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Strategic Management
This study material has been prepared by the faculty of the Board of Studies. The objective of the study material is to provide teaching material to the students to enable them to obtain knowledge and skills in the subject. Students should also supplement their study by reference to the recommended text books. In case students need any clarifications or have any suggestions to make for further improvement of the material contained herein, they may write to the Director of Studies. All care has been taken to provide interpretations and discussions in a manner useful for the students. However, the study material has not been specifically discussed by the Council of the Institute or any of its Committees and the views expressed herein may not be taken to necessarily represent the views of the Council or any of its Committees. Permission of the Institute is essential for reproduction of any portion of this material.
The Institute of Chartered Accountants of India
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Published by Dr. T.P. Ghosh, Director of Studies, ICAI, C-1, Sector-1, NOIDA-201301 Typeset and designed at Board of Studies, The Institute of Chartered Accountants of India. Printed at VPS Engineering Impex Pvt. Ltd. Phase – II Noida. August, 2006, 25,000 copies
Strategic management of information technology in business organizations is an emerging area that requires altogether different managerial skills to handle. These two issues are not sought to be covered in the study material except for a few inklings here and there. There are two broad issues that emerges. They are (a) strategic management of information technology and (b) using information technology in strategic management. They need to strategically manage their enterprises. Business organisations that are able to exploit some form of advantage are more profitable than their rivals. Managing information technology is an important aspect that assists in gaining competitive advantage and entails integration of the two subjects. inter alia. It is interesting to see that businesses compete by selling products that are similar in nature to the same group of customers. considering that the objective is to provide working knowledge. With the changing scope of the Chartered Accountancy profession and the multifarious nature of the work profile of professionals the students need to learn newer and different concepts and acquire multidimensional skills. Chartered Accountants reaching high in the corporate ladder also need to be sound in the concepts and principles of strategic management. As a student of Chartered Accountancy course. reading. How does a company become successful? How a company remains at the top? How a company identifies its potential and is able to deliver its best? How an organisation is able to cope up and gain command over the dynamic and turbulent environment? Answers to these simple questions are really difficult. Strategic management is important for Chartered Accountants. They differentiate their products in order to sell. Information Technology and Strategic Management. With the help of this self-study material on .PREFACE The Paper 6 of Professional Competence Course is divided into two sections viz. In the examinations also students shall be using separate answer books to attempt different sections. An inquisitive mind will have several questions. acquisitions. divestments and corporate successes or failures. The turbulence in the environment forces business organisations to find newer ways to function. For our purpose. However. This book has been prepared to help in learning of section B of the Paper – Strategic Management. they shall remain entirely different subjects. about mergers. With this focus the subject of Strategic Management in chartered accountancy is included in the education and training. at the same time there are some commonalities between the two subjects. Business organisations to perform and excel need a clearer sense of strategic vision and improved understanding of a rapidly changing environment. you must be keenly going through financial newspapers. Information technology and strategic Management are as such two different subjects with different focus.
The knowledge in the field and its quality is evergrowing. Bringing out study material on the subject requires efforts of many.Strategic Management the student are expected to get some insight in the tools and techniques of strategic management. The coverage and treatment of the subject in the study material is just a fraction of the available body of knowledge. who has helped in giving the final shape to this study material. You will get the needed help provided you are clear what do you want. Wish you all the best in your study endeavours. Numerous books are being written on the subject and hundreds of journals are publishing research and other articles on emerging strategical issues in business organisation. Saroj Datta. The world of business organisations and their strategic management is wonderful. Students. Sector -1. has meticulously prepared a draft of the study material. Noida. staying in (or visiting) New Delhi and NCR may drop-in and take benefit of personally meeting the concerned faculty in the Board of Studies. 201301. you are welcome to write a letter to the Institute at C-1. You are advised to take a keen interest in the subject not merely for passing the examination but for making your own professional career path more manageable and meaningful. Dr. In case you find any problem or have any observation on the subjects or study material. . The study material is meant to be a small window to watch and enjoy the world of business organisations. Assistant Director are well appreciable. Shaleen Suneja. Acknowledgements are also due to Dr. exciting and the literature on this world is even more so. Sudhir Dikshit who have also contributed in some of the chapters with their writings on selected topics. Last but not the least the efforts taken by Mr. Sanjeev Shukla and Dr.
Strategic Analyses Situational Analysis – SWOT Analysis. Business Environment General Environment ─ Demographic. . Total Quality Management. and Global. Strategy Implementation and Control Organizational structures. Technological. Establishing strategic business units. Mission and Objectives. Establishing profit centers by business. 2. TOWS Matrix. Contemporary Strategic Issues. Socio-cultural. 3.Paper – 6 : Information Technology & Strategic Management Section B: Strategic Management (50 Marks) Objectives: (a) To develop an understanding of the general and competitive business environment. Strategic Planning Meaning. Human resource strategy. stages. (c) To be able to solve simple cases. 7. strategy formulation. 4. alternatives. Macro-economic. (b) To develop an understanding of strategic management concepts and techniques. Competitive Environment. 6. 5. Formulation of Functional Strategy Marketing strategy. Financial strategy. Strategic levels in organizations. Vision. Legal/political. market segment or customer. Production strategy. Six Sigma. Contents 1. Strategic management imperative. Business Policy and Strategic Management Meaning and nature. Reaching Strategic Edge Business Process Reengineering. Benchmarking. Logistics strategy. product or service. Leadership and behavioural challenges. Portfolio Analysis ─ BCG Matrix.
........... ......... ................CONTENTS CHAPTER 1 : BUSINESS ENVIRONMENT 1............ 3.......8 Strategic Management ....................... 1.. 13........................................................ Introduction......... .......................... 1............................................................13 Elements of Macro Environment............................................................11 Elements of Micro Environment . 1........28 Porter's Five Forces Model .... 8... 1......................................... 3..........Competitive Analysis....7 Components of Business Environment...................................12 ............. 10.....2................... 1........................................... 1............................... 2..................................................................................9 Strategic Decision Making......................................... 1......... 7.... 1........... 4............................................1 Business ................................ 11.... 2...... 14.............................................................. 2...........................2 Environmental Influences on Business ........................................ Introduction................ 7......2....6 Characteristics of Business Environment ................8 Relationship between Organization and its Environment ............... 5... 6..........1 Objectives of a Business ......... 2........30 CHAPTER 2 : BUSINESS POLICY AND STRATEGIC MANAGEMENT 1...27 Competitive Environment .... 1.........15 Strategic Responses to the Environment... 1............................... 1..............................................................2.......................2............................................................................. 1............ ............................2...........................................................................................................11 The Task of Strategic Management............... ....1 Business Policy as a Discipline .. 6.......... 8... 1........................................................4 Why Environmental Analysis? ............................5 The Dynamics of Competitive Strategy ...........2 Generic strategic alternatives....................... 9............1 What is a Strategy............ 1.........................................................................................................2....................................................................... 5.................9 The Micro and Macro Environment ...................................... 12............................ 4.........................................
...... 5..................... Introduction.............. 6.....................................6 Swot Analysis ... 4......................... 7.............................. Mission and Objectives.................................9.................... 3...........12 Tows Matrix ....... 5......... Introduction.....3 The Methods of Industry and Competitive Analysis ...12 Logistics Strategy .................................................................................... 5................................... 3... Vision................................................................. 2............................................................................................. 4....................................................18 CHAPTER 4 : STRATEGIC PLANNING 1............ 2.... 4...... 3...........................................................................................8 Production Strategy Formulation ......................................14 Human Resource Strategy Formulation......................................2 The Stages of Corporate Strategy Formulation-Implementation Process.......13 Research and Development ...4 Strategic Alternatives ....................................................... 5........................................ 5.........................................................14 Strategic Levels in Organisations .................................... 3.....................................2 Financial Strategy Formulation.................... 2................................. 4..... 10. 2............................................................1 Strategic Analyses ........................................ 5......... 3.................................. 3................................21 CHAPTER 3 : STRATEGIC ANALYSIS 1............................................12 CHAPTER 5 : FORMULATION OF FUNCTIONAL STRATEGY 1.........................................1 Marketing Strategy Formulation ............. 3.16 ..................................1 Corporate Strategy.......... 3..... 6................................. 5........................................................................................................................... 7......... 2............................. 3................................... 4......................................1 Situational Analysis...................... Introduction...........................17 Portfolio Analyses ........... 5. 4.................................. 4.......................... 5. 3...
..................................1 Interrelationships between Strategy Formulation and Implementation ..............................9 Total Quality Management (TQM) ...................... 6.......8 Strategic Business Units & Core Competence.............. 4........................... 6.........................21 Leadership and Strategic Implementation ........... 7..........1 Business Process Reengineering.... 2.......................................... 7.......... 2.................................................................... 6. 3..................................................................................................... 6.............................22 ......... 6............................ 4...................... 7...................... Introduction..CHAPTER 6: STRATEGY IMPLEMENTATION AND CONTROL 1................28 Building a Strategy-Supportive Corporate Culture ... 6........................... 5...................................................16 Contemporary Strategic Issues ................ 5......................................1 Benchmarking .........................12 Six Sigma and Management ............................ 7...... 7........................................................................................... 7......6 Organization and Strategy Implementation................................. 6.............. 7.......... Introduction.............................2 Issues in Strategy Implementation ......................32 CHAPTER 7: REACHING STRATEGIC EDGE 1............. 3.. 6............... 6...............
but the one most responsive to change. ♦ Have an understanding of different micro-economic factors that are affecting business. ♦ Know what are the factors that influence a business. ♦ Understand what is environmental analysis and why is it needed. Andrews It is not the strongest of the species that survive. . BUSINESS Etymologically the term business refers to the state of being busy for an individual. No business can function free of interacting and influencing forces that are outside its periphery. organization or society. The term is also interpreted as one's regular occupation or profession.CHAPTER 1 BUSINESS ENVIRONMENT LEARNING OBJECTIVES ♦ Understand the term business and its objectives. Charles Darwin 1. Environment influence businesses and also gets influenced by it. group. ♦ Know the various macro-economic factors and how they are related to business. Awareness of the environment is not a special project to be undertaken only when warning of change becomes deafening… Kenneth R. 2. INTRODUCTION Each business organization operates in its unique environment. nor the most intelligent. ♦ Understand the various components of the competitive environment. ♦ Have an basic knowledge of various types of environment.
company or corporation. processing. how well they are able to combine and utilise resources and to sustain the enterprise as a going and a growing concern. A still broader view of business purpose is that business exists and functions for catering to the material needs and requirements of society. A purpose of business is that business exists to create customers. Thus the term is wide and amenable to different usages. the term refers to a particular entity. to market value of corporate shares and so on. to capital employed. It is said that a business exists for profits. A business for our purposes can be any activity consisting of purchase. growth and change. to include several non-financial factors such as goodwill. It is also interpreted as a particular market sector such as the computer business. as a surplus of business. manufacture. The customer is the foundation of business and keeps it in existence. This is true of every business. relations and so on. OBJECTIVES OF A BUSINESS A business has some purpose.2 . It is for the businesses to create a customer or market. For business enterprises. It is their share. It is a reward for risk taking. It is the customer who determines what a business is. 3. whether it will survive or will eventually perish. in simple terms is selling at a higher price than the cost. People invest in business for getting a return. profit is often regarded as the overall measure of performance. Peter F Drucker has drawn some conclusions about what is a business that are useful for an understanding of the term. Business is society's organ of economic expansion. so far as the owners are concerned. accrues to the owners. As a motive. Other things being equal. within the framework of general considerations of social interest. There will be a group of people who will take decisions that will determine whether an organization is going to prosper or decline. the higher the efficiency the greater is the level and volume of profit. Business efficiency is often expressed in terms of percentage of profit to sales volume. Outside investors also equate profit with the degree of business efficiency and managerial competence and commit their funds in light of such equation and other related assessments.Strategic Management In addition. just as wages are the share of workers. Profit maximization has been qualified with the long-term perspective and has been modified to include development of wealth. It is treated as a financial yardstick for measuring business efficiency and for evaluating managerial competence − how well the decisions and actions of managers turn out to be effective. societal factors. The second conclusion drawn is that the business cannot be explained in terms of profit. profit serves as a stimulant for business effort. The first thing about a business is that it is created and managed by people. A valid purpose of business is to create customers. and/or marketing of products and/or services. Profit. In general. sale. Enterprises pursue multiple objectives rather than a single objective. Profit maximization. The economic criterion of maximising profits for a firm has little relevance in the present times. we may 1.
survival. financial strength of the enterprise an soon. increase in manpower employment. manufacturing facilities. Enterprises seek to balance these objectives in some appropriate manner. All other objectives are facilitative objectives and are meant to be subservient to the profit motive. employee satisfaction and welfare. business and other enterprises are interested in more than mere survival. it gains more value and prominence during the initial stage of the establishment of the enterprise and during general economic adversity. customer service. growth. conservative objective. Some may go even further and emphasise that profit is the sole motive of business enterprises. doing things in the best possible manner and utilising resources in a most suitable combination to get highest productivity. However. general and industry conditions. acquisition of other enterprises and so on. Growth: This is a promising and popular objective which is equated with dynamism. It is a basic. While survival is an obvious objective. productive efficiency.Business Environment identity a set of business objectives pursued by a large cross-section of enterprises. financial solvency. competitive strength. It is a cautious. efficiency is an economic version of the technical objective of productivity-designing and achieving suitable input output ratios of funds. improvement in profits and market share. technological dynamism. stability is a least expensive and risky objective in terms of managerial time and talent and other resources. We may now elaborate some of the more important objectives of business Survival: Survival is the will and anxiety to perpetuate into the feature as long as possible. Growth may take the enterprise along relatively unknown and risky paths. resources. It is pointed out that private business enterprises are operated on behalf of and for the benefit of the owners who have assumed the business risk of investing their funds. A stable and steady enterprise minimises managerial tensions and demands less dynamism from managers. facilities and efforts. product quality. In a sense. Enterprise growth may take one or more of the forms like increase in assets. vigour. implicit objective of most organizations. and so on. diversification. increase in sales volume in existing or through new products. stability. Efficiency: Business enterprise seek efficiency in rationally choosing appropriate means to achieve their goals. promise and success. nature of business competence of management. It is a strategy of least resistance in a hostile external environment. Profitability: It is generally asserted that private enterprises are primarily motivated by the objective of profit. Efficiency is a very useful operational objective. The ability to survive is a function of the nature of ownership. Stability: One of the most important of objectives of business enterprises is stability. In a sense.3 . These relate to profitability. selfreliance. 1. full of promises and pitfalls.
The inputs-output exchange activity is a continuous process and calls for an active interaction with 1. The business converts these resources through various processes into outputs of products and/or services. Stressing this aspect. from country to country. " Business functions as a part of broader environment. technological. The individuals do not live in a vacuum. physical. environment of humans include family. The inputs in the form of human. which could be stored and used for further development and growth. an educational institution produces literate people. Disturbances in the environment may spell extreme threats or open up new opportunities for the firm. adopt different processes and produce different outputs. say customers. the most important of the sectors are socio-economic." A strategist looks on the environment as posing threats to a firm or offering immense opportunities for exploitation. Glueck and Jauch wrote: "The environment includes factors outside the firm which can lead to opportunities for or threats to the firm. The exchange process brings in some surplus (or profits. competitors. business also does not function in an isolated vacuum.Strategic Management 4. The business must continuously monitor and adapt to the environment if it is to survive and prosper. and government. They continuously interact with their environment to live their lives. supplier. Environment is sum of several external and internal forces that affect the functioning of business. furniture. Businesses function within a whole gambit of relevant environment and have to negotiate their way through it. According to Barry M. external and beyond the control of individual industrial enterprises and their managements. roads and other physical infrastructure. For example. friends.4 . ENVIRONMENTAL INFLUENCES ON BUSINESS All living creatures including human beings live within an environment. peers and neighbours. Richman and Melvyn Copen "Environment factors or constraint are largely if not totally. Organizations depend on the external environment for the inputs required by them and for disposing of their outputs in a mutually beneficial manner. It also includes man-made structures such as buildings. adapt to or have to manage and influence them. financial and other related resources are drawn from the environment. reputation. A successful business has to identify. often greatly. A business which continually remains passive to the relevant changes in the environment is destined to gradually fade-away in oblivion. To be successful business has to not only recognise different elements of the environment but also respect. The extent to which the business thrives depends on the manner in which it interacts with its environment. Although there are many factors. good public image and so on) to the business. appraise. These are essentially the 'givers' within which firms and their managements must operate in a specific country and they vary. Different organizations use different inputs. and respond to the various opportunities and threats in its environment. Just like human beings. Apart from the natural environment. A hospital provides health and medical services. The latter are partly exchanged with the external client groups.
5 . it remains the case that. We will make an attempt to identify a framework for understanding the environment of 1. have been historically important. while still achieving a useful and usable level of analysis. Inputs Human Physical Finance Technology Processing Transformation of inputs to outputs Outputs Product Services Environmental Forces 4. they are the natural behaviour of everyone faced with complexity. but it may not be much use because no overall picture emerges of really important influences on the organization.2 Framework to understand the environmental influences In spite of the problems in understanding business environment. Listing all conceivable environmental influences may be possible. which. the difficulty is in making sense of this diversity in a way which can contribute to strategic decision-making. it is very difficult to do so. one of the tasks of the strategic manager is to find ways & means to break out of oversimplification or bias in the understanding of their environment. ♦ The second difficulty is that of uncertainty. organizations can not ignore it. Whether or not change is in fact faster now than hitherto. ♦ Managers are no different from other individuals in the way they cope with complexity. and whether or not the changes are more unpredictable. Arguably. Managers typically claim that the pace of technological change and the speed of global communications mean more and faster change now than ever before. perhaps. 4. These are not perverse managerial behaviours. or confirm prior views.1 Problems in understanding the environmental influences In trying to understand the environment. while it is important to try to understand future external influences on an organization. managers face different problems as follows: ♦ The environment encapsulates many different influences.Business Environment the external environment. They tend to simplify such complexity by focusing on aspects of the environment.
or customers. In general. how it stands in relation to those other organizations competing for the same resources. It may be that there are relatively few of outstanding significance. the competitive arena in which the organization operates. And the process reduces the time pressures on the few which are not anticipated. WHY ENVIRONMENTAL ANALYSIS? When the company ceases to adjust the environment to its strategy or does not react to the demands of the environment by changing its strategy. Here the aim is to identify which of the many different environmental influences are likely to affect the organization's development or performance. to consider the extent to which strategies might need to change. It is clear that because of the difficulty to assessing the future. It is increasingly useful to relate such influences to growing trends towards globalization of industries. To the extent that some or most are anticipated by this analysis and diagnosis.Strategic Management organizations. environmental analysis has three basic goals as follows: 1. find ways of coping with complexity and also assist in challenging managerial thinking. 5. What matters is that there should be an attempt to understand why these are of strategic significance. managerial decisions are likely to be better. ♦ The final step is to moves the focus more towards an explicit consideration of the immediate environment of the organization .6 .of possible futures. the result is lessened achievement of corporate objectives. It is also required to analyse the organization's competitive position: that is. social and technological influences have a bearing on organizations. ♦ The next step might be the auditing of environmental influences. It may also be helpful to construct pictures . This is done by considering the way in which political. In competitive environment we will study five forces analysis (discussed later) that aims to identify the key forces at work in the immediate or competitive environment and why they are significant. From these steps should emerge a view of the really important developments taking place around the organization.or scenarios . From environmental analysis strategists get time to anticipate opportunities and to plan to take optional responses to these opportunities. ♦ Firstly. It also helps strategists to develop an early warning system to prevent threats or to develop strategies which can turn a threat to the firm's advantage. But some can and are. economic. Thus. This will help in identifying key issues. and in what ways? Is it simple or complex to comprehend? This helps in deciding what focus the rest of the analysis is to take. it is useful to take an initial view of the nature of the organizations environment in terms of how uncertain it is.for example. not all future events can be anticipated. the managers can concentrate on these few instead of having to deal with all the environmental influences. as itself. or it could be that there are many interconnected developments. Is it relatively static or does it show signs of change.
Clifton Garvin 6. It is difficult to comprehend at once what factors constitute a given environment. ♦ Environment is complex: the environment consists of a number of factors.Business Environment ♦ First. events. there is dynamism in the environment causing it to continuously change its shape and character. environment is a complex that is somewhat easier to understand in parts but difficult to grasp in totality. "Positive trends in the environment breed complacency. This is frequently seen when the same development is welcomed as an opportunity by one company while another company perceives it as a threat. or a new development. ♦ Third. Some of the important – and obvious – characteristics are briefly described here. It should challenge the current wisdom by bringing fresh viewpoints into the organization. The growth and profitability of an organization depends critically on the environment in which it exists. A particular change in the environment. ♦ Environment is dynamic: the environment is constantly changing in nature. environment analysis should facilitate and foster strategic thinking in organizationstypically a rich source of ideas and understanding of the context within which a firm operates. environmental analysis should provide inputs for strategic decision making. the analysis should provide an understanding of current and potential changes taking place in the environment. The information collected must be useful for and used in strategic decision making. All in all. ♦ Environment is multi-faceted: What shape and character an environment assumes depends on the perception of the observer. At the same time one must have a long term perspective about the future too. Any environment change has an impact on the organization in several different ways. That underscores a basic point: in change there is both opportunity and challenge". CHARACTERISTICS OF BUSINESS ENVIRONMENT Business environment exhibits many characteristics. All these do not exist in isolation but interact with each other to create entirely new sets of influences. . It is important that one must be aware of the existing environment. may be viewed differently by different observers. 1. ♦ Environment has a far reaching impact: The environment has a far reaching impact on organizations.7 . Mere collection of data is not enough. Due to the many and varied influences operating. ♦ Second. conditions and influences arising from different sources.
the general and the relevant environment. dividing it into external and internal components enables us to understand it better. We start with gaining an understanding of the concept of environment. we see how the external environment can be divided into different components. multifaceted and has a far reaching impact. dividing the environment into its external and internal parts. The internal environment (Micro Environment) refers to all the factors within an organization which impart strengths or cause weaknesses of a strategic nature. This is done through a description of four important characteristics of the environment. COMPONENTS OF BUSINESS ENVIRONMENT The environment in which an organization exists could be broadly divided into two parts the external and the internal environment. The Economy at Large Supplier Technology FIRM Substitute Legislation & Regulations Rivals New Entrants Buyers Societal Value & Lifestyles Population Demographics Figure: A Company's Business Environment The external environment (Macro Environment) includes all the factors outside the organization which provide opportunity or pose threats to the organization. Next. Here we deal with the appraisal of the external environment.Strategic Management 7. The environment in which an organization exists can. and classifying the external environment into two parts.8 . be described in terms of the 1. dynamic. observing how a systematic approach can help in environmental appraisal. therefore. Since the environment is complex.
RELATIONSHIP BETWEEN ORGANIZATION AND ITS ENVIRONMENT In relation to the individual corporate enterprise. is one that capitalises on the opportunities through the use of strengths and neutralises the threats by minimizing the impact of weaknesses. in terms of the opportunities and threats. The process of strategy formulation starts with. SWOT. services. The four environmental influences could be described as follows: ♦ An opportunity is a favourable condition in the organization's environment which enables it to consolidate and strengthen its position. constraints. An example of a strength is superior research and development skills which can be used for new product development so that the company gains competitive advantage. the strengths and weaknesses existing within an organization can be matched with the opportunities and threats operating in the environment so that an effective strategy can be formulated. ♦ A strength is an inherent capacity which an organization can use to gain strategic advantage over its competitors. An effective organizational strategy. weaknesses. the external environment offers a range of opportunities. information and values from the larger environmental system. transforms them into outputs of products. An example of a threat is the emergence of strong new competitors who are likely to offer stiff competition to the existing companies in an industry. which is the acronym for strengths. the corporate enterprise draws certain inputs of resources. As a sub-system. threats and pressures and thereby influences the structure and functioning of the enterprise. An example of an opportunity is growing demand for the products or services that a company provides.9 . therefore. A systematic approach to understanding the environment is the SWOT analysis. opportunities and threats. Business firms undertake SWOT analysis to understand the external and internal environment. is crucial for the existence. and the internal environment. growth and profitability of any organization. An understanding of the external environment. the organization. We will learn SWOT analysis in the third chapter. and critically depends on. goals and satisfactions and exchanges with or transmits them 1. An example of a weakness is over dependence on a single product line. or causes damage to.Business Environment opportunities and threats operating in the external environment apart from the strengths and weaknesses existing in the internal environment. the appraisal of the external and internal environment of an organization. 8. Through such an analysis. ♦ A weakness is an inherent limitation or constraint which creates a strategic disadvantage. which is potentially risky for a company in times of crisis. in terms of the strengths and weaknesses. ♦ A threat is an unfavourable condition in the organization's environment which creates a risk for.
Strategic Management
into the external environment. In the process, it generates energy and sustains itself. The relationship between the organization and its environment may be discussed in terms of interactions between them in several major areas which are outlined below: ♦ Exchange of information: The organization scans the external environmental variables, their behaviour and changes, generates important information and uses it for its planning, decision-making and control purposes. Much of the organizational structure and functioning is attuned to the external environmental information. Information generation is one way to get over the problems of uncertainty and complexity of the external environment. Information is to be generated on economic activity and market conditions, technological developments, social and demographic factors political-governmental policies and postures, the activities of other organizations and so on. Both current and projected information is important for the organization. Apart from gathering information, the organization itself transmits information to several external agencies either voluntarily, inadvertently or legally. Other organizations and individuals may be interested in the organization and its functioning and hence approach the organization for information. It is also possible to glean information from the behaviour of the organization itself, from its occasional advertisements, and from annual reports. Also, the organization may be legally or otherwise bound to supply information on its activities to governmental agencies, investors, employees, trade unions, professional bodies and the like. ♦ Exchange of resources: The organization receives inputs—finance, materials, manpower, equipment etc., from the external environment through contractual and other arrangements. It sustains itself by employing the above inputs for involving or producing output of products and services. The organization interacts with the factor markets for purposes of getting its inputs; it competes sometimes and collaborates sometimes with other organizations in the process of ensuring a consistent supply of inputs. The organization is dependent on the external environment for disposal of its output of products and services to a wide range of clientele. This is also an interaction process— perceiving the needs of the external environment and catering to them, satisfying the expectations and demands of the clientele groups, such as customers, employees, shareholders, creditors, suppliers, local community, general public and so on. These groups tend to press on the organization for meeting their expectations, needs and demands and for upholding their values and interests. ♦ Exchange of influence and power: Another area of organizational-environmental interaction is in the exchange of power and influence. The external environment holds considerable power over the organization both by virtue of its being more inclusive as also by virtue of its command over resources, information and other inputs. It offers a range of
Business Environment
opportunities, incentives and rewards on the one hand and a set of constraints, threats and restrictions on the other. In both ways, the organization is conditioned and constrained. The external environment is also in a position to impose its will over the organization and can force it to fall in line. Governmental control over the organization is one such power relationship. Other organizations, competitors, markets, customers, suppliers, investors etc., also exercise considerable collective power and influence over the planning and decision making processes of the organization. In turn, the organization itself is sometimes in a position to wield considerable power and influence over some of the elements of the external environment by virtue of its command over resources and information. The same elements which exercise power over the organization are also subject to the influence and power of the organization in some respects. To the extent that the organization is able to hold power over the environment it increases its autonomy and freedom of action. It can dictate terms to the external forces and mould them to its will. In delineating the relationship between the organization and the environment, one has to be clear on the diversity of both these entities. On the one hand, the nature of relationship depends on the size of the organization, its age, the nature of business, the nature of ownership, degree of professionalization of management, etc. On the other hand, the relationship depends on the fact whether the external environmental elements behave in a random or structured manner (uncertainty v. predictability), whether such elements are placid or turbulent, whether they are slow-changing or fast changing, whether they are simple or complex, and so forth. The degree of interaction between the organization and the external environment is set by the above characteristics. It follows therefore that all organizations do not behave in the same way in relation to their external environment. Their structures and functions are shaped in tune with the demands of the external environment. 9. THE MICRO AND MACRO ENVIRONMENT The environment of business can be categorised into two broad categories micro-environment and macro-environment. Micro-environment is related to small area or immediate periphery of an organization. Micro-environment influences an organization regularly and directly. Within the micro or the immediate environment within which the firm operates we need to address the following issues: ♦ ♦ ♦ ♦ ♦ The employees of the firm, their characteristics and how they are organised. The customer base on which the firm relies for business. The ways in which the firm can raise its finance. Who are the firms suppliers and how are the links between the two being developed? The local community within which the firm operates.
Strategic Management
♦ The direct competition and how they perform. This last point might act as a convenient linking point as we move towards the macro issues influencing the way a firm reacts in the market place. Macro environment has broader dimensions. It mainly consist of economic, technological, political legal and socio-cultural. The issues concerning an organization are: ♦ Who are their threats in the competitive world in which they operate and why? ♦ Which areas of technology might pose a threat to their current product range and why? ♦ The bargaining power of suppliers and customers? ♦ The type of competition they are facing and their perceived threats and weaknesses? The classification of the relevant environment into components or sectors helps an organization to cope with its complexity, comprehend the different influences operating, and relating the environmental changes to its strategic management process. Different bases for classification have been adopted. As already discussed earlier there are two types of environmental forces, which influences an organizations business operation. Some of these forces are external to the firm and the organization has little control over them. Whereas the other types of forces which comes from within the organization and can be controlled by it. Hence, the business environment can be divided into two major components: Macro Environment: consists of demographics and economic conditions, socio-cultural factors, political and legal systems, technological developments, etc. These constitute the general environment, which affects the working of all the firms.
Demographic Economic Government MACRO ENVIRONMENT Legal Political Cultural Technological Global
Micro environment: consist of suppliers, consumers, marketing intermediaries, etc. These are specific to the said business or firm and affects it's working on short term basis.
Business Environment Consumer/Customer Competitors MICRO ENVIRONMENT Organization Market Suppliers Intermediaries
Environmental Scanning Environmental scanning also known as Environmental Monitoring is the process of gathering information regarding company's environment, analysing it and forecasting the impact of all predictable environmental changes. Successful marketing depends largely on how a company can synchronise its marketing programmes with its environmental changes. 10. ELEMENTS OF MICRO ENVIRONMENT This is also known as the task environment and affects business and marketing in the daily operating level. When the changes in the macro environment affect business in the long run, the effect micro environmental changes are noticed immediately. Organizations have to closely analyse and monitor all the elements of micro environment in order to stay competitive. 10.1 Consumers/Customers According to Peter Drucker the aim of business is to create and retain customer. Customers are the people who pay money to acquire an organization's products. The products may be both in form of goods or services. The organizations cannot survive without customers. They will cease to exist. Customers may or may not be a consumer. Consumer is the one who ultimately consumes or uses the product or service. A father may buy a product as a customer for his daughter who will be a consumer. A consumer occupies the central position in the marketing environment. The marketer has to closely monitor and analyse changes in consumer tastes and preferences and their buying habits. ♦ Who are the customers/consumers? ♦ What benefits are they looking for? ♦ What are their buying patterns? 10.2 Competitors Competitors are the other business entities that compete for resources as well as markets.
4 Market The market is larger that customers. which are in same business activity. Direct competition is between organizations. However. particularly threats from competition. A study of the competitive scenario is essential for the marketer. ♦ Employees: Employees are the people who actually do the work in an organization.14 .e. When managers and employees work toward different goals everyone suffers. they differ in beliefs. shareholders. 1956. In micro environment analysis. "We have met the enemy and he is us" . They have different and varied interests. An organization has several non-specific elements of the organization's surroundings that may affect its activities. Understanding its own strengths and capabilities in a particular business.Strategic Management Competition shapes business. education. The market is to be studied in terms of its actual and 1. Employees are the major force within an organization. 10. understanding a business in depth should be the goal of firm's internal analysis. They have a vested interest in the well-being of the company. It is important for an organization that employees embrace the same values and goals as the organization. i. For example.3 Organization Individuals occupying different positions or working in different capacities in organizations consists of individuals who come from outside. and capabilities. nothing is important as self-analysis by the organization itself. These consists of specific organizations or groups that are likely to influence an organization. ♦ Board of directors: Board of directors are found in companies formed under the Companies Act. or organizations who have a major stake in the organization. 10. The board of directors is elected by the shareholders and is charged with overseeing the general management of the organization to ensure that it is being run in a way that best serves the shareholders' interests. Following are a few of major questions that may be addressed for analysing competitions: ♦ Who are the competitors? ♦ What are their present strategy and business objective? ♦ Who are the most aggressive and powerful competitors? Competition may be direct or indirect. These are: ♦ Owners: They are individuals. At the same time competition can also be indirect.. competition between a holiday resort and car manufacturing company for available discretionary income of affluent customers is indirect competition.Pogo. attitudes. groups. goals and resource availabilities of a firm occupy a critical position in the micro environment. The objectives.
designs and administers appropriate strategies and policies to cope with fluctuations therein and otherwise negotiates its way into the future. country or in world. 11. asset ownership. events. It includes factors such as race. The marketer should study the trends and development and the key success factors of the market he is operating. It establishes interacting and interdependent relations. The suppliers provide raw materials.1 Demographic environment The term demographics denotes characteristics of population in a area. 11. ♦ The price sensitivity of the market. Also organizations have to take a major decision on "outsourcing" or "in-house" production depending on this supplier environment. age. In many cases the consumers are not aware of the manufacturer of the products they buy.6 Intermediaries Intermediaries exert a considerable influence on the business organizations.5 Suppliers Suppliers form an important component of the micro environment. services and so on. conducts transactions. Important issues are : ♦ Cost structure of the market. 1.Business Environment potential size. district. They buy product from the local retailers or big departmental stores such as Big bazaars that are increasingly becoming popular. ELEMENTS OF MACRO ENVIRONMENT Macro environment is explained as one which is largely external to the enterprise and thus beyond the direct influence and control of the organization. 10. equipment. groups. ♦ The existing distribution system of the market. Large companies rely on hundreds of suppliers to maintain their production. They can also be considered as the major determining force in the business. The external environment of the enterprise consists of individuals. They constitute a major force. agencies. organizations. ♦ Technological structure of the market. conditions and forces with which the organization comes into frequent contact in the course of its functioning. income. but which exerts powerful influence over its functioning.15 . which shapes competition in the industry. ♦ Is the market mature? 10. Suppliers with their own bargaining power affect the cost structure of the industry. its growth prospect and also its attractiveness. educational attainment.
India has relatively younger population as compared to some countries. Business Organizations need to study different demographic factors. sex ratio. and distribution of income. employment status and location. education. they need to address following issues: ♦ What demographic trends will affect the market size of the industry? ♦ What demographic trends represent opportunities or threats? The business. growth rate affect the business with different magnitude. Particularly. ethnic make-up. the challenge for strategists is to determine what the changes. that have been identified in the demographic characteristics or elements of a population. as well as trends over time to businessmen in addition to economist. are both of interest. We will briefly discuss a few factors that are of interest to a business. Are people living longer? What is the life expectancy of infants? There will be implications for the health care system (for companies serving that segment) and for the development of products and services targeted at older (or younger) population. Some of the demographic factors have great impact on the business. and across households. Among the most important changes in a population's size are: ♦ Changes in a nation's birth rate and/or family size. While each of the major elements of discussed below. Multinationals are interested in India considering its population size.Strategic Management home ownership. geographic distribution. China on the other hand is having an aging population. changes in the specific makeup of a population's size may have even more critical implications. Changes in a nation's birth rate or life expectancy can have important implications for companies. large or small. Marketers and other social scientists often group populations into categories based on demographic variables. imply for the future strategic competitiveness of the company. ♦ Effects of rapid population growth on natural resources or food supplies. Factors such as general age profile. Issues that should be considered include: 1. (i) Population Size: While population size itself. as such.16 . (ii) Geographic Distribution: Population shifts from one region of a nation to another or from non-metropolitan to metropolitan areas may have an impact on a company's strategic competitiveness. Data with respect to these factors within a demographic variable. may be important to companies that require a "critical mass" of potential customers. the country holds huge potential for overseas companies. With having approximately sixteen percent of the world's population. age structure. is concerned with a population's size. ♦ Increases or declines in the total population.
raw material components. manpower market. The economic environment includes general economic situation in the region and the nation. Issues that should be addressed include: ♦ What do changes in the ethnic mix of the population imply for product and service design and delivery? ♦ Will new products and services be demanded or can existing ones be modified? ♦ Managers prepared to manage a more culturally diverse workforce? ♦ How can the company position itself to take advantage of increased workforce heterogeneity? (iv) Income Distribution: Changes in income distribution are important because changes in the levels of individual and group purchasing power and discretionary income often result in changes in spending (consumption) and savings patterns. Strategists must scan. ♦ The concepts of working-at-home and commuting electronically on the information highway have also started in India in an very small level. monitor.2 Economic environment The economic environment refers to the nature and direction of the economy in which a company competes or may compete. The important point to consider is to find out the effect of economic prospect and inflation on the operations of the firms.17 . (iii) Ethnic Mix: This reflects the changes in the ethnic make-up of a population and has implications both for a company's potential customers and for the workforce. forecast. their costs. Economic environment determines the strength and size of the market. services. savings. ♦ Companies may have to consider relocation if population shifts have a significant impact on the availability of a qualified workforce. prices. These may imply changes in recruiting and managing the workforce.Business Environment ♦ The attractiveness of a company's location may be influenced by governmental support. and assess a number of key economic factors mentioned in the table below for both domestic and key international markets. supply markets and so on) which influence the supply of inputs to the enterprise. circulation of money. Income distribution pattern determines the marketing possibilities. and assessing changes in income patterns may identify new opportunities for companies 11. 1. forecasting. quality. conditions in resource markets (money market. Tracking. debt and credit availability. The purchasing power in an economy depends on current income. availability and reliability of supplies.
Strategic Management
Key Economic Factors ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ 11.3 Shift to a service economy Level of disposable income Interest rates Tax rates Government budget deficits Consumption patterns Demand shifts for different categories of goods and services Price fluctuations Global movement of labour and capital Stock market trends Import/export factors Coalitions of Countries/ Regional blocks Political-Legal Environment ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ ♦ Availability of credit Propensity of people to spend Inflation rates Money market rates Gross national product trend Trade Block Formations Income differences by region and consumer groups Worker productivity levels Monetary & Fiscal policies Foreign countries' economic conditions Company of Petroleum Exporting Countries (OPEC) policies Unemployment trends
This is partly general to all similar enterprises and partly specific to an individual enterprise. It includes such factors as the general state of political development, the degree of politicalization of business and economic issues, the level of political morality, the law and order situation, political stability, the political ideology and practices of the ruling party, the purposefulness and efficiency of governmental agencies, the extent and nature of governmental intervention in the economy and the industry, Government policies (fiscal, monetary, industrial, labour and export-import policies), specific legal enactments and framework in which the enterprise has to function and the degree of effectiveness with which they are implemented, public attitude towards business in general and the enterprise in particular and so on. There are three important elements in political-legal environment. (i) Government: Business is highly guided and controlled by government policies. Hence the type of government running a country is a powerful influence on business: A strategist has to consider the changes in the regulatory framework and their impact on the business. Taxes and duties are other critical area that may be levied and affect the business. For example, introduction of Fringe benefits Tax has major impact on the business.
Business Environment
Legal: Business Organizations prefer to operate in a country where there is a sound legal system. However, in any country businesses must have a good working knowledge of the major laws protecting consumers, competitions and organizations. Businesses must understand the relevant laws relating to companies, competition, intellectual property, foreign exchange, labour and so on. Political: Political pressure groups influence and limit organizations. Apart from sporadic movements against certain products, service and organizations, politics has deeply seeped into unions. Also special interest groups and political action committees put pressure on business organizations to pay more attention to consumer's rights, minority rights, and women rights. Socio-Cultural environment
This is too general an entity which influence almost all enterprises in a similar manner. It is a complex of factors such as social traditions, values and beliefs, level and standards of literacy and education, the ethical standards and state of society, the extent of social stratification, conflict and cohesiveness and so forth. Socio-cultural environment consist of factors related to human relationships and the impact of social attitudes and cultural values which has bearing on the business of the organization. The beliefs, values and norms of a society determine how individuals and organizations should be interrelated. The core beliefs of a particular society tend to be persistent. It is difficult for businesses to change these core values, which becomes a determinant of its functioning. Some of the important factors and influences operating in this environment are: ♦ Social concerns, such as the role of business in society, environmental pollution, corruption, use of mass media, and consumerism. ♦ Social attitudes and values, such as expectations of society from business, social customs, beliefs, rituals and practices, changing lifestyle patterns, and materialism. ♦ Family structure and changes in it, attitude towards and within the family, and family values. ♦ Role of women in society, position of children and adolescents in family and society. ♦ Educational levels, awareness and consciousness of rights, and work ethics of members of society. The social environment primarily affects the strategic management process within the organization in the areas of mission and objective setting, and decisions related to products and markets.
Strategic Management
11.5 Technological environment The most important factor, which is controlling and changing people's life, is technology. Technology has literally created wonder. Man could realise its dream of walking in the moon, traveling in spaceships, and go to the other side of the globe within few hours. They have already started dreaming of living of very extended life of hundreds years with the latest development of genetic sciences and technology.
Technology reaches people through people Increased productivity Spend on R&D Changing technology Rise and decline of products Expectations of consumers
Social change
Jobs become more intellectual
Professional managers
Regulation and opposition
System complexity
Demand for capital
Figure: Interference between Business & Technology Technology has changed the way people communicate with the advent of Internet and telecommunication system. Technology has changed the ways of how business operates now. This is leading to many new business opportunities as well as making obsolete many existing
Business Environment
systems. The following factors are to be considered for the technological environment: ♦ The pull of technological change. ♦ Opportunities arising out of technological innovation. ♦ Risk and uncertainty of technological development. ♦ Role of R&D in a country and government's R&D budget. The technology and business are highly interrelated and interdependent also. The fruits of technological research and development are available to society through business only and this also improves the quality of life of the society. Hence, technology is patronized by business. Then again technology also drives business and makes a total change on how it is carried out. The interface between business and technology is explained in the figure: Interface between Business & Technology. Important technology-related issues that might affect a broad variety of companies include: ♦ Access to the "information highway" through the Internet which may enable large numbers of employees to work from home or provide strategists with access to richer sources of information, ♦ Business-to-business sales and exchanges, ♦ Providing customers with access to online shopping through the Internet. For example, Dell Computer Corporation reduces its paperwork flow, schedules its payments more efficiently, and is able to coordinate its inventories efficiently and effectively by using the capabilities of the Internet. This helps to eliminate/reduce paperwork, flatten companies, and shrink time and distance, thus capturing a competitive premium for the company. Because the technological aspects are so important, some of the key questions that can be asked in assessing the technological environment are given below. ♦ What are the technologies {both manufacturing and information technologies} used by the company? ♦ Which technologies are utilised in the company's business, products, or their parts? ♦ How critical is each technology to each of these products and businesses? ♦ Which external technologies might become critical and why? Will they remain available outside the company? ♦ What has been the investment in the product and in the process side of these technologies? For the company and for its competitors? Design? Production? Implementation and service?
political and socio-cultural realities in which the previous assumptions are no longer valid. ♦ Identification of both important emerging global markets and global markets that are changing. The scenario is different now.22 . Among the global environmental factors that should be assessed are: ♦ Potential positive and negative impact of significant international events such as a sport meet or a terrorist attack. these businessmen were more than satisfied. The new concept of global village has changed how individuals and organizations relate to each other. The need to think and act from global perspective is universal. Nature of Globalization Globalization means several things for several people. working methods. and economic. They never felt the need to explore the overseas markets in a big way. Indian businessmen are also out to see beyond the physical boundaries of the country.6 Global environment Today's competitive landscape requires that companies must analyse global environment as it is also rapidly changing.Strategic Management ♦ What are the other applications of the company's technologies? In which applications does the company currently participate and why? In which applicating does the company does not participate and why? ♦ Which technological investments should be curtailed or eliminated? ♦ What additional technologies will be required in order to achieve the current corporate business objectives? . new migratory habits of the workforce as well as increased offshore operation are changing the dynamics of business operation. The Indian companies are acquiring business in different countries. This includes shifts in the newly industrialised countries in Asia that may imply the opening of new markets for products or increased competition from emerging globally competitive companies in countries such as South Korea and China.a set of fresh beliefs. Further. The companies are increasingly interested in globalising. ♦ Differences between cultural and institutional attributes of individual global markets. ♦ What are the implications of the technology and business portfolios for corporate strategy? 11. For some it is a new paradigm . it means integration 1. For developing countries. Due to economic reforms. "If they could pick up some extra sales through exporting. For a long time businessmen everywhere believed that home markets were adequate and safe.
Besides. credit. To be specific. 1. It sells its products in most countries and manufactures in many. It could serve all nations without being especially attached to anyone of them.23 . raises capital and markets wherever it can do the job best. It is a worldwide enterprise chartered by a substantially non-political international body such as IMF or World Bank. Nestle International is an example of an enterprise that has become multinational. patents. ♦ The units respond to some common strategy. It operates as a private business without direct obligations. its managers and shareholders are also based in different nations. In simple economic terms. sources. ♦ Multiple units draw on a common pool of resources. Its function is international business service. minimises the importance of national boundaries. one that. will be the super-national enterprise. globalization means two things: (a) the company commits itself heavily with several manufacturing locations around the world and offers products in several diversified industries. information. and it remains viable only by performing that service adequately for nations which permit its entry. These are discussed as follows: ♦ One reason could be the rapid shrinking of time and distance across the globe thanks to faster communication. A further development. therefore. Even political and geographical barriers become irrelevant At the company level. A company which has gone global is called a multinational (MNC) or a transnational (TNC). and (b) it also means ability to compete in domestic markets with foreign competitors. Why do companies go global? There are several reasons why companies go global. a global company has three characteristics: ♦ It is a conglomerate of multiple units (located in different parts of the globe) but all linked by common ownership. trade names and control systems. growing financial flows and rapid technological changes. globalization refers to the process of integration of the world into one huge market. The global company views the world as one market. marketing and financial advantages in its costs and reputation that are not available to purely domestic competitors. production. by operating in more than one country gains R&D.Business Environment with the world economy. An MNC is. such as money. Such unification calls for removal of all trade barriers among countries. With its integrative view. speedier transportation. it should be able to draw the economic world closer together. perhaps.
Petroleum and mining companies often go global to secure a reliable or cheaper source of raw-materials. ♦ Another reason for going overseas may also vary by industry. ♦ The motivation to go global in high-tech industries is slightly different. ♦ The globalization of firms and industries. and regional economic integration. Japanese have flooded the U. an location of international production. most companies would export the product or service rather than produce it abroad. At this stage. market with automobiles and electronics because the home market was not large enough to absorb whatever was produced. the companies naturally might look to overseas manufacturing plants and sales branches to generate higher sales and better cash flow. ♦ The rise of services to constitute the largest single sector in the world economy. But as foreign demand grows.S. Sooner or later. Some European companies have gone global for similar reason. foreigners may learn about these products. have often ventured overseas to protect old markets or to seek new ones. the foreign market becomes large enough to justify foreign investment. nearly ♦ Rapidly changing technologies that are transforming the nature. ♦ Increasing emphasis on market forces and a growing role for the private sector in all developing countries. Some manufacturing companies. the more significant the transportation factor becomes. important of them are: ♦ Configuring anywhere in the world: An MNC can locate its different operations in 1. The higher the ratio of the unit cost to the selling price per unit. For example cheap labour in India lure foreign investors.Strategic Management ♦ It is being realised that the domestic markets are no longer adequate and rich.24 . the economics of foreign production change. Companies in electronics and telecommunications must spend large sums on research and development for new products and thus may be compelled to seek ways to improve sales volume to support high overhead expenses. Eventually. Manifestation of globalization Globalization manifests itself in many ways. ♦ Companies often set up overseas plants to reduce high transportation costs. organization. by contrast. The following developments are also responsible for transnational operation of companies. If domestic sales and exports do not generate sufficient cash flow. ♦ According to Raymond Vernon companies that develop attractive new products sell them first in their home markets. which has involved both the world's largest economies as well as select developing countries.
bring in new products. the businesses are rewarded with profits. ♦ Lowering of trade and tariff barriers: The apparent and real collapse of international trade barriers proposes a new global cooperative arrangement and a redefinition of roles of state and industry. World over. ♦ Entrepreneur and his unit have a central economic role: In the emerging world order. ♦ Increasing trend towards privatization: Governments are everywhere withdrawing from owning and running business enterprises. Each country's prosperity is interlinked with the rest of the world. consumer markets and lowcost labour. less government interference in business decisions and more dependence on the value-added sector to gain market place competitiveness. For the risk he takes and efforts he puts in. No nation can any longer hope to lead an existence of solitude and isolation in which only domestic industries can function. governments are pulling out from commercial business.Business Environment different countries on the basis of raw material availability. Weak and marginal firms die their natural death. The advantages of cheap labour (and other inputs) evaporate in the face of continuous inflation and high infrastructural costs. resulting in cheaper and abundant supply of goods. The trade tariffs and custom barriers are getting lowered. globalization refers to the unique economically interdependent international environment. businesses are able to innovate. Only firms which are cost effective and quality oriented survive and prosper.25 . Related to this is the viability of the business unit. ♦ Mobility of skilled resources: Skilled labour was once considered to be the decisive factor in plant location and even in determining comparative advantage of a 1. and contribute to nation's wealth. if the companies were to compete globally. ♦ Infrastructural resources and inputs at International prices: Infrastructural inputs must be ensured at competitive prices. The trend is towards increased privatization of manufacturing and services sectors. the entrepreneur and his unit become central figures in the process of economic growth and development of a nation. Given the right environment. ♦ Interlinked and independent economies: In terms of economic-welfare. The role of government is reduced to the provider of infrastructure for private business to prosper. Private entrepreneurs are given greater access and freedom to run business units.
have to form strategic alliances to ward off economic and technological threats and leverage their respective comparative and competitive advantages. The exclusive markets which were once enjoyed are no longer available to a firm. ♦ Market-side efficiency: Integration of global markets implies that costs. ♦ Formation of regional blocks: A final corollary to globalization is the formation of trade blocks.Strategic Management nation. Nepal. like corporations. Bhutan. and terms of business become dominant competition drivers. and Mexico creates new markets and manufacturing opportunities for these countries and threatens to disrupt the plans and strategies of world powers such as Japan. The inexorable pressure of technology and need for its integration means that customers no longer have to be satisfied with shoddy products and services provided by the state monopolies. quality processing time.26 . Canada. Modern factories use highly skilled labour which is freely mobile.. viz. managements are spending vast sums of money to train workers become skilled in their jobs. Similarly. social. 1. cultural. The entire world has become a global village. are no more immobile or restricted for usage with. The signing of NAFTA (North American Free Trade Area) among N. Countries. a developed country which is long on capital and short on land can use a developing country as a base for its manufacturing operations. The reasons for forming such blocks are obvious. Skilled labour is highly mobile. technical and scientific fields and strengthening of cooperation among the member states in the International forums on matters of common interest. Besides labour. America. Similarly formation of European Union and ASEAN affects the World trade balance. labour and capital. the traditional factors of production. India is part of South Asian Association for Regional cooperation (SAARC). Thus. It also strives for social progress and cultural development in the region. other factors of production (land and capital) are also mobile. They are transferable from any part of the world to any other part of the globe. A developing country which is long on land and short on capital can invite foreign investment and make good the deficiency. Where labour is unskilled. SAARC endevours to accelerate economic growth in the Region. Not any more. promotion of active collaboration and mutual assistance in the economic. Customers can make a genuine choice of products and services on the basis of maximum value for money. land. SAARC consist of seven South Asian Countries with Bangladesh. Pakistan and Srilanka as its members in addition of India. Maldives.
They are very passive in their behaviour and are solely guided by the signals of the external environment. They are not ambitious but are content with taking simple paths of least resistance in their goal-seeking and resource transforming behaviour. It is also difficult to determine exactly what business should do in response to a particular situation in the environment. Shaping external environment How far is it possible for organizations to actively shape their relevant environments is an critical question? Can human organizations ever become such super-powerful entities? Is total environmental control and command worth the cost? What are the self-defeating elements in such an approach? Admittedly. It should be remembered that the external environment in larger and more inclusive than the individual organization. They are simple goal-maintaining units. the very dominating behaviour of command organizations may generate powerful countervailing pressures and forces in the environment. They regard that the pervasive complexity and turbulence of the external environmental elements as 'given' within the framework of which they have to function as adaptive-organic sub-systems. they convert threats into opportunities. 1. presumably the former commands more resources and its interests and values are much broader than those of the latter. the businesses should make efforts to exploit the opportunity ad thought the threats. Their feedback systems are highly dynamic and powerful. STRATEGIC RESPONSES TO THE ENVIRONMENT The business organization and its many environments have innumerous interrelationship that at times.Business Environment 12. (iii) Dynamic response: At a still higher sophisticated level. are the businesses that take an intelligent interest to adapt with the changing external environment. are those businesses that regard the external environmental forces as partially manageable and controllable by their actions. (ii) Proceed with caution: At the next level. This is an admittedly sophisticated strategy than to wait for changes to occur and then take corrective-adaptive action. They generate a contingent set of alternative courses of action to be picked up in tune with the changing environment. They seek to monitor the changes in that environment. They are highly conscious and confident of their own strengths and the weaknesses of their external environmental 'adversaries'. In this context following approaches may be noted: (i) Least resistance: Some businesses just manage to survive by way of coping with their changing external environments. stability and strength. it becomes difficult to determine exactly where the organization ends and where its environment begins. They not merely recognise and ward off threats. Strategically. analyse their impact on their own goals and activities and translate their assessment in terms of specific strategies for survival.27 .
Coke and Pepsi may be obvious competitors. Mid-sized and small business also chase same customers and find that prices and product quality are bounded by the moves of their competitors. Competition is not necessarily restricted to same product or services.Strategic Management A innovative and autonomous organization generates its own constraints. While formulating strategies. There can be several competitors vying to satisfy same needs of customers. COMPETITIVE ENVIRONMENT The essence of strategy formulation is coping with competition. income distribution and consumer welfare. organizations have to separately identify and concentrate on the competitors who are significantly affecting the business. such an organization can shape part of its relevant external environment on a reciprocal basis. Businesses have to consider competitors' strategies. At the same time they have to compete with other companies such as Hindustan Lever Ltd whose Kisan squashes will be directed towards same needs. Intense competition is neither a coincidence nor bad luck. Multinationals and large organizations clash directly on every level of product and service. All organizations have competition. Even large public sector monopolies are gradually getting privatised and facing competition. Lesser attention may be given to smaller competitors who have little or no impact the business. It is not above the rule of law and logic of the external environment. They have to also compete with natural juices such as Real. products and services when preparing and implementing their business plans. The monopolies enjoyed by the Bharat Sanchar Nigam Ltd and Mahanagar Telephone Nigam Ltd have faded away after entry of private players. A better understanding of the nature and extent of competition may be reached by answering the following questions: (i) (ii) (iii) (iv) (v) (vi) (vii) Who are the competitors? What are their product and services? What are their market shares? What are their financial positions? What gives them cost and price advantage? What are they likely to do next? Who are the potential competitors? 1. Within certain limits. 13.28 . costs. For a single business organization the competition spells out freedom of entry and exit in the market and affects its prices and scale of operations The nature and extent of competition that a business is facing in the market is one of the major factors affecting the rate of growth. profits levels.
However. These include large business houses such as Tata. wherein a small number of only manufactures/sellers of a product may join together to have monopolistic behaviour. In Kieretsu members remain independent companies in their own right: the only strategy they have in common is to prefer to do business with other kieretsu members. Godrej. An example of oligopoly can be Organization of the Oil Exporting Countries (OPEC). The benefits of cooperation are also seen in Japan. big. is 'the coordination and unification of the petroleum policies of member countries and the determination of the best means for safeguarding their interests. Such cooperation is not necessarily restricted to the organizations producing or dealing in same product or services. The cooperation in organizations forming cartels (a term used to define the groups in oligopoly) may be in form of deciding market shares. ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations. but to share purchasing. as the primary purpose of a kieretsu is not to share information or agree industry standards. The ownership. Its aim according to its Statute. Such arrangements help in reaching greater number of customers. They may identify some common interest for cooperation between them. distribution or any other functions.Business Environment Cooperation in a Competitive Environment: In economics we study oligopoly. prices and profits. Escorts and et al. which is collective group of nations extracting and exporting oil. Kieretsu members are peers and may own significant amounts of each other's stock and have many board members in common. A cold drink manufacture may enter into arrangement with a chain of restaurants to offer its beverages to the clients of restaurants. A kieretsu also differs from a consortium or an association. usually in related industries. the ownership group is nothing but a family and its kith and kin. It is not necessary that the organizations form explicit cartels as they may have tacit arrangements not known to general public. The cooperation may also be witnessed in highly competitive business environment. various credit card companies are entering into arrangements with other businesses to launch co-branded credit cards. are family-managed enterprises. Cooperation on account of family ownership: Theoretically. The interests of the family largely influence the managerial decisions and activities of the enterprise. a very large number of business enterprises. Commonly. There is a total identity between the needs and goals of the family and of the 1. Tata and Fiat have arrangements in relations to cars. medium and small. Lately. In India. they are different from conglomerates (Common in western countries and also found in India) wherein all members are lineated through ownership pattern. Reliance.29 . Birla. Major decisions and sometimes even minor decisions are made by members of the family who manage the enterprise. cooperation generates automatically in businesses owned by a same family. A kieretsu is a loosely-coupled group of companies. Modi. individually and collectively. both when buying and when selling. groups are engaged in the management of their enterprise in a direct manner. where large cooperative networks of businesses are known as kieretsus. These are formed in order to enhance the abilities of individual member businesses to compete in their respective industries.
♦ Competitive pressures stemming from supplier bargaining power and supplier-seller collaboration. one can count several counter examples of familyrun businesses that have resolved these issues amicably. The Murugappa Group in the South. ♦ Competitive pressures stemming from buyer bargaining power and seller-buyer Collaboration.Strategic Management enterprise.(see figure) This model holds that the state of competition in an industry is a composite of competitive pressures operating in five areas of the overall market: ♦ Competitive pressures associated with the market maneuvering and jockeying for buyer patronage that goes on among rival sellers in the industry. Be it the Ambanis of Reliance Industries. 14. Thinking strategically about a company's competitive environment entails using some well defined concepts and analytical tools. the Burmans of Dabur India and the Thapars have settled succession issues without coming into the public eye. in the recent past. faced succession and ownership issues and found them tough to resolve. PORTER'S FIVE FORCES MODEL . ♦ Competitive pressures coming from the attempts of companies in other industries to win buyers over to their own substitute products. the Bajajs of Bajaj Auto. or the Modis of Modi Rubber . Evaluate how strong the pressures comprising each of the five forces are . Sometimes. managers do not need to gather all the information they can find and waste a lot of time digesting it. Succession remains a tricky and conflicting issue in businesses. and subtleties of competitive forces are never the same from one industry to another. Rather. However.30 Identify the specific competitive pressures associated with each of the five forces.COMPETITIVE ANALYSIS To gain a deep understanding of a company's industry and competitive environment. The way one uses the five-forces model to determine what competition is like in a given industry is to build the picture of competition in three steps: Step 1: Step 2: 1. quarrels and conflicts among the managing members of the family on family matters tend to distort their behaviour in managing the enterprise also and thereby damage its functioning. A powerful and widely used tool for systematically diagnosing the principal competitive pressures in a market and assessing the strength and importance of each is the five-forces model of competition. ♦ Competitive pressures associated with the threat of new entrants into the market. mix. the task is much more focused. The character. the Nandas of Escorts.each family has.
31 . moderate to normal. strong. or weak). And the bigger the new entrant. the more severe the competitive effect. Bargaining power of customers: This is another force that influences the competitive condition of the industry. POTENTIAL NEW ENTRANTS Competitive pressures coming from the threat of entry of new rivals Competitive pressures stemming from Suppliers Bargaining Power INDUSTRY COMPETITORS Competitive pressures stemming from buyer Bargaining Power SUPPLIERS BUYERS RIVALRY AMONG EXISTING FIRMS Competitive pressures coming from substitute products FIRMS IN OTHER INDUSTRIES OFFERING SUBSTITUTE PRODUCTS Figure: The Five Force model of Competition Threat of new entrants: New entrants are always a powerful source of competition. Step 3: Determine whether the collective strength of the five competitive forces is conducive to earning attractive profits.Business Environment (fierce. New entrants also place a limit on prices and affect the profitability of existing players. This force will become heavier depending on the possibilities of the 1. The new capacity and product range they bring in throw up new competitive pressure.
usually limit the prices and profits in an industry. Threats from substitutes: Substitute products are a latent source of competition in an industry. if the suppliers are also limited in number they stand a still better chance to exhibit their bargaining power. and substitutes have all to be viewed as forces governing competition in the industry. users of industrial products come together formally or informally and exert pressure on the producer in matters such as price. And they can bring it about all of a sudden. too. exercise considerable bargaining power over companies. coir suffered at the hands of synthetic fibre. Quite often. The more specialised the offering from the supplier. A firm has to give due weightage to each of these forces as a fight can emerge from any quarter. Such a collusion on the part of buyers can be a major force in some industries. Substitute products offering a price advantage and/or performance improvement to the consumer can drastically alter the competitive character of an industry. Two top CDMA service providers Reliance and Tata Teleservices are putting a simultaneous pressure on Qualcomm to reduce the royalties on the CDMA based handsets. And. Substitutes. elements such as cost and investment needed for being a player in the industry 1. industry attractiveness and profitability. And it is obvious that for any player. This is so because these forces influence the causes that underlie industry attractiveness/profitability. The five forces together determine industry attractiveness/profitability. Bargaining power of suppliers: Quite often suppliers. The bargaining power of suppliers determines the cost of raw materials and other inputs of the industry and. in addition to existing rivals or competitors proper. advertising.Strategic Management buyers forming groups or cartels. too. etc. Mostly. quality and delivery. forces such as new entrants. Wherever substantial investment in R&D is taking place. So. This is what is normally understood as competition. greater is his clout. the competitors influence prices as well as the costs of competing in the industry. sales force.32 . For example. threats from substitute products can be expected. customers. in production facilities product development. In many cases they become a major constituent of competition. Rivalry among current players: The rivalry among existing players is an idea that can be easily understood. suppliers. costs and investments of the producer because powerful buyers usually bargain for better services which involve costs and investment on the part of the producer. this is a phenomenon seen in industrial products. The bargaining power of the buyers influences not only the prices that the producer can charge but also influences in many cases. For example. therefore.
(b) Make efforts that changes are reverted back so that organizations can function smoothly. All are elements of micro environment except: (a) Consumer. In response to the changes in the environment organizations in general should: (a) Understand the impact of changes on the strategy and make appropriate modifications. The strength of the forces may vary from industry to industry as also within a given Self-Examination Questions Multiple Choice Questions 1. (b) Government. (b) Suppliers. (c) Competitors. (c) Competitors. All are elements of macro environment except: (a) Society. (d) None of the above.Business Environment decide industry profitability. 1. (b) Environmental factors are largely beyond the control of a single industrial enterprise. (d) Technology.33 . (d) Society. 3. Select the correct statement out of the following: (a) Environmental factors are totally beyond the control of a single industrial enterprise. and all such elements are governed by these forces. The collective strength of these five competitive forces determines the scope to earn attractive profits. 4. 2. (c) Environmental factors are totally within the control of a single industrial enterprise. (c) Ignore the changes.
34 . To further this growth and discuss the common issues various IT professionals of different companies assembled for a meeting. 5. What is competitive environment? Discuss the five forces driving industry competition as given by Porter.Strategic Management (d) None of the above. Essay type Questions Case Study Information technology (IT) exports from the Software Technology Park in Sohanpur in Uttar Pradesh has increased from Rs 1005 crore to Rs 1455 crore in the last five years. 5. (b) (ii) and (iii) (c) (i) and (iii) (d) (i). (ii) and (iii) Short answer Questions 1. 3. The environment has a far reaching impact on organizations. Read the following three statements: (i) (ii) (iii) The environment is constantly changing in nature Various environmental constituents exist in isolation and do not interact with each other. 2. 1. From the combinations given below select an alternative that represent statements that are true: (a) (i) and (ii). What is a kieretsus? What is demographic environment of business? Write a short note on micro environment. 4. Their agenda included discussion on the issues relevant for the development of the technology park and available opportunities in IT industry for companies 1. 2. Do you advocate that organizations should concern themselves with the elements of its outside world? Why? Discuss the relations between organizations and their external environment? How organizations strategically respond to their environment? What do you mean by micro and macro environment? Briefly discuss various elements of macro environment. 3.
(c) 3. Segregate them as positive and negative. Suggest how manpower issues can be dealt by the businesses in the park. He felt that the telecommunications technology in the region is primitive and is not able to meet the present needs of the region. He said retention was a major problem in Sohanpur as professional also preferred bigger cities.Business Environment planning to set up IT and processing businesses in Sohanpur. 2. The nearest airport is 600 km away in New Delhi. Read the above case and answer the following questions: (1) (2) (3) 1. One of the participant highlighted the importance of world-class telecommunication facilities in the area. (c). He highlighted that a major problem is lack of patience in the young generation of IT professionals.Multiple Choice Questions 1. (b) 4. What is importance of an Airport in the city? Discuss. Answers . He suggested that the IT businesses should get together to create a conducive working climate for retention as well as growth. He also spoke at length about the problems of frequent job changes by present youth. (d) List out different environmental factors for a new entrepreneur who wants to start a new IT project in the Technology park. (a) 5. It was felt by a few persons that the absence of an airport and availability of uninterrupted round the clock power supply were major hurdles towards the development of the park.35 .
♦ Learn how strategy operates at different levels of the organization. Without a strategy the organization is like a ship without a rudder. ♦ Have an understanding of corporate vision and mission. including the chartered accountants. when Harvard Business School introduced an integrative course in management aimed at the creation of general management capability. ♦ Know the framework and importance of strategic management. Business policy and strategic management are highly intertwined. BUSINESS POLICY AS A DISCIPLINE The origins of business policy can be traced back to 1911. All professionals. Joel Ross and Michael Kami Strategic management is not a box of tricks or a bundle of techniques. Peter Drucker 1. working towards growth of their businesses must possess sound knowledge of strategic management. the management of business has acquired strategic dimension. It is analytical thinking and commitment of resources to action. With the increased competition. INTRODUCTION This chapter introduces the concept of business policy and strategic management. 2. This course was based on interactive case studies which had been in use at the . ♦ Know the strategic management process.CHAPTER 2 BUSINESS POLICY AND STRATEGIC MANAGEMENT LEARNING OBJECTIVES ♦ Learn what business policy and strategy is all about.
and the mobilization of resources for the attainment of goals in the face of competition or adverse circumstance. Soon. According to Glueck. Such a framework enables a person to make preparations for handling general management responsibilities. is "the study of the functions and responsibilities of senior management. have to do with the choice of purposes. like those of policy in public affairs. a mandatory requirement for the purpose of recognition. The term 'Business Policy' has been traditionally used though new titles for the course have begun to be introduced in recent years. the moulding of organizational identity and character. In business organizational context the term is not much different. compete successfully. business policy as a course spread to different management institutes across different nations and become an integral part of management curriculum. 2. In 1969. as defined by Christensen and others. and the decisions that determine the direction of the organization and shape its future. The course was intended to enhance general managerial capability of students. Starting from day-to-day planning in earlier times. and later by strategic management:. Basically. development in business policy arose from the use of planning techniques by managers. A company's strategy is the game plan management is using to stake out market position. Strategy seeks to relate the goals of the organization to the means of achieving them. attract and please customers. and achieve organizational objectives. Businesses have to respond to a dynamic and often hostile environment for pursuit of their mission. integrative course offered to students who have previously been through a set of core functional area courses. WHAT IS A STRATEGY A typical dictionary will define the word strategy as something that has to do with war and deception of an enemy. conduct its operations. a term that is currently used to describe the process of strategic decision making. managers tried to anticipate the future through preparation of budgets and using control systems like capital budgeting and management by objectives. With the inability of these techniques to adequately emphasize the role of future. the crucial problems that affect success in the total enterprise. long-range planning came to be used. Business Policy tends to emphasise on the rational-analytical aspect of strategic management. The problems of policy in business.Strategic Management school for instructional purposes since 1908. the American Assembly of Collegiate Schools of Business. the introduction of business policy in the curriculum of business schools / management institutes came much later. However. It presents a framework for understanding strategic decision making. During the next few decades. a regulatory body for business schools.2 . made the course of business policy. long-range planning was replaced by strategic planning. the continuous definition of what needs to be done. business policy is considered as a capstone. Business policy. 3.
are highly integrated and pragmatic. Strategy is meant to fill in the need of organizations for a sense of dynamic direction. ♦ It is action oriented and is more specific than objectives. the set of goals has a system of priorities. In general. to offset corporate weaknesses and to make major decisions in general. to mobilise resources.3 . Top management operates in an environment of partial ignorance and uncertainty. to direct effort and behaviour. compete successfully and achieve organizational objectives. though it is valid for short-range situations also and has short-range implications. To the extent the term strategy is associated with unified design and action for achieving major goals. In corporate strategy. comprehensive and integrated plan designed to assure that the basic objectives of the enterprise are achieved. and to meet challenges and threats to corporate survival and success. the sequence and the timing of the moves. 2. to handle events and problems. Following other definitions are also important to understand the term: Igor H. direction and destination what it wants to be. the implications of decisions and action programmes are corporate wide. the combination. a corporate strategy has the following characteristics: ♦ It is generally long-range in nature. evaluate and exploit beneficial opportunities. The very injection of the idea of strategy into business organizations is intended to unravel complexity and to reduce uncertainty of the environment. focus and cohesiveness. Glueck Strategy is consciously considered and flexibly designed scheme of corporate intent and action to achieve effectiveness. to perceive and utilise opportunities. Ansoff : The common thread among the organization's activities and product-markets that defines the essential nature of business that the organization was or planned to be in future. gaining command over the situation with a long-range perspective and securing a critically advantageous position. Its implications for corporate functioning are obvious. William F. to perceive and meet potential threats and crises. the initiative and responses have a cogent rationale behind them. what it wants to do and where it wants to go.Business Policy and Strategic Management A company's strategy consists of the combination of competitive moves and business approaches that managers employ to please customers. Strategy provides an integrated framework for the top management to search for. Objectives and goals alone do not fill in the need. We may define 'strategy' as a long range blueprint of an organization's desired image. means and approaches are determined in advance. : A unified. ♦ It is multipronged and integrated. flexible and contingent. to make full use of resources and strengths.
They obviate the occasions for impulsive and crisis decisions. Even if they get off the ground. 2. They provide a systematic basis for the enterprise to stand its ground in the face of challenge and change as also quickly adjust to them. followed up by policies. These corporate wide strategies need to be operationalized by divisional and functional strategies regarding product lines. corporate objectives and goals tend to remain as mere aspirations and good intentions. Strategy can never be perfect. failures and frustrations. personnel development and like. ♦ It is generally meant to cope with a competitive and complex setting. It is in the very nature of strategy that it is flexible and pragmatic. focus and coherent functioning. sequence. false starts. misdirected moves.4 . flawless and optimal. Strategies provide an integral framework for management to negotiate its way through a complex and turbulent external environment. allowances are made for possible miscalculations and unanticipated events. prices. in a sound strategy. ♦ It is concerned with perceiving opportunities and threats and seizing initiatives to cope with them. production volumes. ♦ It provides unified criteria for managers in function of decision making. takeovers and mergers. The role of strategies thus stems from the fact that achievement of organizational objectives is best with uncertainties and pitfalls. divisional and functional level. diversification. though middle and lower level managers are associated in their formulation and in designing sub-strategies.Strategic Management ♦ It is flexible and dynamic. and so on. R & D projects. it is art of the possible. pervasive pressures. ♦ It gives importance to combination. alert and responsible management. expansion and growth. they will be lacking drive and direction. direction and depth of various moves and action initiatives taken by managers to handle environmental uncertainties and complexities. ♦ It is formulated at the top management level. quality ranges. Strategies are meant to fill in the need of enterprises for a sense of direction. wasted resource uses and the like. market penetration. It is also concerned with deployment of limited organizational resources in the best possible manner. it does not preclude second-best choices. strategy is no substitute for sound. Corporate strategies are formulated by the top managers. sudden emergencies. Without a network of well designed strategies. ♦ It flows out of the goals and objectives of the enterprise and is meant to translate them into realities. However. purchasing sources. trade-offs. They include the determination of the business lines. new investment and divestment areas. vertical and horizontal integration. However. timing. Strategies are formulated at the corporate. product promotion.
acquiring and merging businesses. It is not a 'do nothing' strategy. 4. GENERIC STRATEGIC ALTERNATIVES According to William F Glueck and Lawrence R Jauch there are four generic ways in which strategic alternatives can be considered. ♦ The strategic decisions focus on incremental improvement of functional performance Stability strategies are implemented by approaches wherein few functional changes are made in the products or markets. and to optimise returns on the resources committed in the business. The strategy may take the enterprise along relatively unknown and risky paths. the process is known as conglomerate diversification. This strategy is typical for mature business organizations. Some small organizations will also frequently use stability as a strategic focus to maintain comfortable market or profit position. Innovative and creative firms always look for opportunities and challenges to grow. involving substantially different skills. It is often characterised by significant reformulation of goals and directions. to continue in the chosen business path. 4. These are stability. An enterprise on the move is a more agreeable stereotype than a steady-state enterprise.1 Stability strategies: One of the important goals of a business enterprise is stability − to safeguard its existing interests and strengths.2 Expansion Strategy: Expansion strategy is implemented by redefining the business by adding the scope of business substantially increasing the efforts of the current business. new technology and new markets. technology and knowledge. major initiatives and moves involving investments.5 . new services or new markets. full of promises and pitfalls. expansion. to maintain operational efficiency on a sustained basis. Both the technology of the product and of the market are different from the firm's present experience. promise and success. Expansion also includes diversifying. Expansion is a promising and popular strategy that tends to be equated with dynamism. to venture 2. exploration and onslaught into new products. It involves keeping track of new developments to ensure that the strategy continues to make sense. innovative decisions and action programmes and so on. Expansion through diversification: Diversification is defined as entry into new products or product lines. A stability strategy is pursued by a firm when: ♦ It continues to serve in the same or similar markets and deals in same products and services. vigor. retrenchment and combinations. to pursue well established and tested objectives. When an established firm introduces a new product which has little or no affinity with its present product line and which is meant for a new class of customers different from the firm's existing customer groups. to consolidate the commanding position already reached.Business Policy and Strategic Management 4.
market prestige. It may be possible to improve the sales and profits of existing products by adding suitably related or new products. Synergy may result from such bases as physical facilities. general administration. employee welfare subsidies. acquisitions and mergers are resorted to for purposes of achieving a measure of synergy between the parent and the acquired enterprises.3 Retrenchment Strategy: A business organization can redefine its business by divesting a major product line or market. executives perks. In cases of temporary and partial setbacks. In business parlance also. manufacturing level. risks and skills involved in screening internal growth opportunities. 2. replacement of worn-out machinery. Retrenchment or retreat becomes necessary or expedient for coping with particularly hostile and adverse situations in the environment and when any other strategy is likely to be suicidal−'Strategic retreat' is often resorted to in military engagements. 4. competitive standing.6 . retreat is not always a bad proposition to save the enterprise's vital interests. R & D activities. community development projects. advertising. Expansion through acquisitions and mergers: Acquisition of or merger with an existing concern is an instant means of achieving the expansion. Only positive synergistic effects are relevant in this connection which denote that the positive effects of the merged resources are greater than the some of the effects of the individual resources before merger or acquisition. marketing channels. The nature. raw material sources and so forth. They feel that diversification offers greater prospects of growth and profitability than expansion. seizing them and building up the necessary resource base required to materialise growth. managerial and other manpower. depending upon each contingency. so that the marriage will be mutually beneficial. The enterprise has several options open to it in designing and acting upon its strategy. to minimise the adverse effects of advancing forces. inventory levels. the enterprise can endeavour to cut back on its capital and revenue expenditures-new administrative blocks. research and development and so on. Another reason for diversification lies in its synergistic advantage. Apart from the urge to grow. a happy and lasting affair. extent and timing of retrenchment are matters to be carefully decided by management. because of linkages in technology and/or in markets. Organizations consider merger and acquisition proposals in a systematic manner. diversification is a means of utilising their existing facilities and capabilities in a more effective and efficient manner. investible funds. distribution channels. and so on. or even to regroup and recoup the resources before a fresh assault and ascent on the growth ladder is launched. They may have excess capacity or capability in manufacturing facilities. In somewhat more serious cases of hard times.Strategic Management into new areas of activity and to break new frontiers with the zeal of entrepreneurship. It is an attractive and tempting proposition in the sense that it circumvents the time. For some firms. research and development. technical and managerial skills.
a strategy by diversification and/or acquisition may call for a retrenchment in some obsolete product lines. Similarly the broader expectation of the society in which the organization operates is again an important factor to determine the competitive strategy.4 Combination Strategies: The above strategies are not mutually exclusive. R & D. winding up some branch offices. It is also possible to think of offering itself for take-over by another more viable enterprise. an answer to all problems of existence and a liberation from the fetters of frustration. In the fourth stage.7 . operations. 5. It is to be analysed and find out in which functional area such as marketing.Business Policy and Strategic Management manpower. dividend to shareholders and interest on deposits. the organization has superiority over the competitors. The competitive strategy evolves out of consideration of several factors that are external to the firm as shown in the figure . production facilities and plant locations. 4. the enterprise may resort to sale of some manufacturing facilities and individual product divisions which are a drag on the enterprise's resources. An enterprise may seek stability in some areas of activity. It is possible to adopt a mix of the above to suit particular situations. The strengths and weaknesses of organizations are the internal factors. the enterprise may think of withdrawing from some marginal markets. As a last option an enterprise may seek liquidation which means corporate death. which determine the corporate strategy.Context in which competitive strategy is formulated The economic and technical component of the external environment are considered as major factors leading to new opportunities for the organization and also closing threats. It may also seek retirement either from the production or the marketing stage. withdrawal of some brands and sizes of products. etc. abolition of some executive positions and so on. 2. Retrenchment of ailing products followed by stability and capped by expansion in some situations may be thought of. THE DYNAMICS OF COMPETITIVE STRATEGY Strategic thinking involves orientation of the firm's internal environment with the changes of the external environment. This is the difficult solution. The strength is to considered in the context of the opportunities arising in the external environment. are some of the areas for slashing or postponement as the case may be. In the next stage. The personal values of the key implementers also play major roles in formulating the competitive strategy. plant maintenance. expansion in some and retrenchment in the others. For some organizations. withdrawal of even some slow moving products.
8 . The overall objective of strategic management is two fold: ♦ To create competitive advantage. so that the company can outperform the competitors in order to have dominance over the market. companies need to be farsighted and visionary. companies can operate successfully by creating and delivering superior value to target customers and also learning how to adopt to a continuously changing business environment.Strategic Management Company Strength & Weakness Industry Opportunities and Threats (Economic & Technical) Factors Internal to the Company Competitive Strategy Factors External to the Company Personal Values of the key Implementers Broader Societal Expectation Figure: Context in which Competitive Strategy is Formulated 6. involves developing a strategy to meet competition and ensure long-term survival and growth. Strategic planning. and must develop long-term strategies. So to meet changing conditions in their industries. an important component of strategic management. STRATEGIC MANAGEMENT In a hyper competitive marketplace. 2.
Stage two: This is a process of goal setting for the organization after it has finalised its vision and mission. implementing and executing the strategy. This is also known as SWOT (Strength. the capabilities it plans to develop. A strategic vision is a roadmap of the company's future – providing specifics about technology and customer focus. Ultimately the aim of strategic management is to save the company's business products. and functional plans (plans to carry out daily operations from the different functional disciplines). services and communications so that they achieve targeted profits and growth. No matter how well the strategic processes have been designed and implemented. objectives and goals (to give it means and methods for accomplishing its mission). Opportunity. The present organizational operations are highly influenced by the increasing rate of change in the environment and the ripple effect created on the organization. An organization's Mission states what customers it serves. success depends on how well each department performs its customer-value-adding activities and how well the departments work together to serve the customer.9 .Business Policy and Strategic Management ♦ To guide the company successfully through all changes in the environment. deregulation. its strength and weakness and also environmental threats and opportunities. Threat) analysis. corporate image. Here the firm must find out its relative market position. implementing and executing company strategies are the heart and soul of managing a business enterprise. setting objectives. Strategic management starts with developing a company mission (to give it direction). the geographic and product markets to be pursued. Weakness. and execution are deemed appropriate. It may manifest in the blurring of industry and firm boundaries. or. Value chains and value delivery networks have become popular with organizations that are sensitive to the wants and needs of consumers. 2. strategy.Framework of strategic management: The five stages are as follows: Stage one: This is the starting point of strategic planning and consists of doing a situational analysis of the firm in the environmental context. and then overtimes initiating whatever corrective adjustments in the vision. objectives. driven by technology. Changes can be external to the firm or it may be change introduced to the firms by the managers.1 Framework The basic framework of strategic process can be described in a sequence of five stages as shown in the figure . what need it satisfies. 6. business portfolio (to allow management to utilize all facets of the organization). You may refer third chapter for a detailed discussion on SWOT analysis. crafting a strategy. and what type of product it offers. through globalization. and the kind of company that management is trying to create. The tasks of crafting. The term strategic management refers to the managerial process of forming a strategic vision.
Its ultimate burden is influencing the environmental forces in its favour. It seeks to prepare the corporation to face the future and even shape the future in its favour. simultaneously.Framework of s trategic m anagement 6. Strategic management has the ultimate burden of providing a business organization with certain core competencies and competitive advantages in its fight for survival and growth. In a successful corporation. instead of getting carried away by its turbulence or uncertainties. Stage four: Out of all the alternatives generated in the earlier stage the organization selects the best suitable alternative in line with its SWOT analysis. It is not just a matter of projecting the future. it also serves as a corporate defence mechanism.2 Importance of Strategic Management Strategic management provides the framework for all the major business decisions of an enterprise such as decisions on businesses. It is environmental uncertainty that makes strategy and strategic conduct essential in a business. helping the firm avoid costly mistakes in product market choices or investments.Strategic Management Stage three: Here the organization deals with the various strategic alternatives it has. The more intense the 2. it is concerned with ensuring a good future for the firm. Here again the organization continuously does situational analysis and repeats the stages again. products and markets.10 . investments and organizational structure. strategic planning works as the pathfinder to various business opportunities. Stage five: This is a implementation and control stage of a suitable strategy. Stage Five How Can we Ensure Arrival? (Control) Introduction Stage Four Which Way is Best? (Evaluation) Stage One Where are we Now? (Beginning) Stage Three How Might we Get There? (Means) Stage Two Where are we Want to Be? (Ends) Figure . manufacturing facilities. It is not just a forecasting job. working into the environs and shaping it.
♦ Strategic issues are future oriented: Strategic thinking involves predicting the future environmental conditions and how to orient for the changed conditions. Hence the organization has to build its competitive advantage over the competitors in the business warfare in order to win. Decisions may relate to general day to day operations. STRATEGIC DECISION MAKING Decision making is a managerial process and function of choosing a particular course of action out of several alternative courses for the purpose of accomplishment of the organizational goals. Just like the extinction of the dinosaurous who ruled the earth one time but failed to survive in change condition of earth natural environment many organizational giants have also followed the path of extinction failing to manage drastic changes in the business environment. expertise and effort goes into the process of strategic management. quality of judgment and the perfection of methods and measures. i. They may be major or minor. 'Survival of fittest 'as propagated by Darwin is the only principle of survival for organization. Strategic decisions are different in nature than all other decisions which are taken at various levels of the organization during day-to-day working of the organizations. 7.11 . The major dimensions of strategic decisions are given below: ♦ Strategic issues require top-management decisions: Strategic issues involve thinking in totality of the organizations and also there is lot of risk involved. This can be done only following strategic analysis.e. Also business follows the war principle of 'win or lose'. problems calling for strategic decisions require to be considered by top management. Hence. They may also be strategic in nature. The success of the efforts and activities of the enterprise depends heavily on the quality of strategic management. ♦ Strategic issues involve the allocation of large amounts of company resources: It may require huge financial investment to venture into a new area of business or the organization may require huge number of manpower with new set of skills in them. ♦ Strategic issues are likely to have a significant impact on the long term prosperity of the firm: Generally the results of strategic implementation are seen on a long term basis and not immediately. 2. formulation and implementation. Strategic planning and implementation have become a must for all organizations for their survival and growth in the present turbulent business environment. more critical is the need for strategic management. the vision. insight. considerable thought. where 'fittest' are not the 'largest' or 'strongest' organization but those who can change and adapt successfully to the changes in business environment. experience. and not necessarily win-win situation arises in business world. Quite naturally.Business Policy and Strategic Management environmental uncertainty.
and new opportunities. Identifying an organization's existing vision. or execution in light of actual experience. so as to provide long-term direction. changing conditions. objectives. Every model represents some kind of process. even if these elements are not consciously designed. Relationships among major components of the strategic management process are shown in the model. ♦ Setting objectives: Converting the strategic vision into specific performance outcomes for the company to achieve. but it does represent a clear and practical approach for formulating. delineate what kind of enterprise the company is trying to become and infuse the organization with a sense of purposeful action. ♦ Crafting a strategy to achieve the desired outcomes. implementing. Strategic management model The strategic management process can best be studied and applied using a model. A change in any one of 2. mission. This model like any other modal of management does not guarantee sure-shot success. and strategy. ♦ Implementing and executing the chosen strategy efficiently and effectively. ♦ Strategic issues necessitate consideration of factors in the firm's external environment: Strategic focus in organization involves orienting its internal environment to the changes of external environment. written. Every organization has a vision. The strategic management process is dynamic and continuous. comprehensive. and evaluating strategies. The answer to where an organization is going can be determined largely by where the organization has been. long-term direction. mission.Strategic Management ♦ Strategic issues usually have major multifunctional or multi-business consequences: As they involve organization in totality they affect different sections of the organization with varying degree. objectives. The model illustrated in the Figure: Strategic management model is a widely accepted. THE TASK OF STRATEGIC MANAGEMENT process consists of five interrelated The strategy-making/strategy-implementing managerial tasks.12 . objectives. new ideas. strategy. or communicated. ♦ Evaluating performance and initiating corrective adjustments in vision. and strategies is the starting point for any strategic management process because an organization present situation and condition may preclude certain strategies and may even dictate a particular course of action. 8. These are ♦ Setting vision and mission: Forming a strategic vision of where the organization is headed.
a shift in the economy could represent a major opportunity and require a change in long-term objectives and strategies. objectives.Business Policy and Strategic Management the major components in the model can necessitate a change in any or all of the other components. Therefore. Creativity and candour from participants 2. or a major competitor's change in strategy could require a change in the firm's mission. strengths/weaknesses. Accounting. MIS Issues Measure and Evaluate Performance Perform Internal Audit Strategy Formulation Strategy Implementation Strategy Evaluation Figure Strategic Management Model The strategic management process is not as cleanly divided and neatly performed in practice as the strategic management model suggests. Perform External Audit Develop Vision And Mission Statements Establish Long-term Objectives Generate. and performance. Many organizations conduct formal meetings semi-annually to discuss and update the firm's vision/mission. policies. Finance. a failure to accomplish annual objectives could require a change in policy. Evaluate. Generally. not just at the end of the year or semi-annually. and evaluation activities should be performed on a continual basis. and select Strategies Implement Strategies Management Issues Implement Strategies Marketing. Strategists do not go through the process in lockstep fashion. strategy formulation. strategies. opportunities/threats.13 . there is give-and-take among hierarchical levels of an organization. R&D. For instance. The strategic management process never really ends. implementation.
Formality refers to the extent that participants. products. For instance. Firms that compete in complex. rapidly changing environments. responsibilities. How can you lead if you do not know where are you going? George Newman. a company's senior managers must wrestle with the issue of what directional path the company should take and what changes in the company's product-market-customer-technology focus would improve its current market position and future prospects.1 The Vision Very early in the strategy making process. and success of planning across all types and sizes of organizations. Greater formality in applying the strategic management process is usually positively associated with the cost. authority. Henry Ford's vision of a car in every garage had power because it captured the imagination of others. Firms that have many divisions. comprehensiveness. such as technology companies.14 . aided internal efforts to 2. Top management's views and conclusions about the company's direction and the productcustomer-market-technology focus constitute a strategic vision for the company. Application of the strategic management process is typically more formal in larger and well-established organizations. and approach are specified.John W Teets. CEO. The Conference Board Management's job is not to see the company as it is ……but as it can become. Good communication and feedback are needed throughout the strategic management process. accuracy. 9. duties. Greyhound Corporation 9. providing a panoramic view of the "where we are going" and a convincing rationale for why this makes good business sense for the company. Smaller businesses tend to be less formal. A strategic vision thus points an organization in a particular direction. tend to be more formal in strategic planning. markets. and molds organizational identity. A clearly articulated strategic vision communicates management's aspirations to stakeholders and helps steer the energies of company personnel in a common direction. VISION. mission and objectives in this chapter.Strategic Management are encouraged in meeting. charts a strategic path for it to follow in preparing for the future. . Deciding to commit the company to one path versus another pushes managers to draw some carefully reasoned conclusions about how to try to modify the company's business makeup and the market position it should stake out. MISSION AND OBJECTIVES Amongst the various steps in the strategic management model we will restrict discussion to vision. A strategic vision delineates management's aspirations for the business. and technologies also tend to be more formal in applying strategic-management concepts.
and the kind of company that management is trying to create. A Strategic vision is a road map of a company's future – providing specifics about technology and customer focus. exciting terms that arouse organization wide commitment. the geographic and product markets to be pursued. Coming up with a mission statement that defines what business the company is presently in and conveys the essence of "Who we are and where we are now?" 2. Communicating the strategic vision in clear. ♦ Forming a strategic vision is an exercise in intelligent entrepreneurship. and served as a reference point for gauging the merits of the company's strategic actions. The three elements of a strategic vision: 1. Firms wedded to the idea of strategic management of their enterprise cannot afford to be lax in the matter of mission and business definition. the capabilities it plans to develop. ♦ The best-worded vision statement clearly and crisply illuminate the direction in which organization is headed.Business Policy and Strategic Management mobilize the Ford Motor Company's resources. ♦ Many successful organizations need to change direction not in order to survive but in order to maintain their success.2 Mission According to Glueck & Jauch mission is answer to the question 'what business are we in' that is faced by corporate-level strategist. Using the mission statement as basis for deciding on a long-term course making choices about "Where we are going?" 3. And such firms are seen to fumble in the selection of opportunities and the choice of strategies. as the two ideas are absolutely central to strategic planning. ♦ A well-articulated strategic vision creates enthusiasm for the course management has charted and engages members of the organization.15 . Analysis shows that in actual practice many business firms fail to conceptualise and articulate the mission and business definition with the required clarity. 2. 9. How to develop a strategic vision ♦ The entrepreneurial challenge in developing a strategic vision is to think creatively about how to prepare a company for the future. Why organization should have mission? ♦ To ensure unanimity of purpose within the organization.
and business makeup. clear. A good mission statement should be of precise.Strategic Management ♦ To provide a basis for motivating the use of the organization's resources. It should indicate major components of strategy. to suggest a businesslike operation. activities. and performance parameters can be assessed and controlled. time. ♦ To establish a general tone or organizational climate. business emphasis and path for development – one that typically sets it apart form other similarly situated companies. Mission should contain elements of long-term strategy as well as desired out comes they often basic values and the philosophy of the organizations that is perceived by the senior managers at the senior level who write them. customer focus. feasible. by which customer groups it is targeting and by the technologies and competencies it uses and the activities it performs. Peter Drucker and Theodore Levitt were among the 2. ♦ To facilitate the translation of objective and goals into a work structure involving the assignment of tasks to responsible elements within the organization. What is our mission? And what business are we in? The well-known management experts. A company's Mission statement is typically focused on its present business scope – "who we are and what we do". for allocating organizational resources. ♦ To specify organizational purposes and the translation of these purposes into goals in such a way that cost. mission statements broadly describe an organizations present capabilities. ♦ A company's business is defined by what needs it trying to satisfy. ♦ To develop a basis. ♦ Good mission statements are highly personalized – unique to the organization for which they are developed. ♦ To serve as a focal point for those who can identify with the organization's purpose and direction. Following points are useful while writing mission of a company : ♦ The mission is not to make a profit. competencies and activities are important in defining a company's business because they indicate the boundaries on its operation. or standard. ♦ One of the roles of a mission statement is to give the organization its own special identity. and to deter those who cannot form participating further in the organization's activities. for example.16 . distinctive and motivating. ♦ Technology.
the business managers of the world did not fully appreciate the import of these questions. it legitimises the firm's presence. They also explained that towards facilitating this task. It was only in subsequent years that captains of industry all over the world understood the significance of the seemingly simple questions raised by Drucker and Levitt. in the future? At the time these two experts raised this issue. It is. those were days when business management was still a relatively simple process even in industrially advanced countries like the US. It is a colourful sketch of how the firm wants its future to look. They emphasised that as the first step in the business planning endeavour every business firm must clarify the corporate mission and define accurately the business the firm is engaged in. The corporate mission is an expression of the growth ambition of the firm. the mission serves as a justification for the firm's very presence and existence.Business Policy and Strategic Management first to agitate this issue through their writings. the mission is a grand design of the firm's future. It is the corporation's dream crystallised. Mission amplifies what brings the firm to this business or why it is there. In other words. the firm's future visualised. It provides a dramatic picture of what the company wants to become. in fact. what existence it seeks and what purpose it seeks to achieve as a business firm.17 . the firm should raise and answer certain basic questions concerning its business. 2. irrespective of the current position. such as: ♦ What is our mission? ♦ What is our ultimate purpose? ♦ What do we want to become? ♦ What kind of growth do we seek? ♦ What business are we in? ♦ Do we understand our business correctly and define it accurately in its broadest connotation? ♦ Do we know our customer? ♦ Whom do we intend to serve? ♦ What human need do we intend to serve through our offer? ♦ What brings us to this particular business? ♦ What would be the nature of this business in the future? ♦ In what business would we like to be in. In other words.
To quote Thomas Watson. organizational structure. The answer should have marketing or external perspective and should not be restated to the production or generic activities of business. "The basic philosophy. It is through the mission that the firm spells out its vision. its main purpose is to give internal direction for the future of the corporation. It adds zeal to the firm and its people. former chairman of IBM. innovation and timing. it needs to be spelt out. Mission is the foundation from which the network of aims is built.18 .it is the corporation's guiding principle. It represents the whole thrust of the firm. A mission is not rhetoric . every organization must ask an important question "What business are we in?" and get the correct and meaningful answer. A mission. Company AT&T What Business Are We In? Production-oriented answer Marketing-oriented answer We operate a long-distance telephone company. We produce oil and gasoline products We run a railroad We make cameras and film. According to Peter Drucker. A mission does not represent a specific target. To make the vision come alive and become relevant. Every organization functions through a network of aims. The mission serves as a proclamation to insiders and outsiders on what the corporation stands for.. At the same time it is not all euphoria either.Strategic Management Mission is also an expression of the vision of the corporation. The table given below will clarify and highlight the importance of external perspective. We offer a transportation and material-handling system We help preserve beautiful memories Indian Oil Indian Railways Eastman 2. which the entire firm shares and pursues. We provide multiple forms of reliable. A mission is not a fad-it is a tool to build and sustain commitment of the people to the corporation's policies. its founder/ leader. spirit. while it legitimises the corporation's existence and role in society. It represents the common purpose. however. and drive of an organization have far more to do with its relative achievements than technological or economic resources. Jr. it has to be open to the entire company. A mission is not a confidential affair to be confined at the top. All people are supposed to draw meaning and direction from it. It also expresses the core values and beliefs of the firm". efficient and inexpensive telecommunication services We provide various types of safe and cost-effective energy. is not a PR document.
we sell hope Understanding Mission and Purpose The mission is a statement which defines the role that an organization plays in the society. The organisations also have some purpose that is anything that an organization strives for. knowledge management and acquiring skills to work with future environment influenced by technological and other changes. dynamic business and organization structures. Good Governance and Competitiveness. They do this in terms of their mission and purpose. A book publisher and a magazine editor are both engaged in satisfying the information needs of society but they do it through different means. In the drugstore. Since both mission and purpose go hand in hand. developments in Information Technology and Telecommunication. Mission strictly refers to the particular needs of the society. change management services. Recognise the changes in Economy/Business Environment such as focus on value. Purpose relates to what the organization strives to achieve in order to fulfil its mission to the society." In business policy. Organizations relate their existence to satisfying a particular need of the society. performance measurement services. A book publisher may aim at producing excellent reading material while a magazine editor may strive to present news analysis in a balanced and unbiased manner. both these terms are either used jointly or singly. new Government policies. its information needs. We can described mission as "a statement which defines the role that an organization plays in the society". Recognise the path to success by adapting to the changes. globalization of business and competitive pressures. we make cosmetics.Business Policy and Strategic Management Kodak Revlon In the factory. strategy 2. Both have different purposes but an identical mission: Some examples of vision. and purpose as "anything which an organization strives for. mission and objectives Mission and vision of the Institute of Chartered Accountants of India Mission The Indian Chartered Accountancy Profession will be the valued Trustees of World Class Financial Competencies. for instance. they can be used together while maintaining the basic difference between them.19 Vision . Recognise the opportunities for Chartered Accountants in the emerging areas such as new audit and assurance needs.
2. we will also use the term interchangeably. to lessen work for women. However." 9." Mission of Mckinsey & Co: "To help business corporation and governments to be more successful". Objectives are open-ended attributes that denote the future states or outcomes. general practice specialization and servicing global organizations. Mission of Unilever: "The mission of our company. Goals are close-ended attributes which are precise and expressed in specific terms. They provide meaning and sense of direction to organizational endeavour. Accordingly. however. in equipping Chartered Accountants with top quality education and values. as William Hasketh Lever saw it. this distinction is not made by several theorists on the subject. Mission of Cadbury India: "To attain leadership position in the confectionary market and achieve a strong presence in the food drinks sector. Thus the goals are more specific and translate the objectives to short term perspective.Strategic Management management. is to make cleanliness commonplace. we will make an attempt to distinguish the two. Organizational structure and activities are designed and resources are allocated around the objectives to facilitate their achievement. They also act as benchmarks for guiding organizational activity and for evaluating how the organization is performing. innovative and flexible organization. to foster health. They function as yardstick for tracking an organizations performance and progress. All organizations have objectives.3 Objectives and Goals Business organization translate their vision and mission into objectives.20 . As such the term objectives is synonymous with goals. and to contribute to personal attractiveness that life may be more enjoyable for the people who use our products. Objectives are organizations performance targets – the results and outcomes it wants to achieve." Mission of Ranbaxy: "To become a $1 billion research-based global pharmaceuticals company. Recognise the Institute's role as a proactive. Recognise the need to be known as World Class Advisor." Mission of Reliance Industries: "To become a major player in the global chemicals business and simultaneously grow in other growth industries like infrastructure. The pursuit of objectives is an unending process such that organizations sustain themselves.
marketing. it often duplicates these functions and creates a series of self-contained divisions (each of which contain its own set of functions) to manage each different product or service. there are three main levels of management: corporate. As you can see. Figure 'levels of strategic management' shows the organization of a multidivisional company that is. or materials management. Objective to be meaningful to serve the intended role must possess following characteristics: ♦ Objectives should define the organization's relationship with its environment. Like finance and accounting. production. a company that competes in several different businesses and has created a separate selfcontained division to manage each of these. there are two main types of managers: general managers. who are responsible for supervising a particular function. and functional managers. business. STRATEGIC LEVELS IN ORGANISATIONS In most companies. or operation. The overriding concern of general managers is for the health of the whole company or division under their direction. ♦ Objectives should be understandable. and functional. The general managers of these divisions then become responsible for their particular product line. An organization is divided into several functions and departments that work together to bring a particular product or service to the market. ♦ They should be facilitative towards achievement of mission and purpose. ♦ They should provide the basis for strategic decision-making ♦ They should provide standards for performance appraisal. R&D.Business Policy and Strategic Management Objectives with strategic focus relate to outcomes that strengthen an organizations overall business position and competitive vitality. who bear responsibility for the overall performance of the company or for one of its major selfcontained subunits or divisions. information technology. If a company provides several different kinds of products or services. General managers are found at the 2.21 . activity. they are responsible for deciding how to create a competitive advantage and achieve high profitability with the resources and capital they have at their disposal. that is. a task. ♦ Objectives should be concrete and specific ♦ Objectives should be related to a time frame ♦ Objectives should be measurable and controllable ♦ Objectives should be challenging ♦ Different objectives should correlate with each other ♦ Objectives should be set within constraints 10.
determining what businesses it should be in. Corporate Level CEO. In consultation with other senior executives. formulating and implementing strategies that span individual businesses. but their strategic roles differ depending on their sphere of responsibility. These individuals occupy the apex of decision making within the organization. This role includes defining the mission and goals of the organization.22 . board of directors. other senior executives. and corporate staff Head Office Business Level Divisional managers and staff Division A Division B Division C Functional Level Functional managers Business Functions Business Functions Business Functions Market A Market B Market C Figure : Level of Strategic Management 2. the role of corporate-level managers is to oversee the development of strategies for the whole organization. allocating resources among the different businesses. other senior executives. The corporate level of management consists of the chief executive officer (CEO). The CEO is the principal general manager. and providing leadership for the organization.Strategic Management first two of these levels. and corporate staff. the board of directors.
product development. Thus. The development of such strategies is the responsibility of the general managers in these different businesses or business level managers. Besides overseeing resource allocation and managing the divestment and acquisition processes. production.23 . In other words. including lighting equipment. Corporate-level managers. industrial electronics.Business Policy and Strategic Management Consider General Electric (GE) as an example. customer service. and marketing departments) that provides a product or service for a particular market. Then the general managers in each division work out for their business the details of a strategy that is consistent with this objective. It is not his specific responsibility to develop strategies for competing in the individual business areas. A business unit is a self-contained division (with its own functions-for example. Functional-level managers are responsible for the specific business functions or operations (human resources. it is up to Immelt to develop strategies that span individual businesses. and financial services. and determining whether it should acquire any new ones. allocating resources among the different business areas. such as financial services. corporate-level managers provide a link between the people who oversee the strategic development of a firm and those who own it (the shareholders). purchasing. a major corporate goal is to be first or second in every business in which the corporation competes. aerospace. are setting overall strategic objectives. major appliances. GE is active in a wide range of businesses. whereas corporate-level general managers are concerned with strategies that span individual businesses. construction and engineering services. It is their responsibility to ensure that the corporate and business strategies that the company pursues are consistent with maximizing shareholder wealth. Thus. business-level general managers are concerned with strategies that are specific to a particular business. The main strategic responsibilities of its CEO. turbine generators. At GE. deciding whether the firm should divest itself of any of its businesses. his concern is with building and managing the corporate portfolio of businesses to maximize corporate profitability. The strategic role of these managers is to translate the general statements of direction and intent that come from the corporate level into concrete strategies for individual businesses. it is Immelt's responsibility to probe the strategic thinking of business-level managers to make sure that they are pursuing robust strategies that will contribute toward the maximization of GE's long-run profitability and to hold them into account for their performance. or the businesslevel manager. then ultimately the CEO is likely to be called to account by the shareholders. and so on) that constitute a company or one of its divisions. a functional manager's sphere 2. purchasing. and particularly the CEO. motor and transportation equipment. can be viewed as the guardians of shareholder welfare. The principal general manager at the business level. aircraft engines. If they are not. However. medical systems. finance. Jeffrey Immelt. is the head of the division.
Thus. whereas general managers oversee the operation of a whole company or division.24 .and corporate-level general managers. formulate realistic and attainable strategies. it is important for general managers to listen closely to the ideas of their functional managers. because they are closer to the customer than the typical general manager is. functional managers provide most of the information that makes it possible for business. Moreover.Strategic Management of responsibility is generally confined to one organizational activity. Although they are not responsible for the overall performance of the organization. functional managers nevertheless have a major strategic role: to develop functional strategies in their area that help fulfill the strategic objectives set by business. Indeed. for instance.and corporate-level general managers to. An equally great responsibility for managers at the operational level is strategy implementation: the execution of corporate and business-level plans. Characteristics of strategic management decisions at different levels Characteristic Level of Strategy Corporate Type Measurability Frequency Relation to present activities Risk Profit Potential Cost Time horizon Flexibility Cooperation Required Conceptual Value judgments dominant Periodic or Sporadic Innovative Mixed Semi quantifiable Periodic or Sporadic Mixed Business Functional Operational Usually Quantifiable Periodic Supplementary Wide Range Large Major Long Range High Considerable Moderate Medium Medium Medium Range Medium Moderate Low Small Modest Short Range Low Little 2. manufacturing managers are responsible for developing manufacturing strategies consistent with the corporate objective of being first or second in that industry. functional managers themselves may generate important ideas that subsequently may become major strategies for the company. In GE's aerospace business.
In general corporate level decisions are costly to take.Business Policy and Strategic Management SELF EXAMINATION QUESTIONS Multiple choice questions 1. In general corporate level decisions are costly to take. (i) and (ii) (ii) and (iii) (b) (d) (i) and (iii) (i). Removal of employees from job in one business to relocate them in other business. (a) (b) (c) (d) 3. Strategies are action oriented. From the combinations given below select an alternative that represent statements that are true: (a) (c) 2.25 The first step of strategy formulation in strategic management model is: (a) (b) (c) (d) 4. In general corporate level decisions are costly to take. Undertake external analysis. Strategies are rigidly defined. involve low risk and have large profit potential. involve high risk and have large profit potential. involve low risk and have large profit potential. In general corporate level decisions are cheaper to take. 2. Read the following three statements: (i) (ii) (iii) Strategies have short-range implications. Removal of employees from job through the process of reorganization. Select the correct statement: (a) (b) (c) (d) . Determine vision and mission. Set major objectives. involve high risk and have low profit potential. Undertake internal analysis. (ii) and (iii) Retrenchment strategy in the organization can be explained as Reducing trenches (gaps) created between individuals. Divesting a major product line or market.
Strategic Management 5. The deal. and so on. Short answer questions Write a short note on business policy. 1. The company.26 . Beetroot had put these brands on sale late last year. (around Rs 20 crore per annum) management consultants felt that they are a good fit in Ace's product portfolio. Select the correct alternative: (a) (b) (c) (d) 1. stated in the press release that Ace is buying the brands but not their manufacturing facility at Noida (near Delhi). What do you understand by Strategy? What are major strategic alternatives available to a business organisation? Discuss different strategic levels in organizations. product development. Both (i) and (ii) truly explain features of functional-level manager. purchasing. at rupees thirty-five crores was announced at a joint press conference. Essay type questions Case Study Delhi-based Ace International is close to acquiring popular household brands Yummy and Tasty from Beetroot Ltd. 2. 2. Discuss the process of strategic management. Only (ii) truly explains features of functional-level manager. Ace has emerged as the highest bidder for them. Read the following statements: (i) (ii) Functional-level managers are responsible for the specific business functions. Explain diversification as strategy. 3. customer service. None of (i) and (ii) truly explains features of functional-level manager. It was sometime back that Beetroot felt the need to restructure its unwieldy product portfolio and exit brands which had low business potential for the company. because the plant also makes other food products which are Beetroot's core food brands. Functional-level managers take decisions related to human resources. The company makes the same genre of products and can grow the brands without additional input or distribution costs. While Yummy and Tasty are marginal businesses for Beetroot. Tasty and Yummy are food brands that Ace can 2. Only (i) truly explains features of functional-level manager.
Business Policy and Strategic Management manufacture in its existing plants spread across seven locations in Punjab and Maharashtra. Financial Analysts expect them to add 8-10% to Alpha's Rs 250 crore turnover in the first year. (d) 4. The company can also use the same set of distributors to place these brands in shops. (b) 3.27 . (a) 2. (a) 5. (a) 2. (a) Discuss the business strategy for Ace (b) Discuss the business strategy for Beetroot. Answers – Multiple Choice Questions 1.
♦ Learn some of the methods of competitive analysis that are used in business organizations. good instincts. you're terminal. turns its focus to scanning of environment in which all organizations work as subsystems. STRATEGIC ANALYSES Strategy formulation is not a task in which managers can get by with opinions. after deciding the vision. ♦ Know what is SWOT and TOWS analysis.CHAPTER 3 STRATEGIC ANALYSIS LEARNING OBJECTIVES ♦ Know the importance of strategic analysis in the formulation of strategy. you're in a tenuous position. internal strengths and weaknesses. INTRODUCTION The strategic management process. goals and objectives of the organization. and if you're only half as fast. George Salk The idea is to concentrate our strength against our competitor's relative weakness. and creative thinking. 2. mission. That is environmental scanning covers both scanning of external environment and internal environment. Analysis is the critical starting point of strategic thinking. Bruce Henderson 1. Kenichi Ohmae If you're not faster than your competitor. ♦ Have an understanding of some of the methods used in portfolio analysis. resources. The scanning of external environment leads to the identification of the opportunities and threats thrown open to organizations while the internal analysis leads to the study of strengths and weaknesses which will decide as to what extent each company is going to capitalize the opportunities and threats thrown open. . The two most important situational considerations are (1) industry and competitive conditions and (2) a company's own competitive capabilities. Judgments about what strategy to pursue need to flow directly from solid analysis of a company's external environment and internal situation. and market position.
A manager working on a strategic decision has to balance opportunities. and crafting a winning strategy. to choice of strategy. influences and constraints. Some of these factors can be managed to some extent.2 . setting appropriate objectives. magnitude and importance. A manager who makes an effort to increase the growth momentum of an organization is materially changing strategy. the chances are greatly increased that managers will concoct a strategic game plan that doesn't fit the situation well. Issues to consider for strategic analyses Strategy evolves over a period of time: There are different forces that drive and constrain strategy and that must be balanced in any strategic decision. the complexity and intermingling of variables in the environment reduces the strategic balance in the organization. These constraining forces will be producing an impact that will vary in nature. Without perceptive understanding of the strategic aspects of a company's external and internal environments. and that is unlikely to boost company performance. Competitive 3. that holds little prospect for building competitive advantage. Accurate diagnosis of the company's situation is necessary managerial preparation for deciding on a sound long-term direction. at a particular point of time. An important aspect of strategic analyses is to consider the possible implications of routine decisions. Strategy of a business. Simultaneously there are constraints that limit the choice such as existence of a big competitor. however. Management Strategy Environment Resources Risk: In the strategic analyses the principle of maintaining balance is important. Balance: The process of strategy formulation is often described as one of the matching the internal potential of the organization with the environmental opportunities. degree. is result of a series of small decisions taken over an extended period of time. there will be several others that are beyond the control of a manager. However. as perfect match between the two may not be feasible.Strategic Management What is involved in sizing up a company's overall situation and deciding on a strategy? The analytical sequence is from strategic appraisal of the company's external and internal situation. to evaluation of alternatives. In reality. There are pressures that are driving towards a particular choice such as entering a new market. The lives that we lead is uncertain and the business is no exception. strategic analyses involve a workable balance between diverse and conflicting considerations.
SITUATIONAL ANALYSIS All companies operate in a ''macro environment'' shaped by influences emanating from the economy at large. recessions. a company's macro environment includes all relevant factors and influences outside the company's boundaries. and business model. Internal risk occurs on account of forces that are either within the organization or are directly interacting with the organization on an routine basis. There are enough strategically relevant trends and developments in the macro environment to justify a watchful eye. objectives. liberalization. These factors have been discussed in chapter 1. intercountry relationships all affect businesses and pose risk at varying degree. technological factors. Long-term Changes in the environment lead to obsolescence of strategy. Inconsistencies with the strategy are developed on account of changes in internal capacities and preferences External Strategic Risks Internal Organizational capacity is unable to cope up with strategic demands. For the most part. 3. An important aspect of strategic analysis is to identify potential imbalances or risks and assess their consequences. There are notable exceptions. they must watch for potentially important environmental forces. globalization. assess their impact and influence. population demographics. governmental legislation and regulation. 3.3 . strategy. we mean important enough to have a bearing on the decisions the company ultimately makes about its direction. by relevant. though. technological advancements. societal values and lifestyles.Strategic Analysis markets. Strictly speaking. A broad classification of the strategic risk that requires consideration in strategic analyses is given below: Time Short-term Errors in interpreting the environment cause strategic failure. External risk is on account of inconsistencies between strategies and the forces in the environment. booms. and adapt the company's direction and strategy as needed. influences coming from the outer ring of the macro environment have a low impact on a company's business situation and shape only the edges of the company's direction and strategy. As company managers scan the external environment.
Strategic Management However. It is important to observe this in terms of its different parts in order to be able to relate this back to core client needs.how do they compare.4 . ♦ Competitive situation: Analyze your main competitors . This should form an essential part of any business plan and should be reviewed over time to ensure that it is kept current. What are their competitive advantages? ♦ Distribution situation: Review your distribution Situation . Thinking strategically about a company's external environment Form a strategic vision of where the company needs to head Identity promising strategic options for the company Thinking strategically about a company's internal environment Select the best strategy and business model for the company Figure: From Thinking Strategically about the Company's Situation to Choosing a Strategy Also before developing any given marketing strategy it is important to conduct some form of analysis. The following is just a raw introduction to what to take into account when conducting an analysis and provides a checklist of the most important factors to take into account.how are you getting your product to market? Do you need to go through distributors or other intermediaries? ♦ Environmental factors: What external and internal environmental factors are there that need to be taken into account. the factors and forces in a company's macro environment having the biggest strategyshaping impact almost always pertain to the company's immediate industry and competitive environment. This can include economic or sociological factors that impact on your performance. ♦ Opportunity and issue analysis: Things to write down here are what current opportunities that 3. Many ask what factors are important when doing this.who are they what are they up to . The elements worth considering include: ♦ Product situation: What is my current product? You may want to break this definition up into parts such as the core product and any secondary or supporting services or products that also make up what you sell.
and uncertainties Strategy Identification & Selection ♦ Identify strategic alternatives • Product-maker investment strategies • Functional area strategies • Assets. brand associations. cultural. profitability. motivations. image. culture. sales. weaknesses. weaknesses ♦ Environmental Analysis Technological. government. entry barriers. ♦ Market Analysis Size.Strategic Analysis are available in the market. product portfolio analysis. strategic groups. Strategic strengths. competencies. performance. competitive situations. the economic and competitive traits of the fast-food business have little in 3. employee capability and performance. threats. shareholder value analysis. relative cost. scenarios. strengths. objectives. We have seen earlier in the framework of strategic management that the first question to ask: 'where are we now'? So. Internal Analysis ♦ Performance Analysis Profitability. organizational Capabilities and constraints. and future profit prospects. strategic problems. and synergies ♦ Select strategy ♦ Implement the operating plan ♦ Review strategies Figure: Framework of Strategic Analysis Industries differ widely in their economic characteristics. strategic analysis is the starting point of strategic management as shown in the figure below: Strategic Analysis External Analysis ♦ Customer Analysis Segments. constraints. Financial resources and Constraints. the strengths that the business can rely on and any weaknesses that may effect the business performance. product quality. information-need areas. ♦ Competitor Analysis Identity. weaknesses. unmet needs. and weaknesses. Opportunities. customer satisfaction. trends. projected growth. demographic. cost structure. uncertainties. For example. economic. strengths. the main threats that business is facing and may face in the future. ♦ Determinates Analysis Past and current strategies. and strategic.5 . strengths. cost structure. problems. strategies. new products.
THE METHODS OF INDUSTRY AND COMPETITIVE ANALYSIS Industry and competitive analysis can be done using a set of concepts and techniques to get a clear fix on key industry traits. the geographic boundaries of the market (which can extend from local to worldwide). Competitive forces can be moderate in one industry and fierce. It provides a way of thinking strategically about any industry's overall situation and drawing conclusions about whether the industry represents an attractive investment for company funds. or excellent. the extent to which costs are affected by economies of scale. 4. the challenge is for companies to work cooperatively with suppliers. Moreover. while even weak companies in attractive industries can turn in good performances. Industry and competitive analysis aims at developing insight in several issues. The economic character of industries varies according to such factors as overall size and market growth rate. form the basis for matching its strategy to changing industry conditions and competitive realities.1 Dominant economic features of the industry Industries differ significantly in their basic character and structure. and the industry's profit outlook. in some industries competition focuses on who has the best price. average. the intensity of competition. The issues are given below: 4. The analysis entails examining a company's business in the context of a much wider environment. and maybe even select competitors to create the next round of product innovations and open up whole new vistas of market opportunities. determine whether its profit prospects are poor. The telecom business is shaped by industry and competitive considerations radically different from those that dominate the aviation business. in another. An industry's economic traits and competitive conditions. the pace of technological change. and the types of distribution channels used to access buyers. (as in online shopping and fast foods) or brand reputation (as in laundry detergents and soft drinks)." The factors to consider in profiling an industry's economic features are fairly standard and are given as follows: 3. Analysing these issues build understanding of a firm's surrounding environment and. the number and size of buyers and sellers. In other industries. even cutthroat. customers. Industry and competitive conditions differ so much that leading companies in unattractive industries can find it hard to earn respectable profits. collectively. while in others competition is centered on quality and reliability (as in monitors for PCs and laptops) or product features and performance (as in mobile phones) or quick service and convenience.Strategic Management common with those of Internet service providers. Industry is "a group of firms whose products have same and similar attributes such that they compete for the same buyers. Industry and competitive analysis begins with an overview of the industry's dominant economic features. the market positions and strategies of rival companies. and how they are expected to change. the drivers of industry change.6 . whether sellers' products are virtually identical or highly differentiated. the keys to competitive success.
saturation and stagnation. ♦ The pace of technological change in both production process innovation and new product introductions. there is also concentration of business in different countries on account of graphical and other reasons. for example. Similarly. maturity. transportation. rapid growth and takeoff. lock industry in Aligarh. the competitive process works similarly enough to use a common analytical framework in gauging the nature and intensity of competitive forces. weakly differentiated. marketing. Even though competitive pressures in various industries are never precisely the same. ♦ Capital requirements and the ease of entry and exit. ♦ Whether industry profitability is above/below par. national. information technology in Bangalore. ♦ Whether certain industry activities are characterized by strong learning and experience effects ("learning by doing") such that unit costs decline as cumulative output grows. ♦ Market growth rate and position in the business life (early development. This analytical step is essential because managers cannot devise a successful strategy without in-depth understanding of the industry's competitive character. ♦ Whether companies can realize economies of scale in purchasing. or essentially identical. or global). ♦ Whether key industry participants are clustered in a particular location. decline). Whether and to what extent industry rivals have integrated backward and/or forward. Saris and diamonds in Surat.7 . international. ♦ Small companies dominant companies? ♦ The number of buyers and their relative sizes. regional.2 Nature and strength of competition One important component of industry and competitive analysis involves delving into the industry's competitive process to discover what the main sources of competitive pressure are and how strong each competitive force is. or advertising. ♦ Scope of competitive rivalry (local. manufacturing. ♦ The types of distribution channels used to access consumers. 4.Strategic Analysis ♦ Market size. ♦ Number of rivals and their relative sizes. 3. ♦ Whether the products and services of rival firms are highly differentiated. early maturity. ♦ Whether high rates of capacity utilization are crucial to achieving low-cost production efficiency.
The most dominant forces are called driving forces because they have the biggest influence on what kinds of changes will take place in the industry's structure and competitive environment. Not only is it the widely used technique of competition analysis. Some of the categories/examples of drivers are follows: ♦ The internet and the new e-commerce opportunities and threats it breeds in the industry.4 Identifying the companies that are in the strongest/weakest positions The next step in examining the industry's competitive structure is to study the market positions of 3. All industries are characterized by trends and new developments that gradually produce changes important enough to require a strategic response from participating firms. and decline are used to describe the stages). The popular hypothesis about industries going through a life cycle helps explain industry change but is still incomplete. 4. Analyzing driving forces has two steps: identifying what the driving forces are and assessing the impact they will have on the industry. Some are unique and specific to a particular industry situation. but many drivers of change fall into general category affecting different industries simultaneously. ♦ Changes in the long-term industry growth rate.8 . The most common driving forces: Many events can affect an industry powerfully enough to qualify as driving forces. The life-cycle stages are strongly keyed to changes in the overall industry growth rate (which is why such terms as rapid growth. 4. Yet there are more causes of industry change than an industry's position in the life cycle. ♦ Marketing innovation. It is a powerful tool for systematically diagnosing the principle competitive pressures in a market and assessing how strong and important each one is. there's more analytical value in identifying the specific factors causing fundamental industry and competitive adjustments. Industry and competitive conditions change because forces are in motion that create incentives or pressures for changes. ♦ Diffusion of technical know-how across more companies and more countries. ♦ Product innovation.3 Triggers of change An industry's economic features and competitive structure say a lot about its fundamental character but little about the ways in which its environment may be changing. ♦ Increasing globalization. but it is also relatively easy to understand and apply. ♦ Entry or exit of major forms. early maturity. ♦ Changes in cost and efficiency.Strategic Management Porter's five forces model included in the first chapter is useful in understanding the competition. The concept of driving forces: While it is important to judge what growth stage an industry is in. saturation.
or offer buyers similar services and technical assistance.5 Likely strategic moves of rivals Unless a company pays attention to what competitors are doing. and the plans they have announced is essential to anticipating the actions they are likely to take next and what bearing their moves might have on a company's own best strategic moves. all). ♦ Plot the firms on a two-variable map using pairs of these differentiating characteristics ♦ Assign firms that fall in about the same strategy space to the same strategic group ♦ Draw circles around each strategic group making the circles proportional to the size of the group's respective share of total industry sales revenues 4. full). Competitive intelligence about the strategies rivals are deploying. their latest moves. there are as many strategic groups as there are competitors when each rival pursues a distinctively different competitive approach and occupies a substantially different competitive position in the marketplace. geographic coverage (local. As in sports. and degree of service offered (no-frills. Companies in the same strategic group can resemble one another in any of several ways: they may have comparable product-line breadth. A company can't expect to outmanoeuvre its rivals without monitoring their actions. medium. regional. partial. emphasize the same distribution channels. sell in the same price/quality range. understanding their strategies. One technique for revealing the competitive positions of industry participants is strategic group mapping. which is useful analytical tool for comparing the market positions of each firm separately or for grouping them into like positions when an industry has so many competitors that it is not practical to examine each one in depth. The procedure for constructing a strategic group map and deciding which firms belong in which strategic group is straightforward: ♦ Identify the competitive characteristics that differentiate firms in the industry typical variables are price/quality range (high. use of distribution channels (one. An industry contains only one strategic group when all sellers pursue essentially identical strategies and have comparable market positions. some. low). use essentially the same product attributes to appeal to similar types of buyers. product-line breadth (wide.9 . full).Strategic Analysis rival companies. narrow). and anticipating what moves they are likely to make next. it ends up flying blind into competitive battle. scouting the opposition is essential. At the other extreme. limited. global). depend on identical technological approaches. their resource strengths and weaknesses. degree of vertical integration (none. national.6 Key factors for competitive success An industry's Key Success Factors (KSFs) are those things that most affect industry members' 3. A strategic group consists of those rival firms with similar competitive approaches and positions in the market. Competitive intelligence can help a company determine whether it needs to defend against specific moves taken by rivals or whether those moves provide an opening for a new offensive thrust. 4.
managers need to understand the industry situation well enough to know what is more important to competitive success and what is less important. to put it another way. between competitive success or failure. efforts-being distinctively better than rivals on one or more key success factors presents a golden opportunity for gaining competitive advantage. because the cost of shipping empty cans is substantial. They heed to know what kinds of resources are competitively valuable. KSFs are the rules that shape whether a company will be financially and competitively successful. one of the keys is having plants located close to end-use customers so that the plant's output can be marketed within economical shipping distances (regional market share is far more crucial than national share). KSFs by their very nature are so important that all firms in the industry must pay close attention to them . Managers. Hence. The answers to three questions help identify an industry's key success factors: ♦ On what basis do customers choose between the competing brands of sellers? What product attributes are crucial? ♦ What resources and competitive capabilities does a seller need to have to be competitively successful? ♦ What does it take for sellers to achieve a sustainable competitive advantage? In apparel manufacturing. product attributes. Indeed. At the very least.the particular strategy elements. ultimately.Strategic Management ability to prosper in the marketplace .they are the prerequisites for industry success or. given prevailing and anticipated industry and competitive conditions. using the industry's KSFs as cornerstones for the company's strategy and trying to gain sustainable competitive advantage by excelling at one particular KSF is a fruitful competitive strategy approachKey success factors vary from industry to industry and even from time to time within the same industry as driving forces and competitive conditions change. competitive capabilities. have to resist the temptation to include factors that have only minor importance on their list of key success factorsthe purpose of identifying KSFs is to make judgments about what things are more important to 3. a company with perceptive understanding of industry KSFs can gain sustainable competitive advantage by training its strategy on industry KSFs and devoting its energies to being distinctively better than rivals on one or more of these factors. resources. and business outcomes that spell the difference between profit and loss and. Misdiagnosing the industry factors critical to long-term competitive success greatly raises the risk of a misdirected strategy. is a top-priority analytical consideration. therefore. And even among these three or four. one or two usually outrank the others in importance. In tin and aluminium cans. companies that stand out on a particular KSF enjoy a stronger market position for their. competencies. Only rarely does an industry have more than three or four key success factors at any one time. In contrast.10 . Determining the industry's key success factors. the KSFs are appealing designs and colour combinations (to create buyer interest) and low-cost manufacturing efficiency (to permit attractive retail pricing and ample profit margins).
To compile a list of every factor that matters even a little bit defeats the purpose of concentrating management attention on the factors truly critical to long-term competitive success. 4. Attractiveness is relative. deciding whether industry and competitive conditions present an attractive business opportunity for the company or whether the company's growth and profit prospects are gloomy. if an industry's overall profit prospects are above average. ♦ The severity of problems confronting the industry as a whole.Strategic Analysis competitive success and what things are less important. As a general proposition. ♦ Whether continued participation in this industry adds importantly to the firm's ability to be successful in other industries in which it may have business interests. Industry environments unattractive to weak competitors may be attractive to strong competitors. the industry can be considered attractive. it is unattractive. both near-term and long-term. having to fight an uphill battle against much stronger rivals can make an otherwise attractive industry unattractive). however. it is a mistake to think of industries as being attractive or unattractive to all industry participants and all potential entrants. ♦ The company's potential to capitalize on the vulnerabilities of weaker rivals (perhaps converting an unattractive industry situation into a potentially rewarding company opportunity).7 Prospects and financial attractiveness of industry The final step of industry and competitive analysis is to use the results of analysis of previous six issues to draw conclusions about the relative attractiveness or unattractiveness of the industry. ♦ The company's competitive position in the industry and whether its position is likely to grow stronger or weaker. An assessment that the industry is fundamentally attractive typically suggests that current industry 3. (Being a well-entrenched leader or strongly positioned contender in an otherwise lackluster industry can still produce good profitability. ♦ Whether industry profitability will be favourably or unfavourably affected by the prevailing driving forces. The important factors on which to base such conclusions include: ♦ The industry's growth potential. Company strategists are obligated to assess the industry outlook carefully. ♦ Whether competition currently permits adequate profitability and whether competitive forces will become stronger or weaker. not absolute. However.11 . ♦ The degrees of risk and uncertainty in the industry's future. ♦ Whether the company is able to defend against or counteract the factor that make the industry unattractive. if its profit prospects are below average.
♦ Weakness: A weakness is an inherent limitation or constraint of the organization which creates strategic disadvantage to it. and customer service. product development. and the different positioning strategies that can be used in different industry settings-for example. materials management. opportunities. strong companies may consider diversification into more attractive businesses. cost leadership. 5. focusing on a particular niche or segment of the industry. over the longer term. look for ways to protect their long-term competitiveness and profitability. weaknesses. and perhaps acquire smaller firms if the price is right. the way it position. the organisation's position. fit. alternatively. or choices of future strategies to pursue.12 . or damage to. such as manufacturing. itself in the marketplace to gain a competitive advantage. ♦ Opportunity: An opportunity is a favourable condition in the organisation's environment which enables it to strengthen its position. Thinking strategically requires managers to identify the set of strategies that will create and sustain a competitive advantage: ♦ Functional-level strategy. If the industry and competitive situation is judged relatively unattractive. marketing. directed at improving the effectiveness of operations within a company. ♦ Business-level strategy. Its central purpose is to identify the strategies that will create a firm-specific business model that will best align. begin looking outside the industry for attractive diversification opportunities. Weak companies in unattractive industries may consider merging with a rival to bolster market share and profitability or. 3. expanding sales efforts and investing in additional facilities and equipment as needed.Strategic Management participants employ strategies calculated to strengthen their long-term competitive positions in the business. or some combination of these. given the company's internal strengths and weaknesses and its external opportunities and threats. and threats is normally referred to as a SWOT analysis ♦ Strength: Strength is an inherent capability of the organization which it can use to gain strategic advantage over its competitors. which encompasses the business's overall competitive theme. The comparison of strengths. differentiation. more successful industry participants may choose to invest cautiously. SWOT ANALYSIS The next component of strategic thinking requires the generation of a series of strategic alternatives. Strategic managers compare and contrast the various alternative possible strategies against each other with respect to their ability to achieve major goals and superior profitability. ♦ Threat: A threat is an unfavourable condition in the organisation's environment which causes a risk for. or match a company's resources and capabilities to the demands of the environment in which it operates.
In such situation. Variation in managerial perceptions about organizational strengths and weaknesses and the environmental opportunities and threats lead to differences is approaches to specific strategies and finally the choice of strategy that takes place through an interactive process in dynamic backdrop. which answers the primary questions. ♦ It presents a Comparative Account: SWOT analysis presents the information about both external and internal environment in a structured form where it is possible to compare external opportunities and threats with internal strengths and weaknesses. What business or businesses should we be in to maximize the long-run profitability of the organization. as situation varies. SWOT analysis helps managers to craft a business model (or models) that will allow a company to gain a competitive advantage in its industry (or industries). and how should we enter and increase our presence in these businesses to gain a competitive advantage? The organization's performance in the marketplace is significantly influenced by the three factors ♦ The organization's correct market position ♦ The nature of environmental opportunities and threat ♦ The organization's resource capability to capitalize the opportunities and its ability to protect against the threat The significance of SWOT analysis lies in the following points: ♦ It provides a Logical Framework SWOT analysis provides us with a logical framework for systematic and sound thrashing of issues having bearing on the business situation. global competitive environment that characterizes most industries today. The patterns are combinations say. It is possible that the organization may have several opportunities and some serious threats.Strategic Analysis ♦ Global strategy. high threats and high strengths. It is equally. and this maximizes a company's chances of surviving in the fast-changing. In case a different strategy is needed. high threats and low strengths. SWOT analysis guides the strategist to think of overall position of the organization that helps to identify the major purpose of the strategy under focus. addressing how to expand operations outside the home country to grow and prosper in a world where competitive advantage is determined at a global level.13 . The helps in matching external and internal environments so that a strategist can come out with suitable strategy by developing certain patterns of relationship. ♦ Corporate-level strategy. generation of alternative strategies and the choice of a strategy. 3. high opportunities and low strengths. high opportunities and high strengths. true that the organization may have powerful strengths coupled with major weaknesses in the light of critical success factors. Competitive advantage leads to increased profitability. ♦ It guides the strategist in Strategy Identification: It is natural that a strategist faces a problem when his organization cannot be matched in the four patterns.
♦ Cost advantages. Potential Resources Strengths and Competitive Capabilities ♦ A powerful strategy supported by competitively valuable skills and experience in key areas. ♦ Sophisticated use of e-commerce technologies and processes. ♦ Superior skills in supply chain management. ♦ A strong financial condition. ♦ Superior intellectual capital relative to key rivals.Strategic Management Faced with a constantly changing environment. ♦ A reputation for good customer service. ♦ Proven skills in improving product processes. The company has to review its strength and weakness in the background of environment's opportunities and threat. ample financial resources to grow the business.e. Opportunities. A. image/company reputation. which can be categorized as an opportunity or a threat. ♦ Strong brand name. ♦ Strong advertising and promotion. and Threats. i. ♦ Ability to take advantage of economies of scale and/or learning and experience curve effects. 3. Potential Resource Strengths and Competitive Capabilities Potential Resource Weaknesses and Competitive Deficiencies A Potential Company Opportunities C B Potential External Threats to Company's WellBeing D Figure: SWOT Analysis: What to Look for in Sizing Up a Company's Strengths. each business unit needs to develop a marketing information system to track trends and developments. an organization's SWOT analysis. ♦ Proprietary technology/ superior technological skills/ important patents..14 . ♦ Product innovation skills. ♦ A widely recognized market leader and an attractive customer base. weaknesses.
burdened with too much debt. ♦ Alliances/joint ventures with other firms that provide access to valuable technology. ♦ Subpar e-commerce systems and capabilities relative to rivals. C. 3. ♦ Falling behind rivals in putting e-commerce capabilities and strategies in place. ♦ Integrating forward or backward. ♦ Behind on product quality and/or R&D and/or technological know-how. ♦ Higher overall unit costs relative to key competitors.15 . ♦ Using the internet and e-commerce technologies to dramatically cut costs and/or to pursue new sales growth opportunities. ♦ Too narrow a product line relative to rivals. ♦ Falling trade barriers in attractive foreign markets. Potential Resource Weaknesses and Competitive Deficiencies ♦ No clear strategic direction. ♦ Obsolete facilities. ♦ Expanding the company's product line to meet a broader range of customer needs. ♦ Weak brand image or reputation. B. ♦ Not attracting new customers as rapidly as rivals. ♦ Missing some key skills or competencies/lack of management depth/ a deficiency of intellectual capital relative to leading rivals. ♦ Wide geographic coverage and/or strong global distribution capability. and/or attractive geographic markets. Potential Company Opportunities ♦ Serving additional customer groups or expanding into new geographic markets or product segments. ♦ Plagued with internal operating problems. ♦ Utilizing existing company skills or technological know-how to enter new product lines or new businesses. ♦ Lots of underutilized plant capacity. competencies. no cost control measures or cost accounting practices. ♦ A weak balance sheet.Strategic Analysis ♦ Better product quality relative to rivals. ♦ Weaker dealer network than key rivals and/or lack of adequate global distribution capability. ♦ Short on financial resources to fund promising strategic initiatives. ♦ Subpar profitability.
Potential External Threats to Company's Well-Being ♦ Likely entry of potent new competitors.16 . internal controls to meet exponential growth. SWOT Analyses at Moser Baer ♦ ♦ ♦ ♦ Strengths Weaknesses Integrated manufacturing allowing cost ♦ Need to scale up operations and evolve efficiencies and enhanced speed to market. 3. ♦ Ability to grow rapidly because of sharply rising demand in one or more market segments. ♦ Costly new regulatory requirements. ♦ Need to constantly expand capacities. ♦ Growing bargaining power of customers or suppliers. requiring continuing capital investment.Strategic Management ♦ Openings to take market share away from rivals. ♦ Alliances or joint ventures that expand the firm's market coverage or boost its competitive capability. manpower and overhead costs allow cost leadership. ♦ Market openings to extend the company's brand name or reputation to new geographic areas. ♦ Mounting competition from new Internet start-up companies pursuing e-commerce strategies. Strong focus on R&D and engineering to constantly innovate products and reduce costs. ♦ Slowdowns in market growth. ♦ Adverse shifts in foreign exchange rates and trade policies of foreign governments. D. ♦ Openings to exploit emerging new technologies. ♦ Technological changes or product innovations that undermine demand for the firm's product. ♦ Acquisition of rival firms or companies with attractive technological expertise. Committed shareholders add strength. Lower capital investment. ♦ A shift in buyer needs and tastes away from the industry's product. ♦ Adverse demographic changes that threaten to curtail demand for the firm's product. ♦ Vulnerability to industry driving forces. longevity and sustainability to future plans. ♦ Loss of sales to substitute products. ♦ Increasing intensity of competition among industry rivals – may cause squeeze on profit margins.
large capacities and investments. explosive growth in digital content. incorporated in 1983. However.com/investor_swot. have seen a growing protectionist attitude and a tendency by some local governments to use anti-dumping and trade protection tools to provide protection to local businesses. a sharp reduction in product pricing can impact performance. low demand. Pricing could fall due to oversupply. ♦ Blu-ray/HD-DVD: Efforts are on worldwide ♦ Anti-dumping and anti-subsidy levies: The Company derives a significant part of its to define and develop the next-gen storage revenues from international markets. the Company's capacities. compact discs (CDs) and digital versatile discs (DVDs). TOWS MATRIX Heinz Weihrich has developed a matrix called TOWS matrix by comparing strengths and 3. However. DVDs for video requirements. Based in New Delhi. they start to emulate commodity-type characteristics. ♦ Fall in product prices: As products move into the mature phase in their life-cycle. as the industry is characterized by high volumes. These format and Moser Baer is part of that effort. is one of India's leading technology companies and ranks among the top three media manufacturers in the world.asp) 6. (Source: http://moserbaer. the largest movie industries in the world and huge installed base of read/write drives and customers are shifting to CDs for audio and time to market for a new format. Company is well positioned to tap this the extent of the threat is mitigated by the opportunity. the efficient emerging technologies. low cost ♦ Domestic market: India has one of the and ease of storage on optical media. Also. it has a broad and robust product range of floppy disks. existing top-tier customer base business could be threatened from more and efficient in-house technology. cost reduction due to reduction in input costs or setting up of capacities in low-cost regions About Moser Baer: Moser Baer.Strategic Analysis Opportunities Threats ♦ Exploding DVD-R market: With world-class ♦ Emerging technologies: In a dynamic technology environment.17 . India. the Company continues to keep a close watch on this front and take necessary steps to minimize any fallout.
H) 7. while using the same inputs (Threats. the company must conduct portfolio analysis (a tool by which management identifies and evaluates the various businesses that make up the company). In portfolio analyses top management views its product lines and business units as a series of investments from which it expects returns. Portfolio analysis can be defined as a set of techniques that help strategists in taking strategic decisions with regard to individual products or businesses in a firm's portfolio. cope with threats existing or emerging threats Environmental threats ST : strengths in the organization can be used to minimize existing or emerging threats Figure : The TOWS Matrix (Source: Weihrich. It is primarily used for competitive analysis and corporate strategic planning in multi product and multi business firms. It has been criticized that after conducting the SWOT Analysis managers frequently fail to come to terms with the strategic choices that the outcomes demand. The best business portfolio is the one that best fits the company's strengths and weaknesses to opportunities in the environment. which. The matrix is outlined below: Internal External Elements Organizational strengths Organizational weaknesses Strategic options Environmental opportunities (and risks) SO : strengths can be used to capitalize or build upon existing or emerging opportunities WO : the strategies developed need to overcome organizational weaknesses if existing or emerging opportunities are to be exploited WT : the strategies pursued must minimize or overcome weaknesses and as far as possible. 3. PORTFOLIO ANALYSES In order to analyse the current business portfolio. A business portfolio is a collection of businesses and products that make up the company.18 . In order to overcome this.Strategic Management weaknesses of organization with that of market opportunities and threats. Opportunities. Piercy argues for the TOWS Matrix. Weakness and Strengths) reorganizes them and integrates them more fully into the strategic planning process.
Experience curve results from a variety of factors such as learning effects. ♦ Has its own set of competitors. The SBU can be a company division. less. or no investment. The concept of experience curve is relevant for a number of areas in strategic management. After identifying SBUs the businesses have to assess their respective attractiveness and decide how much support each deserves. For instance. SBUs are common in organisations that are located in multiple countries with independent manufacturing and marketing setups. The most popular is the Boston Consulting Group (BGC) matrix or product portfolio matrix. For instance. Experience curve is based on the commonly observed phenomenon that units costs decline as a firm accumulates experience in terms of a cumulative volume of production. multi-business firm is that resources could be channelised at the corporate level to those businesses that posses the greatest potential. The implication is that larger firms in an industry would tend to have lower unit costs as compared to those for smaller companies. if these consist of a main business and other minor complementary interests. the knowledge of which is a prerequisite to understand different models of portfolio analysis: Strategic business unit: Analysing portfolio may begin with identifying key businesses also termed as strategic business unit (SBU). SBU is a unit of the company that has a separate mission and objectives and which can be planned independently from other company businesses. But there are several other techniques that should be understood in order to have a comprehensive view of how objective factors can help strategists in exercising strategic choice. or even a single product or brand. Experience Curve: Experience curve is an important concept used for applying a portfolio approach. Depending upon analyses businesses may develop growth strategies for adding new products or businesses to the portfolio. In order to design the business portfolio. a diversified company may decide to divert resources from its cash-rich businesses to more prospective ones that hold promise of a faster growth so that the company achieves its corporate level objectives in an optima manner. An SBU has following characteristics: ♦ Single business or collection of related businesses that can be planned for separately.Strategic Analysis They may also be used in less-diversified firms.19 . experience curve is considered a barrier for new firms contemplating entry in an industry. The concept is akin to a learning curve which explains the efficiency increase gained by workers through repetitive productive work. thereby gaining a competitive cost advantage. There are a number of techniques that could be considered as corporate portfolio analysis techniques. economies of scale. a product line within a division. product redesign and technological improvements in production. There are three important concepts. the business must analyse its current business portfolio and decide which business should receive more. 3. ♦ Has a manager who is responsible for strategic planning and profit. The main advantage in adopting a portfolio approach in a multi-product.
Its only serious competitor is LML Vespa Ltd. Particular attention is to be paid on the businesses that are in the declining stage. on an average. Mature businesses may be used as sources of cash for investment in other businesses which need resources. The primary strategic advantage that Bajaj Auto has is in terms of costs. which for the past decade has been selling. Product Life Cycle: Another important concept in strategic choice is that of product life cycle (PLC). the concept of PLC could work just as well. Essentially. If businesses are substituted for product. The main advantage of PLC is that it can be used to diagnose a portfolio of products (or businesses) in order to establish the stage at which each of them exists.2 Boston consulting group (BCG) growth-share matrix The BCG growth-share matrix is the simplest way to portray a corporation's portfolio of investments. Depending on the diagnosis. Introduction Maturity Sales Time Figure: Product Life Cycle 7. retrenchment. expansion may be a feasible alternative for businesses in the introductory and growth stages. Other competitors like Gujarat Narmada and Kinetic Honda find it extremely difficult to compete due to the cost differentials that currently exist. For instance.20 Decline Growth . In the contemporary Indian two wheeler market.. Growth share matrix also known for its cow and dog metaphors is popularly used for 3. appropriate strategic choice could be made. In this way. a balanced portfolio of businesses may be built up by exercising a strategic choice based on the PLC concept. etc. which has a far lesser share of the market. 5 lakh scooters a year and retains more than 60 per cent of the market. PLC is an S-shaped curve which exhibits the relationship of sales with respect of time for a product that passes through the four successive stages of introduction (slow sales growth). growth (rapid market acceptance) maturity (slow down in growth rate) and decline (sharp downward drift).Strategic Management It is also used to build market share and discourage competition. It is a useful concept for guiding strategic choice. the experience curve phenomenon seems to be working in favour of Bajaj Auto. The likely strategic choice for underdog competitors could be a market niche approach or segmentation based on demography or geography. may be adopted for declining businesses. A combination of strategies like selective harvesting.
Using the matrix. ♦ The horizontal axis represents relative market share and serves as a measure of company strength in the market.Strategic Analysis resource allocation in a diversified company. They also need heavy investment to maintain their position and finance their rapid growth potential. In the matrix: ♦ The vertical axis represents market growth rate and provides a measure of market attractiveness. successful. Using the BCG approach. ♦ Cash Cows are low-growth. a company classifies its different businesses on a two-dimensional growth-share matrix. They need heavy investments with low potential to generate cash. In long run when the growth rate slows down. and need less investment to maintain their market share. sometimes called problem children or wildcats. organisations can identify four different types of products or SBU as follows: ♦ Stars are products or SBUs that are growing rapidly. They generate cash and have low costs. high market share businesses or products. Stars High Market Growth Rate Question Marks ? ? ? Cash Cows Dogs R&D Low High Relative Market Share Low Figure: BCG Growth-Share Matrix ♦ Question Marks. They represent best opportunities for expansion. are low market share business in high-growth markets. They are established. stars become cash cows. They require a lot of cash to hold their share. Question marks if left unattended are 3.21 .
It is for business organisations to turn them stars and then to cash cows when the growth rate reduces. Penetration might require greater spending on advertising or personal selling. 7. It also focuses on classifying current businesses but provide little advice for future planning. BCG matrix can be difficult. Market Penetration: Market penetration refers to a growth strategy where the business focuses on selling existing products into existing markets. Build: Here the objective is to increase market share.22 . They may generate enough cash to maintain themselves. even by forgoing short-term earnings in favour of building a strong future with large market share. time-consuming. it must determine what role each will play in the future.Strategic Management capable of becoming cash traps. there are problems and limitations with the method.3 Ansoff's product market growth matrix The Ansoff's product market growth matrix (proposed by Igor Ansoff) is a useful tool that helps businesses decide their product and market growth strategy. The four strategies that can be pursued are: 1. Since growth rate is high. Sometimes they may need cash to survive. Market Development: Market development refers to a growth strategy where the business seeks 3. Penetration is also done by effort on increasing usage by existing customers. Dogs should be minimised by means of divestment or liquidation. ♦ Dogs are low-growth. Management may find it difficult to define SBUs and measure market share and growth. Harvest: Here the objective is to increase short-term cash flow regardless of long-term effect. Once the organisations have classified its products or SBUs. and costly to implement. new.Hold: Here the objective is to preserve market share. however. It is achieved by making more sales to present customers without changing products in any major way. The product/market growth matrix is a portfolio-planning tool for identifying company growth opportunities. With the use of this matrix a business can get a fair idea about how its growth depends upon it markets in new or existing products in both new and existing markets. Overcoming competition in a mature market requires an aggressive promotional campaign. but do not have much future. increasing it should be relatively easier.Divest: Here the objective is to sell or liquidate the business because resources can be better used elsewhere.The growth-share matrix has done much to help strategic planning study. 3. low-share businesses and products. supported by a pricing strategy designed to make the market unattractive for competitors. risky ventures or giving up on established units too quickly. One useful device for identifying growth opportunities for the future is the product/market expansion grid. Companies should always be looking to the future. This can cause unwise expansion into hot. They can lead the company to placing too much emphasis on market-share growth or growth through entry into attractive new markets.
As market conditions change overtime. environmental assessment and business strength assessment. For example. It is 4 by five matrix as follows: 3.Strategic Analysis to sell its existing products into new markets. a company may shift product-market growth strategies. new distribution channels or different pricing policies to attract different customers or create new market segments. favorable. new product dimensions or packaging. The approach forms a two dimensional matrix based on stage of industry maturity and the firms competitive position. tenable. Little is a portfolio analysis method that is based on product life cycle. weak. Existing Products Existing Markets New Markets Market Penetration Market Development New Products Product Development Diversification Figure: Ansoff's Product Market Growth Matrix 7. when its present market is fully saturated a company may have no choice other than to pursue new market. Diversification: Diversification refers to a growth strategy where a business markets new products in new markets. Stage of industry maturity is an environmental measure that represents a position in industry's life cycle.4 ADL matrix The ADL matrix has derived its name from Arthur D.23 . This strategy may require the development of new competencies and requires the business to develop modified products which can appeal to existing markets. strong. It is a strategy for company growth by identifying and developing new markets for current company products. This strategy may be achieved through new geographical markets. It is a strategy for company growth by offering modified or new products to current markets. It is a strategy by starting up or acquiring businesses outside the company's current products and markets. Typically the business is moving into markets in which it has little or no experience. This strategy is risky because it does not rely on either the company's successful product or its position in established markets. Product Development: Product development is refers to a growth strategy where business aims to introduce new products into existing markets. Competitive position is a measure of business strengths that helps in categorization of products or SBU's into one of five competitive positions: dominant.
24 .Strategic Management Stage of industry maturity Competitive position Embryonic Growth Fast grow Attend cost leadership Renew Defend position Act offensively Differentiate Lower cost Attack small firms Mature Defend position Attend cost leadership Renew Fast grow Act offensively Lower cost Focus Differentiate Grow with industry Focus Differentiate Harvest Find niche Hold niche Turnaround Grow with industry Hit smaller firms Ageing Defend position Renew Focus Consider withdrawal Find niche Hold niche Harvest Dominant Fast grow Build barriers Act offensively Strong Differentiate Fast grow Favourable Differentiate Focus Fast grow Focus Differentiate Defend Harvest Turnaround Tenable Weak Hold niche Turnaround Turnaround Grow with Focus industry Hold niche Grow with Focus Retrench industry Withdraw Find niche Turnaround Withdraw Catch-up Retrench Divest Grow with Niche or industry withdraw Figure: Arthur D. Little Strategic Condition Matrix Divest Retrench Withdraw The competitive position of a firm is based on an assessment of the following criteria: 3.
25 . they are generally vulnerable in the face of increased competition from stronger and more proactive companies in the market. results in the market leaders a reasonable degree of freedom. the firm has a considerable degree of freedom over its choice of strategies and is often able to act without its market position being unduly threatened by its competitions. competitive strength replaces market share as the dimension by which the competitive position of each SBU is assessed. Favourable: This position. there are differences. and includes a broader range of factors other than just the market growth rate. Secondly. market attractiveness replaces market growth as the dimension of industry attractiveness. This also uses two factors in a matrix / grid situation as shown below: Business Position High Market Attractiveness High Medium Low Invest Invest Protect Figure : The GE Matrix Each of the above two factors is rated according to criteria such as the following: Medium Invest Protect Harvest Low Protect Harvest Divest 3. Weak: The performance of firms in this category is generally unsatisfactory although the opportunity for improvement do exist. which generally comes about when the industry is fragmented and no one competitor stand out clearly.5 The General Electric Model The General Electric Model (developed by GE with the assistance of the consulting firm McKinsey & Company) is similar to the BCG growth-share matrix. Firstly. However. Tenable: Although the firms within this category are able to perform satisfactorily and can justify staying in the industry. 7. Strong: By virtue of this position.Strategic Analysis Dominant: This is a comparatively rare position and in many cases is attributable either to a monopoly or a strong and protected technological leadership.
3. Self-Examination Questions Multiple Choice Questions 1.26 . That's' where this planning models can help determining which SBU should be stimulated for growth. medium or low with respect to (a) market attractiveness. types. What is an industry? (a) Industry is a group of diverse businesses under common owners. Effectiveness. (b) Industry is a group of firms whose products have same and similar attributes such that they compete for the same buyers. Finally. Every organization has to make decisions about how to use its limited resources most effectively. each SBU is labelled as high. and (b) business position. Then each SBU is rated with respect to all criteria. overall rating for both factors are calculated for each SBU.Strategic Management Evaluating the ability to compete: Business position Size Growth Share by segment Customer loyalty Margins Distribution Technology skills Patents Marketing Flexibility Organization Evaluating the Market Attractiveness Size Growth Customer satisfaction levels Competition: quality. commitment Price levels Profitability Technology Government regulations Sensitivity to economic trends Figure: Criteria for rating Business Position and Market Attractiveness The criteria used to rate market attractiveness and business position assigned different ways because some criteria are more important than others. which one maintained in their present market position and which one eliminated. Based on these ratings.
SWOT analysis is an evaluation of the organization's ________ strengths and weaknesses and its ________ opportunities and threats. (a) avoid. internal (c) external. neutralizing (d) exploit.Strategic Analysis (c) Industry is any business organization engaged in manufacturing activities. neutralizing. avoiding. ignoring 4. Which of the following competitive position of a firm is not as per ADL Matrix? (a) Dominant (b) Favourable (c) Difficult (d) Tenable Short answer questions 1. capitalizing.27 . What is a key success factor? 2. Explain dogs in BCG matrix? 3. What is product development? 3. (a) external. (d) All business organizations excluding those in service sector are industry. Which of the following does "B" stand for in the BCG Matrix? (a) Boom (b) Balance (c) Bankruptcy (d) Boston 5. correcting (c) avoid. 2. external (d) internal. neutralizing. The goal of SWOT analysis is to ________ the organization's opportunities and strengths while ________ its threats and ________ its weaknesses. internal (b) internal. external 3. correcting (b) exploit.
I am involved little. in the discussion regarding the acquisition. We need to analyse it further. Why organisations undertake portfolio analyses? Discuss any one model of portfolio analysis in detail. The merged company hopes to gain a greater market share and achieve greater efficiency. (c) Conduct SWOT analysis from the facts given in the case. There is also need to close down production facilities of two locations out of seven locations of Small. Pertinent points that were raised were as follows: Head Production. We can easily achieve second position if we are able to fully utilise our capacities. The key reason behind buying Small is to create shareholder value over and above that of the sum of the two companies. 'Although.' Head Marketing. Recent years have been tough for both the companies with strong competition. we will become the second largest consumer goods company in India with sales of over Rs. has little presence in some regions and is not a major competitor for us. He started the meeting with following observations: 'After acquiring Small. advise the Big Ltd. The costs of production of these locations is very high and also they are located in eastern India. (d) 3.28 . there is marginal gap between our existing third position and second position. Further.' Different issues were discussed between the managers. how to proceed before arriving at decision to acquire any company. (d) 5. whereas our major sales is in south and west. 2. called an internal meeting of senior managers to discuss issues involved in acquiring Small Ltd. I feel production facilities of both the companies need to be synergised. product launches and aggressive price-cuts. (a) In a low growth product what are the different options available to a company. (b) 2. 350 crores. The market of the products is in mature phase with low growth rate. Case Study The Managing Director of Big Ltd. We will have more money for marketing initiatives. What is TOWS matrix? Is it same as SWOT analysis? Discuss. Small Ltd. (b) If you are appointed as a consulted. I have closely studied various production facilities available to both the companies. Answers – Multiple Choice Questions: 1. for about Rs. 4500 crores.Strategic Management Essay type questions 1. (b) 4. (c) 3. till now.
The degree of aptness of this game plan decides the extent of the firm's success. INTRODUCTION Generally. Statistician Strategy is a deliberate search for a plan of action that will develop a business competitive advantage and compound it. The ultimate question is whether the strategy ironed out is the appropriate onewhether it would take the firm to its objectives. than an exact answer to the wrong question. the strategic planning process culminates in the formulation of corporate strategy. Henderson 1. ♦ Know the different stages of strategy-formulation-implementation process. ♦ Have knowledge of different generic strategies as taken up by corporates. John Tukey. That is why formulation of corporate strategy forms the crux of the strategic planning process . which can be made precise. Corporate strategy is the game plan that actually steers the firm towards success. Chance favors the prepared mind. Louis Pasteur Far better an approximate answer to the right question.Chapter 4 STRATEGIC PLANNING LEARNING OBJECTIVES ♦ Learn the meaning of strategic intent and vision. Bruce D. which is often vague. ♦ To have a basic knowledge of alternative growth/directional strategies. The strength of the entire process of strategic planning is tested by the efficacy of the strategy finally forged by the firm. ♦ Understand the process of strategy formulation.
Now we will take the concept forward. technology and other variables.the direction. 2. It is obvious that responding to environment is part and parcel of a firm's existence. This is where strategy steps in. 2. ♦ It can also be viewed as the objective-strategy design of the firm. How does corporate strategy actually accomplish this task? It is by matching the unique capabilities of the firm with the promises and threats of the environment that it achieves this task. It also helps build the relevant competitive advantages. we can also describe corporate strategy as the objective-strategy design of the firm. The following points will clarify the corporate strategy. And.Strategic Management 2. The question is how good or how methodical is the response. Basically the purpose of corporate strategy is to harness the opportunities available in the environment. It serves as the design for filling the strategic planning gap. it spells out the growth objective of the firm . scope and concerns of corporate strategy Corporate strategy is basically concerned with the choice of businesses. it actually denotes the changes / additions / deletions in the firm's existing product-market postures. ♦ It ensures that the right fit is achieved between the firm and its environment. It amounts to long-term. It spells out the businesses in which the firm will play. Corporate strategy is basically the growth design of the firm. Masterminding and working out the right fit between the firm and its external environment is the primary contribution of corporate strategy.1 Nature. products and markets. to arrive at such an objective-strategy design is the basic burden of corporate strategy formulation. the concept of strategy has been discussed in the second chapter.2 What does corporate strategy ensure? Corporate strategy in the first place ensures the growth of the firm and ensures the correct alignment of the firm with its environment. pace and timing of the firm's growth. ♦ It is the design for filling the firm's strategic planning gap. ♦ It helps build the relevant competitive advantages for the firm. consumer tastes. Strategy is the opposite of adhoc responses to the changes in the environment-in competition. countering the threats embedded therein. It also spells out the strategy for achieving the growth. Thus. ♦ Corporate objectives and corporate strategy together describe the firm's concept of business. ♦ It is concerned with the choice of the firm's products and markets. 4. extent. CORPORATE STRATEGY At an initial level. the markets in which it will operate and the customer needs it will serve. well thought-out and prepared responses to the various forces in the business environment.2 .
Hence. standing as the product of management's analysis and strategic thinking about the company's situation and its conclusions about how to position the company in the marketplace and tackle the task of competing for buyer patronage. shifting customer requirements and expectations.3 Strategy is partly proactive and partly reactive A company's strategy is typically a blend of (1) proactive actions on the part of managers to improve the company's market position and financial performance and (2) as needed reactions to unanticipated developments and fresh market conditions. When market and competitive conditions take an unexpected turn or some aspect of a company's strategy hits a stone wall. Know-how. a portion of a company's strategy is always developed on the fly. and Competitive Capabilities Actual Company Strategy Adaptive reactions to Changing circumstances REACTIVE STRATEGY Figure: A Company's Actual Strategy Is Partly Planned & Partly Reactive But not every strategic move is the result of proactive plotting and deliberate management design. Resource Strength & weaknesses. PLANNED STRATEGY New initiatives plus ongoing strategy features continued from prior periods Company Experiences. This part of management's game plan is deliberate and proactive. Things happen that cannot be fully anticipated or planned for. new technologies and market opportunities. a changing political or economic climate. The biggest portion of a company's current strategy flows from previously initiated actions and business approaches that are working well enough to merit continuation and newly launched managerial initiatives to strengthen the company's overall position and performance. some kind of strategic reaction or adjustment is required. or other 4.3 . coming as a reasoned response to unforeseen developments-fresh strategic maneuvers on the part of rival firms.Strategic Planning 2.
Information gathering and additional analysis will not be able to reduce the uncertainty. because an information-need area may affect several SBUs. For example. proposed. 2. The impact of a strategic uncertainty will depend on the importance of the impacted SBU to a firm. A typical external analysis will emerge with dozens of strategic uncertainties.Strategic Management unpredictable or unanticipated happenings in the surrounding environment. uncertainty that has strategic implications. Developing a strategic vision of where the company needs to head and what its future productcustomer-market-technology focus should be. is a key construct in strategy formulation. Sometimes the strategic uncertainty is represented by a future trend or event that has inherent unpredictability. the number of involved SBUs can also be relevant to a strategic uncertainty's impact. In that case. profits. they need to be grouped into logical clusters or themes. But apart from adapting strategy to changes in the market. However. scenario analysis can be employed. But exactly what is involved in developing a strategy and executing it proficiently? And who besides top management has strategy – formulation – executing responsibility? Crafting and executing a company's strategy is a five-stage managerial process as given below: 1. Finally. profits. The importance of established SBUs may be indicated by their associated sales. Impact of a strategic uncertainty: Each strategic uncertainty involves potential trends or events that could have an impact on present. there is also a need to adapt strategy as new learning emerges about which pieces of the strategy are working well and which aren't and as management hits upon new ideas for improving the strategy. One outcome could be a decision to create organizational and strategic flexibility so that as the business context changes the strategy will adapt. a trend toward natural foods may present opportunities for juices for a firm producing aerated drinks on the basis of a strategic uncertainty.3 Dealing with strategic uncertainty Strategic uncertainty. Some SBUs are more important than others. THE STAGES OF CORPORATE STRATEGY FORMULATION. such measures might need to be supplemented for proposed or growth SBUs for which present sales. Strategies are then developed for each. To be manageable. 4. Scenario analysis basically accepts the uncertainty as given and uses it to drive a description of two or more future scenarios. 3. or costs. or costs may not reflect the true value to a firm.4 .IMPLEMENTATION PROCESS Crafting and executing strategy are the heart and soul of managing a business enterprise. Crafting a strategy thus involves stitching together a proactive/intended strategy and then adapting first one piece and then another as circumstances surrounding the company's situation change or better options emerge-a reactive/adaptive strategy. and even potential strategic business units (SBUs). It is then useful to assess the importance of each cluster in order to set priorities with respect to Information gathering and analysis.
Implementing and executing the chosen strategy efficiently and effectively. strategy. Top management's 4. Crafting a strategy to achieve the desired outcomes and move the company along the strategic course that management has charted. new ideas. and new opportunities. objectives. changing conditions. 4. Deciding to commit the company to one path versus another pushes managers to draw some carefully reasoned conclusions about how to try to modify the company's business makeup and the market position it should stake out. or execution in light of the company's actual performance.Strategic Planning 2. new opportunities and new ideas Figure: The Stages of Corporate Strategy Formulation. Setting objectives and using them as yardsticks for measuring the company's performance and progress. Monitoring developments and initiating corrective adjustments in the company's long-term direction. Stage 1 Stage 2 Stage 3 Crafting a Strategy to Achieve the Objectives and Vision Stage 4 Stage 5 Developing a Strategic Vision Setting Objectives Implementing & Executing the Strategy Monitoring Developments. 3. changing conditions. Evaluating performance and Making Corrective Adjustments Revise as Needed in light of actual performance. 5.5 .Implementation Process Stage 1 : Developing a strategic vision First a company must determine what directional path the company should take and what changes in the company's product – market – customer – technology – focus would improve its current market position and its future prospect.
The managers of a subsidiary.6 . Decisions on overall mission in a major corporation will exercise constraints elsewhere. in broad terms. and molds organizational identity. The objective provides the basis for it major decisions of the firm and also said the organizational performance to be realised at each level. Ideally. strategy is not concerned with the details of SBU competitive strategy or the directions and methods the businesses might take to achieve competitive advantage Rather. the firm is tackling the environment and deciding the locus it should have in the environment. Through the objective setting process. They also endow the firm with characteristics that ensures the projected the growth. charts a strategic path for it to follow in preparing for the future. of course. managers ought to use the objective-setting exercise as a tool for truly stretching an organization to reach its full potential. The managerial purpose of setting objectives is to convert the strategic vision into specific performance targets – results and outcomes the management wants the achieve . or the acquisition of other businesses? These are. As Hamel and Prahalad have highlighted. to investment in internal innovation and new products. Does the corporation aspire to short-term profits or long-term growth. The overall stance of the corporation with regard to such matters may develop over many years. they represent the quantum of growth the firm seeks who achieve in the given time frame. Mission and Strategic Intents: Managers need to be clear about what they see as the role of their organization. the importance of clear strategic intent can go much further: it can help galvanise motivation and enthusiasm throughout the organization by providing what they call a sense of destiny and discovery. to global coverage or the focus on selected countries.and then use these objectives as yardsticks for tracking the company's progress and performance. and this is often expressed in terms of a statement of mission or strategic intent This is important because both external stakeholders and other managers in the organization need to be clear about what the organization is seeking to achieve and. charged with developing a strategy for that business. pulling in different directions. Stage 2 : Setting objectives Corporate objectives flow from the mission and growth ambition of the corporation. A clearly articulated strategic vision communicates management's aspirations to stakeholders and helps steer the energies of company personnel in a common direction. also need to be clear where they fit into the corporate whole. At this level. different levels of management. to a focused set of highly related businesses or a more diversified set of businesses. Basically.Strategic Management views and conclusions about the company's direction and the product-customer-market-technology focus constitute a strategic vision for the company. the concern here is overall strategic direction. how it expects to do so. but by being made explicit it can help direct strategic choice. all matters of strategic choice. A strategic vision delineates management's aspirations for the business and points an organization in a particular direction. there is a risk of the different parts of the organization. indeed all members of the organization. but they are unlikely to change regularly. Challenging company personnel to go all out and deliver big 4. In the absence of this.
to exhibit some urgency in improving both its financial performance and its business position. and to be more intentional and focused in its actions. By spelling out annual (or perhaps quarterly) performance targets. give it a growing competitive advantage over rivals. 4. Strategies represent the actions to be taken to accomplish long-term objectives. ♦ Competitive Position. a company's set of financial and strategic objectives ought to include both short-term and long-term performance targets. ♦ Profitability. The surest path to sustained future profitability quarter after quarter and year after year is to relentlessly pursue strategic outcomes that strengthen a company's business position and. ♦ Employee Relations. Targets to be achieved within three to five years prompt considerations of what to do now to put the company in position to perform better down the road. A need for both short-term and long-term objectives: As a rule. A company that has an objective of doubling its sales within five years can't wait until the third or fourth year to begin growing its sales and customer base. company managers are well advised to put more emphasis on achieving strategic objectives than on achieving financial objectives whenever a trade-off has to be made. strategic planners commonly establish long-term objectives in seven areas. The balanced scorecard approach: A combination of strategic and financial objectives – The balanced scorecard approach for measuring company performance requires setting both financial and strategic objectives and tracking their achievement. What ultimately enables a company to deliver better financial results from operations is the achievement of strategic objectives that improve its competitiveness and market strength. usually from two to five years. ideally. Long-term objectives: To achieve long-term prosperity. ♦ Public Responsibility.Strategic Planning gains in performance pushes an enterprise to be more inventive.7 . management indicates the speed at which longer-range targets are to be approached. Qualities of Long-Term Objectives ♦ Acceptable. such that its very survival is threatened. The time frame for objectives and strategies should be consistent. Having quarterly or annual objectives focuses attention on delivering immediate performance improvements. Unless a company is in deep financial difficulty. ♦ Employee Development. ♦ Technological Leadership. Long-term objectives represent the results expected from pursuing certain strategies. ♦ Productivity.
delivering the best customer service of any company in the industry (or the world). earnings per share. The need for objectives at all organizational levels: objective setting should not stop with top management's establishing of companywide performance targets. Objectives are commonly stated in terms such as growth in assets. establish priorities. So intent are they on reaching the target that they set aggressive stretch objectives and pursue them relentlessly. realistic. Ambitious companies almost invariably begin with strategic intents that are out of proportion to their immediate capabilities and market positions. sometimes even obsessively. and social responsibility. Short-range objectives can be identical to long-range objectives if an organization is already performing at the targeted long-term level. understandable. Clearly established objectives offer many benefits. They provide direction. aid in evaluation. Company objectives need to be 4. A company's objectives sometimes play an other role – that of signaling unmistakable strategic intent to make quantum gains in competing against key rivals and establish itself as a clear-cut winner in the marketplace. hierarchical. ♦ Measurable. But they are undeterred by a grandiose objective that may take a sustained effort of 10 years or more to achieve.Strategic Management ♦ Flexible. or turning a new technology into products capable of changing the way people work and live. challenging. allow synergy.8 . ♦ Suitable. unseating the existing industry leader. growth in sales. Objectives should be quantitative. obtainable. if a company has an ongoing objective of 15 percent profit growth every year and is currently achieving this objective. stimulate exertion. market share. For instance. then the company's long-range and short-range objectives for increasing profits coincide. often against long odds. and aid in both the allocation of resources and the design of jobs. and congruent among organizational units. ♦ Motivating. ♦ Understandable. Short-range objectives then serve as stair-steps or milestones. profitability. Concept of Strategic Intent: A company exhibits strategic intent when it relentlessly pursues an ambitious strategic objective and concentrates its full resources and competitive actions on achieving that objective. The most important situation in which short-range objectives differ from long-range objectives occurs when managers are trying to elevate organizational performance and cannot reach the long-range target in just one year. degree and nature of vertical integration. reduce uncertainty. measurable. ♦ Achievable. A company's strategic intent can entail becoming the dominant company in the industry. minimize conflicts. Each objective should also be associated with a time line. degree and nature of diversification.
Ideally. To achieve this unity. product line. Together. Good communication of strategic themes and guiding principles thus serves a valuable strategy-unifying purpose. its short-range and long-range performance targets. and the competitive moves and internal action approaches to be used in achieving the targeted business results.Strategic Planning broken down into performance targets for each separate business. and the challenges and issues that stand as obstacles to the company's success. A company's strategic plan lays out its future direction. the core 4. the expected actions of the industry's key players. setting objectives. Anything less than a unified collection of strategies weakens company performance. the smaller the risk that people and organization units will go off in conflicting strategic directions when decision making is pushed down to frontline levels and many people are given a strategy-making role. Achieving unity in strategy making is partly a function of communicating the company's basic strategy themes effectively across the whole organization and establishing clear strategic principles and guidelines for lower-level strategy making. and strategy. However. The ideal situation is a team effort in which each organizational unit strives to produce results in its area of responsibility that contribute to the achievement of the company's performance targets and strategic vision. Cohesive strategy making down through the hierarchy becomes easier to achieve when company strategy is distilled into pithy. Company performance can't reach full potential unless each area of the organization does its part and contributes directly to the desired companywide outcomes and results. and buy in to the company's basic direction and strategy. In making strategic decisions. The greater the numbers of company personnel who know. the strategizing process generally has proceeded from the corporate level to the business level and then from the business level to the functional and operating levels. This means setting performance targets for each organization unit that support-rather than conflict with or negate-the achievement of companywide strategic and financial objectives. performance targets. functional department. easy-to-grasp terminology that can be used to drive consistent strategic action throughout the company. they constitute a strategic plan for coping with industry and competitive conditions. and individual work unit. and crafting a strategy are basic direction-setting tasks. the pieces and layers of a company's strategy should fit together like a jigsaw puzzle. inputs from a variety of assessments are relevant. Midlevel and frontline managers cannot do good strategy making without understanding the company's long-term direction and higher-level strategies. All the strategy makers in a company are on the same team and the many different pieces of the overall strategy crafted at various organizational levels need to be in sync and united. They map out the company's direction.9 . Stage 3: Crafting a strategy to achieve the objectives and vision A company's strategy is at full power only when its many pieces are united. understand. Such consistency signals that organizational units know their strategic role and are on board in helping the company move down the chosen strategic path and produce the desired results. Developing a strategic vision.
Organizational Strengths and Weaknesses Competitor Strengths and Weaknesses STRATEGIC DECISION • Strategic Investment • Functional Area Strategies • Sustainable Competitive Advantage Market Needs. and strategies. Figure below summarizes how these assessments combine to influence strategy. activity aimed at shaping the performance of core business activities in a strategy-supportive manner. These assessments focus on determining how attractive the selected market will be.Strategic Management of any strategic decision should be based on three types of assessments. weaknesses. The ideal is to compete in a healthy. The second evaluates competitor strengths. and Key Success Figure: Structuring Strategic Decisions Stage 4 : Implementing & executing the strategy Managing strategy implementation and execution is an operations-oriented. the customers and their needs. given the strategy selected. and the market environment. To convert 4. It is easily the most demanding and time-consuming part of the strategy-management process. The first concerns organizational strengths and weaknesses. the market. growing industry with a strategy based on strengths that are unlikely to be acquired or neutralized by competitor. The third assesses the competitive context. competitor strength. Attractiveness. The goal is to develop a strategy that exploits business strengths and competitor weaknesses and neutralizes business weaknesses and.10 . because an organization's strength is of less value if it is neutralized by a competitor's strength or strategy.
between strategy and internal operating systems. In most situations. management has to see that they are addressed and rectified quickly. consciously building and strengthening strategy-supportive competencies and competitive capabilities. ♦ Using the best-known practices to perform core business activities and pushing for continuous improvement. and approach to strategy execution are never final. ♦ Motivating people to pursue the target objectives energetically ♦ Tying rewards and incentives directly to the achievement of performance objectives and good strategy execution. Stage 5 : Monitoring developments. objectives. strategy. between strategy and the reward structure. ♦ Developing budgets that steer ample resources into those activities critical to strategic success. managing strategy is an ongoing process. The fifth stage of the strategy management process – evaluating the company's progress. build and strengthen company competencies and competitive capabilities. ♦ Creating a company culture and work climate conducive to successful strategy implementation and execution. ♦ Installing information and operating systems that enable company personnel to better carry out their strategic roles day in and day out. strategy. and making corrective adjustments – is the trigger point for deciding whether to continue or change the company's vision. evaluating performance and making corrective adjustments A company's vision. not an every now and then task.11 . create a strategy-supportive work climate. and/or strategyexecution methods. When the organization encounters stumbling blocks or weaknesses. Good strategy execution involves creating strong "fits" between strategy and organizational capabilities. ♦ Ensuring that policies and operating procedures facilitate rather than impede effective execution. and organizing the work effort. So long as the company's direction and strategy seem well matched to 4. motivate people. ♦ Exerting the internal leadership needed to drive implementation forward and keep improving strategy execution. assessing the impact of new external developments.Strategic Planning strategic plans into actions and results. and between strategy and the organization's work climate and culture. managing the strategy-execution process includes the following principal aspects: ♦ Staffing the organization with the needed skills and expertise. objectives. a manager must be able to direct organizational change. and meet or beat performance targets.
A company's direction. questions need to be raised about the appropriateness of its direction and strategy. Larger firms with greater access to resources typically compete on a cost leadership and/or differentiation basis. In this chapter we will see a few more strategic alternatives from the perspective of planning. STRATEGIC ALTERNATIVES We have learnt a few generic strategies in the second chapter. various strategies could yield advantages in cost leadership differentiation. Proficient strategy execution is always the product of much organizational learning. whereas smaller firms often compete on a focus basis. In addition to prompting sharing. differentiation. 4. Focus means producing products and services that fulfill the needs of small groups of consumers. and focus. and focus. Simply fine-tuning the strategic plan and continuing with ongoing efforts to improve strategy execution are sufficient. It is achieved unevenly – coming quickly in some areas and proving nettlesome and problematic in others. Porter's strategies imply different organizational arrangements. Cost leadership emphasizes producing standardized products at a very low per-unit cost for consumers who are price-sensitive. size of firm and nature of competition. and strategy have to be revisited anytime external or internal conditions warrant. direction. poor execution. company executives may decide to stay the course. then company managers are obligated to ferret out whether the causes relate to poor strategy. Differentiation is a strategy aimed at producing products and services considered unique industry wide and directed at consumers who are relatively price-insensitive.12 . Porter calls these base generic strategies. strategies allow organizations to gain competitive advantage from three different bases: cost leadership.Strategic Management industry and competitive conditions and performance targets are being met. 4. 4. Successful strategy execution entails vigilantly searching for ways or continuously improve and then making corrective adjustments whenever and wherever it is useful to do so. objectives. Depending upon factors such as type of industry. Periodically assessing what aspects of strategy execution are working well and what needs improving is normal and desirable. Porter stresses the need for firms to "transfer" skills and expertise among autonomous business units effectively in order to gain competitive advantage. But whenever a company encounters disruptive changes in its external environment. and incentive systems. or both and then to take timely corrective action. control procedures. Sharing activities and resources enhances competitive advantage by lowering costs or raising differentiation.1 Michael Porter's Generic Strategies According to Porter. objectives. If a company experiences a downturn in its market position or shortfalls in performance. It is to be expected that a company will modify its strategic vision. and strategy over time. Porter stresses the need for strategists to perform cost-benefit analyses to evaluate "sharing opportunities" among a firm's existing and potential business units.
But cost leadership generally must be pursued in conjunction with differentiation. as evidenced by high efficiency.13 . learning and experience curve effects. when there are few ways to achieve product differentiation. and shipping costs. and linkages with suppliers and distributors. Striving to be the low-cost producer in an industry can be especially effective when the market is composed of many price-sensitive buyers.Strategic Planning STRATEGIC ADVANTAGE Uniqueness perceived by the customer Low cost position Industry wide DIFFERENTIATION STRATEGIC TARGET FOCUS OVERALL COST LEADERSHIP Particular Segment Only Figure: Michael Porter's Generic Strategy Cost Leadership Strategies A primary reason for pursuing forward. R&D costs associated with new product development or modification of existing products. rewards linked to cost containment. backward. intolerance of waste. intensive screening of budget requests. or when there are a large number of buyers with significant bargaining power. and broad employee participation in cost control efforts. and horizontal integration strategies is to gain cost leadership benefits. wide spans of control. energy costs. Other cost elements to consider in choosing among alternative strategies include the potential for sharing costs and knowledge within the organization. Some risks of pursuing cost leadership are that competitors 4. including economies or diseconomies of scale achieved. driving some competitors out of the market entirely. A successful cost leadership strategy usually permeates the entire firm. when buyers do not care much about differences from brand to brand. A number of cost elements affect the relative attractiveness of generic strategies. tax rates. the percentage of capacity utilization achieved. labor costs. limited perks. low overhead. The basic idea is to under price competitors and thereby gain market share and sales.
lower costs. greater convenience. Strategies such as market penetration and market development offer substantial focusing advantages. A successful differentiation strategy allows a firm to charge a higher price for its product and to gain customer loyalty because consumers may become strongly attached to the differentiation features. Successful differentiation can mean greater product flexibility. engineering design. A risk of pursuing a differentiation strategy is that the unique product may not be valued highly enough by customers to justify the higher price. that technological breakthroughs in the industry may make the strategy ineffective. or that buyer interest may swing to other differentiating features besides price. When this happens. Durable products protected by barriers to quick copying by competitors are best. a cost leadership strategy easily will defeat a differentiation strategy.Strategic Management may imitate the strategy. A differentiation strategy should be pursued only after a careful study of buyers' needs and preferences to determine the feasibility of incorporating one or more differentiating features into a unique product that features the desired attributes. Differentiation does not guarantee competitive advantage. especially if standard products sufficiently meet customer needs or if rapid imitation by competitors is possible. greater compatibility. Special features that differentiate one's product can include superior service. or more features. Because only one firm can differentiate itself with the lowest cost. useful life. All firms in essence follow a differentiated strategy. Firms thus must find durable sources of uniqueness that cannot be imitated quickly or cheaply by rival firms. Risks of pursuing a focus strategy include the possibility that numerous competitors will recognize the successful 4. Common organizational requirements for a successful differentiation strategy include strong coordination among the R&D and marketing functions and substantial amenities to attract scientists and creative people. product performance. has good growth potential. Another risk of pursuing a differentiation strategy is that competitors may develop ways to copy the differentiating features quickly. the remaining firms in the industry must find other ways to differentiate their products. gas mileage. Differentiation Strategies Different strategies offer different degrees of differentiation. or ease of use. Focus strategies are most effective when consumers have distinctive preferences or requirements and when rival firms are not attempting to specialize in the same target segment. Product development is an example of a strategy that offers the advantages of differentiation. improved service. Focus Strategies A successful focus strategy depends on an industry segment that is of sufficient size. and is not crucial to the success of other major competitors. thus driving overall industry profits down. Midsize and large firms can effectively pursue focus-based strategies only in conjunction with differentiation or cost leadership-based strategies. spare parts availability. less maintenance.14 .
scientists. geographic markets. Overall Cost Leadership Strong marketing abilities Product engineering Creative flair Strong capability in basic research ♦ Corporate reputation for Differentiation quality or technological leadership ♦ Long tradition in the industry or unique combinations of skills drawn from other business ♦ Strong cooperation from channels ♦ Combination of the above Focus policies directed at the particular strategic target 4.15 . product development. 4. and marketing. or on particular product-line segments in order to serve a well-defined but narrow market better than competitors who serve a broader market. The comparative skill and resource requirement for these generic strategies is given below: Generic Strategy Commonly Required Skills and Resources ♦ Sustained capital investment and access to capital ♦ Process engineering skills ♦ Intense supervision of labour ♦ Products designed for ease in manufacture ♦ Low-cost distribution system ♦ ♦ ♦ ♦ Common Organizational Requirements ♦ Tight cost control ♦ Frequent.Strategic Planning focus strategy and copy it. An organization using a focus strategy may concentrate on a particular group of customers. detailed control reports ♦ Structured organization and responsibilities ♦ Incentive based on meeting strict quantitative targets ♦ Strong coordination among function in R & D.2 Best-Cost Provider Strategy ♦ Combination of the above policies directed at the particular strategic target The new model of best cost provider strategy is a further development of above three generic strategies. ♦ Subjective measurement and incentives instead of quantitative measures ♦ Amenities to attract highly skilled labour. or that consumer preferences will drift toward the product attributes desired by the market as a whole. or creative people.
16 .Strategic Management Type of Competitive Advantage Being Pursued Lower Cost Differentiation A Broad CrossSection of Buyers Overall Low-Cost Leadership Strategy Broad Differentiation Strategy MARKET TARGET Best-Cost Provider Strategy A Narrower Buyer Segment (or Market Niche) Focused Low-Cost Strategy Focused Differentiation Strategy Figure: The Five Generic Competitive Strategies Distinctive features of the generic competitive strategies are given below : Type of Feature Low-Cost Provider Broad Differentiation Best-Cost Provider Focused Low-Cost and Focused Differentiation ♦ ♦ ♦ Strategic target A broad crosssection of the market ♦ A broad cross♦ section of the market Valueconscious buyer A narrow market niche where buyer needs and preferences are distinctively different from the rest of the market 4.
17 .Strategic Planning ♦ Lower cost in serving the niche (focused low cost) or special attributes that appeal to the tastes or requirements of niche members (focused differentiation) ♦ ♦ ♦ Basic of competitive advantage Lower costs than competitors An ability to offer buyers something different from competitors ♦ More value for the money ♦ ♦ ♦ Market emphasis Try to make a virtue out of product features that ♦ lead to low cost ♦ Build in whatever features buyers are willing to pay for Charge a premium price to cover the extra cots of differentiating features Either underprice rival ♦ brands with comparable features or match the price of rivals and provide better features-to build a reputation for delivering the best value Communicate how the focuser's product attributes and capabilities aim at catering to niche member tastes and/or specialised requirements 4.
18 . tout them to create a reputation and brand image. in every area of the business A good basic ♦ product with few frills (acceptable quality and limited selection) A continuous search for cost ♦ reduction without sacrificing acceptable quality and essential features Communicate the points of difference in credible ways Stress constant ♦ improvement and use innovation to stay ahead of initiative competitors Concentrate on a few differentiating features. several-to-many upscale features Features and attributes that appeal to the tastes and/or special needs of the target segment ♦ ♦ Product emphasis ♦ Creation of value for buyer. We shall also analyse the scope of each of these 4.3 Grand strategies/directional strategies Various strategy alternatives are available to a firm for achieving its growth objective. Many product ♦ variations.Strategic Management ♦ ♦ Offer economical prices/good value ♦ Aim at contributing to a sustainable cost advantagethe key is to manage ♦ costs down. year after year. strong emphasis on differentiating features Develop unique expertise in simultaneously managing costs down and upscaling features and attributes ♦ ♦ ♦ Sustaining the strategy Remain totally dedicated to serving the niche better than other competitors. Here we shall see what these alternatives are. how they have been classified into a few broad categories. strive for product superiority Incorporation of ♦ upscale features and attributes at low cost Tailor-made for the tastes and requirements of niche members 4. don't blunt the firm's image and efforts by entering other segments or adding other product categories to widen market appeal. ♦ ♦ Product line Good-to♦ excellent attributes. wide selection.
which are often called master or business strategies. since it is in view of their scope that firms choose the particular alternative.19 . or by entering new businesses that are unrelated to existing businesses. Grand strategies. the firm seeks significant growth-maybe within the current businesses. are intended to provide basic direction for strategic actions. maybe by entering new business that are related to existing businesses. They are seen as the basic of coordinated and sustained efforts directed toward achieving long-term business objectives. Expansion 4. Strategy Alternatives Stability Expansion Retrenchment Combination Intensification Diversification Market Penetration Market Development Product Development Vertically Integrated Concentric Diversificatio Conglomerate Diversification Forward Backward Figure: Grand Strategies The basic features of the grand strategies is as follows: Strategy Stability Basic Feature The firm stays with its current businesses and product markets. maintains the existing level of effort.Strategic Planning alternatives. and is satisfied with incremental growth. retrenchment and combination known as grand strategies. expansion. Here. The corporate strategies a firm can adopt have been classified into four broad categories: stability.
B. A firm with a mammoth growth ambition can meet its objective only through the expansion strategy. only firms with modest growth objective will vote for this strategy.Strategic Management Retrenchment Combination The firm retrenches some of the activities in a given business (es). or drops the business as such through sell-out or liquidation. ♦ The risk is also less. Characteristics and Scope of Various Grand Strategies A. ♦ It is a fairly frequently employed strategy. ♦ With the stability strategy. in expansion strategy they are very high. ♦ Naturally. ♦ The endeavour is to enhance functional efficiencies in an incremental way. status quo-oriented strategy. the firm has the benefit of concentrating its resources and attention on the existing businesses/products and markets. same product-market posture and functions. Expansion strategy: ♦ Expansion strategy is the opposite of stability strategy. too. ♦ But the strategy does not permit the renewal process of bringing in fresh new products and markets for the firm. While in stability strategy. ♦ Expansion strategy is the true growth strategy. The firm combines the above strategic alternatives in some permutation/combination so as to suit the specific requirement of the firm. In the matter of risks. ♦ Expansion strategy is the most frequently employed generic strategy. ♦ It is basically a safety-oriented. maintaining same level of effort as at present. rewards are limited. through better deployment and utilization of resources. investments and 4. the two are the opposites of each other.20 . Stability strategy: ♦ A firm opting for stability strategy stays with the same business. Conversely. ♦ Expansion strategy involves a redefinition of the business of the corporation. the growth objective of firms employing this strategy will be quite modest. The assessment of the firm is that the desired income and profits would be forthcoming through such incremental improvements in functional efficiencies. ♦ It does not warrant much of fresh investments. ♦ Stability strategy does not involve a redefinition of the business of the corporation.
it is disjointed from the existing businesses.21 . ♦ Intensification. there is no connection between the new business and the existing ones. in turn. But the new products are not vertically linked to the existing ones. it offers several permutations and combinations for growth. the difference lies in the way in which the firm actually pursues the growth. and new ♦ Expansion strategy is a highly versatile strategy. the intermediaries in the chain become new businesses. But. encompasses three alternative routes: ♦ Market penetration strategy ♦ Market development strategy ♦ Product development strategy ♦ Diversification strategy involves expansion into new businesses that are outside the current businesses and markets. ♦ There are three broad types of diversification ♦ Vertically integrated diversification ♦ Concentric diversification ♦ Conglomerate diversification ♦ Vertically integrated diversification involves going into new businesses that are related to the current ones. A new business is spinned off from the firm's existing facilities. in process/ technology/function. markets and functions and pick the one that suits it most. ♦ With intensification strategy. 4. too. the new products are connected to the firm's existing process/technology. ♦ Expansion strategy holds within its fold two major strategy routes: Intensification Diversification ♦ Both of them are growth strategies.Strategic Planning ♦ The process of renewal of the firm through fresh investments businesses/products/markets is facilitated only by expansion strategy. They serve new functions in new markets. A firm opting for the expansion strategy can generate many alternatives within the strategy by altering its propositions regarding products. ♦ In concentric diversification. ♦ In conglomerate diversification too. ♦ It has two components – forward integration and backward integration. the firm pursues growth by working with its current businesses. It is unrelated diversification. They are not intermediates. a new business is added to the firm's portfolio. ♦ The firm remains vertically within the given product-process sequence.
♦ Divestment is to be viewed as an integral part of corporate strategy without any stigma attached. C. B. too. ♦ Psychologically. Stability strategy is adopted because: ♦ It is less risky. ♦ Expansion may be perceived as being threatening. ♦ Increasing size may lead to more control over the market vis-a-vis competitors. 4. involves a redefinition of the business of the corporation. involves less changes and people feel comfortable with things as they are. ♦ Consolidation is sought through stabilising after a period of rapid expansion. Expansion strategy is adopted because: ♦ It may become imperative when environment demands increase in pace of activity. Retrenchment strategy is adopted because: ♦ The management no longer wishes to remain in business either partly or wholly due to continuous losses and unviability. divestment strategy. ♦ Compulsions for divestment can be many and varied. ♦ The environment faced is relatively stable.Strategic Management C. such as ♦ Obsolescence of product/process ♦ Business becoming unprofitable ♦ High competition ♦ Industry overcapacity ♦ Failure of strategy Major reasons for organizations adopting different grand strategies: A.22 . ♦ The environment faced is threatening. Divestment strategy: ♦ Divestment strategy involves retrenchment of some of the activities in a given business of the firm or sell-out of some of the businesses as such. ♦ Advantages from the experience curve and scale of operations may accrue. chief executives may take pride in presiding over organizations perceived to be growth-oriented. ♦ Like expansion strategy. strategists may feel more satisfied with the prospects of growth from expansion.
Igor Ansoff gave a framework as shown which describe the intensification options available to a firm. ♦ The organization is composed of different businesses.Strategic Planning ♦ Stability can be ensured by reallocation of resources from unprofitable to profitable businesses. D. I. and with a single technology. The firm directs its resources to the profitable growth of a single product. Product development Add product features.23 . Market development Expand geographically Target new segments IV. Diversification involving new products and new markets Related Unrelated Figure: Product-Market Expansion Greed Market Penetration The most common expansion strategy is market penetration/concentration on the current business. Product Development 4. each of which lies in a different industry requiring a different response. product refinement Develop a new-generation product Develop new product for the same market III. Growth in existing product markets Increase market share Increase product usage Increase the frequency used Increase the quantity used Find new application for current users II. Combination strategy is adopted because: ♦ The organization is large and faces complex environment. in a single market. Expansion Strategy Expansion or growth strategy can either be through intensification or diversification. to customers in related market areas by adding different channels of distribution or by changing the content of advertising or the promotional media. Market Development It consists of marketing present products.
The firm remains vertically within the same process. • Vertical integration.Strategic Management Product Development involves substantial modification of existing products or creation of new but related items that can be marketed to current customers through establish channels. The example of Reliance Industries provided at the close of this chapter illustrates this dimension of vertically integrated diversification. Based on the nature and extent of their relationship to existing businesses. Diversification Strategy Diversification endeavours can be related or unrelated to existing businesses of the firm. the firm does not jump outside the vertically linked productprocess chain. • Obtain high ROI. • Defend against a takeover. Sequence It moves forward or backward in the chain and enters specific product/process steps with the intention of making them into new businesses for the firm. firms opt to engage in businesses that are related to the existing business of the firm. by-products or taking over competitors' products. • Obtain a bargain price. • Obtain liquid assets. UNRELATED DIVERSIFICATION • Manage and allocate cash flow. RELATED DIVERSIFICATION • Exchange or share assets or competencies. • Tax benefits.24 . • Refocus a firm. Horizontal integrated diversification Through the acquisition of one or more similar business operating at the same stage of the production-marketing chain that is going into complementary products. Figure: Related Diversification Options For A Manufacturer 4. The characteristic feature of vertically integrated diversification is that here. • Reduce risk by operating in multiple product thereby exploiting • Brand name • Marketing skills • Sales and distribution capacity • Manufacturing skills • R&D and new product capability • Economies of scale markets. diversification endeavours have been classified into four broad categories: (i) (ii) (iii) (iv) Vertically integrated diversification Horizontally integrated diversification Concentric diversification Conglomerate diversification Vertically integrated diversification In vertically integrated diversification.
While in vertically integrated diversification. the new product falls within the firm's current process-product chain. 4. there are benefits of synergy with the current operations.25 . The new product is a spin-off from the existing facilities and products/processes. The new product is only connected in a loop-like manner at one or more points in the firm's existing process/technology/product chain. This means that in concentric diversification too.Strategic Planning BACKWARD INTEGRATION Raw6 materials manufacture Components Manufacture Machinery Manufacture Product/Process research/design Raw materials supply Components supply Machinery supply Financing Transport HORIZONTAL INTEGRATION Competitive products Manufacturer Complementary products By-products Repairs and servicing FORWARD INTEGRATION Distribution outlets Transport Marketing information Figure : Motivations for DiversificationConcentric diversification Concentric diversification too amounts to related diversification. the new business is linked to the existing businesses through process. However. in concentric diversification. there is a departure from this vertical linkage. technology or marketing. concentric diversification differs from vertically integrated diversification in the nature of the linkage the new product has with the existing ones. In concentric diversification.
Strategic Management Conglomerate diversification In conglomerate diversification. We deal with each of these strategies below. Turnaround Strategies Retrenchment may be done either internally or externally. There are certain conditions or indicators which point out that a turnaround is needed if the organization has to survive. it adopts a divestment (or divestiture) strategy. high turnover of employees. divisions. it is a totally unrelated diversification. competition. and remedial action. If it cuts off the loss-making units. A set of ten elements that contribute to turnaround are: 4. These danger signs are: ♦ Persistent negative cash flow ♦ Negative profits ♦ Declining market share ♦ Deterioration in physical facilities ♦ Overmanning. it adopts at turnaround strategy. Implementation of plans by target-setting. and market segment positioning. production processes. A workable action plan for turnaround should include: Analysis of product. Clear thinking about the market place and production logic. This is done through an attempt to find out the problem areas and diagnose the causes of the problems. steps are taken to solve the problems. or reduces the functions performed. resulting in a liquidation strategy. For internal retrenchment to take place. and low morale ♦ Uncompetitive products or services ♦ Mismanagement For turnaround strategies to be successful. it is imperative to focus on the short and long-term financing needs as well as on strategic issues. the new businesses/ products are disjointed from the existing businesses/products in every way. no such linkages exist. Retrenchment. known as turnaround strategy. or SBUs. These steps result in different kinds of retrenchment strategies. curtails its product line. If the organization chooses to focus on ways and means to reverse the process of decline. then it may choose to abandon the activities totally. market. If none of these actions work. there is no connection between the new products and the existing ones. emphasis is laid on improving internal efficiency. Next. Conglomerate diversification has no common thread at all with the firm's present position. In process/technology/function. feedback. Divestment and Liquidation Strategies Retrenchment grand strategy is followed when an organization substantially reduces the scope of its activity.26 .
A divestment strategy may be adopted due to various reasons: ♦ A business that had been acquired proves to be a mismatch and cannot be integrated within the company. which involves closing down a firm and selling its assets. a preferable option would be to divest. and the stigma of failure. 4. ♦ Technological upgradation is required if the business is to survive but where it is not possible for the firm to invest in it. creating the need for divestment of that business. ♦ A better alternative may be available for investment. Many small-scale units. termination of opportunities where a firm could pursue any future activities. Divestment is usually a part of rehabilitation or restructuring plan and is adopted when a turnaround has been attempted but has proved to be unsuccessful. profit centre or SBU. Liquidation Strategies A retrenchment strategy considered the most extreme and unattractive is liquidation strategy. causing a firm to divest a part of its unprofitable businesses. ♦ Severity of competition and the inability of a firm to cope with it may cause it to divest. and partnership ventures liquidate frequently but medium-and large-sized companies rarely liquidate in India. It is considered as the last resort because it leads to serious consequences such as loss of employment for workers and other employees. ♦ Persistent negative cash flows from a particular business create financial problems for the whole company. or a major division. The company management.27 . The option of a turnaround may even be ignored if it is obvious that divestment is the only answer. proprietorship firms.Strategic Planning ♦ Changes in the top management ♦ Initial credibility-building actions ♦ Neutralising external pressures ♦ Initial control ♦ Identifying quick payoff activities ♦ Quick cost reductions ♦ Revenue generation ♦ Asset liquidation for generating cash ♦ Mobilization of the organizations ♦ Better internal coordination. Divestment Strategies Divestment strategy involves the sale or liquidation of a portion of business.
When liquidation is evident (though it is difficult to say exactly when). (d) Reactive diversification. the real estate owned by a firm may fetch it more money than the actual returns of doing business. In Michael Porter's generic strategy _____________ emphasizes producing standardized products at a very low per unit-cost for consumers who are price sensitive. trade unions. (b) Inferior product leadership. no (b) effective. for liquidation. Moreover. Liquidation strategy may be unpleasant as a strategic alternative but when a "dead business is worth more than alive".Strategic Management government. Self-Examination Questions Multiple Choice Questions 1. (d) Cost benefit. Under the Companies Act. distinctive (c) ineffective. (b) Vertical diversification. it is a good proposition. voluntary. For instance. an abandonment plan is desirable. It is: (a) Forward diversification. are considered as scrap. the firm cannot expect adequate compensation as most assets. 1956.28 . and other agencies are extremely reluctant to take a decision. liquidation (termed as winding up) may be either by the court. Selling assets for implementing a liquidation strategy may also be difficult as buyers are difficult to find. being unusable. (c) Horizontal diversification. An organisation diversifies in backward sequence in the product chain and enters specific product/process to be used in existing products. 2. (a) effective. (a) Cheap leadership. clear 4. or subject to the supervision of the court. banks and financial institutions. 3. Planned liquidation would involve a systematic plan to reap the maximum benefits for the firm and its shareholders through the process of liquidation. suppliers and creditors. or ask. Focus strategies are _________ when consumers have _________ preferences and when rival firms are not attempting to specialize in the same target segment. (c) Cost leadership.
2. Discuss various stages in strategic formulation and implementation process. (a) related (b) unrelated (c) non integrated (d) uninitiated Short answer questions 1. Essay type questions 1. What is differentiation strategy? 3. The takeover may boost its production of premium garments. they are not clear how to formulate right strategy for the Jazzy Wear. (a) 4. If you are appointed as strategic consultant by the Jazzy Wear. Explain conglomerate diversification. With the fragmented shareholding the top managers of Jazzy Wear know that the Cool Garments will be definitely able to acquire controlling share in their company. Discuss the nature of strategy for both the companies. explain to their top managers the process of strategy formulation.Strategic Planning (d) fragmented. Discuss. Acquiring Jazzy will give it a bigger product portfolio and also a considerable presence in the north Indian market. They feel that if a deal is striked it would also be in their favour. Case Study Cool Garments is exploring options of picking up a strategic equity stake in north based Jazzy Wear. Strategy is partly proactive and partly reactive. fragmented 4.29 . The size of the acquisition would be small — within Rs 50 crore — compared to Cool Garments recent big deals in other states. What do you understand by focus strategy? 2. However. Jazzy Wear special products fit perfectly into Cool Garment's future plans. Discuss strategic alternatives with reference Michael Porter's strategies. (c) 3. a Kanpur -based garment manufacture catering to gents segment. Answers – Multiple Choice Questions: 1. (b) 2. 3. Concentric diversification amounts to _______ diversification. This will also increase Cool Garments' presence in the North. (b) 4.
Henry Mintzberg 1. it is important that R&D be tied more closely to corporate strategy William Spender Most of the time. MIS strategy. production and Human Resource). functional strategies operate below the SBU or business-level strategies. . As market windows open and close more quickly. the effectiveness of strategic management depends critically on the manner in which strategies are implemented. first the major sub areas are identified and then follows a discussion of each of these sub functional areas regarding the content of functional strategies. ♦ Know how to formulate production.CHAPTER 5 FORMULATION OF FUNCTIONAL STRATEGY LEARNING OBJECTIVES ♦ Understand how functional strategies are formulated. In fact. and their importance in the process of strategy implementation. ♦ Learn different aspects of financial strategy. is based on the functional capability factors. For each functional area. In terms of the levels of strategy formulation. INTRODUCTION For effective implementation. Within functional strategies there might be several sub-functional areas. important factors. strategists should not be formulating strategy at all. HR. ♦ To have a fair idea about the role of marketing strategy in implementation. they should be getting on with implementing strategies they already have. strategists have to provide direction to functional managers regarding the plans and policies to be adopted. Functional area strategy: (marketing. financial.
2 .Financial Management Functional strategies. This "partnering" will produce a value delivery network. All company departments must work together to accomplish this. Environmental factors relevant to each functional area have an impact on the choice of functional strategies. Operational plans tell the functional managers what has to be done while policies state how the plans are to be implemented. Organizational strategies affect the choice of functional strategies. Functional strategies affect. The relationship to marketing to the other business functions can be understood by the following points: ♦ Marketing alone cannot produce superior value for the consumer. ♦ Similar situations occurring in different functional areas are handled in a consistent manner by the functional managers. ♦ Each department is a link in the value chain (discussed in chapter 6). the actual process of choice is influenced by objective as well as subjective factors. The reasons why functional strategies are needed: ♦ The strategic decisions are implemented by all the parts of an organization. strategies can be implemented by the functional managers. and are affected by. 5. ♦ The time spent by functional managers in decision-making is reduced as plans lay down clearly what is to be done and policies provide the discretionary framework within which decisions need to be taken. In marketing it is more important to do what is strategically right than what is immediately profitable. ♦ Marketers are challenged to find ways to get all departments to "think customer. In the present day it is considered to be the activities related to identifying the needs of customers and taking such actions to satisfy them in return of some consideration. In this way. The development of functional strategies is aimed at making the strategies-formulated at the top management level-practically feasible at the functional level. and ultimately customers. are made within the guidelines set at higher levels. Functional managers need guidance from the business strategy in order to make decisions. MARKETING STRATEGY FORMULATION Ordinary marketing is an activity performed by business organizations." ♦ In its search for competitive advantage. the firm needs to look beyond its own value chain and into the value chains of its suppliers. distributors. the resource allocation decisions. ♦ Coordination across the different functions takes place where necessary. ♦ There is a basis available for controlling activities in the different functional areas of business. Finally. Strategies need to be segregated into viable functional plans and policies that are compatible with each other. ♦ A company's value chain is only as strong as the weakest link. 2.
developing the marketing mix. To be a price leader or a price follower. To use exclusive dealerships or multiple channels of distribution. 2. selecting target markets.2 The Marketing Process ♦ Once the strategic plan has defined the company's overall mission and objectives. straight commission. To use heavy. 5.Formulation of Functional Strategy Company's Value Chain Customers Suppliers Distributors Figure 5. To advertise online or not. 3. and managing the marketing effort.1 Marketing Issues Countless marketing variables affect the success or failure of strategy implementation. light. ♦ The marketing process is the process of analyzing market opportunities. Some examples of marketing decisions that may require policies are as follows: 1. 5. To reward salespeople based on straight salary.3 . To offer a complete or limited warranty. 6. 4. 7. ♦ Target customers stand at the center of the marketing process.1 : Value Delivery Network 2. 2. or no TV advertising. or or a combination salary/commission. marketing plays a role in carrying out these objectives. To limit (or not) the share of business done with a single customer.
choose the best segments (market targeting).Financial Management Connecting with consumers To succeed in today's competitive marketplace. related items within a product line and terms of sale. Perhaps a better classification would be the 4 Cs: a. Strategies should be taken for the management of channel(s) by which ownership of product is transferred from producers to customers and in many cases. Price = Customer Cost. 5. personal selling. companies must be customer centered.4 . ♦ Place stands for company activities that make the product available to target consumers. The 4 Ps seems to take the seller's view rather than the buyer's view. they must divide up the total market (market segmentation). Necessary strategies pertain to the location of the customers. Strategies are needed to combine individual methods such as advertising." ♦ Product stands for the "goods-and-service" combination the company offers to the target market. and design strategies for profitably serving chosen segments better than the competition (market positioning). Strategic decisions must also be made regarding branding. Developing the marketing mix Once the company has decided on its overall competitive marketing strategy. the system(s) by which goods are moved from where they are produced from they are purchases by the final customers. Also. pricing strategies for entering a market. price flexibility. In addition promotional strategies must be adjusted as a product move from an earlier stages from a later stage of its life. Since companies cannot satisfy all consumers in a given market. The marketing mix consists of everything that the firm can do to influence the demand for its product. Strategies are needed for managing existing product over time adding new ones and dropping failed products. Product = Customer Solution. and sales promotion into a coordinated campaign. must be designed. These variables are often referred to as the "four Ps. Strategies applicable to the middleman such as wholesalers and retails must be designed. ♦ Price stands for the amount of money customers have to pay to obtain the product. The marketing mix is the set of controllable marketing variables that the firm blends to produce the response it wants in the target market. An effective marketing program blends all of the marketing mix elements into a coordinated program designed to achieve the company's marketing objectives by delivering value to consumers. it is ready to begin planning the details of the marketing mix. They must win customers from competitors and keep them by delivering greater value. b. specially with a new product. ♦ Promotion stands for activities that communicate the merits of the product and persuade target consumers to buy it. packaging and other product features such as warrantees.
mechanisms and flow of activities by which the product / service is delivered. ♦ Analyzing company strengths and weaknesses to determine which opportunities the company can best pursue.Formulation of Functional Strategy c. Place = Convenience. 4 P's Product Price Place Promotion 4 C's Customer Solution Customer Cost Convenience Communication Figure: The 4 P's & 4 C's of the Marketing Expanded Marketing Mix In addition to the traditional four Ps the new marketing mix (particularly for services) includes people. physical evidence and process People: all human actors who play a part in delivery of the market offering and thus influence the buyer's perception. Promotion = Communication. 5. Process: the actual procedures. ♦ Feeding information and other inputs to each of the other marketing management functions.5 . Physical evidence: the environment in which the market offering is delivered and where the firm and customer interact. namely the firm's personnel and the customer. ♦ The company performs analysis by ♦ Identifying environmental opportunities and threats. Marketing Analysis ♦ Marketing analysis involves a complete analysis of the company's situation. d.
managers are forced to anticipate important developments that can have an impact. The objectives should be stated as goals that the company would like to attain during the plan's term. budgets. A detailed plan is needed for each business. ♦ A product review. on the firm. either positive or negative. ♦ Having studied the product's threats and opportunities. current marketing situation. product. ♦ Marketing strategy is the marketing logic by which the business unit hopes to achieve its marketing objectives. 5. marketing strategies. ♦ A section on distribution. action programs.6 . ♦ The executive summary is a short summary of the main goals and recommendations to be presented in the plan. or brand. objectives and issues. ♦ The current marketing situation is the section of a marketing plan that describes the target market and the company's position in it. Strategies should be created for all marketing mix components. threats and opportunity analysis. and controls. ♦ In the threats and opportunities section. Important sections include: ♦ A market description. the manager can set objectives and consider issues that will affect them.Financial Management Figure: Managing the marketing effort Marketing Planning Marketing planning involves deciding on marketing strategies that will help the company attains its overall strategic objectives. ♦ Analysis of the competition. A product or brand plan may contain different sections: executive summary.
suppliers. For example. retailing. Such innovative offerings provide a set of benefits that promise to elevate customer service to unprecedented levels. and profits. political and legal forces. Direct marketing includes Catalogue Selling. ♦ Broader forces such as demographic and economic forces. Marketing strategy techniques ♦ Social Marketing: It refers to the design. banking. For instance. implementation. ♦ Person Marketing: People are also marketed. This allows for progress checks and corrective action. and TV shopping. channel members. Shopping. the publicity campaign for prohibition of smoking in Delhi explained the place where one can and can't smoke in Delhi. Mail. Thus. Areas to be analyzed in the environment normally include: ♦ Forces close to the company such as its ability to serve customers. For 5. ♦ Relationship Marketing: The process of creating. It is provision of additional customer services and benefits built around the care and actual products that relate to introduction of hi-tech services like movies on demand. and social and cultural forces. providing special benefits to select customers to strength bonds. maintaining. and publics. Dealing with the Marketing Environment The company must carefully analyze its environment in order to avoid the threats and take advantage of the opportunities. Services is any activity or benefit that one party can offer to another that is essentially intangible and does not result in the. secretarial services. cause. educational or utilities.7 . generally calling for the consumer to make a direct response. ♦ Direct Marketing: Marketing through various advertising media that interact directly with consumers. Telecomputing. Electronic Marketing. and techniques. and enhancing strong. maintain or change attitudes or behavior towards particular people. tools. revenues. other company departments. Person marketing consists of activities undertaken to create. savings. ♦ Augmented Marketing. or practice among a target group. ♦ The last section of the marketing plan outlines the controls that will be used to monitor progress. of marketing to services. on-line computer repair services.Formulation of Functional Strategy ♦ The marketing budget is a section of the marketing plan that shows projected costs. It will go a long way in building relationships. ♦ Services Marketing: It is applying the concepts. competitors. etc. technological and ecological forces. valueladen relationships with customers and other stakeholder. and control of programs seeking to increase the acceptability of a social ideas. British Airways offers special lounges with showers at 199 airports for frequent flyers.
innovative marketing. FINANCIAL STRATEGY FORMULATION The financial strategies of an organization are related to several finance/accounting concepts considered to be central to strategy implementation. and societal marketing. Some examples of decisions that may require finance/accounting policies are: 1. sense-of-mission marketing. maintain. ♦ Concentrated Marketing: A market-coverage strategy in which a firm goes after a large share of one or few sub-markets. preferred stock. long-term debt. Both profit and nonprofit organizations practice organization marketing. professional i. some parts of the day. ♦ Enlightened Marketing: A marketing philosophy holding that a company's marketing should support the best long-run performance of the marketing system.e. business sites marketing. roads are busy for most of times. synchromaketing can be used to find ways to alter the same pattern of demand through flexible pricing. For example woollens or coolers. developing projected financial statements/budgets. buses are overloaded in the morning and evening. and evaluating the worth of a business. and other incentives. politicians. value marketing. or to promote their careers and income. sports stars.Financial Management example. ♦ Place Marketing: Place marketing involves activities undertaken to create. 3. ♦ Differential Marketing: A market-coverage strategy in which a firm decides to target several market segments and designs separate offer for each. To raise capital with short-term debt. Hindustan Lever Limited has Lifebuoy. management/ usage of funds. ♦ Synchromaketing: When the demand for the product is irregular due to season. 5. market themselves to get votes. or hospitals underbooked on weekend or end of the week. ♦ Demarketing: Marketing strategies to reduce demand temporarily or permanently-the aim is not to destroy demand. causing idle capacity or over-worked capacities. promotion. For example. or change attitudes and behavior towards particular places say. For example. but only to reduce or shift it. maintain. ♦ Organization Marketing: It consists of activities undertaken to create. This happens when there is overfull demand. Strategists need to formulate strategies in these areas so that they are implemented. or common stock. These are: acquiring needed capital/sources of fund. Lux and Rexona in popular segment and Liril and Pears in premium segment. Sundays and holidays.8 .. tourism marketing. or change attitudes and behavior of target audiences towards an organization. film stars. Here demarketing can be applied to regulate demand. its five principles include customer-oriented marketing. zoological parks are over-crowded on Saturdays. or on hour basis.
Besides net profit from operations and the sale of assets. Strategies related to the sources of funds are important since they determine how financial resources will be made available for the implementation of strategies. To determine the amount of cash that should be kept on hand. and acquisitions. banks and financial institutions. another may follow a policy of internal financing. 6. or to sell common stock to raise capital for diversification). To extend the time of accounts receivable. This can be a serious concern in today's business environment of hostile takeovers. Nearly all financial institutions require a projected financial statements whenever a business seeks capital. ownership and control of the enterprise are diluted. too much debt in the capital structure of an organization can endanger stockholders' return and jeopardize company survival. procurement of capital and working capital borrowings. Some special stock is issued to finance strategy implementation. Theoretically. and relationship with lenders. To determine an appropriate dividend payout ratio. reserves and surplus as sources of funds.Formulation of Functional Strategy 2. to increase promotion expenditures by 50 percent to support a marketdevelopment strategy. to increase research and development expenditures by 70 percent to support product development. two basic sources of capital for an organization are debt and equity.9 . When compared to prior years and to industry averages. To establish a certain percentage discount on accounts within a specified period of time. to increase salaries by 25 percent to support a market-penetration strategy. Acquiring capital to implement strategies / sources of funds Successful strategy implementation often requires additional capital. Fixed debt obligations generally must be met. financial ratios provide valuable insights into the feasibility of various strategy- 5. This type of analysis can be used to forecast the impact of various implementation decisions (for example. Projected financial statements / budgets Projected (pro forma) financial statement analysis is a central strategy-implementation technique because it allows an organization to examine the expected results of various actions and approaches. The major factors regarding which strategies have to be made are: capital structure. regardless of circumstances. Organisations have a range of alternatives regarding the sources of funds. mergers. In low earning periods. This does not mean that stock issuances are always better than debt for raising capital. Determining an appropriate mix of debt and equity in a firm's capital structure can be vital to successful strategy implementation. 4. A pro forma income statement and balance sheet allow an organization to compute projected financial ratios under various strategy-implementation scenarios. 3. While one company may rely on external borrowings. To lease or buy fixed assets. an enterprise should have enough debt in its capital structure to boost its return on investment by applying debt to products and projects earning more than the cost of the debt. 5.
financial budgets can become a substitute for objectives. flexible budgets. Usage of funds is important since it relates to the efficiency and effectiveness of resource utilization in the process of strategy implementation. variable budgets. dividend decisions. which cost Rs 120 crore. Primarily as a result of the Enron collapse and accounting scandal. current assets. budgets can hide inefficiencies if based solely on precedent rather than on periodic evaluation of circumstances and standards. Financial budgets can be viewed as the planned allocation of a firm's resources based on forecasts of the future. First. budgets are sometimes used as instruments of tyranny that result in frustration. Modi's plant had an investment of Rs 153 crore. A financial budget is also a document that details how funds will be obtained and spent for a specified period of time. absenteeism. fixed asset acquisition. A budget is a tool and not an end in itself. the usage of funds is inefficient. Some common types of budgets include cash budgets. Finally. Financial budgeting should not be thought of as a tool for limiting expenditures but rather as a method for obtaining the most productive and profitable use of an organization's resources. The important factors regarding which plans and policies are to be made are: capital investment. Financial budgets have some limitations. As compared to its competitor Jaypee Rewa's plant. capital budgets. although the period of time for a budget can range from one day to more than ten years. There are almost as many different types of financial budgets as there are types of organizations. divisional budgets. sales budgets. Third. An example is of Modi Cement. Management / usage of funds Plans and policies for the usage of funds deal with investment or asset-mix decisions. operating budgets. and relationship with shareholders. financial budgeting is a method for specifying what must be done to complete strategy implementation successfully. Second. Fundamentally. Annual budgets are most common. profit budgets.10 . and high turnover. If plans and policies are not clear.Financial Management implementation approaches. budgets are especially important in guiding strategy implementation. leading to less than an optimum utilization of resources. expense budgets. resentment. which followed a deliberate policy of generous capital investment in setting up its plant based on the latest technology. managers should increase the participation of subordinates in preparing budgets. budgetary programs can become so detailed that they are cumbersome and overly expensive. factory budgets. The result was high interest liability and 5. companies today are being much more diligent in preparing projected financial statements to "reasonably rather than too optimistically" project future expenses and earnings. and fixed budgets. loans and advances. Implementation of projects in pursuance of expansion strategies typically results in increase in capital work in progress and current assets. When an organization is experiencing financial difficulties. To minimize the effect of this last concern. Over budgeting or under budgeting can cause problems.
Payout policies for dividends and bonus distribution play an important role in the usage of funds. It is the responsibility of the strategists to minimize the conflict of interest between the management and the shareholders. For instance. management control system. add or subtract an appropriate amount for goodwill and overvalued or undervalued assets. which is a major input in cement manufacturing.Formulation of Functional Strategy depreciation. currently a highly profitable cement company in the country. additional paid-in capital. Financial plans and policies. Gujarat Ambuja Cements. and budgeting. The management of funds is an important area of financial strategies. The major factors regarding which plans and policies related to the management of funds have to be made are: the systems of finance. Net worth represents the sum of common stock.11 . Other factors of usage of funds are also considered by companies to attract and retain shareholders' interest. however. In all these cases. and retained earnings. It basically deals with decisions related to the systemic aspects of financial management. intensive. present a dilemma before management. good management of funds often creates the difference between a strategically successful and unsuccessful company. Evaluating the worth of a business Evaluating the worth of a business is central to strategy implementation because integrative. cost control and reduction. ♦ The second approach to measuring the value of a firm grows out of the belief that the worth of any business should be based largely on the future benefits its owners may derive through 5. If a firm has goodwill. In fact. such as retrenchment may result in the sale of a division of an organization or of the firm itself. credit. it is necessary to establish the financial worth or cash value of a business to successfully implement strategies. All the various methods for determining a business's worth can be grouped into three main approaches: ♦ The first approach in evaluating the worth of a business is determining its net worth or stockholders' equity. Thousands of transactions occur each year in which businesses are bought or sold in the United States. perhaps as "intangibles". This total provides a reasonable estimate of a firm's monetary value. The management of funds can play a pivotal role in strategy implementation as it aims at the conservation and optimum utilisation of funds objectives which are central to any strategic action. accounting. This company has been particularly successful in maintaining a low cost for power. growth or retrenchment cannot escape the rigours of a proper management of funds. it will be listed on the balance sheet. and risk management. cash. and diversification strategies are often implemented by acquiring other firms. and tax planning and advantages. After calculating net worth. The priorities of management may often conflict with those of shareholders. Other strategies. has achieved tremendous financial success primarily on the basis of its policies of cost control. Organisations that implement strategies of stability. causing a serious dent in profitability in the initial years.
location. For example. product or service design. the markets to be served. All these collectively influence the operations system structure and objectives which are used to determine the operations plans and policies. remember that firms normally suppress earnings in their financial statements to minimize taxes. A potential problem. The operations system structure. even though substantial information on firms that buy or sell to other firms is available in major libraries. To use this method. operational planning and control. extent of vertical integration. and operations system objectives. A conservative rule of thumb is to establish a business's worth as five times the firm's current annual profit. As indicated in the Global Perspective. The second approach is called the price-earnings ratio method. which is concerned with the manufacturing/ service and supply/delivery system. is that sometimes comparable figures are not easy to locate. will affect what products are offered to which market and how these markets are served. a strategy of expansion through related diversification. a pioneering company in the area of industrial and agro chemicals. plans and policies are set. It starts with the end product and then integrates backward to make raw materials for it. The premium is simply a pershare amount that a person or firm is willing to pay to control (acquire) the other company. To use this method. 4. however. simply multiply the number of shares outstanding by the market price per share and add a premium. adopts a policy of successive vertical integration for import substitution. Strategy implementation would have to take into account the production system factors as they involve decisions which are long-term in nature and influence not only the operations capability of an organisation but also its ability to implement strategies and achieve objectives. The strategy adopted affects the nature of product/service. Production System The production system is concerned with the capacity. using these and perhaps other methods for evaluating the worth of their target companies. Excel Industries. involves three methods. degree of automation. work systems. PRODUCTION STRATEGY FORMULATION The strategy for production are related to the production system.Financial Management net profits. both determine what operations. divide the market price of the firm's common stock by the annual earnings per share and multiply this number by the firm's average net income for the past five years. ♦ The third approach. First. When using the approach. base the firm's worth on the selling price of a similar company. and research and development (R&D). letting the market determine a business's worth. Thus. Another example is of Lakshmi Machine 5.12 . which are related to customer service and resource utilisation. layout. European firms aggressively are acquiring American firms. A five-year average profit level could also be used. and the manner in which the markets are to be served. for instance. The third approach can be called the outstanding shares method. and such factors. Strategies related to production system are significant as they deal with vital issues affecting the capability of the organisation to achieve its objectives.
of the right quality. For a business organization effective logistic strategy will involve raising and finding solutions to the following questions: ♦ Which sources of raw materials and components are available? ♦ How many manufacturing locations are there? ♦ What products are being made at each manufacturing location? 5. and at the right cost. and fabricating the equipment. and quality management. through and out of an organization to achieve a level of service which ensures that the right materials are available at the right place. Here. cost. developing and using a formal logistics strategy is very important. 5. trains. LOGISTICS STRATEGY Management of logistics is a process which integrates the flow of supplies into. it has a separate department of quality assurance having two groups of quality inspection and quality engineering. inventory. Supply chain management helps in logistics and enables a company to have constant contact with its distribution team. Some companies use quality as a strategic tool.13 . indigenisation. Structurally. at the right time. which could consist of trucks. There are about 259 ancillary units that supply sub-assemblies and components. the aim of strategy implementation is to see how efficiently resources are utilised and in what manner the day-to-day operations can be managed in the light of long-term objectives. Operations planning and control provides an example of an organisational activity that is aimed at translating the objectives into reality. Given the changes that affect logistics operations such as emerging technologies and industry initiatives. Organizations try to keep the cost of transporting materials as low as possible consistent with safe and reliable delivery. Thus. standardising. The centralised production provides all the basic inputs to ancillaries and performs the functions of testing. where operations policy related to the product range is aimed at the successive enlargement of its textile machinery range. In implementing its strategy of stable growth. and adaptation to customer needs. materials supply. Operations planning and control at this company is based on the policy of ancillarisation. or any other mode of transportation. and maintenance of plant and equipment. The operations policies at KSB Pumps Ltd lay a great emphasis on quality aspects. Instrumentation Ltd is a public sector company engaged in the business of process control and automation and is currently-following a strategy of expansion and diversification. quality is a consideration not only at the inspection stage but is built into the design itself. For instance.Formulation of Functional Strategy Works. The company's centraiised production is at Kota in Rajasthan and its operations plans are based on the plans of its ancillary units. This is done through a policy of mastering the process of production by absorption of technology. KSB Pumps has built a solid reputation for its quality products. Operations Planning and Control Strategies related to operations planning and control are concerned with aggregate production planning.
These individuals are generally charged with developing new products and improving old products in a way that will allow effective strategy implementation. and altering products to particular tastes and specifications. adapting processes to local markets. and concentric diversification require that new products be successfully developed and that old products be significantly improved. ♦ Develop robotics or manual-type processes. Well formulated R&D policies match market opportunities with internal capabilities. ♦ What is the nature of distribution facilities? ♦ What is the nature of materials handling equipment possessed? Is it ideal? ♦ What is the method for deploying inventory in the logistics network? ♦ Should the business organization own the transport vehicles? Improvement in logistics can results in savings in cost of doing business. RESEARCH AND DEVELOPMENT Research and development (R&D) personnel can play an integral part in strategy implementation.14 . average. ♦ Stress basic or applied research. ♦ Be leaders or followers in R&D. adjusting processes to local raw materials. Companies in virtually every industry are relying on the development of new products and services to fuel profitability and growth. market penetration. R&D employees and managers perform tasks that include transferring complex technology. ♦ Spend a high. Technological improvements that affect consumer and industrial products and services shorten product life cycles. Some examples of how logistics can help a business are as follows: ♦ Cost savings ♦ Reduced inventory ♦ Improved delivery time ♦ Customer satisfaction ♦ Competitive advantage 6. These savings can also reveal in the profits of the company. Strategies such as product development.Financial Management ♦ What modes of transportation should be used for various products. R&D policies can enhance strategy implementation efforts to: ♦ Emphasize product or process improvements. Surveys suggest that the most successful organizations use an R&D strategy that ties external opportunities to internal strengths and is linked with objectives. 5. or low amount of money on R&D. But the level of management support for R&D is often constrained by resource availability.
then in-house R&D is the preferred solution. price becomes increasingly important in the buying decision. ♦ If technology is changing slowly but the market is growing quickly. This strategy requires excellent R&D personnel and an excellent marketing department. laggard firms develop a similar product. finance/accounting. the rate of market growth is moderate. 7. ♦ If both technical progress and market growth are fast. Also. but fewer expenditures in R&D than the two approaches described earlier. will result in a temporary product or process monopoly that the company can exploit. if successful. The reason is that R&D. ♦ If technology is changing rapidly and the market is growing slowly. This approach entails allowing a pioneer firm to develop the first version of the new product and to demonstrate that a market exists. Firms such as 3M and General Electric have been successful with this approach. The following guidelines can be used to help make this decision: ♦ If the rate of technical progress is slow. This is a glamorous and exciting strategy but also a dangerous one. As a new product accepted by customers. A second R&D approach is to be an innovative imitator of successful products. and information systems departments can be minimized with clear policies and objectives. The prescribed approach is to obtain R&D expertise on an exclusive or nonexclusive basis from an outside firm. A third R&D strategy is to be a low-cost producer by mass-producing products similar to but less expensive than products recently introduced. there generally is not enough time for in-house development. R&D expertise should be obtained through acquisition of a well-established firm in the industry? There are at least three major R&D approaches for implementing strategies. Then. ♦ Use university researchers or private sector researchers. R&D. and there are significant barriers to possible new entrants. There must be effective interactions between R&D departments and other functional departments in implementing different types of generic business strategies. The first strategy is to be the first firm to market new technological products. because it may lead to the development of an ultimately obsolete technology or one for which there is no market.Formulation of Functional Strategy ♦ Perform R&D within the firm or to contract R&D to outside firms. then a major effort in R&D may be very risky. This R&D strategy requires substantial investment in plant and equipment. thus minimizing the risks and costs of start up. mass marketing replaces personal selling as the dominant selling strategy. HUMAN RESOURCE STRATEGY FORMULATION The job of human resource manager is changing rapidly as there companies that downsize and 5. Many firms wrestle with the decision to acquire R&D expertise from external firms and develop R&D expertise internally. but many other pioneering firms have fallen. Conflicts between marketing.15 . with rival firms seizing the initiative.
Disruption of social and political structures that accompany strategy execution must be anticipated and considered during strategy formulation and managed during strategy implementation. promotions. Employers' health coverage expenses consume an average 26 percent of firms' net profits. developing leadership workshops. 5. New formal and informal groups' values. Managers can build support for strategy-implementation efforts by giving few orders. A number of other guidelines can help ensure that human relationships facilitate rather than disrupt strategy-implementation efforts. Strategy implementation poses a threat to many managers and employees in an organization. This plan must consider how best to manage spiraling healthcare insurance costs. prerogatives. announcing few decisions. managers should do a form of chatting and informal questioning to stay abreast of how things are progressing and to know when to intervene. and (3) inadequate top management support for implementation activities. The human resource department must develop performance incentives that clearly link performance and pay to strategies.16 . Key thrusts that needed should be rewarded generously and visibly. (2) failure to match individuals' aptitudes with implementation tasks. Specifically. and job enrichment. and priorities may be largely unknown. Managers and employees may become engaged in resistance behavior as their roles. even though most companies now require employees to pay part of their health insurance premiums. and power in the firm change. A well-designed strategic-management system can fail if insufficient attention is given to the human resource dimension. A concern in matching managers with strategy is that jobs have specific and relatively static responsibilities. although people are dynamic in their personal development. depending heavily on informal questioning. Linking company and personal benefits is a major new strategic responsibility of human resource managers. instituting an effective childcare policy. Strategic responsibilities of the human resource manager include assessing the staffing needs and costs for alternative strategies proposed during Strategy formulation and developing a staffing plan for effectively implementing strategies. beliefs. The plan must also include how to motivate employees and managers.Financial Management reorganize. job enlargement. Other new responsibilities for human resource managers may include establishing and administering an employee stock ownership plan (ESOP). Human resource problems that arise when business implement strategies can usually be traced to one of three causes: (1) disruption of Social and political structures. The process of empowering managers and employees through their involvement in strategic management activities yields the greatest benefits when all organizational members understand clearly how they will benefit personally if the firm does well. Commonly used methods that match managers with strategies to be implemented include transferring managers. New power and status relationships are anticipated and realized. and providing leadership for managers and employees in a way that allows them to balance work and family. and seeking to probe and clarify until a consensus emerges. offering career development activities.
The true potential of strategy formulation and implementation presides in people. management processes and systems. and government agency heads must be personally committed to strategy implementation and express this commitment in highly visible ways. skills. stress created by inconsistency can cause uncertainty among managers and employees at all levels. training. employment. small business owners. There is greater recognition that distinctive competencies are obtained through highly developed employee skills. the human resource management function has been accepted as a strategic partner in the formulation of organization's strategies and in the implementation of such strategies through human resource planning. The need to match individual aptitudes with strategy-implementation tasks should be considered in strategy choice.Formulation of Functional Strategy It is surprising that so often during strategy formulation. The following points should be kept in mind : 1. It is rare that a firm selecting new strategies or significantly altering existing strategies possesses the right line and staff personnel in the tight positions for successful strategy implementation. 5. appraisal and rewarding of personnel. trust. Chief executive officers. And so that they can obtain a competitive edge by becoming a low-cost leader or a differentiator puts a heavy premium on having a highly competent and committed team for human resources. attracts.17 . Strategists' formal statements about the Importance of strategic management must be consistent with actual support and rewards given for activities completed and objectives reached. Otherwise. Inadequate support from strategists for implementation activities often undermines organizational success. The firm's external opportunities and threats on the one hand and its internal strengths and weaknesses on the other. Perhaps the best method for preventing and overcoming human resource problems in strategic management is to actively involved many managers and employees' as possible in the process. Recruitment and selection: The workforce will be more competent if a firm can successfully identify. and compensation practices can have a strong influence on employee competence is very important. An organization's recruitment. Although time-consuming. The role of human resources in enabling the organization to effectively deal with the external environmental challenges. To quote Charles Greer. In Human Resource Strategic management. commitment and ownership and reduces resentment and hostility. In a growing number of organizations. and select the most competent applicants. training. this approach builds understanding. distinctive organizational cultures. human resources are now viewed as a source of competitive advantage. and abilities needed for successful strategy implementation are not considered. the strategist tries to achieve a competitive advantage for his organization. performance appraisal. The competitive advantage may be in the form of low cost relationship in the industry or being unique in the industry along dimensions that are widely valued by the customers in particular and the society at large. selection. individual values.
Compensation. developed. once identified. can often be solved through counseling. The Human Resource Management practices of an organization may be an important source of competitive advantage. Appraisal of Performance. The success of an organization depends on its human resources. Strategy and Human Resource Management The human resource strategy of business should reflect and support the corporate strategy. This presupposes an integrated approach towards human resource functions and overall business functions of an organization. coaching or training. The workforce will be more competent if employees are well trained to perform their jobs property. motivated and retained organization play an important role in organizational success. Strategic Role of Human Resource Management The prominent areas where the human resource manager can play strategic role are as follows: 1. Providing purposeful direction: The human resource management must be able to lead people and the organization towards the desired direction involving people right from the 5. ensuring a 'fit' between the employee and the job and retaining.Financial Management 2. Both recruitment and selection policies and procedures should be designed keeping in view the mission and the purpose of the organization. 3. Such deficiencies. For this strategic focus should be given in the following points: ♦ Pre-selection practices including human resource planning and job analysis. motivating and empowering employees to perform well in direction of corporate objectives. 4. An effective human resource strategy includes the way in which the organization plans to develop its employees and provide them suitable opportunities and better working conditions so that their optional contribution is ensured. A firm can usually increase the competency of its workforce by offering pay and benefit packages that are more attractive than those of there competitors. Strategic human resource management may be defined as the linking of human resource management with strategic goals and objectives to improve business performance and develop organizational culture that fosters innovation and flexibility. This means how they are acquired. Human Resources decisions related to training and development. This implies selecting the best available personnel. compensation and motivation should be based on corporate strategy of the organization. Training. ♦ Selection practices meant to staff various positions in the organization. performance appraisal.18 . This practice enables organizations to attract and retain the most capable people. The performance appraisal is to identify any performance deficiencies experienced by employees due to lack of competence. ♦ Post-selection practices to maintain and improve the workers job performance levels.
have little control what they do and little ability to influence the decisions being made around them. The first is cost leadership which means the firm aims to become a low cost leader in the industry. Facilitation of change: The Human resource will be more concerned with substance rather than form. The second competitive strategy is differentiation under which the firm seeks to be unique in the industry in terms of dimensions that are highly valued by the customers. it is likely to generate competitive advantage. many organization have restructured their businesses by divesting those businesses which do not match core competence. courageous and dynamic leadership having faith in 5. educated and uneducated workers. unskilled and professional employee. A core competence is a unique strength of an organization which may not be shared by others.Formulation of Functional Strategy beginning. Goals of an organization states the very purpose and justification of its existence. Objectives are specific aims which must be in the line with the goal of the organization and the all actions of each person must be consistent with the objectives defined. 6. The personnel function will be responsible for furthering the organization not just maintaining it.19 . The management have to ensure that the objects of an organization becomes the object of each person working in the organization and the objectives are set to fulfill the same. or technological capability. Diversion of workforce: In the modern organization management of diverse workforce is a great challenge. Human resource management will have to devote more time to promote changes than to maintain the status quo. The workforce in future will comprise more of educated and self conscious workers. capability. at present. accomplishments rather than activities. Because of this reason. There are two important ways of business can achieve a competitive advantages over the others. 4. Moreover. The most important tasks of a professional management is to ensure that the object of an organization has been internalized by each individual working in the organization. Money will no longer be the sole motivating force for majority of the workers. religious and nationalities. Putting these strategies into effect carries a heavy premium on having a highly committed and competent workforce. It involves giving more power to those who. Creating competitive atmosphere: Present's globalized market maintaining a competitive gain is the object of any organization. etc. marketing. many organizations also have people of different castes. Organization of business around core competence implies leveraging the limited resources of a firm. Non-financial incentives will also play an important role in motivating the workforce. If the business is organized on the basis of core competency. It needs creative. 5. 3. young and old workers. and practice rather than theory. Workforce diversity can be observed in terms of male and female workers. This may be in the form of human resources. 2. Building core competency: The human resource manager has a great role to play in developing core competency by the firm. They will ask for higher degree of participation and avenues for fulfillment. Empowerment of human resources: Empowerment means authorizing every number of a society or organization to take of his/her own destiny realizing his/her full potential.
Focus will shift from extrinsic to intrinsic motivation. As changing work ethic requires increasing emphasis on individuals. (b) In-house development.Financial Management organization's human resources.20 . A core competence is a ________ of an organization which may not be shared by others. Development of works ethics and culture: Greater efforts will be needed to achieve cohesiveness because workers will have transient commitment to groups. Functional managers need ________ from the business strategy in order to _______. Far reaching changes with the help of technical knowledge will be required for this purpose. control 5. (a) Unique strength (b) Unique opportunity (c) Unique product (d) None of the above 3. (a) to function.laden relationships with customers and other stakeholder is: (a) Social marketing (b) Augmented marketing (c) Direct marketing (d) Relationship marketing 2. Self-Examination Questions Multiple Choice Questions 1. The process of creating. 6. 4. If both technical progress and market growth are fast. A vibrant work culture will have to be developed in the organizations to create an atmosphere of trust among people and to encourage creative ideas by the people. value. maintaining. R&D expertise should be obtained through: (a) Acquisition of a technologically sound and well-established firm. (c) Hiring management consultant (d) None of the above. Flexible starting and quitting times for employees may be necessary. and enhancing strong. jobs will have to be redesigned to provide challenge.
sustainable but profitable growth is sacrosanct for us. What is financial strategy? How worth of a business can be evaluated? Case Study Many companies are harping on making their products affordable to the mass consumers as part of their growth strategy. (d) None of the above. The product was aggressively pushed in small and mofussil towns. but squeeze in the margins tremendously reduced the profits. We are not in a position to offer lower-priced shampoos with declining profits. Our competitors have also followed us by reducing their prices. Discuss the concept of production strategy formulation 3. (d) 5. The price of 100 ml and 200 bottles were retained at Rs 45 and 85 respectively. The chairman of the company called a meeting of all the functional heads and made following observations: "We have to chart out long-term strategies for our company. 2. gradually the company may start incurring losses. 3. (a) 3. At this moment. the turnover did not increase as forecasted. our competitors may not do so. Write a short note on evaluating worth of a business. If we continue like this. 2.21 . Essay type questions 1. Contrary to the expectations.Formulation of Functional Strategy (b) guidance make decisions (c) money. Write a short note on marketing mix? 2." (a) What went wrong? Give your assessment of the situation (b) How competitors are related to the internal decisions? (c) What is the strategy used by Clean Head Ltd. (a) 4. Moreover. (a) Answers – Multiple Choice Questions: 1. There was some increase in the volumes. How proper logistics management helps business. Two years back Clean Head Ltd started selling their shampoo at an affordable price of Rs 10 for 40 ml bottle. Short answer questions 1. My dilemma is if we roll back our prices. purchase raw material. but may prove to be elusive. The company expected that the existing customers would continue with the convenience of bigger bottles and purchase them. What is human resource management? Discuss its role in implementation of strategy. big cities also witnessed a shift towards smaller size bottles.
. INTRODUCTION Strategic-management process does not end when the firm decides what strategies to pursue. Too many organizations attempt to carry out a new strategy with an old structure. this truism is often ignored. Implementing strategy affects an organization from top to bottom. it affects all the functional and divisional areas of a business. However. ♦ Understand how to establish strategic Business Units. There must be a translation of strategic thought into strategic action. Translation requires support of all managers and employees of the business. ♦ Understand the role of leadership in the execution of strategy. ♦ Understand why strategy implementation is more difficult than strategy formulation.CHAPTER 6 STRATEGY IMPLEMENTATION AND CONTROL LEARNING OBJECTIVES ♦ Learn the concept of strategy implementation. ♦ Understand the importance of organizational structure in strategy implementation. Winning companies know how to do their work better – Michael Hammer and James Champy A management truism says structure follows strategy. ♦ Learn how to build a supportive corporate culture. – Dale McConkey 1.
INTERRELATIONSHIPS BETWEEN STRATEGY FORMULATION AND IMPLEMENTATION Strategy implementation concerns the managerial exercise of putting a freshly chosen strategy into place. making it work. with presupposes that the decision itself (i. the strategic choice) was made with some thought being given to feasibility and acceptability. The allocation of resources to new courses of action will need to be undertaken. improving the competence with which it is executed and showing measurable progress in achieving the targeted results. The basic elements of strategic management are summarized in the figure below: The environment Expectations & purposes Resources. Strategic implementation is concerned with translating a decision into action.2 .Strategic Management 2. and there may be a need for adapting the organization's structure to handle new activities as well as training personnel and devising appropriate system. Strategy execution deals with the managerial exercise of supervising the ongoing pursuit of strategy. competences & capability Strategic analysis Bases of Strategic choice Strategic choice Strategic implementation Organization Structure & design Strategic options Strategic evaluation & selection Managing strategic change Resource allocation & control Figure: A summary model of the elements of strategic management Source : Johnson and Scholes (1988) 6..e.
such as the lack of experience (e. In such a situation the company will aim at moving from square A to square B. This can be due to various factors. Their path to success also goes through business model redesign and implementation/execution readjustment. it is crucial to realize the difference between the two because they both require very different skills. Square A is the situation where a company apparently has formulated a very competitive strategy. but in practice the distinction is not always made. Often people. Square C is reserved for companies that haven't succeeded in coming up with a sound strategy formulation and in addition are bad at implementing their flawed strategic model.Strategy Implementation and Control Many managers fail to distinguish between strategy formulation and strategy implementation. a company will be successful only when the strategy formulation is sound and implementation is excellent. Yet. but is showing difficulties in implementing it successfully. 6. Thus organizational success is a function of good strategy and proper implementation. but the company is showing excellent implementation skills. This sounds obvious. Also. Square D is the situation where the strategy formulation is flawed. There is no such thing as successful strategic design per se. for startups).g. The matrix in the figure below represent various combination of strategy formulation and implementation: Strategy formulation Sound A C Weak B (Success) Flawed D Excellent Strategy implementation Figure: Strategy formulation and implementation matrix The Figure shows the distinction between sound/flawed strategy formulation and excellent/ weak strategy implementation. given they realize their implementation difficulties. When a company finds itself in square D the first thing they have to do is to redesign their strategy before readjusting their implementation/execution skills. missing leadership and so on. blame the strategy model for the failure of a company while the main flaw might lie in failed implementation. the lack of resources.3 . Square B is the ideal situation where a company has succeeded in designing a sound and competitive strategy and has been successful in implementing it.
4 .Strategic Management Taken together all the elements of business strategy it is to be seen as a chosen set of actions by means of which a market position relative to other competing enterprises is sought and maintained. It needs to be emphasized that 'strategy' is not synonymous with 'long-term plan' but rather consists of an enterprise's attempts to reach some preferred future state by adapting its competitive position as circumstances change.e. The particular point to note is that cell 2 is 6. This gives us the notion of competitive position. In other words. the relationship between inputs and outputs. which has been common in many organizations. While a series of strategic moves may be planned.including that of desired competitive position). In contrast to this view of strategy there is another approach to management practice. usually with a short time horizon) rather than on effectiveness (which is concerned with the organization's attainment of goals . In organizations that lack strategic direction there has been a tendency to look inwards in times of stress. and for management to devote their attention to cost cutting and to shedding unprofitable divisions. an organization in cell 2 or 4 is doomed. since it is achieving what it aspires to achieve with an efficient output/input ratio. In contrast. The responsibility for efficiency lies with operational managers. While efficiency is essentially introspective. with top management having the primary responsibility for the strategic orientation of the organization. effectiveness highlights the links between the organization and its environment. Effective Strateg Ineffective 1 2 Die Slowly Strategic management Efficient Operational Management Thrive 3 Inefficient 4 Die Quickly Survive Figure: Principal combinations of efficiency and effectiveness An organization that finds itself in cell 1 is well placed and thrives. unless it can establish some strategic direction. competitors' actions will mean that the actual moves will have to be modified to take account of those actions. the focus has been on efficiency (i.
This advantage (or inducement) may be in the form of dividends to shareholders. legal compliance from the viewpoint of government.formulation concepts and tools do not differ greatly for small. A technically imperfect plan that is implemented well will achieve more than the perfect plan that never gets off the paper on which it is typed. However. or nonprofit organizations. An emphasis on efficiency rather than on effectiveness is clearly wrong. strategy implementation is fundamentally different from strategy formulation. motivation and leadership skills ♦ Strategy formulation requires coordination ♦ Strategy implementation requires among a few individuals combination among many individuals. Even the most technically perfect strategic plan will serve little purpose if it is not implemented. is focuses primarily on ♦ Strategy implementation efficiency. the strategic direction is present to ensure effectiveness even if rather too much input is being used to generate outputs. for-profit. while to be efficient is to do the thing right. Strategy . ♦ Strategy formulation effectiveness. forces during the action. and effort on developing the strategic plan. It is always more difficult to do something (strategy implementation) than to say you are going to do it (strategy formulation)! Although inextricably linked. ♦ Strategy formulation requires good intuitive ♦ Strategy implementation requires special and analytical skills. Strategy formulation and implementation can be contrasted in the following ways: Strategy formulation Strategy implementation is managing on ♦ Strategy formulation is positioning forces ♦ Strategy implementation before the action. ♦ Strategy formulation intellectual process.Strategy Implementation and Control a worse place to be than is cell 3 since. money. In crude terms. strategy implementation varies substantially among different types 6. not through the plan. in the latter. satisfaction on the part of consumers. large. to be effective is to do the right thing. Many organizations tend to spend an inordinate amount of time. But who determines effectiveness? Any organization can be portrayed as a coalition of diverse interest groups each of which participates in the coalition in order to secure some advantage. Successful strategy formulation does not guarantee successful strategy implementation. To be effective is to survive whereas to be efficient is not in itself either necessary or sufficient for survival. continued business to suppliers of goods and services.5 . wages to employees. responsible behaviour towards society and the environment from the perspective of pressure groups. treating the means and circumstances under which it will be implemented as afterthoughts! Change comes through implementation and evaluation. focuses an ♦ Strategy implementation is primarily an operational process. and so on.
In this way. transferring managers among divisions. Organizations tend to adopt those strategies which can be implemented with the help of the present structure of resources combined with some additional efforts. The implementation tasks put to test the strategists' abilities to allocate resources. These types of activities obviously differ greatly between manufacturing. closing facilities. attitudes. take the organization from where it is to where it wishes to be. lt is to be noted that while strategy formulation is primarily an entrepreneurial activity. Backward Linkages: Just as implementation is determined by the formulation of strategies. the formulation and implementation processes are intertwined.Strategic Management and sizes of organizations. the organizational structure has to undergo a change in the light of the requirements of the modified or new strategy. service. over a period of time. establishing cost-control procedures. formulate functional policies. skills. ♦ The strategic plan devised by the organization proposes the manner in which the strategies 6. besides dealing with various other issues. Two types of linkages exist between these two phases of strategic management. A strategist. or reformulation of existing strategies. adding new departments.6 . Forward Linkages: The different elements in strategy formulation starting with objective setting through environmental and organizational appraisal. and abilities. and take into account the leadership styles required. therefore. building new facilities. changing advertising strategies. ISSUES IN STRATEGY IMPLEMENTATION The different issues involved in strategy implementation cover practically everything that is included in the discipline of management studies. 3. and building a better management information system. Implementing strategies requires such actions as altering sales territories. In real life. Such incremental changes. the formulation process is also affected by factors related with 'implementation. It is to be noted that the division of strategic management into different phases is only for the purpose of orderly study. many changes have to be effected within the organization. strategic alternatives and choice to the strategic plan determine the course that an organization adopts for itself. The next section focuses on the various issues involved in the implementation of strategies. training new employees. changing an organization's pricing strategy. While dealing with strategic choice. and governmental organizations. hiring new employees. With the formulation of new strategies. developing financial budgets. the implementation of strategy is mainly an administrative task based on strategic as well as operational decision-making. remember that past strategic actions also determine the choice of strategy. based on strategic decision -making. The forward linkages deal with the impact of the formulation on implementation while the backward linkages are concerned with the impact in the opposite direction. the formulation of strategies has forward linkages with their implementation. The style of leadership has to be adapted to the needs of the modified or new strategies. For instance. design structures. developing new employee benefits. has to bring to his or her task a wide range of knowledge.
it would be essential to see that a proper organizational structure is designed. do not lead to action. Programmes are usually supported by funds allocated for plan implementation. They may be used for setting up new or additional plants. They are. by themselves. therefore.Strategy Implementation and Control could be put into action. Plans result in different kinds of programmes. For instance. programmes. they may lead to the formulation of various plans. Strategies. and is to be completed within a set time schedule. a statement of intent: implementation tasks are meant to realise the intent. have to be activated through implementation. and for several other activities that are needed for the implementation of strategies. Many activities can be performed simultaneously. After that is provided. in a sense. ♦ Projects create the needed infrastructure for the day-to-day operations in an organization. It requires allocation of funds based on capital budgeting by organizations. which are performed only once. procedures. ♦ Strategies should lead to plans. modernising the existing facilities. An example of a programme is a research and development programme for the development of a new product. certain other activities may be repeated over time. and projects. research and development programmes may consist of several projects. and there are activities. Projects would also require resources. each of which is intended to achieve a specific and limited objective. installation of newer systems. functional policies are devised. One such plan could be a modernization plan. Implementation of strategies is not limited to formulation of plans. which includes goals. ♦ Programmes lead to the formulation of projects. requires separate allocation of funds. and various behavioural inputs are provided so that plans may work. policies.7 . systems are installed. Strategies. rules. the transition from strategy formulation to strategy 6. A project is a highly specific programme for which the time schedule and costs are predetermined. In all but the smallest organizations. Thus. if stability strategies have been formulated. A programme is a broad term. and steps to be taken in putting a plan into action. Given below in sequential manner the issues in strategy implementation which are to be considered: ♦ Project implementation ♦ Procedural implementation ♦ Resource aIIocation ♦ Structural implementation ♦ Functional implementation ♦ Behavioural implementation But it should be noted that the sequence does not mean that each of the foIIowing activities are necessarily performed one after another.
revising reward and incentive plans. matching managers with strategy. and their lack of interest can be detrimental to organizational success. Implementation problems can arise because of this shift in responsibility. especially if strategy-formulation decisions come as a surprise to middle and lower-level managers. products. Strategists' genuine personal commitment to implementation is a necessary and powerful motivational force for managers and employees. every employee should be able to be benchmark her or his efforts against best-in-class competitors so that the challenge becomes personal. plans. Firms should provide training for both managers and employees to ensure that they have and maintain the skills necessary to be world-class performers. Firms need to develop a competitor focus at all hierarchical levels by gathering and widely distributing competitive intelligence. it is essential that divisional and functional managers be involved as much as possible in strategy-formulation activities. altering an existing organizational structure. Too often. devising policies. and performance should be apparent to all organizational members. unless the two coincide. The rationale for objectives and strategies should be understood clearly communicated throughout an organization. Major competitors' accomplishments. This is a challenge for strategists of the firm. strategists are too busy to actively support strategy-implementation efforts. Major external opportunities and threats should be clear. restructuring and reengineering. and where participation and shared objectives are valued more than executive order. where the merit of ideas carries more weight than their source. – Edson Spencer Changes in strategy often require changes in the way an organization is structured for two major 6. downsizing. allocating resources. adapting production/operations processes. and managers and employees' questions should be answered. Of equal importance. minimizing resistance to change.Strategic Management implementation requires a shift in responsibility from strategists to divisional and functional managers. Therefore. actions. Their role in strategy implementation should build upon prior involvement in strategy-formulation activities. Managers and employees throughout an organization should participate early and directly in strategy-implementation decisions. developing a strategy-supportive culture. 4. Top-down flow of communication is essential for developing bottom-up support.8 . strategists should be involved as much as possible in strategy-implementation activities. if necessary. developing an effective human resource function and. Management changes are necessarily more extensive when strategies to be implemented move a firm in major new direction. ORGANIZATION AND STRATEGY IMPLEMENTATION The ideal organizational structure is a place where ideas filter up as well as down. Managers and employees are motivated more by perceived self-interests than by organizational interests. Management issues central to strategy implementation include establishing annual objectives.
although successful firms in a given industry do tend to organize themselves in a similar way. First. For example. Chandler found a particular structure sequence to be often repeated as organizations grow and change strategy over time. follows strategy. Without a strategy or reasons for being (mission). therefore. The second major reason why changes in strategy often require changes in structure is that structure dictates how resources will be allocated. no firm could change its structure in response to every one of these forces. If an organization's structure is based on customer groups. Structure should be designed to facilitate the strategic pursuit of a firm and. structure largely dictates how objectives and policies will be established. consumer goods companies tend to emulate the divisional structure-byproduct form of organization. For example. Small firms tend to be functionally structured (centralized). then resources will be allocated in that manner. As organizations grow. because to do so would lead to chaos. Mediumsize firms tend to be divisionally structured (decentralized).9 . What is appropriate for one organization may not be appropriate for a similar firm. New strategy is formed New administrative problems emerge Organizational performance declines Organizational performance improves A new organizational structure is established Figure: Chandler's Strategy-Structure Relationship Numerous external and internal forces affect an organization. Changes in strategy lead to changes in organizational structure. when a firm changes its strategy. However. Symptoms of an ineffective organizational structure include too many levels of management. Large firms tend to use an SBU (strategic business unit) or matrix structure. companies find it difficult to design an effective structure. There is no one optimal organizational design or structure for a given strategy or type of organization. Objectives and policies are stated largely in terms of products in an organization whose structure is based on product groups. the existing organizational structure may become ineffective. Similarly. too many 6. their structures generally change from simple to complex as a result of linking together of several basic strategies. if an organization's structure is set up along functional business lines. The structural format for developing objectives and policies can significantly impact all other strategy-implementation activities. objectives and policies established under a geographic organizational structure are couched in geographic terms. then resources are allocated by functional areas.Strategy Implementation and Control reasons.
or to make bad products sell. Structure undeniably can and does influence strategy. encourages efficiency. and is sometimes times characterized by low employee morale. and matrix. minimizes career development opportunities. and management information systems. strategic business unit (SBU). minimizes the need for an elaborate control system. Strategies formulated must be workable. and too many unachieved objectives. Some disadvantages of a functional structure are that it forces accountability to the top. such as production/operations. too much attention being directed toward solving interdepartmental conflicts. research and development. But a more important concern is determining what types of structural changes are needed to Implement new strategies and how these changes can best be accomplished.10 . to make bad managers good. finance/accounting.Strategic Management meetings attended by too many people. divisional by geographic area. but changes in structure should not be expected to make a bad strategy good. so if a certain new strategy required massive structural changes it would not be an attractive choice. and inadequate planning for products and markets. We examine this Issue by focusing on seven basic types of organizational structure: functional. structure can shape the choice of strategies. and allows rapid decision making. divisional process. too large a span of control. Besides being simple and inexpensive. marketing. 4. divisional by customer. poor delegation of authority. Changes in structure can facilitate strategy-implementation efforts. A functional structure groups tasks and activities by business function. divisional by product. a functional structure also promotes specialization of labour. Most large companies abandoned the functional structure in favour of decentralization and improved accountability.1 The Functional Structure The most widely used structure is the functional or centralized type because this structure is the simplest and least expensive of the seven alternatives. In this way. line/staff conflicts. Chief Executive Officer Corporate R&D Corporate Finance Strategic Planning Corporate Marketing Corporate Human Resource Finance Production Engineering Accounting Figure: Functional Organization Structure Sales & Marketing Human Resources 6.
The most important issue is that the company's structure must be congruent with or fit with the company's strategy. influenced by factors such as an organization's age and size. few of the coordination problems that are common in larger organizations exist. Simple organizational structure is most appropriate for companies that follow a single-business strategy and offer a line of products in a single geographic market. Organizational structure is the company's formal configuration of its intended roles. increase in size. little formalization. Because of these characteristics. and decision-making processes. few rules. Access to reliable information is imperative if executives are to reach decisions regarding the selection of a structure that is sufficiently flexible and stable. given the chosen strategy. governance mechanisms. In order to implement and manage strategies that have been formulated. authority. Little specialization of tasks. Companies must also maintain a certain degree of stability in their structures so that day-to-day tasks can be completed efficiently. new organizational structures may be required. as companies formulate new strategies. A simple organizational structure may result in competitive advantages for some small companies relative to their larger counterparts. and creative in the global economy if they are to exploit their core competencies in the pursuit of marketplace opportunities. which yield improved decision making. These potential competitive advantages include a broad-based 6.11 . This is because companies must be flexible. Ineffective strategy/structure matches may result in company rigidity and failure. while the company's staff merely serves as an executor. effective strategic leaders seek to develop an organizational structure and accompanying controls that are superior to those of their competitors. which can result in a competitive advantage. given the complexity and need for rapid changes in today's competitive landscape. In the simple structure. procedures. and new products tend to be introduced to the market quickly. The simple structure also is appropriate for companies implementing focused cost leadership or focused differentiation strategies. A simple structure is an organizational form in which the owner-manager makes all major decisions directly and monitors all activities. or change their level of diversification. acts as a framework which reflects managers' determination of what a company does and how tasks are completed. Useful information contributes to the formation and use of effective structures and controls. Thus. all companies-need some form of organizational structure. Organizational structure. And. Selecting the organizational structure and controls that result in effective implementation of chosen strategies is a fundamental challenge for managers. especially top-level managers. innovative. unsophisticated information systems and direct involvement of owner-manager in all phases of day-to-day operations characterise the simple structure.Strategy Implementation and Control A competitive advantage is created when there is a proper match between strategy and structure. communication is frequent and direct.
this problem can be overcome by implementing the multidivisional structure. Functional departments often had difficulty dealing with distinct product lines and markets. small companies grow larger. Costs were not allocated to individual products. Thus. compared to the simple structure. The multidivisional or M-form structure was developed in the 1920s. However. However. The functional structure enables the company to overcome the growth-related constraints of the simple structure. To coordinate more complex organizational functions. innovative structure called for 6. Top managers became over-involved in solving short-run problems (such as coordination.Strategic Management openness to innovation. so it was not possible to assess an individual product's profit contribution. it is incumbent on the company's managers to recognise the inadequacies or inefficiencies of the simple structure and change it to one that is more consistent with company's strategy. the company outgrows the simple structure. and human resources. accounting. R&D. there also are some potential problems. The multidivisional (M-form) structure is composed of operating divisions where each division represents a separate business to which the top corporate officer delegates responsibility for dayto-day operations and business unit strategy to division managers. By such delegation. Functional specialists often may develop a myopic (or narrow) perspective. Differences in functional specialization and orientation may impede communications and coordination. in response to coordinationand control-related problems in large firms. The new. Thus. there are significant increases in the amount of competitively relevant information that requires processing. As a result of this growth.12 . the chief executive officer must integrate functional decision-making and coordinate actions of the overall business across functions. The functional structure consists of a chief executive officer or a managing director and limited corporate staff with functional line managers in dominant functions such as production. More extensive and complicated information-processing requirements place significant pressures on owner-managers (often due to a lack of organizational skills or experience or simply due to lack of time). greater structural flexibility. The functional structure is used by larger companies and by companies with low levels of diversification. communications. Generally. companies should abandon the simple structure in favour of the functional structure. the corporate office is responsible for formulating and implementing overall corporate strategy and manages divisions through strategic and financial controls. losing sight of the company's strategic vision and mission. and an ability to respond more rapidly to environmental changes. especially in coordinating conflicting priorities among the products. marketing. conflict resolution) and neglected long-term strategic issues. if they are successful. Loss of control meant that optimal allocation of firm resources between products was difficult (if not impossible). engineering. enabling or facilitating communication and coordination. When this happens.
Chambers says the goal was to eliminate duplication.2 The Divisional Structure As a small organization grows. small business. Some form of divisional structure generally becomes necessary to motivate employees. As consumption patterns become increasingly similar worldwide. by customer. With a divisional structure. So the Strategic Business Units come into picture. ♦ A small corporate office that would determine the long-term strategic direction of the firm and exercise overall financial control over the semi-autonomous divisions. simplifying control problems. When the firm is less diversified. by product or service. This would enable the firm to more accurately monitor the performance of individual businesses. a by-product structure is becoming more effective than a by-customer or a by geographic type divisional structure. because financial controls are focused on financial outcomes. or by process. improving the allocation of resources and stimulate managers of poorly performing divisions to seek ways to improve performance. In the restructuring. An increase in diversification strains corporate officers' abilities to understand the operations of all of its business units and divisions are then managed by financial controls. control operations. each representing a distinct business ♦ Each division would house its functional hierarchy. Kodak reduced its number of business units from seven by-customer divisions to five by-product divisions. and telecoms. Kodak eliminated its global operations division and distributed those responsibilities 6. CEO John Chambers replaced the three-customer structure based on big businesses. and now the company has centralized its engineering and marketing units so that they focus on technologies such as wireless networks.13 . functional activities are performed both centrally and in each separate division. ♦ Division managers would be given responsibility for managing day-to-day operations. and compete successfully in diverse locations. strategic controls are used to manage divisions. facilitate comparisons between divisions.Strategy Implementation and Control ♦ Creating separate divisions. it has more difficulty managing different products and services in different markets. 4. Strategic control refers to the operational understanding by corporate officers of the strategies being implemented within the firm's separate business units. Chambers' span of control in the new structure is reduced to 12 managers reporting directly to him from 15. Cisco Systems discarded its divisional structure by customer and reorganized into a functional structure. they require that each division's performance be largely independent of the performance of other divisions. but the change should not be viewed as a shift in strategy. which enables corporate officers to manage the cash flow of the divisions through budgets and an emphasis on profits from distinct businesses. The divisional structure can be organized in one of four ways: by geographic area. However.
for instance.Strategic Management across the new by-product divisions. allows local control of local situations. however. and allows new businesses and products In be added easily. Second. and personnel. managers must be well qualified because the divisional design forces delegation of authority better-qualified individuals require higher salaries. First. each division requires functional specialists who must be paid. employee morale is generally higher in a divisional structure than it is in centralized structure. facilities. Perhaps the most important limitation is that a divisional structure is costly. A divisional structure can also be costly because it requires an elaborate. Chief Executive Corporate Finance Corporate Legal/PR General Manager Division A General Manager Division B Marketing Production Personnel Marketing Production Personnel Figure : Divisional Structure A divisional structure has some clear advantages. there exists some duplication of staff services. As a result. That is. leads to a competitive climate within an organization. Third. managers and employees can easily see the results of their good or bad performances. functional specialists are also needed centrally (at headquarters) to coordinate divisional activities. headquarters- 6. The divisional design is not without some limitations. Other advantages of the divisional design are that it creates career development opportunities for managers. for a number of reasons. First and perhaps foremost accountability is clear.14 . Because a divisional structure is based on extensive delegation of authority. divisional managers can be held responsible for sales and profit levels.
secondary schools. The divisional structure by product (or services) is most effective for implementing strategies when specific products or services need special emphasis. the SBU structure is most appropriate. Finally. and diversity of divisions in an organization increase. The span of control becomes too large at top levels of the firm. This structure allows an organization to cater effectively to the requirements of clearly defined customer groups. problems related to isolation of functional area managers. This type of structure can be most appropriate for organization that have similar branch facilities located in widely dispersed areas. Also. The divisional structure allows strict control over and attention to product lines. General Motors. Some airline companies have two major customer divisions: passengers and freight or cargo services. but it may also require a more skilled management force and reduced top management control. for most large organizations and many small firms. size. A divisional structure by geographic area is appropriate for organizations whose Strategies need to be tailored to fit the particular needs and characteristics of customers indifferent geographic areas. Merrill Lynch is organized into separate divisions that cater to different groups of customers. In these instances. Because of limits to an individual chief executive officer's ability to process complex strategic information. When a few major customers are of paramount importance and many different services are provided to these customers. an SBU structure can greatly facilitate strategy implementation efforts. or customers may sometimes receive special treatment. whereas divisional process departments are evaluated on these criteria. products. a key difference between these two designs is that functional departments are not accountable for profits or revenues. Increases in sales often are not accompanied by similar increases in profitability. institutional investors. including wealthy individuals.15 . Nonetheless. 4. when an organization's products or services differ substantially. A divisional structure by geographic area allows local participation in decision making and improved coordination within a region. book-publishing companies often organize their activities around customer groups such as colleges. and private commercial schools. this type of structure is widely used when an organization offers only a few products or services. DuPont. For example. controlling and evaluating divisional operations become increasingly difficult for strategists. the structure of the company needs to change.3 The Strategic Business Unit (SBU) Structure As the number. A divisional structure by process is similar to a functional structure. and increasing diversification. and small corporations. then a divisional structure by customer can be the most effective way to implement strategies. Also in multidivisional organizations. 6. company wide practices. and It may be difficult to maintain consistent. certain regions.Strategy Implementation and Control driven control system. However. and Procter & Gamble use a divisional structure by product to implement strategies. the advantages of a divisional structure more than offset the potential limitations. because activities are organized according to the way work is actually performed.
President Corporate R&D Corporate Finance Strategic Planning Corporate Marketing Corporate Human Resource Strategic Business Unit A Strategic Business Unit B Strategic Business Unit C Strategic Business Unit D Division Division Divisio Division Division Division Figure: SBU Structure This enables the company to more accurately monitor the performance of individual businesses. such as competing in the same industry. the SBU structure groups similar divisions into strategic business units and delegates authority and responsibility for each unit to a senior executive who reports directly to the chief executive officer. Hence. and the role of the group vice president is often ambiguous. the ninety divisions could perhaps be regrouped into ten SBUs according to certain common characteristics. simplifying control problems.Strategic Management The SBU structure is composed of operating units where each unit represents a separate business to which the top corporate officer delegates responsibility for day-to-day operations and business unit strategy to its managers. However. Two disadvantages of an SBU structure are that it requires an additional layer of management. This change in structure can facilitate strategy implementation by improving coordination between similar divisions and channelling accountability to distinct business units.16 . or having the same customers. these limitations often do not outweigh the advantages of unproved coordination and accountability. improving the allocation of resources and can be used to stimulate managers of poorly performing divisions to seek ways to improve performance. the corporate office is responsible for formulating and implementing overall corporate strategy and manages SBUs through strategic and financial controls. 6. being located in the same area. By such delegation. In the ninety-division conglomerate just mentioned. It also facilitates comparisons between divisions. which increases salary expenses.
By its strategy. Because it has been pushing the company to make better use of software products and content (e. Sony's music. SBU groups at the second level.g. are right for their situations.. even when combined with horizontal linking mechanisms like strategic business units.Strategy Implementation and Control A strategic business unit (SBU) structure consists of at least three levels. as also that SBU groups are unrelated to each other. This means that. may be very appropriate when organizations conclude that neither functional nor divisional forms. with a corporate headquarters at the top. Increased levels of diversification call for newer structures that enable fast decision making and where other structures do not seem to be working properly. within each SBU. Structural flexibility is perceived to be of equal importance with strategic flexibility and both of them would enable the company to respond more rapidly to emerging opportunities.17 . Within each SBU. in contrast. divisions producing similar products and/or using similar technologies can be organised to achieve synergy. 6. For General Electric. Sony is one of the few companies that have the opportunity to integrate software and content across a broad range of consumer electronics products. Individual SBUs are treated as profit centres and controlled by corporate headquarters that can concentrate on strategic planning rather than operational control so that individual divisions can react more quickly to environmental changes. GE's SBU form is made up of 10 strategic business units which should enable it to act quickly and more effectively. films and games) in its televisions and audio gear to increase Sony's profitability. It will implement this strategy through the SBU structure. For example. Newer Forms of Organization Structures As companies successfully implement business-level strategies and achieve above average returns.4 The Matrix Structure Most organizations find that organising around either functions (in the functional structure) or around products and geography (in the divisional structure) provides an appropriate organizational structure. 4. However. In matrix structures. this structure will enable the company to "walk. they may diversify their operations by offering different products or following a product diversification strategy or offering the same or additional products in new markets or by following a market diversification strategy. companies generally formulate and implement a corporate-level strategy and business-level strategies for individual units. Sony has been restructuring to match the SBU structure with its ten internal companies as organised into four strategic business units. divisions are related to each other. and divisions grouped by relatedness within each SBU at the third level. The matrix structure. Following such diversification. talk and think" like smaller companies by making decisions and introducing innovative products more rapidly. the structural and control characteristics of the functional structure do not adequately support the successful implementation of corporate-level strategies that call for diversification beyond the single or dominant-business level.
The matrix structure was developed to combine the stability of the functional structure with the flexibility of the product form. In contrast. or sales − is usually functional and is reasonably permanent. however. a continuous battle for power between product and functional mangers is likely. produce conflicts revolving around duties. The product units or projects are usually temporary and act like divisions in that they are differentiated on a product-market basis. and mutual trust and confidence. manufacturing. When several variables such as product. all of whom have important strategic responsibilities. functional and divisional structures depend primarily on vertical flows of authority and communication. organizations need Planning. and technology to their range of activities.Strategic Management functional and product forms are combined simultaneously at the same level of the organization. clear mutual understanding of roles and responsibilities. including construction. 6. healthcare. dual reporting channels. Despite its complexity. a matrix organization can be an effective structural form. Employees have two superiors. Out of these changes are coming product managers. 2) Resources are scarce and 3) Abilities to process information and to make decisions need to be improved. training. authority. shared authority. People from these functional units are often assigned temporarily to one or more product units or projects. and a need for an extensive and effective communication system. To the extent that the goals to be achieved are vague and the technology used is poorly understood. customer. It does.18 . a product or project manager and a functional manager. dual sources of reward and punishment. research and defence. excellent internal communication. there are many channels of communication workers can see the visible results of their work. Some advantages of a matrix structure are that project objectives are clear. engineering. The matrix structure is very useful when the external environment (especially its technological and market aspects) is very complex and changeable. geography. functional managers. and line of bus II have roughly equal strategic priorities. The matrix structures used more frequently by American businesses because firms are pursuing strategies add new products. Other characteristics of a matrix structure that contribute to overall complexity include dual lines of budget authority (a violation of the unity command principle). A matrix structure can result in higher overhead because it more management positions. customer groups. and resource allocation. the matrix structure is widely used in many industries. technology. The matrix structure is often found in an organization or within an SBU when the following three conditions exists: 1) Ideas need to be cross-fertilised across projects or products. The "home" department − that is. In order for a matrix structure to be effective. and geographic managers. and shutting down a project is accomplished relatively easily. A matrix structure is the most complex of all designs because it depends upon both vertical and horizontal flows of authority and communication (hence the term matrix). functional area.
Strategy Implementation and Control Top Management Manufacturing Sales Finance Personnel Manufacturing unit Sales unit Finance unit Personnel unit Manufacturing unit Sales unit Finance unit Personnel unit Manufacturing unit Sales unit Finance unit Personnel unit Manufacturing unit Sales unit Finance unit Personnel unit Changing organizational design Old Organizational Design New Organizational Design ♦ One large corporation ♦ Vertical communication ♦ Centralised top-down decision making ♦ Vertical integration ♦ Work/quality teams ♦ Functional work teams ♦ Minimal training ♦ Specialised individual job design focused on ♦ Mini-business units & cooperative relationships ♦ Horizontal communication ♦ Decentralised participative decision making ♦ Outsourcing & virtual organizations ♦ Autonomous work teams ♦ Cross-functional work teams ♦ Extensive training ♦ Value-chain team-focused job design Figure: Matrix Organization Structure 6.19 .
However. have proposed three distinct phases: 1. It allows a company to concentrate on its distinctive competencies. the project manager becomes a product or brand manager and a second phase begins. with a small headquarters acting as a "broker". function is still the primary organizational structure. while gathering 6. In this arrangement. 4. Reebok and Benetton use the network structure in their operations function by subcontracting manufacturing to other companies in low-cost The network organization structure provides an organization with increased flexibility and adaptability to cope with rapid technological change and shifting patterns of international trade and competition. Product/brand management: If the cross-functional task forces become more permanent. Cross-functional task forces: Temporary cross-functional task forces are initially used when a new product line is being introduced. the matrix structure is not very popular because of difficulties in implementation and trouble in managing. the network organization is a series of independent firms or business units linked together by computers in an information system that designs. Many activities are outsourced. A corporation organized in this manner is often called a virtual organization because it is composed of a series of project groups or collaborations linked by constantly changing non-hierarchical. A project manager is in charge as the key horizontal link. 2. it may contract with people for a specific project or length of time. In its ultimate form.5 Network Structure A newer and somewhat more radical organizational design. and markets a product or service. Rather than being located in a single building or area. Electronic markets and sophisticated information systems reduce the transaction costs of the marketplace. The network structure becomes most useful when the environment of a firm is unstable and is expected to remain so. thus justifying a "buy" over a "make" decision. Companies like Nike.20 . partially owned subsidiaries. Under such conditions. only a shell. Instead of having salaried employees. an organization's business functions are scattered worldwide. produces. Long-term contracts with suppliers and distributors replace services that the company could provide for itself through vertical integration. Functional and product managers have equal authority and must work well together to resolve disagreements over resources and priorities. Both the functional and product structures are permanent. electronically connected to some completely owned divisions. the network structure is an example of what could be termed a "non-structure" by its virtual elimination of in house business functions. there is usually a strong need for innovation and quick response. 3. Mature matrix: The third and final phase of matrix development involves a true dual-authority structure. All employees are connected to both a vertical functional superior and a horizontal product manager. The organization is. in effect. cobweb-like networks. but product or brand managers act as the integrators of semi permanent products or brands.Strategic Management For development of matrix structure Davis and Lawrence. and other independent companies.
continuous learner. The new structural arrangements that are evolving typically are in response to social and technological advances. the territorial structure did not suit the purpose of strategic planning. With new organizational forms. Employees may lack the level of confidence necessary to participate actively in organization-sponsored learning experiences. a multi-business enterprise groups its multitude of businesses into a few distinct business units in a scientific way. As per this concept. The flatter organizational structures that accompany contemporary structures can seem intrusive as a result of their demand for more intense and personal interactions with internal and external stakeholders. It is impractical for an enterprise with a multitude of businesses to provide separate strategic planning treatment to each one of its products/businesses. The learning organization that is a part of new organizational forms requires that each worker become a self motivated. multi-business enterprises. many workers become deskilled-that is.Strategy Implementation and Control efficiencies from other firms who are concentrating their efforts in their areas of expertise. since it is a vital idea in the strategic planning and strategic management endeavour.21 . The purpose is to provide effective strategic planning treatment to each one of its products/businesses. And in many cases. it runs the risk of choosing the wrong functions and thus becoming noncompetitive. Contracting out functions to separate suppliers/distributors may keep the firm from discovering any synergies by combining activities. such as those faced by DuPont. In modern times. The question is: what is the best way of grouping the products/businesses of such large enterprises? An SBU is a grouping of related businesses. And in their internal appraisal they carry out an assessment of their SBUs. however. The network does. If a particular firm overspecialises on only a few functions. it is pertinent to introduce the concept of Strategic Business Unit (SBU). While they may enable the effective management of dispersed organizations. there are some serious implications. STRATEGIC BUSINESS UNITS & CORE COMPETENCE At this juncture. reference to this idea will keep recurring in our subsequent discussions in this text. it has to necessarily group the products/businesses into a manageable number of strategically related business units and then take them up for strategic planning. 6. the conditions above may create stress for many employees. 5. The student must have a good grasp of this concept. The availability of numerous potential partners can be a source of trouble. Historically. most corporations organise their businesses into appropriate SBUs. The concept is relevant to multi-product. multi-business firms were handling business planning on a territorial basis since their structure was territorial. Often. have disadvantages. large. In fact. the world's largest chemical company. which is amenable to composite planning treatment. Combined. they cannot perform well in a new structure that often demands constant innovation and adaptation. such a structure was the outcome of a manufacturing or distribution logistics.
Such a grouping would in its turn. Products/businesses within an SBU receive same strategic planning treatment and priorities. It is also possible that it is engaged in more than six businesses. The concept provides the right direction to strategic planning by removing the vagueness and confusion often experienced in such multi-business enterprises in the matter of grouping of the businesses. Products/businesses that are related from the standpoint of "function" are assembled together as a distinct SBU. say six units. well defined. scientifically demarcated business units. the same product was getting varied strategic planning treatments. help the corporation carry out its strategic management endeavour better. The attributes of an SBU and the benefits a firm may derive by using the SBU idea.Strategic Management When strategic planning was carried out treating territories as the units for planning. The concept of strategic business units (SBU) breaks away from this practice. It may be engaged in only three distinct businesses. ♦ Unrelated products/businesses in any group are separated. it also facilitates the right setting for correct strategic planning and facilitates correct relative priorities and resources to 6. it gave rise to two kinds of difficulties: (i) since a number of territorial units handled the same product. ♦ An improvement over the territorial grouping of businesses and strategic planning based on territorial units. distinct. ♦ An SBU is a grouping of related businesses that can be taken up for strategic planning distinct from the rest of the businesses. ♦ Grouping the businesses on SBU lines helps the firm in strategic planning by removing the vagueness and confusion generally seen in grouping businesses. ♦ A scientific method of grouping the businesses of a multi-business corporation which helps the firm in strategic planning. it is not necessarily in six different businesses. products with dissimilar characteristics were getting identical strategic planning treatment. In other words. If they could be assigned to any other SBU applying the criterion of functional relation. It recognises that just because a firm is structured into a number of territorial units. The endeavour should be to group the businesses into an appropriate number of strategic business units before the firm takes up the strategy formulation task. they are assigned accordingly. and (ii) since a given territorial planning unit carried different and unrelated products. The principle underlying the grouping is that all related products-related from the standpoint of "function"-should fall under one SBU. otherwise they are made into separate SBUs.22 . ♦ The task consists of analysing and segregating the assortment of businesses/portfolios and regrouping them into a few. the SBU concept helps a multi-business corporation in scientifically grouping its businesses into a few distinct business units.
Unilever would argue that the marketing skills associated with the three product markets are similar. The three most important Characteristics of SBU are: ♦ It is a single business or a collection of related businesses which offer scope for independent planning and which might feasibly stand alone from the rest of the organization. objectives. in order to determine where cost improvements could be made and/or value creation improved. These two basic steps of identifying separate activities and 6. This issue of relatedness in turn has direct implications on decisions about diversification relatedness might exist in different ways: ♦ SBUs might build on similar technologies or all provide similar sorts of products or services. the technologies underpinning frozen food. ♦ Each SBU will have its own distinct set of competitors and its own distinct strategy. and who has control of profit-influencing factors. and if so. The Value Chain Analysis Value chain analysis has been widely used as a means of describing the activities within and around an organization.. but all are sold through retail operations. and relating them to an assessment of the competitive strength of an organization (or its ability to provide value-for-money products or services). ♦ Each SBU will have a CEO. whether the corporate body wishes to have a related set of SBUs or not. ♦ SBUs might be serving similar or different markets. mission.Strategy Implementation and Control the various businesses. Value analysis was originally introduced as an accounting analysis to shed light on the 'value added' of separate steps in complex manufacturing processes. on what basis. ♦ Or it may be that other competences on which the competitive advantage of different SBUs are built have similarities. In the basic factors. competition and strategy-one SBU will be distinct from another.23 . The questions posed at the corporate level are. He will be responsible for strategic planning for the SBU and its profit performance. ♦ Has a manager who has responsibility for strategic planning and profit performance. he will also have control over most of the factors affecting the profit of the SBU. viz. ♦ Has its own set of competitors. first. For example. for example. and U nil ever operates in all these product fields. it may be that the customers are similar. washing powders and margarine production may be very different. the responsibilities for strategic planning can be more clearly assigned. ♦ Each SBU is a separate business from the strategic planning standpoint. Even if technology or products differ. The identification of SBUs is a convenient starting point for planning since once the company's strategic business units have been identified.
These resources are of no value unless deployed into activities and organised into routines and systems which ensure that products or services are produced which are valued by the final consumer/user. outbound logistics. For tangible products 6. it is these competences to perform particular activities and the ability to manage linkages between activities which are the source of competitive advantage for organizations. transport etc. One of the key aspects of value chain analysis is the recognition that organizations are much more than a random collection of machines. packaging. ♦ Outbound logistics collect. testing etc. In other words. storing and distributing the inputs to the product/service.24 . operations. and service. This includes materials handling. Firm infrastructure Support Activities Human Resource Management Technology Development Procurement Margin Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Margin Primary Activities Figure: Value Chain (Michael Porter) The primary activities of the organization are grouped into five main areas: inbound logistics. money and people. marketing and sales. stock control.Strategic Management assessing the value added from each were linked to an analysis of an organization's competitive advantage by Michael Porter. store and distribute the product to customers. ♦ Operations transform these various inputs into the final product or service: machining. ♦ Inbound logistics are the activities concerned with receiving. assembly. Porter argued that an understandIng of strategic capability must start with an identification of these separate value activities.
it occurs in many parts of the organization. ♦ Service are all those activities. The key technologies may be concerned directly with the product (e.g. ♦ Technology development: All value activities have a 'technology'. Each of these groups of primary activities are linked to support activities.Strategy Implementation and Control this would be warehousing. Although a threshold competence in all of these activities is necessary to the organization's successful operation.g. materials handling. such as installation. are crucially important to an organization's performance in its primary activities. R&D product design) or with processes (e. finance. information management. However. training. This would include sales administration. These are known as the core competences and will differ from one organization to another depending on bow the company is positioned and the strategies it is pursuing. stocking. For example. communication networks which help users' access a particular service are often important. repair. All shops need to have a threshold competence in the basic activities of purchasing. Infrastructure also consists of the structures and routines of the organization which sustain its culture.25 . etc. raw materials improvements). etc. managing.g.g. These can be divided into four areas ♦ Procurement: This refers to the processes for acquiring the various resource inputs to the primary activities (not to the resources themselves). This gives a supermarket competitive 6. In public services. training and spares. It is concerned with those activities involved in recruiting. In the case of services. developing and rewarding people within the organization. As such. ♦ Human resource management: This is a particularly important area which transcends all primary activities. process development) or with a particular resource (e. the major supermarkets are pursuing strategies which provide lower prices to consumers through their core competences in merchandising. ♦ Infrastructure: The systems of planning. even if it is simply know-how. consider how small shops compete with supermarkets in grocery retailing. it is important to identify those competences which critically underpin the organization's competitive advantage. transport. advertising. etc. it may be more concerned with arrangements for bringing customers to the service if it is a fixed location (e. which enhance or maintain the value of a product/service. sports events). selling and so on. ♦ Marketing and sales provide the means whereby consumers/users are made aware of the product/service and are able to purchase it. securing lower cost supplies and managing in-store activities more efficiently. Identifying Core Competences Value chain analysis is useful in describing the separate activities which are necessary to underpin an organization's strategies and how they link together both inside and outside the organization. quality control. display.
the production and supplier management activities underpinning quality (reliability) were becoming threshold competences. During the 1950s and 1960s. in deciding which competences are core. Core competences may also be the basis on which the organization stretches into new opportunities. since they are underpinned by key resources such as computerised stock/ordering systems and own brand labels. both Ford and the major Japanese companies had achieved similar competence in these two areas of global networks and quality.the ability to exploit the competence in more than one market or arena. The competitive arena then switched to competences which would create some uniqueness of product in an increasingly 'commodity-like' industry.which became critical success factors in allowing them to achieve global sales. The development of global competition in the automobile industry over recent decades also illustrates this issue well. By the mid-1970s they were significantly outperforming Ford on quality and reliability . the US giants such as Ford and GM dominated the global market through their market access core competences of establishing dealer networks and later overseas production plants.the so-called 'lifestyle niche' was produced by companies like Mazda. This agility in design and manufacturing techniques became a new and important core competence in the global competition.Strategic Management advantage over smaller shops: it is difficult for smaller shops to imitate these competences. etc. It is also important to understand that those unique resources and core competences which allow supermarkets to gain competitive advantage over corner shops are not unique resources or core competences in the competitive rivalry between supermarkets. By the mid-1980s. The key resources for the successful corner shop are the style of the owner and the choice of location.the personal service to customers. this is another criterion which should be used . Meanwhile. The new core competences became the ability to provide unique product designs/features at low volumes of manufacture . extended opening hours. It is important to identify an organization's core competences not only for reasons of ensuring or continuing good 'fit' between these core competences and the changing nature of the markets or environment. In this industry. They are necessary resources and threshold competences to survive as a supermarket. The development of 'added value' services and/or geographical spread of markets are two typical ways in which core competences can be exploited to maintain progress 6. So. Although maintaining a global network was a critical success factor which continued to distinguish Ford and the Japanese from many European companies such as Peugeot. as illustrated in this example. Japanese manufacturers were developing competences in defect-free manufacture. So the typical 'corner shop' grocery store gains competitive advantage over supermarkets by concentrating more on convenience and service through different core competences .26 . informal credit. These aspects of service are valued by some consumers and are difficult for the supermarkets to imitate without substantially increasing their costs. home deliveries. The competitive rivalry between supermarkets is therefore achieved through other unique resources (perhaps a key site) or core competences (perhaps in the management of 'own brand' supply). experience shows that these tend to be easily imitated. So long-term competitive advantage needs to be secured by continually shifting the ground of competition.
the competences are incompatible: that is. flexibility and variety to the customers. it will probably add to the overall cost of operations. ♦ It is easy to miss this issue of managing linkages between primary activities in an analysis if. it is necessary to identify the basis on which an organization has gained competitive advantage and hence which are the core competences in sustaining this advantage. The subsections which follow look at how different bases of organizational competences can be analysed and understood. low-unit-cost production. However. the marketing team may be selling speed. The ability to co-ordinate the activities of specialist teams or departments may create competitive advantage through improving value for money in the product or service. for example. The operations may look good because they are geared to high-volume. and it can be helpful in identifying those activities which the organization must undertake at a threshold level of competence and those which represent the core competences of the organization. So high levels of competence in separate activities are not enough if. in order to do this. Specialization of roles and responsibilities is common in most organizations and is one way in which high levels of competence in separate activities is achieved.adding overall cost and/or diminishing value in the product or service. This management of internal linkages in the value chain could create competitive advantage in a number of ways: ♦ There may be important linkages between the primary activities. Value chain analysis is a reminder that the long-term competitive position of an organization is concerned with its ability to sustain value for-money products or services. as here. However. low-variety. but nevertheless over time may be imitated by competitors. ♦ The management of the linkages between a primary activity and a support activity may be the 6.Strategy Implementation and Control once traditional markets are mature or saturated. It is the management of these linkages which provides 'leverage' and levels of performance which are difficult to match. a decision to hold high levels of finished stock might ease production scheduling problems and provide for a faster response time to the customer. An assessment needs to be made of whether the value added to the customer by this faster response through holding stocks is greater than the added cost. For example. However.27 . at the same time. the organization's competences in marketing activities and operations are assessed separately. However. Managing linkages Core competences in separate activities may provide competitive advantage for an organization. they are not related to the same view of what value for money means to the customer. Core competences are likely to be more robust and difficult to imitate if they relate to the management of linkages within the organization's value chain and linkages into the supply and distribution chains. it often results in a set of activities which are incompatible − different departments pulling in different directions .
♦ A more recent philosophy has been total quality management. For example. – Sun Zi A leader lives in the field with his troops. many manufacturers will now involve their suppliers and distributors at the design stage of a product or project. In addition to the management of internal linkage. They have allowed the organizations to create genuinely new services from these core competences or to expand rapidly into new markets. For example. ♦ Linkages between different support activities may also be the basis of core competences. However. LEADERSHIP AND STRATEGIC IMPLEMENTATION Weak leadership can wreck the soundest strategy. Ross Perot 6. channels or customers. the practical difficulties and costs of co-ordinating a wider range of internal activities can outweigh the theoretical benefits. ♦ Within manufacturing industry the competence in closely specifying requirements and controlling the performance of suppliers (sometimes linked to quality checking and/or penalties for poor performance) can be critical to both quality enhancement and cost reduction. Again. making more linkages internal to the organization. ♦ The merchandising activities which manufacturers undertake with their distributors are now much improved and are an important 6. competitive advantage may also be gained by the ability to complement/co-ordinate the organization's own activities with those of suppliers. – H. this could occur in a number of different ways: ♦ Vertical integration attempts to improve performance through ownership of more parts of the value system. Many companies have failed to become competent in managing this linkage properly and have lost out competitively. the extent to which human resource development is in tune with new technologies has been a key feature in the implementation of new production and office technologies.Strategic Management basis of a core competence. Computer-based systems have been exploited in many different types of service organization and have fundamentally transformed the customer experience. It may be key investments in systems or infrastructure which provide the basis on which the company outperforms competition.28 . They have created within these organizations the competence to provide both a better service and a service at reduced cost. forceful execution of even a poor plan can often bring victory. Travel bookings and hotel reservation systems are examples which other services would do well to emulate. which seeks to improve performance through closer working relationships between the specialists within the value system.
Mr. chief administrator. sometimes it is best to be a perceptive listener and a compromising decision maker. Exercising ethics leadership and insisting that the company conduct its affairs like a model corporate citizen. culture builder. arbitrator. For the most part. is a celebrated leader because of the value he has added over his tenure at the company. resource acquirer and allocator. chief entrepreneur and strategist. One of the great legacies he will leave with Infosys is a strong management development program that builds management talent that other companies want and that will fill in managerial gaps after his retirement. and learning what obstacles lie in the path of good execution. policy enforcer. implement it. Managers have five leadership roles to play in pushing for good strategy execution: 1. Keeping the organization responsive to changing conditions. Mr. Reliance Group. 4. sometimes a strongly participative. major change efforts have to be top-down and vision-driven. policy maker. Many occasions call for a highly visible role and extensive time commitments. Murthy whom some consider the master strategic leader. win! But it's easier said than done. 2. Promoting a culture and esprit de corps that mobilizes and energizes organizational members to execute strategy in a competent fashion and perform at a high level. knowledge of operations to reach financial goals. R. spokesperson. For example: N. Sometimes it is useful to be authoritarian and hardnosed. 6. was an icon in himself because of his ability to conceptualise and communicate sweeping strategies. Leading change has to start with diagnosing the situation and then deciding which of several ways to handle it. Ambani was an excellent strategic leader because he was able to provide clear direction for the company and his strong interpersonal skills that inspire loyalty among employees. 5. motivator. while others entail a brief ceremonial performance with the details delegated to subordinates. and ahead of rivals in developing competitively valuable competencies and capabilities. alert for new opportunities. bubbling with innovative ideas. Narayan Murthy. A strategy manager has many different leadership roles to play: visionary. and proficiency in implementing a new vision for the company. collegial approach works best. and head cheerleader. execute it to the fullest. crisis solver.Strategy Implementation and Control The litany of good strategic management is simple enough: craft a sound strategic plan. Pushing corrective actions to improve strategy execution and overall strategic performance. process integrator. negotiator. Infosys. 3. adjust as needed. Mr. Dhirubhai Ambani. Staying on top of what is happening. closely monitoring progress.29 . capabilities builder. ferreting out issues. truly focuses on developing human capital. and sometimes being a coach and adviser is the proper role.
and feelings of co-workers. facilitating the development of appropriate strategic actions and providing guidance that results in strategic competitiveness and earning above-average returns. thoughts. A manager with strategic leadership skills exhibits the ability to guide the company through the new competitive landscape by influencing the behaviour. envision.Strategic Management Leadership role in implementation The changes confronting strategic leaders above provide obvious examples of the importance of strategic leadership. strategic leadership represents a complex form of leadership in companies. and the great challenges faced by strategic leaders. their effects on organizational outcomes. maintain flexibility.30 . In other words. and empower others to create strategic change as necessary. ambiguous information by successfully dealing with change and 6. This indicates that effective strategic leaders must be able to use the strategic management process effectively by guiding the company in ways that result in the formation of strategic intent and strategic mission. Environment al Scanning Organization Information Systems Design Strategic Planning Management Control Leadership Implementation Reward System Policy Formulation Feedback Management Development Figure : Strategy Design and Implementation: Interrelationship of Elements Strategic leadership entails the ability to anticipate. managing through others and successfully processing or making sense of complex.
31 . and division general managers. strategic leaders are challenged to adapt their frames of reference so that they can deal with rapid. In other words. and accepted wisdom that bounds a manager's understanding of the company. Effective Strategic Leadership Shapes the formulation of Strategic Intent Influence Strategic Mission Successful Strategic Actions Formulation of Strategies Implementation of Strategies Strategic Competitiveness Above-Average Returns Figure: Effective Strategic Leadership Strategic leaders are those at the top of the company (in particular. The ability to manage human capital may be the most critical skill that a strategic leader possesses.Strategy Implementation and Control uncertainty. the industry in which it competes. a manager's 6. complex changes. the top management team. A managerial frame of reference is the set of assumptions. and the core competencies that it exploits in the pursuit of strategic competitiveness (and above-average returns). but other commonly recognised strategic leaders include members of the board of directors. In the today's competitive landscape. premises. the CEO).
Corporate culture refers to a company's values. vendors. and personality that define its corporate culture. decisions. These are reflections of Bill Gates marvellous leadership. and the tradition of competing aggressively. courageous. Where Does Corporate Culture Come From? An organization's culture is bred from a complex combination of socio-logical forces operating within its boundaries." its own lore (stories told over and over to illustrate company values and what they mean to stakehoIder). behaviour and thought patterns. the rewards of being part of a team responsible for a popular new software program. This implies that effective strategic leaders must be able to deal with the diverse and cognitively complex competitive situations that are characteristic of today's competitive landscape. its own embedded patterns of "how we do things around here. there are stories of the long hours programmers put in. zealous pursuit of low costs. BUILDING A STRATEGY-SUPPORTIVE CORPORATE CULTURE Every company has a unique organizational culture. The strategic leader has several responsibilities. The bedrock of Wal-Mart's culture is dedication to customer satisfaction. in its ethical standards and official policies. ways of operating. its own taboos and political don'ts-in other words.Strategic Management frame of reference is the foundation on which a manager's mindset is built. And these resources must be developed for the company's future benefit. business practices. business principles. traditions. stockholders. and internal work environment. Effectively managing the company's operations. 7. A company's culture is manifested in the values and business principles that management preaches and practices. in the traditions the organization maintains. Thus. ♦ Being willing to make candid. the emotional peaks and valleys in encountering and overcoming coding problems. the exhilaration of completing a complex program on schedule. its own ingrained beliefs. yet pragmatic. Each has its own business philosophy and principles. unions.32 . The importance of a manager's frame of reference can be seen if we perceive that competitive battles are not between companies or products but between mindsets or managerial frames. and the communities in which it operates). beliefs. At Microsoft. in its stakeholder relationships (especially its dealings with employees. ♦ Seeking feedback through face-to-face communications. a strong work ethic. its own ways of approaching problems and making decisions. its own work climate. ♦ Having decision-making responsibilities that cannot be delegated. in its supervisory 6. the satisfaction of working on cutting-edge projects. including the following: ♦ Managing human capital (perhaps the most critical of the strategic leader's skills). the strategic leadership skills of a company's managers represent resources that affect company performance. ♦ Sustaining high performance over time.
A tight culture-strategy alignment acts in two ways to channel behaviour and influence employees to do their jobs in a strategy-supportive fashion. vision. and giving employees a high degree of decision-making responsibility is very conducive to successful execution of a strategy of delivering superior customer service. How culture can promote better strategy execution a culture Strong cultures promote good strategy execution when there's fit and hurt execution when there's little fit. objectives. in the legends people repeat about happenings in the organization. work group. A work environment where the culture matches the conditions for good strategy execution provides a system of informal rules and peer pressure regarding how to conduct business internally and how to go about doing one's job. When they are. performance targets or strategy.33 . the culture becomes a valuable ally in strategy implementation and execution. practices. Culture: ally or obstacle to strategy execution? An organization's culture is either an important contributor or an obstacle to successful strategy execution. the culture becomes a stumbling block that impedes successful strategy implementation and execution. adding significantly to the power and effectiveness of strategy execution. a culture where frugality and thrift are values strongly shared by organizational members is very conducive to successful execution of a low cost leadership strategy. temperament. in the peer pressures that exist. The beliefs. positively affecting organizational energy. or division. and motivation the workforce. beliefs and practices that become embedded in a company's culture can originate anywhere: from one influential individual. the degree to which organizational units cooperate. A culture where creativity. a significant part of a company's culture emerges from the stories that get told over and over again to illustrate to newcomers the importance of certain values and beliefs and ways of operating.Strategy Implementation and Control practices. For example. encouraging employees to take pride in their work. All these sociological forces. and behavioural norms that match what is needed for good strategy execution helps energize people throughout the company to do their jobs in a strategy-supportive manner. Strategy-supportive cultures shape the mood. and business approaches and practices underpinning a company's strategy may be compatible with its culture or they may not. A culture built around such business principles as listening to customers. 6. combine to define an organization's culture. embracing change. and how customers are treated. in the organization's politics. A culture grounded in values. from the bottom of the organizational hierarchy or the top The role of stories: Frequently. in employees' attitudes and behaviour. and challenging the status quo are pervasive themes is very conducive to successful execution of a product innovation and technological leadership strategy. department. When the culture is in conflict with some aspect of the company's direction. some of which operate quite subtly. and in the "chemistry" and the "vibrations" that permeate the work environment. work habits and operating practices.
the culture has to be changed as rapidly as can be managed – this. The Perils of Strategy-Culture Conflict When a company's culture is out of sync with what is needed for strategic success. it provides structure. performance targets. Employees are stimulated to take on the challenge of realizing the company's vision. The first step is to diagnose which facets of the present culture are strategy supportive and which are not. more usually it means revamping the mismatched cultural features to produce strategy fit. The talk has to be followed swiftly by visible. and a value system in which to operate. the greater the difficulty of implementing new or different strategies until better strategy-culture alignment emerges. of course. presumes that it is one or more aspects of the culture that are out of whack rather than the strategy. standards. to change whatever facets of the corporate culture hinder effective execution. altering incentive compensation (to reward the desired cultural behaviour). and it promotes strong employee identification with the company's vision. managers have to talk openly and forthrightly to all concerned about those aspects of the culture that have to be changed. Creating a strong fit between strategy and culture It is the strategy maker's responsibility to select a strategy compatible with the "sacred" or unchangeable parts of prevailing corporate culture. and collaborate with others as needed to bring the strategy to fruition. It is the strategy implementer's task. All this makes employees feel genuinely better about their jobs and work environment and the merits of what the company is trying to accomplish. Changing a problem culture Changing a company's culture to align it with strategy is among the toughest management tasks-easier to talk about than do. The menu of culture-changing actions includes revising policies and procedures in ways that will help drive cultural change. do their jobs competently and with enthusiasm. A sizable and prolonged strategy-culture conflict weakens and may even defeat managerial efforts to make the strategy work. visibly praising and recognizing people who display the new cultural traits. While correcting a strategyculture conflict can occasionally mean revamping strategy to produce cultural fit. recruiting and hiring new managers and employees who have the desired cultural values and can serve as role models for the desired cultural behaviour. aggressive actions to modify the culture-actions that everyone will understand are intended to establish a new culture more in tune with the strategy.34 . Changing problem cultures is very difficult because of the heavy anchor of deeply held values and habits-people cling emotionally to the old and familiar.Strategic Management A strong strategy-supportive culture nurtures and motivates people to do their jobs in ways conducive to effective strategy execution. Once a culture is executed. Then. The more entrenched the mismatched aspects of the culture. and strategy. once strategy is chosen. It takes concerted management action over a period of time to replace an unhealthy culture with a healthy culture or to root out certain unwanted cultural obstacles and instil ones that are more strategysupportive. it is difficult to change. 6.
organizational changes are seldom accomplished successfully from an office. Until a big majority of employees join the new culture and share an emotional commitment to its basic values and behavioural norms. The strongest signs that management is truly committed to creating a new culture include replacing old-culture traditionalist managers with "new-breed" managers. strategy implementers must enlist the support of first line supervisors and employee opinion leaders. convincing them of the merits of practicing and enforcing cultural norms at the lowest levels in the organization. there's considerably more work to be done in both instilling the culture and tightening the culture strategy fit. sustained commitment by the chief executive coupled with extraordinary persistence in reinforcing the culture at every opportunity through both word and deed. creating and sustaining a strategy-supportive culture is a job for the whole management team. The actions taken have to be credible.Strategy Implementation and Control replacing key executives who are strongly associated with the old culture. One is to engineer some quick successes that highlight the benefits of strategy-culture changes. Major cultural change requires many initiatives from many people. and middle managers have to reiterate values." and translate the organization's philosophy into everyday practice. thus making enthusiasm for the changes contagious. highly visible. competent team psychologically committed to pursuing the strategy in a superior fashion. changing long-standing policies and operating practices that are dysfunctional or that impede new initiatives. tying compensation incentives directly to the new measures of strategic predominance. it's unrealistic to expect an overnight transformation. personally talking to many departmental groups about the reasons for change is essential. undertaking major reorganization moves that bring structure into better alignment with strategy. department heads. Talk and symbolism have to be complemented by substantive actions and real movement. and unmistakably indicative of the seriousness of management's commitment to new strategic initiatives and the associated cultural changes. Senior officers. and making major budgetary reallocations that shift substantial resources from old-strategy projects and programs to new-strategy projects and programs. However. It takes time for a new culture to emerge and prevail. "walk the talk. Implanting the needed culture-building values and behaviour depends on a sincere. The bigger the organization and the greater the cultural shift needed to produce a culture-strategy fit. Moreover. the 6. Neither charisma nor personal magnetism is essential. for the culture-building effort to be successful. However. In addition. and taking every opportunity to communicate to employees the basis for cultural change and its benefits to all concerned.35 . The task of making culture supportive of strategy is not a short-term exercise. instant results are usually not as important as having the will and patience to create a solid. Culture-changing actions While being out front personally and symbolically leading the push for new behaviours and communicating the reasons for new approaches is crucial. There are several ways to accomplish this. strategy implementers have to convince all those concerned that the culture-changing effort is more than cosmetic.
intellectual (c) intelligent. (a) intellectual. whereas divisional process departments are evaluated on these criteria. (a) Matrix (b) M-form (c) U-form (d) Virtual 6. 4. (c) Die Slowly.Strategic Management longer it takes. (c) None of functional departments and divisional process departments are accountable for profits or revenues. Self-Examination Questions Multiple Choice Questions 1. When a set of product groups are superimposed across functional departments. (d) Both the structures are same. intellectual 3. (b) Functional departments are not accountable for profits or revenues. Strategy formulation is primarily an _______________ process and strategy implementation is primarily an _____________ process. 2. organization will: (a) Thrive. it is usually tougher to reshape a deeply ingrained culture that is not strategysupportive than it is to instill a strategy-supportive culture from scratch in a brand-new organization. In large companies. In fact. Select a distinguishing feature between divisional and functional structure? (a) Both functional departments and divisional process departments are accountable for profits or revenues. this creates a ________ type of organization design. operational (b) operational. (d) Die Quickly. (b) Survive.36 . When strategic Management is ineffective and operational management is efficient. changing the corporate culture in significant ways can take two to five years. interim (d) intellectual.
It also has offices located in Nepal and Sri Lanka. (b) What kind of structure will you suggest in two countries? Answers Multiple Choice Questions 1. (d) 6. 1130 crores. with only modest direction from the corporate office. Essay type questions 1. These offices function as liaising office for local importers. What is corporate culture? 2. However. (b) 2. 53 crores. What is strategic implementation? How far is it different from strategy formulation? 2. 3. (c) 4. Each division operates as an independent unit and is responsible for its own activities. The organizational structure of the company is considered to be quite formal. It intends to increase the workforce and setup local assembling units. (2) desktops and (3) accessories. (a) Is the present structure of Speed Technologies functional or divisional? Discuss. The sales of the company from these two countries is marginal and their market share in markets is also low. Its total revenue for the last year approximated Rs. the company intends to expand its network in both the countries with little control from the head office.37 . Compare newer form of organisational structure with the traditional structure.Strategy Implementation and Control Short answer questions 1. The monthly requisitions from the importers are directly despatched by the corporate office. there is huge potential. What is a Strategic Business Unit? 3. Explain the concept of Value Chain Analysis. Considering this. Case Study Speed Technologies is an Indian company with three major divisions: (1) notebooks. Explain the concept of backward linkages in strategy formulation and implementation. and its net operating income was Rs. (a) 3.
Chapter 7 Reaching Strategic Edge LEARNING OBJECTIVES: ♦ Learn how Business Process Reengineering can be used as a strategic tool. ♦ Learn the concept of six sigma quality standards ♦ Have an overview of some of contemporary issues in strategic management. BUSINESS PROCESS REENGINEERING Waiting in a queue in a post office or bank. 2. There are several such changes in strategic ideology. In case of queue the process begins with your stepping into the queue. logistic movements of finished products. that are much more tricky to deal with. ♦ Learn basic of TQM and how it leads to organizational success. INTRODUCTION Business organizations evolve different kind of strategies in response to the environmental forces. you'll get run over if you just sit there. strategic management is also evolving. and ends with receiving the desired items or service and leaving the place. developing new products. Even if you're on the right track. etc. In this chapter we will discuss some of the recent and evolving issues in the subject. There was a time when diversification was strategic buzzword and different organizations believed in entering into newer business irrespective of any relationship with their existing business. Humorist 1. − Will Rogers. Business processes are simply a set of activities that . a person may feel need for improvement in processes. There are other business processes such as purchasing raw material. Then the basic ideology of businesses shifted from diversification to core-competencies. The steps of the process are the activities that you and the personnel providing services perform to complete the transaction. Buying a ticket is a simple business process. With the changes in the environment of the business.
and so on. The performance of business firm is. economy and speed. A set of interconnected processes comprise a business system. What is a Business Process? A process is a set of logically related tasks or activities oriented towards achieving a specified outcome. For example. A core business process creates value by the capabilities it provides to the competitiveness. They are parts of recurrent work processes within which they are located. the outcome of the interrelated operation of its constituent work processes. What is a business process and how it differs from other processes is question that may come to mind. one common process found almost in every organization is the order fulfilment. sequenced and organized. Order fulfilment begins with procuring an order and ends with delivery of goods to the customer.Strategic Management transform a set of inputs into a set of outputs for another person or process. procuring goods from suppliers. therefore. The redesign of processes. The structural elements that constitute a process provide the basis for its analysis. They are vital for success in the industry sector within which the company is positioned.2 . While some core business processes are easily identifiable. The following instances serve to show that core processes 7. provides a powerful basis for improving the performance of a business enterprise. BPR focuses on such critical business processes out of the many processes that go on in any company. It also includes all other related activities in between. Likewise other basic processes may include developing a new product or service. Some processes turn out to be extremely critical for the success and survival of the enterprise. appraisal. launching a new product in the market. Business process or business activities are not discrete or unrelated pieces of work. These are the core business processes of the company. thus. and redesign for achieving higher levels of efficiency and effectiveness. preparing the organization's budget. processing and paying insurance claims. Core business processes are critical in a company's evaluation by its customers. A business process comprises a combination of number of such independent or interdependent processes as: ♦ Developing new product ♦ Customer order processing ♦ Bill payment system Typically a business process involves a number of steps performed by different people in different departments. They are crucial for generating competitive advantages for a firm in the marketplace. "A process is a collection of activities which creates an output of value to the customer and often transcends departmental or functional boundaries. and quality and output. In order to have a better appreciation of what Business Process Reengineering (BPR) really means it would be pertinent to have preliminary knowledge of business processes. some core Business processes may not always be immediately apparent.
delays keep on mounting and it enhances the chances of errors. is a core business process. This may result in a sub-optimal performance for the organization as a whole. most of the existing work processes were developed before the advent of computers and IT revolution. time consuming. As a result the employees tend to focus more on the narrow goals of their own department at the cost of larger goals of the organization as a whole. ♦ In a fast moving consumer goods industry marketing and brand management is a core process. Since the objective of reengineering is to provide competitive advantage to the enterprise. Even after the massive penetration of information technology. In such a situation. the emerging critical issues often remain unattended as they do not fit into the narrow definitions of tasks or roles of an individual department. ♦ In the banking industry. and profit after claims for the company. ♦ In the electronics and semi-conductor industries.Reaching Strategic Edge need to be identified carefully in terms of their bearing on a firms competitiveness: ♦ In the insurance industry. As the small fragments of work move from person to person and from unit to unit. In order to do this we have to necessarily start from the organization's business vision. Seldom there has been any serious effort to systematically analyse the processes and measure their effectiveness towards the organizational efficiency. costly and inefficient.3 . The core processes of a company may change over a period of time according to the shifting requirements of its competitiveness. Also "the existing business processes and work patterns are largely obsolete and irrational. This has resulted only in some sort of mechanization of the existing work methods without bringing 7. most organizations have usually applied the technology only in a limited way to automate their existing work methods or to speed up the isolated or narrow components of a larger existing work process. One of the reason for which an imperative need is felt for process change is that most of the processes that the organizations are engaged in might have been developed by their functional units over a period of time and might have been evolved based on a series of unplanned decisions. Fragmentation of work processes makes it difficult to improve the quality of work performance and also develops a narrow vision among the employees. new product development is a core process. We must remember that. and drive from there the processes that have to be best in the world in order to realize that vision. the actual work that leads to a balance of competitive premium for customers. This results in piecemeal accomplishment of tasks without looking at the overall goal. is a core business process. it is extremely important to identify those core processes which need to be focussed for achieving excellence. The overall business processes in an organization extending over several departments may be quite lengthy. Quite often the individual departments or units of a company aim at optimising their own performance disregarding the resultant effect on other areas of operation. the activities that help mobilise deposits and generate funds for advances to customers.
♦ For considering totally new ways of redesigning processes. It has been possible to double the speed of normal production. Issues that emerge from the foregoing discussions on the need for change form the underlying premises of Business Process Reengineering (BPR). therefore. ♦ A customer-focussed organization needs to be realigned in terms of a process orientation. The redesign effort aims at simplifying and streamlining a process by eliminating all redundant and non-value adding steps. output. It is revolutionary redesign of key business processes that involves examination of the basic process itself. and needs rapid quantum leaps in performance. They may be briefly outlined as follows: ♦ The operational excellence of a company is a major basis for its competitiveness. and principle. it is a total deconstruction and rethinking of a business process in its entirety. ♦ The business strategy of a company should be oriented towards leveraging its operational excellence into the marketplace. such as why the work is done. quality. changing the process or redesigning the process may be the only viable alternative for turnaround. They must break themselves free from their primitive and archaic work processes that drag them down. where is it done and when it is 7. It is. ♦ Dramatic improvement in performance is the prerequisite for overcoming competition. not functions.4 . ♦ How to compete is more important than deciding about where to compete. and responsiveness to customers. each and every concept. needs to abandoned temporarily. Definition of BPR Business Process Reengineering (BPR) refers to the analysis and redesign of workflows and processes both within and between the organizations. imperative that for many organizations on the decline. cost. who does it. assumption. Examples from established Japanese industries as well as new entrepreneurial ventures in Japan proves that it is possible to achieve a much higher level of process performance by redesigning the process. and speeding up the work-flow through the use of IT systems. purpose. This could be achieved by effecting a total change in the process instead of a piecemeal change. utilize assets several times more productively and respond to customers' needs and expectations much more rapidly. BPR is an approach to unusual improvement in operating effectiveness through the redesigning of critical business processes and supporting business systems. Its objective is to obtain quantum gains in the performance of the process in terms of time. It looks at the minute details of the process.Strategic Management in any appreciable change in the process and output.. i. activities and transactions. The orientation of the redesign effort is radical.e. reducing drastically the number of stages or transfer points of work. ♦ Continuous improvement is a deficient approach when a company is far behind the industry standards. unconstrained by its existing structure and pattern. ♦ Process need to managed.
and deciding how it can best be done now. In an attempt to improve performance. starting from scratch. They try to find out answers to such questions like "Why do we do what we do? And why do we do it the way we do?" An attempt to find out answers to such questions may startlingly reveal certain rules. "Reengineering is about business reinvention – not business improvement. In order to improve its competitive position a firm must try to identify the generic business processes which significantly add to the value for its output to the customer and should try to focus on reengineering these processes first. jobs. Business process. It implies forgetting how work has been done so far. BPR focuses on the process of producing the output and output of an organization is the result of its process. The thinking process in reengineering begins with a totally free state of mind without having any preconceived notion. And then it decides on how to do it. In doing reengineering people must ask some most basic questions about their organizations and about their operations. Most people in business focus their attention on tasks. Not all the processes in an enterprise enjoy equal importance in creating customers value. in other words. Reengineering is meant for replacement of the old process by altogether new one to achieve dramatic improvement in the performance. "The generic business processes of a firm needing redesign may be classified into three broad categories as follows: 7. has been defined as the series of activities that utilizes various inputs to create output that are valued by customers. Radical redesigning means going to the root of the problem areas and not attempting to make any superficial changes. Reengineering begins with a fundamental rethinking. Radical redesign involves completely discarding all existing structures and procedures and evolving completely new ways of doing the work. people. Another key element in the reengineering involves radical redesigning of process. as already mentioned earlier." The next key concept that lies behind reengineering is that it aims at achieving dramatic improvement in performance. the same can be achieved by conventional methods of adjustments in operating processes and reengineering is not the answer. or business modification. If an organization feels the need for marginal improvement in any area of operation at any point of time. Reengineering ignores what the existing process is and concentrates on what it should be. Reengineering does not begin with anything given or with any assumptions. structure. It follows from the above and also from the characteristics of the definition of reengineering that its main focus is on the process. "Business process reengineering means starting all over. If something is not required to be done it is outright discarded. business enhancement.5 .Reaching Strategic Edge done." Reengineering. Reengineering first determines what a company must do. but fail to pay adequate attention on the process. means pulling aside much of the age-old practices and procedures of doing a thing developed over hundred years of management experience. assumptions and operational processes as obsolete and redundant.
competitors. advertising. With the help of this research base BPR designers are in a position to create a vision for the future and design new business processes. Implementing BPR in organizations In a crude sense. Customers are also demanding better products and services. human resource management. companies began business process improvement with a continuous improvement model. The most obvious is technology. employees.Strategic Management ♦ Processes pertaining to development and delivery of product(s) and/or services. manufacturing. The approach to BPR begins with defining the scope and objectives of the reengineering project. This model attempts to understand and measure the current processes. It has become a matter of survival for most companies. These usually include marketing. new technology.6 . New technologies (like Information Technology) are rapidly bringing new capabilities to businesses. After opening up of Indian economy companies have been forced to improve their business processes because of increased competition. and building infrastructure. This helps in looking at the problem with a clean mind. performance measurement and reporting. etc. They have to research customers. BPR may be viewed as a means of solving business problem through an imaginative leveraging of IT capabilities. Rationale of BPR Improving business processes is paramount for businesses to stay competitive in today's marketplace. design. These may include research. some companies make reengineering efforts under the assumption that the current processes are wrong and irrelevant. However. More companies have entered the market place. They have to go through a learning process. If they do not receive what they want from one supplier. thereby raising the strategical options and the need to improve business processes dramatically. planning and budgeting. ♦ Process comprising management activities: These include strategy formulation. 7. and competition has become harder and harder. they have many others to choose from. and logistics. ♦ Process involving interface(s) with customers. besides purchasing / procurement and materials management. and make performance improvements. engineering. They are ready to try new brands. In the context of these generic business processes. order fulfilment. and service. free of any biases. major changes are required to just stay even. Over the last decade several factors have accelerated the need to improve business processes. In today's market place. Under such perspectives designers of business process disassociate themselves from existing processes. Persons entrusted with the tasks of BPR have to undertake research in the light of scope and objectives. They also create a plan of action based on the gap between the current and proposed processes.
using and disposing a product.7 . However. The purpose is to gain an understanding of the 'what'. ♦ Impact of IT-systems are identified as: ♦ Compression of time ♦ Overcoming restrictions of geography and/or distance ♦ Restructuring of relationships. as discussed earlier. characterised by IT-assisted speed. That information technology is going to play a significant role in changing the business processes during the years to come. The Role of Information Technology in BPR The accelerating pace at which information technology has developed during the past few years had a very large impact in the transformation of business processes. Formulation of redesign plan is the real crux of the reengineering efforts. 7. Steps in BPR are as follows: Determining objectives and Framework: Objectives are the desired end results of the redesign process which the management and organization attempts to realise. adaptability and integration of data and service points. is focussed on meeting the customer needs and expectation quickly and adequately. Globalization and competition call for better management. Formulate a redesign process plan: The information gained through the earlier steps is translated into an ideal redesign process. direction. Implement the redesign: It is easier to formulate new process than to implement them. has been established beyond doubt. and 'why' of the targeted process. thereby enhancing his/her satisfaction level. The purpose is to redesign business process that clearly provides added value to the customer. In this step alternative processes are considered and the best is selected. It helps in building a comprehensive foundation for the reengineering process. Customer focussed redesign concepts are identified and formulated. faster response to change and adherence to globally accepted standards of quality and services. accuracy.Reaching Strategic Edge technologies and structures. This will provide the required focus. some companies go through the reengineering process with clean perspective without laying emphasis on the past processes. Various studies have conclusively established the role of information technology in the transformation of business processes. It is the joint responsibility of the designers and management to operationalise the new process. their steps in acquiring. Study the Existing Process: The existing processes will provide an important base for the redesigners. Implementation of the redesigned process and application of other knowledge gained from the previous steps is key to achieve dramatic improvements. Identify Customers and Determine their Needs: The designers have to understand customers their profile. and motivation for the redesign process. A reengineered business process.
Reengineering is a revolutionary approach towards radical and total redesigning of the business processes. It aims at achieving excellence and a breakthrough in performance by redesigning the process entirely and radically. Time Customer Cycle Time Customer need is recorded by the organization Figure : Customer Time cycle Customer need satisfier is provided by the organization Reengineering does not mean any partial modification or marginal improvement in the existing work processes. Obviously it requires challenging the necessity of existing rules and procedures and discarding the same to evolve altogether new processes.8 . thereby improving the competitiveness and customer satisfaction. Reengineering does not have any scope for any partial modification or marginal improvement in the existing business processes. While reengineering may lead to restructuring of organization.Strategic Management IT-initiatives. BPR maintains a continuous effort for more and more improvement." BPR aims at reducing the cycle time of process by eliminating the unwanted and redundant steps and by simplifying the systems and procedures and also by eliminating the transit and waiting times as far as possible. BPR is continuous improvement process. Although BPR is a multi-dimensional approach in improving the business performance it's thrust area may be identified as "the reduction of the total cycle time of a business process. provide business values in three distinct areas: ♦ Efficiency – by way of increased productivity. 7. ♦ Effectiveness – by way of better management. thus. ♦ Innovation – by way of improved products and services All these can bring about a radical change in the quality of products and services. Central Thrust of BPR: Improvement on quality and cost follows after improvement on thrust area. Information technology (IT) is a critical factor in the success of bringing this change. any restructuring does not necessarily mean reengineering. The basic principles that differentiate reengineering from any other drive on improving organizational efficiency may be briefly summarized as follows : ♦ At the core of reengineering lies the concept of discontinuous thinking. Even after redesigning of a process.
Reengineering takes time and expenditure. instead of automating the existing process. testing. at least in the short run. Reengineering requires viewing a process from cross-functional perspective. simple. One of them immediately started running away. ♦ "BPR efforts involves managing massive organizational change. If the targets are not properly set or the whole transformation not properly carried out. ♦ While reengineering starts with the process it does not end there. reengineering efforts may turn-out as a failure. Also faster and efficient redesigned business processes provide a firm with many more opportunities for trying. BPR recognizes "the" vast and expanding potential of IT for the most rational. 3. 'No use' the other claimed 'We cannot outrun him." In view of the massive organizational changes involved in reengineering. it is imperative that a reengineering drive is supported by the vision and commitment of the organizations top leadership to see through its successful completion. It disturbs established hierarchies and functional structures and creates serious repercussions and involves resistance among the work-force.9 . and efficient redesign of work structure. Only a limited number of companies are able to have enough courage for having BPR because of the challenges posed. therefore. We are sure to be killed'. modifying and learning. 7. Reengineering effort. People have the choice of making their own decisions instead of being directed. that many companies are reluctant to go through the exercise. The fundamental and radical changes that takes place while reengineering the process has its own implication on other parts of the organization – almost on every part of it. Practically every aspect of the organization changes beyond recognition. Besides many of these systems and procedures have failed to reap the benefit of massive development of information technology during the past few years. people and the goals of the organization. The change in process is almost always accompanied by a whole lot of changes in other areas too. The first person replied 'I need to outrun you and not him'." Reengineering is not just changing the process. These assumptions may not be valid any more. Even there can be loss in revenue during the transition period. "Functional departments find their existence as redundant. BENCHMARKING Two men were passing through a jungle." BPR aims at utilizing information technology for evolving a new process.Reaching Strategic Edge ♦ BPR approach recognizes that most of the existing rules and procedures of work methods are based on certain assumptions about technology. Problems in BPR Reengineering is a major and radical improvement in the business process. Work changes from task oriented to process oriented. Setting of targets is tricky and difficult. focuses on a multidimensional approach disregarding the constraints of organizational structure departmental boundaries. They saw a tiger at a distance.
then the twenty-four hours can be a benchmark. It involves regularly comparing different aspects of performance with the best practices. However. benchmarking exercises are also repeated periodically so that the organization does not lag behind in the dynamic environment. a customer support engineer of a television manufacturer attends a call within forty-eight hours. The organizations possess a large amount of information that helps them in taking strategic and other important decisions. Benchmarking helps organization to get ahead of competition. In recent years.Strategic Management Similarly. IBM adopted 7. Subsequently ALCOA. it studies the circumstances and processes that help in superior performance. It measures a company's products. in cut-throat competition it is important for organizations to gain an edge over their competitors. For example. the concept of benchmarking is much broader than mere controlling as there are major strategic dimensions involved. identifying gaps and finding out novel methods to not only reduce the gaps but to improve the situations so that the gaps are positive for the organization. Eastman Kodak. different commercial and non-commercial organizations are discovering the value of benchmarking and are applying it to improve their processes and systems. Dictionary defines a benchmark as a standard or a point of reference against which things may be compared and by which something can be measured and judged. it may be compared to the concept of control as the similarities do exist. Benchmarking is a process of continuous improvement in search for competitive advantage. The scientific studies conducted by Frederick Taylor in the latter part of the nineteenth century represent an early use of the benchmarking concept. Efforts are made to learn. Over a period of time it covered other spheres of business activity. the concept evolved in companies operating in an industrial environment. Further. Benchmarking helps in improving performance by learning from best practices and the processes by which they are achieved. However. Xerox pioneered this process in late 70's by benchmarking its manufacturing costs against those of domestic and Japanese competitors and got dramatic improvement in the manufacturing cost. Better processes are not merely copied. Companies that translate this information to knowledge and use it in their planning and decision making are the winners. the term got popularity much later in the seventh decade of twentieth century. services and practices against those of its competitors or other acknowledged leaders in their field. What is Benchmarking? In simple words. The term has presumably been adapted from physical sciences wherein it refers to a surveyor's mark made on a stationary object at previously determined position and elevation and used as a reference point to measure altitudes. Benchmarking is not a panacea for all problems. If the industry norm is that all calls are attended within twenty-four hours. benchmarking is an approach of setting goals and measuring productivity based on best industry practices. Initially. improve and evolve them to suit the organizational circumstances. In this sense. at a naïve level. Rather.10 . It developed out of need to have information against which performances can be measured.
Reaching Strategic Edge benchmarking. Organizations identify realistic opportunities for improvements. interviews. Clearly understanding existing business processes: This step will involve compiling information and data on performance. Compare own processes and performance with that of others: While comparing gaps in performance between the organization and better performers is identified. Further. However. Prepare a report and Implement the steps necessary to close the performance gap: A report on the Benchmarking initiatives containing recommendations is prepared. This will include mapping processes. Firms can use benchmarking process to achieve improvement in diverse range of management function like: ♦ Maintenance operations ♦ Assessment of total manufacturing costs ♦ Product development ♦ Product distribution ♦ Customer services ♦ Plant utilization levels ♦ Human resource management The Benchmarking Process Benchmarking processes lack standardization. visits and filling of questionnaires. It also periodically evaluates and reset the benchmarks in the light of changes in the conditions that impact the performance.11 . Such comparisons have to be meaningful and credible. best processes are identified. Information and data is collected by different methods for example. gaps in performance is analysed to seek explanations. Feasibility of making the improvements in the light of the conditions that apply within the organization is also examined. Evaluation: Business organizations evaluate the results of the benchmarking process in terms of improvements vis-à-vis objectives and other criteria set for the purpose. Such a report includes the action plan(s) for implementation. common elements are as follows: (1) Identifying the need for benchmarking and planning: This step will define the objectives the benchmarking exercise. These may be within the same organization or external to them. Identify best processes: Within the selected framework. (2) (3) (4) (5) (6) 7. It will also involve selecting the type of benchmarking.
The TQM philosophy greatly emerged under Deming's guidance. European nations. and extends backward and forward to include the supply chain and the customer chain. The concept of quality control as a distinct discipline emerged in the United States in the 1920s. or limit. Crosby. but not so in Japan. TQM stresses learning and adaptation to continual change as keys to organizational success. Pioneering work by Shewhart. Japan. and should not focus on merely sorting good products from bad. Deming believed the responsibility for quality should be shared by everyone in an organization. it works horizontally across functions and departments. Perhaps most significantly. especially if the sorting is performed by different people from those manufacturing the product. these and other men soon recognized that the concept of quality control need not be restricted only to manufacturing processes. At the time. Deming's quality management philosophies were first developed in the years prior to World War II. Deming's message had essentially fallen on deaf ears in the United States. TQM is a total system approach (not a separate area or program) and an integral part of high-level strategy. Feigenbaum. The idea of assuring quality could also be applied to administrative processes service industries and all sphere of organization activity. was not the most efficient way to assure a quality output. as it is more commonly known) has caught on in essentially every corner of industry. the creation of defective items in industrial processes. involves all employees. who many be regarded as the father of TQM. A more effective management philosophy might focus on actions to prevent a defective product from ever being created. top to bottom. But Deming's work only saw limited application in the United States prior to World War II.12 . But Japan. There are numerous disadvantages to this sorting process. Deming. then as now. Deming believed quality management should be pervasive.Strategic Management 4. rather than simply screening it out. was an island nation that had to import all its raw materials. and others indicated that perhaps better ways to approach the quality control concept existed. it makes sense first to understand some of the underlying concepts of quality management that have guided industrial development. The TQM philosophy is a guiding force in all industrialized nations like USA. Also. they reasoned. as a 7. Deming recognized that most quality problems were system-induced and were therefore not related to workmanship. quality control was intended simply to control.S. To understand this concept fully. etc. corporations in cooperation with deans of business and engineering departments of major universities and recognized consultants: Total Quality Management (TQM) is a people-focused management system that aims at continual increase in customer satisfaction at continually lower real cost. Interestingly. Juran. Perhaps simply sorting good products from bad. TOTAL QUALITY MANAGEMENT (TQM) The Total Quality Management movement (or simply TQM. Subsequently Deming was brought to Japan by General Douglas MacArthur to serve as a management consultant to the Japanese as they rebuilt their industrial base. What is TQM? A definition of total quality was endorsed in 1992 by the chairs and CEOs of nine major U. Japan.
If an organization is serious about implementing TQM. As quality improves. automobiles. Much of the Japanese quality superiority occurred as a result of statistical manufacturing methods and other management philosophies now recognized as Total Quality Management. and everyone takes responsibility for quality. steel. If management is willing to take a sales hit if quality levels are not up to requirements. Almost any organization's senior managers will claim they are committed to quality. and satisfy the customer. from a TQM perspective. the quality assurance department gets 7. but is instead a guiding philosophy shared by everyone in an organization. Various principles that guide the total quality management philosophy are as follows: ♦ A sustained management commitment to quality: An organization's personality and culture will ultimately reflect its senior management's values. shipbuilding. Other organizations traditionally relied on inspection to assure quality. and defining and satisfying customer expectations: Taguchi and Ishikawa contributed heavily to these disciplines. problem solving. most notably in the areas of variability reduction.13 . ♦ Universal quality responsibility: Another basic TQM precept is that the responsibility for quality is not restricted to an organization's quality assurance department. The Japanese dominated almost every market they chose to enter: electronics. rather than simply to detect and sort out defects. They were willing to learn. ♦ Preventing rather than detecting defects: TQM is a management philosophy that seeks to prevent poor quality in products and services. satisfy the customer. teamwork. and the organization's senior management has to be unwavering in its commitment to quality. Superior quality became a common theme of Japanese market dominance. motorcycles. the commitment to do so has to start at the top." That wisdom says it all. The Japanese made additional contributions to the TQM philosophy.Reaching Strategic Edge formerly industrialized nation. but how they act at the end of the month (when shipments are due) really sets the tone for the entire organization. "An ounce of prevention is worth a pound of cure. cameras. TQM means this thinking is reversed. all the talk in the world about quality won't make a difference to the people making the product. had to rebuild its industrial base from essentially nothing. ♦ Focusing on the customer: According to Lee Iacocca had only three rules: Satisfy the customer. the rest of the organization will understand the commitment to quality is real.1 Principles guiding TQM Implementing TQM requires organization wide support. What followed in Japan during the ensuing decades has been well studied and is now well known. That about sums up the TQM philosophy on customer focus. There are several principles that guide success of TQM. The Japanese had no preconceived approaches about sorting defective products from acceptable ones. If management is willing to let a defective product go out the door in order to make sales. and several others. 4.
and in order to improve. Reducing errors. we need to know where we are (or stated differently. Improvements may be of several types: Enhancing value to the customer through new and improved products and services. and waste. ♦ Root cause corrective action: Most of us have experienced instances in which problems we thought were corrected continued to occur. ♦ Employee involvement and empowerment: Another fundamental TQM concept is that employees must be involved and empowered. A few companies fully committed to TQM have done' away completely with their quality assurance organizations. Developing new business opportunities. and it is: If you don't know where you're going. This is an extremely important concept ♦ Continuous improvement and learning: TQM espouses a philosophy of continuous improvement in all areas of an organization. and where are we going? A basic TQM concept is that quality is a measurable commodity. TQM seeks to prevent this by identifying the root causes of problems.14 . leading to new goals or approaches. and by implementing corrective actions that address problems at the root cause level. Improving responsiveness and cycle time performance. Quality measurement is needed in order to focus improvement efforts appropriately. ♦ Quality measurement: There is another saying relevant to TQM. what the current quality levels are). This philosophy ties in closely with the quality measurement and universal quality responsibility concepts mentioned above. The quality measurement aspect of TQM asks the question: Where are we. "Learning" refers to adaptation to change. Continuous improvement is part of the management of all systems and processes.Strategic Management smaller. Improvement and learning need to be embedded in the way an organization operates. "Continuous improvement" refers to both incremental and "breakthrough" improvement. and be driven by opportunities to do better as well as by problems that need to be corrected. and we need to have some idea where we are going (or what quality levels we aspire to). seek to eliminate problems at their source. This means they should be a regular part of daily work. Employee involvement means every employee is involved in running the business and plays an active role in helping the organization meet its goals. Employee empowerment means employees and management recognize that many obstacles to achieving organizational goals can be overcome by employees who are provided 7. Achieving the highest levels of performance requires a well-defined and well-executed approach to continuous improvement and learning. defects. and Improving productivity and effectiveness in the use of all resources. you'll probably end up somewhere.
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with the necessary tools and authority to do so. ♦ The synergy of teams: In addition to the TQM concepts of empowerment and involvement of employees, taking advantage of the synergy of teams is an effective way to address the problems and challenges of continuous improvement. Dr. Kaoru Ishikawa first formalized the teams concept as part of the TQM philosophy by developing quality circles in Japan. ♦ Thinking statistically: Statistical thinking is another basic TQM philosophy. Quality efforts often require reducing process or product-design variation, and statistical methods are ideally suited to support this objective. ♦ Inventory reduction: Largely in response to their lack of natural resources (as well as the 1970s worldwide oil shortages), the Japanese pioneered the concept of reducing inventories. This management philosophy became known as Just-in- Time (or JIT, for short) inventory management. The Japanese JIT inventory management concepts caught on in the United States and other nations. Although the concept was originally intended to address material shortages, an interesting side effect immediately emerged: As inventories grew smaller, quality improved. ♦ Value improvement: The linkage between continuous improvement and value improvement is simultaneously obvious and subtle. This linkage becomes apparent when one considers the definition of quality, which is the ability to meet or exceed customer requirements and expectations. The essence of value improvement is the ability to meet or exceed customer expectations while removing unnecessary cost. But simply cutting costs, however, will not improve value if the focus does not remain on satisfying customer requirements and expectations. ♦ Supplier teaming: Another principle of the TQM philosophy is to develop long-term relationships with a few high-quality suppliers, rather than simply selecting those suppliers with the lowest initial cost. ♦ Training: Training is basic to the TQM process. The concept is based on of empowering employees by providing the tools necessary for continuous improvement. One of the most basic tools is training. "TQM is a management philosophy, an abstract entity!" But TQM is not an overnight cure for an organization's quality problems. The TQM implementation process is not a program. A TQM implementation effort has a beginning, but if implemented properly, it does not have an ending. The continuous improvement process continues indefinitely in organizations that successfully implement TQM. We advise patience when embarking on this journey. 4.2 TQM and traditional management practices TQM is quite different from traditional management practices, requiring changes in organizational
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processes, beliefs and attitudes, and behaviours. "Traditional management" means the way things are usually done in most organizations in the absence of a TQM focus. Many "traditional" organizations have been applying TQM principles all along, so not all of these comments pertain to every organization. The nature of TQM differs from common management practices in many respects. Some of the key differences are as follows: ♦ Strategic Planning and Management: Quality planning and strategic business planning are indistinguishable in TQM. Quality goals are the cornerstone of the business plan. Measures such as customer satisfaction, defect rates, and process cycle times receive as much attention in the strategic plan as financial and marketing objectives. ♦ Changing Relationships with Customers and Suppliers: In TQM, quality is defined as products and services beyond present needs and expectations of customers. Innovation is required to meet and exceed customers' needs. Traditional management places customers outside of the enterprise and within the domain of marketing and sales. TQM views everyone inside the enterprise as a customer of an internal or external supplier, and a supplier of an external or internal customer. Marketing concepts and tools can be used to assess internal customer needs and to communicate internal supplier capabilities. ♦ Organizational Structure: TQM views the enterprise as a system of interdependent processes, linked laterally over time through a network of collaborating (internal and external) suppliers and customers. Each process is connected to the enterprise's mission and purpose through a hierarchy of micro- and macro-processes. Every process contains sub-processes and is also contained within a higher process. This structure of processes is repeated throughout the hierarchy. ♦ Organizational Change: In TQM the environment in which the enterprise interacts is considered to be changing constantly. Management's job, therefore, is to provide the leadership for continual improvement and innovation in processes and systems, products, and services. External change is inevitable, but a favourable future can be shaped. ♦ Teamwork: In TQM individuals cooperate in team structures such as quality circles, steering committees, and self-directed work teams. Departments work together toward system optimization through cross-functional teamwork. ♦ Motivation and Job Design: TQM managers provide leadership rather than overt intervention in the processes of their subordinates, who are viewed as process managers rather than functional specialists. People 'are motivated to make meaningful contributions to what they believe is an important and noble cause, of value to the enterprise and society. The system enables people to feel like winners. 5. SIX SIGMA AND MANAGEMENT Six sigma is often related to Motorola, the company that has invented it. In the eighth decade of the 20th century, Motorola's significantly changed the discussion of quality from one where quality
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levels were measured in percentages (parts per hundred) to parts per million or even parts per billion. It pointed out that modern technology was so complex that old ideas about acceptable quality levels are no longer acceptable. The success of Motorola effectively changed the focus of quality worldwide. Many giants like Xerox, Boeing, GE, Kodak followed Motorola's lead. In India also Tata's, WIPRO and Bharti's and others are effectively reaping the benefits of six-sigma. Human quest for better quality is unending. With the help of technology and newer tools organizations enhance quality of their products that are seemingly of very good quality. Quality refers to the degree of excellence and standard. Better quality is often correlated with superior processes and products. Strategically, a product of good quality should be able to meet the specifications of customer and should be able to satisfy him. If battery of a wristwatch lasts for eight months, but is expected to last for a year by the customer, then the product battery is not of desired quality. Good quality should not always be associated with good products. Another dimension of quality is that it should not be restricted to satisfying the existing desires of customers. It should not put a boundary on quality by limiting it to the current information and perspective of customers. Rather it should be futuristic, i.e., in addition to meeting customer's present expectations, it should be able to improve them. 5.1 What is Six Sigma? Primarily Six Sigma means maintenance of the desired quality in processes and end products. It means taking systemic and integrated efforts toward improving quality and reducing cost. It is a highly disciplined process that helps in developing and delivering near-perfect products and services. It strives to meet and improve organizational goals on quality, cost, scheduling, manpower, new products and so on. It works continuously towards revising the current standards and establishing higher ones. Six Sigma has its base in the concept of probability and normal distribution in statistics. Six Sigma strives that 99.99966% of products manufactured are defect free. Six Sigma is a smarter way to manage a business or a department. Six Sigma puts the customer first and uses facts and data to drive better solutions. Six Sigma efforts target three main areas: ♦ Improving customer satisfaction ♦ Reducing cycle time ♦ Reducing defects Improvements in these areas usually represent dramatic cost savings to businesses, as well as opportunities to retain customers, capture new markets, and build a reputation for top performing products and services. Although it involves measuring and analyzing an organization's business processes, Six Sigma is not merely a quality initiative; it is a business initiative. Achieving the goal of Six Sigma requires
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more than small, incremental improvements; it requires breakthroughs in every area of an operation. In statistical terms, "reaching Six Sigma" means that your process or product will perform with almost no defects. But the real message of Six Sigma goes beyond statistics. Six Sigma is a total management commitment and philosophy of excellence, customer focus, process improvement, and the rule of measurement rather than gut feel. Six Sigma is about making every area of the organization better able to meet the changing needs of customers, markets, and technologies - with benefits for employees, customers, and shareholders. The background of Six Sigma stretches back eighty-plus years, from management science concepts developed in the United States to Japanese management breakthroughs to "Total Quality" efforts in the 1970s and 1980s. But its real impact can be seen in the waves of change and positive results sweeping such companies as GE, Motorola, Johnson & Johnson, and American Express. GE's Key Concepts of Six Sigma At its core, Six Sigma revolves around a few key concepts. Critical to Quality: Defect: Process Capability: Variation: Stable Operations: Design for Six Sigma: 5.2 Six sigma methodology For implementing six sigma there are two separate key methodologies for existing and new processes. Conceptually there is some overlapping between the two. The two methodologies as follows: 1. DMAIC: DMAIC methodology is an acronym for five different steps used in six sigma directed towards improvement of existing product, process or service. The five steps are as follows: ♦ Define: To begin with six sigma experts define the process improvement goals that are consistent with the strategy of the organization and customer demands. They discuss different issues with the senior managers so as to define what needs to done.
Attributes most important to the customer Failing to deliver what the customer wants What your process can deliver What the customer sees and feels Ensuring consistent, predictable processes to improve what the customer sees and feels Designing to meet customer needs and process capability Source: http://www.ge.com/sixsigma/sixsigstrategy.html
It is a strategy for designing new products. Jack Welch. ♦ Control: Initial trial or pilots are run to establish process capability and transition to production. It too was an improvement-focused program. ♦ Measure: Next identify the factors that are critical to quality (CTQs). Six Sigma is customer focused. 1. Measure factors such as product capabilities and production process capability. Total Quality Management (TQM) was popular. ♦ Analyze: Verify cause-and-effect relationship between the factors in the processes. but it ultimately died a slow and silent death in many companies. driving the improvement effort. wrote in the annual report that in just three years. ♦ Define: As in case of DMAIC six sigma experts have to formally define goals of the design activity that are consistent with strategy of the organization and the demands of the customer. ♦ Analyze: Develop and design alternatives. ♦ Verify: Verify designs through simulations or pilot runs. . ♦ Design: Develop details of design and optimise it. 2. DMADV: DMADV is again acronym for the steps followed in implementing six sigma. What makes Six Sigma different? Three key characteristic separate Six Sigma from other quality programs of the past. Six Sigma is much more than improvement 2. It's almost an obsession to keep external customer needs in plain sight.3 What's New About Six Sigma? In the 1980s. 5.Reaching Strategic Edge ♦ Measure: The existing processes are measured to facilitate future comparison. Six Sigma had saved the company more than $2 billion. Experts need to identify the relationship between the factors. They have to make an comprehensive analyses to identify hidden or not so obvious factor. Verify designs may require using techniques such as simulations. Six sigma experts collect process data by mapping and measuring relevant processes.) Six Sigma projects produce major returns on investment. (External customers are mostly those who buy business's products and services. GE's CEO. Six Sigma changes how management operates. Also assess the risks involved. Verified and implemented processes are handed over to the process owners. 7. Create high-level design and evaluate to select the best design. Afterwards continuously measure the process to ensure that variances are identified and corrected before they result in defects.19 . processes and services. 3. ♦ Improve: On the basis of the analysis experts make a detailed plan to improve.
550 unhappy customers every month. he told senior executives that 40 percent of their annual bonus would be based on their involvement and success in implementing Six Sigma. right? The problem is that even a seemingly low percentage of defects can mean a lot of unhappy customers. these high levels of defects put a company in serious risk. complaints. The notion of zero defects is not at work here. the greater the cost of correcting them.000 credit card bills a month and operated at 99. It means providing employees with the time and training to tackle work challenges with some basic. making it that much more difficult to recover from defects. But reaching them requires a great deal of organizational teamwork. When Jack Welch introduced the Six Sigma program at GE. Six Sigma recognizes that there's always some potential for defects. some defects are bound to slip through. and executing to achieve results. not harder. The greater the number of defects that occur.Strategic Management projects. It means having the systems to provide customers what they want when they want it. Six Sigma is about putting into practice the notions of working smarter. and turned-off customers tell others about their experiences. That focused executive attention on turbo-charging Six Sigma in their individual divisions. it is generating defects. If company processed 250. Also defects can lead to lost customers. It is estimated that companies lose 15 percent to 20 percent of revenues each year to ineffective. But at 99. As customers get more and more demanding and impatient. But if a company have lots of customers. A 5 percent increase in customer retention has been shown to increase profits more than 25 percent. inefficient processes-although some might suggest that it's even higher. service activities and that sets attainable. short-term goals while striving for long-range business objectives. Training 7. Ideally. But keeping customers happy is good and profitable for the business. planning. as well as the risk of losing the customers. and cost. and some sophisticated. your company wants to avoid any defects and the resulting cost in money and customer satisfaction. we would have about 1. Six Sigma sets a performance target where defects in many processes and products are almost nonexistent. In a lot of ways. 5. When a business violates important customer requirements.20 . analytical tools. The goal of Six Sigma is to help people and processes aim high in aspiring to deliver defect-free products and services.9997 percent performance.38 percent accuracy (4 sigma). Six Sigma has produced some impressive numbers.4 Six Sigma as a system of management A significant difference between Six Sigma and seemingly similar programs of past years is the degree to which management plays a key role in regularly monitoring program results and accomplishments. even in the best run processes or best-built product. Six Sigma provides a goal that applies to both product and. Senior executives and leaders throughout a business are learning the tools and concepts of Six Sigma: new approaches to thinking.
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in GE was given a huge boost, and thousands of teams were trained in large sessions. At the same time, executives throughout GE participated in days and sometimes weeks of Six Sigma training. But training alone is not a management system. A management system involves accountability for results and ongoing reviews to ensure results. With both accountability and regular reviews, managers can begin to use Six Sigma as a guide to leading their businesses. As a management system, though, Six Sigma is not owned by senior leaders (although their role is critical) or driven by middle management (although their participation is key). The ideas, solutions, process discoveries, and improvements that arise from Six Sigma take place at the front lines of the organization. Six Sigma companies are striving to put more responsibility into the hands of the people who work directly with customers. In short, Six Sigma is a system that combines both strong leadership and grassroots energy and involvement. In addition, the benefits of Six Sigma are not just financial. People at all levels of a Six Sigma company find that better understanding of customers, clearer processes, meaningful measures, and powerful improvement tools make their work more rewarding. 5.5 Six Themes of Six Sigma The critical elements of Six Sigma can be put into six themes as follows: Theme one − genuine focus on the customer: Companies launching Six Sigma have often been appalled to find how little they really understand about their customers. In Six Sigma, customer focus becomes the top priority. For example, the measures of Six Sigma performance begin with the customer. Six Sigma improvements are defined by their impact on customer satisfaction and value. Theme two − data and fact-driven management: Six Sigma takes the concept 'of "management by fact" to a new, more powerful level. Despite the attention paid in recent years to improved information systems, knowledge management, and so on, many business decisions are still being based on opinions and assumptions. Six Sigma discipline begins by clarifying what measures are key to gauging business performance and then gathers data and analyzes key variables. Then problems can be much more effectively defined, analyzed, and resolved-permanently. At a more down-to-earth level, Six Sigma helps managers answer two essential questions to support datadriven decisions and solutions. ♦ What data/information do I really need? ♦ How do we use that data/information to maximum benefit? Theme three − processes are where the action is: Whether focused on designing products and services, measuring performance, improving efficiency and customer satisfaction, or even running the business, Six Sigma positions the process as the key vehicle of success. One of the most remarkable breakthroughs in Six Sigma efforts to date has been convincing leaders and managers-
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particularly in service-based functions and industries-that mastering processes is a way to build competitive advantage in delivering value to customers. Theme four − proactive management: Most simply, being proactive means acting in advance of events rather than reacting to them. In the real world, though, proactive management means making habits out of what are, too often, neglected business practices: defining ambitious goals and reviewing them frequently, setting clear priorities, focusing on problem prevention rather than fire-fighting, and questioning why we do things instead of blindly defending them. Far from being boring or overly analytical, being truly proactive is a starting point for creativity and effective change. Six Sigma, encompasses tools and practices that replace reactive habits with a dynamic, responsive, proactive style of management. Theme five – boundaryless collaboration: "Boundarylessness" is one of Jack Welch's mantras for business success. Years before launching Six Sigma, GE's chairman was working to break barriers and to improve teamwork up, down, and across organizational lines. The opportunities available through improved collaboration within companies and with vendors and customers are huge. Billions of dollars are lost every day because of disconnects and outright competition between groups that should be working for a common cause: providing value to customers. Theme six − drive for perfection; tolerate failure: How can you be driven to achieve perfection and yet also tolerate failure? In essence, though, the two ideas are complementary. No company will get even close to Six Sigma without launching new ideas and approaches-which always involve some risk. If people who see possible ways to be closer to perfect are too afraid of the consequences of mistakes, they'll never try. Finally we must bear in mind that Six Sigma is a gradual process. It starts with a dream or a vision: the goal of near-perfect products and services and superb customer satisfaction. If you are willing to take on this challenge and if your company is willing to support your effort, you will find that few endeavours in your career yield as much satisfaction. 6. CONTEMPORARY STRATEGIC ISSUES If we want to stay competitive, we need to be in e-commerce – Jessica Chu, Marketing manager, Aaeon Technology, Taiwan Our strategy is to integrate the internet into all of our core business. – Thomas Middelhoff, CEO, Bertelsmann AG, Germany 6.1 Strategies for Internet Economy The impact of the Internet and the rapidly emerging e-commerce environment is profound. The advent of the Internet and online networks changes everything. There can be no doubt that the Internet is a driving force of historical and revolutionary proportions. The coming of e-commerce has changed the character of the market, created new driving forces and key success factors and
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bred the formation of new strategic groups. The creativeness with which a company incorporates e-commerce practices holds enormous potential for reconfiguring its value chain and affecting its company's competitiveness. Also the Internet economy presents opportunities and threats that demand strategic response and that require managers to craft bold new strategies. What is Internet Technology? The Internet is an integrated network of banks of servers and high-speed computers, digital switches and routers, telecommunications equipment and lines, and individual users' computers. The backbone of the Internet consists of telecommunications lines (fibre optic lines, high-capacity telephone lines) criss-crossing countries, continents, and the world that allow computers to transfer data in digital form at very high speed. The bandwidth of the line determines the capacity or speed of the data transfer. These lines are connected to computer like digital switches that move traffic along the backbone lines; many of these switches act as routers, deciding which way to direct the traffic and how to handle the requests of users' computers to send or obtain data based on the destinations and line congestion. Users gain access to the network via a local area network (LAN) server or an Internet service provider's computerized switch that has the capability to route traffic to and from end users directly connected to it. Many different types of specialized software are required to make the Internet function and infuse it with attractive e-commerce capabilities. Strategy-shaping characteristics of the E-Commerce environment We need to understand how growing use of the Internet by businesses and consumers reshapes the economic landscape and alters traditional industry boundaries. The following features stand out: ♦ The Internet makes it feasible for companies everywhere to compete in global markets: This is true especially for companies whose products are of good quality and can be shipped economically. In retailing, the Internet opens up a much bigger geographic market than a traditional brick-and-mortar retailer could otherwise reach. e-commerce escalates rivalry among sellers in different geographic areas to a whole new level. ♦ Competition in an industry is greatly intensified by the new e-commerce strategic initiatives of existing rivals and by the entry of new, enterprising e-commerce rivals: Not only is the Internet an important new distribution channel that allows sellers to reach vast numbers of buyers relatively inexpensively but the use of online systems afforded by the Internet also holds considerable potential for improving business efficiency and lowering operating costs. Hence, innovative use of the Internet adds a valuable weapon to the competitive arsenal of rival sellers, giving them yet another way to jockey for market position and manoeuvre for competitive advantage. ♦ Entry barriers into the e-commerce world are relatively low: Many of the activities comprising the value chains of e-commerce businesses can be outsourced. The software necessary for establishing a Web site is readily available (if entrepreneurs do not wish to
Strategic Management
develop their own), and the costs of using a Web hosting company to manage the servers and maintain the site are relatively modest. Relatively low entry barriers explain why there are already hundreds of thousands of newly formed e-commerce firms, with perhaps millions more to spring up around the world in years to come. In many markets and industries, entry barriers are low enough to make additional entry both credible and likely. ♦ Online buyers gain bargaining power because they confront far fewer obstacles to comparing the products, prices, and shipping times of rival vendors: Vendor Web sites are only a few clicks apart and are open for business 24 hours a day, every day of the year, giving buyers unprecedented ability to compare offerings and find the best value. Using online networks, a multinational manufacturer's geographically scattered purchasing groups can easily pool their orders with parts and components suppliers and bargain for volume discounts. Likewise, it is feasible for wholesalers to use online systems to research the products, prices, and features of competing manufacturers and for retailers to shop around and bargain for the best deals from manufacturers and distributors who supply them. Individual consumers can readily get reviews of products, compare the features and prices of rival brands, and put up bids for how much they are willing to pay for items. The Internet eliminates the geographic protection of distance that has traditionally given small-town businesses the advantage of being the only source within reasonable driving distance. Using the Internet, buyers can readily negotiate car purchases with dealers hundreds of miles away. ♦ The Internet makes it feasible for companies to reach beyond their borders to find the best suppliers and, further, to collaborate closely with them to achieve efficiency gains and cost savings: In an e-commerce environment companies can use the Internet to integrate foreign suppliers into their supply chain networks more tightly, boosting savings and speeding new products to market. All companies can extend their geographic search for suppliers and can collaborate electronically with chosen suppliers to streamline ordering and shipping of parts and components, improve just-in-time deliveries, work in parallel on the designs for new products, and communicate speedily and efficiently. But the chief point here is that new competitive pressures can spring from the e-commerce relationships between companies and their suppliers-companies not only gain added bargaining power over their suppliers but efficient online collaboration with chosen suppliers can also be a basis for gaining an edge over rivals. ♦ Internet and PC technologies are advancing rapidly, often in uncertain and unexpected directions: For example, a few years ago, both Intel and Microsoft were focusing all their energies on expanding the role of the personal computer as a multifunctional appliance in both business significance of the internet and bad to initiate crash programs to redirect their efforts. ♦ The internet results in much faster diffusion of new technology and new idea across the world: Companies in emerging countries and elsewhere can use the internet to monitor the latest technological developments and to stay abreast of what is transpiring in the markets of
♦ E-commerce technology opens up a host of opportunities for reconfiguring industry and company value chains: Using the internet to link the orders of customers with the suppliers of components enables just-in-time delivery to manufacturers. ♦ The capital for funding potentially profitable e-commerce businesses is readily available: In the Internet age. paving the way for fundamental changes in the ways business is conducted both internally and with suppliers and customers. an attractive business model. slicing inventory costs and allowing production to match demand. including equity ownership or lucrative stock options in start-up enterprises. It allows more accurate demand forecasting. can make custom manufacturing just as cheap as mass production. thus curtailing the need to keep company personnel at the facilities of major customers. Japan. E-commerce firms are thus competing aggressively for talent and intellectual capital. even billions. speed is a condition of survival. reducing staffing levels at telephone call centers. and a well thoughtout strategic plan ♦ The needed e-commerce resource in short supply is human talent-in the form of both technological expertise and managerial know-how: While some e-commerce companies have their competitive advantage lodged in patented technology or unique physical assets or brand-name awareness. 7. coupled with the use of enterprise resource planning (ERP) software and manufacturing execution system (MES) software. New developments on first one front and then another occur daily. Market and competitive conditions change very quickly. of dollars to fund a promising new venture. Venture capitalists are quite willing to fund start-up enterprises provided they have a promising technology or idea. Tight supply chain management starting with customer orders and going all the way back to components production. The impact of e-commerce technology on industry and company value chains is profound. ♦ The e-commerce environment demands that companies move swiftly: In the exploding ecommerce world. and sometimes cheaper. e-commerce businesses have found it relatively easy to raise hundreds of millions. Companies are discovering ways to deliver service online. and North America and what the leading companies in these areas are doing.Reaching Strategic Edge Europe. Late movers are doomed. and cutting the time required for service technicians to respond to customer faxes and e-mail messages.25 . Two of the most valuable competitive assets a company can have are dominating depth in a particular technology and a workforce with exceptional know-how and experience that gives a firm uniquely strong skills and competitive capabilities. ♦ The Internet can be an economical means of delivering customer service: The Internet provides innovative opportunities for handling customer service activities. individuals with attractive qualifications and know-how can command premium compensation. many are pursuing competitive advantage based on the expertise and intellectual capital of their personnel and on their organizational competencies and capabilities.
These organizations may not have owners in true sense. We can find many organizations around us. Especially for these organizations. Many non-profit and governmental organizations outperform private firms and corporations on innovativeness. boasts nearly two hundred students who can access lectures anytime and chat at fixed times with 7. shifts in the balance of bargaining power both between sellers and their suppliers and between sellers and their customers. The academic institutions have also joined hands with industries in order to deliver education to make graduates more employable. The significant change in the competitive climate has taken place in the educational environment. Hence. greater entry threats. motivation. The educational delivery system has also undergone considerable changes with the introduction of computers and internet technologies. the pace of technological change is rapid and its direction is often uncertain. Market developments occur swiftly. president of Carnegie-Mellon University. they are adopting different strategies for attracting best students. and are totally dependent on outside financing. Internet technology and newly emerging products and services that enable e-commerce further have the effects of altering industry value chains. non-profit and governmental organizations often function as a monopoly. says. 6. and affecting a company's resource strengths and weaknesses. a blurring of traditional industry and geographic boundaries. Compared to for-profit firms. beneficiaries or public at large. and strategic management.26 . and incentives for all kinds of seller-supplier and seller-customer collaboration.2 Strategic management in non-profit and government organization Business organization can be classified as commercial or non-commercial on the basis of the interest they have. Richard Cyert. Educational institutions Educational institutions are using strategic-management techniques and concepts more frequently. A non-commercial organization comes to existence to meet the needs not met by business enterprises. compelling companies to make decisions at Internet speed or risk getting left behind in the dust. or educational purposes. The strategic-management process is being used effectively by countless non-profit governmental organizations. Concord University School of Law. which do not have any commercial objective of making profits. Moreover. produce a product or service that offers little or no measurability of performance. A commercial organization has profit as its main aim. nongovernmental organizations such as Help-Age or Child Relief and You. charitable. "I believe we do a far better job of Strategic management than any company I know ". Their genesis may be for social. spawning substantial opportunities for increasing efficiency and reducing costs. The first all-Internet law school. municipal corporations. Examples of non-commercial organizations can be The Institute of Chartered Accountants of India. Their main aim is to provide services to members. productivity. strategic management provides an excellent vehicle for developing and justifying requests for needed financial support.Strategic Management It is that growing use of e-commerce technology can produce important shifts in an industry's competitive forces – intensified rivalry.
objectives. But in government agencies and departments are finding that their employees get excited about the opportunity to participate in the strategic-management process and thereby have an effect on the organization's mission. In addition. state. Backward integration strategies that some hospitals are pursuing include acquiring ambulance services. Legislators and politicians often have direct or indirect control over major decisions and resources. departments are responsible for formulating. industrial medicine services. strategies. Strategic-management concepts increasingly are being used to enable some organizations to be more effective and efficient. Medical organizations Hospitals are creating new strategies today as advances in the diagnosis and treatment of chronic diseases are undercutting that earlier mission. Strategic issues get discussed and debated in the media and legislatures. outpatient surgery and diagnostic centers. municipal agencies. user-friendly ambulatory services. government agencies 7.27 . Governmental strategists usually enjoy little freedom in altering the organizations' missions or redirecting objectives. and psychiatric services. Public Sector Units. patient. The ten most successful hospital strategies today are providing free-standing outpatient surgery centers. electronic monitoring at home. cardiac rehabilitation centers. preferred provider services. Governmental agencies and departments Central. and diagnostic services. such as sharing results of medical tests and prescribing medicine. skilled nursing units. Hospitals are beginning to bring services to the patient as much as bringing the patient to the hospital. The whole strategic landscape of healthcare is changing because of the Internet. and a reallocation of resources from acute to chronic care in home and community settings. and policies. physical rehabilitation centers. Millions of persons research medical ailments online. which is causing a dramatic shift in the balance of power between doctor. Intel recently began offering a new secure medical service whereby doctors and patients can conduct sensitive business on the Internet. and laboratory testing. Public enterprises generally cannot diversify into unrelated businesses or merge with other firms. waste disposal services. and evaluating strategies that use taxpayers' money in the most costeffective way to provide services and programs. But strategists in governmental organizations operate with less strategic autonomy than their counterparts in private firms. women's medicine services. Pathological laboratories have started collecting door-to-door samples. decentralized service networks.Reaching Strategic Edge professors. resulting in fewer strategic choice alternatives. home health services. Chronic care will require day-treatment facilities. Issues become politicized. A successful hospital strategy for the future will require renewed and deepened collaboration with physicians. who are central to hospitals' well being. Online college degrees are becoming common and represent a threat to traditional Colleges and universities. and hospitals. implementing.
3. (d) Probability and normal distribution. (c) Standard deviation. (b) Traditional controlling has been rephrased as benchmarking. (c) Shareholders. 5. (d) Benchmarking solves all business problems. (b) Correlation. (c) Internet has opened up new opportunities for organisations engaged in manufacturing 7. (b) Internet has no strategic relation with an organisation in service sector. 4. The following statistical technique forms base of six sigma: (a) Mean and Median. Which of the following statements is true: (a) Internet has no strategic relation with an organisation engaged in manufacturing. (b) Supplier. (c) Benchmarking helps in setting goals and measuring productivity based on best industry practices. The focus of six sigma is on: (a) Customer. Self-Examination Questions Multiple Choice Questions 1. (c) Better process reaffirmation.28 . With reference to benchmarking select the correct statement out of the following: (a) The focus of benchmarking is to study existing processes and eliminate the ones that are redundant.Strategic Management are using a strategic management approach to develop and substantiate formal requests for additional funding. (b) Business process removal. (d) Business process reengineering. (d) Government. BPR stands for: (a) Business practices reinstatement. 2.
(c) 3. Ram Swaroop attributed the good performance and ongoing improvement in quality in manufacturing processes. 2. (a) 5. 145. a business owned by Ram Swaroop and his brothers posted a two fold rise in net profit at Rs.Reaching Strategic Edge activities. (a) Do you agree with Ram Swaroop to keep focus on quality? Why. Sales during the period climbed 90 per cent at Rs. (d) 4. What is product development? 3. Define process. Ram Swaroop felt that the existing focus on quality is good enough as it was giving good results.7 crore.29 . (d) Use of Internet is restricted to sending and receiving mails in business organisations. 663 crore. His younger brother Vinod Swaroop displayed his happiness on the performance and said that we can further improve the performance by using six sigma methodology. 20 crore during the corresponding period last year. Short answer questions 1. How can it be implemented? Case Study High Growth Enterprises. What is TQM? Compare it with traditional management practices. 2. (d) 2. (c) 7. 60 crore in the third quarter of the current financial year as against Rs. The company in the first nine months of the current year posted a net profit of Rs. Explain dogs in BCG matrix? Essay type questions 1. Explain business process reengineering. (b) What is six sigma? How can it be useful to the company? Answers – Multiple Choice Questions: 1.
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