an ethical duty
to each of its associates namely, owners, or stockholders, employees, customers, suppliers
and the community at large. Business is a cooperative activity whose very existence
requires ethical behavior. Business ethics is applied ethics

Self-Test Exercise: Check Questions

Part I: choose the best answer for the following questions
1. What are stages 2, 3 and 4 of the outline strategy process?

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 A) Strategy selection; strategy implementation; strategic control
B) Deliberate strategy; emergent strategy; realized strategy.
C) Generate options; select strategy; implement strategy
D) Appraisal of strengths and weaknesses; choice of strategic direction; strategy
implementation
2. Strategic management allows an organization to be more
A) Complacent
B) Proactive
C) Authoritarian
D) Reactive
3. Which one of the following is the logical starting point for strategic management
A. mission B. objectives C. strategies D. all of the above E. none of the above
4._________ gives the direction with in an industry and across industry boundaries.
A. purpose B. objectives C. vector D. all of the above E. none of the above.
5. Strategic management provides framework for decisions on
A. products B. markets C manufacturing D. investments E. all of the above
6. Corporate social responsibility focuses on how to achieve the integration of
A. economic B. environmental C. social imperatives D. all of the above
7. Corporate policy is
A. the guide post decision making B. the one which leads to efficiency
C. the one which clarifies the intention of management
D. all the above
Part- II Say True if the statement is correct and False if it is incorrect
1. A company’s strategy consists of the combination of competitive moves.
2. Strategy is the unified comprehensive and integrated plan.
3. Strategy evaluation is the first stage in strategic management
4. External opportunities and threats are controllable activities.
5. Policy is the means by which annual objectives will be achieved.

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Unit- Two: Strategies in Action
UNIT OBJECTIVES

At the end of this unit the student will be able to:

Differentiate the different types of strategies

Describe guidelines for pursuing strategies
Explain Porter’s generic strategies
Discuss the pros and cons of generic strategies

Unit Introduction
Generally, the strategic planning process culminates in the formulation of corporate
strategy. The strength of the entire process of strategic planning is tested by the efficacy of
the strategy finally forged by the firm. The ultimate question is whether the strategy ironed
out is the appropriate one-whether it would take the firm to its objectives. There are
different alternative strategies that an enterprise could pursue and it can be categorized into
thirteen actions—forward integration, backward integration, horizontal integration, market
penetration, market development, product development, concentric diversification,
conglomerate diversification, horizontal diversification, joint venture, retrenchment,
divestiture, and liquidation—and a combination strategy. Each alternative strategy has
countless variations. For example, market penetration can include adding salespersons,
increasing advertising expenditures, coopering, and using similar actions to increase
market share in a given geographic area. Hence this unit deals with: the deferent types of
strategy including the four generic strategic alternatives, Guidelines for pursuing strategies
and Michael Porter’s generic strategies.

Strategies in Action:
Even if you’re on the right track, you’ll get run over if you just sit there.
-- Will Rogers
Hundreds of companies today embrace strategic planning because:
• Quest for higher revenues

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• Quest for higher profits
Many firms have to use strategic planning in order to earn revenues and more profits.

 Strategy-in-action is dynamic – a continuous, evolutionary process of aligning people

on a goal, getting and analyzing results, and connecting it all back to strategy
formulation. The outcomes of strategy implementation are fed back into the strategy
to galvanize further strategic action.
 This approach to strategy improves organizational vitality and performance. It
focuses on both present and future organizational health. Its goal is to optimize the
performance of the entire system.
 Strategy-in-action is versatile enough to work in various organizational settings, in
business as well as in societal contexts.
Strategy-in-action: Critical success factors
 If one single organ does not function properly, our entire body is in harm’s way.
Similarly, the success factors below work as a comprehensive package. Our experience
teaches us that managers cannot heed only some and discard others. No matter how
good a strategy, sustained success is impossible without juggling all success factors at
once – much like a master juggler who keeps all the plates in the air.
 Ongoing monitoring of all these success factors is critical in sustaining success.
Benchmarks and displays can be used to monitor them ongoingly, much like traditional
performance displays, and can serve as early-warning systems for leaders and managers
at multiple levels.

 Value. Leaders must always maximize value to customers and end-users,

shareholders, employees, and business.
 Catalyst. Leaders must generate change proactively, not merely react to change.
Commit to the strategic intent and to playing a catalytic, strategic role, while being
flexible about the means and pathways to achieving the strategic intent. Experiment
with catalytic projects at low cost and low risk. Use breakdowns as catalysts for
breakthroughs. No outcome is final: every outcome becomes a catalyst for further
initiatives.

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 Action. Leaders must use continuous feedback from operational successes and
failures to reshape the strategy. Strategy must be a dialectic evolution of strategy-
action-strategy-action-strategy.
 Leadership. Leaders must involve themselves in strategy, develop competencies
continuously in all fields and at all levels, and energize the organization toward goal
attainment. A change agent (an organizational leader) is in charge and may need to
change him- or herself to accomplish the needed change, while a change catalyst (an
outside expert or consultant) remains unchanged and therefore objective during the
process.
 Partnership. Leaders must maintain open communication and mutual trust between
themselves and implementers, between labor and management. Promptly address
rumors and fears in the organization.
 People. Leaders must unleash human – and often local or seemingly peripheral –
creativity and ingenuity. The structure must serve people’s strategy, not the other way
around.
 Ownership. Leaders must enable ownership of, and commitment to, the strategy by
all stakeholders. They must ensure continuous input to the strategy both top-down –
from senior executives – and bottom-up – from implementers and end-users. For
example, imagine a CEO who is expected to control the work done by a 7-level
hierarchical organization of some 4,000 employees. Assuming that each individual
has to filter out at least one-half of the information he or she reports, the CEO will
know less than 2 percent of the information available in the organization at any given
time. And who knows whether managers pass the right half of their information to
superiors?i Unless the CEO creates shared understanding and alignment, he or she
will make decisions in the dark. The fact that leaders are accountable for strategy
should not be belittled; but all must own it. Strategy is not for strategic planning
departments alone.
 Learning. Leaders must take risks and innovate. Celebrate successes, and address
failures as learning opportunities. Hold the track record as “so what.” Focus on
what is missing, on the obstacles, and on opportunities for integration.

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 Framework. Leaders must be sense-makers. Make sense of confusion by constantly
adjusting the strategic framework as new circumstances develop. Integrate the parts,
and work on the system as a whole.

2.1 Types of strategy

Pretest
Dear student! What are the different types of strategy? Would you list some of
them before going through the unit?
There are four generic ways in which strategic alternatives can be considered. These are
stability, expansion, retrenchment and combinations.

The different alternatives strategies can be broadly categorized into:

 Integration Strategies: such as forward, backward, vertical, horizontal, etc…

 Intensive Strategies: such as market penetration, market development, product

development, etc….

 Diversification Strategies: such as concentric diversification, horizontal

diversification, conglomerate diversification…..

 Defensive Strategies: such as joint venture, retrenchment, divestiture, liquidation,

combination….

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Vertical integration strategies: allow a firm to gain control over distributors, suppliers,
and/or competitors.
Forward integration strategy :refers to the transactions between the customers and
firm.
Horizontal integration: When the firm looks that other firm which may be taken over
within the area of its own activity

Market Penetration
 Is strategy seeks to increase market share for present products or services in present
markets through greater marketing efforts.
 includes increasing the number of salespersons, increasing advertising
expenditures, offering extensive sales promotion items, or increasing publicity
efforts
Market Development
 Introducing present products or services into new geographic area
Product Development
 a strategy that seeks increased sales by improving or modifying present
products or services
Innovation
 Introducing completely new product or service

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Diversification Strategies

Related diversification /Concentric Diversification

 Adding new, but related, products or services

Unrelated diversification/ Conglomerate Diversification

 Adding new, unrelated products or services

Horizontal Diversification

 Adding new, unrelated products or services for present customers

Retrenchment
 occurs when an organization regroups through cost and asset reduction to reverse
declining sales and profits
Divestiture
 Selling a division or part of an organization
 used to raise capital for further strategic acquisitions or investments.

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Liquidation
 Selling all of a company's assets, in parts, for their tangible worth
 recognition of defeat and, consequently, can be an emotionally difficult strategy

2.1.1 Stability strategies: One of the important goals of a business enterprise is stability −
to safeguard its existing interests and strengths, to pursue well established and tested
objectives, to continue in the chosen business path, to maintain operational efficiency on a
sustained basis, to consolidate the commanding position already reached, and to optimize
returns on the resources committed in the business.
The essence of stability strategy is, therefore, not doing anything but sustaining a moderate
growth in line within the existing trends. It is usually attained after rapid expansion. A firm
following stability strategy maintains its current business and product portfolios; maintains
the existing level of effort; and is satisfied with incremental growth. In other words, a firm
is said to follow stability/consolidation strategy if:
 It decides to serve the same markets with the same products
 It continues to pursue the objectives with a strategic thrust on incremental
improvement of functional performances
 It concentrates its resources in a narrow product-market sphere for developing a
meaningful competitive advantage.
Adopting a stability strategy does not mean that a firm lacks concern for business growth.
It is not a ‘do nothing’ strategy. It involves keeping track of new developments to ensure
that the strategy continues to make sense. This strategy is typical for mature business
organizations. Some small organizations will also frequently use stability as a strategic
focus to maintain comfortable market or profit position.
Since products, markets and functions remain unchanged, stability strategy is basically a
defensive strategy. Stability strategy is useful when:
i) The industry or the economy is in turmoil/confusion or the environment is volatile.
Uncertain conditions might convince strategies to be conservative until they became more
certain. I.e. when managers is not interested in taking risks by venturing into unknown
terrain/environment. Conservative managers believe product development, market

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development, or new ways of doing business entail great risk and therefore, avoid taking
decisions, which can endanger the company.
ii) Environmental instability is minimal and the firm does not forecast any major threat to
itself and the industry concerned as a whole.
iii) The organization just finished a period of rapid growth and needs to consolidate its
gains before pursuing more growth.
iv) The industry is in a mature stage with few or no growth prospects and the firm is
currently in a comfortable position in the industry.
Approaches to stability strategy
Stability strategies are implemented by approaches wherein few functional changes are
made in the products or markets. There are various approaches to developing stability/
consolidation strategy. Such as holding strategy, stable growth, harvesting strategy, profit
or endgame strategy. The management has to select the one that best suits the corporate
objectives.

2.1.2 Expansion Strategies

Expansion strategy is implemented by redefining the business by adding the scope of
business substantially increasing the efforts of the current business. Expansion is a
promising and popular strategy that tends to be equated with dynamism, vigor, promise
and success. An enterprise on the move is a more agreeable stereotype than a steady-state
enterprise. It is often characterised by significant reformulation of goals and directions,
major initiatives and moves involving investments, exploration and onslaught into new
products, new technology and new markets, innovative decisions and action programmes
and so on. Expansion also includes diversifying, acquiring and merging businesses. The
strategy may take the enterprise along relatively unknown and risky paths, full of promises
and pitfalls.
Expansion through diversification: Diversification is defined as entry into new products
or product lines, new services or new markets, involving substantially different skills,
technology and knowledge. When an established firm introduces a new product which has
little or no affinity with its present product line and which is meant for a new class of

33
 customers different from the firm's existing customer groups, the process is known as
conglomerate diversification. Both the technology of the product and of the market are
different from the firm's present experience.
Innovative and creative firms always look for opportunities and challenges to grow, to
venture into new areas of activity and to break new frontiers with the zeal of
entrepreneurship. They feel that diversification offers greater prospects of growth and
profitability than expansion.
For some firms, diversification is a means of utilizing their existing facilities and
capabilities in a more effective and efficient manner. They may have excess capacity or
capability in manufacturing facilities, investible funds, marketing channels, competitive
standing, market prestige, managerial and other manpower, research and development, raw
material sources and so forth. Another reason for diversification lies in its synergistic
advantage. It may be possible to improve the sales and profits of existing products by
adding suitably related or new products, because of linkages in technology and/or in
markets.
Diversification is the deployment of a company's resources into new products and new markets.
The company thus becomes involved in activities that differ from those in which it is currently
involved. Diversification strategy means the company selectively changes the product lines,
customer targets and perhaps its manufacturing and distribution arrangements.
The term diversification actually covers a range of different techniques:
• Concentric diversification — the firm moves into new markets based upon
technological know-how. Firms following a resource-based approach usually take this route, since
it enables them to develop and extend their existing core competencies. This form is also known
as related diversification
• Conglomerate diversification - a firm moves into markets that are unrelated to its existing
technologies and products to build up a portfolio of businesses. Sometimes this is because the
company has developed skills in turnaround or brand management, and can buy an ailing company
very cheaply and quickly create value. Hanson have achieved great things in this way, based upon
a nucleus of around 500 people. On other occasions, a company might use conglomerate
diversification if it believes it has no real future in its existing product market domain. Finally,

34
many entrepreneurial leaders move in and out of markets simply because of opportunities - Virgin
being a good example.
• Vertical Integration - a firm buys up different parts of the wider value system
Moving towards the customer (a producer buying a retailer for example) is forward integration, the
reverse is backward integration. This might be undertaken if the greater value-adding activities
are elsewhere in the supply chain. Many manufacturers find particular specialist component
suppliers are achieving higher returns than they are, and buy into the market. In difficult markets
it might be necessary to own distributors or retail outlets to place the product before a customer.

Firms go for expansion strategy under the following circumstances:

 When the firm has lofty growth objectives and desire fast and continuous growth
in assets, income and profits.
 When enormous new opportunities are emerging in the environment and the firm
is ready and willing to expand its business scope
 When a firm is a leader in its industry and wants to protect its dominant position
 When the firm has surplus resources, it may find it sensible to grow by levering on
its strengths and resources.
 When the environment, especially the regulatory scenario, blocks the growth of the
firm in its existing businesses, it may resort to diversification to meets its growth
objectives.
Expansion through acquisitions and mergers: Acquisition of or merger with an existing
concern is an instant means of achieving the expansion. It is an attractive and tempting
proposition in the sense that it circumvents the time, risks and skills involved in screening
internal growth opportunities, seizing them and building up the necessary resource base
required to materialize growth. Organizations consider merger and acquisition proposals
in a systematic manner, so that the marriage will be mutually beneficial, a happy and lasting
affair.
Apart from the urge to grow, acquisitions and mergers are resorted to for purposes of
achieving a measure of synergy between the parent and the acquired enterprises. Synergy
may result from such bases as physical facilities, technical and managerial skills,
distribution channels, general administration, research and development and so on. Only

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positive synergistic effects are relevant in this connection which denotes that the positive
effects of the merged resources are greater than the sum of the effects of the individual
resources before merger or acquisition.

2.1.3 Retrenchment Strategy

A business organization can redefine its business by divesting a major product line or
market. Retrenchment or retreat becomes necessary or expedient for coping with
particularly hostile and adverse situations in the environment and when any other strategy
is likely to be suicidal.
Many organizations decline due to falling sales, declining profits and more importantly
declining demand. Demand in an industry declines for a variety of reasons.
New substitutes emerge (computers with word processing capabilities replacing
manual electronic typewriters) often with higher quality and lower cost (ball pens
for fountain pens) or buyers shrink or simply disappear.
Changing customer needs, lifestyles and tastes also lead to declining demand
Costs of inputs may increase and reduce demand for products (petrol cars).
In such situations, top managers must find a strategy that will stop the organization’s
decline and put it back on a successful path. Organizational decay is a slow, long-term
deterioration of the firm’s operations caused by its inability to change and adapt to its
external environment. It is a function of environmental adversity (external threats) and
internal adversity (organizational negative aspects). Environment adversity may be viewed
as an overall measure of the firm’s difficulty in coping with the environment. The higher
the level of adversity encountered by the organization, the more difficult it is to achieve its
goals. This results in organizational decay (decline). Low adversity produces more
appropriate adjustments and motivates the firm to pursue a defensible niche. Proactive
organizations, which exercise strategic options, before reaching a very high level of
adversity, can significantly reduce threats from the environment.

Retrenchment is a short-run renewal strategy designed to overcome organizational

weaknesses that are contributing to deteriorating performance. It is meant to replenish and
revitalize the organizational resources and capabilities so that the organization can regain

36
its competitiveness. It may be thought as a minor surgery to correct a problem. Managers
often try a minimal treatment first-cost cutting or a small layoff-hopping that nothing more
painful will be needed to turn the firm around. Retrenchment strategies call for two primary
actions: cost cutting and restructuring
If cost cutting is a part of the strategy implementation, then the plan of implementation
should clearly specify how it will be applied across the organization and why is it being
proposed. Retrenchment strategy alternatives include shrinking selectively, extracting cash
for investment in other businesses, and divestment. While these strategies result in
generating cash, they differ in terms of their intentions. Divestment of the whole business
is an “end game” strategy and it may be done via selling or liquidation of business. Under
the strategy of extraction of cash for investment in other business, cash is generated from
the troubled business mainly via budget and cost contraction. In both strategies, the
intention of management is to quit the troubled business.

In shrinking selectively strategy (SSS), cash is generated via downsizing (contraction of

size) or divesting some operations. The strategy of shrinking selectively involves retrieving
the value of investments in some parts of the market while reinvesting in others b/c in some
niches’ demand will continue to be grow while in others the demand shrivels. The objective
is to capture the desirable niches. A firm, which chooses the SSS, should have some internal
competitive advantages, which it hopes to preserve. Thus, it may prefer to retain some part
of its former businesses by shrinking rather than divesting b/c of the possible advantages it
had built up through the years.
In essence, restructuring involves an organization refocusing on its primary business. Many
firms diversified into businesses they knew little about. Management teams thought this
conglomerate diversification would spread their firms’ risks. If the fortunes of one business
declined, the others in its business portfolio would protect earnings. Quite often, companies
struggled to compete well in the business lines they knew little about. Many of them merge
later (restructuring) by trying to sell off these businesses and refocus their efforts in their
original lines.

The three major variants of retrenchment strategy are:

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i) Turnaround Strategy
A turnaround situation exists when a firm encounters multiple years of declining financial
performance subsequent to a period of prosperity. The strategic causes of performance
downturns include increased competition, raw material shortages, and decreased profit
margins, while operating problems include strikes and labor problems, excess plant
capacity and depressed price levels.

The turnaround process begins with a depiction of external and internal factors as causes
of a firm’s performance downturn. It is typically accomplished through a two stage process.
The initial stage is focused on the primary objectives of survival and achievements of a
positive cash flow. The means to achieve this objective involves an emergency plan to stop
the firm’s financial hemorrhage and a stabilization plan to streamline and improve core
operations. In other words, it may involve product elimination, downsizing the workforce,
cost cutting and asset reduction. The second phase involves a return-to-growth or recovery
stage and the turnaround shifts away from retrenchment and move towards growth and
development and growth in market share. As the external environmental factors assume
importance relative to the internal factors, effective and innovative activities are more
appropriate in the recovery phase of the turnaround process. If the reverse is true, efficiency
maintenance activities are more appropriate. In either case, the recovery phase of the
turnaround process is likely to be more successful in accomplishing turnaround when it is
preceded by proactively structured retrenchment which results in the achievement of near-
term financial stabilization. The means employed for achieving these objectives are
acquisition, new products, new markets, and increased market penetration. Recovery is said
to have been achieved when economic measures indicate that the firm has regained its pre-
downturn levels of performance.
O’Neill(1986) investigated the relationship of contextual factors to the effectiveness of
four primary turnaround strategies: management( new head executive, new definition of
business, new top management team, morale building among employees), cutback (cost
cutting, financial and expense controls, replacing losing subsidiaries), growth ( new
product promotion methods, entering new product areas, acquisitions, add markets), and
restructuring (change in organizational structure, new manufacturing methods).

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ii) Survival Strategy
When the company is on the verge of extinction, it can follow several routes for renewing
the fortunes of the company.
Divestment: - an organization divests when it sells a business unit to another firm that will
continue to operate it. The main purpose was to focus only on the main product or market.
Spin-off:- in a spin-off, a firm sets up a business unit as a separate business through a
distribution of stock or a cash deal. This is one way to allow a new management team to
try to do better with a business unit that has a poor performance.
Restructuring the business operations: - the company tries to survive by restructuring its
management team, financial reengineering or overall business reengineering. Business
reengineering involves throwing aside all old business processes and starting from scratch
to design more efficient processes. This may cut costs and assist a turnaround situation.

iii) Liquidation Strategy

Liquation is the final resort for a declining company. Sometimes a business unit or a whole
company becomes so weak that the owners can not find an interested buyer. A simple
shutdown will prevent owners from throwing good money after bad once it is clear that
there is no future for the business. In such a situation, liquidation is the best option. For
e.g., bankruptcy is a last resort when the business fails financially. The court will liquidate
its assets.

2.1.4 Combination Strategies

The above strategies are not mutually exclusive. It is possible to adopt a mix of the above
to suit particular situations. An enterprise may seek stability in some areas of activity,
expansion in some and retrenchment in the others. Retrenchment of ailing products
followed by stability and capped by expansion in some situations may be thought of. For
some organizations, a strategy by diversification and/or acquisition may call for a
retrenchment in some obsolete product lines, production facilities and plant locations.
Activity 2.1
Discuss the different strategic alternatives available to your organization

39
2.2 Strategy Framework
Pretest
Dear student! What is strategic framework? Describe the process of strategy.
The term strategic management refers to the managerial process of forming a
strategic vision, setting objectives, crafting a strategy, implementing and executing the
strategy, and then overtimes initiating whatever corrective adjustments in the vision,
objectives, strategy, and execution are deemed appropriate. The basic framework of
strategic process can be described in a sequence of five stages as shown in the figure -
Framework of strategic management: The five stages are as follows:
Stage one: This is the starting point of strategic planning and consists of doing a situational
analysis of the firm in the environmental context. Here the firm must find out its relative
market position, corporate image, its strength and weakness and also environmental threats
and opportunities. This is also known as SWOT (Strength, Weakness, Opportunity, Threat)
analysis. You may refer third chapter for a detailed discussion on SWOT analysis.
Stage two: This is a process of goal setting for the organization after it has finalised its
vision and mission. A strategic vision is a roadmap of the company’s future – providing
specifics about technology and customer focus, the geographic and product markets to be
pursued, the capabilities it plans to develop, and the kind of company that management is
trying to create.
An organization’s Mission states what customers it serves, what need it satisfies, and what
type of product it offers.
Stage three: Here the organization deals with the various strategic alternatives it has. Stage
four: Out of all the alternatives generated in the earlier stage the organization selects the
best suitable alternative in line with its SWOT analysis.
Stage five: This is a implementation and control stage of a suitable strategy. Here again
the organization continuously does situational analysis and repeats the stages again.
The process of strategy is cyclical in nature. The elements within it interact among
themselves. The process of strategy does not have the same steps as stated by different
authors. For simplicity, the process has been divided into the following steps:
a) Strategic Intent: Setting of organizational vision, mission and objectives is the starting
point of strategy formulation. The organizations strive for achieving the end results which

40
are ‘vision’, ‘mission’, ‘purpose’, ‘objectives’, ‘goals’, ‘targets’ etc. The hierarchy of
strategic intent lays the foundation for the strategic management of any organization. The
strategic intent makes clear what an organization stands for.

b) Environmental and Organizational Analysis: Environmental analysis (scanning) is

the process through which an organization monitors and comprehends various
environmental factors and determines the opportunities and threats that are provided by
these factors. There are two aspects involved in environmental analysis:-
 Monitoring the environment i.e. environmental search
 Identifying opportunities and threats based on environmental monitoring i.e.
environmental diagnosis.
The environmental analysis plays a very important role in the process of strategy
formulation. The environment has to be analyzed to determine what factors in the
environment present opportunities for greater accomplishment of organizational objectives
and what factors present threats.
Through organizational analysis, the organization has to understand its strengths and
weaknesses. Analysis of internal environment and the organizational capability is very
essential for strategic development.
c) Identification of Strategic Alternatives: After environmental analysis, the next step is
to identify the various strategic alternatives; and they have to be evaluated to match them
with the environmental analysis.
d) Choice of Strategy: The next logical step after evaluation of strategic alternatives is
choice of the most suitable alternative. The strategic alternatives have to be matched with
the problem.
The strategic choice is a decision making process which looks into the following steps:
 Focusing on strategic alternatives
 Evaluating alternatives
 Considering decision factors-objective factors and subjective factors
 Finally, making the strategic choice
e) Implementation of Strategy: After the evaluation of the alternatives, the choice of
strategy is made. This choice now needs to be implemented i.e. strategy is now put into

41
action. Strategy making and strategy implementation are two different things. Strategy
making requires person with vision while strategy implementation requires a person with
administrative ability. If the strategy made is not implemented properly then the objectives
would be lost.
f) Evaluation and Control: This is the last step of the strategy making process. This is an
ongoing process and evaluation and control have to be done for future course of action as
well. To get successful results and to achieve organizational objectives, there has to be
continuous monitoring of the implementation of strategy. The evaluation and control of
strategy may result in various actions may involve any kind of corrective measures
concerned with any of the steps involved in the whole process be it choice for setting
mission or objectives.
2.3 Michael Porter’s Generic Strategies
Pretest
Dear student! What are the Porter’s three generic strategic alternatives for firms?
Could you mention them before reading the following section?
Well! According to Porter, strategies allow organizations to gain competitive advantage
from three different bases: cost leadership, differentiation, and focus. Porter calls these
base generic strategies. Cost leadership emphasizes producing standardized products at a
very low per-unit cost for consumers who are price-sensitive. Differentiation is a strategy
aimed at producing products and services considered unique industry wide and directed at
consumers who are relatively price-insensitive. Focus means producing products and
services that fulfill the needs of small groups of consumers.

Porter's strategies imply different organizational arrangements, control procedures, and

incentive systems. Larger firms with greater access to resources typically compete on a
cost leadership and/or differentiation basis, whereas smaller firms often compete on a focus
basis.

Porter stresses the need for strategists to perform cost-benefit analyses to evaluate “sharing
opportunities” among a firm's existing and potential business units. Sharing activities and
resources enhances competitive advantage by lowering costs or raising differentiation. In
addition to prompting sharing, Porter stresses the need for firms to “transfer" skills and
expertise among autonomous business units effectively in order to gain competitive

42
advantage. Depending upon factors such as type of industry, size of firm and nature of
competition, various strategies could yield advantages in cost leadership differentiation,
and focus.

Business level strategies are popularly known as generic or competitive strategies. M.

Porter classified these strategies into overall cost leadership, differentiation and focus. All
the three strategies can either be used individually or in combination to each other.

Broad
Target
1) Cost 2) Differentiation
Leadership
Competitive
Scope

3 a) Cost Focus 3 b) Focused

Differentiation

Narrow
Target

Lower cost Differentiation

Competitive Advantage

Figure 2.1: Three Generic Competitive Strategies

1. Cost Leadership
The firms operating in this highly competitive environment are always on the move to
become successful. To develop competitive advantage, the firms should produce good
quality products at minimum costs. This means that the firms should provide high quality
at low price so that the customer gets the best value for the product he/she is buying.
43
Therefore, it becomes necessary for the firms to have a strategic edge towards its
competitors. One such competitive strategy is overall cost leadership, which aims at
producing and delivering the product or service at a low cost relative to its competitors at
the same time maintaining the quality. According to porter, following are the prerequisites
of cost leadership:
 Aggressive construction of efficient scale facilities
 Vigorous pursuit of cost reduction from experience
 Tight cost and overhead control
 Cost minimization.
According to Porter cost leadership is perhaps the clearest of the three generic or business
level strategies. To sustain the cost leadership throughout, the firm must be clear about its
accomplishment through different elements of the value chain.
The low-cost leadership strategy at times enables the firm to defend itself against each of
five competitive forces. A cost leader can not ignore the bases of differentiation but it
stresses on producing quality products at low cost for the consumers who are price
sensitive.
Though, low cost can be one of the most important competitive advantages enjoyed by
firms all over the globe but it does have its drawbacks. Some of the drawbacks can be:
 Initiation by the competitive firms
 Threat of competitive firms from other countries
 Firm losing cost leadership due to fast technological changes, which require high
capital investment.
 Threat by competitors to capture still lower cost segments
 Competition based on other than cost may be ignored

2. Differentiation
Differentiation is a strategy, which is directed at producing goods and services considered
unique in its industry and directed at consumers who are relatively price-insensitive.
Differentiation strategy is more of a positioning strategy whereby the firm tries to be unique
in its industry by positioning itself along certain dimensions. Every individual customer is
unique in itself so is his/her preferences regarding tastes, preferences, attitudes, etc… These

44
needs of customers are fulfilled by the firms by producing differentiated products.
Differentiation can lead to differential advantage in which the firm gets the premium in the
market, which is more than the cost of providing differentiation.
Need
There are a number of reasons depending on the nature firm to adopt a differentiation
strategy. It is no necessary that the firm should and must go for differentiation strategy if
it does not require one. The requirement is need based and depends on the firm’s position
in the market. There are a number of factors which result in differentiation.
 To compete against rivals
 To create entry barriers for newcomers by building a unique product
 To reduce the threats arising from the substitutes
 To develop a differentiation advantage
Types of differentiation
Differentiation can be classified into two basic types
 Tangible differentiation
 Intangible differentiation
As the name suggests, tangible means, something which is real and be seen, touched, etc
whereas intangible means, something which is abstract in nature and cannot be touched, it
can just be felt i.e. it is more of customers psychology. Projecting an image about a
particular product is one form of intangible differentiation. This can be done with the help
of packaging, style, etc. this shows that tangible as well as intangible go hand in hand and
either of them can not exist independently.
Intangible differentiation is more effective in those cases where the customer has once
experienced the product, for example, chocolates. Every brand has a unique taste, different
packaging style, etc. this is the case where quality can be judged only after using the
product once but in case where the quality can not be judged by experience, e.g., medical
services, the intangible differentiation is not that effective. In short, it can be said that
intangible dedifferentiation is accompanied by tangible differentiation.
Sources of Differentiation
It’s not only the low price at which different products are offered, which creates
differentiation; instead the firm can differentiate from its competitors by providing

45
something unique, which is valuable to the customers of that product. Differentiation
occurs from the specific activities a firm performs and how they affect the buyer.
Value chain: The value chain consists of a set of value activities resulting in the production
of a specified product. Any business is seen as a number of linked activities, each producing
value for the customer. These activities include all kinds of activities like; marketing
activities, financial activities, HR activities, production activities…etc. if these activities
are performed properly, then only a differentiated product can satisfy the customers and
premium over the cost of the product. The value activity determines the uniqueness of the
product. There are a number of factors, which determine the uniqueness of a firm in a value
activity. Apart from cost factor, there are many more factors, which are responsible for
differentiated products. Porter identified the following:
Policy choice: - every firm decides its own policies regarding the activities to be performed
and the activities to be ignored. The policy choices are basically related to the type of
services to be provided to the customers, the credit policy, to what extent a particular
activity (like; advertising spend) be adopted, the content of activity, skill and experience
required by the employees, etc.
Links:-the uniqueness of a product depends to a large extent on the links within the value
chain with suppliers and distribution channel, the firm deals with. If the firm has a good
link with suppliers and has a sound distribution channel, then it becomes easy for the firm
to produce and supply the products to the end-users.
Timing: - the firms can achieve uniqueness by encashing the opportunities at the right
time. If the timing is perfect then a successful differentiation strategy can be adopted.
Location: - this is one of the important factors for the firms to have uniqueness. For
example, a bank may have its branch which is accessible to the customers, then the bank
will gain an edge towards other banks.
Integration: - the firm can be termed as unique, if its level of integration is high. The
integration level means the coordination level of value activities. I.e. a better service can
be offered to the customers by sharing certain activities.
Learning: - to perform better and better, continuous improvement is necessary and this
comes through continuous learning.

46
Scale: - larger the scale, more will be the uniqueness. If small volumes of products are
produced, than the uniqueness of the product will be lost over a longer period of time. A
very good example can be home-delivery services. The type of scale leading to
differentiation varies depending on the individual firm’s activities.
 Looking at these factors, one can say that differentiation is governed by value
activities in a value chain and these activities in turn are governed by certain driving
factors, which makes the firm unique.
Advantages and Disadvantages of Differentiation
Differentiation has the following advantage
1. Premium price for the firm: - when the firm is able to exploit all sources of
differentiation that are less costly or not costly, then the firm can differentiate from its rival
firms. There can be many examples like changing the mix of product features than adding
more features, which are less costly but differentiate the product giving a competitive
advantage, i.e., the price premium to the firm.
2. Increasing in number units sold: if the product is unique then the demand for it
increases, henceforth increasing the number of units sold. The number of customers is won
by smart differentiating strategy; thereby increasing the number of units sold.
3. Increase in brand loyalty by the customers: - a well- positioned and differentiated
product gains the band loyalty of the customers.
4. Sustaining competitive advantage: - last but not least, this is the crux of the
differentiation. This can be achieved by optimizing cost and increasing profits. It is more
often known as low-cost differentiation strategy.
 Looking at these advantages, one can say that encashing the buyer/customer value is
the must. The firms must concentrate on those activities which affect the customer
value than the ones which do not.
Disadvantages
It is not necessary that every time the firm goes for differentiation strategy, it is successful.
At times there are disadvantages associated with it. Some of the most common
disadvantages are:
a) Uniqueness of the product not valued by buyers: - there are a number of cases where
the differentiated product has not gained importance by the customers, hence failed to

47
position itself in the market. Uniqueness necessarily does not lead to differentiation. More
important is the perception of buyers regarding a particular product.
b) Excess amount of differentiation: - too much of anything is bad. Same is the case with
differentiation. If the firm is unable to understand the customer needs and preferences but
goes on differentiating the product, then the firm loses its market value. Unnecessary
differentiation results in failure.
c) Loss due to differentiation:- in certain cases the firm while differentiating does not
realize the importance of coordinated activities in the value chain, which results in high
costs, considering the fact that differentiation always leads to profitability is absolute
nonsense and result in loss to the firms.
d) Charging high price for differentiated features may cause the customers to forego the
additional advantage from the products/service. Failure to communicate the benefit
arising out of differentiation adequately, or over relying on the intrinsic product attributes
not ready apparent to a customer, may cause the differentiation strategy to fail.
 The disadvantages associated with differentiation should be looked upon with utmost
care by the firms going in for differentiation.
3. Focus
Focus is different from other business strategies as it is segment based and has narrow
competitive scope. This strategy involves the selection of a market segment, or group of
segments, in the industry and meeting the needs of that preferred segment (or niche) better
than the other market competitors. This is also known as a niche strategy. In focus strategy,
the competitive advantage can be achieved by optimizing strategy for the target segment.
Focus strategy has two variants:
i. Cost focus: - is where a firm seeks a cost advantage in the target segment. This is
basically a niche-low cost strategy whereby a cost advantage is achieved in focusers’ target
segment. According to Porter, cost focus exploits differences in cost behaviour in some
segments. In this the focuser concentrate on a narrow buyer segment and out-competes
rivals on the basis of lower cost.
ii. Differentiation focus: - where a firm seeks differentiation in the target segment. In this,
the firm offers niche buyers something different from rivals. Here, the firm seeks
differentiation in its target segment. Differentiation focus exploits the special needs of

48
buyers in specified segments. A very good example of differentiation focus is the newly
launched luxury car. This car is targeted to a certain segment where the customers can
afford to pay.
 Focus strategy can be a tool to help the management team define and rebuild their
business strategy, in turn helping them gain an edge over their competitors.
When we talk about focus strategy as a niche strategy, it means that a market niche is
chosen where customers have distinct preferences or requirements. According to
Thompson the term “niche” is defined as “geographic uniqueness, by specialized
requirements in using the product or by special product attributes that appeal only to
niche members.”
The success of the focus strategy depends on the difference of the target segment from
other segments. To explain this concept let us take example of soft drink market. Coca Cola
and Pepsi are the major players in the Ethiopian market and are rivals but each has
developed a competitive advantage by serving different segments offering flavoured drinks
as well. Coca has different brands like Fanta, Sprite, Coca…etc. and Pepsi has brands like
Mirnda, Pepsi, Mirnda Apple….etc catering different market segments.
Focus strategy can be effective in certain situations only. According to Rao (2004),
following ca be the situations where a focus strategy is efficient:
 Market segment large enough to be profitable
 Market segment has good growth potential
 Market segment is not significant to the success of major competitors
 Focuser has efficient resources
 Focuser is able to defend against challenges
 High costs are difficult to competitors to meet the specialized needs of the niche
 Focuser is able to choose from different segments….etc.
Advantage of focus
i. The focused firm is protected from competition to the extent that the other firms which
have a broader target do not possess the competitive ability to cater to the niche markets,
i.e. a focused firm provide products or service that the other firms can not provide or would
not find it profitable to provide.

49
ii. Powerful buyers are less likely to shift loyalties as they might not find others willing to
cater to the niche markets as the focused firms do.
iii. The specialization that focused firms are able to achieve in serving a niche market acts
as a powerful barrier to substitute products. That is the competency of the focused forms
act as an effective entry barrier to potential entrant.
Disadvantage
a) Serving niche requires developing distinctive competencies which is long-drawn and
difficult process.
b) Once the firm focused, it is difficult to the firm from its commitment to the other
segment.
c) Cost is higher because as the market is smaller/limited and the volume of production and
sales small.
d) Due to technology change, the production of niche product becomes easier. Or there
may be a shift in the customer’s needs and preferences causing them to move to other
products. Or due to higher cost they may shift to other products.
e) Niche may sometimes become attractive enough for the bigger players to shift attention
to them. i.e. the cost leader and differentiator may be attract to the niche and serve them in
a better way.
 After understanding all these business/ generic strategies, we can say that if all the
three are combined and the cost is optimized, then the market share and profitability
can be increased
Self-Test Exercise Activity 2.4

Compare and contrast

a) Cost focus Vs Differentiation focus
b) Cost leadership Vs Differentiation

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Unit Summary
This unit presents the different types of strategic alternative. There are different alternative
strategies that an enterprise could pursue and it can be categorized into thirteen actions—
forward integration, backward integration, horizontal integration, market penetration,
market development, product development, concentric diversification, conglomerate
diversification, horizontal diversification, joint venture, retrenchment, divestiture, and
liquidation—and a combination strategy. Each alternative strategy has countless variations.
The process of strategy making is cyclical in nature. The elements within it interact among
themselves. The process of strategy making does not have the same steps. The process of
strategy begins in strategic intent, and then proceed to Environmental and Organizational
Analysis, Identification of Strategic Alternatives, Choice of Strategy, Implementation of
Strategy and then ends with, Evaluation and Control.
According to Porter, strategies allow organizations to gain competitive advantage from
three different bases: cost leadership, differentiation, and focus. Porter calls these base
generic strategies. Cost leadership emphasizes producing standardized products at a very
low per-unit cost for consumers who are price-sensitive. Differentiation is a strategy aimed
at producing products and services considered unique industry wide and directed at
consumers who are relatively price-insensitive. Focus means producing products and
services that fulfill the needs of small groups of consumers.

Self-Test Exercise : Check Questions

Part I: choose the best answer for the following questions
1. The defensive strategy includes
A. Joint venture B. liquidation [Link] D. all of the above
2. Pre-requisits for cost leadership
A. efficient scale facilities B cost reduction from experience
C. tight cost D. cost minimization E. all of the above
3. Why differentiation?
A. to compete against rivals B. entry barriers for new comers
C. reduction of threats from substitutes
D. all of the above E. none of the above
4. Advantage of differentiation include

51
 A. increasing in number units sold B. premium price for the firm
C. brand loyalty D. competitive advantage E . all of the above
5. Focus strategy is efficient when
A. market segment is profitable B. focuser has efficient resources
C. focuser is able to choose from different segments
D. all of the above E. None of the above
Part- II: - Say True if the statement is correct and False if it is incorrect
1. The strategic intent makes clear what an organization stands for
2. Market penetration is an intensive strategy.
3. Strategy making requires a person with administrative ability.
4. Analysis of internal environment is very essential for strategic development.
5. Strategy making requires person with vision.

52
 Unit- Three: The Business Mission
UNIT OBJECTIVES

After reading this unit, you will be able to:

Learn the meaning of strategic intent and vision.
Understand the process of strategy formulation.
Know the different stages of strategy-formulation-implementation process.

Unit Introduction
Strategy formulation, implementation, and evaluation activities should be performed on a
continual basis, not just at the end of the year or semi-annually. The strategic management
process never really ends. In today's highly competitive business environment, budget-
oriented planning or forecast-based planning methods are insufficient for a large
corporation to survive and prosper. The firm must engage in strategic planning that clearly
defines objectives and assesses both the internal and external situation to formulate
strategy, implement the strategy, evaluate the progress, and make adjustments as necessary
to stay on track.
The Strategic Planning Process includes Mission&Objectives, environmentalScanning
Strategy Formulation, Strategy Implementation, and Evaluation& Control. Hence this unit
deals with, the importance of a clear mission, the nature of business mission and
components of a mission statements and elements of strategic planning process.

3.1 Strategic intent, vision and mission

Pretest
Dear student! Could you define strategic intent vision and mission statements in
your own terms?

Well! Strategic intent is a high-level statement of the means by which your organization
will achieve its vision. It is a statement of design for creating a desirable future (stated in
present terms). Simply put, a strategic intent is your company's vision of what it wants to
achieve in the long term. Strategy should be a stretch exercise, not a fit exercise. Expression

53
of strategic intent is to help individuals and organizations share the common intention to
survive and continue or extend themselves through time and space. It is the heart of any
activity in the organization.
The strategic intent must convey a significant stretch for your company, a sense of
direction, discovery, and opportunity that can be communicated as worthwhile to all
employees. It should not focus so much on today's problems, which are normally dealt with
by company visions and missions, but rather on tomorrow's opportunities.
It is based on a vision of how the future will look in 10-15 years. A strategic intent creates
a picture of the customer daily life and describes discontinuities and anticipated changes
from the world of today. It describes future customer's needs and the success factors
required for meeting these needs. "To achieve great things, you need ambitious visions.
And it does not matter that vision cannot be laid out in details. It is the direction that
counts."
Vision: Serve the purpose of stating what an organization wishes to achieve in long run.
Strategic vision is a road map of a company’s future; it creates a picture of a company’s
destination and provides a rationale for why this destination makes good business sense for
the company. Strategic vision is concerned with “where we are going and why,” i.e. it
portrays a company’s future business scope. Strategic visions become real only when the
vision statement is imprinted in the minds of organization members and then translated into
mission and objectives. Therefore, effectively communicating the strategic vision down
the line to lower-level managers and employees is almost as important as ensuring the
strategic soundness of the organization’s long-term direction and business model. Not only
do people have a need to believe that the company’s management knows where it’s trying
to take the company and what changes lie ahead both externally and internally, but if
frontline employees don’t know what a company’s vision is, they are unlikely to be
committed to making the vision a reality. Generally, a strategic vision has to be put in
writing so that it can be communicated organization wide and then evaluated and debated
by organization members.
The vision of an organization is the expectation of the owner of the organization and putting
this vision into action is mission. Mission is relatively less abstract, subjective, qualitative
philosophical and non-imaginative. A company’s mission statement usually deals with the

54
company’s present business scope and purpose-“where we are now, what we do, and why
we are here.” Mission has a societal orientation and is a statement which reveals what an
organization intends to do for a society. It is a public statement which gives direction for
different activities which organizations have to carry on. Organization’s mission becomes
the cornerstone for strategy.
A vision statement, on the other hand, describes how the future will look if the
organization achieves its mission. A mission statement gives the overall purpose of an
organization, while a vision statement describes a picture of the "preferred future." A
mission statement explains what the organization does, for whom and the benefit. A vision
statement, on the other hand, describes how the future will look if the organization achieves
its mission.
Examples:

Centers for Disease Control

Mission To promote health and quality of life by preventing and controlling disease,
injury, and disability

Vision Healthy People in a Healthy World

Minnesota Department of Health

Mission To protect, maintain and improve the health of all Minnesotans.

Vision Keeping All Minnesotans Healthy

Table 3.1 examples of mission and vision statement

3.2 Nature of Business Mission

 It gives social reasoning. It specifies the role which the organization plays society.
It is the basic reason for existence
 It is philosophical and visionary and relates to top management values. It has long
term perspective.
 It legitimizes societal existence

55
  It reflects corporate philosophy, identity, character and image of organization.
Characteristics of Business Mission
In order to be effective a mission statement should posses the following characteristics.
 A mission statement should be realistic and achievable. Impossible statements do
not motivate people. Aims should be developed in such a way so that it may
become feasible.
 It should neither be too broad nor be too narrow. If it is brad, it will become
meaningless. A narrower mission statement restricts the activities of organization.
 A mission statement should not be ambiguous. It must be clear for action. Highly
philosophical statements do not give clarity.
 It should have societal linkage. Linking the organization to society will build long
term perspective in a better way.
 It should not be static. To cope up with ever changing environment, dynamic
aspects be looked into.
 It should be motivating for members of the organization and of society. The
employees of the organization may stimulate themselves with mission statement.
 The mission statement should indicate the process of accomplishing objectives.
The clues to achieve the mission will be guiding force.

3.3 Components of an Effective Mission Statement

Mission statements can and do vary in length, content, format and specificity. Most
practitioners and academicians of strategic management consider an effectively written
mission statement to exhibit nine mission statement components. Since a mission statement
is often the most visible and public part of the strategic management process, it is important
that it include most, if not all, of these essential components. Components and
corresponding questions that a mission statement should answer are given here.

1. Customers: Who are the enterprise's customers?

2. Products or services: What are the firm's major products or services?
3. Markets: Where does the firm compete?
4. Technology: What is the firm's basic technology?

56
5. Concern for survival, growth, and profitability: What is the firm's commitment
towards economic objectives?
6. Philosophy: What are the basic beliefs, core values, aspirations and philosophical
priorities of the firm?
7. Self-concept: What are the firm's major strengths and competitive advantages?
8. Concern for public image: What is the firm's public image?
9. Concern for employees: What is the firm's attitude/orientation towards employees?
Objectives and Goals
Business organization translates their vision and mission into objectives. Once the organization’s
mission has been determined, its objective, desired future positions that it wishes to reach,
should be identified. Organizational objectives are defined as ends which the organization
seeks to achieve by its existence and operation. They indicate the specific sphere of aims,
activities and accomplishments. Objectives provide a direction to the organization and all
the divisions work towards the attainment of the set objectives.

The Difference between goals and objectives

 Goals are broad while objectives are narrow
 Goals are general intentions; objectives are precise
 Goals are intangible; objectives are tangible
 Goals are abstract; objectives are concrete
 Goals are more influenced by external environment than objective.

3.4 Strategy Planning Process

Pretest
Dear student! What are the stages of strategic planning processes?

Well! Strategic planning and implementation have become a must for all organizations for
their survival and growth in the present turbulent business environment. ‘Survival of fittest
‘as propagated by Darwin is the only principle of survival for organization, where ‘fittest’
are not the ‘largest’ or ‘strongest’ organization but those who can change and adapt
successfully to the changes in business environment. Just like the extinction of the

57
dinosaurous who ruled the earth one time but failed to survive in change condition of earth
natural environment many organizational giants have also followed the path of extinction
failing to manage drastic changes in the business environment. Also business follows the
war principle of ‘win or lose’, and not necessarily win-win situation arises in business
world. Hence the organization has to build its competitive advantage over the competitors
in the business warfare in order to win. This can be done only following strategic analysis,
formulation and implementation.

The Stages of Corporate Strategy Formulation- Implementation Process

Stage 1: Developing a strategic vision

First a company must determine what directional path the company should take and what
changes in the company’s product – market – customer – technology – focus would
improve its current market position and its future prospect. Deciding to commit the
company to one path versus another pushes managers to draw some carefully reasoned
conclusions about how to try to modify the company's business makeup and the market
position it should stake out. Top management's views and conclusions about the company's
direction and the product-customer-market-technology focus constitute a strategic vision
for the company. A strategic vision delineates management's aspirations for the business
and points an organization in a particular direction, charts a strategic path for it to follow
in preparing for the future, and molds organizational identity. A clearly articulated strategic
vision communicates management's aspirations to stakeholders and helps steer the energies
of company personnel in a common direction

Stage 2: Setting objectives

Corporate objectives flow from the mission and growth ambition of the corporation.
Basically, they represent the quantum of growth the firm seeks who achieve in the given
time frame. They also endow the firm with characteristics that ensures the projected the
growth. Through the objective setting process, the firm is tackling the environment and
deciding the locus it should have in the environment.

Stage 3: Crafting a strategy to achieve the objectives and vision

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A company's strategy is at full power only when its many pieces are united. Ideally, the
pieces and layers of a company's strategy should fit together like a jigsaw puzzle. To
achieve this unity, the strategizing process generally has proceeded from the corporate level
to the business level and then from the business level to the functional and operating levels.

Stage 4: Implementing & executing the strategy Managing strategy implementation and
execution is an operations-oriented, activity aimed at shaping the performance of core
business activities in a strategy-supportive manner. It is easily the most demanding and
time-consuming part of the strategy-management process. Good strategy execution
involves creating strong "fits" between strategy and organizational capabilities, between
strategy and the reward structure, between strategy and internal operating systems, and
between strategy and the organization's work climate and culture.

Stage 5: Monitoring developments, evaluating performance and making corrective

adjustments

A company's vision, objectives, strategy, and approach to strategy execution are never
final; managing strategy is an ongoing process, not an every now and then task. The fifth
stage of the strategy management process – evaluating the company's progress, assessing
the impact of new external developments, and making corrective adjustments – is the
trigger point for deciding whether to continue or change the company's vision, objectives,
strategy, and/or strategy-execution methods.

Self-Test Exercise Activity 3.1

1. Discuss vision vs mission
2. Describe the process of strategic planning

Unit Summary
Strategic intent is a high-level statement of the means by which your organization will
achieve its vision. It is a statement of design for creating a desirable future (stated in present
terms). Simply put, a strategic intent is your company's vision of what it wants to achieve
in the long term. Strategy should be a stretch exercise, not a fit exercise. A vision
statement, on the other hand, describes how the future will look if the organization
achieves its mission. A mission statement gives the overall purpose of an organization,
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while a vision statement describes a picture of the "preferred future." A mission statement
explains what the organization does, for whom and the benefit. The firm must engage in
strategic planning that clearly defines objectives and assesses both the internal and external
situation to formulate strategy, implement the strategy, evaluate the progress, and make
adjustments as necessary to stay on track.
Self-Test Exercise :Questions
1. Part- I Say True if the statement is correct and False if it is incorrect
1. Strategy formulation, implementation, and evaluation activities should be
performed on a continual basis.
2. Strategic vision is a road map of a company’s future.
3. Mission is relatively less abstract, objective, qualitative philosophical and non-
imaginative,
4. Goals are general intentions; objectives are precise
5. A strategic vision delineates management's aspirations for the business
Part – II: Fill In The Blank Spaces With The Appropriate Word
1. ___________is a high-level statement of the means by which your organization
will achieve its vision.
2. _______________ is the basic reason for existence
3. _______________ Serve the purpose of stating what an organization wishes to
achieve in long run.
4. _______________ provide a direction to the organization and all the divisions

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 Unit- Four: Components of Business Environment
UNIT OBJECTIVES

After going through this unit, you will be able to:

 Understand elements of micro and macro environment
 Explain the way to scan environment
 Describe nature of globalization
 Discuss forecasting tools and techniques
 Explain the competitive environmental analysis

Unit Introduction
The environment in which an organization exists could be broadly divided into two parts
the external and the internal environment. Since the environment is complex, dynamic,
multi- faceted and has a far reaching impact, dividing it into external and internal
components enables us to understand it better. Here we deal with the appraisal of the
external environment. We start with gaining an understanding of the concept of
environment. This is done through a description of four important characteristics of the
environment, dividing the environment into its external and internal parts, observing how
a systematic approach can help in environmental appraisal, and classifying the external
environment into two parts, the general and the relevant environment. The external
environment (Macro Environment) includes all the factors outside the organization which
provide opportunity or pose threats to the organization. The internal environment (Micro
Environment) refers to all the factors within an organization which impart strengths or
cause weaknesses of a strategic nature. In addition to this, the unit deals with environmental
scanning, global environment, nature of globalization, forecasting tools and techniques,
and competitive environment.

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4. The External Assessment

Pretest
Dear students! What does an external analysis mean? Please try to write on a
sheet of paper before you go through the discussion below.

Well! Strategic analysis is basically concerned with the structuring of the relationship
between a business and its environment. The environment in which business operates has
a greater influence on their successes failures. An external assessment also called
environmental scanning, focuses on identifying and evaluating trends and events beyond
the control of a single firm.
There is a strong linkage between the changing environment, the strategic response of the
business to such changes and the performance. It is therefore important to understand the
forces of external environment the way they influence this linkage. The external
environment which is dynamic and changing holds both opportunities and threats for the
organizations. The organizations while attempting at strategic realignments, try to capture
these opportunities and avoid the emerging threats. At the same time the changes in the
environment affect the attractiveness or risk levels of various investments of the
organizations or the investors.

4.1. Relationship between Organization and Its Environment

In relation to the individual corporate enterprise, the external environment offers a range
of opportunities, constraints, threats and pressures and thereby influences the structure and
functioning of the enterprise. As a sub-system, the corporate enterprise draws certain inputs
of resources, information and values from the larger environmental system, transforms
them into outputs of products, services, goals and satisfactions and exchanges with or
transmits them into the external environment. In the process, it generates energy and
sustains itself.
The relationship between the organization and its environment may be discussed in terms
of interactions between them in several major areas which are outlined below:
Exchange of information: The organization scans the external environmental variables,
their behavior and changes, generates important information and uses it for its planning,

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decision-making and control purposes. Much of the organizational structure and
functioning is attuned to the external environmental information. Information generation
is one way to get over the problems of uncertainty and complexity of the external
environment. Information is to be generated on economic activity and market conditions,
technological developments, social and demographic factors political-governmental
policies and postures, the activities of other organizations and so on. Both current and
projected information is important for the organization.
Apart from gathering information, the organization itself transmits information to several
external agencies either voluntarily, inadvertently or legally. Other organizations and
individuals may be interested in the organization and its functioning and hence approach
the organization for information. It is also possible to glean information from the behavior
of the organization itself, from its occasional advertisements, and from annual reports.
Also, the organization may be legally or otherwise bound to supply information on its
activities to governmental agencies, investors, employees, trade unions, professional
bodies and the like.
Exchange of resources: The organization receives inputs: finance, materials, manpower,
equipment etc., from the external environment through contractual and other arrangements.
It sustains itself by employing the above inputs for involving or producing output of
products and services. The organization interacts with the factor markets for purposes of
getting its inputs; it competes sometimes and collaborates sometimes with other
organizations in the process of ensuring a consistent supply of inputs.
The organization is dependent on the external environment for disposal of its output of
products and services to a wide range of clientele. This is also an interaction process—
perceiving the needs of the external environment and catering to them, satisfying the
expectations and demands of the clientele groups, such as customers, employees,
shareholders, creditors, suppliers, local community, and general public and so on. These
groups tend to press on the organization for meeting their expectations, needs and demands
and for upholding their values and interests.
Exchange of influence and power: Another area of organizational-environmental
interaction is in the exchange of power and influence. The external environment holds
considerable power over the organization both by virtue of its being more inclusive as also

63
by virtue of its command over resources, information and other inputs. It offers a range of
opportunities, incentives and rewards on the one hand and a set of constraints, threats and
restrictions on the other. In both ways, the organization is conditioned and constrained. The
external environment is also in a position to impose its will over the organization and can
force it to fall in line. Governmental control over the organization is one such power
relationship. Other organizations, competitors, markets, customers, suppliers, investors
etc., also exercise considerable collective power and influence over the planning and
decision making processes of the organization. In turn, the organization itself is sometimes
in a position to wield considerable power and influence over some of the elements of the
external environment by virtue of its command over resources and information. The same
elements which exercise power over the organization are also subject to the influence and
power of the organization in some respects. To the extent that the organization is able to
hold power over the environment it increases its autonomy and freedom of action. It can
dictate terms to the external forces and mould them to its will.

In delineating the relationship between the organization and the environment, one has to
be clear on the diversity of both these entities. On the one hand, the nature of relationship
depends on the size of the organization, its age, the nature of business, the nature of
ownership, degree of professionalization of management, etc. On the other hand, the
relationship depends on the fact whether the external environmental elements behave in a
random or structured manner (uncertainty v. predictability), whether such elements are
placid or turbulent, whether they are slow-changing or fast changing, whether they are
simple or complex, and so forth. The degree of interaction between the organization and
the external environment is set by the above characteristics. It follows therefore that all
organizations do not behave in the same way in relation to their external environment.
Their structures and functions are shaped in tune with the demands of the external
environment.

4.2 Environmental Scanning

Environmental scanning also known as Environmental Monitoring is the process of
gathering information regarding company’s environment, analyzing it and forecasting the

64
impact of all predictable environmental changes. Successful marketing depends largely on
how a company can synchronize its marketing programmes with its environmental changes
There are forces of different kinds and complexities, which influence organizations and
their business. The basic aim of strategic management is that a manager must adjust
strategies to reflect the environment in which the business operates. Environmental
scanning is one of the few ways to detect future driving forces early and this involves
studying and interpreting the development of social, political, economic, ecological and
technical events that could become driving forces. It attempts to figure out few radical
happenings or path breaking developments which may be catching on and see their possible
implications 5 to 20 years into the future.
Environmental scanning is normally accomplished by systematically monitoring and
studying current events and constructing scenarios. Constructing scenarios involves a
detailed plausible view of how the business environment of an organization might develop
in the future based on the groupings of key environmental influences and drivers of change
about which there is high level of uncertainty. Scenarios are tools for ordering one’s
perceptions about alternative future environments in which today’s decisions might be
framed. In practice, scenarios resemble a set stories, written or spoken, built around
carefully constructed plots. Scenario planning process can be understood by the following
steps:-
Step-1: Identification of the Issues
Understand the effects of external factors on business are very essential. These factors are:
 Technology driven (new product, IT based integration)
 Political (deregulation, instability)
 Economic (sudden downturns, boom)
 Competitive positioning (moves from competitors)
Step-2: Classification of the Issues
 Support the issue identified with reports/propositions/any other method.
 Determine the uncertainty and kind of impact of the issue.
Step 3 Analyzing and Problem Solving
The relation between uncertainty and impacts on the organization can be present as follows:

65
 High
B. Keep a close
A. Can be Watch
discarded
Uncertainty

C. Can be used for D. Are of highest

long-term Concern
planning

Low
Low High
Impact

Figure 4.1: A Graph between Uncertainty and Impact

Based on above classification a display board of the issues as per their classification can
be used to communicate the issue to all and the following sequence can be taken for
analysis and problem solution:
D. Category - High impact-Low uncertainty: it is the highest priority issues; need to be
addressed immediately and more cautiously. All employees must first
focus on these issues.
B. Category – High impact-High Uncertainty: it is high risk issues, need to be observed
closely and monitored strictly because of high uncertainty involved.
C. Category – Low impact-Low Uncertainty; these issues can be used for long term
planning
A. Category – High Uncertainty_ Low impact; because of low impact to the organization
and high degree of Uncertainty involve, these issues can be altogether
discarded.
The analysis and problem solution proposition part can be done on an individual or team
basis depending upon the interest of the participant(s). All ideas/reports should then be
submitted to the cross functional team for further analysis and implementation.

Self –test Activity 4.1

66
 1. Discuss the relationship between the external environment and your organization
or any organization you are familiar with.
2. Explain the environmental scanning

4.2 The Business Environments

Pretest
Dear students! Would you describe the business environments?

The environment of business can be categorized into two broad categories micro-
environment and macro-environment. Micro-environment is related to small area or
immediate periphery of an organization. Micro-environment influences an organization
regularly and directly. Within the micro or the immediate environment within which the
firm operates we need to address the following issues:
 The employees of the firm, their characteristics and how they are organized.
 The customer base on which the firm relies for business.
 The ways in which the firm can raise its finance.
 Who are the firm’s suppliers and how are the links between the two being
developed?
 The local community within which the firm operates.
 The direct competition and how they perform.
This last point might act as a convenient linking point as we move towards the macro issues
influencing the way a firm reacts in the market place. Macro environment has broader
dimensions. It mainly consists of economic, technological, political, legal and socio-
cultural. The issues concerning an organization are:
♦ Who are their threats in the competitive world in which they operate and why?
♦ Which areas of technology might pose a threat to their current product range and
why?
♦ The bargaining power of suppliers and customers?
♦ The type of competition they are facing and their perceived threats and
weaknesses?

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The classification of the relevant environment into components or sectors helps an
organization to cope with its complexity, comprehend the different influences operating,
and relating the environmental changes to its strategic management process. Different
bases for classification have been adopted. As already discussed earlier there are two types
of environmental forces, which influence an organizations business operation. Some of
these forces are external to the firm and the organization has little control over them.
Whereas the other types of forces which comes from within the organization and can be
controlled by it. Hence, the business environment can be divided into two major
components:
Macro Environment: consists of demographics and economic conditions, socio-cultural
factors, political and legal systems, technological developments, etc. These constitute the
general environment, which affects the working of all the firms. These are Global, Legal,
Political, Technological, Government, Economic, and Demographic
Micro environment: consist of suppliers, consumers, market intermediaries, etc. These
are specific to the said business or firm and affects it’s working on short term basis.
Example Consumer/Customer, Competitors, Market, Organization, Intermediaries, and
Suppliers

4.2.1 Elements of Micro Environment

This is also known as the task environment and affects business and marketing in the daily
operating level. When the changes in the macro environment affect business in the long
run, the effect micro environmental changes are noticed immediately. Organizations have
to closely analyze and monitor all the elements of micro environment in order to stay
competitive.

[Link] Consumers/Customers
According to Peter Drucker the aim of business is to create and retain customer. Customers
are the people who pay money to acquire an organization's products. The products may be
both in form of goods or services. The organizations cannot survive without customers.
They will cease to exist. Customers may or may not be a consumer. Consumer is the one
who ultimately consumes or uses the product or service. A father may buy a product as a

68
customer for his daughter who will be a consumer. A consumer occupies the central
position in the marketing environment. The marketer has to closely monitor and analyze
changes in consumer tastes and preferences and their buying habits.
♦ Who are the customers/consumers?
♦ What benefits are they looking for?
♦ What are their buying patterns?

[Link] Competitors
Competitors are the other business entities that compete for resources as well as markets.
Competition shapes business. A study of the competitive scenario is essential for the
marketer, particularly threats from competition. Following are a few of major questions
that may be addressed for analyzing competitions:
♦ Who are the competitors?
♦ What are their present strategy and business objective?
♦ Who are the most aggressive and powerful competitors?
Competition may be direct or indirect. Direct competition is between organizations, which
are in same business activity. At the same time competition can also be indirect. For
example, competition between a holiday resort and car manufacturing company for
available discretionary income of affluent customers is indirect competition.

[Link] Organization
Individuals occupying different positions or working in different capacities in
organizations consists of individuals who come from outside. They have different and
varied interests. In micro environment analysis, nothing is important as self-analysis by the
organization itself. Understanding its own strengths and capabilities in a particular
business, i.e., understanding a business in depth should be the goal of firm’s internal
analysis. The objectives, goals and resource availabilities of a firm occupy a critical
position in the micro environment.
An organization has several non-specific elements of the organization's surroundings that
may affect its activities. These consist of specific organizations or groups that are likely to
influence an organization. These are:

69
♦ Owners: They are individuals, shareholders, groups, or organizations who have a major
stake in the organization. They have a vested interest in the well-being of the company.
♦ Board of directors: The board of directors is elected by the shareholders and is charged
with overseeing the general management of the organization to ensure that it is being run
in a way that best serves the shareholders' interests.
♦ Employees: Employees are the people who actually do the work in an organization.
Employees are the major force within an organization. It is important for an organization
that employees embrace the same values and goals as the organization. However, they
differ in beliefs, education, attitudes, and capabilities. When managers and employees work
toward different goals everyone suffers.

[Link] Market
The market is larger than customers. The market is to be studied in terms of its actual and
potential size, its growth prospect and also its attractiveness. The marketer should study
the trends and development and the key success factors of the market he is operating.
Important issues are:
♦ Cost structure of the market.
♦ The price sensitivity of the market.
♦ Technological structure of the market.
♦ The existing distribution system of the market.
♦ Is the market mature?
[Link] Suppliers
Suppliers form an important component of the micro environment. The suppliers provide
raw materials, equipment, services and so on. Large companies rely on hundreds of
suppliers to maintain their production. Suppliers with their own bargaining power affect
the cost structure of the industry. They constitute a major force, which shapes competition
in the industry. Also organizations have to take a major decision on “outsourcing” or “in-
house” production depending on this supplier environment.
[Link] Intermediaries
Intermediaries exert a considerable influence on the business organizations. They can also
be considered as the major determining force in the business. In many cases the consumers

70
are not aware of the manufacturer of the products they buy. They buy product from the
local retailers or big departmental stores such as Big bazaars that are increasingly becoming
popular.

4.2.2 Elements of Macro Environment

Pretest
Dear students! Would you discuss the impact that elements of macro environment
pose up on businesses?

Macro environment is explained as one which is largely external to the enterprise and thus
beyond the direct influence and control of the organization, but which exerts powerful
influence over its functioning. The external environment of the enterprise consists of
individuals, groups, agencies, organizations, events, conditions and forces with which the
organization comes into frequent contact in the course of its functioning. It establishes
interacting and interdependent relations, conducts transactions, designs and administers
appropriate strategies and policies to cope with fluctuations therein and otherwise
negotiates its way into the future
.
[Link] Demographic environment
The term demographic denotes characteristics of population in a area, district, country or
in world. It includes factors such as race, age, income, educational attainment, asset
ownership, home ownership, employment status and location. Data with respect to these
factors within a demographic variable, and across households, are both of interest, as well
as trends over time to businessmen in addition to economist. Marketers and other social
scientists often group populations into categories based on demographic variables. Some
of the demographic factors have great impact on the business. Factors such as general age
profile, sex ratio, education, growth rate affect the business with different magnitude.
Business Organizations need to study different demographic factors. Particularly, they
need to address following issues:
♦ what demographic trends will affect the market size of the industry?
♦ what demographic trends represent opportunities or threats?

71
The business, as such, is concerned with a population's size, age structure, geographic
distribution, ethnic make-up, and distribution of income. While each of the major elements
of discussed below, the challenge for strategists is to determine what the changes, which
have been identified in the demographic characteristics or elements of a population, imply
for the future strategic competitiveness of the company. We will briefly discuss a few
factors that are of interest to a business.
(i) Population Size: While population size itself, large or small, may be important to
companies that require a "critical mass" of potential customers, changes in the specific
make-up of a population's size may have even more critical implications. Among the most
important changes in a population's size are:
♦ Changes in a nation's birth rate and/or family size;
♦ Increases or declines in the total population;
♦ Effects of rapid population growth on natural resources or food supplies.
Changes in a nation's birth rate or life expectancy can have important implications for
companies. Are people living longer? What is the life expectancy of infants? There will be
implications for the health care system (for companies serving that segment) and for the
development of products and services targeted at older (or younger) population.
(ii) Geographic Distribution: Population shifts from one region of a nation to another or
from non-metropolitan to metropolitan areas may have an impact on a company's strategic
competitiveness. Issues that should be considered include:
 Companies may have to consider relocation if population shifts have a significant
impact on the availability of a qualified workforce.
 The concepts of working-at-home and commuting electronically on the information
highway have also started in the world in a very small level. These may imply
changes in recruiting and managing the workforce.
(iii) Ethnic Mix: This reflects the changes in the ethnic make-up of a population and has
implications both for a company's potential customers and for the workforce. Issues that
should be addressed include:
♦ what do changes in the ethnic mix of the population imply for product and service
design and delivery?
♦ Will new products and services be demanded or can existing ones be modified?

72
 ♦ Managers prepared to manage a more culturally diverse workforce?
♦ How can the company position itself to take advantage of increased workforce
heterogeneity?
(iv) Income Distribution: Changes in income distribution are important because changes
in the levels of individual and group purchasing power and discretionary income often
result in changes in spending (consumption) and savings patterns. Tracking, forecasting,
and assessing changes in income patterns may identify new opportunities for companies

[Link] Economic Environment

Well! The economic environment refers to the nature and direction of the economy in
which a company competes or may compete. The economic environment includes general
economic situation in the region and the nation, conditions in resource markets (money
market, manpower market, raw material components, services, supply markets and so on)
which influence the supply of inputs to the enterprise, their costs, quality, availability and
reliability of supplies.
Economic environment determines the strength and size of the market. The purchasing
power in an economy depends on current income, prices, savings, and circulation of
money, debt and credit availability. Income distribution pattern determines the marketing
possibilities. The important point to consider is to find out the effect of economic prospect
and inflation on the operations of the firms. Strategists must scan, monitor, forecast, and
assess a number of key economic factors mentioned in the table below for both domestic
and key international markets.
Key Economic Factors:

of goods and services consumer groups

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 ♦

conditions
alitions of Countries/ Regional
blocks
[Link] Political-Legal Environment
This is partly general to all similar enterprises and partly specific to an individual
enterprise. It includes such factors as the general state of political development, the degree
of politicalization of business and economic issues, the level of political morality, the law
and order situation, political stability, the political ideology and practices of the ruling
party, the purposefulness and efficiency of governmental agencies, the extent and nature
of governmental intervention in the economy and the industry, Government policies (fiscal,
monetary, industrial, labor and export-import policies), specific legal enactments and
framework in which the enterprise has to function and the degree of effectiveness with
which they are implemented, public attitude towards business in general and the enterprise
in particular and so on. There are three important elements in political-legal environment.
(i) Government: Business is highly guided and controlled by government policies.
Hence the type of government running a country is a powerful influence on business: A
strategist has to consider the changes in the regulatory framework and their impact on the
business.
Taxes and duties are other critical area that may be levied and affect the business. For
example, introduction of Fringe benefits Tax has major impact on the business.
(ii) Legal: Business Organizations prefer to operate in a country where there is a sound
legal system. However, in any country businesses must have a good working knowledge
of the major laws protecting consumers, competitions and organizations. Businesses must
understand the relevant laws relating to companies, competition, intellectual property,
foreign exchange, labor and so on.
(iii) Political: Political pressure groups influence and limit organizations. Apart from
sporadic movements against certain products, service and organizations, politics has deeply
seeped into unions. Also special interest groups and political action committees put

74
pressure on business organizations to pay more attention to consumer’s rights, minority
rights, and women rights.

[Link] Socio-Cultural Environment

This is too general an entity which influences almost all enterprises in a similar manner. It
is a complex of factors such as social traditions, values and beliefs, level and standards of
literacy and education, the ethical standards and state of society, the extent of social
stratification, conflict and cohesiveness and so forth.
Socio-cultural environment consist of factors related to human relationships and the impact
of social attitudes and cultural values which has bearing on the business of the organization.
The beliefs, values and norms of a society determine how individuals and organizations
should be interrelated. The core beliefs of a particular society tend to be persistent. It is
difficult for businesses to change these core values, which becomes a determinant of its
functioning.
Some of the important factors and influences operating in this environment are:
♦ Social concerns, such as the role of business in society, environmental pollution,
corruption, use of mass media, and consumerism.
♦ Social attitudes and values, such as expectations of society from business, social
customs, beliefs, rituals and practices, changing lifestyle patterns, and materialism.
♦ Family structure and changes in it, attitude towards and within the family, and family
values.
♦ Role of women in society, position of children and adolescents in family and society.
♦ Educational levels, awareness and consciousness of rights, and work ethics of
members of society.
The social environment primarily affects the strategic management process within the
organization in the areas of mission and objective setting, and decisions related to products
and markets.

[Link] Technological environment

The most important factor, which is controlling and changing people’s life, is technology.
Technology has literally created wonder. Man could realize its dream of walking in the
moon, traveling in spaceships, and go to the other side of the globe within few hours. They

75
have already started dreaming of living of very extended life of hundreds years with the
latest development of genetic sciences and technology.
Technology has changed the way people communicate with the advent of Internet and
telecommunication system. Technology has changed the ways of how business operates
now. This is leading to many new business opportunities as well as making obsolete many
existing systems. The following factors are to be considered for the technological
environment:
♦ The pull of technological change.
♦ Opportunities arising out of technological innovation.
♦ Risk and uncertainty of technological development.
♦ Role of R&D (Research and Development) in a country and government’s R&D
budget.
The technology and business are highly interrelated and interdependent also. The fruits of
technological research and development are available to society through business only and
this also improves the quality of life of the society. Hence, technology is patronized by
business. Then again technology also drives business and makes a total change on how it
is carried out. The interface between business and technology is explained in the figure:
Interface between Business & Technology. Important technology-related issues that might
affect a broad variety of companies include:
 Access to the "information highway" through the Internet which may enable large
numbers of employees to work from home or provide strategists with access to
richer sources of information,
 Business-to-business sales and exchanges,
 Providing customers with access to online shopping through the Internet.
For example, Dell Computer Corporation reduces its paperwork flow, schedules its
payments more efficiently, and is able to coordinate its inventories efficiently and
effectively by using the capabilities of the Internet. This helps to eliminate/reduce
paperwork, flatten companies, and shrink time and distance, thus capturing a competitive
premium for the company. Because the technological aspects are so important, some of the
key questions that can be asked in assessing the technological environment are given
below.

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  What are the technologies {both manufacturing and information technologies} used
by the company?
 Which technologies are utilized in the company's business, products, or their parts?
 How critical is each technology to each of these products and businesses?
 Which external technologies might become critical and why? Will they remain
available outside the company?
 What has been the investment in the product and in the process side of these
technologies? For the company and for its competitors? Design? Production?
Implementation and service?
 What are the other applications of the company's technologies? In which
applications does the company currently participate and why? In which applicating
does the company does not participate and why?
 Which technological investments should be curtailed or eliminated?
 What additional technologies will be required in order to achieve the current
corporate business objectives?
 What are the implications of the technology and business portfolios for corporate
strategy?

4.2.3 Global Environment

Today’s competitive landscape requires that companies must analyze global environment
as it is also rapidly changing. The new concept of global village has changed how
individuals and organizations relate to each other. Further, new migratory habits of the
workforce as well as increased offshore operation are changing the dynamics of business
operation. Among the global environmental factors that should be assessed are:
♦ Potential positive and negative impact of significant international events such as a sport
meet or a terrorist attack.
♦ Identification of both important emerging global markets and global markets that are
changing. This includes shifts in the newly industrialized countries in Asia that may imply
the opening of new markets for products or increased competition from emerging globally
competitive companies in countries such as South Korea and China.
♦ Differences between cultural and institutional attributes of individual global markets.

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Due to economic reforms, Indian businessmen are also out to see beyond the physical
boundaries of the country. The Indian companies are acquiring business in different
countries. The need to think and act from global perspective is universal. For a long time
businessmen everywhere believed that home markets were adequate and safe. They never
felt the need to explore the overseas markets in a big way. "If they could pick up some
extra sales through exporting, these businessmen were more than satisfied. The scenario is
different now. The companies are increasingly interested in globalizing.

[Link] Nature of Globalization

Globalization means several things for several people. For some it is a new paradigm - a
set of fresh beliefs, working methods, and economic, political and socio-cultural realities
in which the previous assumptions are no longer valid. For developing countries, it means
integration with the world economy. In simple economic terms, globalization refers to the
process of integration of the world into one huge market. Such unification calls for removal
of all trade barriers among countries. Even political and geographical barriers become
irrelevant
At the company level, globalization means two things: (a) the company commits itself
heavily with several manufacturing locations around the world and offers products in
several diversified industries, and (b) it also means ability to compete in domestic markets
with foreign competitors.
A company which has gone global is called a multinational company (MNC) or a
transnational company (TNC). An MNC is, therefore, one that, by operating in more than
one country gains R&D, production, marketing and financial advantages in its costs and
reputation that are not available to purely domestic competitors. The global company views
the world as one market, minimizes the importance of national boundaries, sources, raises
capital and markets wherever it can do the job best.
To be specific, a global company has three characteristics:
It is a conglomerate of multiple units (located in different parts of the globe) but all linked
by common ownership.
♦ Multiple units draw on a common pool of resources, such as money, credit,
information, patents, trade names and control systems.

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 ♦ The units respond to some common strategy. Nestle International is an example of
an enterprise that has become multinational. It sells its products in most countries and
manufactures in many. Besides, its managers and shareholders are also based in
different nations.
A further development, perhaps, will be the super-national enterprise. It is a worldwide
enterprise chartered by a substantially non-political international body such as IMF or
World Bank. It operates as a private business without direct obligations. Its function is
international business service, and it remains viable only by performing that service
adequately for nations which permit its entry. With its integrative view, it should be able
to draw the economic world closer together. It could serve all nations without being
especially attached to anyone of them.

[Link] Why Do Companies Go Global?

There are several reasons why companies go global. These are discussed as follows:
♦ One reason could be the rapid shrinking of time and distance across the globe thanks to
faster communication, speedier transportation, growing financial flows and rapid
technological changes.
It is being realized that the domestic markets are no longer adequate and rich. Japanese
have flooded the U.S. market with automobiles and electronics because the home market
was not large enough to absorb whatever was produced. Some European companies have
gone global for similar reason.
♦ According to Raymond Vernon companies that develop attractive new products sell them
first in their home markets. Sooner or later, foreigners may learn about these products. At
this stage, most companies would export the product or service rather than produce it
abroad. But as foreign demand grows, the economics of foreign production change.
Eventually, the foreign market becomes large enough to justify foreign investment.
♦ Another reason for going overseas may also vary by industry. Petroleum and mining
companies often go global to secure a reliable or cheaper source of raw-materials. Some
manufacturing companies, by contrast, have often ventured overseas to protect old markets
or to seek new ones. For example cheap labour in India lure foreign investors.

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♦ Companies often set up overseas plants to reduce high transportation costs. The higher
the ratio of the unit cost to the selling price per unit, the more significant the transportation
factor becomes.
♦ The motivation to go global in high-tech industries is slightly different. Companies in
electronics and telecommunications must spend large sums on research and development
for new products and thus may be compelled to seek ways to improve sales volume to
support high overhead expenses. If domestic sales and exports do not generate sufficient
cash flow, the companies naturally might look to overseas manufacturing plants and sales
branches to generate higher sales and better cash flow.
The following developments are also responsible for transnational operation of companies.
Increasing emphasis on market forces and a growing role for the private sector in
nearly all developing countries;
Rapidly changing technologies that are transforming the nature, organization, an
location of international production;
The globalization of firms and industries;
The rise of services to constitute the largest single sector in the world economy;
and regional economic integration, which has involved both the world's largest
economies as well as select developing countries.

4.2.4 Manifestation of Globalization

Globalization manifests itself in many ways. Important of them are:
Configuring anywhere in the world: An MNC(multi-National Company) can locate its
different operations in different countries on the basis of raw material availability,
consumer markets and low-cost labor.
Interlinked and independent economies: In terms of economic-welfare, globalization
refers to the unique economically interdependent international environment. Each
country's prosperity is interlinked with the rest of the world. No nation can any longer
hope to lead an existence of solitude and isolation in which only domestic industries can
function.
Lowering of trade and tariff barriers: The apparent and real collapse of international
trade barriers proposes a new global cooperative arrangement and a redefinition of roles of

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state and industry. The trend is towards increased privatization of manufacturing and
services sectors, less government interference in business decisions and more dependence
on the value-added sector to gain market place competitiveness. World over, governments
are pulling out from commercial business. The trade tariffs and custom barriers are getting
lowered, resulting in cheaper and abundant supply of goods.
Infrastructural resources and inputs at International prices: Infrastructural inputs
must be ensured at competitive prices, if the companies were to compete globally. The
advantages of cheap labor (and other inputs) evaporate in the face of continuous inflation
and high infrastructural costs.
Increasing trend towards privatization: Governments are everywhere withdrawing from
owning and running business enterprises. Private entrepreneurs are given greater access
and freedom to run business units. The role of government is reduced to the provider of
infrastructure for private business to prosper.
Entrepreneur and his unit have a central economic role: In the emerging world order,
the entrepreneur and his unit become central figures in the process of economic growth and
development of a nation. Given the right environment, businesses are able to innovate,
bring in new products, and contribute to nation's wealth. For the risk he takes and efforts
he puts in, the businesses are rewarded with profits. Related to this is the viability of the
business unit. Only firms which are cost effective and quality oriented survive and prosper.
Weak and marginal firms die their natural death.
Mobility of skilled resources: Skilled labor was once considered to be the decisive factor
in plant location and even in determining comparative advantage of a nation. Not anymore.
Skilled labor is highly mobile. Modern factories use highly skilled labor which is freely
mobile. Where labor is unskilled, managements are spending vast sums of money to train
workers become skilled in their jobs. Besides labor, other factors of production (land and
capital) are also mobile. A developing country which is long on land and short on capital
can invite foreign investment and make good the deficiency. Similarly, a developed
country which is long on capital and short on land can use a developing country as a base
for its manufacturing operations. Thus, the traditional factors of production, viz., land,
labor and capital, are no more immobile or restricted for usage with. They are transferable

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from any part of the world to any other part of the globe. The entire world has become a
global village.
Market-side efficiency: Integration of global markets implies that costs, quality
processing time, and terms of business become dominant competition drivers.
Customers can make a genuine choice of products and services on the basis of
maximum value for money. The exclusive markets which were once enjoyed are no
longer available to a firm. The inexorable pressure of technology and need for its
integration means that customers no longer have to be satisfied with shoddy products
and services provided by the state monopolies.
Self-Test Exercise
Activity 4.2
1. What are the elements of micro- environment?
2. Describe the elements of macro-environment?
3. What is the nature of globalization?
4. Discuss the important elements in political-legal environment!
5. Describe factors to be considered for the technological environment?

4.4 Forecasting Tools and Techniques

Pretest
Dear students! What does forecasting mean? Do you describe forecasting tools and
techniques from your own experience?
Forecasts are educated assumptions about future trends and events. Forecasting is a
complex activity due to factors such as technological innovation, cultural changes, new
products, improved services, stronger competitors, shifts in government priorities,
changing social values, unstable economic conditions, and unforeseen events. Most
organizations forecast (project) their own revenues and profits annually. Organizations
sometimes forecast market share or customer loyalty in local areas. Forecasting tools can
be broadly categorized into two groups: quantitative techniques and qualitative techniques.
Quantitative forecasts are most appropriate when historical data are available and when the
relationships among key variables are expected to remain the same in the future. The three

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types of quantitative forecasting techniques are econometric models, regression, and trend
extrapolation.
All quantitative forecasts, regardless of statistical sophistication and complex, are based on
historical relationships among key variables. Linear regression, for example, is based on
the assumption that the future will be just like the past- which, of course, it never is. As
historical relationships become less stable, quantitative forecasts becomes less accurate.
The six basic qualitative approaches to forecasting are: sales force estimate, anticipatory
surveys or market research, scenario forecasts, Delphi forecasts, brainstorming…etc.
qualitative or judgmental forecasts are particularly useful when historical data are not
available or when constituent variables are expected to change significantly in the future.

4.5 Competitive Environment

Pretest
Dear students! Define Competitive Environment?________________________
________________________________________________________________
Well! The competitive environment refers to the situation which organization’s face within
its specific area of operation and this can be understood at an industry level or with respect
to smaller groups (strategic groups). Organization within an industry with similar strategic
characteristics; following similar strategies or computing on similar bases are called
strategic groups. These characteristics for a particular group will be different from those in
the other strategic groups in the same industry or sector. There may be many different
characteristics, which distinguish between strategic groups. For example, size, breadth of
product range, geographical coverage, quality/service levels or marketing spends.
4.5.1 Porter’s five forces framework
The five forces framework developed by Michael porter is the most widely known tool for
analyzing the competitive environment, which helps in explaining how forces in the
competitive environment shape strategies and affect performance. The framework suggests
that there are competitive forces other than direct rivals which shape up the competitive
environment. These competitive forces are:
1. the potential entrants
2. the substitutes products
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 3. the bargaining power of suppliers
4. the bargaining power of buyers
5. the rivalry among competitors in the industry

Threats of
Potential Entrants

Bargaining Bargaining
power of Firm’s power of
Supplier Market Buyers

Threats of
Substitutes

Figure 4.2: Five Force Analysis

However, these five forces are not independent of each other. Pressures from one direction
can trigger off changes in another which is capable of shifting sources of competition. In
the following section each of these five forces are discussed in detail as to understand how
each of these forces affect an industry’s environment so that one can identify the most
appropriate strategic position within the industry.

1) Threat of New Entrants

New entrants are always a powerful source of competition. The new capacity and product
range they bring in throw up new competitive pressure. And the bigger the new entrant,
the more severe the competitive effect. New entrants also place a limit on prices and affect
the profitability of existing players. Entry of a firm in and operating in a market is seen as
a threat to the established firms in that market. The competitive position of the established
firms is affected because the entrants may add new production capacity or it may affect
their market shares. They may also bring additional resources with them which may force
the existing firms to invest more than what was not required before. Altogether the situation
becomes difficult for the existing firms if not threatening always and therefore they resort

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to raising barriers to entry. These barriers are intended to discourage new entrants and this
may be done by organizations, be in any one or more ways as discussed below:
a) Economics of scale: - Firms which operate on a large scale get benefits of lower cost of
production because of the economies scale. Since the new firm normally would start its
operation at a smaller scale; and therefore will have a relatively higher cost of production,
its competitive position in the industry gets adversely affected. This barrier created through
large scale of operation is not only applicable for production side but it can be extended to
advertising , marketing, distribution, financing, after sales customer service, raw materials,
purchasing and research and development as well. For e.g., you would have noticed in
durable industry the kind of investments which players like Samsung and LG do on
advertising and promotions normally and specially during events like FIFA world cup
match. This makes it nearly impossible for any new third player to launch and sustain such
intensive and investment driven marketing attack.
b) Learning or Experience effect: The theory explaining the experience curve or the
learning curve suggests that as firms produce they grow more efficient and this brings them
cost benefits. The efficiency levels are an outcome of the experience, which teaches the
organization better ways of doing things. This again keeps any new entrant at a
disadvantage.
C) Cost disadvantage independent of scale: new entrants may face disadvantages which
are independent of the operations. It may be on account of the lack of proprietary product
knowledge such as patents, favorable access to raw material, favorable locations, existing
plants built and equipped years earlier at lower costs, lower borrowing costs etc.
d) Brand benefits: buyers are often attached to established brands. Differences in physical
or mere perceived value make existing products unique and the new entrants have to tire
out to beat such brands and change the mindset of the customers.
e) Capital requirements: high investments required for start up in any business is another
deterrent for new entrants bringing down the possibility of increased competition.
f) Switching costs: Switching costs, which is nothing but the expenses (financial or
psychological) which a customer incurs in switching from one seller to another. Cases
where such an expense is higher, new entrants find it difficult to establish or survive. Such
costs may be because of a strong brand association or the comfort level a customer may

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be enjoying or it may be on account of a particular technology, which most customers use
and therefore will find it inconvenient to switch to other products/service.
g) Access to distribution channel: any such critical activity like distribution channel in
the business can be a barrier for the entrants when accessibility to them is found to be
difficult. Most existing firms in Fast Moving Consumer Goods (FMCG) industry are found
to have a strong favorable distribution channels which is very difficult to penetrate.
 In addition to the above, few general entry barriers exist in each industry’s case, for
example, regulatory policies, tariffs and international trade restrictions are few such
additional factors.

2) The Threats of Substitutes

Often firms in an industry face competition from outside industry products, which may be
close substitutes of each other. For e.g., with the new technologies in place now the
electronic publishing are the direct substitutes of the texts published in print. Substitute
products are a latent source of competition in an industry. In many cases they become a
major constituent of competition. Substitute products offering a price advantage and/or
performance improvement to the consumer can drastically alter the competitive character
of an industry. However, the competitive pressure, which any industry may face, depends
primarily on three factors:
i. Whether the substitutes available are attractively priced
ii. Whether buyers view substitutes available as satisfactory in terms of their quality
and performance
iii. How easily buyers can switch to substitutes.
Generally it is observed that the availability and acceptability of substitutes determine an
upper price limit to a product. When relative prices of the product in question rise above
that of the substitute products, customers tend to switch away from them.

2) Bargaining Power of Suppliers

Quite often suppliers, too, exercise considerable bargaining power over companies. The
more specialized the offering from the supplier, greater is his clout. And, if the suppliers
are also limited in number they stand a still better chance to exhibit their bargaining power.

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The bargaining power of suppliers determines the cost of raw materials and other inputs of
the industry and, therefore, industry attractiveness and profitability. Business organizations
have a large dependency on suppliers and the latter influence their profit potential
significantly. Suppliers’ decisions on prices, quality of goods and services and other terms
and conditions of delivery and payments have significant impact on the profit trends of an
industry. However, suppliers’ ability to do all these depends on the bargaining power over
buyers.
Suppliers’ bargaining power would normally depend on:
a) Importance of the buyer to the supplier group: the size of the suppliers taken by a
particular buyer is likely to put the buyers in a relatively advantageous position. The same
may be found true if the supplier tends to get an image advantage by supplying to a
particular firm. Consequently in dealing with such buyers, suppliers’ bargaining power is
naturally reduced. Just opposite happens when buyer is not so important to the supplier and
the later then is less likely to offer favorable terms to win or retain the customer.
b) Importance of the Suppliers’ Product to Buyer: Here the position may just be
opposite of the above situation where suppliers have a better bargaining power coming
from their sheer size or image.
c) Greater concentration among suppliers than buyers: an industry, which is largely
dominated by a few large firms, is a highly concentrated industry. Such few firms hold
greater power with them as the proportion of the industry’s total output is in hands such
large firms. This gives such firms greater power over those who do business with them.
d) High switching costs for buyers: In this case buyers suffer b/c of the suppliers’
advantageous position or by the nature of supplies itself; the buyers have to face a higher
switching cost.
e) Credible threats of forward integration by suppliers: Suppliers in a given situation may
see an opportunity in moving up the value chain and may seriously think of getting into the
business of what its buyers have been doing till now. Any indication of that nature from
supplier side puts the buyers at the receiving end as they feel threatened b/c of a new player
in that market and losing an assured source of supplies.

4) Bargaining Power of Customers

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This is another force that influences the competitive condition of the industry. This force
will become heavier depending on the possibilities of the buyers forming groups or cartels.
Mostly, this is a phenomenon seen in industrial products. Quite often, users of industrial
products come together formally or informally and exert pressure on the producer in
matters such as price, quality and delivery. Customers with a stronger bargaining power
relative to their suppliers may force supply prices down or demand better quality for the
same price and may demand more favorable terms of business. For e.g., there will always
be a difference in the bargaining power b/n an individual buying different construction
material like cement, steel or bricks and a real estate builder buying them for the number
of properties he may have been building over so many years.
a) Undifferentiated or standard supplies: a supplier, given the nature of products it
supplies, may have a very limited choice in providing any differentiated products and this
enables a customer to get the deal at the most favorable terms
b) Customer’s price sensitivity: Customer’s buying behavior varies with respect to their
sensitivity to prices. Depending on how important the item is for the customer’s usage and
proportion he may spending on the item concerned, buyers’ sensitivity to price varies.
c) Accurate information about the cost structure of suppliers: A more informed customer
is capable of negotiating with suppliers. Whenever such customers notice a decline in the
supplier’s cost’s they would always bargain for a proportional decrease in price.
d) Greater concentration in buyer’s industry than in supplier’s industry and relatively
large volume purchase: This means that buyers are large and more powerful than
suppliers.
e) Credible threat of backward integration by buyers: different from forward integration
which suppliers tend to attempt at, buyers in order to hold their position stronger in the
market may integrate in backward manner. This will mean that the buyer extends itself to
the previous stage of manufacturing or distribution for which it had been dependent on
suppliers till now.

5. Competitive Rivalry
The rivalry among existing players is an idea that can be easily understood. This is what
is normally understood as competition. And it is obvious that for any player, the

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competitors influence prices as well as the costs of competing in the industry, in production
facilities product development, advertising, sales force, etc. The level of rivalry is
minimum in a perfectly competitive market where there are large number of buyers and
sellers and the product is uniform with everyone. Same is true for a monopoly market where
there is only one player and the type of product is also one. However in case of oligopoly
or monopolistic competition, where you will find few players and the market conditions
allow them to differentiate their products and services, competition if found to be fierce.
i) The Stability of Environment: An unstable environment is likely to call for a hyper-
competitive situation and of the several factors that affect stability could be technological
innovation, changes in government regulations, customers’ profile and their needs.
ii) The life expectancy of competitive advantage: There are industries for example,
consumer electronics, in which the fruits of innovations do not last longer and hence the
companies do not even bother to patent them. This has an adverse implication for the
stability of the competitive environment leading to intense rivalry. Lengths of innovation
cycle, patent protection or switching costs between rivals are few factors; which may
impact the life expectancy of competitive advantage.
iii) Characteristics of the strategies pursued by competitors: this also has or may have an
impact on the general approach to rivalry. For e.g., in a market segmented approach on part
of the competitor leads to lesser rivalry situation. Also the kind of goals, which competitors
pursue, has an impact on the rivalry.
 Lastly, few implications can be picked up from the five forces framework itself.
Lower threats to entry or a higher possibility for substitutes have the potential of
increasing rivalry. A lower engagement between supplier will result into a lesser
rivalry. So will be the effect when buyers face higher switching costs.
 In an overall assessment, two critical observations regarding rivalry can be made
here. First a powerful competitive strategy employed by one rival can greatly
intensify the competitive pressure on other rivals. Second, the frequency and rigor
with which rivals use any or all competitive weapons at their disposal can be a
major determinant of whether the competitive pressures associated with rivalry are
cutthroat, fierce, strong, moderate or weak.

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The five forces together determine industry attractiveness/profitability. This is so because
these forces influence the causes that underlie industry attractiveness/profitability. For
example, elements such as cost and investment needed for being a player in the industry
decide industry profitability, and all such elements are governed by these forces. The
collective strength of these five competitive forces determines the scope to earn attractive
profits. The strength of the forces may vary from industry to industry as also within a given
Self-Test Exercise Activity 4.3
1. What does forecasting mean?
2. Explain the competitive environment by discussing each of the porter’s five forces?

Unit Summary
The environment in which an organization exists could be broadly divided into two parts
the external and the internal environment. The external environment (Macro Environment)
includes all the factors outside the organization which provide opportunity or pose threats
to the organization. The internal environment (Micro Environment) refers to all the factors
within an organization which impart strengths or cause weaknesses of a strategic nature.
Environmental scanning also known as Environmental Monitoring is the process of
gathering information regarding company’s environment, analyzing it and forecasting the
impact of all predictable environmental changes. Globalization means several things for
several people. For some it is a new paradigm - a set of fresh beliefs, working methods,
and economic, political and socio-cultural realities in which the previous assumptions are
no longer valid. For analyzing the competitive environment, which helps in explaining how
forces in the competitive environment shape strategies and affect performance. The
framework suggests that there are competitive forces other than direct rivals which shape
up the competitive environment. These competitive forces are: the potential entrants, the
substitute’s products, the bargaining power of suppliers, the bargaining power of buyers
and the rivalry among competitors in the industry
Self-Test Exercise (Self Check Questions )
Part I: choose the best answer for the following questions
1. All are elements of micro environment except:
(a) Consumer. (b) Suppliers. (c) Competitors. (d) Society.

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2. All are elements of macro environment except:
(a) Society. (b) Government. (c) Competitors. (d) Technology.
3. Select the correct statement out of the following:
(a) Environmental factors are totally beyond the control of a single industrial enterprise.
(b) Environmental factors are largely beyond the control of a single industrial enterprise.
(c) Environmental factors are totally within the control of a single industrial enterprise.
(d) None of the above.
4. In response to the changes in the environment organizations in general should:
(a) Understand the impact of changes on the strategy and make appropriate modifications.
(b) Make efforts that changes are reverted back so that organizations can function
smoothly.
(c) Ignore the changes. Strategic Management (d) None of the above.
5. Read the following three statements:
(i) The environment is constantly changing in nature
(ii) Various environmental constituents exist in isolation and do not interact with
each other.
(iii) The environment has a far reaching impact on organizations.
From the combinations given below select an alternative that represent statements that are
true:
(a) (i) and (ii). (b) (ii) and (iii) (c) (i) and (iii) (d) (i), (ii) and (iii)
Essay type Questions: Briefly discuss each of the following questions
1. Do you advocate that organizations should concern themselves with the elements of its
outside world? Why?
2. Discuss the relations between organizations and their external environment? How
organizations strategically respond to their environment?
3. What do you mean by micro and macro environment?
4. Briefly discuss various elements of macro environment.
5. Discuss the five forces driving industry competition as given by Porter.

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 Unit- Five: The Internal Assessment
UNIT OBJECTIVES

At the end of this unit the students will be able to:

Explain the factors that could be used for internal assessment of organizations
Describe the relationship among the functional areas of businesses
Discuss the types resources to be used in an organization
Recognize the accepted comparison of standards of business organizations
Know how SWOT analysis is going to be made

Unit Introduction
Internal capabilities and process execution at time allow firms to gain competitive edge over
competitors even with relatively lesser resources and lesser advantageous position.
A failure to recognize and understand relationships among the functional areas of business can
be detrimental to strategic management, and the number of those relationships that must be
managed increases dramatically with a firm’s size, diversity, geographic dispersion, and the
number of products or services offered. Often it has been found that quantitative analysis alone
is not sufficient to understand any organization’s strengths and weaknesses. Qualitative
information also supplements quantitative data in understanding basic concepts of what
customers’ value and how they feel about a given product. A comprehensive internal analysis
of an organization’s strengths and weaknesses must however utilize comparison standards.
Hence this unit deals with: Relationship among the functional areas of business, Types of
Resources, Quantitative and Qualitative Assessment, Comparison Standards and SWOT-
Analysis
5.1 Internal Analysis
Pretest
Dear student! Why do organizations assess their internal environment?____
______________________________________________________________

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Well! The changes in the environment may create opportunities, which the organizations try to
exploit or may bring threats for the organizations, which the latter tries to control or neutralize.
However, in order to develop successful strategies to exploit such opportunities of control the
threats, analysis of an organization’s capabilities is important for strategy making which aims
at producing a good fit between a country’s resource capability and its external situation.
Many of the issues of strategic development are concerned with changing strategic capability
better to fit a changing environment. However, looking at strategic development from a different
perspective i.e. stretching and exploiting the organizations capability to create opportunities is
very essential and is called the Resource Based View (RBV) of strategy. That is all the resources
of the organization should mobilized to achieve the objectives.
Professionals from different organizations suggest that a firm’s overall strengths and
weaknesses and its ability to execute are often found more important to its performance than
environmental factors. Internal capabilities and process execution at time allow firms to gain
competitive edge over competitors even with relatively lesser resources and lesser advantageous
position.

5.1.1 Relationship among the Functional Areas of Business

Strategic management is a highly interactive process that requires effective coordination among
management, marketing, finance/accounting, production, R&D, and information systems. A
failure to recognize and understand relationships among the functional areas of business can be
detrimental to strategic management, and the number of those relationships that must be
managed increases dramatically with a firm’s size, diversity, geographic dispersion, and the
number of products or services offered.
Integrating strategy and culture: relationships among a firm’s functional business activities
can perhaps be exemplified best by focusing on organizational culture. Organizational culture
can be defined as “a pattern of behavior developed by an organization as it learns to cope with
its problem of external adaptation and internal integration that has worked well enough to be
considered valid and to be taught to new members as the correct way to perceive, think, and
feel.”
Types of Resources

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 Pretest
Dear students! Please describe the major resources in your organization before you read
the section below
There are three types of resources-Assets, capabilities and competencies which have been
identified under Resource Based View (RBV) of the firm. Strategic thinkers explaining the RBV
suggest that the organizations are collection of tangible and intangible assets combined
capabilities to use those assets. These help organizations develop understanding of these three
types of resources and help us to know how a firm’s internal strength and weaknesses affect its
ability to compete. Strategic importance of Resources
1. Available resources: are those resources that are basic to the capability of any organization:
 Physical resources
 Human resources
 Financial resources
 Intellectual capital
2. Unique resources: unique resources as defined in strategy texts are those resources, which
critically underpin competitive advantage. Their ability to provide value in product is better than
competitor’s resources and is difficult to imitate. Some organizations have patented products of
services that give them advantage; for some service organizations, unique resources may be
particularly the people working in that organization.
3. Core competencies: competency refers to the ability to perform. The difference in
performance between organizations in the same market is rarely explainable by differences in
their resource base, since resources can usually be imitated or traded. Superior performances
are actually determined by the way in which resources are deployed to create competences in
the organization’s activities.
Core competencies are activities or processes that critically underpin an organization’s
competitive advantage. They create and sustain ability to meet the critical success factors of
particular customer groups better than other, provide ways that are difficult to imitate.
Valuable asset capability or competence is due to the following:
 Scarcity: - this is a very basic test to understand its resource value. Just in case any
resource is widely available, then it’s not likely to be a source of competitive advantage.

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  Inimitability: - a resource that is easy to imitate is of little competitive advantage b/c it
will be widely available from a variety of sources. Inimitability however does not last
for long and at some point competition matches or even betters any offering. Therefore,
firms should make effort which may temporarily limit imitation. Physical uniqueness,
causal ambiguity or scale deterrence are few ways how organizations attempt doing this.
 Durability: - hyper competitive market conditions have a tendency to make competitive
advantage less and less sustainable. Durability in such situations becomes a more
stringent test for valuing resources, capabilities and competencies.
 Superiority: - competencies are valuable only if they manifest themselves as
competitive advantages and these means that they are superior to those held by rivals.
“Being good is not enough and a firm must be better than its competitor.”
5.3. Quantitative and Qualitative Assessment
Since every organization’s creation of wealth is the primary goal, any assessment has to focus
on measuring the variety of means that contribute to the creation of wealth. The creation of
wealth depends largely on providing superior value for customers and this is possible when the
organizations have efficient and effective operations with necessary capabilities. The required
capabilities depend on the employees, their skills and motivation levels.
Financial data is the most basic and universally accepted approach in assessing a firm. Financial
analysis emphasizes on the study of financial ratios (ratio analysis)
i. Profitability ratios
ii. Liquidity ratios
iii. Leverage ratios
iv. Activity ratios
Often it has been found that quantitative analysis alone is not sufficient to understand any
organization’s strengths and weaknesses. Particularly the factors related to human resources,
organizational culture and its temperament towards creativity and innovation are few which can
be understood only through qualitative information. Qualitative information also supplements
quantitative data in understanding basic concepts of what customers’ value and how they feel
about a given product.

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5.4. Comparison Standards
Pretest
Dear students! Would you describe the accepted Comparison of Standards of business
organizations?
In order to arrive at some meaningful conclusion regarding strengths and weaknesses, the
analysis should be supported by appropriate standards for comparison. The three commonly
accepted comparison standards are:
a) Industry Norms
The industry norms compare the performance of an organization in the same industry or sector
against a set of agreed performance indicators. Data on industry norms are widely available and
can be found from several published sources. Using such data and comparing an organization
against others in its industry helps the organization understand its true position. For e.g., in the
case of the healthcare sector, such indicators can be; mortality index, doctors per 100 beds…etc.
The danger of industry norms comparison is that the whole industry may be performing badly
and losing out competitively to other industries.

B) Historical Comparisons
Historical comparisons look at the performance of an organization in relation to previous years
in order to identify significant changes. Organizations must endeavor to improve their
performance over time in order to remain competitive and overpower the performance of
competitors. It must try to beat its own best in future, which would call for continuous
improvement. However, in case of the historical comparison it also entails scope for
complacency/satisfaction since the organizations compare their rate of improvement over years
with that of competitors and it is possible that the latter may itself be operating at relatively
lower average.

c) Benchmarking
Benchmarking compares an organization’s performance against ‘best in class’ performance
wherever that is found. Managers seek out the best examples of a particular practice in other
companies as part of an effort to improve the corresponding practice in their own firm. When
the search for best practice limited to competitors, the process is called competitive
benchmarking. Other times managers may seek out the best practices regardless of what industry

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they are in, called functional benchmarking. Benchmarking Provides the motivation and the
means many firms need to seriously rethink how their organizations perform certain tasks.
A comprehensive internal analysis of an organization’s strengths and weaknesses must however
utilize all three types of comparison standards. For instance, an organization can study industry
norms to assess where it stands in terms of number of complaints generated regarding defects
during guarantee period of a product. Then it could benchmark the organization that is best at
controlling the defects. Based on the benchmarking results it could implement major new
programmes and track improvements in these programmes over time using, historical
comparisons.
Self-Test Exercise Activity 5.1
1. Why do organizations assess their internal environment?
2. What is the relationship among the functional areas of business?
3. What types of Resources do organization make use
4. Do Quantitative and Qualitative Assessment go hand in hand?
5. What are the accepted Comparison of Standards of business organizations?

5.5. SWOT- Analysis

Pretest
Dear students! What does SWOT analysis mean? Discuss from your own experience?

Well! A systematic approach to understanding the environment is the SWOT analysis. Business
firms undertake SWOT analysis to understand the external and internal environment. SWOT,
which is the acronym for strengths, weaknesses, opportunities and threats. Through such an
analysis, the strengths and weaknesses existing within an organization can be matched with the
opportunities and threats operating in the environment so that an effective strategy can be
formulated. An effective organizational strategy, therefore, is one that capitalizes on the
opportunities through the use of strengths and neutralizes the threats by minimizing the impact
of weaknesses. The process of strategy formulation starts with, and critically depends on, the
appraisal of the external and internal environment of an organization.
SWOT Analysis is a strategic planning method used to evaluate the Strengths, Weaknesses,
Opportunities, and Threats involved in a business venture. It involves specifying the objective

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of the business venture and identifying the internal and external factors that are favorable and
unfavorable to achieving that objective. It summarizes the key issues from the external
environment and the internal capabilities of an organization those which become critical for
strategy development. SWOT analysis is based on the assumption that if managers can carefully
review such strengths, weaknesses, opportunities, and threats, a useful strategy for ensuring
organizational success will become evident to them. The environment in which an organization
exists can, therefore, be described in terms of the opportunities and threats operating in the
external environment apart from the strengths and weaknesses existing in the internal
environment. An understanding of the external environment, in terms of the opportunities and
threats, and the internal environment, in terms of the strengths and weaknesses, is crucial for the
existence, growth and profitability of any organization.
The four environmental influences could be described as follows:
A. Strengths
Strength is an inherent capacity which an organization can use to gain strategic advantage over
its competitors. An example of strength is superior research and development skills which can
be used for new product development so that the company gains competitive advantage.
Two factors contribute to your strengths: ability and resources available.
Ability is evaluated on 3 counts:
1. Versatility: your ability to adapt to an ever changing environment.
2. Growth: your ability to maintain a continuing growth.
3. Markets: your ability to penetrate or create new markets.
The strength of resources has three dimensions:
1. Availability: your ability to obtain the resources needed.
2. Quality: the quality and up-to-datedness of the resources employed.
3. Allocation: your ability to distribute resources both effectively and efficiently.
Firm’s strengths are its resources and capabilities that can be used as a basis for developing a
competitive advantage. Example:
 Patents
 Strong brand names
 Good reputation among customers
 Cost advantages from proprietary know-how

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  Exclusive access to high grade natural resources
 Favorable access to distribution networks
B. Weaknesses
Weakness is an inherent limitation or constraint which creates a strategic disadvantage. An
example of a weakness is over dependence on a single product line, which is potentially risky
for a company in times of crisis. Your weaknesses are determined through failures, defeats,
losses and inability to match up with the dynamic situation and rapid change. The weaknesses
may be rooted in lack of managerial skills, insufficient quality, technological backwardness,
inadequate systems or processes, slow deliveries, or shortage of resources. There are three
possible outcomes to the analysis of your weaknesses.1
1. Correction of an identified defect.
2. Protection through cover-up and prevention strategies to reduce the exposure of your
weaknesses.
3. Aggression to divert the attention from your weaknesses.
The absence of certain strengths may be viewed as a weakness. Example:
 Lack of patent protection
 A weak brand name
 Poor reputation among customers
 High cost structure
 Lack of access to the best natural resources
 Lack of access to key distribution channels
C. Opportunities
Opportunity is a favourable condition in the organization's environment which enables it to
consolidate and strengthen its position. An example of an opportunity is growing demand for
the products or services that a company provides.
Opportunities are abundant. You must develop a formula which will help you define what
comes within the ambit of an opportunity to focus on those areas and pursue those opportunities
where effectiveness is possible. The formula must define product/service, target market,
capabilities required and resources to be employed, returns expected and the level of risk
allowed.

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Weaknesses of your competitions are also opportunities for you. You can exploit them in two
following ways:
1. Marketing warfare: attacking the weak leader's position and focusing all your efforts
at that point, or making a surprise move into an uncontested area.
2. Collaboration: you can use your complementary strengths to establish a strategic
alliance with your competitor.
The external environmental analysis may reveal certain new opportunities for profit and
growth. Example:
 An unfulfilled customer need
 Arrival of new technologies
 Loosening of regulations
 Removal of international trade barriers
D. Threats
Threat is an unfavourable condition in the organization's environment which creates a risk for,
or causes damage to the organization. An example of a threat is the emergence of strong new
competitors who are likely to offer stiff competition to the existing companies in an
[Link] threats arise from political, economic, social, technological (PEST) forces.
Technological developments may make your offerings obsolete. Market changes may result
from the changes in the customer needs, competitors' moves, or demographic shifts. The
political situation determines government policy and taxation structure.
 Changes in the external environment also may present threats to the firm. Example:
 Shifts in consumer tastes away from the firm’s products
 Emergence of substitute products
 New regulations
 Increased trade barriers
Any organization must try to create a fit with its external environment. The SWOT-diagram is
a very good tool for analyzing the internal strengths and weaknesses a corporation and the
external opportunities and threats. Organizations may use confrontation matrix as a tool to
combine the internal factors with the external factors.

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 Opportunities Threats
Strengths S – O Strategies S – T Strategies
Offensive Adjust
Make the most of these Restore strengths
Weaknesses W – O Strategies W – T Strategies
Defensive Survive
Watch competition Turnaround
closely

S – O Strategies: - pursue opportunities that are a good fit to the company’s strengths.
S – T Strategies: - identify ways that the firm can use its strengths to reduce its vulnerability to
external threats.
W – O Strategies: - overcome weaknesses to pursue opportunities
W – T Strategies: - establish a defensive plan to prevent the firm’s weaknesses from making it
highly susceptible to external threats.
Self-Test Exercise Activity 5.2
1. What does SWOT- Analysis mean?

Unit summary
In order to develop successful strategies to exploit such opportunities of control the threats,
analysis of an organization’s capabilities is important for strategy making which aims at
producing a good fit between a country’s resource capability and its external situation. Strategic
management is a highly interactive process that requires effective coordination among
management, marketing, finance/accounting, production, R&D, and information systems.
Qualitative information also supplements quantitative data in understanding basic concepts of
what customers’ value and how they feel about a given product. A comprehensive internal
analysis of an organization’s strengths and weaknesses must however utilize comparison
standards. SWOT Analysis is a strategic planning method used to evaluate the Strengths,
Weaknesses, Opportunities, and Threats involved in a business venture. It involves specifying
the objective of the business venture and identifying the internal and external factors that are
favorable and unfavorable to achieving that objectiv

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Self-Test Exercise: Check Questions
Part- I Say True if the statement is correct and False if it is incorrect
1. Unique resources as defined in strategy texts are those resources, which critically
underpin competitive advantage.
2. The industry norms compare the performance of an organization in the same industry
or sector against a set of agreed performance indicators.
3. A weakness is an inherent capacity which an organization can use to gain strategic
advantage over its competitors,
4. A strength is an inherent limitation or constraint which creates a strategic disadvantage,
5. Strategic management is a highly interactive process that requires effective
coordination among functional units
Part – II: - Fill in the Blank Spaces with the Appropriate Word
1. stretching and exploiting the organizations capability to create opportunities is very
essential and is called the ____________of strategy.
2._____________ create and sustain ability to meet the critical success factors of particular
customer groups better than other.
3. __________ look at the performance of an organization in relation to previous years in
order to identify significant changes.
4. ______________an organization’s performance against ‘best in class’ performance
wherever that is found.
5.__________ is a favorable condition in the organization's environment which enables it to
consolidate and strengthen its position.

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Unit- Six: Strategy Analysis and Choice

UNIT OBJECTIVES

This unit will discuss issues related to the concepts of strategy analysis and choice. It will also
present different ways through which the analysis of strategy and its choice can be made.
Therefore, after studying this unit, you will be able to:
 Identify issues to consider for strategic analyses
 Discuss the aspects of business portfolio analysis
 Understand the concept of balanced score cared
 Understand issues in strategic formulation
 Describe the 7’S Model
Unit Introduction
Strategic management comprises of three broad activities, namely: strategic analysis, strategic
formulation and strategic implementation. All the three are interrelated. Strategic analysis is the
foundation for formulating strategies and basically comprises of the study of business
environment as a whole. According to George Salk, “If you’re not faster than your competitor,
you’re in a tenuous position, and if you’re only half as fast, you’re terminal.
The strategic management process, after deciding the vision, mission, goals and objectives of
the organization, turns its focus to scanning of environment in which all organizations work as
sub-systems. That is environmental scanning covers both scanning of external environment and
internal environment. The scanning of external environment leads to the identification of the
opportunities and threats thrown open to organizations while the internal analysis leads to the
study of strengths and weaknesses which will decide as to what extent each company is going
to capitalize the opportunities and threats thrown open. Dear learner, refer back the chapters on
external and internal environment.
6.1. Issues to Consider for Strategic Analyses
Pretest
Dear student! Would you identify the different issues that should be considered in
strategic analysis?

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Strategy evolves over a period of time: There are different forces that drive and constrain
strategy and that must be balanced in any strategic decision. An important aspect of strategic
analyses is to consider the possible implications of routine decisions. Strategy of a business, at
a particular point of time, is result of a series of small decisions taken over an extended period
of time. A manager who makes an effort to increase the growth momentum of an organization
is materially changing strategy. The process of strategy formulation is often described as one of
the matching the internal potential of the organization with the environmental opportunities. In
reality, as perfect match between the two may not be feasible, strategic analyses involve a
workable balance between diverse and conflicting considerations. A manager working on a
strategic decision has to balance opportunities, influences and constraints.
For instance, there are pressures that are driving towards a particular choice such as entering a
new market. Simultaneously there are constraints that limit the choice such as existence of a big
competitor. These constraining forces will be producing an impact that will vary in nature,
degree, magnitude and importance. Some of these factors can be managed to some extent;
however, there will be several others that are beyond the control of a manager.
SITUATIONAL ANALYSIS: All companies operate in a ''macro environment'' shaped by
influences emanating from the economy at large, population demographics, societal values and
lifestyles, governmental legislation and regulation, technological factors. These factors have
been discussed in chapter 4.

Thinking
strategically about a Select the
company’s external Form a best
environment strategic Identity strategy
vision of promising and
where the strategic business
company options for model for
needs to the company the
Thinking head company
strategically about a
company’s internal
environment

Fig. 6.1 From Thinking Strategically about the Company's Situation to Choosing a Strategy

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The following diagram shows the procedure followed in strategic analysis before developing
any given strategy it is important to conduct some form of analysis. This should form an
essential part of any business plan and should be reviewed over time to ensure that it is kept
current. The following are the most important factors that should be taken in to account when
conducting strategic analysis.
Product situation: What is my current product? You may want to break this definition up into
parts such as the core product and any secondary or supporting services or products that also
make up what you sell. It is important to observe this in terms of its different parts in order to
be able to relate this back to core client needs.
Competitive situation: Analyze your main competitors - who are they what are they up to - how
do they compare. What are their competitive advantages?
Distribution situation: Review your distribution Situation - how are you getting your product
to market? Do you need to go through distributors or other intermediaries?
Environmental factors: What external and internal environmental factors are there that needs
to be taken into account. This can include economic or sociological factors that impact on your
performance.
Opportunity and issue analysis: Things to write down here are what current opportunities that
are available in the market, the main threats that business is facing and may face in the future,
the strengths that the business can rely on and any weaknesses that may effect the business
performance.

6.2. Portfolio Analyses

Pretest
Dear students! What do you understand by the term portfolio analysis? Please try to write
on a sheet of paper before you go through the discussion below.
In order to analyze the current business portfolio, the company must conduct portfolio analysis
(a tool by which management identifies and evaluates the various businesses that make up the
company). In portfolio analyses top management views its product lines and business units as a
series of investments from which it expects returns. A business portfolio is a collection of
businesses and products that make up the company. The best business portfolio is the one that
best fits the company’s strengths and weaknesses to opportunities in the environment. Portfolio

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analysis can be defined as a set of techniques that help strategists in taking strategic decisions
with regard to individual products or businesses in a firm’s portfolio. It is primarily used for
competitive analysis and corporate strategic planning in multi product and multi business firms.
The main advantage in adopting a portfolio approach in a multi-product, multi-business firm is
that resources could be channelized at the corporate level to those businesses that possess the
greatest potential. For instance, a diversified company may decide to divert resources from its
cash-rich businesses to more prospective ones that hold promise of a faster growth so that the
company achieves its corporate level objectives in an optima manner.
In order to design the business portfolio, the business must analyze its current business portfolio
and decide which business should receive more, less, or no investment. Depending upon
analyses businesses may develop growth strategies for adding new products or businesses to the
portfolio.
There are three important concepts, the knowledge of which is a prerequisite to understand
different models of portfolio analysis:
Strategic business unit: Analyzing portfolio may begin with identifying key businesses also
termed as strategic business unit (SBU). SBU is a unit of the company that has a separate mission
and objectives and which can be planned independently from other company businesses. The
SBU can be a company division, a product line within a division, or even a single product or
brand. SBUs are common in organisations that are located in multiple countries with
independent manufacturing and marketing setups. An SBU has following characteristics:
 Single business or collection of related businesses that can be planned for separately.
 Has its own set of competitors.
 Has a manager who is responsible for strategic planning and profit.
After identifying SBUs the businesses have to assess their respective attractiveness and decide
how much support each deserves.
There are a number of techniques that could be considered as corporate portfolio analysis
techniques. The most popular is the Boston Consulting Group (BGC) matrix or product portfolio
matrix. But there are several other techniques that should be understood in order to have a
comprehensive view of how objective factors can help strategists in exercising strategic choice.
Experience Curve: Experience curve is an important concept used for applying a portfolio
approach. The concept is akin to a learning curve which explains the efficiency increase gained

106
by workers through repetitive productive work. Experience curve is based on the commonly
observed phenomenon that unit’s costs decline as a firm accumulates experience in terms of a
cumulative volume of production. The implication is that larger firms in an industry would tend
to have lower unit costs as compared to those for smaller companies, thereby gaining a
competitive cost advantage. Experience curve results from a variety of factors such as learning
effects, economies of scale, product redesign and technological improvements in production.
The concept of experience curve is relevant for a number of areas in strategic management. For
instance, experience curve is considered a barrier for new firms contemplating entry in an
industry.
It is also used to build market share and discourage competition. In the contemporary Indian
two wheeler market, the experience curve phenomenon seems to be working in favor of Bajaj
Auto, which for the past decade has been selling, on an average, 5 lakh scooters a year and
retains more than 60 per cent of the market. Its only serious competitor is LML Vespa Ltd.,
which has a far lesser share of the market. The primary strategic advantage that Bajaj Auto has
is in terms of costs. Other competitors like Gujarat Narmada and Kinetic Honda find it extremely
difficult to compete due to the cost differentials that currently exist. The likely strategic choice
for underdog competitors could be a market niche approach or segmentation based on
demography or geography.
Product Life Cycle: Another important concept in strategic choice is that of product life cycle
(PLC). It is a useful concept for guiding strategic choice. Essentially, PLC is an S-shaped curve
which exhibits the relationship of sales with respect of time for a product that passes through
the four successive stages of introduction (slow sales growth), growth (rapid market acceptance)
maturity (slowdown in growth rate) and decline (sharp downward drift). If businesses are
substituted for product, the concept of PLC could work just as well. The main advantage of PLC
is that it can be used to diagnose a portfolio of products (or businesses) in order to establish the
stage at which each of them exists. Particular attention is to be paid on the businesses that are
in the declining stage. Depending on the diagnosis, appropriate strategic choice could be made.
For instance, expansion may be a feasible alternative for businesses in the introductory and
growth stages. Mature businesses may be used as sources of cash for investment in other
businesses which need resources. A combination of strategies like selective harvesting,

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retrenchment, etc. may be adopted for declining businesses. In this way, a balanced portfolio of
businesses may be built up by exercising a strategic choice based on the PLC concept.
Sales

Maturity

Decline
Growth
Introduction

Time
Fig. 6.1 Product Life Cycle

Self-Test Exercise Activity 6.1

1. Discuss the portfolio analysis for a your organization
2. Explain the effects of experience curve
3. Describe the product life cycle by discussing each stage.

6.3 Boston Consulting Group (BCG) Growth-Share Matrix

Pretest
Dear student! Would you describe the BCG Growth-share matrix? How the growth rate
and market share of a certain company can be identified?
The BCG growth-share matrix is the simplest way to portray a corporation’s portfolio of
investments. Growth share matrix also known for its cow and dog metaphors is popularly used
for resource allocation in a diversified company. Using the BCG approach, a company classifies
its different businesses on a two-dimensional growth-share matrix. In the matrix:

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  The vertical axis represents market growth rate and provides a measure of market
attractiveness.
 The horizontal axis represents relative market share and serves as a measure of company
strength in the market.
Using the matrix, organisations can identify four different types of products or SBU as follows:
The Boston Consulting Group matrix ("BCG matrix")

Fig. 6.3 BCG Growth-Share Matrix

Using the BCG matrix a company classifies all its SBU's according to two dimensions:
 Relative market share
This indicates likely cash generation, because the higher the share the more cash will be
generated. As a result of 'economies of scale' (a basic assumption of the Boston Matrix), it is
assumed that these earnings will grow faster the higher the share. The exact measure is the
brand's share relative to its largest competitor. Thus, if the brand had a share of 20 per cent, and
the largest competitor had the same, the ratio would be 1:1. If the largest competitor had a share
of 60 per cent, however, the ratio would be 1:3, implying that the organization's brand was in a
relatively weak position. If the largest competitor only had a share of 5 per cent, the ratio would
be 4:1, implying that the brand owned was in a relatively strong position, which might be
reflected in profits and cash flow. If this technique is used in practice, it should be noted that
this scale is logarithmic, not linear.
On the other hand, exactly what is a high relative share is a matter of some debate. The best
evidence is that the most stable position (at least in FMCG markets) is for the brand leader to

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have a share double that of the second brand, and treble that of the third. Brand leaders in this
position tend to be very stable - and profitable
The reason for choosing relative market share, rather than just profits, is that it carries more
information than just cash flow. It shows where the brand is positioned against its main
competitors, and indicates where it might be likely to go in the future. It can also show what
type of marketing activities might be expected to be effective
 Market growth rate - this provides a measure of market attractiveness.
By dividing the matrix into four areas, four types of SBU can be distinguished:
Stars - Stars are high growth businesses or products competing in markets where they are
relatively strong compared with the competition. Often they need heavy investment to sustain
their growth (i.e. star generate large amounts of cash b/c of their strong relative market share,
but also consume large amounts of cash b/c of their high growth rate). Eventually their growth
will slow and, assuming they maintain their relative market share, will become cash cows. The
most widely used strategy here is that; Hold; the company invests just enough to keep the SBU
in its present position
Cash Cows - Cash cows are low-growth businesses or products with a relatively high market
share. These are mature, successful businesses with relatively little need for investment. They
need to be managed for continued profit - so that they continue to generate the strong cash flows
that the company needs for its Stars. The strategy followed is that Harvest; i.e., such business
units should be “milked”, extracting the profits and investing as little cash as possible.
Question marks (problem children or wildcats) - Question marks are businesses or products
with low market share but which operate in higher growth markets. This suggests that they have
potential, but may require substantial investment in order to grow market share at the expense
of more powerful competitors. Management have to think hard about "question marks" - which
ones should they invest in? Which ones should they allow to fail or shrink? The common
strategy used is Build Share; the company can invest to increase market share (for example
turning a "question mark" into a star).
Dogs - Unsurprisingly, the term "dogs" refers to businesses or products that have low relative
share in unattractive, low-growth markets. Thus neither generates nor consumes a large amount
of cash. However, dogs are cash traps b/c of the money tied up in a business that has little
potential. The strategy 1followed may be Divest; the company can divest the SBU by phasing

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it out or selling it - in order to use the resources elsewhere (e.g. investing in the more promising
"question marks").
Strategic Movements
The matrix segments summarise the expected cash flow and profit and also recommends an outline strategy
to follow. Crudely this is to milk the cows, divest the dogs, invest in the stars and examine the problem
children.
Stars tend to move vertically downwards as the market growth rate slows, to become cash cows. The cash
that they generate can be used to turn problem children into stars, and eventually cash cows.
The ideal progression is illustrated below:

High Low
Relative market share (log scale)
Product movement (A to B to C representing the product life
cycle)
Cash movement (from products z to x and y)

Fig. 6.4 product and cash movement of the BCG model

Nevertheless, the matrix position provides a good and objective indication of the competitive
position of the products.
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Limitations of the Model
The BCG matrix provides a framework for allocating resources among different business units
and allows one to compare many business units at a glance. However, the model has the
following drawbacks:
 Market growth rate is only one factor in industry attractiveness, and relative market share
is only one factor in competitive advantage. The growth share matrix overlooks many
other factors in these two important determinants of profitability.
 The framework assumes that each business units is independent of the others. In some
cases, a business unit that is a “dog” may be helping other business units gain a
competitive advantage.
 The matrix depends heavily upon the breadth of the definition of the market. A business
unit may dominate its small niche, but have very low market share in the overall industry.
In such a case, the definition of the market can make the difference between a dog and
a cash cow.
 Difficulty in determining market share: - there is a heavy dependence on the market
share of a business as an indicator of its competitive strength. The calculation of market
share is strongly influenced by the way business activity and the total market is defined.
That is clearly defining market is often difficult- as a result, accurately measuring share
and growth rate can be a problem.
 No consideration for experience curve synergy: - in the BCG approach, business in each
of the different quadrants are viewed independently for strategic purposes. Thus, Dogs
are to be liquidated or divested. But within the framework of the overall corporation,
useful experiences and skills can be acquired by operating low-profit Dog businesses
which may help in lowering the costs of star or cash cow businesses, and this may
contribute to higher corporate profits.

Self-Test Exercise Activity 6.3

Consider a company with which you are familiar. Collect information regarding its various
businesses and describe them using the BCG growth share matrix. First give the chronology of
year-wise business development and then the matrix. _______________________________
_______________________________________________________________________

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6.3 Ansoff’s Product Market Growth Matrix
The Ansoff’s product market growth matrix (proposed by Igor Ansoff) is a useful tool that helps
businesses decide their product and market growth strategy. With the use of this matrix a
business can get a fair idea about how its growth depends upon its markets in new or existing
products in both new and existing markets. Companies should always be looking to the future.
One useful device for identifying growth opportunities for the future is the product/market
expansion grid. The product/market growth matrix is a portfolio-planning tool for identifying
company growth opportunities.

Existing Products New Products

Product
Existing Markets Market Penetration
Development
Market
New Markets Diversification
Development
Figure 6.5 : Ansoff’s Product Market Growth Matrix

Market Penetration: Market penetration refers to a growth strategy where the business focuses
on selling existing products into existing markets. It is achieved by making more sales to present
customers without changing products in any major way. Penetration might require greater
spending on advertising or personal selling. Overcoming competition in a mature market
requires an aggressive promotional campaign, supported by a pricing strategy designed to make
the market unattractive for competitors. Penetration is also done by effort on increasing usage
by existing customers.

Market Development: Market development refers to a growth strategy where the business
seeks to sell its existing products into new markets. It is a strategy for company growth by
identifying and developing new markets for current company products. This strategy may be
achieved through new geographical markets, new product dimensions or packaging, new
distribution channels or different pricing policies to attract different customers or create new
market segments.

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Product Development: Product development is refers to a growth strategy where business aims
to introduce new products into existing markets. It is a strategy for company growth by offering
modified or new products to current markets. This strategy may require the development of new
competencies and requires the business to develop modified products which can appeal to
existing markets.

Diversification: Diversification refers to a growth strategy where a business markets new

products in new markets. It is a strategy by starting up or acquiring businesses outside the
company’s current products and markets. This strategy is risky because it does not rely on either
the company’s successful product or its position in established markets. Typically the business
is moving into markets in which it has little or no experience.
As market conditions change overtime, a company may shift product-market growth strategies.
For example, when its present market is fully saturated a company may have no choice other
than to pursue new market.

6.4 ADL Matrix

The ADL matrix has derived its name from Arthur D. Little is a portfolio analysis method that
is based on product life cycle. The approach forms a two dimensional matrix based on stage of
industry maturity and the firms competitive position, environmental assessment and business
strength assessment. Stage of industry maturity is an environmental measure that represents a
position in industry's life cycle. Competitive position is a measure of business strengths that
helps in categorization of products or SBU's into one of five competitive positions: dominant,
strong, favorable, tenable, and weak. It is 4 by five matrixes as follows:

Stage of industry maturity

Competitive
Embryonic Growth Mature Ageing
position

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 Fast grow Defend position
Defend position
Attend cost Attend cost
Fast grow Renew
leadership leadership
Dominant Build barriers Focus
Renew Renew
Act offensively Consider
Defend position Fast grow
withdrawal
Act offensively Act offensively
Differentiate Lower cost
Find niche
Differentiate Lower cost Focus
Strong Hold niche
Fast grow Attack small Differentiate
Harvest
firms Grow with industry
Focus
Differentiate
Harvest
Differentiate Focus
Find niche Harvest
Favourable Focus Differentiate
Hold niche Turnaround
Fast grow Defend
Turnaround
Grow with industry
Hit smaller firms
Hold niche
Turnaround
Grow with Turnaround
Focus Divest
Tenable industry Hold niche
Grow with Retrench
Focus Retrench
industry
Withdraw
Find niche Turnaround
Catch-up Retrench Withdraw
Weak Withdraw
Grow with Niche or Divest
industry withdraw
Fig. 6.5 Arthur D. Little Strategic Condition Matrix: Adapted from “Study Material Prepared by Board of
Studies the Institute of Chartered Accountants of India”

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The competitive position of a firm is based on an assessment of the following criteria:
Dominant: This is a comparatively rare position and in many cases is attributable either to a
monopoly or a strong and protected technological leadership.
Strong: By virtue of this position, the firm has a considerable degree of freedom over its choice
of strategies and is often able to act without its market position being unduly threatened by its
competitions.
Favourable: This position, which generally comes about when the industry is fragmented and
no one competitor stand out clearly, results in the market leaders a reasonable degree of freedom.
Tenable: Although the firms within this category are able to perform satisfactorily and can
justify staying in the industry, they are generally vulnerable in the face of increased competition
from stronger and more proactive companies in the market.
Weak: The performance of firms in this category is generally unsatisfactory although the
opportunity for improvement do exist.
6.5 The Strategic Position and Action Evaluation (SPACE) Matrix
The Strategic Position and Action Evaluation (SPACE) Matrix is another important Stage
matching tool of formulation framework. It explains that what is our strategic position and what
possible action can be taken. It is not closed matrix. It is prepared on graph. It is closed matrix.
It contains four-quadrant named aggressive, conservative, defensive, or competitive strategies.
The axes of the SPACE Matrix represent two internal dimensions financial strength [FS] and
competitive advantage [CA]) and two external dimensions (environmental stability [ES] and
industry strength [IS]).
These four factors are the most important determinants of an organization's overall strategic
position.

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 FS

Conservative
Aggressive

CA IS
Defensive Competitive

ES

Fig. 6.6 SPACE -Analysis of strategic position

This frame work determines appropriate set of strategies for each quadrant. First
quadrant is aggressive the firm fall in this quadrant that fellow the aggressive strategy.
Second quadrant is conservative all those firms that fall n this quadrant that must fallow
conservative strategy and in next the firm fellow the defensive strategy. All the firms
fall on competitive follow that strategy. After a rating is assigned ranging from +1
(worst) to +6 (best) to each of the variables that make up the financial strength and
industry strength dimensions. Assign a numerical value ranging from -1 (best) to -6
(worst) to each of the variables that make up the environment stability and Competitive
advantage dimensions.
These dimensions are explained below:
Internal Strategic Position External Strategic Position
Financial Strength (FS) Environmental Stability (ES)
Risk involved in business Impact of technology
Debt to equity ratio Price elasticity of demand
Working capital condition Political situation
Leverage and Liquidity Demand variability

Ease of exit from market Price range of competing products

Cash flow statement Rate of inflation
Return on investment Competitive pressure
Competitive Advantage (CA) Industry Strength (IS)

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 Access to the market Demand and supply factors
Market share Resource utilization & Growth potential
Quality of product and services Profit potential
Product life cycle Financial stability
Customer loyalty Technological know-how
Capacity, location and layout Productivity, capacity utilization
Technological know-how Capital intensity
Backward and forward integration Ease of entry into market

Steps for the Preparation of SPACE Matrix

The steps required to develop a SPACE Matrix are as follows:
1. Select a set of variables to relating to financial strength, competitive advantage,
environmental stability, and industry strength.
2. Assign a numerical value ranging from +1 (worst) to +6 (best) to each of the variables that
make up the financial strength and industry strength dimensions. Assign a numerical value
ranging from - 1 (best) to -6 (worst) to each of the variables that make up the environmental
stability and competitive advantage dimensions.
3. Compute an average score and dividing by the number of variables
4. Plot the average scores in the SPACE Matrix.
5. Add the two scores on the x-axis and plot the resultant point on X. Add the two scores on the
y-axis and plot the resultant point on Y. Plot the intersection of the new xy point.
6. Draw a directional vector from the origin of the SPACE Matrix through the new intersection
point. This vector reveals the type of strategies recommended for the organization: aggressive,
competitive, defensive, or conservative.
After the selection of variables the rating is assigned to each. For example, the following
diagram illustrate for financial Strength and industry strength.

Financial Strength (FS) Rating

High Return on investment 3
Large amount of capital 2
Consistently increasing revenue 4

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 Working capital condition 1
Financial strength average is (3+2+4+1)/4 = 2.5
Industry Strength (IS) Rating
Demand and supply factors 5
Resource utilization 3
Profit potential 3
Technological know-how 6
Ease of entry into market 2
Industry strength average is (5+3+3+6+2)/5 = 3.8. It is plotted on graph:

FS

(2.5, 3.8)

2.5

IS
3.8

Fig. 6.5 The graph indicates that firm adopts aggressive strategy

6.6 The General Electric Model

The General Electric Model (developed by GE with the assistance of the consulting firm
McKinsey & Company) is similar to the BCG growth-share matrix. However, there are
differences. Firstly, market attractiveness replaces market growth as the dimension of industry
attractiveness, and includes a broader range of factors other than just the market growth rate.
Secondly, competitive strength replaces market share as the dimension by which the competitive
position of each SBU is assessed. This also uses two factors in a matrix / grid situation as shown
below:
Business Position/Competitive position
Strong Average Weak

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 Market Attractiveness
High Invest Invest Protect

Medium Invest Protect

Harvest

Low Protect Harvest

Divest
Fig. 6.7 The GE Matrix

Each of the above two factors are rated according to criteria such as the following:
Evaluating the ability to compete: Evaluating the Market
Business position Attractiveness
Size
Size
Growth
Growth
Share by segment
Customer satisfaction levels
Customer loyalty
Competition: quality, types,
Margins
Effectiveness, commitment
Distribution
Price levels
Technology skills
Profitability
Patents
Technology
Marketing
Government regulations
Flexibility
Sensitivity to economic trends
Organization
Fig. 6.8 Criteria for rating Business Position and Market Attractiveness: Adapted from “Study Material
Prepared by Board of Studies the Institute of Chartered Accountants of India”

The criteria used to rate market attractiveness and business position assigned different ways
because some criteria are more important than others. Then each SBU is rated with respect to
all criteria. Finally, overall rating for both factors are calculated for each SBU. Based on these
ratings, each SBU is labeled as high, medium or low with respect to (a) market attractiveness,
and (b) business /competitive position.

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Every organization has to make decisions about how to use its limited resources most
effectively. That’s’ where this planning models can help determining which SBU should be
stimulated for growth, which one maintained in their present market position and which one
eliminated.
Self-Test Exercise Activity 6.2
1. Briefly describe the Ansoff’s Product Market Growth Matrix
2. Differentiate BCG and GE models, what is there similarity and difference?
3. What is product development?
4. Discuss the SPACE Matrix and explain how it can be used in the portfolio analysis?

Strategic Selection
After reviewing tests of suitability, acceptability and feasibility, it remains to make a decision and then
implement it. In many companies there is a lack of strategic confidence, and the firm does not actually
take decisions in spite of carrying out a great deal of analysis. One particularly effective method is to
identify several strategies that score most effectively in the suitability models (there is unlikely to be
one outstanding option). These are evaluated for acceptability - particularly those that do not attract
stakeholder resistance. Some suitable strategies will be eliminated by this process. Finally, feasibility is
used to eliminate some options that are suitable and acceptable. At this point, any of the remaining
options is likely to be effective, and selecting the 'correct' one is much less problematic.

6.7 Long Term Objectives

Corporate objectives flow from the mission and growth ambition of the corporation. Basically,
they represent the quantum of growth the firm seeks who achieve in the given time frame. They
also endow the firm with characteristics that ensures the projected the growth. Through the
objective setting process, the firm is tackling the environment and deciding the locus it should
have in the environment. The objective provides the basis for it major decisions of the firm and
also said the organizational performance to be realised at each level. The managerial purpose of
setting objectives is to convert the strategic vision into specific performance targets – results
and outcomes the management wants the achieve - and then use these objectives as yardsticks
for tracking the company's progress and performance.

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Ideally, managers ought to use the objective-setting exercise as a tool for truly stretching an
organization to reach its full potential. Challenging company personnel to go all out and deliver
big gains in performance pushes an enterprise to be more inventive, to exhibit some urgency in
improving both its financial performance and its business position, and to be more intentional
and focused in its actions.

A need for both short-term and long-term objectives: As a rule, a company's set of financial
and strategic objectives ought to include both short-term and long-term performance targets.
Having quarterly or annual objectives focuses attention on delivering immediate performance
improvements. Targets to be achieved within three to five years prompt considerations of what
to do now to put the company in position to perform better down the road. A company that has
an objective of doubling its sales within five years can't wait until the third or fourth year to
begin growing its sales and customer base. By spelling out annual (or perhaps quarterly)
performance targets, management indicates the speed at which longer-range targets are to be
approached.
Long-term objectives: To achieve long-term prosperity, strategic planners commonly establish
long-term objectives in seven areas.

 Profitability  Employee Development  Employee Relations

 Productivity  Technological
Leadership.
 Competitive  Public Responsibility
Position

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

Qualities of Long-Term Objectives: - objectives should be quantitative, measurable, realistic,

understandable, challenging, hierarchical, obtainable, and congruent among organizational
units. Each objective should also be associated with a time line. Objectives are commonly stated

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in terms such as growth in assets, growth in sales, profitability, market share, degree and nature
of diversification, degree and nature of vertical integration, earnings per share, and social
responsibility. Clearly established objectives offer many benefits. They provide direction, allow
synergy, aid in evaluation, establish priorities, reduce uncertainty, minimize conflicts, stimulate
exertion, and aid in both the allocation of resources and the design of jobs,

Short-range objectives can be identical to long-range objectives if an organization is already

performing at the targeted long-term level. For instance, if a company has an ongoing objective
of 15 percent profit growth every year and is currently achieving this objective, then the
company's long-range and short-range objectives for increasing profits coincide. The most
important situation in which short-range objectives differ from long-range objectives occurs
when managers are trying to elevate organizational performance and cannot reach the long-
range target in just one year. Short-range objectives then serve as stair-steps or milestones.

The need for objectives at all organizational levels: objective setting should not stop with top
management's establishing of companywide performance targets. Company objectives need to
be broken down into performance targets for each separate business, product line, functional
department, and individual work unit. Company performance can't reach full potential unless
each area of the organization does its part and contributes directly to the desired companywide
outcomes and results. This means setting performance targets for each organization unit that
support-rather than conflict with or negate-the achievement of companywide strategic and
financial objectives.

The ideal situation is a team effort in which each organizational unit strives to produce results
in its area of responsibility that contribute to the achievement of the company's performance
targets and strategic vision. Such consistency signals that organizational units know their
strategic role and are on board in helping the company move down the chosen strategic path and
produce the desired results.

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6.8 A Comprehensive Strategy Formulation
Important strategy-formulation techniques can be integrated into a three-stage decision-making
framework, as shown below. The tools presented in this framework are applicable to all sizes
and types of organizations and can help strategists identify, evaluate, and select strategies.
 Stage-1 (Formulation Framework)
Stage 1 of the formulation framework consists of the External factor evaluation (EFE Matrix),
the Internal factor evaluation (IFE Matrix), and the Competitive Profile Matrix. It is also called
the Input Stage, since it summarizes the basic input information needed to formulate strategies.
 Stage-2 Matching stage
Stage 2, called the Matching Stage, focuses upon generating feasible alternative strategies by
aligning key external and internal factors. Stage 2 techniques include the Threats-Opportunities-
Weaknesses-Strengths (TOWS) Matrix, the Strategic Position and Action Evaluation (SPACE)
Matrix, the Boston Consulting Group (BCG) Matrix, the Internal-External (IE) Matrix, and the
Grand Strategy Matrix.
 Stage-3 (Decision stage)
Stage 3, called the Decision Stage, and involves a single technique, the Quantitative Strategic
Planning Matrix (QSPM). A QSPM uses input information from Stage 1 to objectively evaluate
feasible alternative strategies identified in Stage 2. A QSPM reveals the relative attractiveness
of alternative strategies and, thus, provides an objective basis for selecting specific strategies.
All nine techniques (EFE Matrix, IFE Matrix, Competitive Profile Matrix, TOWS Matrix,
SPACE Matrix, BCG Matrix, IE Matrix, Grand Strategy Matrix and QSPM) included in the
strategy-formulation framework require integration of intuition and analysis. Without objective
information and analysis, personal biases, politics, emotions, personalities, and halo error (the
tendency to put too much weight on a single factor) unfortunately may play a dominant role in
the strategy-formulation process.
Strategy formulation is both a leadership skill and a process that leaders use to focus their
organizations on where they need to go (positioning the firm), to adapt to their customer needs
and to align their team. You make fundamental decisions about your product offerings and
business design. That is, strategy formulation is where leaders determine how much to stretch,
how to create the benefits for customers, how flexible to be, how to measure progress, and how
to recognize when the strategy cannot be sustained.

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Johnson and Scholes (Exploring Corporate Strategy) have summarized the various aspects of strategic
decisions.
 Determination of the scope of the organization’s activities
 Relating the organization’s activities to the environment in which it operates
 Matching the organization’s activities to its resource capability
 The allocation or re-allocation of resources
 Constraining and providing a framework for lower level operational decisions
 Reflecting the values and expectations of the people in power within the organization
 Determining the long-term direction that the organization takes
 Often implying change in the organization
A strategy is a set of policies adopted by senior management that guides the scope and direction of the
entity. It takes into account the environment in which the company operates.
'Scope' used in this context relates to size and range; it concerns the way in which those responsible
for managing the organization conceive its boundaries. The 'direction' describes product/market
positioning. Strategic decisions affect the long-term direction of the organization. Once the wheels are
set in motion it is often impossible to turn back.
Self-Test Exercise Activity 6.4
1. Discuss the long term objective of your organization
2. Briefly describe the three stage decision in strategic formulation and aspects of strategic decision

6.9 Balanced Scorecard (BSC Model)

Pretest
Dear student! What is mean by Balanced Scorecard (BSC)? Is your organization practice
it?

The balanced scorecard is a strategic planning and management system that is used extensively
in business and industry, government, and nonprofit organizations worldwide to align business
activities to the vision and strategy of the organization, improve internal and external
communications, and monitor organization performance against strategic goals. It was
originated by Drs. Robert Kaplan (Harvard Business School) and David Norton as a
performance measurement framework that added strategic non-financial performance measures
to traditional financial metrics to give managers and executives a more 'balanced' view of

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organizational performance. While the phrase balanced scorecard was coined in the early 1990s,
the roots of the this type of approach are deep, and include the pioneering work of General
Electric on performance measurement reporting in the 1950’s and the work of French process
engineers (who created the Tableau de Bord – literally, a "dashboard" of performance measures)
in the early part of the 20th century.

The balanced scorecard has evolved from its early use as a simple performance measurement
framework to a full strategic planning and management system. The “new” balanced scorecard
transforms an organization’s strategic plan from an attractive but passive document into the
"marching orders" for the organization on a daily basis. It provides a framework that not only
provides performance measurements, but helps planners identify what should be done and
measured. It enables executives to truly execute their strategies.

Recognizing some of the weaknesses and vagueness of previous management approaches, the
balanced scorecard approach provides a clear prescription as to what companies should measure
in order to 'balance' the financial perspective. The balanced scorecard is a management system
(not only a measurement system) that enables organizations to clarify their vision and strategy
and translate them into action. It provides feedback around both the internal business processes
and external outcomes in order to continuously improve strategic performance and results.

Why Implement a Balanced Scorecard?

 Increase focus on strategy and results
 Improve organizational performance by measuring what matters
 Align organization strategy with the work people do on a day-to-day basis
 Focus on the drivers of future performance
 Improve communication of the organization’s Vision and Strategy
 Prioritize Projects / Initiatives
 Kaplan & Norton, discovered that the measures on a balanced scorecard can be used as
the cornerstone of a management system that communicates strategy, aligns individuals
and teams to the strategy, establishes long term strategic targets, aligns initiatives,

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 allocates long- and short term resources and finally, provides feedback and learning
about the strategy


Kaplan and Norton describe the innovation of the balanced scorecard as follows:
"The balanced scorecard retains traditional financial measures. But financial measures tell the
story of past events, an adequate story for industrial age companies for which investments in
long-term capabilities and customer relationships were not critical for success. These financial
measures are inadequate, however, for guiding and evaluating the journey that information age
companies must make to create future value through investment in customers, suppliers,
employees, processes, technology, and innovation."

Fig. 6.7 Using the Balanced Scorecard as a Strategic Management System: Adapted from Robert S.
Kaplan and David P. Norton, Harvard Business Review.

Perspectives
The balanced scorecard suggests that we view the organization from four perspectives, and to
develop metrics, collect data and analyze it relative to each of these perspectives:

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1) The Learning & Growth Perspective
This perspective includes employee training and corporate cultural attitudes related to both
individual and corporate self-improvement. In a knowledge-worker organization, people -- the
only repository of knowledge -- are the main resource. In the current climate of rapid
technological change, it is becoming necessary for knowledge workers to be in a continuous
learning mode. Metrics can be put into place to guide managers in focusing training funds where
they can help the most. In any case, learning and growth constitute the essential foundation for
success of any knowledge-worker organization.
Kaplan and Norton emphasize that 'learning' is more than 'training'; it also includes things like
mentors and tutors within the organization, as well as that ease of communication among
workers that allows them to readily get help on a problem when it is needed.

2) The Business Process Perspective

This perspective refers to internal business processes. Metrics based on this perspective allow
the managers to know how well their business is running, and whether its products and services
conform to customer requirements (the mission). These metrics have to be carefully designed
by those who know these processes most intimately; with our unique missions these are not
something that can be developed by outside consultants.

3) The Customer Perspective

Recent management philosophy has shown an increasing realization of the importance of
customer focus and customer satisfaction in any business. These are leading indicators: if
customers are not satisfied, they will eventually find other suppliers that will meet their needs.
Poor performance from this perspective is thus a leading indicator of future decline, even though
the current financial picture may look good.
In developing metrics for satisfaction, customers should be analyzed in terms of kinds of
customers and the kinds of processes for which we are providing a product or service to those
customer groups.

4) The Financial Perspective

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Kaplan and Norton do not disregard the traditional need for financial data. Timely and accurate
funding data will always be a priority, and managers will do whatever necessary to provide it.
In fact, often there is more than enough handling and processing of financial data. With the
implementation of a corporate database, it is hoped that more of the processing can be
centralized and automated. But the point is that the current emphasis on financials leads to the
"unbalanced" situation with regard to other perspectives. There is perhaps a need to include
additional financial-related data, such as risk assessment and cost-benefit data, in this category.
Strategy Mapping
Strategy maps are communication tools used to tell a story of how value is created for the
organization. They show a logical, step-by-step connection between strategic objectives (shown
as ovals on the map) in the form of a cause-and-effect chain. Generally speaking, improving
performance in the objectives found in the Learning & Growth perspective (the bottom row)
enables the organization to improve its Internal Process perspective Objectives (the next row
up), which in turn enables the organization to create desirable results in the Customer and
Financial perspectives (the top two rows).
For a commercial business, the strategy map illustrates the long-term game plan or competitive
strategy to achieve increased profitability. For a nonprofit or governmental organization, it
illustrates the plan by which the organization intends to improve performance of its mission. In
either case it illustrates the cause-and-effect relationships between different strategic objectives
and their measures, or key performance indicators (KPIs) that are included in a balanced
scorecard.
The focus of the balanced scorecard is to provide organizations with a "balanced" range of
metrics against which to measure their performance. "Balance" implied that organizations can
gain a broader view of leading indicators of performance by including non-financial metrics
(e.g. learning and growth of employees, efficiency of internal business processes, and customer
satisfaction).

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 Fig. 6.8 Strategic Mapping of BSC Model Adapted From Balanced Scorecard Institute
1998-2010

6.5. The 7’S Model

The PESTEL (Political, Economical, Social, Technological, Environmental and Legal) analysis
gives a number of factors and their likely influences. However it is important to identify the
specific factors which may influence an industry and force them towards competitive
adjustments. These factors are termed as structural drivers of change which have the likely effect
on the structure of an industry or on the competitive environment. According to Waterman et
al., organizational change is not only a matter of structure, although structure is a significant
variable in the management of change. When we talk of an effective organizational change, we
can see that it a complex relationship between strategy, structure, systems, staff, style shared
values, skills and super ordinate goals.
Hard (Strategy, Structure, Systems) elements are easier to define or identify and management
can directly influence them. Soft (Shared Values, Skills, Style, Staff) elements, on the other
hand, can be more difficult to describe, and are less tangible and more influenced by culture.

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However, these soft elements are as important as the hard elements if the organization is going
to be successful.

B/c of the interconnectedness of the variables, it would be difficult to make significant

progress in one area without making progress in the others as well. Thus if a planned
change is to be effective, then changes in one S must be accompanied by complementary
changes in the others.
There is no starting point or implied hierarchy in the shape of the diagram, and it is not
obvious which of the seven factors would be the driving force in changing a particular
organization at a certain point in time. The critical variables would be different across
organizations and in the same organization at different points of time.
Considering the links b/n each of the Ss one can identify strengths and weaknesses of an
organization. No S is strength or a weakness in its own right; it is only its degree of
support, or otherwise, for the other Ss which is relevant. Any Ss that harmonizes with
all the other Ss can be thought of as strengths and weaknesses.
It is not obvious which of the seven factors would be the driving force in changing a
particular organization at a certain point in time. The critical variables would be different
across organization and in the same organization at different point of time.

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Unit Summary
When the company is in more than one business, it can select more than one strategic
alternative depending upon demand of the situation prevailing in the different
portifolios. It is necessary to analyze the position of different business of the business
house which is done by corporate portifolio analysis. This analysis can be done by using
any one of the following: Experience curve, PLC concept, BCG matrix, GE matrix,
SPACE diagram, Ansoff’s product market growth matrix, etc. Portfolio analysis is an
important task of a corporate strategist. It provides a framework for analyzing the mutual
compatibility of diverse operations of an organization. Balanced scorecard is one of the
methods to measure the performance of the organization.
The Boston Matrix thus offers a very useful 'map' of the organization's product (or service)
strengths and weaknesses (at least in terms of current profitability) as well as the likely cash
flows. The need which prompted this idea was, indeed, that of managing cash-flow. It was
reasoned that one of the main indicators of cash generation was relative market share, and one
which pointed to cash usage was that of market growth rate.
Self-Test Exercise (Self Check Questions )
Part I: choose the best answer for the following questions
1. Which of the following competitive position of a firm is not as per ADL Matrix?
(a) Dominant (b) Favorable (c) Difficult (d) Tenable
2. The perspective that involves customer management process in the balanced score card
(BSC) frame work is
(a) Success
(b) Financial perspective
(c) Internal (Business perspective
(d) Learning and growth perspective
(e) None of the above
3.___________ is a situation where in a poor strategy is implemented well
(a) Success
(b) Trouble
(c) Roulette
(d) Failure

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 (e) None of the above
4. The market for the fast moving car hammer with so much horsepower that handling becomes
an issue is decreasing. People are more interested in buying Volkswagen and pickups. As a
result, General Motors is stopping production of its Hammer, a car that has had limited sales
recently. Since the hammer can no longer generate enough cash to sustain its manufacture, the
BCG portfolio would classify it as:
(a) Question mark. (b) Dog. (c) Cash cow. (d) Star. (e) None

5. If the organization operates at “Problem Child” in the BCG-matrix, what type of strategies
would you recommend for the division?
(a) Grows and Builds (b) Competitive (c) Harvest or Divest (d) Holds and Maintain

Essay type Questions: Briefly discuss each of the following questions

1. Why organizations undertake portfolio analyses? Discuss any one model of portfolio analysis
in detail.
2. Discuss the concept of BSC (Balanced Scorecard). Explain how it is used to evaluate
organizational performance by giving example.
3. Briefly explain BCG's growth-share matrix in the context of Business portfolio Analysis.
Give practical examples from your surroundings.

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Unit Seven: Implementing Strategies: Management Issues
UNIT OBJECTIVES

After going through this unit, you will be able to understand:

Why strategy implementation is more difficult than strategy formulation
The importance of organizational structure in strategy implementation
The role of leadership in the implementation of strategy
The general framework for strategy implementation
How to build a supportive corporate culture.

Unit Introduction
Strategic-management process does not end when the firm decides what strategies to pursue.
There must be a translation of strategic thought into strategic action. Translation requires
support of all managers and employees of the business. Implementing strategy affects an
organization from top to bottom; it affects all the functional and divisional areas of a business.
The business organization first selects a particular strategy from the various alternatives
available. Once a particular strategy is formulated, the implementation part comes into
existence. Implementation includes all those actions which are necessary to put the strategy into
practices. This is why implementation is said to be more important than the formulation.
Strategy implementation concerns the managerial exercise of putting a freshly chosen strategy
into place. Strategy execution deals with the managerial exercise of supervising the ongoing
pursuit of strategy, making it work, improving the competence with which it is executed and
showing measurable progress in achieving the targeted results. Strategic implementation is
concerned with translating a decision into action, with presupposes that the decision itself (i.e.,
the strategic choice) was made with some thought being given to feasibility and acceptability.
The allocation of resources to new courses of action will need to be undertaken, and there may
be a need for adapting the organization’s structure to handle new activities as well as training
personnel and devising appropriate system.

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 7.1 The Nature of Strategy Implementation
Pretest
Dear student! What is mean by strategy implementation? How do you understand the
interrelationship between strategy formulation and implementation? Please try to write on
a sheet of paper before you go through the discussion below.

Many managers fail to distinguish between strategy formulation and strategy implementation. Yet, it
is crucial to realize the difference between the two because they both require very different skills.
Also, a company will be successful only when the strategy formulation is sound and implementation
is excellent. There is no such thing as successful strategic design per se. This sounds obvious, but in
practice the distinction is not always made. Often people, blame the strategy model for the failure of
a company while the main flaw might lie in failed implementation. Thus organizational success is a
function of good strategy and proper implementation. The matrix in the figure below represent various
combination of strategy formulation and implementation:
Poor

Roulette Failure
Strategy Formulation

Trouble
Success
Good

Good Poor

Strategy Implementation
Fig. 7.1 Interrelationship between strategy formulation and implementation

The Figure represents the importance of both tasks in matrix form and suggests the probable
outcomes of the four possible combinations of these variables:
 Success is the most likely outcome when strategy is appropriate and implementation
good. This shows that, company has succeeded in designing a sound and competitive
strategy and has been successful in implementing it.

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  Roulette involves situation wherein a poor strategy is implemented well. This is the
situation where the strategy formulation is flawed (defective), but the company is
showing excellent implementation skills. When a company finds itself in this area the
first thing they have to do is to redesign their strategy before readjusting their
implementation/execution skills.
 Trouble is characterized by situations wherein an appropriate strategy is poorly
implemented. That is, the situation where a company apparently has formulated a very
competitive strategy, but is showing difficulties in implementing it successfully. This
can be due to various factors, such as the lack of experience (e.g. for startups), the lack
of resources, missing leadership and so on. In such a situation the company will aim at
moving from region to the region of success, given they realize their implementation
difficulties.
 Failure involves situations wherein a poor strategy is poorly implemented. This is
reserved for companies that haven't succeeded in coming up with a sound strategy
formulation and in addition are bad at implementing their flawed strategic model. Their
path to success also goes through business model redesign and
implementation/execution readjustment.

The implementation of organization strategy involves the application of the management

process to obtain the desired results. Particularly, strategy implementation includes designing
the organization's structure, allocating resources, developing information and decision process,
and managing human resources, including such areas as the reward system (motivating),
approaches to leadership, and creating strong fits between strategy and how organization does
things. Implementing strategy is tougher and more time-consuming challenge than formulating
strategy.

It needs to be emphasized that 'strategy' is not synonymous with 'long-term plan' but rather
consists of an enterprise's attempts to reach some preferred future state by adapting its
competitive position as circumstances change. While a series of strategic moves may be
planned, competitors' actions will mean that the actual moves will have to be modified to take
account of those actions. In contrast to this view of strategy there is another approach to

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management practice, which has been common in many organizations. In organizations that
lack strategic direction there has been a tendency to look inwards in times of stress, and for
management to devote their attention to cost cutting and to shedding unprofitable divisions. In
other words, the focus has been on efficiency (i.e. the relationship between inputs and outputs,
usually with a short time horizon) rather than on effectiveness (which is concerned with the
organization's attainment of goals - including that of desired competitive position). While
efficiency is essentially introspective, effectiveness highlights the links between the
organization and its environment. The responsibility for efficiency lies with operational
managers, with top management having the primary responsibility for the strategic orientation
of the organization.
Strategic
Management
Effective Ineffective

1 2
Efficient
Management

Thrive Die Slowly

Operational

3 4
Inefficient
Survive Die quickly

Fig. 7.2 Principal combinations of efficiency and effectiveness

An organization that finds itself in cell 1 is well placed and thrives, since it is achieving what it
aspires to achieve with an efficient output/input ratio. In contrast, an organization in cell 2 or 4
is doomed, unless it can establish some strategic direction. The particular point to note is that
cell 2 is a worse place to be than is cell 3 since, in the latter, the strategic direction is present to
ensure effectiveness even if rather too much input is being used to generate outputs. To be
effective is to survive whereas to be efficient is not in itself either necessary or sufficient for
survival.

In crude terms, to be effective is to do the right thing, while to be efficient is to do the thing
right. An emphasis on efficiency rather than on effectiveness is clearly wrong. But who
determines effectiveness? Any organization can be portrayed as a coalition of diverse interest
groups each of which participates in the coalition in order to secure some advantage. This
advantage (or inducement) may be in the form of dividends to shareholders, wages to

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employees, continued business to suppliers of goods and services, satisfaction on the part of
consumers, legal compliance from the viewpoint of government, responsible behaviour towards
society and the environment from the perspective of pressure groups, and so on.
Even the most technically perfect strategic plan will serve little purpose if it is not implemented.
Many organizations tend to spend an inordinate amount of time, money, and effort on
developing the strategic plan, treating the means and circumstances under which it will be
implemented as afterthoughts! Change comes through implementation and evaluation, not
through the plan. A technically imperfect plan that is implemented well will achieve more than
the perfect plan that never gets off the paper on which it is typed
.
Successful strategy formulation does not guarantee successful strategy implementation. It is
always more difficult to do something (strategy implementation) than to say you are going to
do it (strategy formulation)! Although inextricably linked, strategy implementation is
fundamentally different from strategy formulation. Strategy formulation and implementation
can be contrasted in the following ways:
Strategy formulation Strategy implementation
♦ Strategy formulation is positioning forces ♦ Strategy implementation is managing forces
before the action. during the action.
♦ Strategy formulation focuses on ♦ Strategy implementation focuses on efficiency.
effectiveness.
♦ Strategy formulation is primarily an ♦ Strategy implementation is primarily an
intellectual process. operational process.
♦ Strategy formulation requires good ♦ Strategy implementation requires special
intuitive and analytical skills. motivation and leadership skills
♦ Strategy formulation requires ♦ Strategy implementation requires combination
coordination among a few individuals among many individuals.

Strategy - formulation concepts and tools do not differ greatly for small, large, for-profit, or
non-profit organizations. However, strategy implementation varies substantially among
different types and sizes of organizations. Implementing strategies requires such actions as

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altering sales territories, adding new departments, closing facilities, hiring new employees,
changing an organization's pricing strategy, developing financial budgets, developing new
employee benefits, establishing cost-control procedures, changing advertising strategies,
building new facilities, training new employees, transferring managers among divisions, and
building a better management information system, These types of activities obviously differ
greatly between manufacturing, service, and governmental organizations.

It is to be noted that the division of strategic management into different phases is only for the
purpose of orderly study. In real life, the formulation and implementation processes are
intertwined. Two types of linkages exist between these two phases of strategic management.
The forward linkages deal with the impact of the formulation on implementation while the
backward linkages are concerned with the impact in the opposite direction.

It is to be noted that the division of strategic management into different phases is only for the
purpose of orderly study. In real life, the formulation and implementation processes are
intertwined. Two types of linkages exist between these two phases of strategic management.
The forward linkages deal with the impact of the formulation on implementation while the
backward linkages are concerned with the impact in the opposite direction.

Forward Linkages: The different elements in strategy formulation starting with objective
setting through environmental and organizational appraisal, strategic alternatives and choice to
the strategic plan determine the course that an organization adopts for itself. With the
formulation of new strategies, or reformulation of existing strategies, many changes have to be
effected within the organization. For instance, the organizational structure has to undergo a
change in the light of the requirements of the modified or new strategy. The style of leadership
has to be adapted to the needs of the modified or new strategies. In this way, the formulation of
strategies has forward linkages with their implementation.

Backward Linkages: Just as implementation is determined by the formulation of strategies, the

formulation process is also affected by factors related with 'implementation. While dealing with
strategic choice, remember that past strategic actions also determine the choice of strategy.
Organizations tend to adopt those strategies which can be implemented with the help of the

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present structure of resources combined with some additional efforts. Such incremental changes,
over a period of time, take the organization from where it is to where it wishes to be.
It is to be noted that while strategy formulation is primarily an entrepreneurial activity, based
on strategic decision -making, the implementation of strategy is mainly an administrative task
based on strategic as well as operational decision-making.
Self-Test Exercise Activity 7.1
1. Describe the relationship between strategy formulation and implementation.
2. Briefly explain the possible combination efficiency and effectiveness in the process of
strategy implementation.

7.2 Matching Organization Structure to Strategy

Pretest
Dear student! What is mean by organizational structure? Would you mention some of the
different types of organization structure?

Among several other things, successful implementation of strategy depends on the

appropriateness of the internal organization, which to a large extent is reflected in the structure.
Structure represents the network of relationships within an organization over a fairly long period
of time. Changes in strategy often require changes in the way an organization is structured for
two major reasons. First, structure largely dictates how objectives and policies will be
established. For example, objectives and policies established under a geographic organizational
structure are couched in geographic terms. Objectives and policies are stated largely in terms of
products in an organization whose structure is based on product groups. The structural format
for developing objectives and policies can significantly impact all other strategy-
implementation activities.

The second major reason why changes in strategy often require changes in structure is that
structure dictates how resources will be allocated. If an organization's structure is based on
customer groups, then resources will be allocated in that manner. Similarly, if an organization's
structure is set up along functional business lines, then resources are allocated by functional
areas.

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Structure should be designed to facilitate the strategic pursuit of a firm and, therefore, follows
strategy. Without a strategy or reasons for being (mission), companies find it difficult to design
an effective structure. Chandler found a particular structure sequence to be often repeated as
organizations grow and change strategy over time. There is no one optimal organizational design
or structure for a given strategy or type of organization. What is appropriate for one organization
may not be appropriate for a similar firm, although successful firms in a given industry do tend
to organize themselves in a similar way. For example, consumer goods companies tend to
emulate the divisional structure-by-product form of organization. Small firms tend to be
functionally structured (centralized). Medium-size firms tend to be divisionally structured
(decentralized). Large firms tend to use an SBU (strategic business unit) or matrix structure. As
organizations grow, their structures generally change from simple to complex as a result of
linking together of several basic strategies.

Numerous external and internal forces affect an organization; no firm could change its structure
in response to every one of these forces, because to do so would lead to chaos. However, when
a firm changes its strategy, the existing organizational structure may become ineffective.
Symptoms of an ineffective organizational structure include too many levels of management,
too many meetings attended by too many people, too much attention being directed toward
solving interdepartmental conflicts, too large a span of control, and too many unachieved
objectives. Changes in structure can facilitate strategy-implementation efforts, but changes in
structure should not be expected to make a bad strategy good, to make bad managers good, or
to make bad products sell.

Structure undeniably can and does influence strategy. Strategies formulated must be workable,
so if a certain new strategy required massive structural changes it would not be an attractive
choice. In this way, structure can shape the choice of strategies. But a more important concern
is determining what types of structural changes are needed to Implement new strategies and how
these changes can best be accomplished. We examine this Issue by focusing on seven basic
types of organizational structure: functional, divisional by geographic area, divisional by
product, divisional by customer, divisional process, strategic business unit (SBU), and matrix.

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7.2.1 The Functional Structure
The most widely used structure is the functional or centralized type because this structure is the
simplest and least expensive of the seven alternatives. A functional structure groups tasks and
activities by business function, such as production/operations, marketing, finance/accounting,
research and development, and management information systems. Besides being simple and
inexpensive, a functional structure also promotes specialization of labour, encourages
efficiency, minimizes the need for an elaborate control system, and allows rapid decision
making. Some disadvantages of a functional structure are that it forces accountability to the top,
minimizes career development opportunities, and is sometimes times characterized by low
employee morale, line/staff conflicts, poor delegation of authority, and inadequate planning for
products and markets.

Chief Executive
Officer

Corporate
Corporate Strategic Corporate
Human
Marketing Planning Finance
Resource

Promotion Sales
Department Department

Fig. 7.3 Functional Organization Structure

A competitive advantage is created when there is a proper match between strategy and structure.
Ineffective strategy/structure matches may result in company rigidity and failure, given the
complexity and need for rapid changes in today's competitive landscape. Thus, effective
strategic leaders seek to develop an organizational structure and accompanying controls that are
superior to those of their competitors.
Selecting the organizational structure and controls that result in effective implementation of
chosen strategies is a fundamental challenge for managers, especially top-level managers. This
is because companies must be flexible, innovative, and creative in the global economy if they
are to exploit their core competencies in the pursuit of marketplace opportunities. Companies
must also maintain a certain degree of stability in their structures so that day-to-day tasks can
be completed efficiently.

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7.2.2 The Divisional Structure
As a small organization grows, it has more difficulty managing different products and services
in different markets. Some form of divisional structure generally becomes necessary to motivate
employees, control operations, and compete successfully in diverse locations. The divisional
structure can be organized in one of four ways: by geographic area, by product or service, by
customer, or by process. With a divisional structure, functional activities are performed both
centrally and in each separate division.

Chief Executive

Corporate
Corporate Finance
Legal/PR

General Manager General Manager

Division A Division B

Marketing Marketing

Production Production

Personnel Personnel

Fig. 7.4 Divisional Structure

A divisional structure has some clear advantages. First and perhaps foremost accountability is
clear. That is, divisional managers can be held responsible for sales and profit levels. Because a
divisional structure is based on extensive delegation of authority, managers and employees can
easily see the results of their good or bad performances. As a result, employee morale is
generally higher in a divisional structure than it is in centralized structure. Other advantages of
the divisional design are that it creates career development opportunities for managers, allows
local control of local situations, leads to a competitive climate within an organization, and
allows new businesses and products In be added easily.

The divisional design is not without some limitations, however. Perhaps the most important
limitation is that a divisional structure is costly, for a number of reasons. First, each division
requires functional specialists who must be paid. Second, there exists some duplication of staff

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services, facilities, and personnel; for instance, functional specialists are also needed centrally
(at headquarters) to coordinate divisional activities. Third, managers must be well qualified
because the divisional design forces delegation of authority better-qualified individuals require
higher salaries.

7.2.3 The Matrix Structure

A newer and somewhat more radical organizational design, the network structure is an example
of what could be termed a "non-structure" by its virtual elimination of in house business
functions. Many activities are outsourced. A corporation organized in this manner is often called
a virtual organization because it is composed of a series of project groups or collaborations
linked by constantly changing non-hierarchical, cobweb-like networks. The network structure
becomes most useful when the environment of a firm is unstable and is expected to remain so.
Under such conditions, there is usually a strong need for innovation and quick response. Instead
of having salaried employees, it may contract with people for a specific project or length of
time. Long-term contracts with suppliers and distributors replace services that the company
could provide for itself through vertical integration. Electronic markets and sophisticated
information systems reduce the transaction costs of the marketplace, thus justifying a "buy" over
a "make" decision. Rather than being located in a single building or area, an organization's
business functions are scattered worldwide. The organization is, in effect, only a shell, with a
small headquarters acting as a "broker", electronically connected to some completely owned
divisions, partially owned subsidiaries, and other independent companies. In its ultimate form,
the network organization is a series of independent firms or business units linked together by
computers in an information system that designs, produces, and markets a product or service.

The network organization structure provides an organization with increased flexibility and
adaptability to cope with rapid technological change and shifting patterns of international trade
and competition. It allows a company to concentrate on its distinctive competencies, while
gathering efficiencies from other firms who are concentrating their efforts in their areas of
expertise. The network does, however, have disadvantages. The availability of numerous
potential partners can be a source of trouble. Contracting out functions to separate
suppliers/distributors may keep the firm from discovering any synergies by combining

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activities. If a particular firm overspecializes on only a few functions, it runs the risk of choosing
the wrong functions and thus becoming non-competitive.

Branch in
Country ‘A’

Branch in Branch in
Country ‘B’ Head Country ‘D’
Quarter
In country
‘H’

B Branch in
Branch in
Country ‘E’
Country ‘C’

Fig. 7.5 Network organizational structure

Self-Test Exercise Activity 7.2
1. Discuss with an experienced and knowledgeable person of your organization or
organization you are familiar with regarding how strategy and structure affect each other.
2. What kind of structural form your organization has? Is it suitable keeping in view the
needs of the strategy? Critically evaluate.

7.6 General Framework for Strategy Implementation

The first step in implementation is identifying the activities, decisions, and relationships critical
to accomplishing the activities. There are six principal administrative tasks that shape a
manager's action agenda for implementing strategy. The specific components of each of the six
strategy-implementation tasks:
1. Building an Organization Capable of Executing the Strategy. The organization must have
the structure necessary to turn the strategy into reality. Furthermore, the firm's personnel must

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possess the skill needed to execute the strategy successfully. Related to this is the need to assign
the responsibility for accomplishing key implementation tasks to the right individuals or groups.
2. Establishing a Strategy-Supportive Budget. If the firm is to accomplish strategic
objectives, top management must provide the people, equipment, facilities, and other resources
to carry out its part of the strategic plan. Further, once the strategy has been decided on, the key
tasks to perform and kinds of decision required must be identified, formal plans must also be
developed. The tasks should be arranged in a sequence comprising a plan of action within targets
to be achieved at specific dates.

3. Installing Internal Administrative Support Systems. Internal systems are policies and
procedures to establish desired types of behavior, information systems to provide strategy-
critical information on a timely basis, and whatever inventory, materials management, customer
service, cost accounting, and other administrative systems are needed to give the organization
important strategy-executing capability. These internal systems must support the management
process, the way the managers in an organization work together, as well as monitor strategic
progress.

4. Devising Rewards and Incentives that are tightly linked to Objectives and Strategy.
People and departments of the firm must be influenced, through incentives, constraints, control,
standards, and rewards, to accomplish the strategy.

5. Building a Strategy-Supportive Corporate Culture

Every company has a unique organizational culture. Each has its own business philosophy and
principles, its own ways of approaching problems and making decisions, its own work climate,
its own embedded patterns of "how we do things around here," its own lore (stories told over
and over to illustrate company values and what they mean to stakeholders), its own taboos and
political don'ts-in other words, its own ingrained beliefs, behavior and thought patterns, business
practices, and personality that define its corporate culture. Corporate culture refers to a
company’s values, beliefs, business principles, traditions, ways of operating, and internal work
environment. The bedrock of Wal-Mart's culture, for example, is dedication to customer
satisfaction, zealous pursuit of low costs, a strong work ethic.

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Where Does Corporate Culture Come From?
An organization’s culture is bred from a complex combination of socio-logical forces operating
within its boundaries. A company's culture is manifested in the values and business principles
that management preaches and practices, in its ethical standards and official policies, in its
stakeholder relationships (especially its dealings with employees, unions, stockholders, vendors,
and the communities in which it operates), in the traditions the organization maintains, in its
supervisory practices, in employees' attitudes and behavior, in the legends people repeat about
happenings in the organization, in the peer pressures that exist, in the organization's politics,
and in the "chemistry" and the "vibrations" that permeate the work environment. All these
sociological forces, some of which operate quite subtly, combine to define an organization's
culture, beliefs and practices that become embedded in a company's culture can originate
anywhere: from one influential individual, work group, department, or division, from the bottom
of the organizational hierarchy or the top

How culture can promote better strategy execution

Strong cultures promote good strategy execution when there’s fit and hurt execution when
there’s little fit. A culture grounded in values, practices, and behavioural norms that match what
is needed for good strategy execution helps energize people throughout the company to do their
jobs in a strategy-supportive manner, adding significantly to the power and effectiveness of
strategy execution. For example, a culture where frugality and thrift are values strongly shared
by organizational members is very conducive to successful execution of a low cost leadership
strategy. A culture where creativity, embracing change, and challenging the status quo are
pervasive themes is very conducive to successful execution of a product innovation and
technological leadership strategy. A culture built around such business principles as listening to
customers, encouraging employees to take pride in their work, and giving employees a high
degree of decision-making responsibility is very conducive to successful execution of a strategy
of delivering superior customer service.
A tight culture-strategy alignment acts in two ways to channel behaviour and influence
employees to do their jobs in a strategy-supportive fashion.

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A work environment where the culture matches the conditions for good strategy execution
provides a system of informal rules and peer pressure regarding how to conduct business
internally and how to go about doing one’s job. Strategy-supportive cultures shape the mood,
temperament, and motivation the workforce, positively affecting organizational energy, work
habits and operating practices, the degree to which organizational units cooperate, and how
customers are treated.

A strong strategy-supportive culture nurtures and motivates people to do their jobs in ways
conducive to effective strategy execution; it provides structure, standards, and a value system in
which to operate; and it promotes strong employee identification with the company's vision,
performance targets, and strategy. All this makes employees feel genuinely better about their
jobs and work environment and the merits of what the company is trying to accomplish.
Employees are stimulated to take on the challenge of realizing the company's vision, do their
jobs competently and with enthusiasm, and collaborate with others as needed to bring the
strategy to fruition.

The risks of Strategy-Culture Conflict

When a company's culture is out of sync with what is needed for strategic success, the culture
has to be changed as rapidly as can be managed – this, of course, presumes that it is one or more
aspects of the culture that are out of whack rather than the strategy. While correcting a strategy-
culture conflict can occasionally mean revamping strategy to produce cultural fit, more usually
it means revamping the mismatched cultural features to produce strategy fit. The more
entrenched the mismatched aspects of the culture, the greater the difficulty of implementing new
or different strategies until better strategy-culture alignment emerges. A sizable and prolonged
strategy-culture conflict weakens and may even defeat managerial efforts to make the strategy
work.

Changing a Problem Culture

Changing a company's culture to align it with strategy is among the toughest management tasks-
-easier to talk about than do. Changing problem cultures is very difficult because of the heavy
anchor of deeply held values and habits-people cling emotionally to the old and familiar. It takes
concerted management action over a period of time to replace an unhealthy culture with a

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healthy culture or to root out certain unwanted cultural obstacles and instil ones that are more
strategy-supportive.

The first step is to diagnose which facets of the present culture are strategy supportive and
which are not. Then, managers have to talk openly and forthrightly to all concerned about those
aspects of the culture that have to be changed. The talk has to be followed swiftly by visible,
aggressive actions to modify the culture-actions that everyone will understand are intended to
establish a new culture more in tune with the strategy. The menu of culture-changing actions
includes revising policies and procedures in ways that will help drive cultural change, altering
incentive compensation (to reward the desired cultural behaviour), visibly praising and
recognizing people who display the new cultural traits, recruiting and hiring new managers and
employees who have the desired cultural values and can serve as role models for the desired
cultural behaviour, replacing key executives who are strongly associated with the old culture,
and taking every opportunity to communicate to employees the basis for cultural change and its
benefits to all concerned.

6. Leadership and Strategic Implementation

The litany of good strategic management is simple enough: craft a sound strategic plan,
implement it, execute it to the fullest, and adjust as needed, win! But it's easier said than done.
A strategy manager has many different leadership roles to play: visionary, chief entrepreneur
and strategist, chief administrator, culture builder, resource acquirer and allocator, capabilities
builder, process integrator, crisis solver, spokesperson, negotiator, motivator, arbitrator, policy
maker, policy enforcer, and head cheerleader. Sometimes it is useful to be authoritarian and
hardnosed; sometimes it is best to be a perceptive listener and a compromising decision maker;
sometimes a strongly participative, collegial approach works best; and sometimes being a coach
and adviser is the proper role. Many occasions call for a highly visible role and extensive time
commitments, while others entail a brief ceremonial performance with the details delegated to
subordinates.

Leadership role in implementation

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The changes confronting strategic leaders above provide obvious examples of the importance
of strategic leadership, their effects on organizational outcomes, and the great challenges faced
by strategic leaders. This indicates that effective strategic leaders must be able to use the
strategic management process effectively by guiding the company in ways that result in the
formation of strategic intent and strategic mission, facilitating the development of appropriate
strategic actions and providing guidance that results in strategic competitiveness and earning
above-average returns.

Strategic leadership entails the ability to anticipate, envision, maintain flexibility, and empower
others to create strategic change as necessary. In other words, strategic leadership represents a
complex form of leadership in companies. A manager with strategic leadership skills exhibits
the ability to guide the company through the new competitive landscape by influencing the
behaviour, thoughts, and feelings of co-workers, managing through others and successfully
processing or making sense of complex, ambiguous information by successfully dealing with
change and uncertainty.

Strategic leaders are those at the top of the company (in particular, the CEO), but other
commonly recognized strategic leaders include members of the board of directors, the top
management team, and division general managers. The ability to manage human capital may be
the most critical skill that a strategic leader possesses.
In the today's competitive landscape, strategic leaders are challenged to adapt their frames of
reference so that they can deal with rapid, complex changes. A managerial frame of reference
is the set of assumptions, premises, and accepted wisdom that bounds a manager's understanding
of the company, the industry in which it competes, and the core competencies that it exploits in
the pursuit of strategic competitiveness (and above-average returns). In other words, a manager's
frame of reference is the foundation on which a manager's mindset is built. Thus, the strategic
leadership skills of a company's managers represent resources that affect company performance.
And these resources must be developed for the company's future benefit.

Developing appropriate leadership is one of the most important elements in the implementation
of a strategy. This is important b/c leaders are key organic elements who help an organization

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cope with changes. Appropriate leadership is necessary, though not a sufficient condition, for
mobilizing people, and for developing effective structure and systems for the success of strategy.
Failure of leadership may lead to difficulties in achieving goal congruence, communication
breakdown, ambiguity with regard to roles of sub-units, and difficulty in obtaining commitment
to a plan, e.g., staff conflicts and lack of strategic thinking. Leadership is the key factor for
developing and maintaining the right culture and climate.
Difference between leaders and Managers who are not leaders
 Leaders: Pursue opportunities. Managers: Reduce risk
 Leaders focus on the ends; Managers focus on the means.
 Leaders provide a vision to be believed in and strategic alignment; Managers provide
execution by focusing on organizational rules.
 Leaders focus on the what; Managers focus on the how
 Leaders coach followers, create self-leaders, and empower them; managers provide
instructions
Self-Test Exercise Activity 7.3
1. What functions you think are the most important for a leader from strategic management
point of view and why?
2. Consider the leadership style of your immediate supervisor in the organization you are
working and answer the following?
a. How do you describe his/her leadership style?
b. Is his/her leadership style consistent (or does it vary frequently)

Unity Summary
Successful implementation of strategy, among several other factors depends upon the
appropriateness of the organization structure. The latter must meet the needs of the strategy. The
various forms of organizational structuring may not be equally supportive of a particular strategy
at hand. In designing an appropriate structure, tasks and functions which are critical to the
achievement of strategy must be first identified. Though strategy and structure are interactive
and interrelated, it has been often observed that structure follows strategy. Since structure is a
tool to realize the aims of strategy, it helps people pull together in the performance of their
diverse tasks to accomplish those aims. Various forms of organization structuring are available:

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functional, product, divisions, matrix, virtual etc. Each form has its benefits and limitations
when looked from a particular strategy point of view. There is nothing “best” or ideal structure.
The best organization structure is the one that best fits the overall situation.
A strategy-supportive corporate culture causes the organization to work hard (and intelligently)
toward the accomplishment of the strategy. It consists of influencing behavior through shaping
the norms, values, symbols, and beliefs that managers and employees use in making day-to-day
decisions. Select strategy compatible with the scared or unchangeable parts of organizations
prevailing corporate. Once strategy is chosen, change whatever facets of the corporate culture
hinder effective execution.
In this unit, the stress is more on the concept of leadership and the role of leaders in handling
the people. The key to effective strategic management lies in ensuring the integration of the
functions of management into a culture of excellence. This in itself is a great challenge for
leadership. Whether a leader should change his or her style in according with the demands of
the situation is rather controversial. It is considered better for a leader to be himself/herself. The
role of leader is important for maintaining the corporate culture of the organization. He/she
should set examples to guide his employees to follow a path of sound values and ethical
principles so as to build a strong corporate culture.

Self-Test Exercise
Part I: choose the best answer for the following questions
1. What type of organizational structure do most small businesses follow?
(a) Divisional structure by product
(b) Functional structure
(c) Divisional structure by customer
(d) Matrix structure
(e) Process type structure
2. Work is separated into units that specialize in production, marketing, research and
development, and other management tasks at Sharp Corporation,. This is an example of
(a) Simple structure. (b) Divisional structure. (c) Functional structure.
(d) Matrix structure
3. An organization's structure is

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(a) Often represented by an organizational chart.
(b) The physical building of the organization.
(c) The acceptable behavior demanded by the organization of its employees.
(d) The patterns of beliefs of the employees.
(e) The raw material assets of an organization.
4. A survey of 30 firms in the bank industry, found ten major problems that over half of the
group experienced when they attempted to implement a strategic change. Which of the
following is not one of the implementation problems?
(a) uncontrollable external environmental factors
(b) poor definition of key implementation tasks and activities
(c ) ineffective coordination of activities
(d) crises that distracted attention away from implementation
(e) time allocated for implementation was adequate, but was used inappropriately
5.__________ concerned with whether the resource required to implement the strategy are
available, can be developed or obtained
A. Acceptability B. Feasibility
C. Suitability D. Return E. None of the above

Essay type Questions: Briefly discuss each of the following questions

1. “12 percent of effective management strategy is knowledge and 88 percent is dealing
appropriately with people”. Do you agree with the statement? Discuss.
2. What do you understand by corporate culture? Should the organization have a corporate
culture of its own? Discuss
3. By using the 2 X 2 matrix discuss the relation between strategy formulation and strategy
implementation. Suggest the probable outcomes of the four possible combinations by
giving example.

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Unit Eight: Strategy Review, Evaluation and Control
UNIT OBJECTIVES

This unit focuses on the concepts of process of strategy review, evaluation and control and
discusses different quantitative and qualitative measures. Therefore, after studying this unit, you
will be able to:
 Understand The nature of strategy evaluation
 Describe the strategy evaluation framework
 Understand the characteristics of an effective evaluation system
 Explain the Strategic Control Process

Unit Introduction
The final stage in strategic management is strategy evaluation and control. There are several
reasons why a strategy may not lead to desired results. The external environment may not
actually follow a trend as was expected at the time of planning the strategy. The internal changes
within the organization such as the organizational systems consisting of structures, policies and
procedures may not reflect harmony with the strategy. After a while, the top management of
even middle-level managers may find it difficult to exercise a substantial degree of control over
operating systems. The unexpected moves of the competitors might create major gaps in the
strategy. Thus the list of such factors will require a continuous evaluation and control of strategy.
The fundamental strategy evaluation and control activities are: reviewing internal and external
factors that are the bases for current strategies, measuring performance, and taking corrective
actions.
8.1 The nature of strategy evaluation
Pretest
Dear student! What do you understand by strategic evaluation? Would you mention some
of the process that help us to evaluate strategy?
An organization can have one of the best formulated and implemented strategies but if the
evaluations of these are not done, they become obsolete over a period of time. Therefore, it
becomes important to have an effective evaluation system so as to help the organization to

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achieve its objectives. The evaluation process involves the control mechanism, which helps in
taking corrective actions.
The key to successful strategy is the effective implementation and evaluation system. Any kind
of error in the strategic decisions will harm the organization, which in the long run may be
highly dangerous. Therefore, it is necessary for the management to have a continuous evaluation
system based on which the corrective actions may be taken. The following figure shows the
process of evaluation.

Self- Measure
Objectives
performance B performance
standards and and monitor
environment the
A environment
Strategy
1
C
Implementation

2
4 3 Analyze the
reasons for
performance
Reward or corrective action possibilities D

Fig. 8.1 Evaluation of strategy

The first phase of this process consists of selecting the key success factors, developing measures
and setting standards for the same, and collecting information about actual state (performance
on these measures). The second phase consists of comparison with the standards laid down and
initiating action to alter performance, wherever necessary. The follow up action could relate to
people/business or both and could be tactical or strategic. For instance, if the business has not
picked up as expected, it may be necessary to increase promotional efforts, or revise the product
policy, or as a last resort, the firm may pull out of a particular business.
It is necessary to maintain a distinction between the follow up action towards business/people
and evaluation/control process. If major changes in environment have taken place and if major
assumptions about environment have gone wrong, it may be improper to give credit or discredit
to the people for the deviation in performance from standard set. At the same time good
performance of strategy may not be due to good performance of the people as there may be

155
windfall gains due to changes in the environment not imagined at the time of setting the
standards of performance or targets.

From figure 8.1 it can be realized that the process of evaluation is quite complex and there are
several pitfalls in proper evaluation and control. The success of an organization is gauged by its
effectiveness and efficiency. Effectiveness is measured by the degree of to which the
organization has achieved its objectives while efficincy refers to the manner of resources
utilization for achieving the output. The two can thus be represented as follow:
Output Output
Effectiveness  b) Efficiency 
Objectives Input

It is easy to evaluate efficiency by comparing output/input of various organizations or

organization units with one another. Inputs, by and large, are always quantifiable. An
organization is more efficient than the other if it uses less resource (inputs) than another, the
same output or if for the same input it gives more output. The latter case requires output to be
measured in quantitative terms and hence is more difficult to assess.

Measurement of effectiveness has both numerator and denominator which are comparatively
more difficult to quantify. Hence assessment of effectiveness is more difficult than the
assessment of efficiency of the organization. In a profit oriented organization, profit becomes a
surrogate measure for both efficiency as well as effectiveness. Profit is the difference between
revenue and expense, and thus is a measure of efficiency. Being the objective itself, profit also
becomes a measure of effectiveness. In organizations with multiple objectives, the situation is
different if the surrogate measures like profit are not available/not sufficient for evaluating the
strategy. In such cases the major problem in evaluating the strategy is to develop measures for
evaluating the strategy. The problem is solved by identifying the key variable or key success
factors which are measures of performance of certain key activities of the organization.
In corporate strategy, Johnson and Scholes present a model in which strategic options are
evaluated against three key success criteria:
 Suitability (would it work?)
 Feasibility (can it be made to work?)
 Acceptability (will they work it?)

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Suitability
Suitability deals with the overall rationale of the strategy. The key point to consider is whether
the strategy would address the key strategic issues underlined by the organization’s strategic
position.
 Does it make economic sense?
 Would the organization obtain economies of scale, economies of scope or experience
economy?
 Would it be suitable in terms of environment and capabilities?
Feasibility
Feasibility is concerned with whether the resources required to implement the strategy are
available, can be developed or obtained. Resources include funding, people, time and
information. Feasibility can be evaluated by cash flow analysis, forecasting, break-even
analysis, etc….
Cash flow refers to the movement of cash into or out of a business, a project, or a financial
product. It is usually measured during a specified, finite period of time.
Forecasting is the process of estimation in unknown situations. Risk and uncertainty are central
to forecasting and prediction. Forecasting is used in the practice of Customer Demand Planning
in everyday business forecasting for manufacturing companies.
Break-Even analysis (BEP) is the point at which cost or expenses and revenue are equal: there
is no net loss or gain, and one has "broken even". A profit or a loss has not been made, although
opportunity costs have been paid, and capital has received the risk-adjusted, expected return.

Acceptability
Acceptability is concerned with the expectations of the identified stakeholders (mainly
shareholders, employees and customers) with the expected performance outcomes, which can
be return, risk and stakeholder reactions.
Return deals with the benefits expected by the stakeholders (financial and non-financial). For
example, shareholders would expect the increase of their wealth, employees would expect
improvement in their careers and customers would expect better value for money.
Risk deals with the probability and consequences of failure of a strategy (financial and non-
financial).

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A stakeholder reaction deals with anticipating the likely reaction of stakeholders. Shareholders
could oppose the issuing of new shares, employees and unions could oppose outsourcing for
fear of losing their jobs, customers could have concerns over a merger with regards to quality
and support.
Self Check Questions Activity 8.1
1. Analyze the periodical evaluation report in your organization. Do they emphases
effectiveness or efficiency?
2. Discuss the three key success criteria against which strategy can be evaluated

8.2 Characteristics of an Effective Evaluation System

A Good evaluation system must possess various qualities. It must meet several basic
requirements to be effective. First, strategy-evaluation activities must be economical; too much
information can be just as bad as too little information; and too many controls can do more harm
than good. Strategy-evaluation activities also should be meaningful; they should specifically
relate to a firm's objectives. They should provide managers with useful information about tasks
over which they have control and influence.

Strategy-evaluation activities should provide timely information; on occasion and in some areas,
managers may need information daily. For example, when a firm has diversified by acquiring
another firm, evaluative information may be needed frequently. However, in an R&D
department, daily or even weekly evaluative information could be dysfunctional. Approximate
information that is timely is generally more desirable as a basis for strategy evaluation than
accurate information that does not depict the present. Frequent measurement and rapid reporting
may frustrate control rather than give better control. The time dimension of control must
coincide with the time span of the event being measured.

Strategy evaluation should be designed to provide a true picture of what is happening. For
example, in a severe economic downturn, productivity and profitability ratios may drop
alarmingly, although employees and managers are actually working harder. Strategy evaluations
should portray this type of situation fairly.

Information derived from the strategy-evaluation process should facilitate action and should be
directed to those individuals in the organization who need to take action based on it. Managers

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commonly ignore evaluative reports that are provided for informational purposes only; not all
managers need to receive all reports. Controls need to be action-oriented rather than
information-oriented.

Strategy evaluations should be simple, not too cumbersome, and not too restrictive. Complex
strategy evaluation systems often confuse people and accomplish little. The test of an effective
evaluation system is its usefulness, not its complexity. Large organizations require a more
elaborate and detailed strategy-evaluation system because it is more difficult to coordinate
efforts among different divisions and functional areas. Managers in small companies often
communicate with each other and their employees daily and do not need extensive evaluative
reporting systems. Familiarity with local environments usually makes gathering and evaluating
information much easier for small organizations than for large businesses. But the key to an
effective strategy evaluation system may be the ability to convince participants that failure to
accomplish certain objectives within a prescribed time is not necessarily a reflection of their
performance.
There is no one ideal strategy-evaluation system. The unique characteristics of an organization,
including its size, management style, purpose, problems, and strengths, can determine a
strategy-evaluation and control system's final design. Robert Waterman offered the following
observation about successful organizations' strategy-evaluation and control systems:

8.3 A Strategy-Evaluation Framework

Strategy-evaluation activities in terms of key questions that should be addressed, alternative
answers to those questions, and appropriate actions for an organization to take. Notice that
corrective actions are almost always needed except when (1) external and internal factors have
not significantly changed and (2) The firm is progressing satisfactorily toward achieving stated
objectives.

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 Review underlying
Bases Evaluation Framework

Differences? Yes

III.
No Take
corrective
II. Measure Firm performance Action

Differences? Yes

No

Continue present course

Fig. 8.2 Strategy-Evaluation Framework

There are many methods/ techniques used in strategic control systems. Every organization has
its own way of using a particular technique according to the requirements of the organization.
DuPont’s system of financial control
Budget –i.e. preparation and allocation of resources
Time-related control
Audits
MBO etc... are some of the important control methods used by organizations.
8.4 Measuring Organizational Performance
Another important strategy-evaluation activity is measuring organizational performance. This
activity includes comparing expected results to actual results, investigating deviations from
plans, evaluating individual performance, and examining progress being made toward meeting
stated objectives. Both long-term and annual objectives are commonly used in this process.
Criteria for evaluating strategies should be measurable and easily verifiable. Criteria that predict
results may be more important than those that reveal what already has happened. For example,
rather than simply being informed that sales last quarter were 20percent under what was

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expected, strategists need to know that sales next quarter may be 20 percent below standard
unless some action is taken to counter the trend. Really effective control requires accurate
forecasting.

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

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

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

Quantitative criteria commonly used to evaluate strategies are financial ratios, which strategists
use to make three critical comparisons: (1) comparing the firm's performance over different time
periods, (2) comparing the firm's performance to competitors', and (3) comparing the firm's
performance to industry averages. Some key financial ratios that are particularly useful as
criteria for strategy evaluation are as follows:
Return on investment Debt to equity
Return on equity Earnings per share
Profit margin Sales growth
Market share Asset growth
But there are some potential problems associated with using quantitative criteria for evaluating
strategies. First, most quantitative criteria are geared to annual objectives rather than long-term
objectives. Also, different accounting methods can provide different results on many
quantitative criteria. Second, intuitive judgments are almost always involved in deriving
quantitative criteria. For these and other reasons, qualitative criteria are also important in
evaluating strategies. Human factors such as high absenteeism and turnover rates, poor

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production quality and quantity rates, or low employee satisfaction can be underlying causes of
declining performance.

Seymour Tilles identified six qualitative questions that are useful in evaluating strategies:
1. Is the strategy internally consistent?
2. Is the strategy consistent with the environment?
3. Is the strategy appropriate in view of available resources?
4. Does the strategy involve an acceptable degree of risk?
5. Does the strategy have an appropriate time framework?
6. Is the strategy workable?
Self Check Questions Activity 8.2
1. describe the strategy evaluation framework
2.
8.4 Approaches to the Evaluation of Organizational Effectiveness
Pretest
Dear student! What do you know about the different approaches used to evaluate
organizational effectiveness?
An organization's effectiveness is in major part a measure of the effectiveness of its master
strategy. Selection of the appropriate basis for assessing organizational effectiveness presents a
challenging problem for managers and researchers. There are no generally accepted
conceptualizations prescribing the best criteria. Different organizational situations - pertaining
to the performance of the organization's structure, the performance of the organization's human
resources, and the impact of the organization's activities -require different criteria.

i)The Rational Goal Model

The rational goal approach focuses on the organization's ability to achieve its goals. An
organization's goals are identified by establishing the general goal, discovering means or
objectives for its accomplishment, and defining a set of activities for each objective. The
organization is evaluated by comparing the activities accomplished with those planned for.

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ii) The Systems Resource Model
The systems resource model analyzes the decision-maker’s capability to efficiently distribute
resources among various subsystems’ needs. The systems resources model defines the
organization as a network of interrelated subsystems

iii) The Bargaining Model

Each organizational problem requires a specific allocation of resources. The bargaining model
presumes that an organization is a cooperative, sometimes competitive, resource distributing
system.
Decisions, problems and goals are more useful when shared by a greater number of people. Each
decision-maker bargains with other groups for scarce resources which are vital in solving
problems and meeting goals.

iv) The Managerial Process Model

The managerial process model assesses the capability and productivity of various managerial
processes -decision making, planning, budgeting, and the like -for performing goals.

v) Organizational Development Model

This model appraises the organization's ability to work as a team and to fit the needs of its
members. The model focuses on developing practices to foster:
1. supervisory behavior manifesting interest and concern for workers;
2. team spirit, group loyalty, and teamwork among workers and between workers and
management;
3. confidence, trust and communication among workers and between workers and
management;
4. more freedom to set their own objectives

vi) The Structural Functional Model

The structural functional approach tests the durability and flexibility of the organization's
structure for responding to a diversity of situations and events. According to this model, all
systems need maintenance and continuity.

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8.6. Strategic Control: Control Process
Pretest
Dear student! What do we mean by control process? Would you mention some of the
different types of control?

The final strategy-evaluation activity, taking corrective actions, requires making changes to
reposition a firm competitively for the future. Examples of changes that may be needed are
altering an organization's structure, replacing one or more key individuals, selling a division, or
revising a business mission. Other changes could include establishing or revising objectives,
devising new policies, issuing stock to raise capital, adding additional salespersons, allocating
resources differently, or developing new performance incentives. Taking corrective actions does
not necessarily mean that existing strategies will be abandoned or even that new strategies must
be formulated.

Management control refers to the process by which an organization influences its subunits and
members to behave in ways that lead to the attainment of organizational objectives. Robert J.
Mockler define management control as “Management control is a systematic effort to set
performance standards with planning objectives, to design information feedback systems, to
compare actual performance with these predetermined standards, to determine whether there are
any deviations and to measure their significance, and to take any action required to assure that
all corporate resources are being used in the most effective and efficient way possible in
achieving corporate objectives.”

8.6.1Types of Control
Management can implement controls before an activity commences/start, while the activity is
going on, or after the activity has been completed. The three respective types of control based
on timing are feed forward, concurrent, and feedback.

i) Feed forward Control

Feed forward control focuses on the regulation of inputs (human, material, and financial
resources that flow into the organization) to ensure that they meet the standards necessary for
the transformation process.

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Feed forward controls are desirable because they allow management to prevent problems rather
than having to cure them later. Unfortunately, these controls require timely and accurate
information that is often difficult to develop. Feed forward control also is sometimes called
preliminary control, preventive control, or steering control.

However, some authors use term "steering control" as separate types of control. These types of
controls are designed to detect deviation from some standard or goal to allow correction to be
made before a particular sequence of actions is completed.

ii) Concurrent Control

Concurrent control takes place while an activity is in progress. It involves the regulation of
ongoing activities that are part of transformation process to ensure that they conform to
organizational standards. Concurrent control is designed to ensure that employee work activities
produce the correct results.
Concurrent control sometimes is called screening or yes-no control, because it often involves
checkpoints at which determinations are made about whether to continue progress, take
corrective action, or stop work altogether on products or services.
iii) Feedback Control
This type of control focuses on the outputs of the organization after transformation is complete.
Sometimes called post action or output control, fulfils a number of important functions. For
one thing, it often is used when feed forward and concurrent controls are not feasible or are too
costly.

The major drawback of this type of control is that, the time the manager has the information and
if there is significant problem the damage is already done. But for many activities, feedback
control fulfils a number of important functions.
iv) Multiple Controls
Feed forward, concurrent, and feedback control methods are not mutually exclusive. Rather,
they usually are combined into a multiple control systems. Managers design control systems to
define standards of performance and acquire information feedback at strategic control points.

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Problems of Control Systems
There are a large number of problems associated with control systems for strategy evaluation.
An efficient system may collect a lot of irrelevant data whereas a sophisticated system might
ignore crucial information. Some of the typical problems in control:
 There may not be a consensus on the criteria for measuring the effectiveness and
efficiency of the strategy.
 The reporting data may be invalid
 The performance norms may be based on output on which the relevant business may not
have a control
 Often performance standards may be set with inherent contradictions. For example, an
increase in market share may be expected in conjunction with an absolute decrease in
marketing expenditure.
 Employees may consider the system to be unfair and therefore may not accept it.
 Overemphasis on measuring short-term performance may make managers forget about
the strategy which inherently has long connotations.
 It is very difficult to set “good”, “average”, and “poor” levels of performance in
situations where the outputs are not very tangible. That is, Difficulty predicting future
with accuracy
Unit Summary
This unit discusses the different concepts of strategy evaluation and control. The effort has been
to make you understand the qualitative issues of evaluation system and the importance of control
for the successful implementation of the strategy. Ineffective system of evaluation and control
is important for the success of corporate strategy. It is also necessary for taking decisions on
whether strategy should be continued or modified. The success of a strategy should be
considered both in terms of effectiveness and efficiency.
The problem in evaluation and control is that of developing appropriate measures. The key
variables of the organization may guide the duration of measures for evaluation and control.
Structure also plays an important role in evaluation and control of strategy. Defective structures
may leads to inadequate evaluation and control. For evaluation of strategy or concrete action,
all factors of cost and environment must be included. On the basis of evaluation the corrective
action may be taken if the performance is not up to the planned levels.

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Self -Test Exercise
Part I: choose the best answer for the following questions
1. A type of control known by “Steering control”
(a) Feedback control B. Feed ward control (c) Concurrent control
(d) Screening control (e) None of the above
2. Internal audit is done
(a) Before external audit
(b) After external audit
(c) Parallel to external audit
(d) Vertical to external audit
None of the above
3. Relative deficiency or superiority is important information in performing which activity?
(a) External audit (b) Allocating resources (c ) Internal audit (d) Evaluating strategies
Essay type Questions: Briefly discuss each of the following questions
1. Discuss the strategic control process
2. What can be the characteristics of an effective control system? Discuss.

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 JIMMA UNIVERSITY
CONTINUING AND DISTANCE EDUCATION
DEPARTMENT OF MANAGEMENT
Strategic management (MGMT 462)

Instructions:

This booklet has THREE parts. Part I consists of 10 true /false questions; Part II consists

20 multiples choice and part –III five list questions .All of the questions are compulsory

and will be marked. Thus, you are expected to submit during your final exam time.

Dear student, it is obligatory for you to strictly observe and follow specific instructions

supplied for each of the three parts included in this booklet and requirements of every

question. You are strongly recommended not to attempt the questions prior to a

thorough study of the course material and attempting review questions provided

therein. Hand written assignment is more preferable.

Name: ______________________________________________
Id. No.: ______________________________________________
Faculty/College: ________________________________________
Department: ________________________________________
Tutorial Centre: ________________________________________
Year _____________________
Term _____________________

Part I. True or False questions

Write “True” if the statement is correct or “False” if the statement is Incorrect

(0.5Marks for each question)

-----------[Link] strategic management process is dynamic and continues

----------2. Ansoff has used the term “common thread’ for Objectives

-----------3. The strategy provides a cooperative, integrated, and enthusiastic approach to

tackling problems and opportunities

-----------4. Tactics determines the major plan to be undertaken while strategy is the means by
which previously determined plan are executed

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-----------5. High costs are difficult to competitors to meet the specialized need for niche

-----------6. The process of strategy making is cyclical in nature

-----------7. The internal environment refers to all factors inside the organization which provide
opportunity or pose threat to the organization

-----------8. Technology is patronized by business

-----------9. If the resource is widely available, it has a high probability to be a source of

competitive advantage

----------10. Experience curve is an important concept used for applying a portfolio approach

Part II Multiple Choice Questions

Choose the best answer and write your answer (1Marks for each question)

----------[Link] one of the following is false

A. strategy is the grand design

B. Strategic management is not a science but art

C. Strategy is a compulsive and integrated plan

D. Strategy is meant to fill the need of an individual for sense of dynamic direction

E. B and C

------------[Link] management focuses on integrating the following function except

A. Management C. Marketing E. None

B. Finance D. Research and Development
------------3. All managers at all companies face the following basic question in thinking
strategically about their companies present circumstance except.

A. Where we want to know B. Where do we want to go

B. How will we get there D. Where are we now E. None
------------4. Which one of the following is an enduring statement of purpose that distinguish
one business from other similar firms

A. Strategies B. Polices C. Objective D. mission statements E. None

------------5. Which one of the following is a mass of measurement of the firm’s capability to
take advantage new product market move

A. Competitive advantage C. Purpose E. None

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 B. Synergy D. Feedback
-------------6. Which of the following is one of an approach to stability strategy implemented
by redefining the business by adding the scope business substantially increasing
the efforts of the current business.

A. Expansion strategies B. Retrenchment strategy C. Turnaround strategy

D. Survival strategy E. None
-------------7. The following are prerequisites of cost leadership except

A. Cost minimization
B. Tight cost and overhead control
C. Aggressive construction of efficient scale facilities
D. Vigorous pursuit of cost reduction from experience
E. None
-------------8. Which one of the factor which can be responsible for differentiated products
except

A. Policy choice B. Links C Trimming E. Learning E. All

------------9. Which one the following cannot be considered as advantage of product
differentiation

A. Premium price for firm

B. Increase in brand loyalty
C. Charging a high price for differentiated features
D. Premium price for the firm
E. None
------------10. Which one the following is true about mission

A. Mission is tangible

B. Mission is subjective
C. Mission statement describes a picture of the preferred future
D. Mission is quantitative philosophical
E. ALL
-----------11. Which one of the following cannot be planning process

A. Identification of the issues

B. Classification of the issues
C. Analyzing and problem solving
D. B and C
E. None
---------------[Link] one of the following is false

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 A. Taxes and duties are critical areas that may be levied and affect the business
B. Political pressure groups influence and limit organization
C. Business hi highly guided and controlled by government policies
D. Any country business must have a good working knowledge of the major laws
protecting consumers, competition and organizations
E. None
---------------[Link] one of the following compare the performance of an organization in the
same industry or sector against a set of agreed performance indicators

A. Industry Norms B. Historical comparisons D. Benchmarking D All E. None

---------------14. Which one of the following is an inherent limitation or constraint which

creates a strategic disadvantage

A. Weakness B. Aggression C. Marketing warfare D. Threats E. None

---------------15. Which are the following are the most important factors that should be taken
into account when conducting strategic analysis

A. Product situation B. Competitive situation C. Distribution situation

D. Environmental factors E. None

---------------16. Which one of the following is a drawback of the BCG matrix model

A. Difficulty in determining market share

B. No consideration for experience curve synergy

C. The matrix depends heavily upon the breadth of the definition of the market

D. The framework assumes that each business unit is independent of the others

E. None

-----------17. Based on BCG matrix model :

A. Cash cow are high growth business or products competing in market where they are
relatively strong compared with the competition

B. Stars are low-growth business or products with a relatively high market need to be
managed for continued profit

C. Question marks refer to business or products that have a low relative share in
unattractive, low-growth markets

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 D. Dogs are business or product with low market share but which operate in higher growth
market

E. None

------------18. Objective should be

A. Attainable B. Measure C. Understandable D. Hierarchical E. All

-------------19. Which one the following stage focuses upon generating feasible alternative
strategies by aligning key external and internal factors

A. Formulation framework stage B. Matching stage C. Decision stage

D .A and C E. All

------------20. Which one of the following is a performance measurement framework to a full

strategic planning and management system

A. Business Process Reengineering B. Citizen charter

C. Structural adjustment D Balanced score card E. None

Part III.
Write the correct answer in the given blank space (Total 5marks)

1. List out the three stages of strategic management process (2 marks)

--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
2. ------------------- Gives the direction within an industry and across industry boundaries
which the firms propose to pursue (0.5mark)

3. -------------------A single use comprehensive plan laying down the principal steps for
accomplishing specific objectives and sets an approximate time limit for each stage
(0.5mark)

4. List out four stages of product life cycle (1.5marks)

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 ------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------

5. ----------------------- type of control focuses on the output of the organization after

transformation is completed (0.5mark)

i
S.L. Sutherland, “Independent review and political accountability: should democracy be on autopilot?”
Optimum: The Journal of Public Sector Management, vol. 24-2, Autumn 1993. 27.

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