SCHOOL OF MANAGEMENT STUDIES

UNIT – I – Business Policy and Strategy – SBAA1504

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 I. INTRODUCTION TO BUSINESS POLICY
Nature and Importance of Business Policies - Definitions of Policy, Procedures, Process and
Programmes, - Types of Policies - Policy Formulation and Implementation - Company’s
vision and mission - need for a mission statement, criteria for evaluating a mission statement
- Goal, Process & Input formulation of the mission statement - Drucker’s Performance Area.
Strategic management - need, scope, importance and process

BUSINESS POLICY:
Business policies are the guidelines formulated by an organization to govern its
actions. They define the limits and the scope within which decisions must be made by the
subordinates. It allows the lower level management to deal with the issues and challenges
without consulting top level management every time for making decisions.

The term "Business Policy" comprises of two words, Business and Policy. Business as
we know means exchange of goods and services for increasing utilities. Policy may be
defined as "the mode of thought and the principles underlying the activities of an
organization or an institution." Policies are general statements of principles which guide the
thinking, decision- making and actions in an organization.

Business policy is a set of principles and rules which directs the decisions of the
subordinates. Policies are framed by the top level management to serve as a road map for
operational decision making. It is helpful in stressing the rules, principles and values of the
organization. Policies are designed, by taking opinions and general views of a number of
people in the organization regarding any situation. They are made from the past experience
and basic understanding. In this way, the people who come under the range of such policies
will completely agree upon its implementation. Policies help the management of an
organization to determine what is to be done, in a particular situation. These have to be
consistently applied over a long period of time to avoid discrepancies and overlapping.

[Link]: “Business Policy, basically, deals with decisions regarding the future of
an on-going enterprise. Such policy decisions are taken at the top level after carefully
evaluating the organizational strengths and weaknesses in relation to its environment”.

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Features of Business Policy:
An effective business policy must have following features-
a) Specific- Policy should be specific/definite. If it is uncertain, then the implementation
will become difficult.
b) Clear- Policy must be unambiguous. It should avoid use of jargons and connotations.
There should be no misunderstandings in following the policy.
c) Reliable/Uniform- Policy must be uniform enough so that it can be efficiently
followed by the subordinates.
d) Appropriate- Policy should be appropriate to the present organizational goal.
e) Simple- A policy should be simple and easily understood by all in the organization.
f) Inclusive/Comprehensive- In order to have a wide scope, a policy must be
comprehensive.
g) Flexible- Policy should be flexible in operation/application. This does not imply that
a policy should be altered always, but it should be wide in scope so as to ensure that
the line managers use them in repetitive/routine scenarios.
h) Stable- Policy should be stable else it will lead to indecisiveness and uncertainty in
minds of those who look into it for guidance.

SIGNIFICANCE OF THE SUBJECT:

This subject has a certain significance they are broadly classified into three, they are;

1. knowledge uses:
a) Knowledge of concepts, i.e., what concept to use and when to use.
b) Knowledge about the business environment
c) Real life knowledge about practical (happening) aspects of business
d) Knowledge about standards and methods of evaluations ( of whatever is
happening in the organization and outside and how standards are set, modified
and work evaluated)
e) Build up business literature: all relevant, important happenings and related
information about what is taking place in the organization and outside, will
help future plans, policies and decisions.
2. skill uses:
a) Analytical skills: for developing the organization and its standards.

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 b) Empirical skills: for testing any concept which is to be introduced newly into
the organization, the organization should be capable of testing from positive
and negative angles.
c) Decision making skills: to make the right decision, at the right time to help
increase profit and improve the organization.
d) Intuitive skills: every business owner should have an idea to guess what may
happen in the future and take suitable actions or develop policies in advance
e) Communication skills: so as to help inform others and gather data from
others, for overall organizational development.
3. attitude uses:
a) Develop wholesome approach rather than narrow approach; this will
involve the entire business than taking or giving importance to any one part of
the organization. Thus, a whole some approach covering he entire organization
is always better than a narrow approach.
b) Creative and innovative approach: organizations should be creative, i.e.,
adopt new approaches to get better profits or make new product or they can
also be innovative by altering the existing products slightly suit the existing
markets, increase the market share or organisation image.
c) Flexibility and dynamism: the organisation should be flexible to suit and
change or modify itself to the changing environmental conditions. It should
have dynamism to adopt new technology or changes as per new technology or
changes as per organisation need and requirement
d) Intuition: the people at the top level in the organisation should be capable to
foresee the future of the organisation based on very limited data available at
present.

CLASSIFICATION OF POLICIES

Similar to objectives policies are also classified. They are as follows;

 According to level of formation

 Functional area policies
 According to expression
 According to nature of origin

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  According to scope of organisation
 According to the nature of managerial functions
 Situational or contingency policies

ACCORDING TO LEVEL OF FORMULATION

a) Top Management policies: These are usually developed by the MD, VC, and GM.
They are usually about investments, diversification, acquisitions, available capital,
HR requirement, R & D requirements, problems with promotion, transfer, and
achieving organizational goals, etc.
b) Middle level Management policies: These are developed after talks between middle
and upper level executives. They usually are about employee selection for a specific
job, installation (fixing) new equipment’s, resources and their selection, deciding
wages and salaries, and developing incentive plans, getting finance to solve problems,
etc.
c) Lower Level Management policies: These are developed by the people who are
usually supervisors. They are directly related in achieved. They are in-charge of
providing tools, raw materials, training, quality, discipline, improving the morale of
employees, motivating them and reducing absenteeism, etc
d) Operational Level Management policies: This is usually written down rules and
policies in manuals and work books which the operational level employees are
supposed to follow.

ACCORDING TO FUNCTIONAL AREA

a) Production Policies: These involve policies regarding product line, type of product,
selection of technology, process, equipment, tools, location of plant, layout, budget,
maintenance, inventory control, quality, cost control, labor relations, etc.
b) Marketing and sales policies: These are related to market analysis, trend, demand
forecasting, total concept of product mix and market mix. Spotting present and
potential market, the size and nature of customers, competitors, distribution of
products, promotion and pricing, selection, training and developing sales force,
division of market area, establishing sales volume and sales budgets, etc.
c) Financial Policies: These are required for prosperity and long survival. They include
capital requirement such as working, short, medium, and long term, methods of fund

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 raising, utilization of funds, profit policy, accounting policy, allocation policy,
finished goods inventory policy, provision for bad debts, etc
d) Personnel Policies: These are concerned with recruitments, selection, and utilization
of human resources. Sources of HR, training, promotion, transfer, wages, incentives,
benefits, services, etc.

ACCORDING TO EXPRESSION
a) Oral policies: These are word of mouth policies adopted usually, when organizations
are small and face to face communication is desired. Direct communication with
better understanding is desired, for flexibility. However, it suffers from drawbacks
like improper interpretation, easily forgotten when issued less frequently etc.
b) Written Policies: These are put in black and white and stated clearly, for the
personnel to understand. Therefore, it is clear, complete, precise, contain legal terms
use simple language and be warm to all those who read. It should be convenient and
handy for reference and application wherever and whenever necessary. However, they
too have disadvantages, as they are at times problem creating if not properly framed.
c) Implied Policies: These can be understood from the behaviour of executives, they are
not stated or written, they may be included in the philosophy of the business, social
values and even traditions. Best suitable are dress codes, prohibition of smoking or
drinking in working areas. Employing people of certain community, race, gender, etc
can only be an implied policy, but written policies like above can cause legal
problems.

ACCORDING TO NATURE OF ORIGIN

a) Originated Policies: These policies are derived from the company objectives, which
are determined by the top management. Subordinate are supposed to readily accept
such policies.
b) Appealed Policies: These are also known as “suggested policies”, since these are
based on the suggestions of employees, subordinate or consultant. They are more
effective as they involve employees and the top management.
c) Imposed Policies: These are not accepted willingly, but are rather forced by external
forces like government, trade unions, legal acts, society, etc. they have to be followed
whether they like it or not.

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 d) Derivate Policies: These are derived from the basic or major policies and are
operational. They are guidelines in day-to-day operations and are usually developed
by the respective departments or sections.

ACCORDING TO THE SCOPE OF ORGANISATION

a) Basic Policies: They form the basis of the organization and are developed by top
management. They give idea about the company, its activities, its environment, and
their influence over other policies, which is very important to the organization.
b) General Policies: They are usually developed by the middle level management. Such
policies are very specific and apply to large segments of the organizations.
c) Specific or departmental Policies: It is developed by a specific department, for
managing its routine activities i.e., day-to-day activities of the department.

ACCORDING TO THE NATURE OF MANAGERIAL FUNCTIONS

a) Planning Policies: These are connected with the path of action, which leads to
company activities, and achieving organizational goals. They include;
 Establishing corporate objectives.
 Collecting and classifying information
 Developing alternate course of action
 Comparison of objectives against feasibility, consequence etc
 Optimum (minimum use of resources) course of action
 Establishing standards, rules, policies, procedures, programs,
budgets, etc
b) Organizing Policies: These policies include
 Establishing and maintaining a clear and precise organizational
structure
 Determining the role of each level of management
 Deciding authority, responsibility, degree of centralization,
decentralization
 Line and staff relationship and their communication
c) Directional Policies: They are also called ‘actuating’ policies, they involve
 Providing effective leadership
 Assisting people in achieving their objectives and organizational goals.

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  Integrating people to suitable tasks
 Effective communication with all members of the organization.
 Proper organizational climate for employee development and
motivation
d) Controlling Policies: These are established to measure results. They involve
measuring actual results against standards or pre-established results. They involve
 Continuous observation of performance
 Measurement of results
 Finding deviation and taking corrective action
 Best mode of control
 Comparison of actual with standards
 Finding causes for deviations, pin-pointing deviations which are
significant
 Implementing corrective action when there is deviation

SITUATIONAL AND CONTINGENCY POLICIES

a) Normal Policies: These policies provide guidelines to the employees in routine day-
to-day conduct of business and its smooth functioning.
b) Contingency Policies: These policies are made to meet unexpected moments or
situations like
 Sudden floods, earth quakes, fire, famine, market slump
 Change in business cycles, war, labor strike, political problems, and
social sensitivity.
 Situational beyond the control of business unit like economic policy,
fiscal policy changes, monetary policy, trade or industrial policy being
unfavourable.
 Competitors’ strategies in production, R & D, innovations, quality
improvement, new techniques of production.
Most companies which are farsighted prepare contingency policies well in
advance, to help them to meet the situations whenever they arise.

PROCEDURE OF POLICY MAKING:

Policy can be defined as follows;

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“Business policy is an implied overall guide, setting up boundaries, that supply the general
limits and direction in which management action will take place” - Prof. George Terry

Besides a business policy - “is nothing more than a well-developed statement of individuals
and goals” - Prof. Peter and Wotrube.

STEPS IN POLICY MAKING:

IDENTIFY THE SITUATION

DEVELOPMENT OF POLICY

DISSEMINATION

EXPLANATION OF THE POLICY

ACCEPTANCE OF THE POLICY

FEED BACK

CHIEF FEATURES OF POLICY:

The following are the important features of any policy

 policies are general statements for the attainment of objectives

 policies have hierarchy
 policies limit the area within which the decision is to be taken
 policies in general are meant for mutual application by subordinates
 they pre decide issues and avoid repetition
 it should be applied in all functional areas and at all levels
 it should provide the clearest guidelines to avoid confusion

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PROGRAM AND ITS EFFECTIVENESS

Program has the following definitions “It is a single use comprehensive plan laying down the
principle steps for accomplishing (completing) a specific job or objective in a specific time”.

Thus, it outlines by whom, when and where new product development programs,
management programs, training, sales programs, etc

EFFECTIVE PROGRAMS

An effective program has the following steps:

 it is divided into several steps for achieving objectives

 it establishes relationship between several steps to ensure a smooth flow of the
sequence of operations.
 It decides responsibility and accountability
 It determines the resources needed
 It fixes the time limit by assigning a time for each program, etc

DIFFERENCE BETWEEN POLICIES AND PROGRAMS

The differences between policies and programs are given below;

CONCEPT POLICY PROGRAM

Definition Broad and comprehensive Detailed step by step course of
guidelines about the future action
direction of the company
Time period Long range plan of action Short and stable

Type Broad in direction and has to Simple and complex activities

be followed taken up to carry out the given
policy
Basics It is the foundation for It exists due to policies
programs

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PROCEDURES ITS IMPORTANCE:

Procedures can be definite in several ways;“A series of functions or steps taken up to

accomplish a specific task” It can also be defined as” It is a precise means of making a step
by step guide of action that operates within a policy frame work”.

IMPORTANCE OF PROCEDURES:

The importances of procedures are given below;

 It reduces directing work

 It indicates the steps to be taken and the required time and the order for performing
certain activities
 It facilities training
 It reduces the problem of trial and error techniques
 Work operation gets simplified through a well-planned steps
 Better results at lower costs
 The true limit in performance helps in effective control over operations

STEPS IN EFFECTIVE PROCEDURE:

The following are the steps in effective procedures;

 List out the detailed and essential steps and then taken up performance
 Establish accountability and responsibility then standardize the procedure
 All the phases are to be linked with control so that performance can be reviewed
 They should be stable and not rigid
 Develop fruitful decisions in policies by taking into consideration, time, cost and
environment
 Any changes to be made should be taken up well in advance and should be written
down to help easy understanding
 These procedures should be understood, accepted and known to everyone involved
with them.

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DIFFERENCE BETWEEN POLICIES AND PROCEDURES

The following are the differences between policies and procedures;

CONCEPT POLICY PROCEDURE

Definition Guide for thought and action Guide for action and involves the
method of doing a task
Basis Foundation for procedures They follow policies

Responsibility Top management Middle and lower levels

Stability Stable Changes in the short-run

Emphasis General approach Step-by-step approach

Scope and Broad and comprehensive Rigid with no freedom

flexibility
Application Long range plans Short range plans

Goal orientation Directly related Indirectly related

Work Does not provide a method for A standard method for work exists
methodology doing work

MISSION: Mission of any organisation identifies with, “the scope of operations of an

organisation. It gives the reason for the existence of an organisation and clearly an
organisation with a mission finds it easier to succeed than an organisation without one”.

Thus, mission of any organisation is to see the scope of an organisation or the boundary of an
organization, or the limit to which the organisation can expand or reach.

EXAMPLE: IOCL (INDIAN OIL COPORATION LIMITED) has its mission statement as
thus:

“Maintaining national leadership in oil refining, marketing and pipeline transportation”.

VISION: These are long term goal projections as to what one is to be. What is intended to do
over a long period?

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Vision of any organisation can be defined as; “the goals that are the broadest, most general
and all inclusive. The most effective visions are those that appeal to the emotions of the
employees and the aspirations of the organization’s management”. Thus, they reveal what the
organisation should be like in the future.

EXAMPLE: IOCL vision states that, “Indian Oil aims to achieve international standards of
excellence in all aspects of energy and diversified businesses with focus on customer delight
through quality products and services”.

CHARACTERISTICS OF MISSION AND VISION STATEMENT

The following are the chief or important characteristics of mission and vision statements.
They are;

 It should be feasible.
 It should be precise.
 It should be clear.
 It should be motivating.
 It should be distinctive.
 It should indicate the major components of strategy.
 It should indicate how objectives are to be accomplished.

INPUT FORMULATION OF MISSION STATEMENT:

The mission statement should identify the forces that drive the organization's strategic vision.
The mission statement must reflect the values, beliefs, and philosophy of operations of the
organization. The mission statement should be achievable. It should be realistic enough for
organization members to buy into it. The mission statements stage the role that organization
plays in society. It is one of the popular philosophical issues which are being looked into
business mangers since last two decades.

Criteria of Mission Statement: In order to be effective, a mission statement should possess

the following criteria.

 The mission statement should focus on satisfying customer needs

 The mission statement should tell “Who” their customers are

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  The mission statement should explain “What” customer needs the company is trying
to satisfy
 The mission statement should explain “How” the company should serve its customers
 The mission statement should be based on a competitive advantage
 The mission statement should be based on the distinctive core competencies
 The mission statement should motivate and inspire employee commitment
 The mission statement should be realistic
 The mission statement should be specific, short and sharply focused
 The mission statement should be clear and easily understood.

Examples of Mission Statement:

 India Today “ The complete new magazine”

 Bajaj Auto, “Value for Money for Years”
 HCL, “ To be a world class Competitor”
 HMT, “Timekeepers of the Nation”
 Some experts argue that these are the publicity slogans. They are not mission
statements. A few other examples are as follows:
 Ranbaxy Industries “To become a research based international Pharmaceuticals
Company”.
 Eicher Consultancy “To make India an economic power in the lifetime, about 10 to 15
years, of its founding senior managers.”

GOALS: Goals denote what an organisation hopes to accomplish in future period of time.
They represent a future state or an outcome of the effort put in now (both financial and non-
financial issues, qualitative) to achieve objectives.

OBJECTIVES: “the ends that state specifically what the goals should achieve. They are
strong (concrete) and specific, in contrast (comparative) to goals which can be generalized
(qualitative)”.

EXAMPLE: IOCL’s objectives are to focus on cost, quality, customer care, value addition
and risk management.

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ROLE OF OBJECTIVES:

The following are the role of objectives;

 Objectives define the organisation relationship with its environment.

 Objectives help an organisation to pursue its vision and mission.
 Objectives provide the basis for strategic decision making.
 Objectives provide the standards for performance appraisal.

CHARACTERISTICS OF OBJECTIVES:

The objectives have certain characteristics, they are;

 Understandable (clarity).
 Concrete and specific (specificity)
 Related to a time frame (periodicity)
 Measurable and controllable (verifiability)
 Challenging and good (quality)
 Correlate with other objectives (multi publicity)
 Set within constraints (reality)

TYPES OF OBJECTIVES:

The different types of objectives are

 Economic objectives: financial aspects, fiscal and other objectives

 Social objectives: objectives, which are societal suitable and acceptable
 Survival objectives: objectives established or taken up by companies to survive, or
exist in the business
 Growth objectives: established by firms or organizations to grow and develop.
 Long term objectives: objectives established for a period of more than an year
 Short term objectives: objectives that are established for a period of less than a
year.
 Higher level objectives: the objectives that are established for the strategic level or
top level of the organisation

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  Lower level objectives: the objectives that are established for lower level of the
organisation or the middle level
 General objectives: objectives which cover the overall aspect of the business
 Specific objectives: objectives that are specific with clear instructions for any
business are termed thus
 Comprehensive objectives: a concise, brief list of objectives covering all areas of
the organisation
 Functional objectives: a set of objectives specifically developed for each
functional area in the organisation like HR, R&D, finance, Quality Control,
Marketing, and Production and so on.

DRUCKER’S VIEWS ON PERFORMANCE - CONCEPT:

“Performance” is the synonymy of “Result”. Drucker had in-depth discussion on performance
and result in his writings. Performance plays a significant role in Drucker’s management
theory. Two fundamental management tools – Innovation and Business theory of an
organization, are seen as two utmost important Drucker’s ideologies.

Importance of performance is conspicuous. However, the problem is how can we be certain

that we attain performance? How do we know if the result attained is our final goal? What
determines the performance and result? The answers to all these questions have to be referred
to the business objectives of the enterprise or organization.

Drucker suggests that, we have to set the organizational objectives based on the evaluation of
the outer environment, as well as the goal and competence of the organization. And we will
be able to outline the expected performance and result based on the organizational objectives.
This process is the essence of strategic planning, which also constitutes the business theory of
an organization or enterprise.

Drucker has raised three classic questions to explain the concept of theory of the business:
What is the nature of our business? Who are our customers? What are the core values of the
customers? Our path of thinking and answers to these questions should be derived from
essences of these questions; the answers will help us out with constructing the strategy for
actualizing centralization within an organization.

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We have to identify the client groups that need you the most, at the same time you are most
willing to satisfy their needs and skillful at serving them. If you are able to integrate these
two criteria, then you will succeed in grasping the target market.

Centralization is a business strategy that forces you to choose your battlefield, and it
determines the placement of the resources of the company. In the end, business objectives
have to be actualized by applying it on actual works and ideologies of the company, if not it
will simply become autistic thinking. The most important aspect of business strategy and
business objectives, is to plan out the strategic business moves that will lead to attainment of
the performance goal; while distribute enough resources, including the best talents within an
organization, for the business moves.

None of the marketing theories are everlasting, they need to be revised, reviewed and even
rebuilt from time to time. Although enterprises that have over hundred years of history do
exist, none of them stake their survival on a single product throughout the enterprise history.
On the other hand, none of these enterprises follow through the same marketing strategies
and management methods in order to survive.

Drucker emphasizes that all products, services, working process and marketing strategy have
to be reviewed periodically, so as to find out which components are outdated and invalid.

Revision of business theory does not induce innovation. Organization needs to innovate from
time to time, even when the current business theory is still workable. However, invention of a
new business theory brings about important innovation.
A new business theory is not an extension of the existing market and product line; instead it
leads to products and markets that are never seen before.

An enterprise only has two obligations: Marketing and Innovation. Only these two tasks can
bring about results, while all others are considered as cost of the business. Building the
business theory of an organization is the fundamental marketing tasks. Business theory assists
the company with exploring the needs of customers; thus, any amendment to the business
theory is the upmost important innovation of an enterprise.

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From this angle of view, we know that innovation should be treated as the active marketing.
In today’s volatile economy, the revision of business theory becomes more frequent than
before. In the past some of the renowned enterprises can survive on the same business theory
for a few decades, or even half a century; however, this is no longer the case. The change also
indicates that all modern managers have to be ready for innovation at all time, instead of
simply modifying the qualities of the existing products, working process and services.

Although we are situated in an era that all business theories are needed to be modified
constantly; nevertheless, it gives us the chance to enter new business sectors and new
markets. The era is pushed forward by innovation; today is the era of which the newcomers
surpass the old-timers.

Performance is a cruel master. It requires all managers to shoulder the responsibilities of

fostering the social resources, Drucker called this the ethics responsibility, legality and
righteousness of management; on the other hand, the quest for high standard of performance
motivates all managers and their subordinates to perform at their full potentials; it also help to
build sense of achievement while actualize the freedom and dignity of everyone.

“Management is to make an organization to attain high performance.” Human has invented

all sorts of tools in the history, which extended from manual tools to mechanical facilities,
atomic science, spaceships, Internet and biological engineering. Human beings can do both
good deeds and bad deeds by using any of the above tools. Management is also a tool, and it
is far more effective than all kinds of high technology.

In fact, management determines the usage of all resources, including both live and dead
resources, physical resources and knowledge resources; while it also determines the
efficiency of these recourses. However, management is different from other tools. People
cannot use the power of management to control others nor utilize their bad deeds.

Management is a tool for bringing about goodness. The ultimate goal of management is to
bring about positive change and improve the living qualities of people. Goodness is the
inborn nature of management; it helps to determine what kinds of enterprise performance are
needed by the society.

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STRATEGIC MANAGEMENT – MEANING AND CONCEPT:
The Strategic Management process is the way in which strategists determine objectives and
make strategic decisions. Strategic Management can be found in various types of
organizations, business, service, cooperative, government, and the like.
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
objectives”
Bowman, Singh, and Thomas (2002) Strategic management is about the direction of
organizations, most often, business firms. It includes those subjects of primary concern to
senior management, or to anyone seeking reasons for success and failure among
organizations.

Some important objectives of strategic management are as follows:

1. To exploit and create new and different opportunities for tomorrow.
2. To provide the conceptual frameworks that will help a manager understand the key
relationships among actions, context, and performance.
3. To put an organisation into a competitive position.
4. To sustain and improve that position by the deployment and acquisition of appropriate
resources and by monitoring and responding to environmental changes.
5. To monitor and respond to the demands of key stakeholders.
6. To find, attract, and keep customers.
7. To ensure that the company is meeting the needs and wants of its customers, which is a
cornerstone in providing the quality product or service that customers really want.
8. To sustain a competitive position.
9. To utilize the company’s strengths and take full advantage of its competitor’s weaknesses.
10. To understand the various concepts involved like strategy, policies, plans and
programmes.
11. To have knowledge about environment—how it affects the functioning of an
organisation.
12. To determine the mission, objectives and strategies of a firm and to visualize how the
implementation of strategies can take place.

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Nature and Scope of Strategic Management:
Strategic management is both an Art and science of formulating, implementing, and
evaluating, cross-functional decisions that facilitate an organization to accomplish its
objectives. The purpose of strategic management is to use and create new and different
opportunities for future. The nature of Strategic Management is dissimilar form other facets
of management as it demands awareness to the “big picture” and a rational assessment of the
future options. It offers a strategic direction endorsed by the team and stakeholders, a clear
business strategy and vision for the future, a method for accountability, and a structure for
governance at the different levels, a logical framework to handle risk in order to guarantee
business continuity, the capability to exploit opportunities and react to external change by
taking ongoing strategic decisions.

Strategic management process encompasses of following phases.

 Establishing the hierarchy of strategic intent
 Strategic formulation.
 Implementation
 Evaluation and control.
Strategy formulation comprises of developing a vision and mission, identifying an
organization’s external opportunities and threats, determining internal strengths and
weaknesses, establishing long-term objectives, creating alternative strategies, and choosing
particular strategies to follow.
Strategy implementation needs a company to ascertain annual objectives, formulate policies,
stimulate employees, and assign resources so that formulated strategies can be implemented.
Strategy implementation includes developing a strategy-supportive culture, creating an
effective organizational structure, redirecting marketing efforts, preparing budgets,
developing and utilizing information systems, and relating employee reward to organizational
performance.
Strategy evaluation is the last stage in strategic management. Managers must know when
particular strategies are not working well. Strategy evaluation is the main process for
obtaining this information.

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Importance of Strategic Management:
Planning or designing a strategy involves a great deal of risk and resource assessment, ways
to counter the risks, and effective utilization of resources all while trying to achieve a
significant purpose.
An organization is generally established with a goal in mind, and this goal defines the
purpose for its existence. All of the work carried out by the organization revolves around this
particular goal, and it has to align its internal resources and external environment in a way
that the goal is achieved in rational expected time.
Undoubtedly, since an organization is a big entity with probably a huge underlying
investment, strategizing becomes a necessary factor for successful working internally, as well
as to get feasible returns on the expended money.
Strategic Management on a corporate level normally incorporates preparation for future
opportunities, risks and market trends. This makes way for the firms to analyze, examine and
execute administration in a manner that is most likely to achieve the set aims. As such,
strategizing or planning must be covered as the deciding administration factor.
Strategic Management and the role it plays in the accomplishments of firms has been a
subject of thorough research and study for an extensive period of time now. Strategic
Management in an organization ensures that goals are set, primary issues are outlined, time
and resources are pivoted, functioning is consolidated, internal environment is set towards
achieving the objectives, consequences and results are concurred upon, and the organization
remains flexible towards any external changes.
As more and more organizations have started to realize that strategic planning is the
fundamental aspect in successfully assisting them through any sudden contingencies, either
internally or externally, they have started to absorb strategy management starting from the
most basic administration levels. In actuality, strategy management is the essence of an
absolute administration plan. For large organizations, with a complex organizational structure
and extreme regimentation, strategizing is embedded at every tier.
Apart from faster and effective decision making, pursuing opportunities and directing work,
strategic management assists with cutting back costs, employee motivation and gratification,
counteracting threats or better, converting these threats into opportunities, predicting probable
market trends, and improving overall performance.

21
Keeping in mind the long-term benefits to organizations, strategic planning drives them to
focus on the internal environment, through encouraging and setting challenges for employees,
helping them achieve personal as well as organizational objectives. At the same time, it is
also ensured that external challenges are taken care of, adverse situations are tackled and
threats are analyzed to turn them into probable opportunities.

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 SCHOOL OF MANAGEMENT STUDIES

UNIT – II – Business Policy and Strategy – SBAA1504

1
 II. STRATEGIC ANALYSIS MODELS AND TOOLS

External Environment- Appraisal using PESTEL – Competitor Analysis using Porter’s 5-

Forces model-Environmental Threat and Opportunity Profile (ETOP) -Value chain
Analysis- Scanning Functional Resources and Capabilities for building Organization
Capability Profile (OCP) SWOT Analysis.

STRATEGIC ANALYSIS – CONCEPT:

Strategic analysis refers to the process of conducting research on a company and its
operating environment to formulate a strategy. The definition of strategic analysis may
differ from an academic or business perspective, but the process involves several
commonfactors:

 Identifying and evaluating data relevant to the company’sstrategy.

 Defining the internal and external environments to beanalysed.
 Using several analytic methods such as Porter’s five forces analysis, SWOT
analysis, and value chain analysis.

Strategic analysis helps to explore organizations growth options, addresses challenges

within industry, and makes better corporate decisions. Strategy analysis is an approach to
facilitating, researching, analyzing, and mapping an organization's abilities to achieve a
future envisioned state based on present reality and often with consideration of the
organization's processes, technologies, business development and people's capabilities.

SCANNING THE ENVIRONMENT:

PESTEL ANALYSIS:
A PESTEL analysis or PESTLE analysis (formerly known as PEST analysis) is a
framework or tool used to analyze and monitor the macro-environmental factors that may
have a profound impact on an organization’s performance. This tool is especially useful
when starting a new business or entering a foreign market. PESTEL is an acronym that
stands for Political, Economic, Social, Technological, Environmental and Legal factors.
PEST or PESTEL analysis is a simple and effective tool used in situation analysis to
identify the key external (macro environment level) forces that might affect an

2
organization. These forces can create both opportunities and threats for an organization.
Therefore, the aim of doing PEST is to:
 Find out the current external factors affecting anorganization.
 Identify the external factors that may change in thefuture.
 To exploit the changes (opportunities) or defend against them (threats) better
than competitors woulddo.
The outcome of PEST is an understanding of the overall picture surrounding the company.
Political Factors: These factors are all about how and to what degree a government
intervenes
[Link]
s could be classified here. This can include government policy, political stability or
instability, corruption, foreign trade policy, tax policy, labor law, environmental law and
trade restrictions. Furthermore, the government may have a profound impact on a nation’s
education system, infrastructure and health regulations. These are all factors that need to be
taken into account when assessing the attractiveness of a potential market.
Economic Factors: Economic factors are determinants of a certain economy’s
performance. Factors include economic growth, exchange rates, inflation rates, interest
rates, disposable income of consumers and unemployment rates. These factors may have a
direct or indirect long term impact on a company, since it affects the purchasing power of
consumers and could possibly change demand/supply models in the economy.
Consequently it also affects the way companies’ price their products andservices.

Social Factors:This dimension of the general environment represents the demographic

characteristics, norms, customs and values of the population within which the organization
operates. This includes population trends such as the population growth rate, age
distribution, income distribution, career attitudes, safety emphasis, health consciousness,
lifestyle attitudes and cultural barriers. These factors are especially important for marketers
when targeting certain customers. In addition, it also says something about the local
workforce and its willingness to work under certainconditions.

Technological Factors:These factors pertain to innovations in technology that may affect

the operations of the industry and the market favorably or unfavorably. This refers to
technology incentives, the level of innovation, automation, research and development

3
(R&D) activity, technological change and the amount of technological awareness that a
market possesses. These factors may influence decisions to enter or not enter certain
industries, to launch or not launch certain products or to outsource production activities
abroad. By knowing what is going on technology-wise, you may be able to prevent your
company from spending a lot of money on developing a technology that would become
obsolete very soon due to disruptive technological changes elsewhere.

Environmental Factors:Environmental factors have come to the forefront only relatively

recently. They have become important due to the increasing scarcity of raw materials,
pollution targets and carbon footprint targets set by governments. These factors include
ecological and environmental aspects such as weather, climate, environmental offsets and
climate change which may especially affect industries such as tourism, farming, agriculture
and insurance. Furthermore, growing awareness of the potential impacts of climate change
is affecting how companies operate and the products they offer. This has led to many
companies getting more and more involved in practices such as corporate social
responsibility (CSR) andsustainability.

Legal Factors:Although these factors may have some overlap with the political factors,
they include more specific laws such as discrimination laws, antitrust laws, employment
laws, consumer protection laws, copyright and patent laws, and health and safety laws. It is
clear that companies need to know what is and what is not legal in order to trade
successfully and ethically. If an organization trades globally this becomes especially tricky
since each country has its own set of rules and regulations. In addition, you want to be
aware of any potential changes in legislation and the impact it may have on your business
in the future. Recommended is to have a legal advisor or attorney to help you with these
kinds of things.

PEST analysis is also done to assess the potential of a new market. The general rule is that
the more negative forces are affecting that market the harder it is to do business in it. The
difficulties that will have to be dealt with significantly reduce profit potential and the firm
can simply decide not to engage in any activity in that market.

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PORTER’S FIVE FORCES OF COMPETITIVE POSITION ANALYSIS:

Porter's Five Forces of Competitive Position Analysis were developed in 1979 by

Michael E Porter of Harvard Business School as a simple framework for assessing and
evaluating the competitive strength and position of a businessorganization.
This theory is based on the concept that there are five forces that determine the
competitive intensity and attractiveness of a market. Porter’s five forces help to identify
where power lies in a business situation. This is useful both in understanding the strength
of an organization’s current competitive position, and the strength of a position that an
organization may look to move into.
Strategic analysts often use Porter’s five forces to understand whether new products or
services are potentially profitable. By understanding where power lies, the theory can
also be used to identify areas of strength, to improve weaknesses and to avoid mistakes.

The five forces are:

1. Supplier power. An assessment of how easy it is for suppliers to drive up prices. This
is driven by the: number of suppliers of each essential input; uniqueness of their product
or service; relative size and strength of the supplier; and cost of switching from one
supplier toanother.
2. Buyer power. An assessment of how easy it is for buyers to drive prices down. This is
driven by the: number of buyers in the market; importance of each individual buyer to
the organization; and cost to the buyer of switching from one supplier to another. If a
business has just a few powerful buyers, they are often able to dictateterms.
3. Competitive rivalry. The main driver is the number and capability of competitors in
the market. Many competitors, offering undifferentiated products and services, will
reduce market attractiveness.
4. Threat of substitution. Where close substitute products exist in a market, it increases
the likelihood of customers switching to alternatives in response to price increases. This
reduces both the power of suppliers and the attractiveness of themarket.
5. Threat of new entry. Profitable markets attract new entrants, which erodes
profitability. Unless incumbents have strong and durable barriers to entry, for example,
patents, economies of scale, capital requirements or government policies, then
profitability will decline to a competitive rate.
Arguably, regulation, taxation and trade policies make government a sixth force for

5
many industries. Five forces analysis helps organizations to understand the factors
affecting profitability in a specific industry, and can help to inform decisions relating to:
whether to enter a specific industry; whether to increase capacity in a specific industry;
and developing competitive strategies.

ENVIRONMENT THREAT AND OPPORTUNITY PROFILE:

It is a technique to structure the environment for fundamental business analysis.
It was developed by Glueck. ETOP is summarized depiction of the environmental actors
and their impact on the organization. The preparation of ETOP involves dividing the
environment into different sectors and then analyzing the impact of each factor of the
organization. A detailed ETOP subdivides each environment sector into sub factor and
then the impact of each sub factor on the organization and is described in a form of
statement. A summary of ETOP shows only the major factors. ETOP is the most useful
way of structuring the result of environmentalanalysis.

Environmental Degree of Importance Degree of Impact

Factors High(3) Medium(2) Low(1) High ±3 Medium ±2 Low ±1

Economic

Political – Legal

Technological

Socio-cultural

Competitive

The strategic managers should keep focus on the following dimensions,

1. Issue Selection: Focus on issues, which have been selected, should not be missed
since there is a likelihood of arriving at incorrect priorities. Some of the impotent issues
may be those related to market share, competitive pricing, customer preferences,
technological changes, economic policies, competitive trends,etc.

2. Accuracy of Data: Data should be collected from good sources otherwise the entire
process of environmental scanning may go waste. The relevance, importance,

6
manageability, variability and low cost of data are some of the important factors, which
must be kept infocus.
3. Impact Studies: Impact studies should be conducted focusing on the various
opportunities and threats and the critical issues selected. It may include study of probable
effects on the company’s strengths and weaknesses, operating and remote environment,
competitive position, accomplishment of mission and vision etc. Efforts should be taken
to make assessments more objective wherever possible.
4. Flexibility in Operations: There are number of uncertainties exist in a business
situation and so a company can be greatly benefited buy devising proactive and flexible
strategies in their plans, structures, strategy etc. The optimum level of flexibility should
bemaintained.

Some of the key elements for increasing the flexibility are as follows:

(a) The strategy for flexibility must be stated to enable managers adopts it during unique
situations.
(b) Strategies must be reviewed and changed ifrequired.
(c) Exceptions to decided strategies must be handled beforehand. This would enable
managers to violate strategies when it isnecessary.
(d) Flexibility may be quite costly for an organization in terms of changes and
compressed plans; however, it is equally important for companies to meet
urgentchallenges.

VALUE CHAIN ANALYSIS:

Value chain analysis is a process of dividing various activities of the business in
primary and support activities and analyzing them, keeping in mind, their contribution
towards value creation to the final product. And to do so, inputs consumed by the
activity and outputs generated are studied, so as to decrease costs and increase
differentiation.

Value chain analysis is used as a tool for identifying activities, within and around the firm
and relating these activities to an assessment of competitive strength.

7
As shown above, Michael Porter classified the entire value chain into nine activities which
are interrelated to one another. While primary activities include the activities that are
performed to satisfy external demand, secondary activities are those which are performed to
satisfy internal requirements.

Classification of Value Chain Analysis:

Value Chain Analysis is grouped into primary or line activities, and support activities
discussed as under:

1. Primary Activities: The functions which are directly concerned with the
conversion of input into output and distribution activities are called primary
activities. Itincludes:
 Inbound Logistics: It includes a range of activities like receiving, storing,
distributing, etc. which make available goods and services for operational

8
 processes. Some of those activities are material handling, transportation,
stock control,etc.
 Operations: The activity of transforming input raw material to final product
ready for sale is termed as operation. Machining, assembling, packaging
are the activities covered under operations.
 Outbound Logistics: As the name suggests, the activities that help in
collecting, storage and delivering the product to the customer is
outboundlogistics.
 Marketing and Sales: All the activities like advertising, promotion, sales,
marketing research, public relations, etc. performed to make the customer
aware of the product or service and create demand for it, comes
undermarketing.
 Service: Service means service provided to the customer so as to improve or
maintain the value of the product. It includes financing service, after-sales
service and soon.

2. Support Activities: Those activities which assist primary activities in

accomplishment are support activities. Theseare:
 Procurement: This activity serves the organization, by supplying all the
necessary inputs like material, machinery or other consumable items, that
required by the organization for performing primaryactivities.
 Technology Development: At present, technology development requires
heavy investment, which takes years for research and development.
However, its benefits can be enjoyed for several years and by a multitude
of users in theorganization.
 Human Resource Management: It is the most common plus important
activitywhich excel all primary activities of the organization. It
encompasses overseeing the selection, retention, promotion, transfer,
appraisal and dismissal of staff.
 Infrastructure: This is the management system, which provides, its
services to the whole organization and includes planning, finance,
information management, quality control, legal, government affairs,etc.

In the fast paced world, the main focus of the organization is customer satisfaction, and

9
value chain analysis is the technique that helps to attain that level. Under this, each
business activity is considered as essential, which contributes value and is constantly
analyzed, to increase value as regards the cost incurred.

ORGANIZATIONAL CAPABILITY PROFILE (OCP):

OCP is summarized statement which provides overview of strength and weakness
in key result areas likely to affect future operation of the organization. Information in
this profile may be presented in qualitative terms or quantitative terms. After the
preparation of OCP, the organization is in a position to assess its relative strength and
weaknesses through its competitors. If there is any gap in area, suitable action may be
taken to overcome [Link] shows the company’s capacity. OCP tells about company’s
potential and capability. OCP tells what company cando.
The organizational capability profile is drawn in the form of a chart. The strategists are
required to systematically assess the various functional areas and subjectively assign
values to the different functional capability factors and sub factors along a scale ranging
from values of -5 to +5.

Capability Factors Weakness (-5) Normal (0) Strength (+5)

Financial -5
Technical 0
Human Resource -5
Marketing 5
R&D 0

SWOT ANALYSIS:

SWOT Analysis is a strategic management tool that assists an enterprise in

discerning their internal Strengths, and Weaknesses, and external Opportunities, and
Threats, to determine its competitive position in the market. The SWOT Analysis helps
in ascertaining the factors that influences the efficiency and effectiveness of any product,
project, or business entity. These are explained as under:

10
Strengths: The strengths of a company are the core competencies, in which the business
has an edge over its competitors. It covers aspects such as:

 Strong financial condition

 A large customerbase.
 Strong brand name or a uniqueproduct
 Latest technology orpatents
 Influential advertising andpromotion.
 CostAdvantage
 Quality in product and customerservice.

Weaknesses: Weaknesses can be described as the areas of limitations of the business that
hinders the growth of the company and even leads to a strategic disadvantage. These are
the areas which need improvement to perform competitively. It encompasses:

 Obsolete facilities and outdatedtechnology.

 The unit cost of a product is higher than the competitors.
 No or less internal control.
 Less quality in products and servicesoffered.
 Weak brand image.
 Financial condition is not verysound.
 Underutilization of plantcapacity.
 Lack of major skills or competencies, and intellectualcapital.

Opportunities: Opportunities can be understood as the condition, which is favorable or

beneficial to the organization in the business environment that the business could exploit to
gain an advantage. These are:

11
  Looking for areas of development, by utilizing skills and technology to
enter new markets
 Adding new products to the existing product line to increase customerbase.
 Forward and backward integration.
 Acquiring rivals businesses.
 Joint ventures, mergers and alliances to increase marketcoverage.

Threats: Threat implies an adverse condition which can lead the business enterprise to
losses, and can also harm the overall position and reputation of the enterprise. It entails:

 A downtrend in marketgrowth.
 A new entrant to themarket.
 Substitute products that can decreasesales.
 Increasing the bargaining power of customers andsuppliers.
 New regulatory requirements
 Changes in a demographic environment that will decrease demand for
firm’sproduct.

Importance of SWOT Analysis:

 Logical framework of analysis: SWOT Analysis equips the management
with an insightful framework for eliminating issues in a systematic manner
that can influence the condition of business, formulation of various
strategies and theirselection.
 Presents a comparative report: The analysis facilitates in presenting
systematic information about the internal and external environment. This
helps in making a comparison of external opportunities and threats with
internal strengths and weaknesses, as well as reconciling the internal and
external business environment, to help the managers in choosing the best
strategy, by considering variouspatterns.
 Strategy Identification: Every organization has its strengths weakness,
opportunities and threats. So, the SWOT Analysis acts as a guide to the
strategist to reckon the exact position, i.e. where the business stands, so as
to identify the primary objective of the strategy under consideration.

12
SWOT Analysis helps the company’s management in designing a business model
specific to the firm. The model perfectly suits or aligns the company’s resources or
competencies, as per the needs of the business environment, wherein the organization
operates and helps in gaining a competitive advantage over the rivals. This will increase
the profitability, market share and the chances to survive in the dynamic competitive
business environment.

13
 SCHOOL OF MANAGEMENT STUDIES

UNIT – III – Business Policy and Strategy – SBAA1504

1
 III. FORMULATION OF COMPETITIVE STRATEGIES
Strategic alternatives at corporate level - concept of grand strategies - Strategic choice
models - Strickland's Grand Strategy - Selection Matrix, Model of Grand Strategy Clusters,
BCG, GE Nine Cell Matrix - Strategic alternatives at business level.

GRAND STRATEGIES - CONCEPT

The Grand Strategies are the corporate level strategies designed to identify the firm’s choice
with respect to the direction it follows to accomplish its set objectives. Simply, it involves the
decision of choosing the long term plans from the set of available alternatives. The Grand
Strategies are also called as Master Strategies or Corporate Strategies.

Strategic Choice:

Strategic Choice involves a whole process through which a decision is taken to choose a
particular option from various alternatives. There can be various methods through which the
final choice can be selected upon. Managers and decision makers keep both the external and
internal environment in mind before narrowing it down to one.

Factors affecting strategic choice:

 Environmental constraints.

 Internal organizations and management power relationships.

 Values and preferences.

 Management`s attitude towards risk.

 Impact of past strategy.

 Time constraints- time pressure, frame horizon, timing of decision.

 Information constraints.

 Competitor’s reaction.

STRICKLAND’S GRAND STRATEGY SELECTION MATRIX

The Grand Strategy Selection Matrix developed by Strickland is one helpful tool in the
development of talent that is likely to overcome weaknesses, build on existing strengths,
avert future threats & seize future opportunities. It is used in strategic business planning.

2
It focuses on two key issues:

1) Should strategists devote attention to overcoming present weakness or to building on

present strengths?

2) Or it should strategists concentrate efforts inside the organization or outside it?

Each Alternative Grand strategy can be translated into talent development terminology.

The basic idea underlying the matrix is that two variables are of central concern in the
strategy selection process:

1. The principal purpose of the grand strategy and

2. The choice of an internal or external emphasis for growth and/or profitability.

It is valuable to note, that even early approaches to strategy selection were based on matching
a concern for internal versus external growth with a principal desire to overcome weakness or
maximize strength. The same concerns led to the development of the Grand Strategy
Selection Matrix.

A firm in Quadrant I often views itself as overly committed to a particular business with
limited growth opportunities or involving high risks because the company has “all its eggs in
one basket”. One reasonable solution is vertical integration, which enables the firm to reduce
risk by reducing uncertainty either about inputs or about access to customers. Alternatively, a

3
firm can choose conglomerate diversification, which provides profitable alternatives for
investment without diverting management attention from the original business. However, the
external orientation to overcoming weaknesses usually results in the most costly grand
strategies. The decision to acquire a second business demands both large initial time
investments and sizable financial resources. Thus, strategic managers considering these
approaches must guard against exchanging one set of weaknesses for another. A more
conservative approach to overcoming the weakness is found in

Quadrant II. Firms often choose to redirect resources from one business activity to another
within the company. While this approach does not reduce the company’s commitment to its
basic mission, it does reward success and enables further development of proven competitive
advantages. The least disruptive of the Quadrant II strategies is retrenchment, the pruning of
the current business activities. If weaknesses arose from inefficiencies, retrenchment can
actually serve as a turnaround strategy, meaning the business gains new strength by
streamlining its operations and eliminating waste. However, when the weaknesses are a major
obstruction to success in the industry, and when the costs of overcoming the weaknesses are
unaffordable or are not justified by a cost benefit analysis, then eliminating the business must
be considered. Divestiture offers the best possibility for recouping the company’s investment,
but even Liquidation can be an attractive option when the alternatives are an unwarranted
drain on organizational resources or bankruptcy.

A common business adage states that a company should build from strength. The premise is
that growth and survival depend on an ability to capture a market share that is large enough
for essential economies of scale. If a firm believes profitability will derive from this approach
and prefers an internal emphasis for maximizing strengths, four alternative grand strategies
hold considerable promise. As shown in Quadrant III, the most common approach is
concentration on the business, that is, market penetration. The business then selects this
strategy is strongly committed to its current products and markets. It will strive to solidify its
position by reinvesting resources to fortify its strength. Two alternative approaches are
market development and product development. With either of these strategies the business
attempts to broaden its operations. Market development is chosen if strategic managers feel
that existing products would be well received by new customer groups. Product development
is preferred when existing customers are believed to have an interest in products related to the
firm’s current lines. This approach may also be based on special technological or other
competitive advantages. A final alternative for Quadrant III firms is innovation. When the

4
business strength’s are in creative product design or unique production technologies, sales
can be stimulated by accelerating perceived obsolescence. This is the principle underlying an
innovative grand strategy.

Maximizing a business’s strength by aggressively expanding its basis of operations usually

requires an emphasis in selecting grand strategy. Preferred options here are shown in
Quadrant IV. Horizontal integration is attractive because it enables a firm to quickly
increase output capability. The skills of the original business’s managers are often critical in
converting new facilities into profitable contributors to the parent company; this expands a
fundamental competitive advantage of the firm-management. Concentric diversification is a
good second choice for similar reasons. Because the original and newly acquired businesses
are related, the distinctive competencies of the diversifying firm are likely to facilitate a
smooth, synergistic, and profitable expansion. The final option for increasing resource
capability through external emphasis is a joint venture. This alternative allows a business to
extend its strengths into competitive arenas that it would be hesitant to enter alone. A
partner’s production, technological, financial, or marketing capabilities can significantly
reduce financial investment and increase the profitability of success to the point that
formidable ventures become attractive growth alternatives.

5
A business’s situation is defined in terms of the growth rate of the general market and
competitive position in that market. When these factors are considered simultaneously, a
business can be broadly categorized into four quadrants:

 Strong competitive position in a rapidly growing market,

 Weak position in rapidly growing market,
 Weak position in a slow-growth market,
 Strong position in a slow-growth market.

Each of these quadrants suggests a set of promising possibilities for selection of grand
strategy.

Firms in Quadrant I are in an excellent strategic position. One obvious grand strategy for
such firms is continued concentration on their current business as it is presently defined.
Because consumers seem satisfied with the firm’s current strategy, it would be dangerous to
shift notably from the established competitive advantages. However, if the businesses have
the resources that exceed the demands of the concentration strategy, it should consider
vertical integration. Either forward or backward integration helps a business protect its profit
margins and market share by ensuring better access to either consumers or material inputs.
Finally quadrant I firm might be wise to consider concentric diversification to diminish the
risks associated with a narrow product or service line; with this strategy, heavy investment in
the company’s basic area of proven ability continues.

Quadrant II: In a rapidly growing market, even a small or relatively weak business is often
able to find a profitable niche. Thus, formulation or reformulation of a concentration strategy
is usually the first option to consider. However, if the firm lacks either a critical competitive
element or sufficient economies of scale to achieve competitive cost efficiencies, then a grand
strategy that directs company efforts toward horizontal integration is often a desirable
alternative. A final pair of option involves deciding to stop competing in the market or
product area. A multiproduct firm may conclude that the goals of its mission are most likely
to be achieved if this business is dropped through divestiture. Not only does this grand
strategy eliminate a drain on resources, it may also provide additional funds to promote other
business activities. As an option of last resort, a firm may decide to liquidate the business. In
practical terms this means that the business cannot be sold as a going concern and is at best
worth only the value of its tangible assets.

6
The decision to liquidate is an undeniable admission of failure by firm’s strategic
management and is thus often delayed – to the further detriment of the company. Strategic
managers tend to resist divestiture because it is likely to jeopardize their control of the firm
and perhaps even their jobs. By the time the desirability of divestiture is acknowledged, the
business has often deteriorated to the point of failing to attract potential buyers as a business.
The consequences of such delays are financially disastrous for the owners of the firm,
because the value of a going concern is many times greater than simple asset value. Strategic
managers who have business in the position of Quadrant III and feel that continued slow
market growth and a relatively weak competitive position are going to continue will usually
attempt to decrease their resource commitment to that business. Minimal withdrawal is
accomplished through retrenchment; this strategy has the side benefits of making resources
available for other investments and of motivating employees to increase their operating
efficiency. An alternative strategy is to divert resources for expansion through investment in
other businesses. This approach typically involves either concentric or conglomerate
diversification, because the firm usually wants to enter more promising arenas of competition
than firms of integration or development would allow. The final options for quadrant III
businesses are divestiture, if an optimistic buyer can be found, and liquidation.

Quadrant IV businesses have a basis of strength from which to diversify into more
promising growth areas. These businesses have characteristically high cash flow levels and
limited internal growth needs. Thus, they are in an excellent position for concentric
diversification into ventures that utilize their proven business acumen. A second choice is
conglomerate diversification, which spreads investment risk and does not divert managerial
attention from the present business. The final option is joint ventures, which are especially
attractive to multinational firms. Through joint venture a domestic business can gain
competitive advantages in promising new fields while exposing itself to limited risks.

Grand strategy clusters are a model that focuses on each strategy as it would work within
the strategic plans of a company. These strategies then are clustered to shape the business
direction and focus on the long term goals of the company.

BCG matrix is a matrix used by large corporations to decide the ratio in which resources are
allocated among various business segments. Similar to this, GE matrix also helps firms
decide their strategy with respect to different product lines, i.e. the product they should add in
the range of products offered by them and in which opportunity the firm should invest.

7
Both BCG matrix and GE matrix are two-dimensional models, which are used by big
business houses, having several product lines and business units. The latter was developed as
an improvement over the former, and so overcomes many limitations.

DEFINITION OF BCG MATRIX

BCG Matrix or otherwise known as Boston Consulting Group growth share matrix is used
to represent the company’s investment portfolio.

Large corporations usually face problems in allocating resources amongst various units and
product lines. To cope with this problem, in 1970, Bruce Henderson designed a matrix for
the Group called as BCG matrix. It is based on two factors which are:

 The growth rate of the product-market.

 Market share held by the company in the respective market, in comparison to its
competitors.

BCG Matrix helps the corporation in analyzing the product lines or business units, for
prioritizing them and allocating resources. The model aims at identifying the problem of
resource deployment, among different business segments. In this approach, various
businesses of a company are classified on a two-dimensional grid.

8
BCG – Growth Share matrix

The vertical axis shows market growth rate, which is a measure of how attractive the market
is?

The horizontal axis indicates relative market shares, which is an indicator of how strong the
company’s position is?

With the help of this matrix, the company can ascertain four kind of strategic business unit or
products as follows:

Stars: It represents those products which are growing at a faster rate and requires the huge
investment to maintain their position in the market.

Cash Cows: The products whose growth is low but holds high market share. They reap a lot
of cash for the company and do not require finance for expansion.

Question Marks: It indicates those products which possess a low market share in a high-
growth market and so need heavy investment to hold their share in the market, but do not
generate cash in the same proportion.

Dogs: Dogs represents those products, which neither have a high growth rate nor high market
share. Such products generate enough cash to maintain themselves but will not survive in the
long term.

DEFINITION OF GE MATRIX

GE matrix, alternately known as General Electric Model is a business planning matrix.

The model is inspired by traffic lights which are used to manage traffic at crossings, wherein
green light says go, yellow says caution and Red say stop.

The matrix comprises of nine cells, with two major dimensions, i.e. business strength and
industry attractiveness. Business strength is influenced by market share, brand image, profit
margins, customer loyalty, and technological capability and so on. On the other hand,
industry attractiveness is influenced by drivers such as pricing trends, economies of scale,
market size, market growth rate, segmentation, distribution structure, etc.

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GE – Portfolio matrix

When various product lines or business units are drawn on the matrix, strategic choices can
be made, on the basis of their position in the matrix. Product falling into green section reflects
the business is in the good position, but product lying into yellow section needs the
managerial decision for making choices and the product in the red zone, are dangerous as
they will lead the company to losses.

PORTER'S MODEL OF GENERIC STRATEGIES FOR COMPETITIVE

ADVANTAGE

Porter suggested four "generic" business strategies that could be adopted in order to gain
competitive advantage. The strategies relate to the extent to which the scope of business
activities are narrow versus broad and the extent to which a business seeks to differentiate its
products.
The short video below provides an overview of Porter's Generic Strategies and there are some
additional study notes below the video.

The key strategic challenge for most businesses is to find a way of achieving a sustainable
competitive advantage over the other competing products and firms in a market.

A competitive advantage is an advantage over competitors gained by offering consumers

greater value, either by means of lower prices or by providing greater benefits and service
that justifies higher prices.

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The four strategies are summarized in the figure below:

The differentiation and cost leadership strategies seek competitive advantage in a broad range
of market or industry segments. By contrast, the differentiation focus and cost focus
strategies are adopted in a narrow market or industry.

Cost Leadership: With this strategy, the objective is to become the lowest-cost producer in
the industry. The traditional method to achieve this objective is to produce on a large scale
which enables the business to exploit economies of scale.

Why is cost leadership potentially so important? Many (perhaps all) market segments in the
industry are supplied with the emphasis placed on minimizing costs. If the achieved selling
price can at least equal (or near) the average for the market, then the lowest-cost producer
will (in theory) enjoy the best profits.

This strategy is usually associated with large-scale businesses offering "standard" products
with relatively little differentiation that are readily acceptable to the majority of customers.
Occasionally, a low-cost leader will also discount its product to maximize sales, particularly
if it has a significant cost advantage over the competition and, in doing so, it can further
increase its market share.

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A strategy of cost leadership requires close cooperation between all the functional areas of a
business. To be the lowest-cost producer, a firm is likely to achieve or use several of the
following:

 High levels of productivity

 High capacity utilization
 Use of bargaining power to negotiate the lowest prices for production inputs
 Lean production methods (e.g. JIT)
 Effective use of technology in the production process
 Access to the most effective distribution channels

Cost Focus: Here a business seeks a lower-cost advantage in just one or a small number of
market segments. The product will be basic - perhaps a similar product to the higher-priced
and featured market leader, but acceptable to sufficient consumers. Such products are often
called "me-too's".

Differentiation Focus: In the differentiation focus strategy, a business aims to differentiate

within just one or a small number of target market segments. The special customer needs of
the segment mean that there are opportunities to provide products that are clearly different
from competitors who may be targeting a broader group of customers.

The important issue for any business adopting this strategy is to ensure that customers really
do have different needs and wants - in other words that there is a valid basis for
differentiation - and that existing competitor products are not meeting those needs and wants.

Differentiation focus is the classic niche marketing strategy. Many small businesses are able
to establish themselves in a niche market segment using this strategy, achieving higher prices
than un-differentiated products through specialist expertise or other ways to add value for
customers. There are many successful examples of differentiation focus. A good one is
Tyrell’s Crisps which focused on the smaller hand-fried, premium segment of the crisps
industry.

Differentiation Leadership: With differentiation leadership, the business targets much

larger markets and aims to achieve competitive advantage through differentiation across the
whole of an industry. This strategy involves selecting one or more criteria used by buyers in a

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market - and then positioning the business uniquely to meet those criteria. This strategy is
usually associated with charging a premium price for the product - often to reflect the higher
production costs and extra value-added features provided for the consumer.

Differentiation is about charging a premium price that more than covers the additional
production costs, and about giving customers clear reasons to prefer the product over other,
less differentiated products. There are several ways in which this can be achieved, though it is
not easy and it requires substantial and sustained marketing investment. The methods include:

 Superior product quality (features, benefits, durability, reliability)

 Branding (strong customer recognition & desire; brand loyalty)
 Industry-wide distribution across all major channels (i.e. the product or brand is an
essential item to be stocked by retailers)
 Consistent promotional support – often dominated by advertising, sponsorship etc

Great examples of a differentiation leadership include global brands like Nike and Mercedes.
These brands achieve significant economies of scale, but they do not rely on a cost leadership
strategy to compete. Their business and brands are built on persuading customers to become
brand loyal and paying a premium for their products.

WHAT ARE THE SIMPLE RULES THAT GUIDE OUR STRATEGIES?

The simple rules provide the guidelines within which managers can pursue
opportunities. Strategy, then, consists of the unique set of strategically significant processes
and the handful of simple rules that guide them. The basic idea is that when strategizing,
large organizations spend too much time discussing the ‘what’ (climate change? Gender?
Education? Livelihoods?), and too little on the ‘how’. And within the ‘how’, the most
important bit is probably the default questions and instincts that govern an organization’s
daily decision-making, rather than the long-winded strategy documents that no-one reads.

‘Strategy as Simple Rules’, by Kathleen M. Eisenhardt and Donald Sull, looks at the private
sector, and argues that ‘In a period of predictability and focused opportunities, a company
should have more rules in order to increase efficiency. When the landscape becomes less
predictable and the opportunities more diffuse, it makes sense to have fewer rules in order to

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increase flexibility.’ or more pithily ‘when business becomes complicated, strategy should be
simple.’

Simple rules, which grow out of experience, fall into five broad categories: how- to rules,
boundary conditions, priority rules, timing rules, and exit rules. Companies with simple-
rules strategies must follow the rules religiously and avoid the temptation to change them
too frequently.

 How-to rules: Everyone must be passionately committed to social justice, and

supporting the agency of poor/excluded people and communities
 Boundary rules: Any investment in advocacy requires a realistic chance of winning
something, be it a policy change, a shift in attitudes, or getting an issue onto the
public agenda
 Priority rules: How many people will benefit? How many of them will belong to
poor/excluded people and communities? Will the changes be sustainable?
 Timing rules: What critical juncture or political/organizational window of
opportunity will the advocacy take advantage of?
 Exit rules: Who will decide on exit? On what evidence? How will partners and
communities be involved in the decision?

Thus the process used to develop simple rules matters as much as the rules themselves.
Involving a broad cross-section of employees, for example, injects more points of view into
the discussion, produces a shared understanding of what matters for value creation, and
increases buy-in to the simple rules. Investing the time up front to clarify what will move the
needles dramatically increases the odds that simple rules will be applied where they can have
the greatest impact.

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 SCHOOL OF MANAGEMENT STUDIES

UNIT – IV – Business Policy and Strategy – SBAA1504

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 IV. STRATEGIC IMPLEMENTATION
Strategic Implementation: Developing short-term objectives and policies - functional tactics
and rewards - Structural Implementation: an overview of Structural Considerations
Behavioral Implementation: an overview of: Leadership and Corporate Culture Mc Kinsey
7-S Framework Establishing Strategic Control

STRATEGIC IMPLEMENTATION – CONCEPT:

Strategy Implementation refers to the execution of the plans and strategies, so as to
accomplish the long-term goals of the organization. It converts the opted strategy into the
moves and actions of the organization to achieve the objectives. Simply put, strategy
implementation is the technique through which the firm develops, utilizes and integrates its
structure, culture, resources, people and control system to follow the strategies to have the
edge over other competitors in the market.

Strategy Implementation is the fourth stage of the Strategic Management process, the
other three being a determination of strategic mission, vision and objectives, environmental
and organizational analysis, and formulating the strategy. It is followed by Strategic
Evaluation and Control.

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Process of Strategy Implementation:

 Building an organization, that possesses the capability to put the strategies into action
successfully.
 Supplying resources, in sufficient quantity, to strategy-essential activities.
 Developing policies which encourage strategy.
 Such policies and programs are employed which helps in continuous improvement.
 Combining the reward structure, for achieving the results.
 Using strategic leadership.

The process of strategy implementation has an important role to play in the company’s
success. The process takes places after environmental scanning, SWOT analyses and
ascertaining the strategic issues.

Prerequisites of Strategy Implementation:

 Institutionalization of Strategy: First of all the strategy is to be institutionalized,

in the sense that the one who framed it should promote or defend it in front of the
members, because it may be undermined.

 Developing proper organizational climate: Organizational climate implies the

components of the internal environment that includes the cooperation,
development of personnel, the degree of commitment and determination,
efficiency, etc., which converts the purpose into results.

 Formulation of operating plans: Operating plans refers to the action plans,

decisions and the programs, that take place regularly, in different parts of the
company. If they are framed to indicate the proposed strategic results, they assist in
attaining the objectives of the organization by concentrating on the factors which
are significant.

 Developing proper organizational structure: Organization structure implies the

way in which different parts of the organization are linked together. It highlights
the relationships between various designations, positions and roles. To implement
a strategy, the structure is to be designed as per the requirements of the strategy.

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  Periodic Review of Strategy: Review of the strategy is to be taken at regular
intervals so as to identify whether the strategy so implemented is relevant to the
purpose of the organization. As the organization operates in a dynamic
environment, which may change anytime, so it is essential to take a review, to
know if it can fulfil the needs of the organization.

Even the best-formulated strategies fail if they are not implemented in an appropriate manner.
Further, it should be kept in mind that, if there is an alignment between strategy and other
elements like resource allocation, organizational structure, work climate, culture, process and
reward structure, then only the effective implementation is possible.

Aspects of Strategy Implementation:

 Creating budgets which provide sufficient resources to those activities which are
relevant to the strategic success of the business.

 Supplying the organization with skilled and experienced staff.

 Conforming that the policies and procedures of the organization assist in the
successful execution of the strategies.

 Leading practices are to be employed for carrying out key business functions.

 Setting up an information and communication system that facilitates the workforce of

the organization, to perform their roles effectively.

 Developing a favorable work climate and culture, for proper implementation of the
strategy.

 Strategy implementation is the time-taking part of the overall process, as it puts the
formulated plans into actions and desired results.

STRUCTURAL IMPLEMENTATION – CONCEPT:

A structural implementation is nothing but arrangement of tasks and sub tasks required to
implement a strategy. A Diagrammatic representation could be organizational chart but
administrative mechanism provides flesh and blood to the organization structure. An
organizationally structure is the outline of authority and responsibility relationship among

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different job positions. It is a formal arrangement of tasks and sub – tasks which are needed
to implement strategies.

An organization structure has two broad dimensions; namely

1. Vertical Dimensions: The vertical structure is planned to facilitate superiors to implement

control over the work of subordinates. Vertical structures are known as tall structures. Such
structures are suitable for companies which produce standardized products / services on a
large scale with the help of mass production systems and well established technologies. The
vertical dimension is characterized by

 Specialization of tasks
 Chain of command
 Formal reporting relationships
 Grouping of individuals into departments
 Upward and downward communication
2. Horizontal Dimensions: The horizontal dimension is designed to make certain
cooperation and coordination among employees working at the same level of authority.
Horizontal structures are also known as flat structures. Such structures are more vital for
companies making differentiated products. Medium sized manufacturing and service
enterprises and non-profit organization which present specific social services are examples of
these organizations. The main characteristics of horizontal dimensions are

 Sharing of tasks
 Sharing of information
 Decentralized decision making
 Focus on learning

Types of Organization Structure:

The main types of organizational structures are given below:

1. Entrepreneurial Structure: The entrepreneurial structure is the most basic and the
simplest type of organizational structure. This structure is suitable for an organization that is
owned and managed by one person. Such an organization is typically a single product firm
that serves a local market.

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2. Functional Structure: The expansion into the same line of business necessitates
specialization of tasks and delegation of authority to heads of different functional areas.
Functional structure is suitable for medium sized firms having limited number of products.
Grouping of activities on the basis of functions performed for strategic implementation
creates functional structures. For example, production, marketing, finance and personnel are
the basic functions in a manufacturing organization. The process of functional differentiation
may continue through successive level in the hierarchy.

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7
8
9
Structural Considerations in Strategic Implementation:
Before implementing a new or revised strategy, company leaders must ensure the
organizational structure can support the planned activities. After identifying the tasks that the
company must perform well to succeed, company executives configure organizational
hierarchies to support primary strategic goals and achieve competitive advantages. They also
identify areas of weakness that pose risks and devise techniques for handling crises.
Successful strategic implementation depends on structuring the organization’s employees so
they can most effectively use the tools and resources available to create quality products and
services.

 Structuring Activities

To prevent their staff from spending time on activities not directly related to achieving
companies' strategic goals, managers identify tasks that can be outsourced to third-party

10
vendors. Structuring work this way allows experts to perform these jobs, typically at a lower
cast, while employees focus on their core competencies supporting main businesses. For
example, computer manufacturers typically outsource assembly while focusing internally on
design, sales and distribution duties.

 Aligning Functions to Strategic Objectives

Before corporate leaders can implement new strategies, they need to ensure that all personnel
in the organizational structure possess the necessary skills, knowledge and resources to
accomplish the tasks. Work must flow from one function to another so leaders should
establish clear processes with policies and procedures that define roles and responsibilities.
The strategy must be consistent across all departments, adaptive to changes, competitively
advantageous and technically feasible.

 Establishing Authority

Successfully implementing a new strategy requires that managers and employees understand
what activities require executive approval and which decisions employees have the
empowerment to make without further approval. Ideally, decision makers should be those
people who are closest to the situation and most knowledgeable about the impact. By
avoiding micro-managing the organization, managers streamline operations and eliminate
wasteful tasks. If the organization is structured to allow employees the flexibility to make
critical decisions, they must also be held accountable for their actions.

 Developing Partnerships

Strategic implementations require personnel to work together to achieve specific, measurable,

attainable, relevant and time-constrained goals and objectives. Establishing a common
balanced scorecard prevents groups from competing against each other to succeed
individually at the expense of the whole company. If company executives foster a cooperative
environment between departments, managers share resources, personnel and knowledge
effectively. Additionally, the organizational structure should encourage new employees to
seek out coaching and mentoring from corporate executives. By encouraging learning and
development, company leaders establish a framework for sustainable growth.

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BEHAVIORAL IMPLEMENTATION – CONCEPT:

The behavioral of the employees affect the success of the organization. Strategic
implementation requires support, discipline, motivation and hard work from all manager and
employees.

 Influence Tactics: The organizational leaders have to

successfully implement the strategies and achieve the objectives.

 Power: it is the potential ability to influence the behavior of others.

 Empowerment as a way of Influencing Behavior: The top executives have to

empower lower level employees.

STRATEGY: "Strategy is the direction and scope of an organization over the long term,
which achieves advantage in a changing environment through its configuration of resources
and competences with the aim of fulfilling stakeholder expectations". Every organization has
to manage its strategies in main three areas;

 The organizations internal resources

 The external environment within which the organization operates
 The organizations ability to add value to what it does

CULTURE: Corporate culture refers to the beliefs and behaviors that determine how
a company's employees and management interact and handle outside business transactions.
Often, corporate culture is implied, not expressly defined, and develops organically over time
from the cumulative traits of the people the company hires. Thus,

 Culture is the social glue.

 Culture provides boundary-defining roles.
 Culture conveys a sense of identity for organization members.
 It serves as a “sense-making” and control mechanism that guides and shapes the
attitudes and behavior of employees.

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LEADERSHIP: Leadership is fundamental aspect of strategic management and paramount
in strategy implementation. The ability to anticipate, envisions, maintain flexibility and
empower others to create strategic change.

Strategic leadership affects organizational culture as well, through the way they delegate
authority and divide up task relationships. It is pivotal for any leader to have a cultural
awareness in formulation, exaction and evaluation of strategy process for any organization
irrespective of their purpose of existence. Ultimately it is leader’s ability to strike the right
balance between Strategy, leadership and culture to realize organizational effectiveness.

MCKINSEY 7-S FRAMEWORK

The model was developed in the late 1970s by Tom Peters and Robert Waterman, former
consultants at McKinsey & Company. They identified seven internal elements of an
organization that need to align for it to be successful.

When to Use the McKinsey 7-S Model:

The model can be applied to many situations and is a valuable tool when organizational
design is at question. The most common uses of the framework are:
 To facilitate organizational change.
 To help implement new strategy.
 To identify how each area may change in a future.
 To facilitate the merger of organizations.

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The goal of the model was to show how 7 elements of the company: Structure, Strategy,
Skills, Staff, Style, Systems, and Shared values, can be aligned together to achieve
effectiveness in a company. The key point of the model is that all the seven areas are
interconnected and a change in one area requires change in the rest of a firm for it to function
effectively. McKinsey model, which represents the connections between seven areas and
divides them into ‘Soft Ss’ and ‘Hard Ss’. The shape of the model emphasizes
interconnectedness of the elements.

Let's look at each of the elements individually:

 Strategy: this is your organization's plan for building and maintaining a competitive
advantage over its competitors.
 Structure: this how your company is organized (that is, how departments and teams
are structured, including who reports to whom).
 Systems: the daily activities and procedures that staffs use to get the job done.
 Shared values: these are the core values of the organization, as shown in its corporate
culture and general work ethic. They were called "super ordinate goals" when the
model was first developed.
 Style: the style of leadership adopted.
 Staff: the employees and their general capabilities.

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  Skills: the actual skills and competencies of the organization's employees.

STRATEGIC CONTROL – CONCEPT:

“Strategic control involves the monitoring and evaluation of plans, activities, and results with
a view towards future action, providing a warning signal through diagnosis of data, and
triggering appropriate interventions, be they either tactical adjustment or strategic
reorientation.” The various components of the strategic control process generate answers to
these two questions:

1. Has the strategy been implemented as planned?

2. Based on the observed results, does the strategy need to be changed or adjusted?

Strategic Control Techniques:

There are four primary types of strategic control:

Premise Control: Every organization creates a strategy based on certain assumptions, or

premises. As such, premise control is designed to continually and systematically verify
whether those assumptions, which are foundational to your strategy, are still true. These are
typically environmental (e.g. economic or political shifts) or industry-specific (e.g. new
competitors) variables.

Implementation Control: This type of control is a step-by-step assessment of

implementation activities. It focuses on the incremental actions and phases of strategic
implementation, and monitors events and results as they unfold. Is each action or project
happening as planned? Are the proper resources and funds being allocated for each step? This
process continually questions the basic direction of your strategy to ensure it’s the right one.

There are two subcategories of implementation control:

 Monitoring Strategic Thrusts or Projects
 Reviewing Milestones

Special Alert Control: When something unexpected happens, a special alert control is
mobilized. This is a reactive process, designed to execute a fast and thorough strategy

15
assessment in the wake of an extreme event that impacts an organization. The event could be
anything from a natural disaster or product recall to a competitor acquisition. In some cases, a
special alert control calls for the formation of a crisis team usually comprising members of
the strategic planning and leadership teams and in others, it merely means activating a
predetermined contingency plan.

Strategic Surveillance Control: Strategic surveillance is a broader information scan. Its

purpose is to identify overlooked factors both inside and outside the company that might
impact your strategy. This process ideally covers any “ground” that might be missed by the
more focused tactics of premise and implementation control. The surveillance could
encompass industry publications, online or social mentions, industry trends, conference
activities, etc.

Six Steps of the Strategic Control Process:

1. Determine what to control.

2. Set standards.

3. Measure performance.

4. Compare performance.

5. Analyze deviations.

6. Decide if corrective action is needed.

Thus the entire strategic planning, implementation, and control process takes significant
effort and thought. It requires a lot of buy-in from your leadership team. It also requires
employees to understand why their actions are important and continuously work toward
achievement of goals even if those goals shift over time.

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 SCHOOL OF MANAGEMENT STUDIES

UNIT – V – Business Policy and Strategy – SBAA1504

1
 V. FUNCTIONAL LEVEL STRATEGIES
Types - Marketing strategies - HRM strategies - Financial strategies - Research and
development strategies - Production strategies.

FUNCTIONAL LEVEL STRATEGY – CONCEPT:

Functional Level Strategy can be defined as the day to day strategy which is formulated to
assist in the execution of corporate and business level strategies. These strategies are framed
as per the guidelines given by the top level management. In business, plans for the future are
defined with goals and objectives. Together these goals are the basis for the strategy that is
drawn up to actually achieve them. Strategies determine the results, performance, and goals
that have to be achieved. Generally, strategies are developed on three levels: corporate,
business, and functional.
Functional Level Strategy is concerned with operational level decision making,
called tactical decisions, for various functional areas such as production, marketing, research
and development, finance, personnel and so forth. As these decisions are taken within the
framework of business strategy, strategists provide proper direction and suggestions to the
functional level managers relating to the plans and policies to be opted by the business, for
successful implementation.

Who is responsible for functional strategies?

In hierarchical organizations, different people are responsible for the implementation of
strategies on a functional level. Usually they are the senior experts such as a financial
manager or engineering manager. On a corporate level, the CEO or president are responsible
for the implementation of the most important strategies. Some examples of common
functional strategies are production strategy, debt financing, organizational strategies,
marketing strategies, financial strategies, etc.

Functional strategies core points:

Of the three levels of strategy, the functional strategy is the most detailed one. Each
department has its own specific goals and tools or digital support solutions. These are also
included in the functional strategy. All departments also keep track of statistics on
performance and team successes.

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Take into account the following matters when creating functional strategies.

1. Aligning functional and business strategy:

Eventually the goal of the functional strategies is to support the overall business strategies.
That’s why the strategies on a functional level always have to be aligned with the business-
level strategy and the corporate-level strategy.

2. Progression:

A threat to properly implementing a functional strategy is tracking too much data and
information in order to measure progress. It’s essential to consider carefully what data must
be tracked to determine if progress is being made toward supporting the business strategy.

3. Integration:

Just aligning the functional strategy to the business strategy isn’t enough. Horizontally
separate functional strategies have to be integrated as well. An example could be coordinating
procurement/production, stocks, and logistics.

4. Allocating resources:

It is important that the different divisions and departments get the right resources to
implement the functional strategy. In other words, a functional strategy can’t be implemented
if the department doesn’t have the resources. This refers to both material resources – money –
and personnel. If the department in question doesn’t have those resources, this can have
serious consequences for the extent to which the department can successfully contribute to
the business strategy.

Role of Functional Strategy:

 It assists in the overall business strategy, by providing information concerning the

management of business activities.
 It explains the way in which functional managers should work, so as to achieve better
results.

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  Functional Strategy states what is to be done, how is to be done and when is to be
done are the functional level, which ultimately acts as a guide to the functional staff.
And to do so, strategies are to be divided into achievable plans and policies which
work in tandem with each other. Hence, the functional managers can implement the
strategy.

Functional Strategy step-by-step plan:

Business strategies determine the organization’s overall course. Based on this, the strategies
on the organization’s functional level are determined. This step-by-step plan describes an
approach for defining a strategy at a functional level. It answers the question of how to create
a functional strategy that properly supports the business strategy.

1. Aligning business functions and business strategy

In many organizations, functional strategies aren’t properly aligned with the overall business
strategy. This leads to inefficiencies such as wasting resources and activities, as well as
activities and projects that don’t support the overall strategy. In the worst cases, a functional
strategy can even impede the overall business strategy. One way to counteract this is by
actively involving the functional management when developing functional strategies. They
can provide specific information about workflows and the ways different units work. As
familiar from the theory behind the MOST analysis, it is crucial that the most important
stakeholders are involved with creating the strategy. These are shareholders, the board,
workers, clients, and suppliers. Their input is important so that the strategies are fully aligned
and meet their most important expectations.

2. From Business Strategy to Functional Strategy

Different sources of information are used to develop a functional strategy. In most cases, the
overall business strategy is the most important element. Preferences and demands from other
stakeholders, such as clients and the board, are also taken into account. In addition,
benchmarking provides important input, or the results of SWOT analyses.

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3. Collect input from stakeholders

Collecting information about different individual functions isn’t just necessary to define their
expectations, but is also aimed at ensuring that the functional strategy is aligned with the
present reality. It’s therefore important that organizations regularly use surveys to find out
what’s working and what’s not. In the example of the HR department of the pharmaceutical
company, the HR owner must, for instance, initiate an employee satisfaction survey to
determine to what extent the positions meet employee expectations.

4. Define crucial objectives

It was explained before that functional strategies are generally much more detailed than, for
instance, business strategies. There’s often no shortage of ideas of what to do with functional
strategies. However, the capacity to implement these ideas is usually limited. Therefore focus
on the objectives that are absolutely essential for supporting the business strategy. Align this
based on the input provided by different stakeholders.

5. Prepare for implementation

When it comes to defining the various functional actions that together make up the functional
strategy, ‘who’ is just as important as ‘what’. The best way to achieve this is to turn strategy
development into a team activity. This way every management team is involved in
developing the strategy. That allows each manager take personal responsibility for
implementing a particular initiative.

6. Define Key Performance Indicators (KPIs)

Key Performance Indicators (KPIs) are vitally important to monitor the progress of the
functional strategy compared to the business strategy. You can read more about creating these
progress statistics here.

7. Feedback & monitoring

Developing a functional strategy based on the business strategy is a good first step for a
successful organisation. However, as the business develops, circumstances can change.
That’s why it’s important that the alignment of the functional strategy to the business strategy

5
remains an important focus. In addition to a set of good KPIs, it’s important that a business
steering group is appointed to collect feedback to maintain alignment.

Functional Areas of Business:

There are several functional areas of business which require strategic decision making, as
follows;

I. FUNCTIONAL MARKETING STRATEGY:

Marketing consists of activities related to identifying consumer needs and working to meet
those needs with a product or service. One of the most important components of a
functional marketing strategy is the marketing mix. This consists of all steps a business can
and must take to increase demand for products or services. The traditional marketing mix
consists of price, promotion, process, and people.
Marketing management is “planning, organizing, controlling and implementing of marketing
programmes, policies, strategies and tactics designed to create and satisfy the demand for the
firms’ product offerings or services as a means of generating an acceptable profit.” It deals
with creating and regulating the demand and providing goods for which customers are willing
to pay a price worth their value.

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Elements of marketing management:
The basic elements of marketing management are:
(a) Customer orientation:
The focus of marketing function is to sell goods desired by consumers; the goods that satisfy
their needs.
(b) Integrated effort:
Marketing function should be coordinated with other functional areas of production, finance
and personnel management.
(c) Profitability:
While the consumer wants a product that satisfies his needs, seller sells a product which
provides profit. A successful marketing strategy should provide profits to the marketer along
with customer satisfaction.
(d) Viability:
The goods should not only earn profits, they should also build reputation of the firm in terms
of quantity, quality and the price at which goods are sold.

Marketing mix:
Marketing plans are made within the constraints of controllable and non- controllable
variables. The non-controllable variables are social, technological, political, cultural and legal
factors which affect the marketing strategies. Controllable factors are the product, price,
promotion and channels of distribution. Marketing mix is the combination of controllable
variables that make a successful marketing programme.
(a) Product mix:
It deals with physical attributes and benefits of the product. Ownership gives a sense of pride
and satisfaction to the consumer and, therefore, the product should be properly designed,
colored and packed.
(b) Pricing mix:
Pricing is an important marketing decision. Pricing is affected by factors such as costs, legal
framework, prices charged by competitors and the prices that consumers are ready to pay.
Price should recover the costs and earn a reasonable return on capital. This ensures long-run
survival and growth of the enterprise.
(c) Promotion mix:
It refers to communication with the consumers regarding the product. It motivates them to
buy the goods.

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Sales can be promoted in three ways:
(i) Advertisement:
It presents the product details to consumers through media. It is a non-personal means of
communication.
(ii) Personal selling:
The seller directly contacts the buyer and convinces them to buy the goods.
(iii) Sales promotion:
It supplements advertisement and personal selling as a means of promoting sales. It increases
sales by holding contests, lotteries etc. Different combinations of sales promotion techniques
can be used at a point of time.

Channel mix:
After the product is designed, priced and advertised it arouses consumers’ interest to buy. The
channel mix identifies the path through which goods are transferred from sellers to buyers.
The seller may sell directly to the buyer or through intermediation of wholesalers and
retailers.
More than one channel of distribution can be adopted at the same time; for example, a
wholesaler can sell through retailers and also directly to consumers. The channel mix selects
and maintains the channel to ensure consistency in selling practices followed by the sales
people.

II. FUNCTIONAL FINANCIAL STRATEGY:

The Functional Strategy for the financial area relates to everything to do with financial
management, such as planning, acquiring, using, and managing a company’s financial
resources. It’s about raising capital, creating budgets for various departments, application of
funds, investments, work capital management, dividend payments, calculating net values, etc.

Some of the functional areas covered in financial management are discussed as such:
1. Determining Financial Needs:
A finance manager is supposed to meet financial needs of the enterprise. For this purpose, he
should determine financial needs of the concern. Funds are needed to meet promotional
expenses, fixed and working capital needs. The requirement of fixed assets is related to the
type of industry. A manufacturing concern will require more investments in fixed assets than

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a trading concern. The working capital needs depend upon the scale of operations, larger the
scale of operations, the higher will be the needs for working capital. A wrong assessment of
financial needs may jeopardies the survival of a concern.
2. Selecting the Sources of Funds:
A number of sources may be available for raising funds. A concern may resort to issue of
share capital and debentures. Financial institutions may be requested to provide long-term
funds. The working capital needs may be met by getting cash credit or overdraft facilities
from commercial banks. A finance manager has to be very careful and cautious in
approaching different sources. The terms and conditions of banks may not be favorable to the
concern. A small concern may find difficulties in raising funds for want of adequate
securities or due to its reputation. The selection of a suitable source of funds will influence
the profitability of the concern. This selection should be made with great caution.
3. Financial Analysis and Interpretation:
The analysis and interpretation of financial statements is an important task of a finance
manager. He is expected to know about the profitability, liquidity position, short-term and
long-term financial position of the concern. For this purpose, a number of ratios have to be
calculated. The interpretation of various ratios is also essential to reach certain conclusions.
Financial analysis and interpretation has become an important area of financial management.
4. Cost-Volume-Profit Analysis:
Cost-volume-profit analysis is an important tool of profit planning. It answers questions like,
what is the behavior of cost and volume. At what point of production a firm will be able to
recover its costs? How much a firm should produce to earn a desired profit? To understand
cost-volume-profit relationship, one should know the behavior of costs. The costs may be
subdivided as: fixed costs, variable costs and semi-variable costs. Fixed costs remain constant
irrespective of changes in production. An increase or decrease in volume of production will
not influence fixed costs. Variable costs, on the other hand, vary in direct proportion to
change in production. Semi-variable costs remain constant for a period and then become
variable for a short period. These costs change with the change in output but not in the same
proportion.
The first concern of a finance manager will be to recover all costs. He will aspire to achieve
break-even point at the earliest. It is a point of no-profit no-loss. Any production beyond
break-even point will bring profits to the concern. The volume of sales, to earn a desired
profit, can also be ascertained. This analysis is very helpful in deciding the volume of output

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or sales. The knowledge of cost-volume profit analysis is essential for taking important
decisions about production and profits.
5. Capital Budgeting:
Capital budgeting is the process of making investment decisions in capital expenditures. It is
an expenditure the benefits of which are expected to be received over a period of time
exceeding one year. It is an expenditure incurred for acquiring or improving the fixed assets,
the benefits of which are expected to be received over a number of years in future. Capital
budgeting decisions are vital to any organization. An unsound investment decision may prove
to be fatal for the very existence of the concern.
The crux of capital budgeting is the allocation of available resources to various proposals.
The crucial factor which influences the capital budgeting decision is the profitability of the
prospective investment. For making correct capital budgeting decisions, the knowledge of its
techniques is essential. A number of methods like payback period method, rate of return
method, net present value method, internal rate of return method and profitability index
method may be used for making capital budgeting decisions.
6. Working Capital Management:
Working capital is the life blood and nerve centre of a business. Just as circulation of blood is
essential in the human body for maintaining life, working capital is essential to maintain the
smooth running of business. No business can run successfully without an adequate amount of
working capital. Working capital refers to that part of the firm’s capital which is required for
financing short-term or current assets such as cash, receivables and inventories. It is essential
to maintain a proper level of these assets. Finance manager is required to determine the
quantum of such assets. Cash is required to meet day-to-day needs and purchase inventories
etc.
The scarcity of cash may adversely affect the reputation of a concern. The receivables
management is related to the volume of production and sales. For increasing sales, there may
be a need to give more credit facilities. Though sales may go up but the risk of bad debts and
cost involved in it may have to be weighed against the benefits. Inventory control is also an
important factor in working capital management. The inadequacy of inventory may cause
delays or stoppages of work. Excess inventory, on the other hand, may result in blocking of
money in stocks, more costs in stock maintaining etc. Proper management of working capital
is an important area of financial management.

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7. Profit Planning and Control:
Profit planning and control is an important responsibility of the financial manager. Profit
maximization is, generally, considered to be an important objective of a business. Profit is
also used as a tool for evaluating the performance of management. Profit is determined by the
volume of revenue and expenditure. Revenue may accrue from sales, investments in outside
securities or income from other sources. The expenditures may include manufacturing costs,
trading expenses, office and administrative expenses, selling and distribution expenses and
financial costs.
The excess of revenue over expenditure determines the amount of profit. Profit planning and
control directly influence the declaration of dividend creation of surpluses, taxation etc.
Break even analysis and cost-volume profit relationship are some of the tools used in profit
planning and control.
8. Dividend Policy:
Dividend is the reward of the shareholders for investments made by them in the shares of the
company. The investors are interested in earning the maximum return on their investments
whereas management wants to retain profits for further financing. These contradictory aims
will have to be reconciled and in the interests of shareholders and the company. The company
should distribute a reasonable amount as dividends to its members and retain the rest for its
growth and survival.
A dividend policy is influenced by number of factors such as magnitude and trend of
earnings, desire and type of shareholders, future requirements of the company, government’s
economic policy, taxation policy, etc. Dividend policy is an important area of financial
management because the interests of the shareholders and the needs of the company are
directly related to it.

III. FUNCTIONAL HUMAN RESOURCES STRATEGY:

The functional HR strategy consists of everything related to the development of employees
and the opportunities and working conditions they are offered in order for them to be able to
contribute to the organisation. The functional HR strategy consists of recruitment & selection,
development, motivation, and retaining employees and other relations.
Human resource strategy covers how an organization works for the development of
employees and provides them with the opportunities and working conditions so that they will
contribute to the organization as well. This also means to select the best employee for

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performing a particular task or job. It strategizes all the HR activities like recruitment,
development, motivation, retention of employees, and industrial relations.

Human resource department performs the following functions:

(a) Human resource planning or manpower planning balances the demand for employees in
qualitative and quantitative terms and its supply from various internal and external resources.
Internal sources fill organizational posts from within the organisation and external sources
provide labor from outside sources such as labor market.
(b) Recruitment analyses requirements of the job, prepares job description and invites
applications from those whose qualifications match the job description.
(c) Selection selects the most suitable person out of those who have applied for the job.
Written tests and interviews are conducted to select the suitable candidates.
(d) Performance appraisal assesses the performance with the targeted performance to check
deviations and provide training to improve the performance.
(e) Training enhances the knowledge and skills of employees. It enables them to effectively
manage the organizational positions and promotes their growth. Training programmes can be
conducted on-the-job or external agencies can provide training to the employees.
(f) Rewards deal with the pay structure for each job. Rewards vary with the skill, knowledge
and competence for each job position.
(g) Industrial relations maintain harmonious relations between the management and
employees. Grievances or disputes are settled by the personnel manager by following legal
provisions and rules.
(h) Employee communication and participation communicates managerial decisions to
employees and allows them to participate in the decision-making processes.
(i) Personnel records maintain record of employees regarding their qualification, experience
and achievements. It is maintained by the personnel department. This serves as the basis for
internal recruitment where employees can be placed at jobs within the organisation. These
records help in matching job description with job specification, which is, matching the
requirement of the job with qualifications of the person.

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The focus of HRM is growth and development of the organisation along with its work
force.
Features of HRM:
(a) It views employees as important organizational resource that is committed to
organizational needs and works towards its goals.
(b) It aims to satisfy individual needs by providing challenging, lucrative and meaningful jobs
to employees.
(c) It follows the concept of ‘mutuality’ where managers focus on mutual goals, mutual
respect, mutual rewards etc.
(d) It allows employees to participate in the decision-making processes.
(e) It caters to the interests of people internal (labor force) and external to the organisation
(customers, suppliers, shareholders etc.)

Objectives of HRM:
(a) Effective utilization of human resource.
(b) Motivate people to make them committed to organizational goals.
(c) Frame policies and procedures that fulfill the needs of employees.
(d) Aim at growth and development of employees through teamwork, co-operation, creativity
and innovation.
(e) Maintain human flexibility in the jobs they are placed at and the number of hours they
spend on each job to achieve quality management.

IV. FUNCTIONAL PRODUCTION STRATEGY:

A firm’s production strategy focuses on the overall manufacturing system, operational
planning and control, logistics and supply chain management. The primary objective of the
production strategy is to enhance the quality, increase the quantity and reduce the overall cost
of production.
Production Management refers to the application of management principles to the production
function in a factory. In other words, production management involves application of
planning, organizing, directing and controlling the production process.

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Definition of Production Management:
It is observed that one cannot demarcate the beginning and end points of Production
Management in an establishment. The reason is that it is interrelated with many other
functional areas of business, viz., marketing, finance, industrial relation policies etc.
Alternately, Production Management is not independent of marketing, financial and
personnel management due to which it is very difficult to formulate some single appropriate
definition of Production Management.

The following definitions try to explain main characteristics of production

management:
(i) In the words of E.L. Brech, “Production Management is the process of effective planning
and regulating the operations of that section of an enterprise which is responsible for the
actual transformation of materials into finished products.” This definition limits the scope of
production management to those activities of an enterprise which is associated with the
transformation process of inputs into outputs.

In short, the main activities of production management can be listed as:

(i) Specification and procurement of input resources namely management, material, and land,
labor, equipment and capital.
(ii) Product design and development to determine the production process for transforming the
input factors into output of goods and services.
(iii) Supervision and control of transformation process for efficient production of goods and
services.
Functions of Production Management:
The definitions discussed above clearly shows that the concept of production management is
related mainly to the organizations engaged in production of goods and services. Earlier these
organizations were mostly in the form of one man shops having insignificant problems of
managing the productions.
But with development and expansion of production organizations in the shape of factories
more complicated problems like location and lay out, inventory control, quality control,
routing and scheduling of the production process etc. came into existence which required
more detailed analysis and study of the whole phenomenon.

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This resulted in the development of production management in the area of factory
management. In the beginning the main function of production management was to control
labor costs which at that time constituted the major proportion of costs associated with
production.
But with development of factory system towards mechanization and automation the indirect
labor costs increased tremendously in comparison to direct labor costs, e.g., designing and
packing of the products, production and inventory control, plant layout and location,
transportation of raw materials and finished products etc. The planning and control of all
these activities required more expertise and special techniques.

In modern times production management has to perform a variety of functions, namely:

 Design and development of production process.
 Production planning and control.
 Implementation of the plan and related activities to produce the desired output.
 Administration and co-ordination of the activities of various components and
departments responsible for producing the necessary goods and services.
However, the responsibility of determining the output characteristics and the distribution
strategy followed by an organization including pricing and selling policies are normally
outside the scope of Production Management.

Scope of Production Management:

The scope of production management is indeed vast. Commencing with the selection of
location, production management covers such activities as acquisition of land, constructing
building, procuring and installing machinery, purchasing and storing raw materials and
converting them into saleable products. Added to the above are other related topics such as
quality management, maintenance management, production planning and control, methods
improvement and work simplification and other related areas.

V. FUNCTIONAL RESEARCH AND DEVELOPMENT STRATEGY:

The research and development strategy focuses on innovating and developing new products
and improving the old one, so as to implement an effective strategy and lead the market.
Product development, concentric diversification and market penetration are such business
strategies which require the introduction of new products and significant changes in the old

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one.
For implementing strategies, there are three Research and Development approaches:
 To be the first company to market a new technological product.
 To be an innovative follower of a successful product.
 To be a low-cost producer of products.
The Functional Strategy for research & development is about innovation and the development
of new products as well as the improvement of existing products. Examples of functional
strategies in this area: product development, diversification, and market penetration.

The following activities are performed under it:

New Product Research:
Before a new product is developed, a research and development department conducts a
thorough study to support the project. The research phase includes determining product
specifications, production costs and a production time line. The research also is likely to
include an evaluation of the need for the product before the design begins to ensure it is a
functional product that customers want to use.
New Product Development:
The research paves the way for the development phase. This is the time when the new
product is actually developed based on the requirements and ideas created during the
research phase. The developed product must meet the product guidelines and any regulatory
specifications.
Existing Product Updates:
Existing products of the company also fall under the scope of research and development.
The department regularly evaluates the products offered by the company to ensure they are
still functional. Potential changes or upgrades are considered. In some cases, the research
and development department is asked to resolve a problem with an existing product that
malfunctions or to find a new solution if the manufacturing process must change.
Quality Control Checks:
In many companies, the research and development team handles the quality checks on
products created by the company. The department has an intimate knowledge of the
requirements and specifications of a particular project. This allows team members to ensure
the products meet those standards so the company puts out quality products. If the company

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also has a quality assurance team, it may collaborate with research and development on
quality checks.
Innovation and Staying Ahead of Treads:
The research and development team aids the company in staying competitive with others in
the industry. The department is able to research and analyze the products other businesses
are creating, as well as the new trends within the industry. This research aids the
department in developing and updating the products created by the company. The team
helps direct the future of the company based on the information it provides and products it
creates.

FUNCTIONAL STRATEGY SUMMARY

Strategies on a functional level consist of actions and objectives that support the overall
business strategy. In hierarchical organizations, different people are responsible for the
implementation of various functional strategies. They are usually the department managers.
Such as a general financial director. He or she is responsible for implementing the financial
strategy. A marketing manager is responsible for implementing the marketing strategy.
The most important condition for properly functioning strategies is that they are aligned with
the overall business strategy. One way to ensure this is to involve functional management
with strategy development. They know about the workflows, available resources, and
maximum capacity. When developing a functional strategy, information from different
sources is used. Think for instance of input from stakeholders such as clients, the board, and
suppliers. Benchmarking and the results of strategic analyses, such as SWOT analyses, are
also considered.
Because functional strategies tend to be much more detailed than the overall business
strategy, it’s necessary to make a choice from the many possible objectives. Only actions and
processes that demonstrably support the business strategies must be implemented to
effectively use resources. It’s important to develop KPIs to measure progress and
effectiveness. Over time, the functional strategies can be adjusted based on these KPIs, so
that they continue to support the business strategy.

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