STRATEGIC MANAGEMENT

Unit 1 : Introduction to Strategic Management 1

Unit 2 : Strategy Formulation and Defining Vision 17

Unit 3 : Defining Mission, Goals and Objectives 31

Unit 4 : External Assessment 47

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

Unit 6 : Organisational Appraisal: Internal Assessment - 2 93

Unit 7 : Corporate Level Strategies 119

Unit 8 : Business Level Strategies 151

Unit 9 : Strategic Analysis and Choice 169

Unit 10 : Strategy Implementation 195

Unit 11 : Structural Implementation 217

Unit 12 : Behavioural Implementation 237

Unit 13 : Functional and Operational Implementation 263

Unit 14 : Strategic Evaluation and Control 283

Copyright © Yashwantrao Chavan Maharashtra Open University, Nashik.

(First edition developed under DEB development grant)
❑ First Publication : October 2017 ❑ Publication No. : 2234
❑ Cover Design : Shri. Avinash Bharne
❑ Printed by : Shri. Shashikant Ahirrao, M/s. Abhiyankit Printers, B-11, NICE, Satpur, Nashik - 422 007
❑ Publisher : Dr. Dinesh Bhonde, Registrar, Y. C. M. Open University, Nashik- 422 222

ISBN : 978-81-8055-418-6
MBA 301
 Syllabus
STRATEGIC MANAGEMENT MBA-301

UNIT 1 : INTRODUCTION TO STRATEGIC MANAGEMENT

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

UNIT 2 : STRATEGY FORMULATION AND DEFINING VISION

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

UNIT 3 : DEFINING MISSION, GOALS AND OBJECTIVES

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

UNIT 4 : EXTERNALASSESSMENT
Concept of Environment—Porter’s Five Force Analysis—The Five
Forces—Forces that Shape Competition—Industry Analysis—
Framework for IndustryAnalysis —Competitive Analysis—Environmental
Scanning— Features of EnvironmentalAnalysis—Techniques of
Environmental Scanning.

UNIT 5 : ORGANISATIONAL APPRAISAL: THE INTERNAL

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

UNIT 6 : ORGANISATIONALAPPRAISAL: INTERNALASSESSMENT 2

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

UNIT 8 : BUSINESS LEVEL STRATEGIES

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

UNIT 9 : STRATEGIC ANALYSIS AND CHOICE

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

UNIT 10 : STRATEGY IMPLEMENTATION

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

UNIT 11 : STRUCTURAL IMPLEMENTATION

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

UNIT 12 : BEHAVIOURAL IMPLEMENTATION

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

UNIT 14 : STRATEGIC EVALUATION AND CONTROL

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

⬛⬛⬛⬛
 Introduction to
UNIT 1 : INTRODUCTION TO Strategic Management

STRATEGIC MANAGEMENT
NOTES
1.0 Unit Objectives

1.1 Introduction

1.2 Definition of Strategic Management

1.3 Nature of Strategic Management

1.4 Dimensions of Strategic Management

1.5 Need for Strategic Management

1.6 Benefits of Strategic Management

1.7 Risks involved in Strategic Management

1.8 Strategic Management Process

1.9 Summary

1.10 Key Terms

1.11 Questions and Exercises

1.12 Further Reading and References

1.0 Unit Objectives

After reading this unit, you should be able to:

 State the meaning, nature and importance of strategic

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

1.1 Introduction
NOTES

Strategic Management : 2
 Strategic Management is exciting and challenging. It makes
fundamental decisions about the future direction of a firm – its
purpose, its resources and how it interacts with the environmentin which
it operates. Every aspect of the organisation plays a role in strategy –
its people, itsfinances, its production methods, its customers and so
[Link] Management can be described as the identification of the
purpose of the organisationand the plans and actions to achieve that
purpose. It is that set of managerial decisions andactions that
determine the long-term performance of a business enterprise. It
involves formulatingand implementing strategies that will help in
aligning the organisation and its environment toachieve organisational
goals. Strategic management does not replace the traditional
managementactivities such as planning, organising, leading or
controlling. Rather, it integrates them into abroader context taking into
account the external environment and internal capabilities and
theorganisation’s overall purpose and direction. Thus, strategic
management involves thosemanagement processes in organisations
through which future impact of change is determinedand current
decisions are taken to reach a desired future. In short, strategic
management is aboutenvisioning the future and realizing it.

1.2 Definition of Strategic Management

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

management.

As already mentioned, the concepts in strategic management NOTES

have been developed by a numberof authors like Alfred Chandler,
Kenneth Andrews, Igor Ansoff, William Glueck, Henry Mintzberg,
Michael E. Porter, Peter Drucker and a host of others. There are
therefore severaldefinitions of strategic management. Some of the
important definitions are:

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

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

– Alfred Chandler, 1962

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

lead to the development of aneffective strategy or strategies to help
achieve corporate objectives”. Check Your Progress
– Glueck and Jauch, 1984
Discuss the various
elements of strategic
3. “Strategic management is a process of formulating, implementing management?
and evaluating cross-functionaldecisions that enable an organisation
to achieve its objective”.

– Fed R David, 1997

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

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

– Pearce and Robinson, 1988 Strategic Management : 3

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

NOTES – Johnson and Sholes, 2002

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

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

– Dess, Lumpkin & Taylor, 2005

We observe from the above definitions that different authors

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

This definition consists of three basic elements:

l. Determination of long-term goals

2. Adoption of courses of action

3. Allocation of resources to achieve those goals

Though this definition is simple, it does not consist of all the

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

organisation.

2. Decisions about two basic questions: NOTES

(a) What businesses should we compete in?

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

strategies?

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

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

1.3 Nature of Strategic Management

Strategic Management can be defined as the art & science of

formulating, implementing, and evaluating, cross-functional

decisions that enable an organisation to achieve its objectives.

Strategic management is different in nature from other

aspects of management. An individual manager is most often

required to deal with problems of operational nature. He generally

focuses on day-to- day problems such as the efficient production of

goods, the management of a sales force, the monitoring of financial

performance or the design of some new system that will improve the Strategic Management : 5

level of customer service.!

Introduction to
Strategic Management 1.4 Dimensions of Strategic Management
The characteristics of strategic management are as follows:

1. Top management involvement: Strategic management

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

2. Requirement of large amounts of resources: Strategic

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

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

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

4. Future-oriented: Strategic management encompasses

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

5. Multi-functional or multi-business consequences:

Strategic management has complex implications for most areas
of the firm. They impact various strategic business units
especially in areas relating to customer-mix, competitive
focus, organisational structure etc. All these areas will be
affected by allocations or reallocations of responsibilities and
Strategic Management : 6
resources that result from these decisions.
 6. Non-self-generative decisions: While strategic management may Introduction to
involve making decisions relatively infrequently, the Strategic Management

organisation must have the preparedness to make strategic

decisions at any
point of time. That is why Ansoffcalls them “non-self-generativeNOTES
decisions.”

1.5 Need for Strategic Management

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

It enables managers to consider how to grasp opportunities and

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

Thirdly, strategic management helps to formulate better

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

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

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

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

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

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

6. It provides clear objectives and direction for employees.

1.6 Benefits of Strategic Management

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

– Harlan Cleveland

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

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

Now, systems are much more open, environment is characterized

by increasingly unstable economic growth, budgets are constantly
revised, inputs are thoroughly unpredictable, and planning in the
traditional sense is no longer tenable.
Strategic Management : 8
Therefore, today’s enterprises need strategic management to reap
the benefits of business opportunities, overcome the threats and stay
ahead
in the race. The purpose of strategicmanagement is to exploit and Introduction to
create new and different opportunities for tomorrow; while long term Strategic Management

planning, in contrast, tries to optimize for tomorrow the trends of

today.
NOTES
Today, all top companies are involved in strategic
management. They are finding ways torespond to competitors, cope
with difficult environmental changes, meet changing customerneeds
and effectively use available resources.

It is important to note that strategic planning goes far beyond

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

l. Strategic thinking

2. Strategic decision-making

3. Strategic approach

A structured approach to strategy planning brings several

benefits (Smith, 1995; Robbins, 2000)

1. It reduces uncertainty: Planning forces managers to look

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

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

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

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

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

NOTES

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

1. Financial Benefits: Research indicates that organisations

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

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

management offers otherintangible benefits to a firm. They are;

(a) Enhanced awareness of external threats

(b) Improved understanding of competitors’ strategies

(c) Reduced resistance to change

(d) Clearer understanding of performance-reward relationship

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

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

(g) Increased order and discipline.

According to Gordon Greenley, strategic management offers the following

benefits:

1. It allows for identification, prioritization and exploitation of

opportunities.

2. It provides objective view of management problems.

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

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

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

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

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

3. Another negative effect of strategic management may arise if

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

1.8 Strategic Management Process

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

1. Strategic Analysis: The foundation of strategy is a

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

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

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

3. Strategy Implementation: Implementation depends on

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

4. Strategy Evaluation and Control: Organisations set up

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

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

Strategic Management : 12 Although a sense of direction is important, it can also stifle

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

When a strategy becomes internalized into a corporate culture,

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

Formulation and implementation of strategy must thus occur

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

1.10 Key Terms

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

Financial Benefits: profits associated with strategic management

Multifunctional Consequences: having complex implications on most of

the functions of the organisation

Non-financial Benefits: intangible benefits associated with strategic

management

Non-Self Generative Decisions: decisions that are taken infrequently but

promptly when neededat any point of time

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

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

Strategic Management: stream of decisions and actions that lead to

NOTES

Strategic Management : 14
development of effective strategy

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

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

achieve a specific objective

1.11 Questions and Exercises

1. Discuss the various elements of strategic management.

2. Examine the significance of strategic management.

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

determine objectives and strategic decisions”. Discuss.

4. Bring out the distinguishing features of strategic management.

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

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

6. Depict the model of strategic management and explain its

components.

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

organisation is runninginto losses due to poor management and

decision making. How will you analyse the situation and move

your organisation out of the situation?

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

problems did you encounter? Did you overcome them? How? If

no, what were the reasons for their beinginsurmountable?

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

and prioritize your tasks?

10. Describe a specific instance, in a group situation, where you Introduction to
made your views known about an issue important to yourself. Strategic Management

What was the issue, and why was it crucial?

11. Outline in very broad terms how you would create a strategy for NOTES
say, a public interest campaign.

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

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

1.12 Further Reading and References

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

FORMULATION AND
DEFINING VISION NOTES

2.0 Unit Objectives

2.1 Introduction

2.2 Aspects of Strategy Formulation

2.3 Business Vision

2.3.1 Defining Vision

2.3.2 Nature of Vision

2.3.3 Characteristics of Vision Statements

2.3.4 Importance of Vision

2.3.5 Advantages of Vision

2.4 Summary

2.5 Key Terms

2.6 Questions and Exercises

2.7 Further Reading and References

2.0 Unit Objectives

After studying this unit, you should be able to:

 Discuss various aspects of strategy formulation Strategic Management : 17

 Explain the relevance business vision

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

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

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

There are four primary steps in this phase:

1. Reviewing the current key objectives and strategies of the

organisation, which usuallywould have been identified and
evaluated as part of the diagnosis
2. Identifying a rich range of strategic alternatives to address the
three levels of strategy formulation outlined below, including but
not limited to dealing with the critical issues.
3. Doing a balanced evaluation of advantages and disadvantages
of the alternatives relativeto their feasibility plus expected
Strategic Management : 18
effects on the issues and contributions to the success of
theorganisation
4. Deciding on the alternatives that should be implemented or Strategy Formulation and
[Link] organisations, and in the practice of strategic Defining Vision

management, strategies must be implementedto achieve the

intended results. Here it has to be remembered that the most NOTES

wonderful strategyin the history of the world is useless if not
implemented successfully.

2.2 Aspects of Strategy Formulation

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

1. Corporate Level Strategy

2. Competitive Strategy

3. Functional Strategy

Let us understand each of them one by one.

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

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

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

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

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

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

NOTES lines of business).

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

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

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

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

2.3 Business Vision

The first task in the process of strategic management is to
formulate the organisation’s visionand mission statements. These
Strategic Management : 20
statements define
the organisational purpose of a firm. Togetherwith objectives, they Strategy Formulation
form a “hierarchy of goals.” and Defining Vision

 Plans

 Objectives NOTES

 Goals

 Mission

 Vision

A clear vision helps in developing a mission statement, which

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

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

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

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

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

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

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

1. Core ideology
NOTES
2. Envisioned future

Core ideology is based on the enduring values of the

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

2.3.1 Defining Vision

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

2.3.2 Nature of Vision

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

Strategic Management :22

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

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

power. It capturedthe imagination of others and aided internal efforts to
mobilize resourcesand make it a reality. A good vision always needs to
be a bit beyond acompany’s reach, but progress towards the vision is
what unifies theefforts of company personnel.

2.3.3 Characteristics of Vision Statements

As may be seen from the above definitions, many of the
characteristics of vision given by theseauthors are common such as
being clear, desirable, challenging, feasible and easy to
[Link] and Back off have identified four generic features of
visions that are likely to enhanceorganisational performance:

1. Possibilitymeans the vision should entail innovative possibilities

for dramatic organisational improvements.

2. Desirabilitymeans the extent to which it draws upon shared

Check Your Progress
organisational norms andvalues about the way things should “Employees have a
greater role to play in
be done. formulating strategy”.
Comment?
3. Action abilitymeans the ability of people to see in the vision,

actions that they can takethat are relevant to them.

4. Articulationmeans that the vision has imagery that is

powerful enough to communicateclearly a picture of where

the organisation is headed.

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

2.3.5 Advantages of Vision

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

1. Good vision fosters long-term thinking.

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

3. It is inspiring and exhilarating.

Strategic Management : 24
4. It represents a discontinuity, a step function and a jump ahead so

that the company knowswhat it is to be.

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

sense in the market place.

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

be used for the benefit of people

Nutt and Backoff identify three different processes for

crafting a vision:

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

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

2.4 Summary
Strategic management is the set of managerial decisions and

action that determines theway for the long-range performance of the

[Link] Strategic Management : 25

Strategy Formulation includes environmental scanning, strategy formulation, strategy
and Defining Vision
implementation,evaluation and [Link] formulation is the
development of long range plans for the effective managementof

NOTES environmental opportunities and threats in light of corporate

strengths and [Link] includes defining the corporate mission,
specifying achievable objectives, developingstrategies and setting
policy [Link] strategy is one, which decides what
business the organisation should be in, andhow the overall group of
activities should be structured and [Link] Strategy is
concerned with creating and maintaining a competitive advantagein
each and every area of [Link] that is related to each
functional area of business such as production, marketingand
personnel is called functional [Link] vision is a short,
succinct, and inspiring statement of what the organisation intends to
become and to achieve at some point in the future, often stated in
competitiveterms.

2.5 Key Terms

Core Ideology: based on the enduring values of the organisation

Corporate Level Strategy:Involves broad decisions about

organisation’s scope and direction.

Facilitation Approach: A wide range of people participate in the

process of developing and articulating a vision.

Functional Strategy: Involves decisions about each unit of the

organisation.

Leader Dominated Approach: The CEO provides the strategic

vision for the organisation.

Pump-priming Approach: The CEO provides visionary ideas and

selects people and groups within the organisation to further develop

Strategic Management : 26
those ideas.
Strategic Business Area (SBA):SBA is a distinctive segment of the Strategy Formulation
environment in which the firm wants to do business. and Defining Vision

Sustainable Competitive Advantage:getting a substantial edge over

the competitors.
NOTES
Vision: The overall goal of an organisation that all business
activities and processes should contribute toward achieving.

2.6 Questions and Exercises

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

Check your
progress Fill in the
blanks:

1. Strategy formulation is the process of determining appropriate

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

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

innovative possibilities for dramatic organizational

improvement.

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

Strategic Management : 28
paint a picture of the kind of company the management is
trying to create.
Answers: Strategy Formulation
1. objectives 2. Implemented 3. four 4. corporate mission, and Defining Vision
objectives,
strategies 5. become, achieve 6. Three 7. advantage 8. decline,
failure 9. Possibility 10. Graphic NOTES

2.7 Further Reading and References

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

 Fred R. David, Strategic Management – Concepts and

Cases, Pearson Education Inc., 2005.

 Ian Palmer, Richard Dunford and Gib Akin, Managing

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

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

AND OBJECTIVES
NOTES
3.0 Unit Objectives

3.1 Introduction

3.2 Defining Mission

3.3 Importance of Mission Statement

3.4 Characteristics of a Mission Statement

3.5 Components of a Mission Statement

3.6 Formulation of Mission Statements

3.7 Evaluating Mission Statements

3.8 Concept of Goals and Objectives

3.8.1 Goals

3.8.2 Objectives

3.9 Summary

3.10 Key Terms

3.11 Questions and Exercises

3.12 Further Reading and References

3.0 Unit Objectives

After studying this unit, you should be able to:

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

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

3.2 Defining Mission

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

minimum, a mission statement should define who are the primary

customers of the company, identify the products and services it produces,
NOTES
and describe the geographical location in which it operates.

Example:

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

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

Most of the above mission statements set the direction of the

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

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

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

3.4 Characteristics of a Mission Statement

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

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

2. Clearly articulated: It should be easy to understand so that the
values, purposes, and goals of the organisation are clear to
everybody in the organisation and will be a guide to them.
3. Broad, but not too general: A mission statement should achieve
a fine balance between specificity and generality.
4. Inspiring: A mission statement should motivate readers to
action. Employees should find it worthwhile working for such

Strategic Management : 34 an organisation.

5. It should arouse positive feelings and emotions of both Defining Mission,
employees and outsiders about the organisation. Goals and Objectives

6. Reflect the firm’s worth: A mission statement should

generate the impression that the firm is successful, has
NOTES
direction and is worthy of support and investment.
7. Relevant: A mission statement should be appropriate to the
organisation in terms of its history, culture and shared values.
8. Current: A mission statement may become obsolete after
some time. As Peter Druckerpoints out, “Very few mission
statements have anything like a life expectancy of thirty, let
alone, fifty years. To be good enough for ten years is probably
all one can normally expect”. Changes in environmental
factors and organisational factors may necessitate
modification of the mission statement.
9. Unique: An organisation’s mission statement should
establish the individuality and uniqueness of the company.
10. Enduring: A mission statement should continually guide and
inspire the pursuit of organisational goals. It may not be fully
achieved, but it should be challenging for managers and
employees of the organisation.
11. Dynamic: A mission statement should be dynamic in
orientation allowing judgments about the most promising
growth directions and the less promising ones.
12. Basis for guidance: Mission statement should provide useful
criteria for selecting a basis for generating and screening strategic
options.
13. Customer orientation: A good mission statement identifies
the utility of a firm’s products or services to its customers,
and attracts customers to the firm.
14. A declaration of social policy: A mission statement should
contain its philosophy about social responsibility including its
Strategic Management : 35
obligations to the stakeholders and the society at large.
Defining Mission, 15. Values, beliefs and philosophy: The mission statement
Goals and Objectives
should lay emphasis on the values the firm stands for;
company philosophy, known as “company creed”, generally

NOTES accompanies or appears within the mission statement.

3.5 Components of a Mission Statement

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

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

or services?
2. Primary markets: Where does the firm compete?
3. Principal technology: Is the firm technologically current?
4. Customers: Who are the firm’s customers?
5. Concern for survival, growth and profitability: Is the firm
committed to growth and financial soundness?
6. Company philosophy: What are the basic beliefs, values,
aspirations and ethical priorities of the firm?
7. Company self-concept: What is the firm’s distinctive
competence or major competitive advantage?
8. Concern for public image: Is the firm responsive to social,
community and environmental concerns?
9. Concern for employees: Are employers considered a valuable
asset of the firm?
10. Concern for quality: Is the firm committed to highest quality?
Strategic Management : 36
 Defining Mission,
3.6 Formulation of Mission Statements Goals and Objectives

There is no standard method for formulating mission

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

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

establishes the mission which may remain unchanged down the
years or may be modified as the conditions change.
2. In some cases, the mission statement is drawn up by the CEO
and board of directors or a committee of strategists constituted
for the purpose.
3. Engaging consultants for drawing up the mission statement is
also common.
4. Many companies hold brainstorming sessions of senior
executives to develop a mission statement. Soliciting
employee’s views is also common.
5. According to Fred R. David, an ideal approach for developing a
mission statement would be to select several articles about
mission statements and ask all managers to read these as
background information. Then ask managers to prepare a draft
mission statement for the organisation. A facilitator or a
committee of top managers, merge these statements into a
single document and distribute this draft mission statement to
all managers. Then the mission statement is finalized after
taking inputs from all the managers in a meeting.
Strategic Management : 37
Defining Mission, 6. Decision on how best to communicate the mission to all
Goals and Objectives
managers, employees and external constituencies of an
organisation are needed when the document is in its final form.

NOTES Some organisations even develop a videotape to explain the

mission statement and how it was developed.
7. The practice in Indian companies appears to be a consultative-
participative route. For Example, at Mahindra and Mahindra,
workshops were conducted at two levels within the organisation
with corporate planning group acting as facilitators. The State
Bank of India went one step ahead by inviting labour unions to
partake in the exercise. Satyam Computers went one more step
ahead by involving their joint venture companies and overseas
clients in the process.

Mission of two Global

Companies Mission Statement of

IBM

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

manufacture of the industry’s most advanced information technologies,
including computer systems, software, and storage systems and
microelectronics. We translate these advanced technologies into value
for our customers through our professional solutions, services and
consulting businesses worldwide.

Mission Statement of FedEx

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

We will produce outstanding financial returns by providing totally
reliable, competitively superior, global, air-ground transportation of
high-priority goods and documents that require rapid, time-certain
Strategic Management : 38
delivery.”

Source: [Link] and [Link]

 Defining Mission,
3.7 Evaluating Mission Statements Goals and Objectives

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

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

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

Stated vs. Operational Goals

Operational goals are the real goals of an organisation. Stated

goals are the official goals of an organisation. Operational goals tell
us what the organisation is trying to do, irrespective of what the
official goals say the aims are. Official goals generally reflect the basic
Strategic Management : 40 philosophy of the company and are expressed in abstract terminology,
for example, ‘sufficient profit’, ‘market leadership’ etc. According to
Charles Perrow, the following are the important operational goals:
 1. Environmental Goals: An organisation should be responsive Defining Mission,
to the broader concerns of the communities in which it Goals and Objectives

operates, and should have goals that satisfy people in the

external environment. For example, goals like customer
NOTES
satisfaction and social responsibility may be important
environmental goals.
2. Output Goals: Output goals are related to the identification of
customer needs. Issues like what markets should we serve,
which product lines should be followed, etc. are examples of
output goals.
3. System Goals: These goals relate to the maintenance of the
organisation itself. Goals like growth, profitability, stability
etc. are examples.
4. Product Goals: These goals relate to the nature of products
delivered to customers. They define quantity, quality, variety,
innovativeness of products.
5. Derived Goals: These goals relate to derived or secondary
areas like contribution to political activities, promoting social
service institutions etc.

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

Characteristics of Objectives
Well – stated objectives should be:
1. Specific
Strategic Management : 41
2. Quantifiable
Defining Mission, 3. Measurable
Goals and Objectives
4. Clear
5. Consistent

NOTES 6. Reasonable
7. Challenging
8. Contain a deadline for achievement
9. Communicated, throughout the organisation.

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

Nature of Objectives

The following are the characteristics of objectives:

Hierarchy of Objectives : In a multi – divisional firm,

objectives should be established for the overall company as
well as for each division. Objectives are generally established
at the corporate, divisional and functional levels, and as such,
they form a hierarchy. The zenith of the hierarchy is the
mission of the organisation. The objectives at each level
Strategic Management : 42
contribute to the objectives at the next higher level.
 Long-range and Short-range Objectives : Organisations Defining Mission,
need to establish both long-range and short-range objectives Goals and Objectives

(Long– range means more than one year, and short–range

means one year and less.) Short-range objectives spell out the
NOTES
near – term results to be achieved. By doing so, they indicate
the speed and the level of performance aimed at each
succeeding period.

Multiplicity of Objectives : Organisations pursue a number of

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

Network of Objectives : Objectives form an interlocking

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

3.9 Summary
 A mission can be defined as a sentence describing a

company’s function, markets and competitive advantages. Strategie Management : 43

 Developing your mission statement is the step which moves

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

3.10 Key Terms

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

underlying a company’s practice or conduct.

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

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

with no quantification of outcomes or time limit.

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

who its customers are.

Objectives: The results an organisation wants to achieve in pursuing

its basic mission.

3.11 Questions and Exercises

1. “Mission describes the present and vision the future”. With
this statement in mind compare mission and vision
statements.
2. Are goals and objectives the same thing? Justify your
Strategie Management : 44 answer. Discuss the unique characteristics of goals and
objectives.
 3. Suppose you are going to open a new mobile device Defining Mission,
manufacturing company. Prepare a mission statement for Goals and Objectives

your company. (Try and include as many elements mentioned

in the unit as possible)
NOTES
4. “It is necessary to review the mission statement periodically”.
Justify the statement
5. How can a mission statement set the tone of the organisation?
6. Analyse the characteristics of a good mission statement.
7. “Like an individual should know him/herself inside out, an
organisation should also know itself”. Substantiate
8. “Goals are general in nature while objectives are specific”.
Explain using suitable examples.
9. Explain the concept of stated and operational goals with the
help of appropriate examples.

Check your progress

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

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

3.12 Further Reading and References

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

Strategie Management : 46
 External Assessment

UNIT 4: EXTERNAL ASSESSMENT

NOTES
4.0 Unit Objectives

4.1 Introduction

4.2 Concept of Environment

4.3 Porter’s Five Force Analysis

4.3.1 The Five Forces

4.3.2 Forces that Shape Competition

4.4 Industry Analysis

4.4.1 Framework for Industry Analysis

4.4.2 Industry Analysis

4.5 Competitive Analysis

4.6 Environmental Scanning

4.6.1 Features of Environmental Analysis

4.6.2 Techniques of Environmental Scanning

4.7 Summary

4.8 Key Terms

4.9 Questions and Exercises

4.10 Further Reading and References

4.0 Unit Objectives

After studying this unit, you should be able to:

 Realise the concept of environment

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

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

4.2 Concept of Environment

Environment literally means the surroundings, external
objects, influences or circumstances under which someone or
something exists. The environment of any organisation is “the
aggregateof all conditions, events and influences that surround and
affect it.” Davis, K, The Challenge of Business, (New York: McGraw
Hill, 1975), p. [Link] refers to all external forces which have
a bearing on the functioning of business. Jauch and Gluecke has defined
environment as “The environment includes factors outside the firm
which can lead to opportunities or a threat to the firm. Although there
are many factors themost important of the sectors are socio-
economic, technological, supplier, competitor and govt.”The recent

Strategic Management : 48 changes in tariff rates have changed the toy industry of India with the
market nowbeing dominated by Chinese products. A slight change in
the Reserve Bank of India’s monetarypolicy can increase or decrease External Assessment
interest rates in the market. A slight shift in the government’sfiscal
policy can shift the whole demand curve towards the right or the left.
NOTES

Importance of Business Environment

1. Environment is Complex: The environment consists of a

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

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

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

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

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

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

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

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

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

NOTES andmarkets.

7. Changes in the environment can change the competitive

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

8. Sometimes developments are difficult to predict with any

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

4.3 Porter’s Five Force Analysis

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

4.3.1 The Five Forces

Strategic Management : 50 In essence, the job of the strategist is to understand and cope
with competition. However, managers define competition too narrowly,
as if it occurs only among today’s direct [Link] competition for
profits
goes beyond established industry rivals. It includes four other Forces model is
competitive forces as well: customers, suppliers, potential entrants the threat of new
and substitutes. entrants. New
entrants bring
The Five Forces model developed by Michnal E. Porter has
new capacity
been the most commonly used analytical tool for examining
and often
competitive environment. According to this model, the intensity of
substantial
competition in an industry depends on five basic forces. These five
resources to an
forces are:
industry with a
1. Threat of new entrants desire to gain
2. Intensity of rivalry among industry competitors market share.
Established
3. Bargaining power of buyers
companies
4. Bargaining power of suppliers already

5. Threat of substitute products and services.

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

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

4.3.2 Forces that Shape Competition

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

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

 External Assessment

NOTES

Check Your Progress

“The five forces model
provides the rationale
for increasing or
decreasing resources
commitment”.
Comment?

Strategic Management : 51
External Assessment operating in an industry often attempt to discourage new
entrants from entering the industry to protect their share of the
market and profits. Particularly when big new entrants are

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

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

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

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

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

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

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

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

Strategic Management : 52 resources in order to compete can deter new entrants.
Capital may be necessary not only for fixed assets, but also
to extend customer credit, build inventories and fund start-
up losses.
The barrier is particularly great if the capital is required for External Assessment
unrecoverable expenditure, such as up-front advertising or
research and development. While major corporations have
the financial resources to invade almost any industry, the
NOTES
capital requirements in certain fields limit the pool of likely
entrants. It is important not to overstate the degree to which
capital requirements alone deter entry; if industry returns are
attractive and are expected to remain so, and if capital
markets are efficient, investors will provide new entrants
with the funds they need.
(d) Switching costs : Switching costs are the one-time costs
that a customer has to bear to switch from one product to
another. When switching costs are high, customers can be
locked up in the existing product, even if new entrants offer a
better product. Thus, the higher the switching costs are, the
higher is the barrier to entry. Enterprise Resource Planning
(ERP) software is an example of a product with very high
switching costs. Once a company has installed SAP’s ERP
system, the cost of moving to a new vendor are
astronomical.
(e) Access to distribution channels: The new entrant’s need to
secure distribution channel for the product can create a
barrier to entry. The established companies have already tied
up with distribution channels. For example, a new food item
may have to displace others from the supermarket shelf via
price breaks, promotions, intense selling efforts or some
other means. The more limited the wholesale or retail
channels are, tougher will be the entry into an industry.
Sometimes, if the barrier is so high, a new entrant must
create its own distribution channels as Timex did in the
watch industry in the 1950s.
(f) Cost disadvantages independent of size:Some existing
Strategic Management : 53
companies may have advantages other than size or
economies of scale. These are derived from:
External Assessment (i) Proprietary technology
(ii) Preferential access to raw material sources
(iii) Government subsidies

NOTES (iv) Favorable geographical locations

3. Expected Retaliation : How new entrants believe that the

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

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

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

Strategic Management : 54
from each other. Firms use tactics like price discounting,
advertising
campaigns, new product introductions and increased customer External Assessment
service or warranties. Intense rivalry lowers prices and raises
costs. It squeezes profits out of an industry. Thus, intense rivalry
among established companies constitutes a strong threat to
NOTES
profitability. Alternatively, if rivalry is less intense, companies
may have the opportunity to raise prices or reduce spending on
advertising etc. which leads to higher level of industry profits.

The intensity of rivalry is greatest under the following conditions:

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

NOTES strategic or emotional factors that keep firms competing

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

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

competitive forces is the bargaining power of buyers.
Bargaining power of buyers refers to the ability of buyers to
bargain down prices charged by firms in the industry or
driving up the costs of the firm by demanding better product
quality and service. By forcing lower prices and raising costs,
powerful buyers can squeeze profits out of an industry. Thus,
powerful buyers should beviewed as a threat. According to
Porter, buyers are most powerful under the following
conditions:
(a) There are few buyers : If there are few buyers or each one
does bulk purchases, then they have more bargaining
power. Large buyers are particularly powerful in industries
like telecommunication equipment, off-shore drilling, and
bulk chemicals. High fixed costs and low marginal costs
increase the pressure on rivals to keep capacity filling
through discounts.
(b) The products are standard or undifferentiated : If the
products purchased from the firm are standard or
undifferentiated, the buyers can easily find alternative sources
Strategic Management : 56
of supplies. Then buyers can play one company against the
other, as in commodity grain markets.
 (c) The buyer faces low switching costs : Switching costs External Assessment
lock the buyer to a particular firm. If switching costs are
low, buyers can easily switch from one firm’s product to
another.
NOTES
(d) The buyer earns low profits : If the buyer is under
pressure to trim its purchasing costs, the buyer is price
sensitive and bargains more.

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

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

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

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

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

by few companies and is more concentrated than the
firms to whom it sells, an industry is called Strategic Management : 57
concentrated. The
External Assessment suppliers can then dictate prices, quality and terms.
(b) Product is differentiated : When suppliers offer products
that are unique or differentiated or built-up switching

NOTES costs, it cuts off the firm’s options to play one supplier
against the other. For example, pharmaceutical companies
that offer patented drugs with distinctive medical benefits
have more power over hospitals, drug buyers etc.
(c) Dependence of supplier group on the firm : When
suppliers sell to several firms and the firm does not
represent a significant fraction of its sales, suppliers are
prone to exert power. In other words, the supplier group
does not depend heavily on the industry for revenues.
Suppliers serving many industries will not hesitate to
extract maximum profits from each one. If a particular
industry accounts for a large portion of a supplier group’s
volume or profit, however, suppliers will want to protect
the industry through reasonable pricing.
(d) Importance of the product of the firm : When the
product is an important input to the firm’s business or when
such inputs are important to the success of a firm’s
manufacturing process or product quality, the bargaining
power of suppliers is high.
(e) Threat of forward integration : When the supplier poses
a credible threat of integrating forward, this provides a
check against the firm’s ability to improve the terms by
which it purchases.
(f) Lack of substitutes : The power of even large, powerful
suppliers can be checked if they compete with substitutes.
But, if they are not obliged to compete with substitutes as
they are not readily available, the suppliers can exert
power.
Strategic Management : 58

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

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

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

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

4.4 Industry Analysis

Each business operates among a group of firms that produce
competing products or services known as an “industry”. An industry
 External Assessment

NOTES

Strategic Management : 59
External Assessment thus a group of firms producing similar products or services. By
similar products we mean products that customers perceive to be
substitutes for one another.

NOTES
Example : Firms that produce and sell textiles such as Reliance
Textiles, Raymond, S. Kumar’s etc. belong to the textile industry.
Similarly, firms that produce PCs, such as Apple, Compaq, AT&T,
IBM, etc. belong to the Microcomputer industry. Although there are
usually some differences among competitors, each industry has its
own set of “rules of combat” governing such issues as product
quality, pricing and distribution. This is especially true in industries that
contain a large number of firms offering standardized products and
services. As such, it is important for strategic managers to understand
the structure of the industry in which their firms operate before
deciding how to compete successfully. Industry analysis is therefore
a critical step in the strategic analysis of a firm. In a perfect world,
each firm would operate in one clearly defined industry. However,
many firms compete in multiple industries, and strategic managers in
similar firms often differ in their conceptualization of the industry
environment. In addition, the advent of Internet has completely

changed the way business is done. As a result, the process of

industry definition and analysis can be specially challenging when
internet competition is considered. The basic purpose of industry
analysis is to assess the strengths and weaknesses of a firm relative to
its competitors in the industry. It tries to highlight the structural
realities of particular industry and the extent of competition within
that industry. Through industry analysis, an organisation can find
whether the chosen field is attractive or not and assess its own
position within the industry.

Strategic Management : 60
4.4.1 Framework for Industry Analysis
Industry analysis covers two important components:
 1. Industry environment External Assessment
2. Competitive environment

The following are the aspects to be covered in the above analysis:

NOTES
Industry Analysis
1. Industry features
2. Industry boundaries
3. Industry environment
4. Industry structure
5. Industry performance
6. Industry practices
7. Industry attractiveness
8. Industry prospects for future

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

4.4.2 Industry Analysis

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

2. Industry Boundaries : All the firms in the industry are not

similar to one another. Firms within the same industry could
differ across various parameters, such as:
(a) Breadth of market
(b) Product/service quality
(c) Geographic distribution
(d) Level of vertical integration
(e) Profit motives

3. Industry Environment : Based on their environment,

industries are basically of two types:

(a) Fragmented Industries : A fragmented industry consists

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

 Emerging industries : Are those in the introductory

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

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

incomplete without an understanding of its structural
attributes. Structural attributes are the enduringcharacteristics
that give an industry its distinctive character.

Industry structure consists of four elements:

(a) Concentration : It means the extent to which industry
sales are dominated by only a few firms. In a highly
concentrated industry (i.e. an industry whose sales are
dominated by a handful of firms), the intensity of
competition declines over time. High concentration serves
as a barrier to entry into an industry, because it enables
the firms to hold large market shares to achieve
Strategic Management : 63
significant economies of scale.
External Assessment (b) Economies of scale : This is an important determinant of
competition in an industry. Firms that enjoy economies of
scale can charge lower prices than their competitors,

NOTES because of their savings in per unit cost of production.

They also can create barriers to entry by reducing their
prices temporarily or permanently to deter new firms from
entering the industry.
(c) Product differentiation : Real perceived differentiation
often intensifies competition among existing firms.

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

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

5. Industry attractiveness : Industry attractiveness is dependent

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

Strategic Management : 64 Strong companies may consider diversification into more

attractive businesses. Weak companies may consider merging
with a rival to bolster market share and profitability.
 6. Industry performance : This requires an examination of data External Assessment
relating to:
(a) Production
(b) Sales NOTES
(c) Profitability
(d) Technological advancements etc.

7. Industry practices : Industry practices refer to what a

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

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

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

4.5 Competitive Analysis

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

NOTES The essence of strategy formulation is coping with

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

4.6 Environmental Scanning

Environmental analysis or scanning is the process of
monitoring the events and evaluating trends in the external
Check Your Progress
environment, to identify both present and future opportunities and
Discuss Industry
analysis using Porter’s threats that may influence the firm’s ability to reach its goals.
five forces theory? Strategists need to analyse a variety of different components of the
external environment, identify “Key Players” within those domains,
and be very cognizant of both threats and opportunities within the
environment. It is from such an analysis that managers can make
decisions on whether to react to, ignore, or try to influence or
anticipate future opportunities and threats discovered. The main
purpose of environmental scanning is therefore to find out the
correct “fit” between the firm and its environment, so that managers
Strategic Management : 66
can formulate strategies to take advantage of the opportunities and
avoid or reduce the impact of threats.
4.6.1 Features of Environmental Analysis External Assessment

In the context of a changing environment, the process of

environmental analysis is very well comparable to the functions of radar.
From this analogy, it is possible to derive three important features of NOTES
the process of environmental analysis (Ian Wilson).

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

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

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

4.6.2 Techniques of Environmental Scanning

So far, we have discussed the constituents of macro and
operating environment and how these can become a threat or
opportunity. As a corporate strategist, one has to identify the impact
of these environmental forces on firm’s choice of direction and
action. Environmental analysis involves two phases, viz; information
Strategic Management : 67
gathering and evaluation.
External Assessment Glueck and Jauch mention the following sources for environmental
analysis:
1. Verbal and written information : Verbal information is

NOTES generally obtained by direct talk with people, by

attending meetings, seminars etc, or through media.
Written or documentary information includes both
published and unpublished material.
2. Search and scanning : This involves research for
obtaining the required information.
3. Spying : Although it may not be considered ethical,
spying to get information about competitor’s business is
not uncommon.
4. Forecasting : This involves estimating the future trends
and changes in the environment. There are many
techniques of forecasting. It can be done by the corporate
planners or consultants. For the above purpose, firms use
a number of tools and techniques depending on their
specific requirements in terms of quality, relevance, cost
etc.

Some of the techniques which are generally used for carrying

out environmental analysis are:
1. PESTEL analysis
2. SWOT analysis
3. ETOP
4. QUEST
5. EFE Matrix
6. CPM
7. Forecasting techniques
(a) Time series analysis
(b) Judgmental forecasting
Strategic Management : 68 (c) Expert opinion
(d) Delphi’s technique
 (e) Multiple scenario listed.
(f) Statistical modelling
(g) Cross-impact analysis
(h) Brainstorming
(i) Demand/hazard forecasting

The above techniques are briefly discussed below:

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

SWOT Analysis : SWOT analysis is discussed in more detail in

Unit 5.

ETOP : Environmental Threats and Opportunities Profile (ETOP)

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

1. List environmental factors : The different aspects of the

general as well as relevant environmental factors are
 External Assessment

NOTES

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

EFE Matrix : Just like ETOP, the External Factor Evaluation

Matrix (EFE Matrix) helps to summarize and evaluate the various
components of external environment. The EFE Matrix can be
developed in five steps:

1. List 10 to 20 important opportunities and threats.

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

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

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

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

Forecasting Techniques : Macro environmental and industry

scanning and analysis are only marginally useful if what they do
is to reveal current conditions. To be truly useful, such analysis
must forecast future trends and changes. Forecasting is a way of
estimating the future events that are likely to have a major impact
on the enterprise. It is a technique whereby managers try to
Strategic Management : 71
predict the
External Assessment future characteristics of the environment to help managers take
strategic decisions. Various techniques are used to forecast future
situations. Important among these are:
NOTES
1. Time series analysis : Extrapolation is the most widely
practiced form of forecasting. Simply stated, extrapolation
is the extension of present trends into the future. It rests on
the assumption that the world is reasonably consistent and
changes slowly in the short run. They attempt to carry a
series of historical events forward into the future. Because
time series analysis projects historical trends into the
future, its validity depends on the similarity between past
trends and future conditions.
2. Judgemental forecasting : This is a forecasting technique
in which employees, customers, suppliers etc., serve as a
source of information regarding future trends. For
example, sales representatives may be asked to forecast
sales growth in various product categories based on their
interaction with customers. Survey instruments may be
mailed to customers, suppliers or trade associations to
obtain their judgments on specific trends.
3. Expert opinion : This is a non-quantitative technique in
which experts in a particular area attempt to forecast likely
developments. Knowledgeable people are selected and
asked to assign importance and probability rating to
various future developments. This type of forecast is based
on the ability of a knowledgeable person to construct
probable future developments on the interaction of key
variables. The delphi technique is one such technique.
4. Delphi Technique : This is a forecasting technique in

Strategic Management : 72 which the opinion of experts in the appropriate field are
obtained
about the probability of the occurrence of specified events. External Assessment
The responses of the experts are compiled and a summary
is sent to each expert. This process is repeated until
consensus is arrived at regarding the forecast of a NOTES
particular event.
5. Statistical modelling : It is a quantitative technique that
attempts to discover causal factors that link two or more-
time series together. They use different sets of equations.
Regression analysis and other econometric methods are
examples. Although very useful for grasping historical
trends, statistical modelling is based on historical data. As
the patterns of relationships change, the accuracy of the
forecast deteriorates.
6. Cross-impact Analysis : By this analysis, researchers
analyze and identify key trends that will impact all other
trends. The question is then put: “If event A occurs, what
will be the impact on all other trends”. The results are
used to build “domino chains”, with one event triggering
others.
7. Brainstorming : Brainstorming is a technique to generate
a number of alternatives by a group of 6 to 10 persons.
The basic ground rule is to propose ideas without first
mentally evaluating them. No criticism is allowed. Ideas
tend to build on previous ideas until a consensus is reached.
This is a good technique to create ideas.
8. Demand/Hazard forecasting : Researchers identify major
events that would greatly affect the firm. Each event is
rated for its convergence with several major trends taking
place in society and its appeal to a group of the public; the
Strategic Management : 73
higher the event’s convergence and appeal, the higher its
probability of occurring.
External Assessment
4.7 Summary
 External assessment is a step where a firm identifies
opportunities that could benefit it andthreats that it should
NOTES
avoid.
 It involves monitoring, evaluating, and disseminating of
information from the external and internal environments to
key people within the corporation.
 The nature and degree of competition in an industry hinge on
five forces, viz. the threat ofnew entrants, the bargaining
power of customers, the bargaining power of suppliers,
thethreat of substitute products or services and the jockeying
among current contestants.
 To establish a strategic agenda for dealing with these
contending
currents and to grow despite them, a company must
understand how they work in its industry and how they affect
the company in its particular situation.
 The process of conducting external environment assessment
starts with collating information and intelligence on factors
affecting the external environment.
 Industry analysis is a tool that facilitates a company’s
understanding of its position relativeto other companies that
produce similar products or services.
 Environmental analysis or scanning is the process of
monitoring
the events and evaluatingtrends in the external environment,
to identify both present and future opportunities andthreats
that may influence the firm’s ability to reach its goals.

4.8 Key Terms

Competition: Rivalry between two or more parties to achieve a
Strategic Management : 74
similar goal.
Environment: The totality of surrounding conditions.
Environmental Scanning: Process of gathering, analyzing, and External Assessment
dispensing information for tactical or strategic purposes.
Fragmented Industries: Consists of a large number of small or
medium-sized companies, none of which is in a position to NOTES
determine industry price.
Porters Five Forces: Named after Michael E. Porter, this model
identifies and analyzes competitive forces that shape every
industry, and helps determine an industry’s weaknesses and
strengths.
Switching Costs: One-time costs that a customer has to bear to
switch from one product to another.

4.9 Questions and Exercises

1. “The five forces model provides the rationale for increasing
or decreasing resources commitment”. Comment.
2. Are there any disadvantages in using Porter’s five forces
model? Elucidate the pros and cons of using the model.
3. “The five forces theory is a short-sighted theory”. Why/why
not?
4. Discuss Industry analysis using Porter’s five forces theory.
5. Present at least 7 points to highlight the importance of
industry analysis.
6. Do you think it is important to define an industry’s
boundaries? Why/why not?
7. Suppose a firm competes in the microcomputer industry.
Where in your opinion, the boundaries of this industry begin
and end?
8. Analyse the features that determine the strength of the
competitive forces operating in the industry.
Strategic Management : 75
9. “Each industry’s attractiveness or profitability potential is a
direct function of the interactions of various environmental
External Assessment forces that determine the nature of competition.” Discuss.
10. Is it feasible to create strategic group in any industry?
Explain the rationale behind creating these groups.
NOTES 11. Present a critical assessment of industry life cycle analysis.
12. These days, the industry uses a very popular term- hyper-
competition. Find out what it means and elucidate through
examples.

Check your progress

Fill in the blanks:
1. At the level of marketing strategy, a competitor has four
variables: ................, ................, ................ and ................
2. Competitors’ reactions can be studied at.................levels.
3. The five forces and strategic group models present a
................ picture of competition while emphasizing the role
of ................
4. The shakeout stage ends when the industry enters its
................ stage.
5. Under the shakeout stage, ................ are forced out, and a
small number of industry leaders emerge.
6. The ................ represents all the players in the game and
analyses how their interactions affect the firm’s ability to
generate and appropriate value.
7. Buyers, suppliers, new entrants and substitute products are all
.................forces.
8. A primary industry may be considered as a group of.............,
whereas a secondary industry includes ................
9. ................, ................ and ................ are essential for
conducting an environmental survey.
10. Analyzing a company’s industry begins with identifying the
Strategic Management : 76
industry’s dominant.................features.
 11. A.................industry is dominated by a small number of Publishing.
large
USA, 2003.
companies.
12. Defining an industry’s boundaries is incomplete without an
understanding of its..................attributes.
13. Firms that enjoy.................can charge lower prices than
their
competitors.
14. With Porter’s framework, a strong competitive force can be
regarded as a ................
15......................are the one-time costs that a customer has to bear
to switch from one product to another.
16. The new entrant’s need to secure..................for the product
can create a barrier to entry.

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

4.10 Further Reading and References

Books
 Gregory G. Dess, GT Lumpkin and ML Taylor, Strategic
Management–Creating Competitive Advantage, McGraw-
Hill, Irwin, NY, 2003.
 Michael Porter, How Competitive Forces Shape Strategy,
Harvard Business Review, 1979. John Parnell, Strategic
Management – Theory and Practice, Atomic Dog
 External Assessment

NOTES

Strategic Management : 77
External Assessment  Pearce JA and Robinson RB, Strategic Management, Mc
Graw Hill, NY, 2000.

 VS Ramaswamy and [Link], Strategic Planning,

NOTES
Macmillan, New Delhi, 1999.

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

APPRAISAL : THE
INTERNAL ASSESSMENT NOTES

1
5.0 Unit Objectives

5.1 Introduction

5.2 Importance of Internal Analysis

5.3 SWOT Analysis

5.3.1 Carrying out SWOT Analysis

5.3.2 Steps in SWOT Analysis

5.3.3 Critical Assessment of SWOT Analysis

5.3.4 Advantages and Limitations

5.4 Summary

5.5 Key Terms

5.6 Questions and Exercises

5.7 Further Reading and References

5.0 Unit Objectives

After studying this unit, you should be able to:

 State the importance of internal analysis

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

Strategic Management : 80
“organisational audit”, “internal corporate assessment” etc. Over the
years, research has shown that the overall strengths and weaknesses
of a firm’s resources and capabilities are more important for a
strategy than environmental factors. Even where the industry was
unattractive and generally unprofitable, firms that came out with
superior products enjoyed good profits.,Managers perform internal
analysis to identify the strengths and weaknesses of a firm’s resources
and capabilities. The basic purpose is to build on the strengths and
overcome the weaknesses in order to avail of the opportunities and
minimize the effects of threats. The ultimate aim is to gain and sustain
competitive advantage in the marketplace.

5.2 Importance of Internal Analysis

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

2. To exploit the opportunities that are in line with its capabilities

3. To correct important weaknesses

1. Opportunities: An opportunity is a major favourable situation in

a firm’s environment. Examples include market growth,
 Organisational Appraisal : Internal Assessment 1

NOTES
4. To defend against threats

[Link] assess capability gaps and take steps to enhance its

capabilities.

This exercise is also the starting point for developing the

competitive advantage required for the survival and growth of the firm.

5.3 SWOT Analysis

SWOT stands for strengths, weaknesses, opportunities and
threats. SWOT analysis is a widely used framework to summaries a
company’s situation or current position. Any company undertaking
strategic planning will have to carry out SWOT analysis: establishing its
current position in the light of its strengths, weaknesses, opportunities and
threats. Environmental and industry analyses provide information needed
to identify opportunities and threats, while internal analysis provides
information needed to identify strengths and weaknesses. These are the Check Your Progress
fundamental areas of focus in SWOT analysis. SWOT analysis stands at Analyses the role of
internal analysis in
the core of strategic management. It is important to note that strengths
strategy formulation?
and weaknesses are intrinsic (potential) value creating skills or assets or
Strategic Management : 81
the lack thereof, relative to competitive forces. Opportunities and threats,
however, are external factors that are not created by the company, but
emerge as a result of the competitive dynamics caused by ‘gaps’ or
‘crunches’ in the market. We had briefly mentioned about the meaning
of the terms opportunities, threats, strengths and weaknesses. We revisit
the same for purposes of SWOT analysis.
Organisational Appraisal
changes in competitive or regulatory framework, technological
: Internal Assessment 1
developments or demographic changes, increase in demand,
opportunity to introduce products in new markets, turning R&D

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

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

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

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

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

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

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

5.3.1 Carrying out SWOT Analysis

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

5.3.2 Steps in SWOT Analysis

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

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

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

3. Translation: Translate the conclusions into strategic actions by

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

NOTES In devising a SWOT analysis, there are several factors that

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

Probably the biggest mistake that is commonly made in

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

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

The four sets of strategies that emerge are:

SO Strategies : SO strategies are generated by thinking of ways

in which a company can use its strengths to take advantage of
opportunities. This is the most desirable and advantageous Check Your Progress

strategy as it seeks to mass up the firm’s strengths to exploit What points would you
keep in mind to
opportunities. For example, Hindustan Lever has been augmenting enhance the quality of
the material while
its strengths by taking over businesses in the food industry, to
devisinga SWOT
exploit the growing potential of the food business. Analysis?

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

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

WO Strategies : WO Strategies attempt to take advantage of

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

WT Strategies : WT Strategies are basically defensive strategies

and primarily aimed at minimizing weaknesses and avoiding
threats. For example, managerial weakness may be solved by change
of managerial personnel, training and development etc. Weakness
due to excess manpower may be addressed by restructuring,
downsizing, delayering and voluntary retirement schemes. External
threats may be met by joint ventures and other types of strategic
alliances. In some cases, an unprofitable business that cannot be
revived may be divested. Strategies which utilize a strength to take
advantage of an opportunity are generally referred toas “exploitative”
or “developmental strategies”. Strategies which use a strength to
eliminate a weakness may be referred to as “blocking strategies”.
Strategies which overcome a weakness to take advantage of an
opportunity or eliminate a threat may be referred to as “remedial
strategies”. The TOWS matrix is a very useful tool for generating a
series of alternative strategies that the decision-makers of the firm
might not otherwise have considered. It can be used for the
company as a whole or it can be used for a specific business unit
within a company. However, it may be noted that the TOWS matrix
Strategic Management : 86
is only one of many ways to generate alternative strategies.
5.3.3 Critical Assessment of SWOT Analysis matching
a firm’s
SWOT analysis is one of the most basic techniques for internal
analysing firm and industry conditions. It provides the “raw material” strengths

for analysing internal conditions as well as external conditions of a firm. and

weaknesse
SWOT analysis can be used in many ways to aid strategic analysis.
s with its
For example, it can be used for a systematic discussion of a firm’s

resources and basic alternatives that emerge from such an analysis.

Such a discussion is necessary because a strength to one firm may be

a weakness for another firm, and vice-versa. For example, increased

health consciousness of people is a threat to some firms (e.g.

tobacco) while it is an opportunity to others (e.g. health clubs).

According to Johnson and Sholes (2002), a SWOT analysis

summarises the key issues from the business environment and the

strategic capability of an organisation that impacts strategy

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

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

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

dealing with the changes taking place in the business environment. It

can also be used to assess whether there are opportunities to exploit

further the unique resources or core competencies of the

organisation. Overall, SWOT analysis helps focus discussion on

future choices and the extent to which the company is capable of

supporting its strategies.

5.3.4 Advantages and Limitations

Advantages
1. It is simple.
2. It portrays the essence of strategy formulation:
Organisational Appraisal : Internal Assessment 1

NOTES

Strategic Management : 87
Organisational Appraisal :
Internal Assessment 1 external opportunities and threats.

3. Together with other techniques like Value Chain

Analysis and RBV, SWOT analysis improves the quality
NOTES of internal analysis.
Limitations

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

dynamics of competitive environment.
2. SWOT emphasizes a single dimension of strategy (i.e.
strength or weakness) and ignores other factors needed
for competitive success.
3. A firm’s strengths do not necessarily help the firm
create value or competitive advantage.
4. SWOT’s focus on the external environment is too
narrow.

In spite of the above criticism and its limitations, SWOT

analysis is still a popular analytical tool used by most organisations. It is
definitely a useful aid in generating alternative strategies, through what
is called TOWS matrix.

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

resources and possessesinternal capabilities and core

competencies.

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

Strengths, Weaknesses,

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

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

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

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

5.6 Questions and Exercises

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

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

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

Answers:
1. strengths, weaknesses, opportunities, threats 2. opportunity

Strategic Management : 90 3. Strength 4. internal, external 5. SWOT 6. narrow 7. Internal

analysis
8. Threats 9. Translation 10. TOWS
 Organisational Appraisal :
5.7 Further Reading and References Internal Assessment 1

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

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

APPRAISAL: INTERNAL
ASSESSMENT 2 NOTES

6.0 Unit Objectives

6.1 Introduction

6.2 Strategy and Culture

6.3 Value Chain Analysis

6.3.1 Analysis

6.3.2 Conducting a Value Chain Analysis

6.3.3 Usefulness of the Value Chain Analysis

6.4 Organisational Capability Factors

6.4.1 Resources

6.4.2 Strategic Importance of Resources

6.4.3 Critical Success Factors

6.5 Benchmarking

6.6 Summary

6.7 Key Terms

6.8 Questions and Exercises

6.9 Further Reading and References

6.0 Unit Objectives

After studying this unit, you Should be able to:

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

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

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

6.2 Strategy and Culture

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

Although corporate cultures can be changed, it may often take

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

‘FIT’ between Strategy and Culture

A culture grounded in values, practices and behavioural norms

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

6.3 Value Chain Analysis

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

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

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

1. The added value that each part of the organisation

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

In a company with more than one product area, the analysis

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

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

1. Activities that differentiate the product

2. Activities that lower its costs

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

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

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

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

1. Primary activities

2. Support activities

Primary activities contribute to the physical creation of the product

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

Support activities include such activities as procurement, HR etc.

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

Primary Activities

Inbound Logistics : These activities focus on inputs. They

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

Operations : These include all activities associated with

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

NOTES They include advertising, promotion, sales force, channel

selection, channel relations and pricing.

Support Activities

Procurement :Activities associated with purchasing and

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

Porter refers to procurement as a secondary activity, although

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

Technology Development : Activities relating to product

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

Human Resource Management : Activities associated with

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

Firm Infrastructure : Activities relating to general

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

Johnson and Sholes (2002) observe that few organisations

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

6.3.2 Conducting a Value Chain Analysis

Value chain analysis involves the following steps.

Identify Activities

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

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

Allocate Costs

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

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

Identify the Activities that Differentiate the Firm

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

Examine the Value Chain

Once the value chain has been determined, managers need to

Strategic Management : 99
Organisational Appraisal
: Internal Assessment 2
identify the activities that are critical to buyer satisfaction and market
success. This is essential at this stage of the value chain analysis for the
following reasons:

NOTES 1. If the company focuses on low-cost leadership, then

managers should keep a strict vigil oncosts in each
activity. If the company focuses on differentiation,
advantage given by each activity must be carefully
evaluated.
2. The nature of value chain and the relative importance of
each activity within it, vary from industry to industry.
3. The relative importance of value chain can also vary by a
company’s position in a broader value system that
includes value chains of upstream suppliers and
downstream distributors and retailers.
4. The interrelationships among value-creating activities
also need to be evaluated.

The final basic consideration in applying value chain analysis is

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

1. Interrelationships among the activities within the firm.

Strategic Management : 100

2. Relationships among the activities within the firm and
with other organisations that are a part of the firm’s
expanded value chain.
6.3.3 Usefulness of the Value Chain Analysis Organisational Appraisal :
Internal Assessment 2

The value chain analysis is useful to recognize that individual

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

Analyzing the separate activities in the value chain helps

management to address the following issues:

1. Which activities are the most critical in reducing cost

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

Porter identified the following as the most important cost and

value drivers:
Cost Drivers

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

NOTES supplies reduces input costs)

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

Value Drivers

Value drivers are similar to cost drivers, but they relate to

other features (other than low price) valued by buyers. Identifying value
derivers comes from understanding customer requirements, which may
include:

1. Policy choices (choices such as product features,

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

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

Organisations capabilities lies in its resources. The resources

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

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

1. Physical resources include plant and machinery, land

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

NOTES Capabilities

Resources are not very productive on their own. They need

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

Core Competence

Superior performance does not merely come from resources

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

1. an activity or process that provides customer value in

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

Task Enlist at least five types of resources that all

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

1. Competence is something an organisation is good at

doing.

2. Core competence is a proficiently performed internal

activity.

3. Distinctive competence is an activity that a company

performs better than its rivals.

4. Distinctive competencies become the basis for

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

NOTES 1. Value: Does it provide competitive advantage?

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

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

that resource is considered a strength and a distinctive competence.

Using Resources to Gain Competitive Advantage: Grant proposes a

five-step resource based approach to strategy analysis.

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

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

6.4.2 Strategic Importance of Resources

Johnson and Sholes (2002 ) explain the strategic importance

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

them, strategic capability is the ability of an organisation to put its

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

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

Threshold Resources

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

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

Unique Resources

Unique resources are those resources that are critically

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

6.4.3 Critical Success Factors

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

Rockart (1979) has applied the CSFs approach to several

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

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

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

Rockart has also identified four major sources of CSFs:

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

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

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

NOTES
Types of Benchmarking

Benchmarking can be of following types:

1. Process benchmarking: the initiating firm focuses its

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

There is no single benchmarking process that has been

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

The 12 stage methodology consisted of:

1. Select subject ahead

2. Define the process

3. Identify potential partners

4. Identify data sources

5. Collect data and select partners Strategic Management : 111

6. Determine the gap

Organisational Appraisal :
Internal Assessment 2
7. Establish process differences

8. Target future performance

9. Communicate
NOTES
10. Adjust goal

11. Implement

12. Review/recalibrate.

The following is an example of a typical benchmarking methodology:

1. Identify your problem areas: Because benchmarking can

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

Strategic Management : 112 between towers, transfer of patients from surgery to

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

6.6 Summary
 Culture is a powerful component of an organisation’s

success, laying the tracks for strategyto roll out [Link] is the

foundation for profit, productivity and progress. While it can

accelerate getting tothe next level of performance, it can just Strategic Management : 113
as easily act as drag.
Organisational Appraisal :
 Culture-strategy Fit is a leading organisational culture
Internal Assessment 2
consulting firm conducting groundbreaking culture diagnosis
and change projects to help organisations leverage their

NOTES cultureto drive strategy and performance.

 It involves specifying the objective of the business venture or
project and identifying theinternal and external factors that
are favorable and unfavorable to achieving that objective.
 A value chain is a chain of [Link] pass through all
activities of the chain in order and at each activity the
productgains some value.
 The chain of activities gives the products more added value
than
the sum of added valuesof all activities.
 It is important not to mix the concept of the value chain with
the costs occurring throughout the activities.
 Benchmarking is an improvement tool whereby a company
measures its performance orprocess against other companies’
best practices, determines how those companies achieved
their performance [Link] uses the information
to improve its own performance.

6.7 Key Terms

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

Benchmarking: The concept of discovering what is the best performance

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

Cultural Fit: Compatibility of culture with other arenas.

Deculturation involves imposition of the acquiring firm’s culture

Strategic Management : 114 forcefully on the acquired firm.
 Integration involves merging the two cultures in such a way that Organisational Appraisal :
Internal Assessment 2
separate cultures of both firms are preserved in the resulting culture.

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

satisfy market demands.’ NOTES

6.8 Questions and Exercises

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

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

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

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

Books

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

Business Publications, Texas, 1984.

 Francis Cherunilam, Strategic Management, Himalaya

Publishing Home, Mumbai, 1998.

 Johnson Gerry and Sholes Kevan, Exploring Corporate

Strategy, 6th Edition, Pearson Education Ltd., 2002.

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

Strategic Management : 117

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

7.0 Unit Objectives

7.1 Introduction

7.2 Expansion Strategies

7.3 Retrenchment Strategies

7.3.1 Turnaround Strategy

7.3.2 Divestment

7.3.3 Bankruptcy

7.3.4 Liquidation

7.4 Combination Strategies

7.5 Internationalisation

7.6 Cooperation Strategies

7.6.1 Joint Ventures

7.6.2 Strategic Alliances

7.6.3 Consortia

7.7 Restructuring

7.8 Summary

7.9 Key Terms

7.10 Questions and Exercises

7.11 Further Reading and References

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

NOTES  Discuss the expansion strategies: concentration, integration and

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

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

Corporate strategy is thus concerned with two basic issues:

1. What businesses should a firm compete in?

2. How can these businesses be coordinated and managed

so that they create “Synergy.”
Strategic Management : 120
 Synergy means that the whole is greater than the sum of its Corporate Level
parts. In organisationalterms, synergy means that as separate departments Strategies

within an organisation co-operate andinteract, they become more

productive than if each were to act in isolation. In strategicmanagement,
NOTES
the corporate parent has to create synergy among the separate
businessunits by effectively coordinating their activities, so that the
corporate whole is greaterthan the sum of the independent units.
Synergy is said to exist for a multi-divisionalcorporation if the return
on investment (ROI) of each division is greater than what thereturn
would be if each division were an independent business.

7.2 Expansion Strategies

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

Reasons for Pursuing Growth Strategies

Firms generally pursue growth strategies for the following reasons:

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

achieve large-scale operations, whereby fixed costs
can be spread over a large volume of production.
2. To attract merit: Talented people prefer to work in
firms with growth.
3. To increase profits: In the long run, growth is
necessary for increasing profits of the organisation,
especially in the turbulent and hyper–competitive
environment.
4. To become a market leader: Growth allows firms to
Strategic Management :
reach leadership positions in themarket. Companies 121
such as
Corporate Level Reliance Industries, TISCO etc. reached commanding
Strategies
heightsdue to growth strategies.
5. To fulfill natural urge: A healthy firm normally has a

NOTES natural urge for growth. Growthopportunities provide

great stimulus to such urge. Further, in a dynamic world
characterizedby the growth of many firms around it, a
firm would have a natural urge for growth.
6. To ensure survival: Sometimes, growth is essential for
survival. In some cases, a firm maynot be able to survive
unless it has critical minimum level of business. Further, if
a firmdoes not grow when competitors are growing, it
may undermine its competitiveness.

Categories of Growth Strategies

Growth strategies can be divided into three broad categories:

1. Intensive Strategies

2. Integration Strategies

3. Diversification Strategies

Concentration Strategies

Without moving outside the organisation’s current range of products

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

2. Market development
NOTES
3. Product development

1. Market penetration: Market penetration seeks to increase

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

2. Market Development: Market development seeks to

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

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

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

(i) Regional expansion

(ii) National expansion

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

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

achieved through:

(i) Developing product versions to appeal to

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

Example: Hindustan Lever entered the low price

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

(i) New untapped or unsaturated markets exist

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

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

(v) The firm has resources for expanded

operations

3. Product Development: Product development seeks to

increase the market share by developing new or improved
products for present [Link] can be achieved through:

(a) Developing new product features

(b) Developing quality variations

(c) Developing additional models and sizes

(product proliferation)

Example: Hindustan Lever keeps on adding new

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

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

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

Integration basically means combining activities relating to the

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

Full integration: participating in all stages of the industry

value chain.

Partial integration: participating in selected stages of the

industry value chain.

A firm can pursue vertical integration by starting its own

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

1. Vertical integration and

2. Horizontal integration

Vertical Integration

As already explained above, vertical integration involves

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

1. Backward Integration: Backward integration involves

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

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

opening their own showrooms.

Advantages of Vertical Integration: The following are the advantages

of vertical integration:

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

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

1. Increased costs, expenses and capital requirements.

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

Disadvantages of Vertical Integration: The following are the disadvantages of

vertical integration

1. It boosts the firm’s capital investment.

2. It increases business risk.
3. It denies financial resources to more worthwhile pursuits.
4. It locks a firm into relying on its own in-house sources of
supply.
5. It poses all kinds of capacity-matching problems.
Strategic Management : 126
 6. It calls for radically different skills and capabilities, Corporate Level
which may be lacked by the manufacturer. Strategies

7. Outsourcing of component parts may be cheaper and

less complicated than in-house manufacturing.
NOTES
Most of the world’s automakers, despite their expertise in
automobile technology and manufacturing, strongly feel that
purchasing many of their key parts and components from
manufacturing specialists result in:

1. Higher quality

2. Lower costs

3. Greater design flexibility

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

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

1. Whether vertical integration can enhance the

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

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

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

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

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

1. It yields access to new markets.

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

1. A firm competes in a growing industry.

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

Diversification is the process of adding new businesses to the

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

off into the manufacturing of copying machines.

Types of Diversification: Broadly, there are two types of NOTES

diversification:

1. Concentric Diversification: Adding a new, but

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

2. Conglomerate diversification: Adding a new, but

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

Advantages

(a) Business risk is scattered over diverse industries.

(b) Financial resources are invested in industries

that offer the best profit prospects.

(c) Buying distressed businesses at a low price can

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

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

(b)The new business may not provide any

competitive advantage if it has no strategic fits.

Diversification into both Related and Unrelated Businesses: Some

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

1. Dominant business enterprises: In such enterprises, one

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

2. Narrowly diversified enterprise: These are enterprises that

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

3. Broadly diversified enterprises: These enterprises are

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

7.3 Retrenchment Strategies

They are the last resort strategies. A company may pursue
retrenchment strategies when it has a weak competitive position in
some or all of its product lines resulting in poor performance – sales
Strategic Management : 130
are down
and profits are dwindling. In an attempt to eliminate the weaknesses Corporate Level
that aredragging the company down, management may follow one or Strategies

more of the followingretrenchment strategies.

1. Turnaround NOTES

2. Divestment

3. Bankruptcy

4. Liquidation

7.3.1 Turnaround Strategy

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

When Turnaround becomes Necessary

Do companies turn sick overnight and qualify as potential

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

1. Decreasing market share : This is the most significant

symptom of a major sickness. A company which is losing its
market share to competition needs to sit up and take careful
Strategic Management : 131
note. Regular monitoring of market share helps companies to
keep a tag on
Corporate Level
themperformance in the market vis-à-vis their competitors.
Strategies
Any indication of declining market share should trigger off
immediate corrective action.
NOTES 2. Decreasing constant rupee sales : Sales figures, to be
meaningful, should be adjusted for inflation. If constant rupee
sales figures are showing a declining trend, then this is a
danger signal to watch out.

3. Decreasing profitability : Profit figures are a good indication

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

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

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

5. Restricted dividend policies : Dividends frequently missed or

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

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

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

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

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

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

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

9. Inflexible chief executives : A chief executive who is

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

10. Management succession problems : When nearly all the top

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

11. Unquestioning boards of directors : Directors, who have

family, social or business ties with the chief executive or have
served very long on the board, may no longer be objective
 Corporate Level
Strategies

NOTES

Strategic Management : 133

Corporate Level judgment. Thus, these directors serve limited purpose in
Strategies
terms of questioning or cautioning the CEO about his actions.

12. A management team unwilling to learn from its

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

Types of Turnaround Strategies

Slater has classified the turnaround strategies into two broad

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

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

1. Revenue-increasing strategies

2. Cost-cutting strategies

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

If the sick firm is operating substantially but not extremely

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

Turnaround Process

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

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

1. When a business cannot be turned around

2. When a business needs more resources than the

company can provide

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

performance

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

organisation

5. When a large amount of cash is required quickly

6. When government’s legal actions threaten the existence

of a business.

Reasons for Divestitures

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

a particular division within the company cannot be managed
profitably; it may think of selling the division to another
company. This does not mean the division itself is
unprofitable. The other firm with greater expertise in the line
of business could manage the division more profitably. This
means the division can be managed better by someone else
than the selling company.
Strategic Management : 136
2. Reverse synergy : Synergy refers to additional gains that can
be derived when two firms combine. When synergy exists,
the
combined entity is worth more than the sum of the parts valued Corporate Level
separately. In other words, 2 + 2 = 5. Reverse synergy exists Strategies

when the parts are worth more separately than they are within
the parent company’s corporate structure. In other words, 2 + NOTES
2
= 3. In such a case, an outside bidder might be able to pay more
for a division than what the division is worth to the parent
company.

3. Poor performance : Companies may want to divest divisions

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

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

because the post divestiture firm, as well as the divested
division, has greater access to capital markets. The combined
capital structure may not help the company to attract the
capital from the investors. Some investors are looking at steel
companies and others may be looking for cement companies.
Check Your Progress
These two groups of investors are not interested in investing
“Horizontal integration
in combined company, with cement and steel businesses due eliminates or reduces
competition”. Comment?
to the cyclical nature of businesses. So each group of
investors are interested in stand-alone cement or steel
companies. So divestitures may provide greater access to
capital markets for the two firms as separate companies rather
than the combined corporation.

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

cash inflows. The companies that are under financial distress
or in insolvency may be forced to sell profitable and valuable Strategic Management : 137

divisions to tide over the crisis.

Corporate Level 6. To release the managerial talent : Sometime the
Strategies
management may be overburdened with the management of
the conglomerate leading to inefficiency. So they sell one or

NOTES more divisions of the company. After the divestiture, the

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

7. To correct the mistakes committed in investment decisions:

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

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

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

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

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

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

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

Types of Divestitures

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

company distributes on a prorate basis the shares of the new
Strategic Management : 138
company to the shareholders of the parent company free of
cost.
There is no money transaction, subsidiary’s assets are not company may sell a
revalued, and transaction is treated as stock dividend. Both 100% interest in
the companies exist and carry on their businesses independently subsidiary company
after spin-off. During spin-off, a new company comes into or it may choose to
existence. remain

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

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

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

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

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

different form of spin-off and sell off. It resembles Initial
Public Offering (IPO) of some portion of equity stock of a
wholly owned subsidiary by the parent company. The parent
 Corporate Level
Strategies

NOTES

Strategic Management : 139

Corporate Level in the subsidiary’s line of business by selling only a partial
Strategies
interest (shares) and keeping the remaining percentage of
ownership. After the sale of shares to the public, the

NOTES subsidiary company’s shares will be listed and traded

separately in the capital market.

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

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

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

7.3.4 Liquidation
Liquidation occurs when an entire company is dissolved and
its assets are sold. It is a strategy of the last resort. When there are no
buyers for a business which wants to be sold, the company may be
wound up and its assets may be sold to satisfy debt obligations.
Liquidation becomes the inevitable strategy under the following
Strategic Management : 140 circumstances:

1. When an organisation has pursued both turnaround

strategy
and
divestitur
e
strategy,
butfailed.
 2. When an organisation’s only alternative is Corporate Level
bankruptcy. A company can legally declare bankruptcy Strategies

first and then wind up the company to raise needed

funds to pay debts.
NOTES
3. When the shareholders of a company can minimize
their losses by selling the assets of a business.

7.4 Combination Strategies

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

7.5 Internationalisation
When the focus of a business is its domestic operations, but a
portion of its activities are outside the home country, it is called an
“International Company”. In other words, an international company
is one that is primarily based in a single country but that acquires
some meaningful share of its resources or revenues from other
countries. For example, a small company engaged in exporting some
of its products beyond its home country, is called “international” in
its operations. Internationalisation involves creating an international
division and exporting the products through that division. The firm
Strategic Management : 141
really focuses on the domestic market, and exports what is demanded
abroad. All control
Corporate Level is retained at home office regarding product and marketing
Strategies
strategies. As a firm becomes more successful abroad, it might set up
manufacturing and marketing facilities in the foreign country, and allow
NOTES a certain degree of customization. Country units are allowed to make
some minor adaptations to products to suit local needs. But they
have far less independence and autonomy compared to multi-
domestic companies. All sources of core competencies are
centralized. The majority of large US multinationals pursued the
international strategy in the decades following World War II. These
companies centralized R&D and product development but established
manufacturing facilities as well as marketing divisions abroad.
Companies such as Mc Donald’s and Kellogg’s are examples of
firms that followed such a strategy in the beginning. Although these
companies do make some local adaptations, they are of a very
limited nature. With increasing pressure to reduce costs due to
global competition, especially from low-cost countries, the use of
this strategy has become limited.

The disadvantages of this strategy are:

1. By concentrating most of its activities in one

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

Exporting

This means selling the products in other countries through an

agent or a distributor. This choice offers avenues for larger firms to
begin their international expansion with a minimum investment.
Strategic Management : 142

There are merits and demerits.

Merits Corporate Level
Strategies
1. Less expensive

2. No need to set up manufacturing facilities abroad

NOTES
Demerits

1. Not suitable for bulky, perishable or fragile goods

2. Import duties make the product expensive

3. High transportation costs

4. Cannot avail lower production costs in host country

7.6 Cooperation Strategies

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

7.6.1 Joint Ventures

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

1. Improvement of efficiency

2. Access to knowledge Strategic Management : 143

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

NOTES Merits

1. Two partners bring complementary expertise to the new

venture

2. Both parties share capital and risks.

3. Helps to meet host country regulations

Demerits

1. Two partners may fail to get along

2. The firm has to share profits with the partner

3. Host country culture may pose problems

7.6.2 Strategic Alliances

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

7.6.3 Consortia Notes

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

1. Multipartner Consortia : These are multi-partner alliances

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

2. Cross - holding Consortia : These include large Japanese

Keiretsus (Sumitomo, Mitsubishi, and Mitsui) and Korean NOTES
Chaebols (Daewoo, LG, Hyundai, and Samsung). Two
important features of cross-holding consortia are building long-
term focus and gaining technological critical mass among
affiliated member companies.

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

Restructuring can involve changes in assets, capital structure

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

2. Capital restructuring involves changing the debt-equity mix

or the mix between different classes of debt or equity.

3. Management restructuring involves changes in the

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

7.8 Summary
 Strategy is the direction and scope of an organisation over the
long-term. Strategies achieve advantages for the organisation
through its configuration of resources within a challenging
environment, to meet the needs of markets and to fulfil
stakeholder expectations.
 Strategies exist at several levels in any organisation – ranging
from the overall business through to individuals working in it.
 Growth strategies are the most widely pursued corporate
[Link] moving outside the organisation’s current
range of products or services, it maybe possible to attract
customers by intensive advertising, and by realigning the
productand market options available to the organisation.
These strategies are generally referredto as intensification
Strategic Management : 146
or concentration strategies.
  There are three important intensive strategies, viz. Market Corporate Level
penetration, Marketdevelopment and Product development. Strategies

Integration basically means combining activities relating to

the present activity of a [Link] is basically of two NOTES
types, viz. vertical integration and horizontal integration.
 Diversification is the process of adding new businesses to the
existing businesses of the company.
 A company may pursue defense strategies when it has a
weak competitive position insome or all of its product lines
resulting in poor performance.
 Retrenchment strategies are last resort strategies. Companies
can use any of the fourretrenchment strategies- turnaround,
divestment, bankruptcy and liquidation.
 Firms can take the international route by exporting a part of
their produce to other nationsor by outsourcing a small
chunk of their work outside.
 Cooperative strategies such as strategic alliance and joint
ventures are a logical and timelyresponse to intense and
rapid changes in economic activity, technology and
globalisation.
 Restructuring is another means by which the corporate
office can add substantial value toa business. Restructuring can
involve changes in assets, capital structure or management.

7.9 Key Terms

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

7.10 Questions and Exercises

1. If a firm succeeds in making the customers to switch from
the competitor’s brands to the firm’s brands, while
maintaining its existing customers intact, there will be an
increase in the firm’s sales. Why/why not?
2. Explain the concept of product development. Under what
conditions, do you think it is feasible?
3. As a manager, in which situations would you apply vertical
integration and why?
4. “Horizontal integration eliminates or reduces competition”.
Comment
5. Discuss the concept of last resort strategies. Under what
conditions should they be applied?
6. “A firm is sick!” What do you mean by this statement? How
can you prevent this sickness?
7. Do you think that the turnaround process is difficult? Why/
Strategic Management : 148
why not?
 8. Suppose you are the business head of a firm which is in existing
deep financial trouble and is losing customers because of businesses of the
lack of proper services. In such a situation, what will you do company.
and how would you justify your actions?

Check your progress

Fill in the blanks:
1. The customer.....................defines the value proposition that
the organisation will apply to satisfy customers.
2. The....................focuses on all the activities and key
processes
required in order for the company to excel at providing the
value expected by the customers.
3. The ................... and ................... is the foundation of any
strategy and focuses on the intangible assets of an
organisation.
4 strategy implies continuing the current activities
of the firm without any significant change in direction.
5. A..........................strategy is a decision to do nothing new.
6.........................strategies are the most widely pursued corporate

strategies.
7.......................seeks to increase market share for existing
products
in the existing markets.
8. Market...........................seeks to increase market share by selling
the present products in new markets.
9 seeks to increase the market share by developing
new or improved products for present markets.
10......................increases the dependability of the supply and
quality
of raw materials.
11........................involves gaining ownership or increased control
over distributors or retailers.
12. ................... is the process of adding new businesses to the
 Corporate Level
Strategies

NOTES

Strategic Management : 149

 Corporate Level 13. By expanding into...................., the company can obtain new
Strategies
technologies and products, which can complement its present
businesses.
14. Competition as a reason of corporate.....................occurs in the
NOTES
form of product and/or price competition.

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

7.11 Further Reading and References

Books

 Adapted from Pearce JA and Robinson RB, Strategic

Management, McGraw Hill, NY, 2000.

 W. Chan Kim and Renee Mauborgne, Blue Ocean Strategy,

Harvard Business School Press, 2005.

 Wheelen Thomas L, David Hunger J, KrishRangarajan, Concepts

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

Strategic Management : 150

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

8.1 Introduction

8.2 Industry Structure

8.3 Positioning of the Firm

8.4 Generic Strategies

8.4.1 Risks in Competitive Strategies

8.4.2 Critical Assessment of Generic Strategies

8.4.3 Comment on Porter’s Generic Strategies

8.5 Business Tactics

8.6 Summary

8.7 Key Terms

8.8 Questions and Exercises

8.9 Further Reading and References

8.0 Unit Objectives

After studying this unit, you should be able to:

 Define industry structure

 Describe the positioning of firm
 Discuss the generic strategies
 Identify the business tactics

Strategic Management : 151

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

8.2 Industry Structure

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

and public policy.

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

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

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

These features determine the strength of the competitive

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

Identification of Segment Gaps and their Competitive Positioning

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

Identifying the Positioning within the Segment

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

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

 1. Perceptual mapping: In-depth qualitative research on actual Business Level
and prospective customerson the way they make their Strategies

decisions in the market place, e.g. strong versus weak,

cheapversus expensive, modern versus traditional.
NOTES
2. Positioning: Brands or products are then placed on the
map using the research dimensions.
3. Options development: Take existing and new products
and use their existing strengthsand weaknesses to devise
possible new positions on the map.
4. Testing: First with simple statements with customers,
then at a later stage in the marketplace.

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

experimentation with actual and potential customers.

8.4 Generic Strategies

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

NOTES ‘generic’ because they can be used in a variety of situations, across

diverse industries at various stages of development.

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

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

Strategic Management : 156

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

products:

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

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

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

1. Creative flair

NOTES 2. Engineering skills

3. R&D capabilities
4. Innovative marketing capabilities
5. Motivation for innovation
6. Corporate reputation for quality or technological capabilities.

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

Strategic Management : 158 new brand name has to be developed and supported. For these and
related reasons, it may be better to adopt a focus strategy.
 The focus strategy has two variants: to
1. Cost focus: A firm seeks to achieve low cost position buyers.
in its target segment only.
2. Differentiation focus: A firm seeks to differentiate its
products in its target segment only.

8.4.1 Risks in Competitive Strategies

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

1. Risks of cost leadership:

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

Proximity in differentiation means that companies that

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

2. Risks of differentiation:
(a) Differentiation may not be
sustained # If competitors
imitate.
# If features of differentiation become less important
 Business Level
Strategies

NOTES

Strategic Management : 159

Business Level
(b) Cost proximity is lost.
Strategies
(c) Firms that follow focus strategy may achieve even greater
differentiation in segments.

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

A company following a differentiation strategy must ensure

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

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

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

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

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

Strategic Management : 160 the advantage of focusing.

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

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

8.4.3 Comment on Porter’s Generic

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

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

NOTES will be able to catch up, even if this takes some years and is at
lower profit margins. But permanent price reductions by the
cost leader may have a damaging impact on the market
positioning of its product or service that will limit its
usefulness.

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

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

on this at all.
3. As markets fragment and product life cycles become shorter,
NOTES
the concept of broad targetsmay become increasingly
redundant.

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

1. Tactics are the tools used to achieve goals.

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

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

Diversification and Specialisation

Two different business strategies that deal with the scope of
a company are diversification and specialisation. A business can
diversify by simply expanding its products and services, such as
adding a new division, or through merging or acquiring
another [Link] is the opposite of diversification. It
refers to narrowing a business’s products tofocus on a more specific

Strategic Management : 164 type of product. By focusing limited resources on a smaller product
line,a business may hope to improve the quality of its remaining
products, or
simply divest itself ofan unprofitable product. Business Level
Strategies

Research and Development

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

Risk Management Notes

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

8.6 Summary
 Business conditions are always changing, so it’s a good
practice to periodically step backand take a hard look at the
business strategy and analyse its implementation.
 Business Strategy can be defined as a long-term approach to
implementing a firm’s businessplans to achieve its business
objectives.
 A business strategy addresses how the firm competes in a
market and how it attains and sustains competitive
advantage.
 The term “industry structure” refers to the number and size
distribution of firms in an industry. Strategic Management : 165

 The competitive position within the segment then needs to be

Business Level explored, because only thiswill show how the organisation
Strategies
will compete within the segment.
 Cost Leadership Strategy emphasises efficiency. By producing
NOTES high volumes of standardisedproducts, the firm hopes to take
advantage of economies of scale and experience curveeffects.
 The product is often a basic no-frills product that is produced
at a relatively low cost andmade available to a very large
customer base.
 Differentiation is aimed at the broad market that involves the
creation of a product or services that is perceived throughout
its industry as unique.
 Focus Strategy concentrates on a select few target markets and
is also called a segmentationstrategy or niche strategy.

8.7 Key Terms

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

8.8 Questions and Exercises

1. Which industry is Vodafone a part of? Identify the features
of that industry and comment on its status in India.
2. Critically analyse the benefits of positioning for a firm.
Strategic Management : 166
 3. Suppose you are the CEO of a cosmetic firm. Under what Business Level
situations would you choose a low-cost, differentiation, or Strategies

speed- based strategy?

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

Check your progress

Fill in the blanks:
1. ....................means the extent to which industry sales are
dominated by only a few firms.
2. Competitive positioning gives............................advantage to the
firms.
3 are the tools used for meeting the goals and
objectives as designed by the strategy.
4. A company focuses only the production of ladies shoes. This
is an example of............................
5. Each of these generic strategies has the potential to overcome
Strategic Management : 167
the....................of competition.
Business Level 6. A cost leadership strategy is likely to work better where the
Strategies
product is ..................
7. Compared with the low-cost leader, competitors will have

NOTES ...................costs.
8. The...................strategy selects a segment or group of
segments
in the industry and tailors its strategy to serve them to the
exclusion of others.
9. If the differentiation involves quality, it may not be credible
to offer .................. quality and.................. products under
the same brand name.
10. Hybrid strategies include a combination of ..................
strategies.

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

8.9 Further Reading and References

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

Strategic Management : 168

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

9.1 Introduction

9.2 Process for Strategic Choice

9.2.1 Focusing on a few Alternatives

9.2.2 Considering Selection Factors

9.2.3 Evaluating the Alternatives

9.2.4 Making the Actual Choice

9.3 Industry Analysis

9.4 Corporate Portfolio Analysis

9.4.1 Display Matrices

9.4.2 Balancing the Portfolio

9.4.3 Portfolio and other Analytical Models

9.5 Contingency Strategies

9.6 Summary

9.7 Key Terms

9.8 Questions and Exercises

9.9 Further Reading and References

Strategic Management : 169

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

NOTES  Describe the process for strategic choice

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

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

9.2 Process for Strategic Choice

According to Glueck and Jauch, “strategic choice is the

decision to select from among the alternatives considered the strategy

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

process consists of four distinct steps:

1. Focusing on a few alternatives.

2. Considering the selection factors.

3. Evaluating the alternatives.

Strategic Management :170 4. Making the actual choice.
 9.2.1 Focusing on a few Alternatives Strategic Analysis
and Choice
Strategists never consider all feasible options that could
benefit the firm because there are innumerable options. So
strategists should narrow down the choice to a reasonable number of NOTES
alternatives. But it is still difficult to tell what that reasonable number
is. For deciding on a reasonable number of alternatives, we can
make use of the following concepts:

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

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

Check Your Progress

9.2.2 Considering Selection Factors
Conduct an industry
The concepts of Gap Analysis and Business definition would analysis for the Indian
help the strategist to identify a few workable alternatives. These automobile industry?

must be analysed further against a set of selection criteria. Selection

factors are the criteria against which the alternative strategies are
evaluated. These selection factors consist of:

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

BCG matrix, GE matrix etc. and are hard facts or data used
to facilitate a strategic choice. They are also called
Strategic Management : 171
rational,
Strategic Analysis
normative or prescriptive factors.
and Choice
2. Subjective factors : on the other hand, are based on one’s
personal judgment or descriptive factors such as consistency,
NOTES feasibility, etc. which are discussed in the previous unit.

9.2.3 Evaluating the Alternatives

After narrowing down the alternative strategies to a few
alternatives, each alternative has to be evaluated for its suitability to
achieve the organisational objectives. Evaluation of strategic alternatives
basically involve bringing together the results of the analysis carried
out on the basis of objective and subjective criteria.

9.2.4 Making the Actual Choice

An evaluation of alternative strategies leads to a clear assessment
of which alternative is most suitable to achieve the organisational
goals. The final step, therefore, is to make the actual choice. One or
more strategies have to be chosen for implementation. Besides the
chosen strategies, some contingency strategies should also be worked
out to meet any eventualities. In both the above two steps, a number of
portfolio analyses like BCG, nine–cell matrix etc., can be useful.

9.3 Industry Analysis

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

The importance of industry analysis can thus be summarised

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

9.4 Corporate Portfolio Analysis

Many companies offer more than one product, and serve
more than one customer. They have a portfolio (i.e. a basket) of
products. This is a good strategy because a firm which is dependent
on one product or customer runs immense risk. Decisions on
strategy, therefore, generally involve a range of products in a range
 Strategic Analysis
and Choice

NOTES

Strategic Management : 173

Strategic Analysis Portfolio analysis is an analytical tool which views a corporation as
and Choice
a basket or portfolio of products or business units to be managed
for the best possible returns, and help a corporate to build a multi-

NOTES business strategy. When an organisation has several products in its

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

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

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

The aim of portfolio analysis is:

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

9.4.1 Display Matrices

“Display matrices” are simple frameworks in which
products or business units are displayed as a series of investments
from which top management expects a profitable return. It charts and
characterises different products or businesses in the organisation’s
Strategic Management : 174
portfolio of investments in such a way that top management
constantly juggles to
ensure the best returns from them. As already stated, key purpose of Strategic Analysis
portfolio models is to assist in achieving a balanced portfolio of and Choice

businesses. This means that portfolio should consist of those businesses

whose profitability, growth, cash flow and risk elements would
NOTES
complement each other, and add up to a satisfactory overall
corporate performance. Imbalance in portfolio, for example, could be
caused either by excessive cash generation with too few growth
opportunities or by insufficient cash generation to fund the growth
requirements of other businesses in the portfolio.

9.4.2 Balancing the Portfolio

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

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

maintain the overall profitabilityof the corporation, even
though some of the businesses are loss making. This is ensured
through balancing investments.
2. Cash flow: A growing firm may be profitable, but it will
also require additional cash outflows for investment
requirements. Mature businesses, though less profitable, do
not require much of investments though they may not be net
cash generators. Thus, portfolio analysis must balance different
businesses, which together must give a comfortable
overallcash flow position in harmony with the desired
strategy of the company.
3. Growth: All businesses or products go through the life
cycle of introduction, growth, maturity and decline stages. If
a company depends on one product alone, it would face
problems in the declining stage of the product. It may be too
Strategic Management : 175
late to start a new product at this stage because of the time
lag involved in
Strategic Analysis waiting till it achieves its growth rate. It is therefore better to
and Choice
match different businesses at different stages in their life cycles,
to achieve stability which is sometimes called “extended

NOTES corporate immortality”. Thus the balancing of the portfolio

implies that though individual businesses grow, mature and
decline, yet the company continues to grow.
4. Risk: Another major objective of portfolio analysis is to
reduce the risk due to economic trends and market forces in a
country. The aim is to put together diverse businesses with
different or even opposite market forces to ensure a stable and
smoother financial performance of the overall corporation.

9.4.3 Portfolio and other Analytical Models

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

BCG Matrix
The BCG matrix was developed by the Boston Consultancy
group in 1970s. It is also called the “Growth share matrix”.
This is the most popular and the simplest matrix to describe a
corporation’s portfolio of businesses or products. BCG matrix
is based on the premise that majority of the companies carry out
multiple business activities in a number of different product-
Strategic Management : 176
market segments.
Together, these different businesses form the business Strategic Analysis
portfolio of the company, which need to be balanced for and Choice

overall profitability of the company. To ensure long-term

success, a company’s business portfolio should consist of both
NOTES
high-growth products in need of cash inputs and low-growth
products that generate excess cash. The BCG matrix helps to
determine priorities in a product portfolio. Its basic purpose
is to invest where there is growth from which the firm can
benefit, and divest those businesses that havelow market
share and low growth prospects. Each of the products or
business units is plotted on a two-dimensional matrix
consisting of :
1. Relative market share
2. Market growth rate.

Relative Market Share: Relative market share is defined as

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

The relative market share reflects the firm’s capacity to

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

NOTES expand its operations. It makes it easier for the company to

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

Building the BCG Matrix

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

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

Analysis of BCG Matrix

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

Stars (High Growth, High Market Share)

Stars are products that enjoy a relatively high market share in a
strongly growing market. They are (potentially) profitable
and may grow further to become an important product or
category for the company. The firm should focus on and Check Your Progress

invest in these products or business units. The general Analyse the main
advantages of portfolio
features of stars are: analysis? Why it is a
1. High growth rate means they need heavy investment good option for
multiproduct or ganisa-
2. High market share means they have economies of tions?
scale and generate large Amounts......of cash
3. But they need more cash than they generate.

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

NOTES elsewhere.

Cash Cows (Low Growth, High Market Share)

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

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

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

Question Marks (High Growth, Low Market Share)

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

1. Their cash needs are high

2. But their cash generation is low
NOTES
3. Organisation must decide whether to strengthen
them or sell them.

Dogs (Low Growth, Low Market Share)

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

Turnaround can be one of the strategies to pursue because

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

Ge Nine Cell Matrix

This matrix was developed in 1970s by the General Electric
Company with the assistance of the consulting firm,
McKinsey & Co., USA. This is also called GE Multifactor
Portfolio matrix. The GE matrix has been developed to
Strategic Management : 181
overcome the obvious limitations of BCG matrix. This
matrix consists of nine cells
Strategic Analysis (3×3) based on two key variables:
and Choice
1. Business strength; and
2. Industry attractiveness.
NOTES The horizontal axis represents “business strength” and the
“vertical axis represents”, “industry attractiveness”.
The business strength is measured by considering such
factors as:
1. Relative market share
2. Profit margins
3. Ability to compete on price and quality
4. Knowledge of customer and market
5. Competitive strengths and weaknesses
6. Technological capacity
7. Calibre of management
Industry attractiveness is measured considering such
factors as:
1. Market size and growth rate
2. Industry profit margin
3. Competitive intensity
4. Economies of scale
5. Technology
6. Social, environmental, legal and human aspects

The individual product-lines or business units are plotted as

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

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

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

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

NOTES

Strategic Management : 183

Strategic Analysis Custodial
and Choice
Here both competitive capabilities and business prospects
are unattractive or average. Bear with the situation with a
NOTES little bit of help from the other product divisions or get out
of the SBU so as to focus more on other attractive
businesses.

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

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

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

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

Arthur D Little Portfolio Matrix (ADL)

Strategic Management : 184 Arthur D Little Company’s matrix links the stages of the
product life cycle with the business strength. On the vertical
axis, businesses are classified with respect to their business
strength
as weak, tenable, favoured, strong or dominant. Along the Strategic Analysis
horizontal axis, four steps in the product life cycle, i.e. and Choice

embryonic, growth, mature and decline are marked.

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

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

NOTES 4. Competitive strategies

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

The firm can adopt any of the aggressive growth strategies

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

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

Defensive Quadrant
When the directional vector falls in the “defensive
quadrant”, it suggests that the firm should focus on
rectifying internal weaknesses and external threats, through

Strategic Management : 186 defensive strategies. Defensive strategies or retrenchment

strategies include
turnaround, divestiture, bankruptcy or liquidation. Strategic Analysis
Competitive Quadrant and Choice

When a directional vector falls in the “competitive

quadrant”, the firm should follow competitive strategies,
NOTES
which include backward, forward, and horizontal
integration, market penetration; market development,
product development, joint ventures and strategic alliances.

Quantitative Strategic Planning Matrix (QSPM)

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

The QSPM is a tool that allows strategists to evaluate

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

The six steps required to develop a QSPM are:

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

NOTES wants to pursue.

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

9.5 Contingency Strategies

Strategic choice is made on the basis of certain assumptions
and conditions. If the conditions change drastically, the chosen
strategies may have to be discarded altogether. If they are not too
radical, the strategies may have to be modified suitably. But
changes do not occur in a sequential order, nor do they give any
impending warnings. They surface suddenly leaving deep scars on
the faces of managers—if they are unprepared. To be on the safe
side, strategists always keep contingency strategies ready. Such
contingency strategies are formulated in advance to take care of
unknown events and unexpected challengers. As rightly
summarised by Peter Drucker, successful managers do not wait for
future. They make the future through their proactive planning and
advanced preparation. They introduce original action by removing

Strategic Management : 188 present difficulties, anticipate future problems, change the goals to
suit internal and external changes,
experiment with creative ideas and take initiative, attempt to shape Strategic Analysis
the future and create a more desirable environment. and Choice

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

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

9.6 Summary
 Strategic choice is the decision to select from among the
alternatives considered, the strategy which will best meet
the enterprise objectives.
 This decision-making processconsists of four distinct steps:
Focusing on a few alternatives. Considering the selection
factors. Evaluating the alternatives. Making the actual
choice.
 Strategic analysis framework consists of three stages: Input
stage, Matching stage and Decision stage
 The basic purpose of industry analysis is to assess the
strengths and weaknesses of a firm relative to its
competitors in the industry.
 Portfolio analysis is an analytical tool which views a
corporation as a basket or portfolio of products or business
units to be managed for the best possible returns, and help a
corporate to build a multi-business strategy.
Strategic Management : 189
 Various matrices are used under this approach.
Strategic Analysis
 Though the portfolio approaches have limitations, but all
and Choice
these limitations can be overcomethrough effective strategy
development and meticulous planning.
NOTES  While the core competence concept appealed powerfully to
companies disillusioned withdiversification, it did not offer any
practical guidelines for developing corporate-levelstrategy.
 Contingency plans are organised and coordinated set of steps
to be taken if an emergencyor disaster (fire, hurricane,
injury, robbery, etc.) strikes.

9.7 Key Terms

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

Display Matrices: Frameworks in which products or business units

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

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

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

mix of business in terms of both individual and collective
contributions to strategic goals.

Relative Market Share: The ratio of the market share of the

concerned product or business unit in the industry divided by the
share of the market leader.

Strategic Choice: Selection of a strategy that will best meet the

firm’s objectives.
Strategic Management : 190
 Strategic Analysis
9.8 Questions and Exercises and Choice

1. Suppose you are the head of a garments making firm that

has just started its operations in India. Discuss the process NOTES
of strategic choice that you are most likely to follow.

2. Conduct an industry analysis for the Indian automobile

industry.
3. Analyse the main advantages of portfolio analysis? Why it is
a good option for multiproduct organisations?
4. Through examples, prove that some of the underlying
assumptions of the BCG matrix may not hold good for some
businesses.
5. Compare and contrast the General Electric Grid and the
BCG Matrix?
6. Do you think, BCG Matrix has limited application? Justify your
answer.
7. Though BCG matrix can be very helpful in forcing decisions
in managing a portfolio of products, it cannot be employed
as the sole means of determining strategies for a portfolio of
products. Do you agree with this statement or not? Why?
8. On the basis of GE Matrix, make an analysis of banking
company of your choice.
9. Analyse the main issues which have to be taken care of
while formulating a multi business strategy.
10. Do you think it is possible to sustain over a long run without
formulating multi business strategy? Why/ why not?

Check your progress

Fill in the blanks:
1. The balancing of the portfolio implies that though individual
businesses grow, mature and decline, yet the company
Strategic Management : 191
continues to .................. .
Strategic Analysis
and Choice 2. The GE matrix has been developed to overcome the obvious
limitations of .................
3. In GE Matrix, the horizontal axis represents...................and
NOTES
the vertical axis represents .................
4. GE matrix is also called...................strategy matrix.
5. Directional Policy Matrix (DPM) was developed by
.................
6. Arthur D Little Company’s matrix links the stages of the
product life cycle with the .................
7. On the vertical axis in Arthur D Little Company’s matrix,
businesses are classified with respect to their business
strength as ................., ................., .................,............or
.................
8. The axes of the space matrix represent two internal
dimensions, namely, ................. and .................
9. The axes of the space matrix represent two external
dimensions, namely, ................. and .................
10. BCG matrix is also called the .................
11. The BCG matrix helps to determine...................in a product
portfolio.
12. A high growth rate enables the company to....................its
operations.

Answers:
1. grow 2. BCG matrix 3. business strength, industry attractiveness
4. Stoplight 5. Shell Chemicals, UK 6. business strength 7. weak,
tenable, favoured, strong, dominant 8. financial strength,
competitive advantage 9. environmental stability, industry
Strategic Management : 192
strengths 10. Growth share matrix 11. Priorities 12. Expand
 Strategic Analysis
9.9 Further Reading and References and Choice

Books
 Richard Lynch, Corporate Strategy, Prentice Hall, Pearson NOTES
Education Ltd., UK, 2006.
 [Link], Strategic Management, Prentice Hall of India,
New Delhi, 2005.
 Online links [Link]/Lessons/lesson_a_d_little
 [Link]/strategy/matrix/bcg
 [Link]/methods_ge_mckinsey

Strategic Management : 193

Strategic Management : 194
 Strategy
Implementation
UNIT 10: STRATEGY
IMPLEMENTATION NOTES

10.0 Unit Objectives

10.1 Introduction

10.2 Activating Strategies

10.3 Nature of Strategy Implementation

10.4 Barriers and Issues in Strategy Implementation

10.5 Model for Strategy Implementation

10.6 Resource Allocation

10.6.1 Importance of Resource Allocation

10.6.2 Managing Resource Conflict

10.6.3 Criteria for Resource Allocation Process

10.6.4 Factors affecting Resource Allocation

10.6.5 Difficulties in Resource Allocation

10.7 Summary

10.8 Key Terms

10.9 Questions and Exercises

10.10 Further Reading and References

Strategic Management : 195

Strategy
Implementation 10.0 Unit Objectives
After studying this unit, you should be able to:
 Explain how strategies are activated
NOTES
 State the nature and barriers in strategy implementation
 Discuss the model of strategy implementation
 Describe the concept of resource allocation

10.1 Introduction
Strategy implementation is the process of putting
organisation’s various strategies into action by setting annual or short-
term objectives, allocating resources, developing programmes,
policies, structures, functional strategies etc. Even the best strategic
plan will be useless unless it is implemented properly. The strategy
implementation is, therefore, the most difficult element of the strategic
management process. This is so because there has to be a “fit”
between the strategy and the organisation.

10.2 Activating Strategies

There is no guarantee that a well designed strategy is likely to
be approved and implemented automatically. The strategic leader
must, therefore, defend the strategy from every angle, communicate
how the strategy when implemented would benefit the whole
organisation and secure the wholehearted support of employees
working at various levels. To keep things on track, he can list out
priorities, programme implementation process, budgets, etc. on paper
so that nothing is left to chance. While giving a concrete shape to the
strategy, he should also take note of regulatory mechanisms that
govern business activity and see that everything is in order. Some of
the important things to be kept in mind are listed below:
Strategic Management : 196
1. Formation of a company: This must be in line with Strategy
provisions of the Companies Act, 1956, covering issues such Implementation

as formation of a company, its registration, obtaining suitable

licenses before commencing operations, raising funds from
NOTES
various sources in accordance with the provisions of SEBI
Act, 1992.
2. Operations of a company: The company must compete in
a fair way and earn the profits through legally blessed routes
only observing the (a) provisions of competition law;
(b)Import/ export restrictions, (c) FERA regulations (FEMA
regulations, 2000); (d) Patent, trademark, copyright (Indian
Patents Act 1995, The Trade and Merchandise Marks Act
1958, The Copyrights Act 1957 etc.) stipulations; (e) Labour
Laws (regarding employment of women, children, payment of
wages, providing welfare amenities, keeping healthy industrial
relations etc.); (f) environmental protection (The Environment
Protection Act 1986), (g) pollution control requirements; (h)
consumer protection measures etc.
3. Winding up operations: Even when the company decides
to get out of a venture/business, the rules of the game need to
be followed scrupulously (whether in offering golden
handshake to employees or asking all the employees to quit Check Your Progress
in one go). After the institutionalisation of strategy in the “Strategic decisions to
be communicated and
above manner, action plans could be formulated. These are
understood throughout
basically functional level strategies undertaken at the the organisation”.
Elucidate?
departmental level and usually deal with operational aspects
of a strategy. The action plans, however, must try to translate
the overall strategic plan in letter and spirit without any
deviations. Issues like who will do what, what kind of support
is required at various stages, what kind of privities have to be
fixed while implementing active plans, how does a particular
Strategic Management : 197
active plan contribute to the broad objectives of the strategy
etc. must also be carefully looked into. Once the
Strategy action plans are ready, the strategist must resolve issues relating
Implementation
to allocation of scarce resources over the entire organisation.

NOTES 10.3 Nature of Strategy Implementation

A successful strategy formulation does not guarantee
successful strategy implementation. It affects an organisation from top
to bottom; it affects all divisional and functional areas of business. It
requires the right alignment between the strategy and various
activities, processes within the organisation. The complexities in the
task of implementation arise from a number of organisational
adjustments that are required over an extended period of time and the
need to match them all to the strategy. Key people need to be added or
reassigned, resources have to be mobilised and allocated, functional
strategies and policies are to be designed, organisational structure may
have to be changed, a strategy- supportive culture may have to be
developed, reward and incentive plans are to be revised and if
necessary, restructuring, re-engineering and redesigning becomes
imperative. In short, the difficulties in affecting the organisational
adjustments arise from the tasks associated with change. The success
of strategy implementation, to a large extent, therefore, depends on the
way the task of change management is carried out.

10.4 Barriers and Issues in Strategy

Implem- entation
Management must keep in mind the following key issues that
arise in implementing strategy and how empowering systems might
relate to such issues.

1. Time Horizon: Such systems have both long-term and

short- term dimensions. For example, rewards like
Strategic Management : 198
productivity bonus should be based on quantitative measures of
performance related
to the short-term. On the other hand, it is appropriate to link Strategy
long-term rewards with qualitative measures and a few relevant Implementation

quantitative measures.
2. Risk Considerations: When risk-prone behaviour is
NOTES
desired, qualitative measures of performance may be more
beneficial, for example, rewards like bonus or stock
options. This is because quantitative measures may lead to
risk-averse behaviour to avoid failure rather than risk prone
behaviour to achieve results.
3. Bases of Individual Rewards: Reward systems should be
linked to an individual’s capability,effort and job
satisfaction. If rewards are geared to only one aspect, it may
have a negativeeffect on performance in other aspects.
4. Bases of Group Rewards: An important issue in reward
systems is whether to haveindividual rewards or group rewards.
Rewarding individuals for effort and performance may be
difficult unless the organisational structure permits
individual performance to be isolated from that of others.
Thus, for example, with respect to managerial contribution
to corporate performance, individual rewards may be
beneficial and appropriate because individual’s contribution
is relatively independent of others. On the other hand, if
individual’s contributions are relatively interdependent, it
would be appropriate to adopt schemes based on group
performance. Again, rewarding individuals may be
necessary where entrepreneurial or creative behaviours are
sought to be encouraged. On the contrary, if greater co-
operation and team work is sought to be rewarded, group
reward schemes would be more desirable.
5. Corporate and SBU Perspectives: In multi-divisional
organisations, reward systems with a balanced approach
towards corporate interests and the interests of the Strategic Strategic Management : 199
Strategy Business Units (SBUs) should be designed, where business
Implementation
units have greater autonomy and independence. Likewise, if
the SBUs are not likely to influence corporate performance,

NOTES unit-based reward schemes would be more beneficial. But in

the case of directors andgeneral managers, placed in the
units, who have dual responsibility of achieving unit aswell
as corporate objectives, due care must be taken to design
balanced empoweringenvironment.

10.5 Model for Strategy Implementation

According to Steiner and Miner, “the implementation of
policies and strategies is concerned with the design and management
of systems to achieve the best integration of people, structures,
processes and resources in reaching organisational purposes”.
Implementation of strategy therefore involves a number of
interrelated decisions, choices, and a broad range of activities. It
requires an integration of people, structures, processes etc. Mc
Kinsey’s 7-S model is good at capturing the importance of all these
elements in the implementation of strategy. The 7-S framework was
developed in 1970s by the well-known consultancy firm, the Mc
Kinsey Company of the United States. The 7-S framework is
illustrated :
 Strategy
 Shared
 Values
 Structure
 Systems
 Staff
 Skills Style
The purpose of the model is to show the interrelationship
between different elements of an organisation, and the need to bring
Strategic Management : 200
them together.
7-S Framework Strategy
Implementation
This framework basically deals with organisational change.
The main thrust of change is not connected only with the
organisation’s strategy. It has to be understood by the complex
NOTES
relationships that exist between strategy, structure, systems, style,
staff, skills and super- ordinategoals. These are called the 7-S of the
organisation.

The 7-S framework suggests that there are several factors that
influence an organisation’s ability to change. The variables involved are
interconnected so that altering one element may wellimpact other
connected elements. Hence, significant changes cannot be achieved
in any variablewithout making changes in all the variables. There is
no starting point or implied hierarchy inthe shape of the diagram, so
it is not obvious which of the 7 factors would be the driving forcein
changing a particular organisation at a particular point of time. All
the elements are equallyimportant. The critical variables of change
could be different across organisations. They couldalso be different
in the same organisation. Fundamentally, the framework makes the
point that effective strategy implementation is more than an
individual subject, but is coupled with skills, styles, structures,
systems, staff and super- ordinate goals.

Super-ordinate Goals: “Super-ordinate goals” mean the

“goals of a higher order which express the values, vision and
mission that senior management brings to the organisation”.
These can be considered as the fundamental ideas around
which a business is built. Hence, theyrepresent the main
values and aspirations of an organisation. They are the broad
notions offuture direction. They can be considered to be
equivalent to “organisational purposes”.

Strategic Management : 201

Structure: “Structure” means the organisational structure of
the
Strategy company. The design of organisational structure is a critical
Implementation
task of top management. Organisational structure refers tothe
relatively more durable organisational arrangements and

NOTES relationships. It prescribes the formal relationships among

various positions and activities, communication channels, roles
to be performed by various members of an organisation.

Organisational structure performs four major functions:

1. It reduces external uncertainty.
2. It reduces internal uncertainty due to variable, unpredictable
and random human behaviour.
3. It provides a wide variety of devices like departm-
entalization, specialization, division oflabour,
delegation of authority etc.
4. It helps in coordinating various activities of the organisation
and focus on its objectives.

Organisational structure must be designed in accordance with

the needs of the strategy. According to Chandler, structure must
follow strategy. In other words, changes in strategy must be
followed by changes in organisational structure. According to
McKinsey, the relationship between strategy and structure,
though important, rarely provides unique structural solutions.
Quite often the main problem in strategy relates to its
execution.

Systems: “Systems” mean the procedures that make the

organisation work. They include the rules, regulations and
procedures, both formal and informal, that complement the
organisational structure. Systems include production planning and
control systems, cost accounting procedures, capital budgeting
Strategic Management : 202 systems, performance evaluation systems etc. Often, changes in
strategy require changes in systems.
Style: “Style” means the way the company conducts its business. Strategy
Top managers in organisations can use style to bring about Implementation

change. Organisations differ from each other in their “styles”

of working. The style of an organisation, according to the
NOTES
McKinsey framework, becomes evident through the patterns
of actions taken by the top management team over a period
of time. Thus, an important part of managing change is
establishing and nurturing a good ‘fit’ between culture and
strategy.

Staff: “Staff” refers to the pool of people who need to be

developed, challenged and encouraged. It should be ensured
that the staff has the potential to contribute to the
achievement of goals.

Three important aspects about staff are:

1. Selecting meritorious people for specific
organisational positions.
2. Developing abilities and skills in them, to take up
challenging assignments.
3. Motivating them to give their best to achieve
strategic goals.

Skills: “Skills” are the most crucial attributes or capabilities

of an organisation. Skills in the 7-S framework can be
considered as an equivalent of “distinctive competencies”.

For example : Hindustan Lever is known for its marketing

skills, TELCO for its engineering skills, IBM for its customer
service, Du Pont for its research and development skills and
Sony for its new product development skills. Skills are
developed over a period of time and are a result of a number
Strategic Management : 203
offactors. Hence, to implement a new strategy, it is necessary
to build new skills.
Strategy
Strategy: “Strategy” is the long-term direction and scope of
Implementation
an organisation. It is the route that the company has chosen
to achieve competitive success.

NOTES
Alignment of the Framework
Successful implementation of strategy requires the right
alignment of different elements within the organisation. The
Mc Kinsey consultants call strategy, structure, and systems
as the “hard elements” of the organisation and the other 4 Ss
i.e. style, skills, staff and super-ordinate goals as the “soft
elements” of the organisation. The hard elements are more
tangible and definite, and so they are often the ones that gain
the greater attention, however, the soft elements are equally
important, even if they are less easy to measure, assess and
plan.

10.6 Resource Allocation

Most strategies need resources to be allocated to them if they
are to be implemented successfully. Let us examine some special
circumstances that may affect the allocation of resources. Resource
allocation deals with the procurement and commitment of financial,
physical and human resources to strategic tasks for achievement of
organisational objectives. This involves the process of providing
resources to particular business units, divisions, functions etc for the
purpose of implementing strategies. All organisations have at least
five types of resources:

1. Physical Resources
2. Financial Resources
3. Human Resources

Strategic Management : 204

4. Technological Resources
5. Intellectual Resources
 These resources may already exist in the organisation or Strategy
may have to be acquired. Resource allocation decisions are very Implementation

critical in that they set the operative strategy for the firm. Resource
allocation decisions about how much to invest in which areas of
NOTES
business reinforce the strategy and commit the organisation to the
chosen strategy.

10.6.1 Importance of Resource Allocation

A company’s ability to acquire sufficient resources needed
to support new strategic initiatives and steer them to the
appropriate organisational units has a major impact on the strategy
implementation process. Too little funding arising from constrained
financial resources or from sluggish management action slows
progress and impedes the efforts of organisational units to execute
their part of the strategic plan effectively. At the same time, too
much funding wastes organisational resources and reduces
financialperformance. Both these extremes emphasize the need for
managers to be careful about resource allocation. Resource allocation
becomes a critically important exercise when there are majorshifts
from the past strategies in terms of product/ market scope. For
example, if the firm’sstrategy is expansion in one line, withdrawal
from another and stability in the rest of theproducts, then greater Check Your Progress
resources will have to flow to the first and lesser to the second and Why is it said that using
thethird. Similarly, if the strategy is to develop competitive edge a formula approach in
resource allocation may
through product development, greater resources will have to be be counterproductive.
committed to R&D. Resource allocation is a powerful means of Discuss with reasons
accompanied with
communicating the strategy in the organisation as itgives the examples?
signals to all concerned. It will demonstrate what strategy is really
in [Link] allocation decisions should be taken
judiciously because using a formula approach (i.e. allocating funds as
a percentage of sales or profits), may be inappropriate and
Strategic Management : 205
[Link] should be taken to see that the resources are
not allocated or withdrawn because of easy availability or paucity.
Strategy
Implementation 10.6.2 Managing Resource Conflict
The common approach to resource allocation is through
budgetary system. There are however, many other tools, which can
NOTES be used for this purpose. Some of the important tools used for
resource allocation are discussed below:

BCG Matrix
The BCG matrix, which is generally used for portfolio analysis, can
also be used as a guideline for resource allocation. The surplus
resources from “cash cows” can be reallocated to “stars” or
“question marks”. In so far as businesses categorized as “dogs” are
concerned, with low growth and low market share, they may not
need any thrust, and resources can be gradually withdrawnfrom
such businesses and invested in other promising businesses. The
BCG matrix is a useful tool because it impresses upon a
portfolio approach to resourceallocation. It helps in averting over-
investment in any particular type of business and underinvestmentin
promising businesses from the long-term perspective. Despite the
utility of theBCG matrix, however, it should be used with care and
only as a guideline. It does not provide aconcrete measure for
making a finer choice, particularly among the businesses of the
samenature.

PLC-based Budgeting
Resource allocation can also be linked to different stages of a
Product Life Cycle (PLC). A product in introductory and growth
stages may require more resources than a product in mature and
decline stages.

Zero-based Budgeting (ZBB)

The key differences between ZBB and traditional budgeting is that
Strategic Management : 206
ZBB requires managers to justify their budget requests in detail
from the scratch, without relying on the previous budget
allocations.
Therefore, instead of taking the last year’s budget as the base for Strategy
projecting the future allocations, ZBB forces the managers to Implementation

review the objectives and operations afresh and justify the budget
requests. ZBB is, therefore, a type of budget that requires managers
NOTES
to rejustify the past objectives, projects and budgets and set
priorities for the future. It amounts to recalculationof all
organisational activities to see which should be eliminated or
funded at a reduced orincreased level.

Capital Budgeting
Capital Budgeting techniques can be used for long-term
commitment of resources, such as capital investments in mergers,
acquisitions, joint ventures, and setting up of new plants etc.
Various techniques like payback period, net present value, internal
rate of return, etc. can be used to find which investments would
earn maximum returns.

Operating Budgets
Operating budgets are necessary for more routine resource
allocation for conducting operations. There are two types of
systems:

1. Fixed budgeting system: This system commits resources

based on activity levels. In this type of budgeting, there
may be a tendency to retain the committed resources
even if the activity levels are not being achieved, thus
depriving other divisions of the resources, which have a
better potential.
2. Flexible budgeting system: This system provides for
transfer of funds from one unit to another if a fall is
expected in actual activity level in a particular unit, thus
ensuring better resource utilization. But this system has
Strategic Management : 207
the disadvantage of encouraging non-seriousness about
budgetary allocations.
Strategy
Implementation 10.6.3 Criteria for Resource Allocation
Process
NOTES In large, diversified companies, the corporate office plays a
major role in allocating resources among various strategies
proposed by its operating units or divisions. In many cases,
product groups,
business units or functional areas may bid for funds to support their
strategic proposals.

There are three criteria which can be used when allocating

resources.
1. Contribution towards fulfillment of organisational
objectives: At the centre of the organisation, the
resource allocation task is to steer resources away from
areas that are poor at delivering the organisation’s
objectives and towards those that are good at delivering
the organisation’s objectives.

2. Support of key strategies : In many cases, the problem

with resource allocation is that the requests for funds
usually exceed the funds normally available. Thus, there
needs to be some further selection mechanism beyond
the delivery of the organisation’s mission and objectives.
This second criterion relates to two aspects of resource
analysis:
(a) Support of core competencies : Resources should
develop and enhance core competencieswhich, in
turn, help achieve competitive advantage.
(b) Enhancement of value chain activities : Resources
should assist particularly those activities of the value
Strategic Management : 208
chain which help the organisation to achieve low
cost or differentiation and thereby enhance and
sustain
competiti
ve
advantag
e of the
firm.
 (c) Risk-acceptance level of the organisation: Clearly, Strategy
if the risk is higher, there is a lower likelihood that Implementation

the strategy will be successful. Some organisations

will be more comfortable with accepting higher
NOTES
levels of risk than others. So, the criterion in this
case needs to be considered in relation to the risk-
acceptance level of the organisation.

10.6.4 Factors affecting Resource Allocation

Resource allocation may not necessarily be a purely
‘rational’ decision-making process. It is also a behavioural and
political process involving people who may be motivated by
different objectives. Some of the major factors affecting resource
allocation are discussed below:

1. Objectives of the organisation: People motivated by

different objectives exercise theirinfluence over the

funding of projects. There are two types of objectives.

Official (explicit) objectives and operative (implicit)

objectives. Allocations of resources are more guided by

implicit objectives than explicit objectives. The formal

and informal organisations also influence the perception of

which projects should be chosen for funding.

2. Powerful units: Sometimes, powerful SBU heads secure

larger allocation of funds than their ‘fair share’.

3. Dominant strategists: The preferences of dominant

strategists like the CEO, Directors, SBU heads, etc. are

reflected in the way resources are allocated. The

divisional and departmental heads know that such

Strategic Management : 209
preferences matter and try to present their demands in

line with them.

Strategy
4. Internal politics: Resources are often construed as
Implementation
power, and those units, which manage to secure
substantial resources, are perceived as more powerful
NOTES than others. Internal politics within the organisation to
secure more and more resources, affect the process of
resource allocation.
5. External influences: Apart from internal politics, external
influences like government policy, demands of
shareholders, financial institutions, community and
others, also affect resource allocation. For example,
legal requirements may require additional finances in
labour welfare and social security, pollution control,
safety equipments and energy conservation. The
shareholders may expect higher dividends, and
resources have to be directed to them. Financial
institutions may impose restrictions or require
companies to invest in technology up-gradation and
R&D. Similarly, the discharge of social responsibilities by
the firm requires allocation of sufficient funds. Thus,
external influence affect the process of resource
allocation.

10.6.5 Difficulties in Resource Allocation

The resource allocation process can sometimes become
fairly complex, and may even create several difficulties to the
strategists. Some of the difficulties that can create problems are:

1. Scarcity of Resources: Resources are hard to find. Even

if finance is available, the cost ofcapital could be a
constraint. Non-availability of highly skilled people
Strategic Management : 210
could be another problem.

2. Restrictions on Generating Resources: Within

organisations
, the new
units which
have greater
potential
for growth in the future, may not be able to generate To avoid the
resources in the short run. Allocation of resources on par above difficulties,
with existing SBUs, divisions and departments through strategists should pay
the usual budgeting process, will put them at a maximum attention to
disadvantage. resource allocation, and

3. Bloated Demands: Unit managers may sometimes ‘prioritize’ budgeting

submit inflated or overstated demands for funds to guard allocations in the initial
against any budget-cuts. This subverts the decision stages taking overall
process. objectives into account.

4. Negative Attitude: Units, which do not get the desired

allocations, may develop a negative attitude towards the
corporate managers. They may work at cross purposes,
which may obstruct the implementation of the intended
strategy.

5. Budget Battles: The actual allocation of funds to any unit

has a major effect on the work environment of the unit
and the career of the manager concerned. If a manager
loses the ‘budget battle’, his subordinates feel that the
manager has failed them, and may not cooperate with
him.

6. Budgetary Process: The budgetary process itself can

lead to problems if it is not tied to the strategic plans of
the firm. If top management fails to communicate the
shifts in the strategic plans and the lower levels are
unaware of the shifts, any intended strategy is unlikely
to succeed.

7. New SBUs: The budgetary process is tied to the way

units and divisions are arranged organisationally. New
SBUs can be at a disadvantage if they are unaware of the
intricacies of the budget procedures used in their
organisations.
 Strategy Implementation

NOTES

Strategic Management : 211

Strategy
Implementation 10.7 Summary
 Most strategies need resources to be allocated to them if they
are to be implemented successfully.
NOTES
 A successful strategy formulation does not guarantee successful
strategy implementation.
 It affects an organisation from top to bottom; it affects all
divisional and functional areas of business.
 Implementation of strategy involves a number of interrelated
decisions, choices, and a broad range of activities. It requires an
integration of people, structures, processes etc.
 Mc Kinsey’s 7-S model is good at capturing the importance of all
these elements in the implementation of strategy.
 A company’s ability to acquire sufficient resources needed to
support new strategic initiatives and steer them to the
appropriate organisational units has a major impact on the
strategy implementation process.

10.8 Key Terms

Bottom-up Approach: In this approach, resources are distributed
through a process of aggregation from the operating level. The
operating levels work out the requirements of each subunit and the
resources are allocated accordingly.
Capital Budgeting: used for long-term commitment of resources,
such as capital investments in mergers, acquisitions, joint ventures
etc.
McKinsey 7-S Model: A model of organisational effectiveness that
postulates that there areseven internal factors of an organisation that
needs to be aligned and reinforced in order for it to be successful.
Operating Budget: Necessary for more routine resource allocation
Strategic Management : 212
for conducting operations.
Top-down Approach: In this approach, resources are allocated Strategy
Implementation
through a process of segregation down to the operating levels. The
Board of Directors, the Managing Director or members of top
management typically decide the requirements of each subunit and NOTES
distribute resources accordingly,.
Zero Based Budgeting: Budget requests in detail from the scratch,
without relying on the previous budget allocations.

10.9 Questions and Exercises

1. Does a successful strategy formulation guarantee a

successful implementation? Why/ why not?

2. “Strategic decisions to be communicated and understood

throughout the organisation”. Elucidate.

3. Why is it said that using a formula approach in resource

allocation may be counterproductive. Discuss with reasons

accompanied with examples.

4. “There has to be a “fit” between the strategy and the

organisation.” Substantiate

5. “Formulation and implementation are inextricably linked”.

Discuss

6. Bring out the differences between formulation and

implementation of strategy.

7. Discuss the relevance of McKinsey’s 7-S model in modern

business organisations.

8. Critically evaluate the McKinsey’s 7-S Model.

9. “Resource allocation is a powerful tool to communicate the

strategies of the organisation”. Justify.

Strategic Management : 213
Strategy
Implementation
Check your
progress Fill in the
blanks:
NOTES 1................................are the core values of the company that are
evidenced in the corporate culture and the general work
ethic.
2. ...................represents the competencies of the employees
working for the company.
3. Resource allocation deals with the............................and
.......................of financial, physical and human resources to
strategic tasks.
4. ...................... budget specifies materials, labour, overheads
and other costs.
5........................and ‘political’ considerations are inevitable in a
typical organisation.
6. The common approach to resource allocation is through
.......................system.
7. In BCG Matrix, the........................represent low growth and
low market share.
8............................budgeting system provides for transfer of funds

from one unit to another if a fall is expected in actual activity

level in a particular unit.
9............................budgeting techniques can be used for long-term

commitment of resources.
10. The problem with resource allocation is that the requests for
funds usually.......................the funds normally available.

Answers:
1. Super ordinate goals 2. Skills 3. Procurement, commitment
Strategic Management : 214
4. Operating 5. ‘Behavioural’ 6. Budgetary 7. “Dogs” 8. Flexible
9. Capital 10. Exceed
 Strategy
10.10 Further Reading and References Implementation

Books
 Fred R. David, Strategic Management – Concepts and Cases,
NOTES
Pearson Education Inc., 2005.
 Hamel F and Prahalad CK, “Competing for the Future”,
Harvard Business School Press, Boston 1994.
 Richard Lynch, Corporate Strategy, Essex, Pearson
Education Ltd, 2006.

Online links
 [Link]/.../business-plan-strategy-implementation
 [Link]/4218/resource_allocation
 [Link]/Knowledgebase/Strategy/Implementation

Strategic Management : 215

Strategic Management : 216
UNIT 11: STRUCTURAL Structural
Implementation
IMPLEMENTATION
NOTES

11.0 Unit Objectives

11.1 Introduction

11.2 Basic Principles of Organisational Structure

11.3 Relation between Strategy and Structure

11.4 Improving Effectiveness of Traditional Organisational Structures

11.5 Types of Organisational Structures

11.6 Modular Organisation

11.7 Towards Boundary less Structures

11.8 Structures for Strategies

11.9 Summary

11.10 Key Terms

11.11 Questions and Exercises

11.12 Further Reading and References

11.0 Unit Objectives

After studying this unit, you should be able to:
 Describe the types of organisational structures
 Define organisational design and change
 Explain the structures for strategies
Strategic Management : 217
Structural
Implementation 11.1 Introduction
To implement its strategy successfully a firm must have an
appropriate organisational structure. An organisational structure is a
NOTES
set of formal tasks and reporting relationships which provide a
framework for control and coordination within the organisation. The
visual representation of an organisational structure is called
organisational chart. The purpose of an organisational structure is to
coordinate and integrate the efforts of employees at all levels – corporate,
business and functional levels – so that they work together to achieve
the specific set of strategies. Organisational structure is a tool that
managers use to harness resources for getting things [Link] is
defined as:
1. The set of formal tasks assigned to individuals and
departments.
2. Formal reporting relationships, including lines of
authority, responsibility, number of hierarchical levels
and span of manager’s control.
3. The design of systems to ensure effective coordination of
employees across departments. The set of formal tasks
and formal relationships provides a framework for
vertical control of the organisation.

There are two different aspects of the organisational structure:

1. Superstructure : This is the highly visible part of the organis-

ational structure. This depicts how people are grouped into
different divisions, departments and sections and how they
are related to each other. The superstructure also indicates the
principal ways in which the organisational operations are
integrated and coordinated. By showing their levels, it
Strategic Management : 218 indicates which groups have relatively more strategic
importance.
 2. Infrastructure: This is comparatively less visible part of the Structural
organisational structure. It is concerned with issues like Implementation

delegation of authority, specialization, communication,

information systems and procedures. The infrastructure
NOTES
enables the organisation to engagein a number ofdisparate
activities and still keep them coordinated. The design of
organisational structure is a critical task of the top
management of an organisation. It is the skeleton of the
whole organisation. It provides relatively more durable
organisational arrangements and relationships.

Thus, an organisational structure fulfils two fundamental and

opposing requirements:
1. Division of labour into various tasks
2. Coordination of these tasks to accomplish effective
control of an organisation.
However, as an organisation grows and becomes more
complex, it needs appropriate changes in its design.

11.2 Basic Principles of Organisational

Structure
There are several important principles of organisation, which Check Your Progress
need to be understood before building an organisation’s structure. Do you agree with the
statement that work
They are: can be performed
more efficiently if
1. Hierarchy: Hierarchy defines who reports to whom and the employees are
allowed to
span of control. Span of control is the number of people specialize? Why/why
reporting to a supervisor. It determines how closely a not?
supervisor can monitor subordinates. Tall structures have
many levels in the hierarchyand a narrow span.
Communication up and down the hierarchy becomes
Strategic Management : 219
difficult. Flatstructures are horizontally
Structural dispersed having fewer levels in the hierarchy. The trend
Implementation
inrecent years has been towards flat structures allowing for
wider spans of control as a wayto facilitate better

NOTES communication and co- ordination.

2. Chain of Command: The chain of command is an unbroken
line of authority that links all persons in an organisation and
shows who reports to whom. It has two underlying principles.
Unity of command means that each employee is held
accountable to only onesupervisor. The scalar principle means
a clearly defined line of authority in the
[Link] and responsibility for different tasks
should be distinct. All persons in the organisation should know
to whom they report as well as the successive management
levels all the way to the top.
3. Specialization : Specialization, sometimes called division of
labour, is the degree to which organisational tasks are
subdivided into separate jobs. Work can be performed more
efficiently if employees are allowed to specialize. This is because
an employee in each department performs only the tasks
relevant to his specialized function. Despite the apparent
advantages of specialization, many organisations are moving
away from this principle. With too much specialization,
employees are isolated performing only a single, boring job.
Many companies are, therefore, enlarging jobs to provide
greater challenges or assigning tasks to teams so that
employees can rotate among several jobs performed by the
team.
4. Authority, Responsibility and Delegation: Authority is the formal
and legitimate right of a manager to make decisions, issue
orders, allocate resources and command obedience.
Responsibility is the duty to perform the task or activity an
Strategic Management : 220 employee has been assigned. Accountability means that the
people with authority and responsibility are subject to
reporting and
justifying task
outcomes to those
above them in the
chain of command.
Delegation is the process managers use to transfer authority and Structural
responsibility to positions below them in the hierarchy. The Implementation

principle is that there must be parity between authority and

responsibility. It means managers can be made accountable for
NOTES
results only when they are delegated with sufficient
authority commensurate with the responsibility. Most
organisations today encourage managers to delegate
authority to the lowest possible level to provide maximum
flexibility to meet customer needs and adapt to the
environment. Managers are encouraged to delegate
authority, although they often find it difficult.
5. Centralization and Decentralization: Centralization and
decentralization refer to the level at which decisions are
made. Centralization means that decision-making is done
atthe top levels of the organisation. Decentralization means
that decision making is pushed down to the lower levels in
the organisation. Centralization helps in better coordination,
but too much centralization results in slow response and
demotivates people at lower levels. Decentralization relieves
the burden on top managers, makes greater use of worker’s
skills, ensures decision making by well-informed people
and permits rapid response to external changes. But it does
not mean that every organisation should decentralize.
Managers should diagnose the organisational situation and
select the decision-making level.
6. Formalization: Formalization is the extent to which written
documentation is used to direct and control employees. Written
documentation includes rules, regulations, policies, procedures,
job descriptions etc. They are inexpensive ways to
coordinate activities. These documents complement the
organisational structure by providing descriptions of tasks,
Strategic Management : 221
responsibilities
Structural
and authority. The use of rules and regulations is a part of
Implementation
bureaucratic model of organisation.
7. Departmentalization: Another fundamental characteristic of

NOTES organisational structure is departmentalization, which means

grouping positions into departments and departments into
the total organisation.

11.3 Relation between Strategy and

Structure
Strategic management posits that the strategy and the
organisation structure of the firm must match. In a classic study of
large U.S. corporations such as DuPont, General Motors, Sears, and
Standard Oil, Alfred Chandler concluded that structure follows strategy.
This means that changes in corporate strategy lead to changes in
organisational structure. He also concluded that organisations
follow a pattern of development from one kind of structural
arrangement to another as they expand. According to Chandler, these
structural changes occur because the old structure was not suitable.
Chandler therefore proposed the following as the sequence of what
occurs:

1. New strategy is created

2. New administrative problems emerge
3. Economic performance declines
4. New appropriate structure is invented
5. Profit returns to its previous level

Chandler found that in their early years, corporations such

as DuPont and General Motors had a centralized functional
structure, which was suitable for a limited range of products. As they

Strategic Management : 222

added new product lines and created their own distribution
networks, the old structure became too complex. Therefore, they
shifted to a decentralized structure with several autonomous
divisions.
 more diverse,
11.4 Improving Effectiveness of
there
Traditional Organisational
Structures
In the changed times and situations, traditional organisational
structure is crumbling under the weight of ever-increasing
regulations that drive greater accountability and transparency. Smart
companies are on the forefront of building new and improved
structures that support and enhance this new compliance
environment, and best practices are emerging. The best structure for
an organisation is determined by many aspects of its situation – the
technology, size, environment and strategy. Frequently, structures
evolve as the organisation moves from one stage of growth to the
next. The external and internal environments affectstructural design
in different ways.

Rate of Change : When the organisation operates in a more

dynamic environment, it needs to be able to respond quickly
to the rapid changes that occur. In static environments,
change is slow and predictable and does not require great
sensitivity on the part of the organisation. In dynamic
environments, the organisation structure and its people need
to be flexible, well co-ordinated and able to respond quickly
to outside influences. The dynamic environment implies a
more flexible, organic structure.
Degree of Complexity : Some environments can be easily
monitored from a few key data movements. Others are highly
complex, with many influences that interact in complex ways.
One method of simplifying the complexity is to decentralize
decisions in that particular area. The complex environment
will usually benefit from a decentralized structure.
Market Complexity : Some organisations sell a single
product or variations on one product. Others sell ranges of
products that are essentially diverse. As markets become
 Structural Implementation

NOTES

Strategic Management : 223

Structural
is usually a need to divisional the organisation as long as
Implementation
synergy or economies of scale are unaffected.
Competitive Situations : With friendly rivals, there is no great

NOTES need to seek the protection of the centre. In deeply hostile

environments, however, extra resources and even legal
protection may be needed; these are usually more readily
provided by central headquarters. As markets become more
hostile, the organisation usually needs to be more centralized.

11.5 Types of Organisational Structures

There are seven basic types of organisational structures:
1. Simple structure
2. Functional structure
3. Divisional structure
4. SBU structure
5. Matrix structure
6. Network structure
7. Virtual structure

Let us understand each of them briefly.

1. Simple Structure: In this structure, the owner-manager
controls all activities and makes all the decisions. This
structure may be appropriate for small and young
organisations. Coordination of tasks is done through direct
supervision. There is little specialization of tasks, few rules
and regulations and communication is informal.
2. Functional Structure: Functional structures are grouped based
on major functions performed. Each function is led by a
functional specialist. Functional structures are formed in
organisations in which there is a single or closely related
Strategic Management : 224 products or services.
3. Divisional Structure : Divisional structures are used by Structural
diversified organisations. In a divisional structure, divisions Implementation

are created as self-contained units with separate

functional departments for each division. A division may
NOTES
be organised around geographic area, products, customers
etc. The head office determines corporate strategy,
allocates resources among divisions and appoints and
rewards the heads of these divisions. Each division is
responsible for product, market and financial objectives
for the division as well as their division’s contribution to
overall corporate performance.
4. Matrix Structure : The matrix structure is, in effect, a
combination of functional and divisional structures. In
this structure, there are functional managers and product
or project managers. Employees report to one functional
manager and to one or more project managers. For
example, a product group wants to develop a new
product. For this project it obtains personnel from
functional departments like Finance, Production, Marketing,
HR, Engineering etc. These personnel work under the
product manager for the duration of the project. Thus,
they are responsible for two managers – the product
manager and the manager of their functional area. While
functional heads have vertical control over the functional
managers, the product or project heads have horizontal
control over them. Thus, matrix structure provides a dual
reporting. The dual lines of authority makes the matrix
structure unique. The matrix structure has been used
successfully by companies such as IBM, Unilever, Ford
Motor Company etc.
5. Network Structure: A network organisation outsources or
subcontracts many of its major functions to separate
Strategic Management : 225
companies and coordinates their activities from a small
headquarters. Rather than being housed under one roof,
Structural
activities like design, manufacturing, marketing, distribution
Implementation
etc. are outsourced to separate organisations that are
connected electronically to the central office.

NOTES 6. Virtual Organisation: This is an extension of the

network structure. In this approach, independent
organisations form temporary alliances to exploit specific
opportunities, then disband when their objectives are
met. The term virtual means “being in effect but not
actually so”. The virtual organisations consist of a
network of independent companies – suppliers,
customers or even competitors – linked together to share
skills, costs, markets and rewards. The members of a
virtual organisation pool and share the knowledge and
expertise of each other.

11.6 Modular Organisation

The organisational capabilities to interact with others have
been greatly improved as a result of modern information and
communications technologies: Nowadays a company can maintain
more relationships with more companies at much lower costs than
before. The increased business networks require modularization of
the products, the processes and the firm in order to be effective.
Modular products tend to favour a modular organisation form, as the
various units involved in the design process of products with
interchangeable components are loosely coupled,operate
autonomously, and can be easily reconfigured. The concept of
modularity can be applied not only to complex product system
design, but also to business system interpretation and design. A
modular organisation is one in which different functional
components are separated from one another, a technique adopted

Strategic Management : 226 from software engineering. A modular organisation is in contrast to

a composite organisation in which there is no separation between
functions. Modular organisation is also distinct from hierarchical
organisation. Modular
organisation is chiefly concerned with the horizontal design of a Structural
system. Modularity allows components to be produced separately Implementation

and used interchangeably in different configurations without

compromising system integrity. In modular organisations,
NOTES
coordination tasks are delegated to individual modules (functions,
teams, etc.) and coherence is achieved easily through fully
specified interfaces. In addition to the reduction of managerial
complexity, this structural, hierarchical function-based
decomposition results in the localization of the impacts of
environmental disturbances within specific modules, increasing the
immunity and adaptability of the overall organisation in a
turbulent environment.

11.7 Towards Boundary less Structures

Traditional companies with boundaries, rules, and
extensive plans are at a supreme disadvantage in today’ globalized
world, where technology changes daily and the value chain
commands changes of its own. In a traditional company where
people are categorized into neatly defined positions with their job
descriptions filed in triplicate in the Human Resources department,
the way a company plans its business can cause it to sink despite
planning because the boundaries can mean lost opportunities, being
overtaken by the competition, loss of revenues, or watching its
niche slip away because of a new technology, an alteration in the
global marketplace, or simply a failure to market its product
effectively. When changes occur, they happen too quickly for its
organisational processes to meet them; as a result, opportunities
are quickly lost, problem situations take over rapidly, and before
the company can respond appropriately, it has lost customers,
opportunities, and market share. Although that company likely has
more than enough talent within its walls to offset all of those
Strategic Management : 227
disasters, the talent is never put to use, because employees are
constrained to operate within the confines of their job descriptions,
Structural
where only the prescribed talents can be put to good use. The
Implementation
answer to this dilemma lies in boundary less organisations. A
boundary less organisation is a contemporary approach to

NOTES organisational design. It is an organisation that is not defined by, or

limited to, the horizontal, vertical, or external boundaries imposed
by a predefined structure. This term was coined by former GE
chairman Jack Welch because he wanted to eliminate vertical and
horizontal boundaries within GE and break down external barriers
between the company and its customers and suppliers.

11.8 Structures for Strategies

To understand the logic behind this approach to the
development of organisational structures, it is helpful to look at the
historical background. As already mentioned, prior to the early
1960s, the US strategist Alfred Chandler studied how some leading
US corporations had developed their strategies in the first half of the
twentieth century. He then drew some major conclusions from this
empirical evidence, the foremost one being that the organisation first
needed to develop its strategy and, after this, to devise the organisation
structure that delivered that strategy. Chandler drew a clear
Check Your Progress distinction between devising a strategy and implementing it. He
In your opinion, which
defined strategy as: “The determination of the basic long-term goals
aspects of an
organisation determine and objective of an enterprise, and the adoption of courses of action
the best design for it?
and the allocation of resources necessary for carrying out these
goals”. The task of developing the strategy took place at the
corporate and business levels of the organisation. The job of
implementing it then fell to the various functional areas. Chandler’s
research suggested that, once a strategy had been developed, it was
necessary to consider the structure needed to carry it out. A new
strategy might require extra resources, or new personnel or
Strategic Management : 228
equipment which would alter the work of the enterprise.
Strategy and Structure are Interlinked Structural
According to modern strategists, strategy and structure are Implementation

interlinked. It may not be optimal for an organisation to develop

its structure after it has developed its strategy. The relationship is
NOTES
more complex in two respects:

1. Strategy and the structure associated with it may need to

develop at the same time in an experimental way : As the
strategy develops, so does the structure. The organisation
learns to adapt to itschanging environment and to its
changing resources, especially if such change is radical.
2. If the strategy process is emergent, then learning and
experimentation involved may need a more open and less
formal organisation structure.

Managing the Complexity of Strategic Change

Quinn suggests that strategic change may need to proceed
incrementally, i.e. in small stages. Hecalled the process “logical
incrementalism”. The clear implication is that it may not be
possible to define the final organisation structure, which may also
need to evolve as the strategy moves forward incrementally. He
recognizes the importance of informal organisation structures in
achieving agreement to strategy shifts. If the argument is correct, it
will be evident that any idea of a single, final organisation
structure – after deciding on a defined strategy – is dubious.

Criticism of the Strategy – First, Structure- Afterwards

Process
1. Structures may be too rigid, hierarchical and bureaucratic
to cope with the newer social values and rapidly changing
environment.
2. The type of structure is just as important as the business Strategic Management : 229
area
Structural
in developing the organisation’s strategy. It is the structure
Implementation
that will restrict, guide and form the strategy.
3. Value chain configurations that favour cost cutting or,
NOTES alternatively, new market opportunities may also alter the
organisation required.
4. The complexity of strategic change needs to be managed,
implying that more complex organisational considerations
will be involved. Simple configurations such as a move
from a functional to a divisional structure are only a
starting point in the process.
5. The role of top and middle management in the formulation
of strategy may also need to be reassessed: Chandler’s view
that strategy is decided by the top leadership alone has been
challenged. Particularly for new, innovative strategies, middle
management and the organisation’s culture and structure
may be important. The work of the leader in empowering
middle management may require a new approach – the
organic style of leadership.

The Concept of ‘Strategic Fit’

Although it may not be possible to define which comes
first, there is a need to ensure that strategy and structure are
consistent with each other. For example, Pepsi Co reorganised its
North American business to ensure that its strengths in the growing
non-carbonated drinks market could be exploited across its full
range of drinks. For an organisation to be economically effective,
there needs to be a matching process between the organisation’s
strategy and its structure. This is the concept of strategic fit. In
essence, organisations need to adopt an internally consistent set of
practices in order to undertake the proposed strategy effectively. It
should be said that such practices will involve more than the
Strategic Management : 230 organisation’s structure. They will also cover such areas as
reward systems, information systems and
processes, culture, leadership styles, etc. There is strong empirical Structural
evidence, both from Chandler and Senge, that there does need to be Implementation

a degree of strategic fit between the strategy and the organisation

structure. Although the environment is changing all the time,
NOTES
organisations may only change slowly and not keep pace with
external change, which can often be much faster – for example, the
introduction of digital technology. It follows that it is unlikely that
there will be a perfect fit between the organisation’s strategy and its
structure. There is some evidence that a minimal degree of fit is
needed for an organisation to survive. It has also been suggested
that, if the fit is ensured early during the strategic development
process, then higher economic performance may result. However,
as the environment changes, the strategic fit will also need to
change.

11.9 Summary
Organisations are structured in a variety of ways, dependant
on their objectives and culture. The structure of an organisation will
determine the manner in which it operates and it’s performance.
Structure allows the responsibilities for different functions and
processes to be clearly allocated to different departments and
employees. The wrong organisation structure will hinder the
success of the business. Organisational structures should aim to
maximize the efficiency and success of [Link] effective
organisational structure will facilitate working relationships between
various sections of the organisation. It will retain order and command
whilst promoting flexibility and creativity. Internal factors such as size,
product and skills of the workforce influence the organisational
structure. As a business expands the chain of command will
lengthen and the spans of control will widen. The higher the level
of skill each employee has the more the business will make use of
Strategic Management : 231
the matrix structure to maximize these skills across the
organisation.
Structural
Implementation 11.10 Key Terms
Agile Organisation: A firm that identifies a set of business

NOTES capabilities central to high profitability operations and then build a

virtual organisation around those capabilities.
Chain of Command: an unbroken line of authority that links all
persons in an organisation and shows who reports to whom
Formalization: extent to which written documentation is used to
direct and control employees.
Hierarchy: defines who reports to whom and the span of control
Infrastructure: concerned with issues like delegation of authority,
specialization, communication, information systems and procedures
Modular Organisation: An organisation in which different functional
components are separated from one another.
Outsourcing: subcontracting a service with another company or
person to do a particular function.
Span of Control: The number of employees that each manager/
supervisor is responsible for. Superstructure: depicts how people
are grouped into different divisions, departments and sections and
how they are related to each other.
Virtual Organisations: consist of a network of independent companies
- suppliers, customers or even competitors linked together to share
skills, costs, markets and rewards.

11.11 Questions and Exercises

1. In your opinion, what fundamental requirements does an
organisational structure fulfill?
2. Do you agree with the statement that work can be
performed more efficiently if employees are allowed to

Strategic Management : 232

specialize? Why/ why not?
 3. What do you see as the reason behind the recent trend of with its situation is
most organisations encouraging managers to delegate called .....................
authority to the lowest possible level?
4. In your opinion, which aspects of an organisation determine
the best design for it?
5. Compare and contrast the functional and divisional
structures?
6. Give example of an organisation that has successfully
employed the matrix structure. Analyse its success mantra.
7. Prove that network structure can weaken the employee
loyalty.
8. Illustrate the advantages due to which some organisations
sell a single product or variations on one product.
9. “Being boundary-less can be the disadvantages for an
organisation”. Explain
10. Suggest any three advantages of modular organisations.

Check your progress

Fill in the blanks:
1. The.......................indicates the principal ways in which the
organisational operations are integrated and coordinated.
2. The.....................enables the organisation to engage in a
number
of disparate activities.
3..........................means that each employee is held accountable
to
only one supervisor.
4............................means that decision-making is done at the top
levels of the organisation.
5. The ..................... principle means a clearly defined line of
authority in the organisation.
6 is the process managers use to transfer authority
and responsibility to positions below them in the hierarchy.
7. The process of designing an organisation’s structure to match
 Structural Implementation

NOTES

Strategic Management : 233

 Structural
8. Divisional structures are used by.......................organisations.
Implementation
9. The ..................... structure is, in effect, a combination of
functional and divisional structures.
NOTES 10. A......................organisation outsources or subcontracts many
of its major functions to separate companies.
11. The complex environment will usually benefit from a
. structure.
[Link] markets become more hostile, the organisation usually needs
to be.......................centralized.
13. A ..................... organisation is an organisation that is not
defined by, or limited to, the horizontal, vertical, or external
boundaries imposed by a predefined structure.

14. The biggest advantage of an agile virtual organisation is it

can draw on.................worldwide.
15. A modular organisation is in contrast to a .....................
organisation.

Answers:
1. superstructure 2. Infrastructure 3. Unity of command
4. Centralization 5. scalar 6. Delegation 7. organisational design
8. Diversified 9. matrix 10. Network 11. decentralized 12. More
13. boundaryless 14. Expertise 15. Composite

11.12 Further Reading and References

Books
 Burt R.S., Structural Holes : The Social Structure of
Competition, Harvard University Press: Cambridge,
 Garud R., Kumaraswamy A., Technological and Organisational
Designs for Realizing Economies of Substitution, Strategic

Strategic Management : 234

Management, Journal.
Online
 www. [Link]/.../70029-Types-organisational-
structure
 [Link]/courses/adv.../amc3_ch6two1 NOTES

Strategic Management : 235

Strategic Management : 236
UNIT 12: BEHAVIOURAL Behavioural
Implementation
IMPLEMENTATION
NOTES
12.0 Unit Objectives

12.1 Introduction

12.2 Stakeholders and Strategy

12.3 Strategic Leadership

12.3.1 Leadership Approaches

12.4 Corporate Culture and Strategic Management

12.4.1 Influence of Culture on Behaviour

12.4.2 Creating Strategy Supportive Culture

12.5 Personal Values and Ethics

12.5.1 Importance of Ethics

12.5.2 Approaches to Ethics

12.5.3 Building an Ethical Organisation

12.6 Social Responsibility and Strategic Management

12.6.1 Responsibilities of Business

12.6.2 Need for CSR: The Strategy

12.7 Summary

12.8 Key Terms

12.9 Questions and Exercises

12.10 Further Reading and References

Strategic Management : 237

Behavioural
Implementation 12.0 Unit Objectives
After studying this unit, you should be able to:
 Explain the concept of stakeholder management
NOTES
 Describe the concept of strategic leadership
 Discuss the corporate culture and strategic management
 Identify the role of personal values and ethics
 Realise the concept between social responsibility and strategic
management

12.1 Introduction
Successful strategy formulation does not at all guarantee
successful strategy implementation. It is always more difficult to
actually carry out something than to say you are going to do it.
Strategy implementation requires support, discipline, motivation and
hard work from all managers and employees. Managers should pay
careful attention to a number of key issues while executing the
strategies. Chief among them are how the organisation should be
structured to put its strategy into effect and how such variables as
leadership, power and organisational culture should be managed to
enable employees to work together while implementing the firm’s
strategic plans. Organisations in stable, predictable environments
often become relatively tall, with many hierarchical levels and
narrow spans of control. On the other hand, companies in dynamic,
rapidly changing environments usually adopt flat structures with few
hierarchical levels and wide spans of control.

12.2 Stakeholders and Strategy

A firm’s stakeholders are the individuals, groups, or other
organisations that are affected by and affect the firm’s decisions and

Strategic Management : 238 actions. Depending on the specific firm, stakeholders mayinclude
government, employees, shareholders, suppliers, distributors, the relationships,
media and even the community in which the firm is located among interfaces,
many others. and put this
1. When it comes to corporate mission values stakeholders will information
maximise the value for allstakeholders, as opposed to in line
shareholders who only maximise the value for themselves.
2. Stakeholders also play a role in the decision making process
in a business. Although since employees and customers are
included in being stakeholders they too are considered when
it comes to decision making.
3. When it comes to accountability it does not just come down
to being accountable to themselves. Accountability lies with
the customer, suppliers, government, community and
employee stakeholders.

Stakeholder Management
An organisation needs to have an effective stakeholder
management system in place, which provides a great support in
achieving its strategic objectives. It interprets and influences both
the external and internal environments and creates positive
relationships with stakeholders through the appropriate management
of their expectations and agreed objectives. Stakeholder
Management is a process and control that must be planned and
guided by underlying principles. Stakeholder Management, within
business or projects, prepares a strategy that utilises informationor
intelligence collected during the following common processes:

1. Stakeholder Identification: identify the parties, either

internal or external to organisation, that are affected by
the business. For this purpose, a stakeholder map can be
used.
2. Stakeholder Analysis: identify and acknowledge
stakeholder’s needs, concerns, wants, authority, common
 Behavioural Implementation

NOTES

Check Your Progress

Assess the value of
stakeholders in an
organsiation. Why is it
important to manage
the stakeholders well?

Strategic Management : 239

Behavioural within the Stakeholder Matrix.
Implementation
3. Stakeholder Matrix: position the stakeholders on a matrix
based on their level of influence, impact or enhancement

NOTES they may provide to the business or its projects.

4. Stakeholder engagement: engaging stakeholders does not
seek to develop the project/ business requirements, solution
or problem creation, or establishing roles and
responsibilities. The process focuses on knowing and
understanding each other, at the Executive level. It gives an
opportunity to discuss and agree expectations of
communication and, primarily, agree a set of Values and
Principles that all stakeholders will abide by.
5. Communicating Information: expectations are established
and agreed for the manner in which communications are
managed between stakeholders - who receives
communications, when, how and to what level of detail.
Protocols may be established including security and
confidentiality classifications.

12.3 Strategic Leadership

Leadership is the art and process of influencing people so that
they will strive willingly and enthusiastically towards achievement of
the organisation’s purpose. Specific styles of leadership are often
associated with specific approaches to the crafting and execution of
strategies. The organisation’s purpose and strategy do not just drop out
of a process of discussion, but are actively directed by an individual
with strategic vision, whom we call “strategic leader”. Strategic leadership
establishes the firm’s direction by developing and communicating a
vision of the future and inspiring organisation members to move in
that direction. Unlike managerial leadership which is generally

Strategic Management : 240 concerned with the short-term day-to-day activities, strategic leadership
is concerned with determining the firm’s strategy, direction, aligning the
firm’smstrategy with its culture,
modeling and communicating high ethical standards, and Behavioural
initiatingmchanges in the firm’s strategy when necessary. The most Implementation

successful leadership is not just tom define the vision and mission
of an organisation in a cold, abstract manner but to communicate
NOTES
trust, enthusiasm and commitment to strategy.

Leaders play a central role in performing six critical and

interdependent activities in implementation of strategies:
1. Clarifying strategic intent: Leaders motivate employees
to embrace change by setting forth a clear vision of
where the business’s strategy needs to take the
organisation.
2. Setting the Direction: Leaders set the direction and
scope of the organisation through formulating
appropriate corporate and business strategies.
3. Building the organisation: Since leaders are attempting
to embrace change, they are often required to rebuild
their organisation to align it with the ever – changing
environment and needs of the strategy. And such an
effort often involves overcoming resistance to change
and addressing problems like the following:
(a) Ensuring a common understanding about
organisational priorities
(b) Clarifying responsibilities among managers and
organisational units
(c) Empowering managers and pushing authority lower
in the organisation
(d) Uncovering and remedying problems in
coordination and communication across the
organisation
(e) Gaining personal commitment from managers to a
shared vision
Strategic Management : 241
(f) Keeping closely connected with “what’s going on in
the organisation”.
Behavioural 4. Shaping organisational culture: Leaders play a key role
Implementation
in developing and sustaining a strategy supportive
culture. Leaders know well that the values and beliefs

NOTES shared throughout their organisation will shape how the

work of the organisation is done. And when attempting to
embrace accelerated change, reshaping their
organisation’s culture is an activity that occupies
considerable time for most leaders.
5. Creating a learning organisation: Leaders must also
play a central role in creating a learning organisation.
Learning organisation is one that quickly adapts to
change. The five elements central to a learning
organisation are:
(a) Inspiring and motivating people with a mission or
purpose
(b) Empowering people at all levels throughout the
organisation
(c) Accumulating and sharing internal knowledge
(d) Gathering external information
(e) Challenging the status quo to stimulate creativity
6. Instilling ethical behaviour: Ethics may be defined as a
system of right and wrong. Business ethics is the application
of general ethical standards to commercial enterprises. A
leader plays a central role in instilling ethical behaviour
in the organisation. The ethical orientation of a leader is
generally considered to be a key factor in promoting
methical behaviour among employees. Leaders who
exhibit high ethical standards become role models for
others in the organisation and raise its overall level of
ethical behaviour. In essence, ethical behaviour must
start with the leader before the employees can be
Strategic Management : 242
expected to perform accordingly.
12.3.1 Leadership Approaches Behavioural
Implementation
Research has found that some leadership approaches are more
effective than others for bringing about change in organisation. Three
types of leadership that can have a substantial impact are NOTES
transactional, transformational and charismatic leadership. These
types of leadership are briefly explained below:

1. Transactional Leadership: Transactional leaders clarify

the role and task requirements ofsubordinates, initiate
structure, provide appropriate rewards, and try to be
considerate to and meet the social needs of subordinates.
The transactional leader’s ability to satisfy subordinates
may improve productivity. Transactional leaders excel at
management functions. They are hardworking, tolerant,
and fair minded. They take pride in keeping things running
smoothly and efficiently. Transactional leaders often stress
the impersonal aspects of performance, such as plans,
schedules and budgets. They have a sense of commitment
to the organisation and conform to organisational norms
and values. In short, transactional leaders use the authority
of their office to exchange rewards such as pay and status
for employees and generally seek to enhance an
organisation’s performance steadily, but not dramatically.
In other words, transactional leadership is important to all
organisations, but leading change requires a different
approach, viz. transformational leadership.
2. Transformational Leadership: Transformational leaders
have a special ability to bring about innovation and
change. They encourage the followers to question the
status quo. They have the ability to lead change in the
organisation’s mission, strategy, structure and culture as
Strategic Management : 243
well as promote innovation in products and technologies.
Transformational leaders do
Behavioural not rely solely on tangible rules and incentives to control
Implementation
specific transactions with followers. They focus on intangible
qualities such as vision, shared values, and ideas to build

NOTES relationships and find common ground to enlist in the

change process.
3. Charismatic and Visionary Leadership: Charismatic leader-
ship goes beyond transactional and transformational leadership.
Charisma is a “fire that ignites followers’ energy and
commitment, producing results above and beyond the call
of duty”. The charismatic leader has the ability to inspire
and motivate people to do more than what they would
normally do, despite obstacles and personal sacrifice.
Followers transcend their own self interestsfor the sake of
the leader. Charismatic leaders are often skilled in the art of
visionary leadership. A vision is an attractive, ideal future
that is credible yet not readily attainable. Visionary leaders
see beyond current realities and help followers believe in a
brighter future. They speak to the hearts of their followers,
letting them be part of something bigger than themselves.
Thus, visionary leaders have a strong vision for the future
and can motivate others to help realise it. They have an
emotional impact on subordinates because they strongly
believe in the vision and can communicate it to others in a
way that makes the vision real, personal and meaningful to
others.
When charismatic and visionary leaders respond to organisational
problems, they can have a powerful, positive influence on
organisational performance.

12.4 Corporate Culture and Strategic

Strategic Management : 244 Management
A company’s culture is manifested in the values and business
principles that
management preaches
and practices.
Example: Culture is manifested in: Behavioural
1. Corporate stories Implementation

2. Attitudes and behaviours of employees

3. Core values
NOTES
4. Organisation’s politics
5. Approaches to people management and problem solving
6. Relationships with stakeholders; and
7. Atmosphere that permeates its work environment

An organisation’s culture is similar to an individual’s

personality. Just as an individual’s personality influences the
behaviour of an individual, the shared assumptions (beliefs and
values) among a firm’s members influence the opinions and actions
within that firm. Quite often, the elements of company culture
originate with a founder or other early influential leader who
articulates the values, beliefs and principles to which the company
should [Link] elements then get incorporated into company
policies, a creed or value statement, strategies and operating
practices. Over time, these values and practices become shared by
company employees and managers. Culture is thus perpetuated as:

1. New leaders act to reinforce them

2. New employees are encouraged to adopt and follow them
3. Stories of people and events told and retold
4. Organisation members are honoured and rewarded for
displaying cultural norms.

12.4.1 Influence of Culture on Behaviour

An organisation’s culture can exert a powerful influence on
the behaviour of all employees. It can, therefore, strongly affect a
company’s ability to adopt new strategies. A problem for a strong
Strategic Management : 245
culture is that a change in mission, objectives, strategies or policies
is not likely to be
Behavioural successful if it is in opposition to the culture of the company.
Implementation
Corporate culture has a strong tendency to resist change because its
very existence often rests on preserving stable relationships and

NOTES patterns of behaviour.

12.4.2 Creating Strategy Supportive Culture

Once a strategy is established, it is difficult to change. It is
the strategy-maker’s responsibility to select a strategy compatible
with the organisation’s prevailing corporate culture. If it is not
possible, once a strategy is chosen, it is the strategy implementer’s
responsibility to change the corporate culture that hinders effective
execution of a chosen strategy.

Changing a Problem Culture

Changing a company’s culture to align it with strategy is one
of the toughest management tasks. This is because the deeply held
values and habits are heavily anchored, and people cling emotionally
to the old and familiar. It takes concerted management action over a
period of time to root out certain unwanted behaviours and instill
behaviours that are more strategy-supportive. Changing culture
requires competent leadership at the top. Great power is needed to
force major cultural change, to overcome the spring back resistance
of entrenched cultures, and great power normally resides only at the
top. Changing a problem culture involves the following four steps:

Step 1: Identify facts of present culture that are strategy –

supportive and those that are not.
Step 2: Clearly define desired new behaviours and specify key
features of “new” culture.
Step 3: Talk openly about problems of present culture, and
how new behaviours will improve performance.
Strategic Management : 246
Step 4: Follow with visible, aggressive actions to modify
culture.
Managing Culture Change decorations in
As already explained in earlier sections, the culture that an the executive
organisation wishes to develop is conveyed through rites, rituals, suites,
myths, legends, actions etc. Only with bold leadership and conservative
concerted action on many fronts can a company succeed in expense
tackling a major cultural change. Top leadership should play a accounts and
key role in communicating the need for a cultural change and
personally launching
actions to prod the culture into better alignment with strategy.
Changing culture requires both (a) Symbolic actions and (b)
Substantive actions. They require serious commitment on the part of
the top management. The following measures are helpful in
building a strategy supportive culture:

1. Emphasise key themes or dominant values: Leaders

must emphasise dominant values through internal
company communications. They must repeat at every
opportunity the messages of why cultural change is
good for the company.
2. Stories and legends: Leaders must tell stories,
anecdotes and legends in support of basic beliefs.
Organisational members must identify with them, and
share those beliefs and values.
3. Rewards: Visibly praising and generously rewarding
people who display new culturalnorms will slowly
change the culture.
4. Recruiting and hiring : New managers and
employees are to be recruited who have the desired
cultural values.
5. Revising policies and procedures in ways that will help
the new culture.
6. Leading by example: If the organisation’s strategy involves
low-cost leadership, senior management must display
in their own actions and decisions, inexpensive
 Behavioural Implementation

NOTES

Strategic Management : 247

Behavioural entertainment allowances, lean corporate allowances,
Implementation
few executive perks, and so on.
7. Ceremonial events: In ceremonial functions, companies

NOTES must honour individuals and groups who exhibit cultural

norms and reward those who achieve strategic
milestones.
8. Group gatherings: Top management must participate in
employee training programmes etc. to stress strategic
priorities, values, ethical principles and cultural norms.
Every group gathering must be seen as an opportunity to
repeat and ingrain values, praise good deeds, reinforce
cultural norms and promote changes that assist strategy
implementation. Thus, best companies and best
executives expertly use symbols, role models, and
ceremonial occasions to achieve the strategy-culture fit.

Managing Culture Clash

When merging or acquiring another company, top
management must give some consideration to a potential clash of
corporate cultures. Integrating cultures is a top challenge to a
majority ofcompanies. It is dangerous to assume that the firms can
simply be integrated into the same reporting structures. The greater
the gap between the cultures of the two firms, the faster executives
in the acquired firm quit their jobs, and valuable talent is lost.

Value Preservation of Their Own Culture

There are four general methods of managing two different
cultures. They are:-

1. Integration involves merging the two cultures in such a

way that separate cultures of both firms are preserved in
Strategic Management : 248 the resulting culture.
2. Assimilation: Here, the acquired firm willingly surrenders
 its culture and adopts the culture of the acquiring company. Behavioural
3. Separation : Here there is a separation of the two Implementation

comp- anies’ cultures. They are structurally separated,

without cultural exchange.
NOTES
4. Deculturation: This involves imposition of the acquiring
firm’s culture forcefully on the acquired firm. This often
results in much confusion, conflict, resentment and
stress.

12.5 Personal Values and Ethics

Values, personal values, and core values all refer to the
same thing. They are desirable qualities, standards, or principles.
Values are a person’s driving force and influence their actions and
reactions. Ethics is defined as “the discipline dealing with what is
good and bad, and right and wrong, or with moral duty and
obligation.” Ethics refers to the moral principles and values that
govern the behaviour of a person or group. Ethics helps us in
deciding what is good or bad, moral or immoral, fair or unfair in
conduct and decision-making. In other words, ethics serve as a
“moral compass” to guide our actions. There are many sources for
an individual’s ethics. These include family background, religious
beliefs, community standards and expectations etc.

12.5.1 Importance of Ethics

There has been a growing interest in corporate ethics over
the past several years. This is perhaps because of a spate of recent
corporate scandals at such firms as Enron, Tyco, Texaco etc.
Withouta strong ethical culture, the chances of ethical crises
occurring in companies cannot be ruled [Link] to this, companies
face enormous costs in terms of financial and reputational loss as
well as erosion of human capital and relationships with suppliers,
Strategic Management : 249
customers, society at large and governmental agencies. An ethical
organisation is driven by ethical
Behavioural values and integrity. Such values shape the search for
Implementation
opportunities, the design of systems and the decision-making
processes of the organisation. They provide a common frame of

NOTES reference that serves as a unifying force across different functions

and employee groups. Organisational ethics define what a company
is and what it stands for. The potential benefits of an ethical
organisation are many. A strong ethical orientation can have a
positive effect on employee commitment and motivation to excel.
This is particularly important in today’s knowledge-intensive
organisations, where human capital is critical in creating value and
competitive advantage. An ethically sound organisation can also
strengthen its bonds among its suppliers, customers and
governmental agencies. The ethical orientation of a leader is
generally considered to be a key factor in promoting ethical
behaviour among employees. Leaders who exhibit high ethical
standards become role models for others in the organisation and
raise its overall ethical behaviour. In essence, ethical behaviour
must start with the leader, who plays a central role in instilling
ethical behaviour in the organisation.

12.5.2 Approaches to Ethics

Check Your Progress
When an ethical dilemma arises, there are four approaches
Critically analyse the
to guide our action. These four approaches are: -
role of strategic leader
vis-à- vis managerial
leaders.
Utilitarian Approach
According to this approach, moral behaviour is one that
produces the greatest good for the greatest number.

Individualism Approach
According to this approach, acts are moral when they
promote the individual’s best long-term interests, which ultimately
Strategic Management : 250
lead to the greater good.
Moral – Rights Approach Behavioural
According to this approach, the fundamental rights and Implementation

liberties should be respected in all decisions. Thus, an ethically

correct decision
NOTES
is one that best maintains the rights of those people affected by it.
Six moral rights should be considered during decision-making:

1. Right of free consent

2. Right of privacy
3. Right of freedom of conscience
4. Right of free speech
5. Right to due process
6. Right to life and safety
To make ethical decisions, managers need to avoid
interfering with the rights of others.

Justice Approach
According to this approach, moral decisions must be based on
equity, fairness and impartiality.
Four types of justices are of concern to managers:

1. Distributive justice requires that individuals should not

be treated differently on the basis of race, sex, religion or
national origin. Individuals who are similar should be
treated similarly. Thus, men and women should not receive
different salaries if they are performing the same job.
2. Procedural justice requires that rules be administered
fairly. Rules should be clearly stated and be consistently
and impartially administered.
3. Compensatory justice requires that individuals should be
compensated for the cost of their injuries by the party
responsible. Moreover, individuals should not be held
Strategic Management : 251
responsible for matters over which they have no control.
Behavioural 4. Natural duty principle: This principle reflects a duty to
Implementation
help others who are in need or danger; duty not to cause
unnecessary suffering; and the duty to comply with the
NOTES just rules of an institution.

12.5.3 Building an Ethical Organisation

A firm must have several key elements before it can become
a highly ethical organisation. These elements must be constantly
reinforced in order for the firm to be successful:

Role Models
For good or bad, leaders are role models in their
organisation. The values as well as the character of leaders become
transparent to an organisation’s employees through their behaviour.
Leaders must take responsibility for ethical lapses within the
organisation, which enhances the loyalty and commitment of
employees through the organisation.

Code of Ethics
They are another important element of an ethical
organisation. Such mechanisms provide a statement and guidelines
for norms and beliefs as well as decision–making. They provide
employees with a clear understanding of the ethical standards of the
organisation. Many large companies have developed such codes
code of conduct.

1. Reward and Evaluation Systems : An appropriate

reward and evaluation system should consider both the
outcomes and the means adopted to achieve the
organisational goals and objectives. Inappropriate
reward systems may cause individuals to commit
Strategic Management : 252 unethical acts.
2. Policies and Procedures : Most of the unethical
behaviours in organisations could be traced to the
absence of
policies
 and procedures to guide behaviour. It is important to Behavioural
carefully develop policies and procedures to guide Implementation

behaviour so that all employees are encouraged to

behave in an ethical manner. However, it is not enough
NOTES
merely to have policies “on the books”. Rather, they
must be effectively communicated, enforced and
monitored. The company should also follow sound
corporate governance practices.

Ethics Training
The purpose of ethic training is to encourage ethical behaviour.
Companies should provide appropriate training in ethical
standards. It enables managers to align ethical behaviour with
organisational goals.

Ethics Audit
Companies should undertake periodic audits to ensure that
proper ethical standards are being followed by all deportments of
the organisation.

Chief Ethics Officer

Some large corporations appoint a senior officer with the
exclusive responsibility of overseeing the ethical conduct of
employees. He functions like a watchdog on ethics.

Ethics Committee : An ethics committee establishes polices

regarding ethical conduct and resolves major ethical
dilemmas faced by the employees of an organisation. Ethics
committee performs such functions as organisation of
regular meetings to discuss ethical issues, identifying
possible violations of the code, enforcing the code,
rewarding ethical behaviour etc. Ethics Hotline : This is a
Strategic Management : 253
special telephone line that enables
Behavioural employees to bypass the proper channel for reportingtheir
Implementation
ethical dilemmas and problems. The line is usually handled
by an executive also investigatesthe matter and helps

NOTES resolve the problems of the concerned employees.

12.6 Social Responsibility and Strategic

Management
Corporate social responsibility (CSR) consists of “actions
that appear to further some social good, beyond the interests of the
firm” It includes such topics as environmental ‘green’ issues,
treatment of employees and suppliers, charitable work and other
matters related to the community. It is important to note that CSR
requires firms to go beyond what the law requires – just doingthe
minimum required by the law is not sufficient. “Corporate social
responsibility is concernedwith the ways in which an organisation
exceeds the minimum obligations to the stakeholders”(Johnson and
Sholes, 2002).Corporate Social Responsibility is therefore a
company’s duty to operate its business by meansthat avoid harm to
other stakeholders and the environment, and also to consider
overall betterment ofsociety in its decisions and actions. The essence
of socially responsible behaviour is that a companyshould strive to
balance its actions to benefit its shareholders without any adverse
impact onother stakeholders like employees, suppliers, customers,
local communities and society at large,and, further, to proactively
mitigate any harmful effects on the environment its actions
andbusiness may have.

12.6.1 Responsibilities of Business

A business organisation has four responsibilities:

1. Economic responsibilities: are the most basic responsi-

Strategic Management : 254
bilities of a business firm. This involves the essential
responsibility of business to provide goods and services to responsibilities.
society at a reasonable cost. In discharging that
economic responsibility, the company provides
productive jobs to its workforce, pays taxes to
central, state and local governments.
2. Legal responsibilities : reflect the firm’s obligation to
comply with the laws that regulate business activities,
especially in the areas of consumer safety and pollution
control.
3. Ethical responsibilities: reflect the company’s notion of
right or proper business behaviour. Ethical
responsibilities go beyond legal requirements. Firms are
expected, though not legally bound, to behave ethically.
4. Discretionary responsibilities: are those that are
voluntarily assumed by business organisations that adopt
the citizenship approach. They support ongoing charities,
publicservice advertisement campaigns, donations, medical
camps, public welfare activities etc. A commitment to
full corporate responsibility requires strategic managers
to attack social problems with the same zeal in which
they tackle business problems. Business managers
should keep in mind that economic and legal
responsibilities are mandatory, ethical responsibilities
are expected, and discretionary responsibilities are
desirable. The above four responsibilities are listed in
order of priority. A business firm must first make a profit
to satisfy its economic responsibilities. A firm must also
follow the laws as a good corporate citizen. Carrol,
however, argues that business firms have obligations
beyond the economic and legal responsibilities; that
firms must also fulfil its social responsibilities.
Social responsibility includes both ethical and
discretionary responsibilities, but not economic and legal
 Behavioural Implementation

NOTES

Strategic Management : 255

Behavioural
Implementation 12.6.2 Need for CSR: The Strategy
After considering the arguments for and against CSR, it
becomes evident that it is in the enlightened self-interest of
NOTES companies to be good corporate citizens and devote some of their
resources and
energies to employees, the communities in which they operate, and
society in general. There are five important reasons why companies
should undertake social responsibilities.

Self-interest of the Organisation : Every organisation

obtains critical inputs from the environment and converts
them into goods and services to be used by society at large. In
this process they help shareholders to get appropriate returns
on their investment. It is expected that organisations
acknowledge and act upon theinterests and demands of
other stakeholders such as citizens and society in general that
are beyond its immediate constituencies – owners, customers,
suppliers and employees. That is, they must consider the needs
of the broader community at large, and act in a socially
responsible way.

It generates Internal Benefits : CSR generates internal

benefits like employee recruitment, workforce retention and
training. Companies with good CSR reputation are better
able to attract and retain employees compared to companies
with tarnished reputations. Some employees just feel better
about working for a company committed to improving
society. This can contribute to lower turnover and better
worker productivity. This also benefits the firm by way of
lower costs for staff recruitment and training. Provision of
good working conditions results in greater employee
Strategic Management : 256 commitment.

It Reduces Risks : CSR reduces the risk of damage to

reputation and
increases
buyer
patronage.
Consumer,
environmental and human rights activist groups are quick Behavioural
to criticise businesses that are not socially responsive. Implementation

Pressure groups can generate adverse publicity, organise

boycotts, and influence buyers to avoid an offender’s
NOTES
products. Research has shown that adverse publicity is
likely to cause a decline in a company’s stock price.

In the Best Interest of Shareholders : CSR is in the best

interest of shareholders. Well-conceived social
responsibility strategies work to the advantage of
shareholders in several
ways. Socially responsible behaviour can help avoid or prevent
legal and regulatory actions that could prove costly or
burdensome. A study of leading companies found that
environmental compliance and developing eco-friendly
products an enhance earnings per share, profitability, and
the likelihood of winning contracts.

It gives Competitive Advantage : Being known as a

socially responsible firm may provide a firm a competitive
advantage. Example: Firms that are eco-friendly enhance
their corporate image. In western countries, many consumers
boycott products that are not “green”. Companies that take
the lead in being environmentally friendly, such as by using
recycled materials, producing ‘green’ products, and helping
social welfare programmes, enhance their corporate
image. In sum, companies that take social responsibility
seriously can improve their business reputation and
operational efficiency while reducing their risk of exposure
and encouraging loyalty and innovation. Overall,
companies that take special pains to protect the
environment (beyond what is required by law), are active in
Strategic Management : 257
community affairs, and are generous supporters of
charitable causes are more likely to be seen as good
Behavioural companies to work for or do business with. It will also
Implementation
benefit the shareholders.

NOTES 12.7 Summary

 A firm’s stakeholders are the individuals, groups, or other
organisations that are affectedby and also affect the firm’s
decisions and actions.
 An organisation needs to have an effective stakeholder
management system in place,which provides a great support
in achieving its strategic objectives.
 Strategic leadership establishes the firm’s direction by
developing and communicating avision of the future and
inspiring organisation members to move in that direction.
 A company’s culture is manifested in the values and
business principles that managementpreaches and practices.
An organisation’s culture can exert a powerful influence on
thebehaviour of all employees.
 Ethics refers to the moral principles and values that govern
the behaviour of a person orgroup. Ethics helps us in
deciding what is good or bad, moral or immoral, fair or unfair
inconduct and decision-making.
 Corporate social responsibility (CSR) consists of “actions that
appear to further somesocial good, beyond the interests of
the firm” It includes such topics as environmental‘green’
issues, treatment of employees and suppliers, charitable work
and other mattersrelated to the community.
 Corporate Social Responsibility is a company’s duty to
operate
its business by means thatavoid harm to other stakeholders
and the environment, and also to consider overall
Strategic Management : 258 betterment ofsociety in its decisions and actions.
 Behavioural
12.8 Key Terms Implementation

Culture: The beliefs and behaviors that determine how a

company’s employees and management interact and handle outside NOTES
business transactions.
Corporate Social Responsibility: A company’s sense of responsibility
towards the community and environment (both ecological and
social) in which it operates.
Deculturation: The removing or abandoning of one’s own culture
and replaces it with another.
Ethics: Motivation based on ideas of right and wrong.
Stakeholders: A person, group, or organisation that has direct or
indirect stake in an organisation.
Strategic leadership: A manger’s potential to express a strategic
vision for the organisation, or a part of the organisation, and to
motivate and persuade others to acquire that vision.

12.9 Questions and Exercises

1. Assess the value of stakeholders in an organsiation. Why is

it important to manage the stakeholders well?

2. Critically analyse the role of strategic leader vis-à-vis

managerial leaders.

3. “Visionary leadership inspires the impossible: fiction

becomes truth”. Substantiate

4. Discuss the three approaches to leadership. Assess the

importance of each of them.

5. “An organisation’s culture is similar to an individual’s

personality.” Comment

6. “There is no best or worst culture”. Elucidate

Strategic Management : 259
Behavioural
7. Suppose you are the manager of a firm that has just acquired
Implementation
another firm. How will you ensure that there is good ‘fit’ between
the culture and startegy of the new firm?
NOTES 8. What do you mean by problem culture? How will deal with
such a culture?
9. Is it necessary for an organisation to be ethical? Give your
viewpoint and justify.
10. CSR is not an obligation, then why most of the successful
companies engage in it?

Check your progress

Fill in the blanks:
1. The company must place its stakeholders on a
….............................based on their level of influence or
impact.
2. A manager is concerned with short term activities of the
organisation, while a.........................is concerned with the
long
term aspects.
3. Strategic leaders must also play a central role in creating a
….....................organisation.
4. In general,............................may be defined as a system of right
and wrong.
5. …………………leaders have a special ability to bring about
innovation and change.
6. Charismatic leaders are often skilled in the art of
………………. leadership.
7. An organisation’s culture is similar to an individual’s
…………………..
8. When the acquired firm willingly surrenders its culture and
adopts the culture of the acquiring company, it is

Strategic Management : 260 called…........................of culture.

9. An ethical organisation is driven by ethical..........................and
…………………...
 10. It is a…........................responsibility of a business to adopt Behavioural
the citizenship approach. Implementation

Answers: NOTES
1. stakeholder matrix 2. strategic leader 3. learning 4. Ethics
5. Transformational 6. Visionary 7. personality 8. Assimilation 9.
values,
integrity 10. discretionary

12.10 Further Reading and References

Books
 Carter McNamara, Organisational Culture, Authenticity
Consulting, LLC, 2000.
 Collins, James C. and Jerry I. Porras, Built to Last: Successful
Habits of Visionary Companies, New York: Harper Business,
1994.

 Edgar Schein, Jay Shafritz and J. Steven Ott, eds. 2001,

Organisational Culture and Leadership in Classics of Organisation
Theory, Fort Worth: Harcourt College Publishers, 1993.

Strategie Management : 261

Strategic Management : 262
UNIT 13: FUNCTIONAL AND Functional and
Operational Implementation
OPERATIONAL
IMPLEMENTATION NOTES

13.0 Unit Objectives

13.1 Introduction

13.2 Functional Strategies

13.2.1 Nature of Functional Strategies

13.2.2 Need for Functional Strategies

13.3 Functional Plans and Policies

13.4 Operational Plans and Policies

13.4.1 Importance of Operational Strategy

13.4.2 Components of Operational Plan and Policies

13.5 Personnel (HR) Plans and Strategies

13.5.1 HR Planning

13.5.2 Staffing

13.5.3 Training and Development

13.5.4 Performance Management

13.5.5 Compensation and Rewards

13.5.6 Industrial Relations

13.6 Summary

13.7 Key Terms

13.8 Questions and Exercises

13.9 Further Reading and References Strategic Management : 263

Functional and
Operational Implementation 13.0 Unit Objectives
After studying this unit, you should be able to:
 Describe functional strategies
NOTES
 Explain the functional plans and policies
 State the operational plans and policies
 Discuss personnel plans and policies

13.1 Introduction
Once corporate level and business level strategies are
developed, management must turn itsattention to formulating
strategies for each functional area of the business unit. For
effectiveimplementation of strategies, functional strategies provide
direction to functional managersregarding the plans and policies to be
adopted in each functional area.

13.2 Functional Strategies

Functional Strategy is the approach taken by a functional area
to achieve corporate and business unit objectives and strategies by
maximising resource productivity. It is concerned withdeveloping
and nurturing a distinctive competence to provide a company or
business unit with a competitive advantage.

Just as a multi-divisional corporation has several business

units, each with its own business strategy, each business unit has its
own set of departments, each with its own functional strategy.

13.2.1 Nature of Functional Strategies

Functional strategies are essential to implement business
strategy. In fact, the effectiveness of acorporate or business strategy
Strategic Management : 264
execution
depends critically on the manner in which strategies are implementation.
implemented at the functional level. The corporate strategy provides
the long-term direction and scope of a firm. The business strategy
outlines the competitive posture of its operations in an industry. The
functional strategy clarifies the business strategy, giving specific
short-term guidance to operating managers in the areas of
operations, marketing, finance, HR, R&D etc., and increases the
likelihood of their success.

13.2.2 Need for Functional Strategies

Functional managers need guidance from the corporate and
business strategies in order to make decisions. In simple terms,
functional strategies tell the functional manager what to do in
hisarea to achieve business objectives. Glueck and Jauch have
suggested five reasons to show why functional strategies are
needed. Functional strategies are developed to ensure that :

1. The strategic decisions are implemented by all the parts

of an organisation.
2. There is a basis available for controlling activities in
different functional areas of a business.
3. The time spent by functional managers on decision-
making may be reduced.
4. Similar situations occurring in different functional areas
are handled by the functional managers in a consistent
manner.
5. Coordination across different functions takes place where
necessary.

13.3 Functional Plans and Policies

The process of developing functional plans and policies is
quite similar to that of strategyformulation, with the difference that
functional heads are responsible for their formulation and
 Functional and Operational Implementation

NOTES

Check Your Progress

Analyse the importance
of functional strategies.
Are they more
important than
businessstrategy?

Strategic Management : 265

Functional and
Operational Environmental factors relevant to each functional area will have an
Implementation impact on the choice of strategies. Finally, the actual process of choice
involves a negotiation betweenfunctional managers and business unit
managers. Thus, functional strategies are generallyformulated in all
NOTES
key functional [Link] each of the functional strategies, a set of
policies will have to establish for appropriate areasof the business.
The policies will ensure that the strategies are carried out as intended
and thatthe different functional areas are working towards the same
ends. Companies have plans andpolicies that cover nearly every
major aspect of the firm. The firm should have strategies inevery
major aspect of business, at least in key functional areas. We will
highlight some of themore important issues for each functional area
that need to be addressed in their respectivefunctional strategies.

The functional strategies required in key functional areas are

outlined below:

Financial Strategy : In the financial management area, the major

concern of the strategy relates to the acquisition and
utilisation of funds. Major issues involved are the sources
from where the funds will come, from equity or by borrowing.
How much of the borrowing will be short-term and how
muchlong-term. In terms of usage of funds, the policy
decisions would relate to whether and to what extent funds
have to be deployed in fixed assets and current assets. The
long-term or capitalinvestment decisions relate to buying or
leasing the fixed assets. A retrenchment strategy orpaucity of
funds may compel the organisation to lease rather than buy. In
case of an organisationwhere capital investment decisions are
decentralised, a “hurdle rate” may be fixed so as to avoid
investment in weaker projects by one division and non-
Strategic Management : 266
investment by another division.
Cash Flow : Apart from capital budgeting, another Functional and
Operational Implementation
consideration in financial strategy which influencesother
functional areas is the cash flow. A company may frame
bonus and dividend policiesbased on availability of cash. In
NOTES
case a company proposes expansion through internally
generatedfunds, it may reduce bonus and dividend. This is
particularly so when it has formulated ambitiousgrowth
strategies which require large cash. Similarly, if the firm has
high risk business, itshould have a conservative debt/equity ratio
to guard against heavy interest [Link] funds position
and optimisation orientation of top management also
determines the accountsreceivable and payable policies.
Financial strategies and policies may even determine
theaccounting policies as these affect the profitability,
balance-sheet and hence cash flow throughtaxes, dividend,
bonus etc.

Marketing Strategy : Functional strategies in marketing

area are required for marketing – mix decisions, i.e. the four
Ps of marketing, viz. Product design, Product distribution,
Pricing and Promotion aspects ofmarketing. In terms of
specifics, the product decisions relate to such issues as the
variety ofproduct (shape, size, model etc.), quality
requirements, introduction/ withdrawal of products, nature
of customers etc. Specific policies are also required
regarding distribution channels i.e. through retailers or
direct selling? What would be the spread of distribution
network? Whether new dealers will be established or old ones
developed? The promotion strategies will relate to mode of
promotion, coverage and nature (corporate, product or brand
promotion). Again, very clear and specific strategies will
have to be made about pricing, etc., full cost or standard cost
Strategic Management : 267
based pricing. Offensive vs. defensive postures also
influence pricing policies.
Functional and
Operational
HR Strategy : HR strategy deals with matters like HR
Implementation planning, recruitment and selection, training
anddevelopment, compensation management, performance
management, rewards and incentivesetc. What
NOTES compensation/reward system will be able to attract people of
the desired type to join the organisation so as to meet the task
requirements demanded by the strategy? What strategies are
necessary to groom internal people for new positions? The
problem becomes acute in thecontext of turnaround
strategies. On the one hand, the most competent people
leave and the firmfinds it difficult to attract suitable
replacements. On the other hand, it faces the problem
ofsurplus staff. HR strategies for retrenchment, though
painful, are quite necessary but difficult todevelop.

Production Strategy : The functions relating to production

need strategies relating to quality assurance,
machineutilisation, location of facilities, balancing the line,
scheduling of production, and materialsmanagement. The
strategy for entering into export market will dictate a different
policy regardingquality of products and maintenance.
Location of facilities may be determined by closeness
tomarket or input supply points. Decisions must be made to
determine whether and how much tomake or buy, on the
basis of cost differential, availability, criticality of the item,
capacity ifexpansion becomes necessary. In case of bought
out items, policies regarding number of suppliersand the
criteria for selecting them are necessary.

R&D Strategy : In the area of research and development,

functional strategies regarding the nature of research are
necessary. In case of expansion through new product
Strategic Management : 268
development, heavy emphasis has to be laid on basic and
applied research.
 Functional and
13.4 Operational Plans and Policies Operational Implementation

Operations management is the core function of any

organisation. This function converts inputs (raw materials, supplies, NOTES
machines and people) into value added outputs. Operations
managementcovers all manufacturing processes in an organisation
and includes raw material sourcing,purchasing, production, distribution
and logistics. This function contributes to the organisation’sability to
add value to the goods and services.

13.4.1 Importance of Operational Strategy

The key to successful survival of an enterprise is how
efficiently the production activity is managed. The two major factors that
contribute to business failures are: obsolescence of theproduct line
and excessive production costs. These factors themselves have been
the outcome ofineffective production [Link] strategy
plays a crucial role in shaping the ultimate success of a firm. It
enables anorganisation to make optimal decisions regarding product,
production capacity, plant location,choice of machinery and
equipment, maintenance of existing facilities and host of other
aspectsof production. Constant review of production plan aids in
maintaining proper balance of capitalinvestment in plant, equipment
and inventory; efficient operation of the production system,product
mix, Quality control; and ensures effective material handling and
Planning of [Link] the broad framework of corporate and
business strategies, production strategy helps in maintaining full co-
ordination with marketing and engineering functions to formulate
plans toimprove products and services. It calls upon management to
keep in constant touch with financeand personnel to achieve the
optimal use of assets, cost control, recruitment of suitable
Strategic Management : 269
personneland management of labour disputes and negotiations.
Functional and
Operational 13.4.2 Components of Operational Plan and
Implementation
Policies
The different components of a production strategy should ideally
NOTES consist of the following:

Product Mix : A firm should decide about the product mix (how
many and what kind of products to beproduced) keeping in view
Objectives such as productivity, cost efficiency, Quality,
reliability, flexibility etc.

Capacity Planning : Capacity Planning is the process of

forecasting demand and deciding what Resources will berequired
to meet that demand. Meclain and Thomas suggested that capacity
Planning involves the following five sequential steps.

1. Predict future demand and competitive reactions: The

firm should forecast the demand for various
products/services as also estimate customer reaction to the
products offeredby it. It should also take care of potential
countermoves by competitors.
2. Translate above estimates into capacity needs: Based on
forecasts, the firm must decidethe quantity that can be
manufactured keeping input limitations, such as plant
equipment,manpower etc in mind.
3. Create alternative capacity plans: Depending on what the
market might absorb and whatthe organisation can
produce, management should create alternative capacity
plans forvarious products/services that are offered to
customers.
4. Evaluate each alternative: The firm should identify the
opportunities and Threats associated with each alternative,
Strategic Management : 270 and carefully evaluate in terms of additional costs
involved,
 payoffsetc. Functional and
Operational Implementation
5. Select and implement a particular capacity plan : The
capacity plan that best servesorganisational Objectives
should be selected and implemented.
NOTES

Technology and Facilities Planning

1. Choosing Machines and Equipments : A strategic
decision to be made by a production manager is what
type of equipments the organisation will require for
production purposes, how much it will cost, what will be
itsoperating cost and what services it will render to the
organisation and for how [Link] of equipment for
making a particular product essentially depends on
the basicmanufacturing process. The decision-maker
must, therefore, familiarise himself with theproduction
process to be [Link] consideration in the
choice of new equipment for a plant is the type and
degree ofoperating skill required and presently available
skills within the organisation. Other factorsworth
consideration are the ease with which the equipment can
be operated and the safetyfeatures of the equipment.
2. Equipment Investment : Acquisition of equipment involves
capital expenditure which will have long-term effects on
thefinancial position of the company. Hence, before
taking a final decision regarding investment ina machine,
detailed analysis of such investment in terms of cost-
benefits must be made and itsdesirability and
worthwhileness should be evaluated with the help of
internal rate of return ornet present value [Link]
decision to replace the existing machine is equally
important to the enterprise. In thisregard the management
has to decide when the replacement should be made and Strategic Management : 271
the bestreplacement policy that must be
Functional and
Operational
considered while making comparisons between an
Implementation existingunit of equipment and its possible replacement. In
order to make a sound economic comparison,all the factors
must be converted into cost considerations. The rate of
NOTES return so obtained iscompared with the cut-off rate to
ascertain whether the replacement is economically viable.
3. Physical Facilities Decision : Facilities strategy covers
plans for location analysis and selection, design and
specificationsincluding layout of equipment, plant, warehouses
and related services. Facilities Planning deals with the
separate but interrelated costs of material, supplies,
manpower, services and facilities. Its Mission is to find
ways to minimise the aggregate of such costs in making and
distributing the products at the proper time.
4. Plant Location : Plant location is essentially an investment
decision having long-term significance. Once a plant is
acquired, it is a permanent asset that cannot readily be sold.
The management may alsocontemplate relocation of the plant
when business expansion and advanced technology require
additional facilities to serve new market areas, to produce
new products, or simply to replacethe old, obsolete plants
to increase the company’s production [Link] selection
of an appropriate plant site calls for location study of the
region in which thefactory is to be situated, the community
in which it should be placed and finally, the exact site inthe
city or countryside.
5. Plant Building : Once the company has chosen the plant
site,
due consideration must be given to providingphysical
facilities. A company requiring extensive space will always
construct new [Link] planning a building for the
manufacturing facilities, a number of factors will have to be
Strategic Management : 272 keptin mind such as nature of the manufacturing process,
plant layout and space
 requirements, lighting, ventilating, air-conditioning, service Functional and
Operational Implementation
facilities and future expansion.
6. Plant Layout : Plant layout involves the arrangement
and location of production machinery, work centres and
NOTES
auxiliary facilities and activities (inspection, handling of
material storage and shipping) for the purpose of
achieving efficiency in manufacturing products or
supplying consumer services.

Maintenance of Equipment
Maintenance of equipment is an important component of
planning consideration. It is intimatelylinked with replacement policies.
Every manufacturing enterprise follows some maintenanceroutine
in order to avoid unexpected breakdowns and thus minimise costs
associated withmachine down time, possible loss of potential sales,
idle direct and indirect labour delays,customer dissatisfaction from
possible delays in deliveries and the actual cost of repairing
themachine.
1. Excess Capacity : In carrying excess capacity method an
organisation carries stand-by capacity, which is used if
trouble occurs. This excess capacity can be whole machines
or it can be major parts or componentswhich ordinarily
Check Your Progress
take time to obtain. Carrying excess capacity involves
cost which must becompared with costs arising out of a Discuss the functional
strategies required in
slow- down or a shut-down of a whole series of key functional areas
dependentoperations. Therefore, the decision in this regard of business?

is cost trade-offs.
2. Preventive Maintenance : Preventive maintenance is based
on the premise that good maintenance prevents
breakdowns. Preventive maintenance means preventing
breakdowns by replacing worn-out machines ortheir
parts before their breakdown. It anticipates likely Strategic Management : 273
difficulties and does the expected neededrepairs at a
convenient time before
Functional and
Operational
the repairs are actually needed. Preventive
Implementation maintenancedepends upon the past knowledge that
certain wearing parts will need replacement after anormal
interval of use.
NOTES
Inventory Management
This is concerned with management of inventory consisting
of raw materials, work-in-process, goods in transit, finished goods
etc. Inventory management is a critical function becausesubstantial
money can be locked up in inventory, which can be put to
productive use. There arevarious techniques that can be used for
effective inventory management.
1. Economic Order Quantity
2. ABC analysis
3. Just-in-time (JIT) Inventory systems etc.

Quality Management
Quality is a major consideration in Production/Operations
strategy. By using techniques likeTotal quality management
(TQM), Six Sigma etc, organisations strive to produce ‘Zero
defectproducts’ Operations strategy should consist of appropriate
Quality improvement programmes to achieve total Quality in
products and services of the [Link] Find out about the
quality management practices at McDonalds.

13.5 Personnel (HR) Plans and Strategies

Personnel policies are guides to action. Brewster and Ricbell
defined HR policies as “a set ofproposals and actions that act as a
reference point for managers in their dealings with
employees”.Management should pay attention to the following
aspects of HR policies:
Strategic Management : 274
 1. HR policies must be related to the strategic objectives of systems.
the firm.
2. They should be stated in definite, clear and understandable
language.
3. They should be sufficiently comprehensive and provide
yardsticks for future action.
4. They should be stable enough to assure people that there
will not be drastic overnight changes.
5. They should be built on the basis of facts and sound
judgment.
6. They should be just, fair and equitable.
7. They must be reasonable and capable of being
accomplished.
8. Periodic review of HR policies is essential to keep in tune
with changing circumstances.

13.5.1 HR Planning
HR planning is the first key component for developing a
human resource strategy. It involvestranslating corporate – wide
strategic objectives into a workable plan and serves as a blue-print for
all specific HR programmes and policies. It is the process of
analysing and identifying theneed for and availability of human
resources so that the organisation can meet its objectives. It helps
determine the manpower needs of firms and develop strategies for
meting those needs. According to Jeffrey Mello, key objectives of
HR planning are:

1. Prevents overstaffing and understaffing.

2. Ensures the organisation has the right number of employees
with the right skills in the right places and at the right time.
3. Ensures the organisation is responsive to changes in its
environment.
4. Provides direction and coherence to all HR activities and
 Functional and Operational Implementation

NOTES

Strategic Management : 275

Functional and
Operational 5. Unites the perspectives of line and staff managers.
Implementation 6. Facilitates leadership continuity through succession planning.

Although HR planning follows from the strategic plan, the

NOTES
information collected in the HRplanning process contributes to the
assessment of internal organisation’s environment done in strategic
planning.

13.5.2 Staffing
Staffing, the process of recruiting applicants and selecting
prospective employees, remains akey strategic area for human resource
strategy. Given that an organisation’s performance is adirect result
of the individuals it employs, the specific strategies used and
decisions made in thestaffing process will directly impact the
success of the strategic plan.

Recruitment : Recruitment means attracting people to

apply for jobs in the organisation. The strategic issues
inrecruitment are:
1. Temporary versus permanent employees
2. Internal versus external recruiting
3. When and how extensively to recruit
4. Methods of recruiting

Selection : Once a sufficient pool of applicants has been

received, critical decisions need to be made
regardingapplicant screening, methods of selection and
placement. The selection methods should bereliable and
valid.

Placement : After selecting a candidate, he should be

Strategic Management : 276 placed on a suitable job. Placement is an importanthuman
resource
 activity. If neglected, it may create employee adjustment Functional and
Operational Implementation
problems. An employeeplaced in a wrong job may quit the
organisation in frustration.

NOTES
13.5.3 Training and Development
Training and development of employees is a key strategic
issue for organisations. It is themeans by which organisations
determine the extent to which their human assets are
viableinvestments. Training involves employees acquiring knowledge
and skills that they will beable to use on the job. There are two key
factors to develop successful training programmes in organisations.

The first is planning and strategising the training. This

involves four distinct steps:
1. Needs assessment
2. The establishment of objectives and measures
3. Delivery of the training
4. Evaluation

The second key factor is to ensure that desired results are

achieved or accomplished. Training needs are to be integrated with
performance management systems and compensation.

13.5.4 Performance Management

An organisation’s long-term success in meeting its strategic
objectives rests on managingemployee performance and ensuring
that performance measures are consistent with the strategicneeds.
One purpose of performance management systems is to facilitate
employee development.A second purpose is to determine
appropriate rewards and compensation, which must be clearlylinked
to achievement of strategic goals.
Strategic Management : 277
Functional and
Operational 13.5.5 Compensation and Rewards
Implementation
Organisations face a number of key strategic issues in
setting their compensation and reward policies and programmes.

NOTES These include:

1. Compensation relative to the market
2. Balance between fixed and variable compensation
3. Appropriate mix of financial and non financial compensation
4. Developing an overall cost-effective compensation
programme that results in high performance.

In addition to these strategic issues, the fast pace of change

and the need for organisations torespond in order to remain competitive
create challenges for all HR programmes, but particularlyfor
compensation. Organisations should revaluate their compensation
programmes within thecontext of their corporate strategy and
specific HR strategy to ensure that they are consistentwith the
necessary performance measures required by the organisation.
Overly rigid compensation systems inhibit the flexibility needed by
the company’s competitive [Link] strategy must encourage
creativity to meet strategic objectives. Therefore,
compensationsystems must ensure that behaviours that help
achieve strategic objectives are appropriatelyrewarded.

13.5.6 Industrial Relations

Industrial relations is a key strategic issue for organisations
because the nature of the relationshipbetween employees can have
a significant impact on morale, motivation and
[Link], how organisations manage the day- to-
day aspects of the employment relationshipcan be a key variable
affecting their ability to achieve strategic [Link]
appropriate collective bargaining and participative management
Strategic Management : 278
practices, industrialrelations can be managed effectively. HR Functional and
Operational Implementation
strategy must incorporate long-term plans andprogrammes to maintain
industrial peace for effective implementation of the business
strategy.
NOTES

13.6 Summary
 Functional Strategy is concerned with developing and
nurturing a distinctive competenceto provides a company or
business unit with a competitive advantage.
 Functional strategies are essential to implement business
strategy.
 Functional policies will ensure that the strategies are carried
out as intended and that thedifferent functional areas are
working towards the same ends. Companies have plans
andpolicies that cover nearly every major aspect of the firm.
 Operations strategy plays a crucial role in shaping the
ultimate success of a firm. It enablesan organisation to make
optimal decisions regarding product, production capacity,
plantlocation, choice of machinery and equipment,
maintenance of existing facilities and hostof other aspects of
production.
 Personnel policies are guides to action. Brewster and Ricbell
defined HR policies as “a setof proposals and actions that
act as a reference point for managers in their dealings
withEmployees.”

13.7 Key Terms

Capacity Planning: Process of forecasting demand and deciding
what Resources will be requiredto meet that demand.
Cash flow: The excess of cash revenues over cash outlays in a given
period of time (not includingnon-cash expenses) Strategic Management : 279

Functional Strategy: Approach taken by a functional area to

achieve
Functional and
Operational
corporate and businessunit objectives and strategies by maximising
Implementation resource productivity.
Human Resource Planning: The ongoing process of systematic
planning to achieve optimum use of an organisation’s most
NOTES valuable asset - its human resources.
Industrial Relations: Interaction between employers, employees,
and the government; and the institutions and associations through
which such interactions are mediated.
Inventory Management: Management of inventory consisting of
raw materials, work-in-process,goods in transit, finished goods etc.
Operations Management: Design, execution, and control of a
firm’s operations that convert its resources into desired goods and
services, and implement its business strategy.

13.8 Questions and Exercises

1. Analyse the importance of functional strategies. Are they
more important than businessstrategy?
2. Suppose you are the manager of a newly established
garments company. You have abusiness strategy ready for
you that stresses on competitive positioning and
properstakeholder management. Draft out a proper
functional strategy for your company, if theobjective is to
establish a brand name in the long run.
3. Discuss the functional strategies required in key functional
areas of business.
4. “Operations management is the core function of any
organisation”. Justify
5. Why is choice of equipments to be used in business a major
strategic decision?
6. “It is necessary to have personnel strategies in place in
order to make other strategiessuccessful.” Comment
Strategic Management : 280
 7. Critically analyse staffing and training as strategies decisions. Functional and
Operational Implementation
8. Evaluate the importance of effective marketing and R&D
strategies.
9. “The key to successful survival of an enterprise is how NOTES
efficiently the production activity is managed.” Discuss
10. How does obsolescence of the product line affect the
organisation?

Check your progress

Fill in the blanks:
1................................. strategy outlines the competitive posture of
its
operations in an industry.
2........................................ will ensure that the strategies are carried

out as intended.
3. A company often frames bonus and dividend policies based
on availability of ……………………….
4. Marketing strategy includes the decision regarding the four
Ps referred to as the…………………….
5. Decision related to logistics comes under the purview
of…..............................strategy.
6. Some organisations that prefer to build smaller capacity to
take care of normal requirements, meet peak demand by
way of imports or …………………………
7. Plant location is essentially........................................decision
that has a long-term significance.
8. ABC Analysis is a technique used for…………………….
9. ……………….is the process of recruiting applicants and
selecting prospective employees.
10. The main purpose of performance management systems is to
facilitate ……………………. Strategic Management : 281
Functional and
Operational
Answers:
Implementation 1. Business 2. Policies 3. cash 4. marketing mix 5. operation
6. Subcontracting 7. investment 8. inventory management 9. Staffing
10. employee development
NOTES

13.9 Further Reading and References

Books
 Azhar Kazmi, Strategic Management and Business Policy, 3rd
Edition, Tata McGraw Hill.
 C Appa Rao, B Parvathiswara Rao and K Sivaramakrishna,
Strategic Management and Business Policy, Excel Books
 Hill and Jones, Strategic Management: An Integrated
Approach, 6th Edition, Biztanatra/ Cengage

Strategic Management : 282

 Strategic Evaluation
UNIT 14: STRATEGIC and Control

EVALUATION AND
CONTROL NOTES

14.0 Unit Objectives

14.1 Introduction

14.2 Nature of Strategic Evaluation and Control

14.2.1 Types of General Control Systems

14.2.2 Basic Characteristics of Effective Evaluation and

Control System

14.3 Strategic Control

14.3.1 Types of Strategic Control

14.3.2 Approaches to Strategic Control

14.4 Operational Control

14.4.1 Setting of Standards

14.4.2 Measurement of Performance

14.4.3 Identifying Deviations

14.4.4 Taking Corrective Action

14.5 Techniques of Strategic Control

14.6 Summary

14.7 Key Terms

14.8 Questions and Exercises

Strategic Management : 283

14.9 Further Reading and References

Strategic Evaluation
and Control 14.0 Unit Objectives
After studying this unit, you should be able to:
 State the nature of strategic evaluation and control
NOTES
 Discuss the concept of strategic control and operational control
 Explain the techniques for strategic control
 Identify the role of organisational systems in evaluation

14.1 Introduction
Strategic evaluation and control is the final phase in the
process of strategic management. Its basic purpose is to ensure that
the strategy is achieving the goals and objectives set for thestrategy.
It compares performance with the desired results and provides the
feedback necessaryfor management to take corrective
[Link] to Fred
R. David, strategy evaluation includes three basic activities :
1) Examining theunderlying bases of a firm’s strategy
2) Comparing expected results with actual results
3) Taking corrective action to ensure that performance conforms
to plans.
Sometime, the bestformulated strategies become obsolete as a
firm’s external and internal environments [Link] should,
therefore, identify important milestones and set strategic thresholds to
assistthem in knowing the changes in the underlying assumptions of a
strategy and, if necessary alterthe basic strategic direction. The evaluation
process thus works as an early warning system forthe
[Link] evaluation generally operates at two levels –
strategic and operational level. At thestrategic level, managers try to
examine the consistency of strategy with environment. At
theoperational level, the focus is on finding how a given strategy is
effectively pursued by theorganisation. For this purpose, different
Strategic Management : 284
control systems are used both at strategic and operationallevels.
 Strategic Evaluation
14.2 Nature of Strategic Evaluation and and Control
Control
Strategic evaluation and control is defined as the process of
NOTES
determining the effectiveness of a given strategy in achieving the
organisational objectives and taking corrective actions wherever
required. According to Pearce and Robinson, strategic control is
concerned with tracking a strategyas it is being implemented,
detecting problems or changes in its underlying premises, and
making necessaryadjustments. In contrast to post-action control,
strategic control seeks to guide action on behalf ofthe strategies,. as
they are taking place and when the end result is still several years off
.Strategic control in an organisation is similar to what the “steering
control” is in a ship. Steeringkeeps a ship, for instance, stable on its
course. Similarly, strategic control systems sense to whatextent the
strategies are successful in attaining goals and objectives, and this
information is fedto the decision-makers for taking corrective action
in time. Strategic managers can steer theorganisation by instituting
minor modifications or resort to more drastic changes such as
alteringthe strategic direction altogether. Strategic control systems
thus offer a framework for tracking,evaluating or reorienting the
functioning of the firm’s strategy.
Check Your Progress
Comment on the nature
14.2.1 Types of General Control Systems of strategic control and
evaluation?
Basically, there are three types of general control systems:
1. Output control (i.e. control on actual performance results)
2. Behaviour control (i.e. control on activities that generate
the performance)
3. Input control (i.e. control on resources that are used in
performance)

Output Control : Output controls specify what is to be Strategic Management : 285

accomplished by focusing on the end result. This control
isdone
Strategic Evaluation through setting objectives, targets or milestones for each
and Control
division, department, section and executives, and measuring
actual performance. These controls are appropriate when

NOTES specificoutput measures haven’t been agreed on. Often

rewards and incentives are linked to performancegoals.
Behaviour Control : Behaviour controls specify how
something is to be done. This control is done through policies,
rules, standard operating practices and orders from superiors.
These controls are the mostappropriate when performance
results are hard to measure. Rules standardise the
behaviourand make outcomes predictable. If employees follow
rules, then actions are performed anddecisions handled the
same way time and again. The result is predictability and
accuracy, which is the aim of all control systems. The main
mechanisms of behaviour control are:
1. Operating budgets
2. Standard operating practices
3. Rules and procedures

Input Control : Input controls specify the amount of

resources, such as knowledge, skills, abilities, of employeesto
be used in performance. These controls are most appropriate
when output is difficult tomeasures.

14.2.2 Basic Characteristics of Effective

Evaluation and Control System
Effective strategy evaluation systems must meet several basic
requirements. They must be :

1. Simple: Strategy evaluation must be simple, not too

comprehensive and not too [Link] systems
Strategic Management : 286 often confuse people and accomplish little. The test of an
effectiveevaluation system is its simplicity not its
complexity.
2. Economical: Strategy evaluation activities must be Strategic Evaluation
economical. Too many controls can domore harm than and Control

good.
3. Meaningful: Strategy evaluation activities should be
NOTES
meaningful. They should specificallyrelate to a firm’s
objectives. They should provide managers with useful
information abouttasks over which they have control
and influence.
4. Timely: Strategy evaluation activities should provide
timely information. For example,when a firm has
diversified into a new business by acquiring another
firm, evaluativeinformation may be needed at frequent
intervals. Time dimension of control must coincidewith the
time span of the event being measured.
5. Truthful: Strategy evaluation should be designed to provide
a true picture of what ishappening. Information should
facilitate action and should be directed to those
individualswho need to take action based on it.
6. Selective: The control systems should focus on selective
criteria like key important factorswhich are critical to
performance. Insignificant deviations need not be
focused.
7. Flexible: They must be flexible to take care of changing
circumstances.
8. Suitable: Control systems should be suitable to the
needs of the organisation. They mustconform to the
nature and needs of the job and area to be controlled.
9. Reasonable: Control standards must be reasonable.
Frequent measurement and rapidreporting may frustrate
control.
[Link]: A control system would be effective only if it
is unbiased and impersonal. Itshould not be subjective
Strategic Management : 287
and arbitrary. Otherwise, people may resent them.
Strategic Evaluation
11. Acceptable: Controls will not work unless they are
and Control
acceptable to those who apply them.
[Link] Understanding and Trust: Control systems

NOTES should not dominate decisions. Ratherthey should foster

mutual understanding, trust and common sense. No
department shouldfail to cooperate with another in
evaluating and control of strategies.
[Link] Responsibility for Failure: An effective control system
must fix responsibility forfailure. Detecting deviations
would be meaningless unless one knows where they
areoccurring and who is responsible for them. Control
system should also pinpoint whatcorrective actions are
[Link] is no ideal strategy evaluation and control
system. The final design depends on the
uniquecharacteristics of an organisation’s size, management
style, purpose, problems and strengths.

14.3 Strategic Control

Strategic control is a type of “steering control”. We have to
track the strategy as it is beingimplemented, detect any problems or
changes in the predictions made, and make necessaryadjustments.
This is especially important because the implementation process itself
takes a long time before we can achieve the results. Strategic
controls are, therefore, necessary to steer the firm through these
events.

14.3.1 Types of Strategic Control

There are four types of strategic controls:
1. Premise control
2. Strategic surveillance
Strategic Management : 288 3. Special alert control
4. Implementation control
Premise Control : Strategy is built around several assumptions or achieve
predictions, which are called planning premises. Premise implementation
control checks systematically and continuously whether the control are:
assumptions on which the strategy is based are still valid. If a
vital premise is no longer valid, the strategy may have to
bechanged. The sooner these invalid assumptions are
detected and rejected, the better are the chances of changing
the strategy.

Strategic Surveillance : Strategic surveillance is a broad-based

vigilance activity in all daily operations both inside and
outside the organisation. With such vigilance, the events that
are likely to threaten the course ofa firm’s strategy can be
tracked. Business journals, trade conferences, conversations,
observationsetc. are some of the information sources for
strategic surveillance.

Special Alert Control : Sudden, unexpected events can

drastically alter the course of the firm’s strategy. Such events
trigger an immediate and intense reconsideration of the
firm’s strategy.

Implementation Control : Strategy implementation takes place as

a series of steps, programmes, investments and moves that
occur over an extended period of time. Resources are
allocated, essential people are put in place, special
programmes are undertaken and functional areas initiate
strategy related [Link] control is aimed at
assessing whether the plans, programmes and policies
areactually guiding the organisation towards the
predetermined objectives or not. Implementationcontrol
assesses whether the overall strategy should be changed in the
light of the results ofspecific units and individuals involved in
implementation of the strategy. Two important methodsto
 Strategic Evaluation
and Control

NOTES

Strategic Management : 289

Strategic Evaluation
A. Monitoring Strategic Thrusts: Strategic thrusts are
and Control
small critical projects that need to bedone if the overall
strategy is to be accomplished. They are critical factors

NOTES in the success [Link] approach is to agree early

in the planning process on which thrusts are critical
factorsin the success of the strategy. Managers
responsible for these - implementation controls will
single them out from other activities and observe them
frequently. Another approachis to use stop/go
assessments that are- linked to a series of these
thresholds (time, costs,success etc.) associated with a
particular thrust.
B. Milestone Reviews: Milestones are critical events that
should be reached during strategyimplementation.
These milestones may be fixed on the basis of.
(a) Critical events
(b) Major resource allocations
(c) Time frames etc.

14.3.2 Approaches to Strategic Control Notes

According to Dess, Lumpkin and Taylor, there are two
approaches to strategic control.

Traditional Approach : Traditional approach to strategic

control is sequential:
1. Strategies are formulated and top management sets goals
2. Strategies are implemented
3. Performance is measured against goals
4. Corrective measures are taken, if there are deviations.
Control is based on a feedback loop from performance
Strategic Management : 290 measurement to strategy [Link] process typically
involves lengthy time lags and often tied to a firm’s annual
 planningcycle. This reactive measure is not sufficient to control a Strategic Evaluation
strategy. As already explained, this isbecause a strategy takes and Control

a long period for implementation and to produce results. The

uncertainfuture requires continuous evaluation of the
NOTES
planning premises and strategy [Link] is a
better contemporary approach for strategic control.

Contemporary Approach : Under this approach, adapting to

and anticipating both internal and external
environmentchange is an integral part of strategic
[Link] approach addresses the assumptions and
premises that provide the foundation for thestrategy. The key
question addressed here is: do the organisation’s goals and
strategies still fitwithin the context of the current
environment? This involves two key actions:
1. Managers must continuously scan and monitor the
external and internal environment
2. Managers must continuously update and challenge
the assumptions underlying the strategy. This may even
need changes in the strategic direction of the firm.
While strategic control requires the contemporary approach,
operational control is generally done through traditional approach.

14.4 Operational Control

Operational control provides post-action evaluation and
control over short periods. They involve systematic evaluation of
performance against predetermined objectives.

14.4.1 Setting of Standards

The first step in the control process is setting of standards.
Standards are the targets against which the actual performance will
Strategic Management : 291
be measured. They are broadly classified into quantitative standards
and
Strategic Evaluation
qualitative standards.
and Control

Quantitative

NOTES These are expressed in physical or monetary terms in respect

of production, marketing, finance etc. They may relate to:
1. Time standards
2. Cost standards
3. Productivity standards
4. Revenue standards

Qualitative
Qualitative criteria are also important in setting standards.
Human factors such as highabsenteeism and turnover rates, poor
production quality or low employee satisfaction can bethe
underlying causes of declining performance. So, qualitative standards
also need to beestablished to measure performance.

14.4.2 Measurement of Performance

The second step in operational control is the measurement of
actual performance. Here, theactual performance is measured against
the standards fixed. Standards of performance act as thebenchmark
Check Your Progress
against which the actual performance is to be compared. It is
“Strategic control is a
type of steering important, however, tounderstand how the measurement of
control”. Discuss performance actually takes place. Operationally measuringis done
through accounting, reporting and communication systems. A variety
of evaluationtechniques are used for this purpose, which are explained
in the next section. The other importantaspects of measurement
relates to:

Difficulties in Measurement : There are several activities

Strategic Management : 292

for which it is difficult to set standards and measure
performance. Example : Performance of a worker in terms of
units produced
 in a day, week or monthcan easily be measured. On the Strategic Evaluation
other hand, it is not easy to measure the contribution of and Control

amanager or to assess departmental performance. The

solution lays in developing verifiableobjectives, stated in
NOTES
quantitative and qualitative terms, against which
performance can bemeasured.

Timing of Measurement : Timing refers to the point of

time at which measurement should take place. Delay
in measurementor measuring before time can defeat the
very purpose of measurement. So measurement shouldtake
place at critical points in a task schedule, which could be at
the end of a definable activity orthe conclusion of a task.
Example: In a project implementation schedule, there
could be several critical points at which measurement
would take place.

Periodicity in Measurement : Another important issue in

measurement is “how often to measure”, Generally,
financialstatements like budgets, balance-sheets, and profit and
loss accounts are prepared every [Link] there are certain
reports like production reports, sales reports etc. which are
done on a daily, weekly, monthly basis.

14.4.3 Identifying Deviations

The third step in the control process is identifying
[Link] measurement of actual performance and its
comparison with standards of performancedetermines the degree of
deviation or variation between actual performance and the
standard.

Strategic Management : 293

Broadly, the following three situations may arise:
 The actual performance matches the standards
Strategic Evaluation  The actual performance exceeds the standards
and Control
 The actual performance falls short of the standards

The first situation is ideal, but sometimes may not be

NOTES
realistic. Generally, a range of tolerancelimits within which the
results may be accepted satisfactorily, are fixed and deviations from
it are considered as variance. The second situation is an indication
of superior performance. If exceeding the standards isconsidered
unusual, a check needs to be made to test the validity of tests and
the measurement system. The third type of situation, which
indicates shortfall in performance, should be taken seriously and
strategists need to pinpoint the areas where the performance is below
standard and go into the causes of deviation. The analysis of
variance is generally presented in a format called ‘variance chart’
and submitted to the top management for their evaluation. After
noting the deviations, it is necessary to find the causes of deviation,
which can be ascertained through the following questions: (Thomas)

1. Is the cause of deviation internal or external?

2. Is the cause random or expected?
3. Is the deviation temporary or permanent?
Analysis of variance leads to a plan for corrective
action.

14.4.4 Taking Corrective Action

The last and final step in the operational control process is
taking corrective action. Corrective action is initiated by the
management to rectify the shortfall in performance. If the
performance is consistently low, the strategists have to do an in
depth analysis and diagnosis to isolate the factors responsible for
such low performance and take appropriate corrective actions.
Strategic Management : 294
There are three courses for corrective action:
 1. Checking performance Strategic Evaluation
2. Checking standards and Control

3. Reformulating strategies, plans and objectives.

NOTES
14.5 Techniques of Strategic Control
Organisations use many techniques or mechanisms for
strategic control. Some of the important mechanisms are:

1. Management Information systems: Appropriate

information systems act as an effective control system.
Management will come to know the latest performance
in key areas and take appropriate corrective measures.

2. Benchmarking: It is a comparative method where a

firm finds the best practices in an area and then
attempts to bring its own performance in that area in line
with the best practice. Best practices are the
benchmarks that should be adopted by a firm as the
standards to exercise operational control. Through this
method, performance can be evaluated continually till it
reaches the best practice level. In order to excel, a firm
shall have to exceed the benchmarks. In this manner,
benchmarking offers firms a tangible method toevaluate
performance.

3. Balanced scorecard: It is a method based on the

identification of four key performance measures i.e.
customer perspective, internal business perspective,
innovation and learning perspective, and the financial
perspective. This method is a balanced approach to
performance measurement as a range of financial and
non- financial parameters are taken into account for Strategic Management : 295

evaluation.
Strategic Evaluation
and Control 14.6 Summary
 Strategic evaluation generally operates at two levels –
strategic and operational level. Atthe strategic level,
NOTES
managers try to examine the consistency of strategy with
[Link] the operational level, the focus is on
finding how a given strategy is effectively pursuedby the
organisation.
 Strategic control is a type of “steering control”. We have to
track the strategy as it is beingimplemented, detect any
problems or changes in the predictions made, and make
necessaryadjustments.
 Operational control provides post-action evaluation and
control
over short periods.
 They involve systematic evaluation of performance against
predetermined objectives.
 Organisations use many techniques or mechanisms for strategic
control. Some of theimportant mechanisms are management
Information systems, bench marking, balanced scorecard,
key factor rating, responsibility centres, network technique,
Management by Objectives (MBO), Memorandum of
Understanding.

14.7 Key Terms

Balanced Scorecard: Strategic performance management tool - a semi-
standard structured report supported by proven design methods and
automation tools.
Benchmarking: Comparative method where a firm finds the best
practices in an area and then attempts to bring its own performance
in that area in line with the best practice.
Strategic Management : 296 Management by Objectives: Process of agreeing upon objectives
within an organisation so that management and employees agree to
the objectives and understand what they are in the organisation. Strategic Evaluation
and Control
Operational control: ensures that day-to-day actions are consistent
with established plans and objectives.
Responsibility centre: A segment of a business or other NOTES
organisation, in which costs can be segregated, with the head of that
segment being held accountable for expenses.
Strategic evaluation and control: Process of determining the
effectiveness of a given strategy in achieving the organisational
objectives and taking corrective actions wherever required.
Strategic surveillance: Broad-based vigilance activity in all daily
operations both inside and outside the organisation.

14.8 Questions and Exercises

1. Comment on the nature of strategic control and evaluation.
2. According to you, what should be the criteria for an
effective evaluation system?
3. In evaluating a strategy, it is important to examine whether
an organisation has the abilities, competencies, skills and
talents needed to carry out a given strategy. Why?
4. If you were a strategist making evaluation, what would you
do if you find something wrong though nothing is wrong
with the performance?
5. Suggest some corrective actions that you would undertake if
the performance is being affected adversely by inadequate
resource allocation and ineffective systems.
6. How would you check whether a strategy can be
implemented within the resources of an enterprise?
7. “Strategic control is a type of steering control”. Discuss
8. Discuss the general approaches to strategic control.
Strategic Management : 297
Strategic Evaluation 9. Discuss the steps in implementing effective operational
and Control
control system.
10. Analyse the role of organisational systems in evaluation.
NOTES
Check your
progress Fill in the
blanks:
1..........................................control focuses on finding how a given

strategy is effectively pursued by the organisation.

2................................................control is concerned with tracking a

strategy as it is being implemented.

3...........................................control is done through policies, rules,
standard operating practices and orders from superiors.
4. Assumptions or predictions around which a strategy is built
is referred to as…………………………
5. PERT and CPM are techniques of.............................control.
6. Control is based on a.................................from performance
measurement to strategy formulation.
7. The analysis of variance in performance is generally
presented in a format called ……………………
8. Best practices serve as……………………..against which
actual performance is evaluated. Notes
9. ……………………………… are used to isolate a unit so
that it can be evaluated separately from the rest of the
corporation.
10. Management by Objectives method was proposed
by…………………….

Answers:
1. Operational 2. Strategic 3. Behaviour 4. planning premises

Strategic Management : 298 5. network 6. feedback loop 7. variance chart 8. Benchmarks

9. Responsibility centres 10. Peter F Drucker.
 Strategic Evaluation
14.9 Further Reading and References and Control

Books
 Fed R David, Strategic Management, New Jersey, Prentice
NOTES
Hall, 1997.
 Gregory G. Dess, GT Lumpkin and ML Taylor, Strategic
Management – Creating Competitive Advantage, McGraw-
Hill, Irwin, NY, 2003.
 Pearce JA and Robinson RB, Strategic Management, McGraw
Hill, NY, 2000.
 Vipin Gupta, Kamala Gollakota and R. Srinivasan, Business
Policy and Strategic Management, Prentice-Hall of India, New
Delhi, 2005.
 Wheelen Thomas L, David Hunger J, KrishRangaraja, Concepts
in Strategic Management and Business Policy, New Delhi,
Pearson Education, 2006.

Strategic Management : 299