Strategic Management

CHAPTER 1
BUSINESS ENVIRONMENT
LEARNING OBJECTIVES
♦ Understand the term business and its objectives.
♦ Know what are the factors that influence a business.
♦ Understand what is environmental analysis and why is it needed.
♦ Have a basic knowledge of various types of environment.
♦ Have an understanding of different micro-economic factors that are affecting business.
♦ Know the various macro-economic factors and how they are related to business.
♦ Understand the various components of the competitive environment.
Awareness of the environment is not a special project to be undertaken only when
warning of change becomes deafening…
Kenneth R. Andrews
It is not the strongest of the species that survive, nor the most intelligent, but the
one most responsive to change.
Charles Darwin
1. INTRODUCTION
Each business organization operates in its unique environment. Environment influence
businesses and also gets influenced by it. No business can function free of interacting and
influencing forces that are outside its periphery. In the new economy the facets of business
are rapidly changing as compared to earlier years. The development in technology and faster
communication have lead to evolvement of newer kinds of businesses. The concept of
businesses such as e-bay, rediff were non-existent in yesteryears. Businesses are conducted
through internet and has lead to virtual shrinking of physical boundaries between nations.
Strategic Management

1.2
2. BUSINESS
Etymologically the term business refers to the state of being busy for an individual, group,
organization or society. The term is also interpreted as one’s regular occupation or profession.
In another sense, the term refers to a particular entity, company or corporation. It is also
interpreted as a particular market sector such as the computer business. Thus the term is wide
and amenable to different usages. A business for our purposes can be any activity consisting
of purchase, sale, manufacture, processing, and/or marketing of products and/or services.
It is said that a business exists for profits. Profit, as a surplus of business, accrues to the
owners. It is their share, just as wages are the share of workers. People invest in business for
getting a return. It is a reward for risk taking, so far as the owners are concerned. As a motive,
profit serves as a stimulant for business effort.
For business enterprises, profit is often regarded as the overall measure of performance.
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; how well they are able to combine and utilise resources and to sustain the
enterprise as a going and a growing concern. Other things being equal, 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, to capital employed, to market
value of corporate shares and so on. 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.
Peter F Drucker has drawn two important conclusions about what is a business that are useful
for an understanding of the term business.
♦ The first thing about a business is that it is created and managed by people. There will be
a group of people who will take decisions that will determine whether an organization is
going to prosper or decline, whether it will survive or will eventually perish. This is true of
every business.
♦ The second conclusion drawn is that the business cannot be explained in terms of profit.
The economic criterion of maximising profits for a firm has little relevance in the present
times. Profit maximization, in simple terms is selling at a higher price than the cost. Profit
maximization has been qualified with the long-term perspective and has been modified to
include development of wealth, to include several non-financial factors such as goodwill,
societal factors, relations and so on.
3. OBJECTIVES OF A BUSINESS
A business has some purpose. A valid purpose of business is to create customers. It is for the
businesses to create a customer or market. A purpose of business is that business exists to
Business Environment

1.3
create customers. It is the customer who determines what a business is. The customer is the
foundation of business and keeps it in existence. A still broader view of business purpose is
that business exists and functions for catering to the material needs and requirements of
society, within the framework of general considerations of social interest. Business is society’s
organ of economic expansion, growth and change.
Enterprises pursue multiple objectives rather than a single objective. In general, we may
identify a set of business objectives pursued by a large cross-section of enterprises. These
relate to profitability, productive efficiency, growth, technological dynamism, stability, selfreliance,
survival, competitive strength, customer service, financial solvency, product quality,
diversification, employee satisfaction and welfare, and so on. Enterprises seek to balance
these objectives in some appropriate manner. 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. It is a basic, implicit objective of most organizations. While survival is an
obvious objective, it gains more value and prominence during the initial stage of the
establishment of the enterprise and during general economic adversity. The ability to
survive is a function of the nature of ownership, nature of business competence of
management, general and industry conditions, financial strength of the enterprise and so
on. However, business and other enterprises are interested in more than mere survival.
♦ Stability: One of the most important of objectives of business enterprises is stability. It is
a cautious, conservative objective. In a sense, stability is a least expensive and risky
objective in terms of managerial time and talent and other resources. A stable and steady
enterprise minimises managerial tensions and demands less dynamism from managers.
It is a strategy of least resistance in a hostile external environment.
♦ Growth: This is a promising and popular objective which is equated with dynamism,
vigour, promise and success. Enterprise growth may take one or more of the forms like
increase in assets, manufacturing facilities, increase in sales volume in existing products
or through new products, improvement in profits and market share, increase in manpower
employment, acquisition of other enterprises and so on. Growth may take the enterprise
along relatively unknown and risky paths, full of promises and pitfalls.
♦ Efficiency: Business enterprise seek efficiency in rationally choosing appropriate means
to achieve their goals, doing things in the best possible manner and utilising resources in
a most suitable combination to get highest productivity. In a sense, efficiency is an
economic version of the technical objective of productivity – designing and achieving
suitable input output ratios of funds, resources, facilities and efforts. Efficiency is a very
useful operational objective.
Strategic Management

1.4
♦ Profitability: It is generally asserted that private enterprises are primarily motivated by
the objective of profit. Some may go even further and emphasise that profit is the sole
motive of business enterprises. All other objectives are facilitative objectives and are
meant to be subservient to the profit motive. 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.
4. ENVIRONMENTAL INFLUENCES ON BUSINESS
All living creatures including human beings live within an environment. Apart from the natural
environment, environment of humans include family, friends, peers and neighbours. It also
includes man-made structures such as buildings, furniture, roads and other physical
infrastructure. The individuals do not live in a vacuum. They continuously interact with their
environment to live their lives.
Just like human beings, business also does not function in an isolated vacuum. Businesses
function within a whole gambit of relevant environment and have to negotiate their way
through it. The extent to which the business thrives depends on the manner in which it
interacts with its environment. 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,
adapt to or have to manage and influence them. The business must continuously monitor and
adapt to the environment if it is to survive and prosper. Disturbances in the environment may
spell extreme threats or open up new opportunities for the firm. A successful business has to
identify, appraise, and respond to the various opportunities and threats in its environment.
Environment is sum of several external and internal forces that affect the functioning of
business. According to Barry M. Richman and Melvyn Copen "Environment factors or
constraint are largely if not totally, external and beyond the control of individual industrial
enterprises and their managements. These are essentially the ’givers’ within which firms and
their managements must operate in a specific country and they vary, often greatly, from
country to country." A strategist looks on the environment as posing threats to a firm or
offering immense opportunities for exploitation. Stressing this aspect, Glueck and Jauch
wrote: "The environment includes factors outside the firm which can lead to opportunities for
or threats to the firm. Although there are many factors, the most important of the sectors are
socio-economic, technological, supplier, competitors, and government. "
Business functions as a part of broader environment. The inputs in the form of human,
physical, financial and other related resources are drawn from the environment. The business
converts these resources through various processes into outputs of products and/or services.
The latter are partly exchanged with the external client groups, say customers. The exchange
process brings in some surplus (or profits, reputation, good public image and so on) to the
business, which could be stored and used for further development and growth.
Business Environment

1.5
Different organizations use different inputs, adopt different processes and produce different
outputs. For example, an educational institution produces literate people. A hospital provides
health and medical services. Organizations depend on the external environment for the inputs
required by them and for disposing of their outputs in a mutually beneficial manner. The inputoutput
exchange activity is a continuous process and calls for an active interaction with the
external environment.
4.1 Problems in understanding the environmental influences
In trying to understand the environment, managers face different problems as follows:
♦ The environment encapsulates many different influences; the difficulty is in making sense
of this diversity in a way which can contribute to strategic decision-making. Listing all
conceivable environmental influences may be possible, but it may not be of much use
because no overall picture emerges of really important influences on the organization.
♦ The second difficulty is that of uncertainty. Managers typically claim that the pace of
technological change and the speed of global communications mean more and faster
change now than ever before. Whether or not change is in fact faster now than hitherto,
and whether or not the changes are more unpredictable, it remains the case that, while it
is important to try to understand future external influences on an organization, it is very
difficult to do so.
♦ Managers are no different from other individuals in the way they cope with complexity.
They tend to simplify such complexity by focusing on aspects of the environment, which,
perhaps, have been historically important, or confirm prior views. These are not perverse
managerial behaviours; they are the natural behaviour of everyone faced with complexity.
Arguably, one of the tasks of the strategic manager is to find ways & means to break out
Inputs
Human
Physical
Finance
Technology
Processing
Transformation of
inputs to outputs
Outputs
Product
Services
Environmental Forces
Strategic Management

1.6
of oversimplification or bias in the understanding of their environment, while still achieving
a useful and usable level of analysis.
4.2 Framework to understand the environmental influences
In spite of the problems in understanding business environment, organizations can not ignore
it. We will make an attempt to identify a framework for understanding the environment of
organizations. This will help in identifying key issues, find ways of coping with complexity and
also assist in challenging managerial thinking.
♦ Firstly, it is useful to take an initial view of the nature of the organizations environment in
terms of how uncertain it is. Is it relatively static or does it show signs of change, 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.
♦ The next step might be the auditing of environmental influences. Here the aim is to
identify which of the many different environmental influences are likely to affect the
organization’s development or performance. This is done by considering the way in which
political, economic, social and technological influences have a bearing on organizations.
It is increasingly useful to relate such influences to growing trends towards globalization
of industries. It may also be helpful to construct pictures - or scenarios - of possible
futures, to consider the extent to which strategies might need to change.
♦ The final step is to focus more towards an explicit consideration of the immediate
environment of the organization - for example, the competitive arena in which the
organization operates. In competitive environment we will study five forces analysis
(discussed later in the chapter) that aims to identify the key forces at work in the
immediate or competitive environment and why they are significant. There should be an
attempt to understand why the forces are of strategic significance. It is also required to
analyse the organization’s competitive position: that is, how it stands in relation to those
other organizations competing for the same resources, or customers, as itself.
5. 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, the result is reduced achievement of
corporate objectives. From environmental analysis strategists get time to anticipate
opportunities and to plan to take optional responses to these opportunities. 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. It is clear that because of the difficulty to
assessing the future, not all future events can be anticipated. But some can and are. To the
extent that some or most are anticipated by this analysis and diagnosis, managerial decisions
are likely to be better. And the process reduces the time pressures on the few which are not
Business Environment

1.7
anticipated. Thus, the managers can concentrate on these few instead of having to deal with
all the environmental influences.
In general, environmental analysis has three basic goals as follows:
♦ First, the analysis should provide an understanding of current and potential changes
taking place in the environment. It is important that one must be aware of the existing
environment. At the same time one must have a long term perspective about the future
too.
♦ Second, environmental analysis should provide inputs for strategic decision making.
Mere collection of data is not enough. The information collected must be useful for and
used in strategic decision making.
♦ Third, 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. It should challenge the current wisdom by bringing fresh viewpoints into the
organization.
“Positive trends in the environment breed complacency. That underscores a basic point: in
change there is both opportunity and challenge”. - Clifton Garvin
6. CHARACTERISTICS OF BUSINESS ENVIRONMENT
Business environment exhibits many characteristics. Some of the important – and obvious –
characteristics are briefly described here.
♦ Environment is complex: the environment consists of a number of factors, events,
conditions and influences arising from different sources. All these do not exist in isolation
but interact with each other to create entirely new sets of influences. It is difficult to
comprehend at once the factors constituting a given environment. All in all, environment is
a complex that is somewhat easier to understand in parts but difficult to grasp in totality.
♦ Environment is dynamic: the environment is constantly changing in nature. Due to the
many and varied influences operating, there is dynamism in the environment causing it to
continuously change its shape and character.
♦ Environment is multi-faceted: What shape and character an environment assumes
depends on the perception of the observer. A particular change in the environment, or a
new development, may be viewed differently by different observers. This is frequently
seen when the same development is welcomed as an opportunity by one company while
another company perceives it as a threat.
♦ Environment has a far reaching impact: The environment has a far reaching impact on
organizations. The growth and profitability of an organization depends critically on the
environment in which it exists. Any environment change has an impact on the organization
in several different ways.
Strategic Management

1.8
7. COMPONENTS OF BUSINESS ENVIRONMENT
The environment in which an organization exists could be broadly divided into two parts the
external and the internal environment. Since the environment is complex, dynamic, multifaceted
and has a far reaching impact, dividing it into external and internal components
enables us to understand it better. Here we deal with the appraisal of the external
environment. This is done through a description of important characteristics of the
environment, dividing the environment into its external and internal parts, observing how a
systematic approach can help in environmental appraisal, and classifying the external
environment into two parts, the general and the relevant environment. Next, we see how the
external environment can be divided into different components.
Figure: A Company’s Business EnvironmentThe external environment (Macro Environment)
includes all the factors outside the organization which provide opportunity or pose threats to
the organization. The internal environment (Micro Environment) refers to all the factors within
an organization which impart strengths or cause weaknesses of a strategic nature.
The environment in which an organization exists can, therefore, be described in terms of the
opportunities and threats operating in the external environment apart from the strengths and
weaknesses existing in the internal environment. The four environmental influences could be
described as follows:
The Economy at
Large
Technology
Societal Value
& Lifestyles
Population
Demographics
Legislation
&
Regulations
Supplier
New Buyer
Entrants
Rivals
FIRM
Substitute
Business Environment

1.9
♦ An opportunity is a favourable condition in the organization’s environment which enables it
to consolidate and strengthen its position. An example of an opportunity is growing
demand for the products or services that a company provides.
♦ A threat is an unfavourable condition in the organization’s environment which creates a
risk for, or causes damage to, the organization. An example of a threat is the emergence
of strong new competitors who are likely to offer stiff competition to the existing
companies in an industry.
♦ A strength is an inherent capacity which an organization can use to gain strategic
advantage over its competitors. 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.
♦ A weakness is an inherent limitation or constraint which creates a strategic disadvantage.
An example of a weakness is over dependence on a single product line, which is
potentially risky for a company in times of crisis.
An understanding of the external environment, in terms of the opportunities and threats, and
the internal environment, in terms of the strengths and weaknesses, is crucial for the
existence, growth and profitability of any organization.
A systematic approach to understanding the environment is the SWOT analysis. Business
firms undertake SWOT analysis to understand the external and internal environment. SWOT,
which is the acronym for strengths, weaknesses, opportunities and threats. Through such an
analysis, the strengths and weaknesses existing within an organization can be matched with
the opportunities and threats operating in the environment so that an effective strategy can be
formulated. An effective organizational strategy, therefore, is one that capitalises on the
opportunities through the use of strengths and neutralises the threats by minimizing the impact
of weaknesses. The process of strategy formulation starts with, and critically depends on, the
appraisal of the external and internal environment of an organization. We will learn more about
SWOT analysis in the third chapter.
8. RELATIONSHIP BETWEEN ORGANIZATION AND ITS ENVIRONMENT
In relation to the individual corporate enterprise, the external environment offers a range of
opportunities, constraints, threats and pressures and thereby influences the structure and
functioning of the enterprise. As a sub-system, the corporate enterprise draws certain inputs of
resources, information and values from the larger environmental system, transforms them into
outputs of products, services, goals and satisfactions and exchanges with or transmits them
into the external environment. In the process, it generates energy and sustains itself.
The relationship between the organization and its environment may be discussed in terms of
interactions between them in several major areas which are outlined below:
Strategic Management

1.10
♦ 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
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
Business Environment

1.11
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 in which a 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.
♦ 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
Strategic Management

1.12
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.
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.
MACRO ENVIRONMENT
Demographic
Economic
Government
Technological
Political
Cultural
Legal
Global
Business Environment

1.13
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?
MICRO ENVIRONMENT
Consumer/Customer
Competitors
Suppliers
Intermediaries
Organization
Market
Strategic Management

1.14
10.2 Competitors
Competitors are the other business entities that compete for resources as well as markets.
Competition shapes business. A study of the competitive scenario is essential for the
marketer, particularly threats from competition. Following are a few of major questions that
may be addressed for 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. Direct competition is between organizations, which are
in same business activity. At the same time competition can also be indirect. For example,
competition between a holiday resort and car manufacturing company for available
discretionary income of affluent customers is indirect competition.
10.3 Organization
Individuals occupying different positions or working in different capacities in organizations
consists of individuals who come from outside. They have different and varied interests. In
micro environment analysis, nothing is important as self-analysis by the organization itself.
Understanding its own strengths and capabilities in a particular business, i.e., understanding a
business in depth should be the goal of firm’s internal analysis. The objectives, goals and
resource availabilities of a firm occupy a critical position in the micro environment.
“We have met the enemy and he is us” - Pogo.
An organization has several non-specific elements of the organization’s surroundings that may
affect its activities. These consists of specific organizations or groups that are likely to
influence an organization. These are:
♦ Owners: They are individuals, shareholders, groups, or organizations who have a major
stake in the organization. They have a vested interest in the well-being of the company.
♦ Board of directors: Board of directors are found in companies formed under the
Companies Act, 1956. The board of directors is elected by the shareholders and is
charged with overseeing the general management of the organization to ensure that it is
being run in a way that best serves the shareholders’ interests.
♦ Employees: Employees are the people who actually do the work in an organization.
Employees are the major force within an organization. It is important for an organization
that employees embrace the same values and goals as the organization. However, they
differ in beliefs, education, attitudes, and capabilities. When managers and employees
work toward different goals everyone suffers.
Business Environment

1.15
10.4 Market
The market is larger that customers. The market is to be studied in terms of its actual and
potential size, its growth prospect and also its attractiveness. The marketer should study the
trends and development and the key success factors of the market he is operating. Important
issues are :
♦ Cost structure of the market.
♦ The price sensitivity of the market.
♦ Technological structure of the market.
♦ The existing distribution system of the market.
♦ Is the market mature?
10.5 Suppliers
Suppliers form an important component of the micro environment. The suppliers provide raw
materials, equipment, services and so on. Large companies rely on hundreds of suppliers to
maintain their production. Suppliers with their own bargaining power affect the cost structure
of the industry. They constitute a major force, which shapes competition in the industry. Also
organizations have to take a major decision on “outsourcing” or “in-house” production
depending on this supplier environment.
10.6 Intermediaries
Intermediaries exert a considerable influence on the business organizations. They can also be
considered as the major determining force in the business. In many cases the consumers are
not aware of the manufacturer of the products they buy. They buy product from the local
retailers or big departmental stores such as Big bazaars, Subhiksha and Vishal Mega Mart
that are increasingly becoming popular in some big cities.
11. 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, but which exerts powerful
influence over its functioning. The external environment of the enterprise consists of
individuals, groups, agencies, organizations, events, conditions and forces with which the
organization comes into frequent contact in the course of its functioning. It establishes
interacting and interdependent relations, conducts transactions, designs and administers
appropriate strategies and policies to cope with fluctuations therein and otherwise negotiates
its way into the future.
Strategic Management

1.16
11.1 Demographic environment
The term demographics denotes characteristics of population in a area, district, country or in
world. It includes factors such as race, age, income, educational attainment, asset ownership,
home ownership, employment status and location. Data with respect to these factors within a
demographic variable, and across households, are of interest, to businessmen in addition to
economist. Marketers and other social scientists often group populations into categories based
on demographic variables. Some of the demographic factors have great impact on the
business. Factors such as general age profile, sex ratio, education, growth rate affect the
business with different magnitude. India has relatively younger population as compared to
some countries. China on the other hand is having an aging population. Many multinationals
are interested in India considering its population size. With having approximately sixteen
percent of the world’s population, the country holds huge potential for overseas companies.
Business Organizations need to study different demographic factors. Particularly, they need
to address following issues:
♦ What demographic trends will affect the market size of the industry?
♦ What demographic trends represent opportunities or threats?
The business, as such, is concerned with a population’s size, age structure, geographic
distribution, ethnic make-up, and distribution of income. While each of the major elements of
discussed below, the challenge for strategists is to determine what the changes, that have
been identified in the demographic characteristics or elements of a population, imply for the
future strategic competitiveness of the company. We will briefly discuss a few factors that are
of interest to a business.
(i) Population Size: While population size itself, large or small, may be important to
companies that require a "critical mass" of potential customers, changes in the specific makeup
of a population’s size may have even more critical implications. Among the most important
changes in a population’s size are:
♦ Changes in a nation’s birth rate and/or family size;
♦ Increases or declines in the total population;
♦ Effects of rapid population growth on natural resources or food supplies.
Changes in a nation’s population growth rate and life expectancy can have important
implications for companies. Are people living longer? What is the life expectancy of infants?
There will be implications for the health care system (for companies serving that segment) and
for the development of products and services targeted at older (or younger) population.
Business Environment

1.17
(ii) Geographic Distribution: Population shifts from one region of a nation to another or from
non-metropolitan to metropolitan areas may have an impact on a company’s strategic
competitiveness. Issues that should be considered include:
♦ The attractiveness of a company’s location may be influenced by governmental
support.
♦ Companies may have to consider relocation if population shifts have a significant
impact on the availability of a qualified workforce.
♦ The concepts of working-at-home and commuting electronically on the information
highway have also started in India in an very small level. These may imply changes
in recruiting and managing the workforce.
(iii) Ethnic Mix: This reflects the changes in the ethnic make-up of a population and has
implications both for a company’s potential customers and for the workforce. Issues that
should be addressed include:
♦ What do changes in the ethnic mix of the population imply for product and service
design and delivery?
♦ Will new products and services be demanded or can existing ones be modified?
♦ Managers prepared to manage a more culturally diverse workforce?
♦ How can the company position itself to take advantage of increased workforce
heterogeneity?
(iv) Income Distribution: Changes in income distribution are important because changes in the
levels of individual and group purchasing power and discretionary income often result in
changes in spending (consumption) and savings patterns. Tracking, forecasting, and
assessing changes in income patterns may identify new opportunities for companies
11.2 Economic environment
The economic environment refers to the nature and direction of the economy in which a
company competes or may compete. The economic environment includes general economic
situation in the region and the nation, conditions in resource markets (money market,
manpower market, raw material components, services, supply markets and so on) which
influence the supply of inputs to the enterprise, their costs, quality, availability and reliability of
supplies.
Economic environment determines the strength and size of the market. The purchasing power in
an economy depends on current income, prices, savings, circulation of money, debt and credit
availability. Income distribution pattern determines the marketing possibilities. The important
Strategic Management

1.18
point to consider is to find out the effect of economic prospect and inflation on the operations of
the firms. Strategists must scan, monitor, forecast, and assess a number of key economic
factors mentioned in the table below for both domestic and key international markets.
Key Economic Factors
♦ Shift to a service economy ♦ Availability of credit
♦ Level of disposable income ♦ Propensity of people to spend
♦ Interest rates ♦ Inflation rates
♦ Tax rates ♦ Money market rates
♦ Government budget deficits ♦ Gross national product trend
♦ Consumption patterns ♦ Trade Block Formations
♦ Demand shifts for different
categories of goods and services
♦ Income differences by region and
consumer groups
♦ Price fluctuations ♦ Worker productivity levels
♦ Global movement of labour and
capital
♦ Monetary & Fiscal policies
♦ Stock market trends ♦ Foreign countries’ economic
conditions
♦ Import/export factors ♦ Company of Petroleum Exporting
Countries (OPEC) policies
♦ Coalitions of Countries/ Regional
blocks
♦ Unemployment trends
11.3 Political-Legal Environment
This is partly general to all similar enterprises and partly specific to an individual enterprise. It
includes such factors as the general state of political development, the degree of
politicalization of business and economic issues, the level of political morality, the law and
order situation, political stability, the political ideology and practices of the ruling party, the
purposefulness and efficiency of governmental agencies, the extent and nature of
governmental intervention in the economy and the industry, Government policies (fiscal,
monetary, industrial, 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.
Business Environment

1.19
(i) Government: Business is highly guided and controlled by government policies.
Hence the type of government running a country is a powerful influence on business:
A strategist has to consider the changes in the regulatory framework and their impact
on the business.
Taxes and duties are other critical area that may be levied and affect the business.
For example, introduction of Fringe benefits Tax has major impact on the business.
(ii) Legal: Business Organizations prefer to operate in a country where there is a sound
legal system. However, in any country businesses must have a good working
knowledge of the major laws protecting consumers, competitions and organizations.
Businesses must understand the relevant laws relating to companies, competition,
intellectual property, foreign exchange, labour and so on.
(iii) Political: Political pressure groups influence and limit organizations. Apart from
sporadic movements against certain products, service and organizations, politics has
deeply seeped into unions. Also special interest groups and political action
committees put pressure on business organizations to pay more attention to
consumer’s rights, minority rights, and women rights.
11.4 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.
Strategic Management

1.20
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.
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.
Figure: Interference between Business & Technology
Increased
productivity
Spend
on
R&D
Changing
technology
Rise and
decline of
products
Expectations
of
consumers

Business
Social
change
Techno-
structure
Professional
managers Regulation
and
opposition
System
complexity
Demand
for capital
Technology
reaches
people
through
people
Jobs
become
more
intellectual
Business Environment

1.21
Technology has changed the way people communicate with the advent of Internet and
telecommunication system. Technology has changed the ways of how business operates now.
This is leading to many new business opportunities as well as making obsolete many existing
systems. The following factors are to be considered for the technological environment:
♦ The pull of technological change.
♦ Opportunities arising out of technological innovation.
♦ Risk and uncertainty of technological development.
♦ Role of R&D in a country and government’s R&D budget.
Technology can act as both opportunity and threat to a business. It can act as opportunity as
business can take advantage of adopting technological innovations to their strategic
advantage. However, at the same time technology can act as threat if organisations are not
able to adopt it to their advantage. For example, an innovative and modern production system
can act as threat if the business is not able to change their production system. New entrants
can always use availability of technological improvements in products or production methods
that can be a threat to a business.
Technological opportunities and threats are not limited to the product or production.
Technology permeates whole gambit of business. It can transform how a business acts and
functions.
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
Strategic Management

1.22
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?
♦ What are the other applications of the company’s technologies? In which applications
does the company currently participate and why? In which applicating does the
company does not participate and why?
♦ Which technological investments should be curtailed or eliminated?
♦ What additional technologies will be required in order to achieve the current
corporate business objectives? .
♦ What are the implications of the technology and business portfolios for corporate
strategy?
11.6 Global environment
Today’s competitive landscape requires that companies must analyse global environment as it
is also rapidly changing. The new concept of global village has changed how individuals and
organizations relate to each other. Further, new migratory habits of the workforce as well as
increased offshore operation are changing the dynamics of business operation. Among the
global environmental factors that should be assessed are:
♦ Potential positive and negative impact of significant international events such as a
sport meet or a terrorist attack.
♦ Identification of both important emerging global markets and global markets that are
changing. This includes shifts in the newly 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.
Business Environment

1.23
♦ Differences between cultural and institutional attributes of individual global markets.
Due to economic reforms, Indian businessmen are also out to see beyond the physical
boundaries of the country. The Indian companies are acquiring business in different countries.
The need to think and act from global perspective is universal. For a long time businessmen
everywhere believed that home markets were adequate and safe. They never felt the need to
explore the overseas markets in a big way. "If they could pick up some extra sales through
exporting, these businessmen were more than satisfied. The scenario is different now. The
companies are increasingly interested in globalising.
Nature of Globalization
Globalization means several things for several people. For some it is a new paradigm - a set
of fresh beliefs, working methods, and economic, political and socio-cultural realities in which
the previous assumptions are no longer valid. For developing countries, it means integration
with the world economy. In simple economic terms, globalization refers to the process of
integration of the world into one huge market. Such unification calls for removal of all trade
barriers among countries. Even political and geographical barriers become irrelevant
At the company level, globalization means two things: (a) the company commits itself heavily
with several manufacturing locations around the world and offers products in several
diversified industries, and (b) it also means ability to compete in domestic markets with foreign
competitors.
A company which has gone global is called a multinational (MNC) or a transnational (TNC). An
MNC is, therefore, one that, by operating in more than one country gains R&D, production,
marketing and financial advantages in its costs and reputation that are not available to purely
domestic competitors. The global company views the world as one market, minimises the
importance of national boundaries, sources, raises capital and markets wherever it can do the
job best.
To be specific, a global company has three characteristics:
♦ It is a conglomerate of multiple units (located in different parts of the globe) but all
linked by common ownership.
♦ Multiple units draw on a common pool of resources, such as money, credit,
information, patents, trade names and control systems.
♦ The units respond to some common strategy. Nestle International is an example of
an enterprise that has become multinational. It sells its products in most countries
and manufactures in many. Besides, its managers and shareholders are also based
in different nations.
Strategic Management

1.24
A further development, perhaps, will be the super-national enterprise. It is a worldwide
enterprise chartered by a substantially non-political international body such as IMF or World
Bank. It operates as a private business without direct obligations. Its function is international
business service, and it remains viable only by performing that service adequately for nations
which permit its entry. With its integrative view, it should be able to draw the economic world
closer together. It could serve all nations without being especially attached to anyone of them.
Why do companies go global?
There are several reasons why companies go global. These are discussed as follows:
♦ One reason could be the rapid shrinking of time and distance across the globe thanks to
faster communication, speedier transportation, growing financial flows and rapid
technological changes.
♦ It is being realised that the domestic markets are no longer adequate and rich. Japanese
have flooded the U.S. market with automobiles and electronics because the home market
was not large enough to absorb whatever was produced. Some European companies
have gone global for similar reason.
♦ According to Raymond Vernon companies that develop attractive new products sell them
first in their home markets. Sooner or later, foreigners may learn about these products. At
this stage, most companies would export the product or service rather than produce it
abroad. But as foreign demand grows, the economics of foreign production change.
Eventually, the foreign market becomes large enough to justify foreign investment.
♦ Another reason for going overseas may also vary by industry. Petroleum and mining
companies often go global to secure a reliable or cheaper source of raw-materials. Some
manufacturing companies, by contrast, have often ventured overseas to protect old
markets or to seek new ones. For example cheap labour in India lure foreign investors.
♦ Companies often set up overseas plants to reduce high transportation costs. The higher
the ratio of the unit cost to the selling price per unit, the more significant the
transportation factor becomes.
♦ The motivation to go global in high-tech industries is slightly different. Companies in
electronics and telecommunications must spend large sums on research and
development for new products and thus may be compelled to seek ways to improve sales
volume to support high overhead expenses. If domestic sales and exports do not
generate sufficient cash flow, the companies naturally might look to overseas
manufacturing plants and sales branches to generate higher sales and better cash flow.
The following developments are also responsible for transnational operation of companies.
♦ Increasing emphasis on market forces and a growing role for the private sector in
nearly all developing countries;
Business Environment

1.25
♦ Rapidly changing technologies that are transforming the nature, organization, an location
of international production;
♦ The globalization of firms and industries;
♦ The rise of services to constitute the largest single sector in the world economy; and
regional economic integration, which has involved both the world’s largest economies as
well as select developing countries.
Manifestation of globalization
Globalization manifests itself in many ways. important of them are:
♦ Configuring anywhere in the world: An MNC can locate its different operations in
different countries on the basis of raw material availability, consumer markets and lowcost
labour.
♦ Interlinked and independent economies: In terms of economic-welfare,
globalization refers to the unique economically interdependent international
environment. Each country’s prosperity is interlinked with the rest of the world. No
nation can any longer hope to lead an existence of solitude and isolation in which only
domestic industries can function.
♦ Lowering of trade and tariff barriers: The apparent and real collapse of international
trade barriers proposes a new global cooperative arrangement and a redefinition of roles
of state and industry. The trend is towards increased privatization of manufacturing and
services sectors, less government interference in business decisions and more
dependence on the value-added sector to gain market place competitiveness. World
over, governments are pulling out from commercial business. The trade tariffs and
custom barriers are getting lowered, resulting in cheaper and abundant supply of goods.
♦ Infrastructural resources and inputs at International prices: Infrastructural inputs
must be ensured at competitive prices, if the companies were to compete globally. The
advantages of cheap labour (and other inputs) evaporate in the face of continuous
inflation and high infrastructural costs.
♦ Increasing trend towards privatization: Governments are everywhere withdrawing
from owning and running business enterprises. Private entrepreneurs are given greater
access and freedom to run business units. The role of government is reduced to the
provider of infrastructure for private business to prosper.
Strategic Management

1.26
♦ Entrepreneur and his unit have a central economic role: In the emerging world
order, the entrepreneur and his unit become central figures in the process of economic
growth and development of a nation. Given the right environment, businesses are able to
innovate, bring in new products, and contribute to nation’s wealth. For the risk he takes
and efforts he puts in, the businesses are rewarded with profits. Related to this is the
viability of the business unit. Only firms which are cost effective and quality oriented
survive and prosper. Weak and marginal firms die their natural death.
♦ Mobility of skilled resources: Skilled labour was once considered to be the
decisive factor in plant location and even in determining comparative advantage of a
nation. Not any more. Skilled labour is highly mobile. Modern factories use highly
skilled labour which is freely mobile. Where labour is unskilled, managements are
spending vast sums of money to train workers become skilled in their jobs. Besides
labour, other factors of production (land and capital) are also mobile. A developing
country which is long on land and short on capital can invite foreign investment and
make good the deficiency. Similarly, a developed country which is long on capital and
short on land can use a developing country as a base for its manufacturing
operations.
Thus, the traditional factors of production, viz., land, labour and capital, are no more
immobile or restricted for usage with. They are transferable from any part of the world to
any other part of the globe. The entire world has become a global village.
♦ Market-side efficiency: Integration of global markets implies that costs, quality
processing time, and terms of business become dominant competition drivers.
Customers can make a genuine choice of products and services on the basis of
maximum value for money. The exclusive markets which were once enjoyed are
no longer available to a firm. The inexorable pressure of technology and need for
its integration means that customers no longer have to be satisfied with shoddy
products and services provided by the state monopolies.
♦ Formation of regional blocks: A final corollary to globalization is the formation of
trade blocks. The reasons for forming such blocks are obvious. Countries, like
corporations, have to form strategic alliances to ward off economic and technological
threats and leverage their respective comparative and competitive advantages. The
signing of NAFTA (North American Free Trade Area) among N. America, Canada,
and Mexico creates new markets and manufacturing opportunities for these countries
Business Environment

1.27
and threatens to disrupt the plans and strategies of world powers such as Japan.
Similarly formation of European Union and ASEAN affects the World trade balance.
India is part of South Asian Association for Regional cooperation (SAARC). SAARC
consist of seven South Asian Countries with Bangladesh, Bhutan, Maldives, Nepal,
Pakistan and Sri Lanka as its members in addition of India. SAARC endevours to
accelerate economic growth in the Region. It also strives for social progress and cultural
development in the region, promotion of active collaboration and mutual assistance in the
economic, social, cultural, technical and scientific fields and strengthening of cooperation
among the member states in the International forums on matters of common interest.
12. STRATEGIC RESPONSES TO THE ENVIRONMENT
The business organization and its many environments have innumerous interrelationship that
at times, it becomes difficult to determine exactly where the organization ends and where its
environment begins. It is also difficult to determine exactly what business should do in
response to a particular situation in the environment. Strategically, the businesses should
make efforts to exploit the opportunity ad thought the threats.
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. They are simple goal-maintaining units. 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.
(ii) Proceed with caution: At the next level, are the businesses that take an intelligent
interest to adapt with the changing external environment. They seek to monitor the
changes in that environment, analyse their impact on their own goals and activities and
translate their assessment in terms of specific strategies for survival, stability and
strength. 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. This is an admittedly sophisticated strategy than to wait
for changes to occur and then take corrective-adaptive action.
(iii) Dynamic response: At a still higher sophisticated level, are those businesses that
regard the external environmental forces as partially manageable and controllable by
their actions. Their feedback systems are highly dynamic and powerful. They not merely
recognise and ward off threats; they convert threats into opportunities. They are highly
conscious and confident of their own strengths and the weaknesses of their external
environmental ‘adversaries’. They generate a contingent set of alternative courses of
action to be picked up in tune with the changing environment.
Strategic Management

1.28
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, the very dominating behaviour of command organizations may
generate powerful countervailing pressures and forces in the environment. It should be
remembered that the external environment in larger and more inclusive than the individual
organization; presumably the former commands more resources and its interests and values
are much broader than those of the latter.
A innovative and autonomous organization generates its own constraints. It is not above the
rule of law and logic of the external environment. Within certain limits, such an organization
can shape part of its relevant external environment on a reciprocal basis.
13. COMPETITIVE ENVIRONMENT
The essence of strategy formulation is coping with competition. Although competition makes
organizational working difficult, intense competition is neither a coincidence nor bad luck. All
organizations have competition. Multinationals and large organizations clash directly on every
level of product and service. Mid-sized and small business also chase same customers and find
that prices and product quality are bounded by the moves of their competitors. Even large public
sector monopolies are gradually getting privatised and facing competition. The monopolies
enjoyed by the Bharat Sanchar Nigam Ltd and Mahanagar Telephone Nigam Ltd have faded
away after entry of private players. 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 benefit of competition are also enjoyed by the society and the markets in which
organisations operate. The customers are able to get products at lower costs and better
quality. They get better value of their money because of competition.
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, income distribution and consumer welfare.
Businesses have to consider competitors’ strategies, profits levels, costs, products and
services when preparing and implementing their business plans.
While formulating strategies, organizations have to separately identify and concentrate on the
competitors who are significantly affecting the business. Lesser attention may be given to
smaller competitors who have little or no impact the business. There can be several
competitors vying to satisfy same needs of customers. Competition is not necessarily
restricted to same product or services. Coke and Pepsi may be obvious competitors. 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. They have to also compete with natural
juices such as Real.
Business Environment

1.29
A better understanding of the nature and extent of competition may be reached by answering
the following questions:
(i) Who are the competitors?
(ii) What are their product and services?
(iii) What are their market shares?
(iv) What are their financial positions?
(v) What gives them cost and price advantage?
(vi) What are they likely to do next?
(vii) Who are the potential competitors?
Cooperation in a Competitive Environment: In economics we study oligopoly, wherein a
small number of only manufactures/sellers of a product may join together to have monopolistic
behaviour. An example of oligopoly can be Organization of the Oil Exporting Countries
(OPEC), which is collective group of nations extracting and exporting oil. Its aim according to
its Statute, is ‘the coordination and unification of the petroleum policies of member countries
and the determination of the best means for safeguarding their interests, individually and
collectively; ways and means of ensuring the stabilization of prices in international oil markets
with a view to eliminating harmful and unnecessary fluctuations. The cooperation in
organizations forming cartels (a term used to define the groups in oligopoly) may be in form of
deciding market shares, prices and profits. 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. Tata and Fiat
have arrangements in relations to cars. Such cooperation is not necessarily restricted to the
organizations producing or dealing in same product or services. They may identify some common
interest for cooperation between them. A cold drink manufacture may enter into arrangement with a
chain of restaurants to offer its beverages to the clients of restaurants. Lately, various credit card
companies are entering into arrangements with other businesses to launch co-branded credit
cards. Such arrangements help in reaching greater number of customers.
The benefits of cooperation are also seen in Japan, 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. A kieretsu is a
loosely-coupled group of companies, usually in related industries. Kieretsu members are peers
and may own significant amounts of each other’s stock and have many board members in
common. However, they are different from conglomerates (Common in western countries and
also found in India) wherein all members are lineated through ownership pattern. A kieretsu
also differs from a consortium or an association, as the primary purpose of a kieretsu is not to
share information or agree industry standards, but to share purchasing, distribution or any
other functions. In Kieretsu members remain independent companies in their own right: the
Strategic Management

1.30
only strategy they have in common is to prefer to do business with other kieretsu members,
both when buying and when selling.
Cooperation on account of family ownership: Theoretically, cooperation generates
automatically in businesses owned by a same family. The ownership, groups are engaged in the
management of their enterprise in a direct manner. Commonly, the ownership group is nothing
but a family and its kith and kin. In India, a very large number of business enterprises, big,
medium and small, are family-managed enterprises. These include large business houses such
as Tata, Birla, Godrej, Reliance, Modi, Escorts and et al. Major decisions and sometimes even
minor decisions are made by members of the family who manage the enterprise. The interests of
the family largely influence the managerial decisions and activities of the enterprise. There is a
total identity between the needs and goals of the family and of the enterprise.
Sometimes, 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. Succession remains a tricky and conflicting issue in businesses. Be it the
Ambanis of Reliance Industries, the Bajajs of Bajaj Auto, the Nandas of Escorts, or the Modis
of Modi Rubber - each family has, in the recent past, faced succession and ownership issues
and found them tough to resolve. However, one can count several counter examples of familyrun
businesses that have resolved these issues amicably. The Murugappa Group in the South,
the Burmans of Dabur India and the Thapars have settled succession issues without coming
into the public eye.
14. PORTER’S FIVE FORCES MODEL - COMPETITIVE ANALYSIS
To gain a deep understanding of a company’s industry and competitive environment,
managers do not need to gather all the information they can find and waste a lot of time
digesting it. Rather, the task is much more focused. Thinking strategically about a company’s
competitive environment entails using some well defined concepts and analytical tools.
The character, mix, and subtleties of competitive forces are never the same from one industry to
another. A powerful and widely used tool for systematically diagnosing the significant competitive
pressures in a market and assessing the strength and importance of each is the five-forces
model of competition.(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 manoeuvring and jockeying for buyer
patronage that goes on among rival sellers in the industry.
♦ Competitive pressures associated with the threat of new entrants into the market.
♦ Competitive pressures coming from the attempts of companies in other industries to win
buyers over to their own substitute products.
♦ Competitive pressures stemming from supplier bargaining power and supplier-seller
collaboration.
Business Environment

1.31
♦ Competitive pressures stemming from buyer bargaining power and seller-buyer
Collaboration.
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: Identify the specific competitive pressures associated with each of the five
forces.
Step 2: Evaluate how strong the pressures comprising each of the five forces are
(fierce, strong, moderate to normal, or weak).
Step 3: Determine whether the collective strength of the five competitive forces is
conducive to earning attractive profits.
Figure: The Five Force model of Competition
POTENTIAL
NEW
ENTRANTS
Competitive pressures
coming from the threat
of entry of new rivals
Competitive
pressures stemming
from Suppliers
Bargaining Power Competitive pressures
stemming from buyer
Bargaining Power
SUPPLIERS BUYERS
FIRMS IN OTHER
INDUSTRIES
OFFERING
SUBSTITUTE
PRODUCTS
Competitive pressures
coming from substitute
products
INDUSTRY
COMPETITORS
RIVALRY AMONG
EXISTING FIRMS
Strategic Management

1.32
Threat of new entrants: New entrants are always a powerful source of competition. The new
capacity and product range they bring in throw up new competitive pressure. And the bigger
the new entrant, the more severe the competitive effect. New entrants also place a limit on
prices and affect the profitability of existing players.
Bargaining power of customers: This is another force that influences the competitive
condition of the industry. This force will become heavier depending on the possibilities of the
buyers forming groups or cartels. Mostly, this is a phenomenon seen in industrial products.
Quite often, users of industrial products come together formally or informally and exert
pressure on the producer in matters such as price, quality and delivery. Two top CDMA
service providers Reliance and Tata Teleservices had put a simultaneous pressure on
Qualcomm to reduce the royalties on the CDMA based handsets.
Such a collusion on the part of buyers can be a major force in some industries. The bargaining
power of the buyers influences not only the prices that the producer can charge but also
influences in many cases, 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.
Bargaining power of suppliers: Quite often suppliers, too, exercise considerable
bargaining power over companies. The more specialised the offering from the supplier, greater
is his clout. And, if the suppliers are also limited in number they stand a still better chance to
exhibit their bargaining power. The bargaining power of suppliers determines the cost of raw
materials and other inputs of the industry and, therefore, industry attractiveness and
profitability.
Rivalry among current players: The rivalry among existing players is an idea that can be
easily understood. This is what is normally understood as competition. And it is obvious that
for any player, the competitors influence prices as well as the costs of competing in the
industry, in production facilities product development, advertising, sales force, etc.
Threats from substitutes: Substitute products are a latent source of competition in an
industry. In many cases they become a major constituent of competition. Substitute products
offering a price advantage and/or performance improvement to the consumer can drastically
alter the competitive character of an industry. And they can bring it about all of a sudden. For
example, coir suffered at the hands of synthetic fibre. Wherever substantial investment in R&D
is taking place, threats from substitute products can be expected. Substitutes, too, usually limit
the prices and profits in an industry.
Business Environment

1.33
So, in addition to existing rivals or competitors proper, forces such as new entrants,
customers, suppliers, and substitutes have all to be viewed as forces governing competition in
the industry. A firm has to give due weightage to each of these forces as a fight can emerge
from any quarter.
The five forces together determine industry attractiveness/profitability. This is so because
these forces influence the causes that underlie industry attractiveness/profitability. For
example, elements such as cost and investment needed for being a player in the industry
decide industry profitability, and all such elements are governed by these forces. The
collective strength of these five competitive forces determines the scope to earn attractive
profits. The strength of the forces may vary from industry to industry as also within a given
SELF-EXAMINATION QUESTIONS
Multiple Choice Questions
1. All are elements of micro environment except:
(a) Consumer.
(b) Suppliers.
(c) Competitors.
(d) Society.
2. All are elements of macro environment except:
(a) Society.
(b) Government.
(c) Competitors.
(d) Technology.
3. Select the correct statement out of the following:
(a) Environmental factors are totally beyond the control of a single industrial
enterprise.
(b) Environmental factors are largely beyond the control of a single industrial
enterprise.
(c) Environmental factors are totally within the control of a single industrial
enterprise.
(d) None of the above.
Strategic Management

1.34
4. In response to the changes in the environment organizations in general should:
(a) Understand the impact of changes on the strategy and make appropriate
modifications.
(b) Make efforts that changes are reverted back so that organizations can function
smoothly.
(c) Ignore the changes.
(d) None of the above.
5. Read the following three statements:
(i) The environment is constantly changing in nature
(ii) Various environmental constituents exist in isolation and do not interact
with each other.
(iii) The environment has a far reaching impact on organizations.
From the combinations given below select an alternative that represent statements that
are true:
(a) (i) and (ii).
(b) (ii) and (iii)
(c) (i) and (iii)
(d) (i), (ii) and (iii)
6. Under Porters five forces new entrants are ________ source of competition.
(a) Significant
(b) Marginal
(c) Insignificant
(d) Infinite
7. Which environmental factor regulates the values and beliefs, traditions and customs of
society?
(a) Political-legal factor
(b) Technological factor
(c) Economic factor
(d) Socio-cultural factor
Business Environment

1.35
Objective Type Questions
State with reasons which of the following statements are correct/incorrect:
(a) According to Peter F Drucker businesses exist for making profits.
(b) Society within which a company operates is part of its micro environment.
(c) Competitors are part of macro environment of an organisation.
(d) The environment is constantly changing.
(e) Various environmental constituents exist in isolation and do not interact with each other.
(f) Businesses function in an isolated manner.
(g) Under porters five forces new entrants are insignificant source of competition.
Short answer Questions
1. What is a kieretsus?
2. What is demographic environment of business?
3. Write a short note on micro environment.
Essay type Questions
1. Do you advocate that organizations should concern themselves with the elements of its
outside world? Why?
2. Discuss the relations between organizations and their external environment? How
organizations strategically respond to their environment?
3. What do you mean by micro and macro environment?
4. Briefly discuss various elements of macro environment.
5. What is competitive environment? Discuss the five forces driving industry competition
as given by Porter.
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. To further
this growth and discuss the common issues various IT professionals of different companies
assembled for a meeting. Their agenda included discussion on the issues relevant for the
development of the technology park and available opportunities in IT industry for companies
planning to set up IT and processing businesses in Sohanpur.
Strategic Management

1.36
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. The
nearest airport is 600 km away in New Delhi.
One of the participant highlighted the importance of world-class telecommunication facilities in
the area. He felt that the telecommunications technology in the region is primitive and is not
able to meet the present needs of the region. He also spoke at length about the problems of
frequent job changes by present youth. He highlighted that a major problem is lack of patience
in the young generation of IT professionals. He said retention was a major problem in
Sohanpur as professional also preferred bigger cities. He suggested that the IT businesses
should get together to create a conducive working climate for retention as well as growth.
Read the above case and answer the following questions:
(1) List out different environmental factors for a new entrepreneur who wants to start a new
IT project in the Technology park. Segregate them as positive and negative.
(2) What is importance of an Airport in the city? Discuss.
(3) Suggest how manpower issues can be dealt by the businesses in the park.
Answers – Multiple Choice Questions
1. (d), 2. (c), 3. (b), 4. (a), 5. (c), 6. (c), 7. (d)
CHAPTER 2
BUSINESS POLICY AND STRATEGIC
MANAGEMENT
LEARNING OBJECTIVES
♦ Learn what business policy and strategy is all about.
♦ Know the framework and importance of strategic management.
♦ Know the strategic management process.
♦ Have an understanding of corporate vision and mission.
♦ Learn how strategy operates at different levels of the organization.
Without a strategy the organization is like a ship without a rudder.
Joel Ross and Michael Kami

Strategic management is not a box of tricks or a bundle of techniques. It is
analytical thinking and commitment of resources to action.
Peter Drucker
1. INTRODUCTION
This chapter introduces the concept of business policy and strategic management. With the
increased competition, the management of business has acquired strategic dimension. All
professionals, including the chartered accountants, working towards growth of their
businesses must possess sound knowledge of strategic management. Business policy and
strategic management are highly intertwined.
2. BUSINESS POLICY AS A DISCIPLINE
The origins of business policy can be traced back to 1911, when Harvard Business School
introduced an integrative course in management aimed at the creation of general management
capability. This course was based on interactive case studies which had been in use at the
Strategic Management

2.2
school for instructional purposes since 1908. The course was intended to enhance general
managerial capability of students. However, the introduction of business policy in the
curriculum of business schools / management institutes came much later. In 1969, the
American Assembly of Collegiate Schools of Business, a regulatory body for business schools,
made the course of business policy, a mandatory requirement for the purpose of recognition.
During the next few decades, business policy as a course spread to different management
institutes across different nations and become an integral part of management curriculum.
Basically, business policy is considered as a capstone, integrative course offered to students
who have previously been through a set of core functional area courses. The term ’Business
Policy’ has been traditionally used though new titles for the course have begun to be
introduced in recent years.
According to Glueck, development in business policy arose from the use of planning
techniques by managers. Starting from day-to-day planning in earlier times, 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, long-range planning came to be used. Soon, long-range planning
was replaced by strategic planning, and later by strategic management:, a term that is
currently used to describe the process of strategic decision making.
Business policy, as defined by Christensen and others, is "the study of the functions and
responsibilities of senior management, the crucial problems that affect success in the total
enterprise, and the decisions that determine the direction of the organization and shape
its future. The problems of policy in business, like those of policy in public affairs, have to
do with the choice of purposes, the moulding of organizational identity and character, the
continuous definition of what needs to be done, and the mobilization of resources for the
attainment of goals in the face of competition or adverse circumstance.
Business Policy tends to emphasise on the rational-analytical aspect of strategic
management. It presents a framework for understanding strategic decision making. Such a
framework enables a person to make preparations for handling general management
responsibilities.
3. MEANING AND THE NATURE OF MANAGEMENT
To understand strategic management to be studied later, we need to have a basic
understanding of the term management The term ‘management’ can be used in two major
contexts.
(a) It is used with reference to a key up-group in an organisation. In relation to an
organisation, management is the chief organ entrusted with the task of making it a
purposeful and productive entity, by undertaking the task of bringing together and
Business Policy and Strategic Management

2.3
integrating the disorganised resources of manpower, money, materials, and technology
into a functioning whole. An organisation becomes a unified functioning system when
management systematically mobilises and utilises the diverse resources.
Management is a critical variable and a vital sub-system in an organisation. The
survival and success of an organisation depend to a large extent on the competence
and character of management. Management has to also facilitate organisational
change and adaptation. It has to also work for resolution of organisational conflicts.
(b) It is also used with reference to a set of interrelated functions and processes, to a field
of study or discipline in social sciences and to a vocation or profession. The functions
and processes of management are wide-ranging but closely inter-related. They range
all the way from design of the organisation, determination of the goals and activities,
mobilisation and acquisition of resources, allocation of tasks and resources among the
personnel and activity units. They also include adoption of certain techniques, tools and
methods for carrying on activities, through articulation of skills and efforts of
organisational personnel in a unified manner and installation of communication and
control systems to ensure that what is planned is achieved.
Management refers to an integrated set of functions and processes designed to initiate
and unify group effort in a meaningful manner directed towards pursuing certain goals.
It is in this context we will study strategic management later. Management involves
mobilisation and utilisation of physical human and other needed resources in judicious
manner through certain skills, techniques, and activities.
A wide range of definitions of management exist in the literature on management. Here
we shall cite the definitions of a few theorists :
Peter Drucker: Management is a function, a discipline, a task to be done, and
managers practise this discipline, carry out the functions and discharge these tasks.
Dalton McFarland: Management is the process by which managers create, direct,
maintain and operate purposive organisations through systematic, co-ordinated an cooperative
human effort.
Management is an influence process to make things happen, to gain command over
phenomena, to induce and direct events and people in a particular manner. Influence is
backed by power, competence, knowledge and resources. Influence is not unilateral but
multilateral. Managers formulate their goals, values and strategies, partly autonomously, to
cope with, to adapt and to adjust themselves with the behaviour and changes of the
environment.
Strategic Management

2.4
4. 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. In business organizational context the term is not much different.
Businesses have to respond to a dynamic and often hostile environment for pursuit of their
mission. Strategy seeks to relate the goals of the organization to the means of achieving them.
A company’s strategy is the game plan management is using to stake out market position,
conduct its operations, attract and please customers, compete successfully, and achieve
organizational objectives.
A company’s strategy consists of the combination of competitive moves and business
approaches that managers employ to please customers, compete successfully and achieve
organizational objectives. We may define ‘strategy’ as a long range blueprint of an
organization’s desired image, direction and destination what it wants to be, what it wants to do
and where it wants to go. Following other definitions are also important to understand the
term:
Igor H. 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.
William F.
Glueck
: A unified, comprehensive and integrated plan designed to assure
that the basic objectives of the enterprise are achieved.
Strategy is consciously considered and flexibly designed scheme of corporate intent and
action to achieve effectiveness, to mobilise resources, to direct effort and behaviour, to handle
events and problems, to perceive and utilise opportunities, and to meet challenges and threats
to corporate survival and success. In corporate strategy, the set of goals has a system of
priorities; the combination, the sequence and the timing of the moves, means and approaches
are determined in advance, the initiative and responses have a cogent rationale behind them,
are highly integrated and pragmatic; the implications of decisions and action programmes are
corporate wide, flexible and contingent.
The very injection of the idea of strategy into business organizations is intended to unravel
complexity and to reduce uncertainty of the environment. To the extent the term strategy is
associated with unified design and action for achieving major goals, gaining command over
the situation with a long-range perspective and securing a critically advantageous position. Its
implications for corporate functioning are obvious.
Strategy is meant to fill in the need of organizations for a sense of dynamic direction, focus
and cohesiveness. Objectives and goals alone do not fill in the need. Strategy provides an
integrated framework for the top management to search for, evaluate and exploit beneficial
opportunities, to perceive and meet potential threats and crises, to make full use of resources
Business Policy and Strategic Management

2.5
and strengths, to offset corporate weaknesses and to make major decisions in general. Top
management operates in an environment of partial ignorance and uncertainty.
In general, a corporate strategy has the following characteristics:
♦ It is generally long-range in nature, though it is valid for short-range situations also and
has short-range implications.
♦ It is action oriented and is more specific than objectives.
♦ It is multipronged and integrated.
♦ It is flexible and dynamic.
♦ It is formulated at the top management level, though middle and lower level managers
are associated in their formulation and in designing sub-strategies.
♦ It is generally meant to cope with a competitive and complex setting.
♦ It flows out of the goals and objectives of the enterprise and is meant to translate them
into realities.
♦ It is concerned with perceiving opportunities and threats and seizing initiatives to cope
with them. It is also concerned with deployment of limited organizational resources in the
best possible manner.
♦ It gives importance to combination, sequence, timing, direction and depth of various
moves and action initiatives taken by managers to handle environmental uncertainties
and complexities.
♦ It provides unified criteria for managers in function of decision making.
Strategies are meant to fill in the need of enterprises for a sense of direction, focus and
coherent functioning. Strategies provide an integral framework for management to negotiate
its way through a complex and turbulent external environment. 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. They obviate the occasions for impulsive and crisis decisions, false starts,
misdirected moves, wasted resource uses and the like. Without a network of well designed
strategies, followed up by policies, corporate objectives and goals tend to remain as mere
aspirations and good intentions. Even if they get off the ground, they will be lacking drive and
direction. The role of strategies thus stems from the fact that achievement of organizational
objectives is best with uncertainties and pitfalls.
Strategies are formulated at the corporate, divisional and functional level. Corporate strategies
are formulated by the top managers. They include the determination of the business lines,
expansion and growth, vertical and horizontal integration, diversification, takeovers and
mergers, new investment and divestment areas, R & D projects, and so on. These corporate
Strategic Management

2.6
wide strategies need to be operationalized by divisional and functional strategies regarding
product lines, production volumes, quality ranges, prices, product promotion, market
penetration, purchasing sources, personnel development and like.
However, strategy is no substitute for sound, alert and responsible management. Strategy can
never be perfect, flawless and optimal. It is in the very nature of strategy that it is flexible and
pragmatic; it is art of the possible; it does not preclude second-best choices, trade-offs,
sudden emergencies, pervasive pressures, failures and frustrations. However, in a sound
strategy, allowances are made for possible miscalculations and unanticipated events.
5. GENERIC STRATEGIC ALTERNATIVES
According to William F Glueck and Lawrence R Jauch there are four generic ways in which
strategic alternatives can be considered. These are stability, expansion, retrenchment and
combinations.
5.1 Stability strategies: One of the important goals of a business enterprise is stability − to
safeguard its existing interests and strengths, to pursue well established and tested
objectives, to continue in the chosen business path, to maintain operational efficiency on a
sustained basis, to consolidate the commanding position already reached, and to optimise
returns on the resources committed in the business.
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.
♦ 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. It is not a ‘do nothing’ strategy. It involves keeping track of new
developments to ensure that the strategy continues to make sense. This strategy is typical for
mature business organizations. Some small organizations will also frequently use stability as a
strategic focus to maintain comfortable market or profit position.
5.2 Expansion Strategy: Expansion strategy is implemented by redefining the business by
adding the scope of business substantially increasing the efforts of the current business.
Expansion is a promising and popular strategy that tends to be equated with dynamism, vigor,
promise and success. An enterprise on the move is a more agreeable stereotype than a
steady-state enterprise. It is often characterised by significant reformulation of goals and
directions, major initiatives and moves involving investments, exploration and onslaught into
new products, new technology and new markets, innovative decisions and action programmes
and so on. Expansion also includes diversifying, acquiring and merging businesses. The
strategy may take the enterprise along relatively unknown and risky paths, full of promises and
pitfalls.
Business Policy and Strategic Management

2.7
Expansion through diversification: Diversification is defined as entry into new products or
product lines, new services or new markets, involving substantially different skills, technology
and knowledge. When an established firm introduces a new product which has little or no
affinity with its present product line and which is meant for a new class of customers different
from the firm’s existing customer groups, the process is known as conglomerate
diversification. Both the technology of the product and of the market are different from the
firm’s present experience.
Innovative and creative firms always look for opportunities and challenges to grow, to venture
into new areas of activity and to break new frontiers with the zeal of entrepreneurship. They
feel that diversification offers greater prospects of growth and profitability than expansion.
For some firms, diversification is a means of utilising their existing facilities and capabilities in
a more effective and efficient manner. They may have excess capacity or capability in
manufacturing facilities, investible funds, marketing channels, competitive standing, market
prestige, managerial and other manpower, research and development, raw material sources
and so forth. Another reason for diversification lies in its synergistic advantage. It may be
possible to improve the sales and profits of existing products by adding suitably related or new
products, because of linkages in technology and/or in markets.
Expansion through acquisitions and mergers: Acquisition of or merger with an existing concern
is an instant means of achieving the expansion. It is an attractive and tempting proposition in
the sense that it circumvents the time, risks and skills involved in screening internal growth
opportunities, seizing them and building up the necessary resource base required to
materialise growth. Organizations consider merger and acquisition proposals in a systematic
manner, so that the marriage will be mutually beneficial, a happy and lasting affair.
Apart from the urge to grow, acquisitions and mergers are resorted to for purposes of
achieving a measure of synergy between the parent and the acquired enterprises. Synergy
may result from such bases as physical facilities, technical and managerial skills, distribution
channels, general administration, research and development and so on. Only 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.
5.3 Retrenchment Strategy: A business organization can redefine its business by
divesting a major product line or market. Retrenchment or retreat becomes necessary or
expedient for coping with particularly hostile and adverse situations in the environment and
when any other strategy is likely to be suicidal−’Strategic retreat’ is often resorted to in military
engagements. In business parlance also, retreat is not always a bad proposition to save the
enterprise’s vital interests, to minimise the adverse effects of advancing forces, or even to
Strategic Management

2.8
regroup and recoup the resources before a fresh assault and ascent on the growth ladder
is launched.
The nature, extent and timing of retrenchment are matters to be carefully decided by
management, depending upon each contingency. The enterprise has several options open
to it in designing and acting upon its strategy. In cases of temporary and partial setbacks,
the enterprise can endeavour to cut back on its capital and revenue expenditures-new
administrative blocks, replacement of worn-out machinery, advertising, R & D activities,
employee welfare subsidies, community development projects, executives perks, and so
on. In somewhat more serious cases of hard times, inventory levels, manufacturing level,
manpower, plant maintenance, dividend to shareholders and interest on deposits, are
some of the areas for slashing or postponement as the case may be. In the next stage,
the enterprise may think of withdrawing from some marginal markets, withdrawal of some
brands and sizes of products, withdrawal of even some slow moving products, winding up
some branch offices, abolition of some executive positions and so on. In the fourth stage,
the enterprise may resort to sale of some manufacturing facilities and individual product
divisions which are a drag on the enterprise’s resources. It may also seek retirement
either from the production or the marketing stage. It is also possible to think of offering
itself for take-over by another more viable enterprise. As a last option an enterprise may
seek liquidation which means corporate death. This is the difficult solution, an answer to
all problems of existence and a liberation from the fetters of frustration.
5.4 Combination Strategies: The above strategies are not mutually exclusive. It is
possible to adopt a mix of the above to suit particular situations. An enterprise may seek
stability in some areas of activity, expansion in some and retrenchment in the others.
Retrenchment of ailing products followed by stability and capped by expansion in some
situations may be thought of. For some organizations, a strategy by diversification and/or
acquisition may call for a retrenchment in some obsolete product lines, production
facilities and plant locations.
6. THE DYNAMICS OF COMPETITIVE STRATEGY
Strategic thinking involves orientation of the firm’s internal environment with the changes
of the external environment. The competitive strategy evolves out of consideration of
several factors that are external to the firm as shown in the figure - 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.
Similarly the broader expectation of the society in which the organization operates is
again an important factor to determine the competitive strategy. The strengths and
weaknesses of organizations are the internal factors, which determine the corporate
Business Policy and Strategic Management

2.9
strategy. It is to be analysed and find out in which functional area such as marketing, R &
D, operations, etc. the organization has superiority over the competitors. The strength is
to considered in the context of the opportunities arising in the external environment. The
personal values of the key implementers also play major roles in formulating the
competitive strategy.















Figure: Context in which Competitive Strategy is Formulated
7. STRATEGIC MANAGEMENT
In a hyper competitive marketplace, companies can operate successfully by creating and
delivering superior value to target customers and also learning how to adapt to a
continuously changing business environment. So to meet changing conditions in their
industries, companies need to be farsighted and visionary, and must develop long-term
strategies. Strategic planning, an important component of strategic management, involves

Competitive Strategy
Personal Values of
the key
Implementers
Company Strength &
Weakness
Broader Societal
Expectation
Industry Opportunities and
Threats (Economic &
Technical)
Factors External to
Factors Internal to the Company
the Company
Strategic Management

2.10
developing a strategy to meet competition and ensure long-term survival and growth. 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.
♦ To guide the company successfully through all changes in the environment.
The present organizational operations are highly influenced by the increasing rate of change
in the environment and the ripple effect created on the organization. Changes can be external
to the firm or it may be change introduced to the firms by the managers. It may manifest in the
blurring of industry and firm boundaries, driven by technology, deregulation, or, through
globalization. The tasks of crafting, implementing and executing company strategies are the
heart and soul of managing a business enterprise.
Strategic management starts with developing a company mission (to give it direction),
objectives and goals (to give it means and methods for accomplishing its mission), business
portfolio (to allow management to utilize all facets of the organization), and functional plans
(plans to carry out daily operations from the different functional disciplines).
No matter how well the strategic processes have been designed and implemented, success
depends on how well each department performs its customer-value-adding activities and how
well the departments work together to serve the customer. Value chains and value delivery
networks have become popular with organizations that are sensitive to the wants and needs of
consumers. Ultimately the aim of strategic management is to save the company’s business
products, services and communications so that they achieve targeted profits and growth.
The term strategic management refers to the managerial process of forming a strategic vision,
setting objectives, crafting a strategy, implementing and executing the strategy, and then
overtimes initiating whatever corrective adjustments in the vision, objectives, strategy, and
execution are deemed appropriate.
7.1 Framework
The basic framework of strategic process can be described in a sequence of five stages as
shown in the figure - Framework of strategic management: The five stages are as follows:
Stage one - Where are we Now? (Beginning): This is the starting point of strategic
planning and consists of doing a situational analysis of the firm in the environmental
context. Here the firm must find out its relative market position, corporate image, its
strength and weakness and also environmental threats and opportunities. This is also
known as SWOT (Strength, Weakness, Opportunity, Threat) analysis. You may refer third
chapter for a detailed discussion on SWOT analysis.
Stage two: - Where are we Want to Be? (Ends): This is a process of goal setting for the
organization after it has finalised its vision and mission. A strategic vision is a roadmap of
Business Policy and Strategic Management

2.11
the company’s future – providing specifics about technology and customer focus, the
geographic and product markets to be pursued, the capabilities it plans to develop, and
the kind of company that management is trying to create.
An organization’s Mission states what customers it serves, what need it satisfies, and
what type of product it offers.
Stage three - How Might we Get There? (Means): Here the organization deals with the
various strategic alternatives it has.
Stage four - Which Way is Best? (Evaluation): Out of all the alternatives generated in the
earlier stage the organization selects the best suitable alternative in line with its SWOT
analysis.
Stage five - How Can we Ensure Arrival? (Control): This is a implementation and control
stage of a suitable strategy. Here again the organization continuously does situational
analysis and repeats the stages again.
Figure - Framework of strategic management
7.2 Importance of Strategic Management
Strategic planning and implementation have become a must for all organizations for their
survival and growth in the present turbulent business environment. ‘Survival of fittest ‘as
propagated by Darwin is the only principle of survival for organization, where ‘fittest’ are
not the ‘largest’ or ‘strongest’ organization but those who can change and adapt
successfully to the changes in business environment. Many organizational giants have
Stage One
Where are we Now?
(Beginning)
Stage Four
Which Way is Best?
(Evaluation)
Stage Five
How Can we Ensure Arrival?
(Control)
Stage Two
Where are we Want to Be?
(Ends)
Stage Three
How Might we Get There?
(Means)
Introduction
Strategic Management

2.12
also followed the path of extinction failing to manage drastic changes in the business
environment. Also business follows the war principle of ‘win or lose’, and not necessarily
win-win situation arises in business world. Hence the organization has to build its
competitive advantage over the competitors in the business warfare in order to win. This
can be done only by following process of strategic management - strategic analysis,
formulation and implementation. The major benefits of strategic management are:
♦ Strategic management helps organisations to be more proactive instead of reactive
in shaping its future. Organisations are able to analyse and take actions instead of
being mere spectators. Thereby they are able to control there own destiny in a better
manner. It helps them in working within vagaries of environment and shaping it,
instead of getting carried away by its turbulence or uncertainties.
♦ Strategic management provides framework for all the major business decisions of an
enterprise such as decisions on businesses, products, markets, manufacturing
facilities, investments and organisational structure. It provides better guidance to
entire organisation on the crucial point - what it is trying to do.
♦ Strategic management is concerned with ensuring a good future for the firm. It seeks
to prepare the corporation to face the future and act as pathfinder to various
business opportunities. Organisations are able to identify the available opportunities
and identify ways and means as how to reach them.
♦ Strategic management serves as a corporate defence mechanism against mistakes
and pitfalls. It help organisations to avoid costly mistakes in product market choices
or investments.
♦ Over a period of time strategic management helps organisation to evolve certain core
competencies and competitive advantages that assist in its fight for survival and
growth.
8. 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. Decisions may relate to general day to day operations. They may be
major or minor. They may also be strategic in nature. 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. 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. Hence, problems
calling for strategic decisions require to be considered by top management.
Business Policy and Strategic Management

2.13
♦ 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.
♦ Strategic issues are future oriented: Strategic thinking involves predicting the future
environmental conditions and how to orient for the changed conditions.
♦ 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.
♦ 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.
9. THE TASK OF STRATEGIC MANAGEMENT
The strategy-making/strategy-implementing process consists of five interrelated
managerial tasks. These are
♦ Setting vision and mission: Forming a strategic vision of where the organization is
headed, so as to provide long-term direction, delineate what kind of enterprise the
company is trying to become and infuse the organization with a sense of purpose.
♦ Setting objectives: Converting the strategic vision into specific performance
outcomes for the company to achieve.
♦ Crafting a strategy to achieve the desired outcomes.
♦ Implementing and executing the chosen strategy efficiently and effectively.
♦ Evaluating performance and initiating corrective adjustments in vision, long-term
direction, objectives, strategy, or execution in light of actual experience, changing
conditions, new ideas, and new opportunities.
Strategic management model
The strategic management process can best be studied and applied using a model. Every
model represents some kind of process. The model illustrated in the Figure: Strategic
management model is a widely accepted, comprehensive. This model like any other model
of management does not guarantee sure-shot success, but it does represent a clear and
practical approach for formulating, implementing, and evaluating strategies. Relationships
among major components of the strategic management process are shown in the model.
Strategic Management

2.14
Identifying an organization’s existing vision, mission, objectives, and strategies is the starting
point for any strategic management process because an organization present situation and
condition may preclude certain strategies and may even dictate a particular course of action.
Every organization has a vision, mission, objectives, and strategy, even if these elements are
not consciously designed, written, or communicated. The answer to where an organization is
going can be determined largely by where the organization has been.
The strategic management process is dynamic and continuous. A change in any one of the
major components in the model can necessitate a change in any or all of the other
components. For instance, a shift in the economy could represent a major opportunity and
require a change in long-term objectives and strategies; a failure to accomplish annual
objectives could require a change in policy; or a major competitor’s change in strategy could
require a change in the firm’s mission. Therefore, strategy formulation, implementation, and
evaluation activities should be performed on a continual basis, not just at the end of the
year or semi-annually. The strategic management process never really ends.
Figure Strategic Management Model
Develop
Vision
And
Mission
Statements
Establish
Long-term
Objectives
Generate,
Evaluate,
and select
Strategies
Implement
Strategies
Management
Issues
Implement
Strategies
Marketing,
Finance,
Accounting,
R&D, MIS
Issues
Measure and
Evaluate
Performance
Strategy
Formulation
Strategy
Implementation
Strategy
Evaluation
Perform
External
Audit
Perform
Internal
Audit
Business Policy and Strategic Management

2.15
The strategic management process is not as cleanly divided and neatly performed in
practice as the strategic management model suggests. Strategists do not go through the
process in lockstep fashion. Generally, there is give-and-take among hierarchical levels of
an organization. Many organizations conduct formal meetings semi-annually to discuss
and update the firm’s vision/mission, opportunities/threats, strengths/weaknesses,
strategies, objectives, policies, and performance. Creativity and candour from participants
are encouraged in meeting. Good communication and feedback are needed throughout
the strategic management process.
Application of the strategic management process is typically more formal in larger and
well-established organizations. Formality refers to the extent that participants,
responsibilities, authority, duties, and approach are specified. Smaller businesses tend to
be less formal. Firms that compete in complex, rapidly changing environments, such as
technology companies, tend to be more formal in strategic planning. Firms that have many
divisions, products, markets, and technologies also tend to be more formal in applying
strategic-management concepts. Greater formality in applying the strategic management
process is usually positively associated with the cost, comprehensiveness, accuracy, and
success of planning across all types and sizes of organizations.
10. VISION, MISSION AND OBJECTIVES
Amongst the various steps in the strategic management model we will restrict discussion
to vision, mission and objectives in this chapter.
How can you lead if you do not know where are you going?
George Newman, The Conference Board
Management’s job is not to see the company as it is ……but as it can become.
- John W Teets, CEO, Greyhound Corporation
10.1 The Vision
Very early in the strategy making process, 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. Deciding to commit the company to one path versus
another pushes managers to draw some carefully reasoned conclusions about how to try
to modify the company’s business makeup and the market position it should stake out.
Top management’s views and conclusions about the company’s direction and the productcustomer-
market-technology focus constitute a strategic vision for the company. A
strategic vision delineates management’s aspirations for the business, providing a
panoramic view of the “where we are going” and a convincing rationale for why this makes
Strategic Management

2.16
good business sense for the company. A strategic vision thus points an organization in a
particular direction, charts a strategic path for it to follow in preparing for the future, and
molds organizational identity. A clearly articulated strategic vision communicates
management’s aspirations to stakeholders and helps steer the energies of company
personnel in a common direction. For instance, Henry Ford’s vision of a car in every
garage had power because it captured the imagination of others, aided internal efforts to
mobilize the Ford Motor Company’s resources, and served as a reference point for
gauging the merits of the company’s strategic actions.
A Strategic vision is a road map of a company’s future – providing specifics about
technology and customer focus, the geographic and product markets to be pursued, the
capabilities it plans to develop, and the kind of company that management is trying to
create.
The three elements of a strategic vision:
1. 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. Using the mission statement as basis for deciding on a long-term course making
choices about “Where we are going?”
3. Communicating the strategic vision in clear, exciting terms that arouse
organization wide commitment.
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.
♦ Forming a strategic vision is an exercise in intelligent entrepreneurship.
♦ Many successful organizations need to change direction not in order to survive but in
order to maintain their success.
♦ A well-articulated strategic vision creates enthusiasm for the course management
has charted and engages members of the organization.
♦ The best-worded vision statement clearly and crisply illuminate the direction in which
organization is headed.
10.2 Mission
According to Glueck & Jauch mission is answer to the question ‘what business are we in’
that is faced by corporate-level strategist. Analysis shows that in actual practice many
business firms fail to conceptualise and articulate the mission and business definition with
the required clarity. And such firms are seen to fumble in the selection of opportunities
Business Policy and Strategic Management

2.17
and the choice of strategies. Firms wedded to the idea of strategic management of their
enterprise cannot afford to be lax in the matter of mission and business definition, as the
two ideas are absolutely central to strategic planning.
Why organization should have mission?
♦ To ensure unanimity of purpose within the organization.
♦ To provide a basis for motivating the use of the organization’s resources.
♦ To develop a basis, or standard, for allocating organizational resources.
♦ To establish a general tone or organizational climate, for example, to suggest a
businesslike operation.
♦ To serve as a focal point for those who can identify with the organization’s purpose
and direction, and to deter those who cannot form participating further in the
organization’s activities.
♦ To facilitate the translation of objective and goals into a work structure involving the
assignment of tasks to responsible elements within the organization.
♦ To specify organizational purposes and the translation of these purposes into goals
in such a way that cost, time, and performance parameters can be assessed and
controlled.
A company’s Mission statement is typically focused on its present business scope –
“who we are and what we do”; mission statements broadly describe an organizations
present capabilities, customer focus, activities, and business makeup.
Mission should contain elements of long-term strategy as well as desired outcomes they
often basic values and the philosophy of the organizations that is perceived by the senior
managers at the senior level who write them. A good mission statement should be of
precise, clear, feasible, distinctive and motivating. It should indicate major components of
strategy. Following points are useful while writing mission of a company :
♦ The mission is not to make a profit.
♦ One of the roles of a mission statement is to give the organization its own special
identity, business emphasis and path for development – one that typically sets it
apart form other similarly situated companies.
♦ A company’s business is defined by what needs it trying to satisfy, by which
customer groups it is targeting and by the technologies and competencies it uses and
the activities it performs.
Strategic Management

2.18
♦ Technology, competencies and activities are important in defining a company’s
business because they indicate the boundaries on its operation.
♦ Good mission statements are highly personalized – unique to the organization for
which they are developed.
What is our mission? And what business are we in?
The well-known management experts, Peter Drucker and Theodore Levitt were among the
first to agitate this issue through their writings. 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. They also explained that
towards facilitating this task, the firm should raise and answer certain basic questions
concerning its business, 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 the future?
At the time these two experts raised this issue, the business managers of the world did
not fully appreciate the import of these questions; those were days when business
management was still a relatively simple process even in industrially advanced countries
like the US. 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.
The corporate mission is an expression of the growth ambition of the firm. It is, in fact, the
firm’s future visualised. It provides a dramatic picture of what the company wants to
Business Policy and Strategic Management

2.19
become. It is the corporation’s dream crystallised. It is a colourful sketch of how the firm
wants its future to look, irrespective of the current position. In other words, the mission is
a grand design of the firm’s future.
Mission amplifies what brings the firm to this business or why it is there, what existence it
seeks and what purpose it seeks to achieve as a business firm. In other words, the
mission serves as a justification for the firm’s very presence and existence; it legitimises
the firm’s presence.
Mission is also an expression of the vision of the corporation, its founder/ leader. To make
the vision come alive and become relevant, it needs to be spelt out. It is through the
mission that the firm spells out its vision.
It represents the common purpose, which the entire firm shares and pursues. A mission is
not a confidential affair to be confined at the top; it has to be open to the entire company.
All people are supposed to draw meaning and direction from it. It adds zeal to the firm and
its people. A mission is not a fad-it is a tool to build and sustain commitment of the people
to the corporation’s policies. A mission is not rhetoric - it is the corporation’s guiding
principle.
A mission does not represent a specific target. At the same time it is not all euphoria
either. It represents the whole thrust of the firm. To quote Thomas Watson, Jr., former
chairman of IBM, "The basic philosophy, spirit, and drive of an organization have far more
to do with its relative achievements than technological or economic resources,
organizational structure, innovation and timing. It also expresses the core values and
beliefs of the firm”.
Every organization functions through a network of aims. Mission is the foundation from
which the network of aims is built. The mission serves as a proclamation to insiders and
outsiders on what the corporation stands for. A mission, however, is not a PR document;
while it legitimises the corporation’s existence and role in society, its main purpose is to
give internal direction for the future of the corporation.
According to Peter Drucker, every organization must ask an important question “What
business are we in?” and get the correct and meaningful answer. The answer should have
marketing or external perspective and should not be restated to the production or generic
activities of business. The table given below will clarify and highlight the importance of
external perspective.

Strategic Management

2.20
What Business Are We In?
Company Production-oriented answer Marketing-oriented answer
AT&T We operate a long-distance
telephone company.
We provide multiple forms of reliable,
efficient and inexpensive
telecommunication services
Indian Oil We produce oil and gasoline
products
We provide various types of safe and
cost-effective energy.
Indian
Railways
We run a railroad We offer a transportation and
material-handling system
Eastman
Kodak
We make cameras and film. We help preserve beautiful memories
Revlon In the factory, we make
cosmetics.
In the drugstore, 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. Organizations relate their existence to satisfying a particular need of the
society. They do this in terms of their mission and purpose. We can described mission as
"a statement which defines the role that an organization plays in the society", and purpose
as "anything which an organization strives for." In business policy, both these terms are
either used jointly or singly. Since both mission and purpose go hand in hand, they can be
used together while maintaining the basic difference between them. Mission strictly refers
to the particular needs of the society, for instance, its information needs. Purpose relates
to what the organization strives to achieve in order to fulfil its mission to the society. A
book publisher and a magazine editor are both engaged in satisfying the information
needs of society but they do it through different means. 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 have different purposes but an
identical mission:
Some examples of vision, 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, Good Governance
and Competitiveness.
Business Policy and Strategic Management

2.21
Vision Recognise the changes in Economy/Business Environment such as
focus on value, dynamic business and organization structures,
developments in Information Technology and Telecommunication, new
Government policies, globalization of business and competitive
pressures.
Recognise the path to success by adapting to the changes, knowledge
management and acquiring skills to work with future environment
influenced by technological and other changes.
Recognise the opportunities for Chartered Accountants in the
emerging areas such as new audit and assurance needs, performance
measurement services, change management services, strategy
management, general practice specialization and servicing global
organizations.
Recognise the Institute’s role as a proactive, innovative and flexible
organization, in equipping Chartered Accountants with top quality
education and values.
Recognise the need to be known as World Class Advisor.
Mission of Unilever: “The mission of our company, as William Hasketh Lever saw it, is to
make cleanliness commonplace, to lessen work for women, to foster health, and to
contribute to personal attractiveness that life may be more enjoyable for the people who
use our products.”
Mission of Mckinsey & Co: “To help business corporation and governments to be more
successful”.
Mission of Cadbury India: “To attain leadership position in the confectionary market and
achieve a strong presence in the food drinks sector.”
Mission of Reliance Industries: “To become a major player in the global chemicals
business and simultaneously grow in other growth industries like infrastructure.”
Mission of Ranbaxy: “To become a $1 billion research-based global pharmaceuticals
company.”
10.3 Objectives and Goals
Business organization translate their vision and mission into objectives. As such the term
objectives is synonymous with goals, however, we will make an attempt to distinguish the
two. Objectives are open-ended attributes that denote the future states or outcomes.
Goals are close-ended attributes which are precise and expressed in specific terms. Thus
the goals are more specific and translate the objectives to short term perspective.
Strategic Management

2.22
However, this distinction is not made by several theorists on the subject. Accordingly, we
will also use the term interchangeably.
Objectives are organizations performance targets – the results and outcomes it wants to
achieve. They function as yardstick for tracking an organizations performance and
progress.
All organizations have objectives. The pursuit of objectives is an unending process such
that organizations sustain themselves. They provide meaning and sense of direction to
organizational endeavour. 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.
Objectives with strategic focus relate to outcomes that strengthen an organizations overall
business position and competitive vitality. Objective to be meaningful to serve the
intended role must possess following characteristics:
♦ Objectives should define the organization’s relationship with its environment.
♦ 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.
♦ Objectives should be understandable.
♦ 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
11. STRATEGIC LEVELS IN ORGANISATIONS
In most companies, there are two main types of managers: general managers, who bear
responsibility for the overall performance of the company or for one of its major selfcontained
subunits or divisions, and functional managers, who are responsible for
supervising a particular function, that is, a task, activity, or operation. Like finance and
accounting, production, marketing, R&D, information technology, or materials
management.
An organization is divided into several functions and departments that work together to bring
a particular product or service to the market. If a company provides several different kinds
Business Policy and Strategic Management

2.23
of products or services, it often duplicates these functions and creates a series of selfcontained
divisions (each of which contain its own set of functions) to manage each different
product or service. The general managers of these divisions then become responsible for
their particular product line. The overriding concern of general managers is for the health of
the whole company or division under their direction; 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. Figure ‘levels of strategic management’ shows the organization
of a multidivisional company that is, a company that competes in several different
businesses and has created a separate self-contained division to manage each of these. As
you can see, there are three main levels of management: corporate, business, and
functional. General managers are found at the first two of these levels, but their strategic
roles differ depending on their sphere of responsibility.
Figure : Level of Strategic Management
Head
Office

Division A

Division B

Division C
Business
Functions
Business
Functions
Business
Functions
Corporate Level
CEO, other senior executives,
board of directors, and
corporate staff
Business Level
Divisional managers
and staff
Functional Level
Functional managers
Market A Market B Market C
Strategic Management

2.24
The corporate level of management consists of the chief executive officer (CEO), other
senior executives, the board of directors, and corporate staff. These individuals occupy
the apex of decision making within the organization. The CEO is the principal general
manager. In consultation with other senior executives, the role of corporate-level
managers is to oversee the development of strategies for the whole organization. This
role includes defining the mission and goals of the organization, determining what
businesses it should be in, allocating resources among the different businesses,
formulating and implementing strategies that span individual businesses, and providing
leadership for the organization.
Consider General Electric (GE) as an example. GE is active in a wide range of businesses,
including lighting equipment, major appliances, motor and transportation
equipment, turbine generators, construction and engineering services, industrial
electronics, medical systems, aerospace, aircraft engines, and financial services. The
main strategic responsibilities of its CEO, Jeffrey Immelt, are setting overall strategic
objectives, allocating resources among the different business areas, deciding whether the
firm should divest itself of any of its businesses, and determining whether it should
acquire any new ones. In other words, it is up to Immelt to develop strategies that span
individual businesses; his concern is with building and managing the corporate portfolio of
businesses to maximize corporate profitability.
It is not his specific responsibility to develop strategies for competing in the individual
business areas, such as financial services. The development of such strategies is the
responsibility of the general managers in these different businesses or business level
managers. However, 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.
Besides overseeing resource allocation and managing the divestment and acquisition
processes, corporate-level managers provide a link between the people who oversee the
strategic development of a firm and those who own it (the shareholders). Corporate-level
managers, and particularly the CEO, can be viewed as the guardians of shareholder
welfare. It is their responsibility to ensure that the corporate and business strategies that
the company pursues are consistent with maximizing shareholder wealth. If they are not,
then ultimately the CEO is likely to be called to account by the shareholders.
A business unit is a self-contained division (with its own functions-for example, finance,
purchasing, production, and marketing departments) that provides a product or service for
a particular market. The principal general manager at the business level, or the businesslevel
manager, is the head of the division. The strategic role of these managers is to
translate the general statements of direction and intent that come from the corporate level
Business Policy and Strategic Management

2.25
into concrete strategies for individual businesses. Thus, whereas corporate-level general
managers are concerned with strategies that span individual businesses, business-level
general managers are concerned with strategies that are specific to a particular business.
At GE, a major corporate goal is to be first or second in every business in which the
corporation competes. Then the general managers in each division work out for their
business the details of a strategy that is consistent with this objective.
Functional-level managers are responsible for the specific business functions or
operations (human resources, purchasing, product development, customer service, and so
on) that constitute a company or one of its divisions. Thus, a functional manager’s sphere
of responsibility is generally confined to one organizational activity, whereas general
managers oversee the operation of a whole company or division. 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 fulfil the strategic objectives set by business- and corporate-level general managers.
In GE’s aerospace business, for instance, manufacturing managers are responsible for
developing manufacturing strategies consistent with the corporate objective of being first
or second in that industry. Moreover, functional managers provide most of the information
that makes it possible for business- and corporate-level general managers to, formulate
realistic and attainable strategies. Indeed, because they are closer to the customer than
the typical general manager is, functional managers themselves may generate important
ideas that subsequently may become major strategies for the company. Thus, it is
important for general managers to listen closely to the ideas of their functional managers.
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 Business Functional
Type
Measurability

Frequency

Relation to
present
activities
Conceptual
Value judgments
dominant
Periodic or
Sporadic
Innovative
Mixed
Semi quantifiable
Periodic or Sporadic
Mixed
Operational
Usually
Quantifiable
Periodic
Supplementary
Strategic Management

2.26
Risk
Profit Potential
Cost
Time horizon
Flexibility
Cooperation
Required
Wide Range
Large
Major
Long Range
High
Considerable
Moderate
Medium
Medium
Medium Range
Medium
Moderate
Low
Small
Modest
Short Range
Low
Little
SELF EXAMINATION QUESTIONS
Multiple Choice Questions
1. Read the following three statements:
(i) Strategies have short-range implications.
(ii) Strategies are action oriented.
(iii) Strategies are rigidly defined.
From the combinations given below select an alternative that represent statements that are
true:
(a) (i) and (ii)
(b) (i) and (iii)
(c) (ii) and (iii)
(d) (i), (ii) and (iii)
2. Retrenchment strategy in the organization can be explained as
(a) Reducing trenches (gaps) created between individuals.
(b) Divesting a major product line or market.
(c) Removal of employees from job through the process of reorganization.
(d) Removal of employees from job in one business to relocate them in other business.
3. The three stages of strategic management are:
(a) Stratify assessment, strategy execution, and strategy evaluation.
(b) Strategy formulation, strategy implementation, and strategy evaluation.
Business Policy and Strategic Management

2.27
(c) Strategy formulation, strategy implementation, and strategy execution.
(d) Strategy formulation, strategy execution, and strategy assessment.
4. The four generic strategic alternatives propounded by Glueck and Jauch are:
(a) retirement, combination, stability and expansion
(b) retrenchment, combination, stability and expansion
(c) retrenchment, termination, retirement and stability
(d) retirement, expansion, termination and growth
5. The first step of strategy formulation in strategic management model is:
(a) Undertake internal analysis.
(b) Undertake external analysis.
(c) Set major objectives.
(d) Determine vision and mission.
6. Select the correct statement:
(a) In general corporate level decisions are costly to take, involve high risk and have large
profit potential.
(b) In general corporate level decisions are costly to take, involve low risk and have large
profit potential.
(c) In general corporate level decisions are costly to take, involve high risk and have low
profit potential.
(d) In general corporate level decisions are cheaper to take, involve low risk and have
large profit potential.
Objective Type Questions
State with reasons which of the following statements are correct/incorrect:
(a) Strategies have short-range implications
(b) Functional level managers are responsible for the specific business functions.
(c) Vision and Mission are translated into objectives.
Short answer questions
1. Write a short note on business policy.
Strategic Management

2.28
2. Explain diversification as strategy.
Essay type questions
1. What do you understand by Strategy? What are major strategic alternatives available
to a business organisation?
2. Discuss different strategic levels in organizations.
3. Discuss the process of strategic management.
Case Study
Delhi-based Ace International is close to acquiring popular household brands Yummy and
Tasty from Beetroot Ltd. The deal, at rupees thirty-five crores was announced at a joint
press conference.
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. Beetroot had
put these brands on sale late last year. Ace has emerged as the highest bidder for them.
The company, stated in the press release that Ace is buying the brands but not their
manufacturing facility at Noida (near Delhi), because the plant also makes other food
products which are Beetroot’s core food brands.
While Yummy and Tasty are marginal businesses for Beetroot, (around Rs 20 crore per
annum) management consultants felt that they are a good fit in Ace’s product portfolio.
The company makes the same genre of products and can grow the brands without
additional input or distribution costs. Tasty and Yummy are food brands that Ace can
manufacture in its existing plants spread across seven locations in Punjab and
Maharashtra. The company can also use the same set of distributors to place these
brands in shops. Financial Analysts expect them to add 8-10% to Alpha’s Rs 250 crore
turnover in the first year.
(a) Discuss the business strategy for Ace
(b) Discuss the business strategy for Beetroot.
Answers - Multiple Choice Questions
1. (a), 2. (b), 3. (b), 4. (b), 5. (d), 6. (a)

CHAPTER 3
STRATEGIC ANALYSIS
LEARNING OBJECTIVES
♦ Know the importance of strategic analysis in the formulation of strategy.
♦ Learn some of the methods of competitive analysis that are used in business organizations.
♦ Know what is SWOT and TOWS analysis.
♦ Have an understanding of some of the methods used in portfolio analysis.
Analysis is the critical starting point of strategic thinking.
Kenichi Ohmae
If you’re not faster than your competitor, you’re in a tenuous position, and if you’re only half
as fast, you’re terminal.
George Salk
The idea is to concentrate our strength against our competitor’s relative weakness.
Bruce Henderson
1. INTRODUCTION
The strategic management process, after deciding the vision, mission, goals and objectives of the
organization, turns its focus to scanning of environment in which all organizations work as subsystems.
That is environmental scanning covers both scanning of external environment and
internal environment. The scanning of external environment leads to the identification of the
opportunities and threats thrown open to organizations while the internal analysis leads to the
study of strengths and weaknesses which will decide as to what extent each company is going to
capitalize the opportunities and threats thrown open.
2. STRATEGIC ANALYSES
Strategy formulation is not a task in which managers can get by with opinions, good instincts, and
creative thinking. Judgments about what strategy to pursue need to flow directly from solid analysis
of a company’s external environment and internal situation. The two most important situational
considerations are (1) industry and competitive conditions and (2) a company’s own competitive
capabilities, resources, internal strengths and weaknesses, and market position.
Strategic Management

3.2
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, to choice of strategy. Accurate diagnosis of the company’s situation is
necessary managerial preparation for deciding on a sound long-term direction, setting appropriate
objectives, and crafting a winning strategy. Without perceptive understanding of the strategic
aspects of a company’s external and internal environments, the chances are greatly increased that
managers will concoct a strategic game plan that doesn’t fit the situation well, that holds little
prospect for building competitive advantage, and that is unlikely to boost company performance.
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. An important aspect of strategic
analyses is to consider the possible implications of routine decisions. Strategy of a business, at a
particular point of time, is result of a series of small decisions taken over an extended period of
time. A manager who makes an effort to increase the growth momentum of an organization is
materially changing strategy.
Balance: The process of strategy formulation is often described as one of the matching the internal
potential of the organization with the environmental opportunities. In reality, as perfect match
between the two may not be feasible, strategic analyses involve a workable balance between
diverse and conflicting considerations. A manager working on a strategic decision has to balance
opportunities, influences and constraints. There are pressures that are driving towards a particular
choice such as entering a new market. Simultaneously there are constraints that limit the choice
such as existence of a big competitor. These constraining forces will be producing an impact that
will vary in nature, degree, magnitude and importance. Some of these factors can be managed to
some extent, however, there will be several others that are beyond the control of a manager.
Risk: In the strategic analyses the principle of maintaining balance is important. However, the
complexity and intermingling of variables in the environment reduces the strategic balance in the
Strategy Environment
Resources
Management
Strategic Analysis

3.3
organization. The lives that we lead is uncertain and the business is no exception. Competitive
markets, liberalization, globalization, booms, recessions, technological advancements, intercountry
relationships all affect businesses and pose risk at varying degree. An important aspect of
strategic analysis is to identify potential imbalances or risks and assess their consequences. A
broad classification of the strategic risk that requires consideration in strategic analyses is given
below:
External risk is on account of inconsistencies between strategies and the forces in the
environment. Internal risk occurs on account of forces that are either within the organization or are
directly interacting with the organization on an routine basis.
3. SITUATIONAL ANALYSIS
All companies operate in a ’’macro environment’’ shaped by influences emanating from the
economy at large, population demographics, societal values and lifestyles, governmental
legislation and regulation, technological factors. These factors have been discussed in chapter 1.
Strictly speaking, a company’s macro environment includes all relevant factors and influences
outside the company’s boundaries; by relevant, we mean important enough to have a bearing on
the decisions the company ultimately makes about its direction, objectives, strategy, and business
model. For the most part, 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. There are notable exceptions, though. There are enough strategically relevant trends
and developments in the macro environment to justify a watchful eye. As company managers scan
Time
Short-term Long-term
External
Errors in interpreting
the environment cause
strategic failure.
Changes in the
environment lead to
obsolescence of
strategy.
Strategic
Risks
Internal
Organizational
capacity is unable to
cope up with strategic
demands.
Inconsistencies with
the strategy are
developed on
account of changes in
internal capacities
and preferences
Strategic Management

3.4
the external environment, they must watch for potentially important environmental forces, assess
their impact and influence, and adapt the company’s direction and strategy as needed.
However, 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.







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. This should form an essential part of any business plan and should be reviewed over time
to ensure that it is kept current. Many ask what factors are important when doing this. 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.
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. It is important to observe this in terms of its different parts in
order to be able to relate this back to core client needs.
♦ Competitive situation: Analyze your main competitors - who are they what are they up to -
how do they compare. What are their competitive advantages?
♦ Distribution situation: Review your distribution Situation - how are you getting your product to
market? Do you need to go through distributors or other intermediaries?
♦ Environmental factors: What external and internal environmental factors are there that need
to be taken into account. This can include economic or sociological factors that impact on
your performance.
Thinking strategically
about a company’s
external environment
Thinking strategically about
a company’s internal
environment
Form a
strategic
vision of
where the
company
needs to
head
Identity
promising
strategic
options for
the company
Select the
best
strategy
and
business
model for
the
company
Strategic Analysis

3.5
♦ Opportunity and issue analysis: Things to write down here are what current opportunities that
are available in the market, the main threats that business is facing and may face in the
future, the strengths that the business can rely on and any weaknesses that may effect the
business performance.
We have seen earlier in the framework of strategic management that the first question to ask:
‘where are we now’? So, strategic analysis is the starting point of strategic management as shown
in the figure below:
Strategic Analysis
External Analysis
♦ Customer Analysis
Segments, motivations, unmet needs.
♦ Competitor Analysis
Identity, strategic groups, performance,
image, objectives, strategies, culture,
cost structure, strengths, weaknesses.
♦ Market Analysis
Size, projected growth, profitability, entry
barriers, cost structure, strengths,
weaknesses
♦ Environmental Analysis
Technological, government, economic,
cultural, demographic, scenarios,
information-need areas.
Internal Analysis
♦ Performance Analysis
Profitability, sales, shareholder value
analysis, customer satisfaction, product
quality, brand associations, relative cost,
new products, employee capability and
performance, product portfolio analysis.
♦ Determinates Analysis
Past and current strategies, strategic
problems, organizational Capabilities and
constraints, Financial resources and
Constraints, strengths, and weaknesses.
Opportunities, threats, trends, and strategic,
uncertainties.
Strategic strengths, weaknesses, problems,
constraints, and uncertainties
Strategy Identification & Selection
♦ Identify strategic alternatives
• Product-maker investment strategies
• Functional area strategies
• Assets, competencies, and synergies
♦ Select strategy
♦ Implement the operating plan
♦ Review strategies
Figure: Framework of Strategic Analysis
Strategic Management

3.6
Industries differ widely in their economic characteristics, competitive situations, and future profit
prospects. For example, the economic and competitive traits of the fast-food business have little in
common with those of Internet service providers. The telecom business is shaped by industry and
competitive considerations radically different from those that dominate the aviation business.
The economic character of industries varies according to such factors as overall size and market
growth rate, the pace of technological change, the geographic boundaries of the market (which can
extend from local to worldwide), the number and size of buyers and sellers, whether sellers’
products are virtually identical or highly differentiated, the extent to which costs are affected by
economies of scale, and the types of distribution channels used to access buyers. Competitive
forces can be moderate in one industry and fierce, even cutthroat, in another. Moreover, in some
industries competition focuses on who has the best price, 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. (as in online shopping and fast foods) or
brand reputation (as in laundry detergents and soft drinks). In other industries, the challenge is for
companies to work cooperatively with suppliers, customers, and maybe even select competitors to
create the next round of product innovations and open up whole new vistas of market
opportunities.
An industry’s economic traits and competitive conditions, and how they are expected to change,
determine whether its profit prospects are poor, average, or excellent. Industry and competitive
conditions differ so much that leading companies in unattractive industries can find it hard to earn
respectable profits, while even weak companies in attractive industries can turn in good
performances.
4. 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 intensity of competition, the drivers of industry change, the
market positions and strategies of rival companies, the keys to competitive success, and the
industry’s profit outlook. 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. The analysis entails examining a company’s business in the context of a much
wider environment. Industry and competitive analysis aims at developing insight in several issues.
Analysing these issues build understanding of a firm’s surrounding environment and, collectively,
form the basis for matching its strategy to changing industry conditions and competitive realities.
The issues are given below:
4.1 Dominant economic features of the industry
Industries differ significantly in their basic character and structure. Industry and competitive
analysis begins with an overview of the industry’s dominant economic features. Industry is "a group
Strategic Analysis

3.7
of firms whose products have same and similar attributes such that they compete for the same
buyers." The factors to consider in profiling an industry’s economic features are fairly standard and
are given as follows:
♦ Market size.
♦ Scope of competitive rivalry (local, regional, national, international, or global).
♦ Market growth rate and position in the business life (early development, rapid growth and
takeoff, early maturity, maturity, saturation and stagnation, decline).
♦ Number of rivals and their relative sizes.
♦ Small companies dominant companies?
♦ The number of buyers and their relative sizes. Whether and to what extent industry rivals
have integrated backward and/or forward.
♦ The types of distribution channels used to access consumers.
♦ The pace of technological change in both production process innovation and new product
introductions.
♦ Whether the products and services of rival firms are highly differentiated, weakly
differentiated, or essentially identical.
♦ Whether companies can realize economies of scale in purchasing, manufacturing,
transportation, marketing, or advertising.
♦ Whether key industry participants are clustered in a particular location, for example, lock
industry in Aligarh. Saris and diamonds in Surat, information technology in Bangalore.
Similarly, there is also concentration of business in different countries on account of graphical
and other reasons.
♦ Whether certain industry activities are characterized by strong learning and experience
effects ("learning by doing") such that unit costs decline as cumulative output grows.
♦ Whether high rates of capacity utilization are crucial to achieving low-cost production
efficiency.
♦ Capital requirements and the ease of entry and exit.
♦ Whether industry profitability is above/below par.
4.2 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. This analytical step is essential because managers cannot devise a
Strategic Management

3.8
successful strategy without in-depth understanding of the industry’s competitive character. Even
though competitive pressures in various industries are never precisely the same, the competitive
process works similarly enough to use a common analytical framework in gauging the nature and
intensity of competitive forces.
Porter’s five forces model included in the first chapter is useful in understanding the competition. It
is a powerful tool for systematically diagnosing the principle competitive pressures in a market and
assessing how strong and important each one is. Not only is it the widely used technique of
competition analysis, but it is also relatively easy to understand and apply.
4.3 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. All industries are characterized
by trends and new developments that gradually produce changes important enough to require a
strategic response from participating firms. The popular hypothesis about industries going through
a life cycle helps explain industry change but is still incomplete. The life-cycle stages are strongly
keyed to changes in the overall industry growth rate (which is why such terms as rapid growth,
early maturity, saturation, and decline are used to describe the stages). Yet there are more causes
of industry change than an industry’s position in the life cycle.
The concept of driving forces: While it is important to judge what growth stage an industry is in,
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. 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. Analyzing driving forces has two steps: identifying what the
driving forces are and assessing the impact they will have on the industry.
The most common driving forces: Many events can affect an industry powerfully enough to qualify
as driving forces. Some are unique and specific to a particular industry situation, but many drivers
of change fall into general category affecting different industries simultaneously. Some of the
categories/examples of drivers are follows:
♦ The internet and the new e-commerce opportunities and threats it breeds in the industry.
♦ Increasing globalization.
♦ Changes in the long-term industry growth rate.
♦ Product innovation.
♦ Marketing innovation.
♦ Entry or exit of major forms.
Strategic Analysis

3.9
♦ Diffusion of technical know-how across more companies and more countries.
♦ Changes in cost and efficiency.
4.4 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
rival companies. 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.
A strategic group consists of those rival firms with similar competitive approaches and positions in
the market. Companies in the same strategic group can resemble one another in any of several
ways: they may have comparable product-line breadth, sell in the same price/quality range,
emphasize the same distribution channels, use essentially the same product attributes to appeal to
similar types of buyers, depend on identical technological approaches, or offer buyers similar
services and technical assistance. An industry contains only one strategic group when all sellers
pursue essentially identical strategies and have comparable market positions. At the other
extreme, 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.
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, medium, low); geographic coverage (local, regional, national, global);
degree of vertical integration (none, partial, full); product-line breadth (wide, narrow); use of
distribution channels (one, some, all); and degree of service offered (no-frills, limited, full).
♦ 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
4.5 Likely strategic moves of rivals
Unless a company pays attention to what competitors are doing, it ends up flying blind into
competitive battle. A company can’t expect to outmanoeuvre its rivals without monitoring their
actions, understanding their strategies, and anticipating what moves they are likely to make next.
As in sports, scouting the opposition is essential. Competitive intelligence about the strategies
rivals are deploying, their latest moves, their resource strengths and weaknesses, and the plans
Strategic Management

3.10
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. 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.
4.6 Key factors for competitive success
An industry’s Key Success Factors (KSFs) are those things that most affect industry members’
ability to prosper in the marketplace - the particular strategy elements, product attributes,
resources, competencies, competitive capabilities, and business outcomes that spell the difference
between profit and loss and, ultimately, between competitive success or failure. KSFs by their very
nature are so important that all firms in the industry must pay close attention to them - they are -
the prerequisites for industry success or, to put it another way, KSFs are the rules that shape
whether a company will be financially and competitively successful. 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, 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). In tin and aluminium cans, because the cost of shipping empty cans is substantial,
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).
Determining the industry’s key success factors, given prevailing and anticipated industry and
competitive conditions, is a top-priority analytical consideration. At the very least, managers need
to understand the industry situation well enough to know what is more important to competitive
success and what is less important. They heed to know what kinds of resources are competitively
valuable. Misdiagnosing the industry factors critical to long-term competitive success greatly raises
the risk of a misdirected strategy. In contrast, 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.
Indeed, companies that stand out on a particular KSF enjoy a stronger market position for their,
efforts-being distinctively better than rivals on one or more key success factors presents a golden
opportunity for gaining competitive advantage. Hence, using the industry’s KSFs as cornerstones
Strategic Analysis

3.11
for the company’s strategy and trying to gain sustainable competitive advantage by excelling at one
particular KSF is a fruitful competitive strategy approach-
Key success factors vary from industry to industry and even from time to time within the same
industry as driving forces and competitive conditions change. Only rarely does an industry have
more than three or four key success factors at any one time. And even among these three or four,
one or two usually outrank the others in importance. Managers, therefore, 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
competitive success and what things are less important. 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.
4.7 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,
both near-term and long-term. Company strategists are obligated to assess the industry outlook
carefully, 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.
The important factors on which to base such conclusions include:
♦ The industry’s growth potential.
♦ Whether competition currently permits adequate profitability and whether competitive forces
will become stronger or weaker.
♦ Whether industry profitability will be favourably or unfavourably affected by the prevailing
driving forces.
♦ The company’s competitive position in the industry and whether its position is likely to grow
stronger or weaker. (Being a well-entrenched leader or strongly positioned contender in an
otherwise lackluster industry can still produce good profitability; however, having to fight an
uphill battle against much stronger rivals can make an otherwise attractive industry
unattractive).
♦ The company’s potential to capitalize on the vulnerabilities of weaker rivals (perhaps
converting an unattractive industry situation into a potentially rewarding company
opportunity).
♦ Whether the company is able to defend against or counteract the factor that make the
industry unattractive.
♦ The degrees of risk and uncertainty in the industry’s future.
Strategic Management

3.12
♦ The severity of problems confronting the industry as a whole.
♦ 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.
As a general proposition, if an industry’s overall profit prospects are above average, the industry
can be considered attractive; if its profit prospects are below average, it is unattractive. However, it
is a mistake to think of industries as being attractive or unattractive to all industry participants and
all potential entrants. Attractiveness is relative, not absolute, Industry environments unattractive to
weak competitors may be attractive to strong competitors.
An assessment that the industry is fundamentally attractive typically suggests that current industry
participants employ strategies calculated to strengthen their long-term competitive positions in the
business, expanding sales efforts and investing in additional facilities and equipment as needed. If
the industry and competitive situation is judged relatively unattractive, more successful industry
participants may choose to invest cautiously, look for ways to protect their long-term
competitiveness and profitability, and perhaps acquire smaller firms if the price is right; over the
longer term, strong companies may consider diversification into more attractive businesses. Weak
companies in unattractive industries may consider merging with a rival to bolster market share and
profitability or, alternatively, begin looking outside the industry for attractive diversification
opportunities.
5. SWOT ANALYSIS
The next component of strategic thinking requires the generation of a series of strategic
alternatives, or choices of future strategies to pursue, given the company’s internal strengths and
weaknesses and its external opportunities and threats. The comparison of strengths, weaknesses,
opportunities, 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.
♦ Weakness: A weakness is an inherent limitation or constraint of the organization which
creates strategic disadvantage to it.
♦ Opportunity: An opportunity is a favourable condition in the organisation’s environment
which enables it to strengthen its position.
♦ Threat: A threat is an unfavourable condition in the organisation’s environment which causes
a risk for, or damage to, the organisation’s position.
Its central purpose is to identify the strategies that will create a firm-specific business model that
will best align, fit, or match a company’s resources and capabilities to the demands of the
environment in which it operates. Strategic managers compare and contrast the various alternative
possible strategies against each other with respect to their ability to achieve major goals and
Strategic Analysis

3.13
superior profitability. Thinking strategically requires managers to identify the set of strategies that
will create and sustain a competitive advantage:
♦ Functional-level strategy, directed at improving the effectiveness of operations within a
company, such as manufacturing, marketing, materials management, product development,
and customer service.
♦ Business-level strategy, which encompasses the business’s overall competitive theme, the
way it position; itself in the marketplace to gain a competitive advantage, and the different
positioning strategies that can be used in different industry settings-for example, cost
leadership, differentiation, focusing on a particular niche or segment of the industry, or some
combination of these.
♦ Global strategy, 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.
♦ Corporate-level strategy, which answers the primary questions. What business or businesses
should we be in to maximize the long-run profitability of the organization, 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,
generation of alternative strategies and the choice of a strategy. Variation in managerial
perceptions about organizational strengths and weaknesses and the environmental
opportunities and threats lead to the approaches to specific strategies and finally the choice
of strategy that takes place through an interactive process in dynamic backdrop.
♦ 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. The helps in
matching external and internal environments so that a strategist can come out with suitable
strategy by developing certain patterns of relationship. The patterns are combinations say,
high opportunities and high strengths, high opportunities and low strengths, high threats and
high strengths, high threats and low strengths.
Strategic Management

3.14
♦ 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. It is possible that the
organization may have several opportunities and some serious threats. It is equally, true that
the organization may have powerful strengths coupled with major weaknesses in the light of
critical success factors. In such situation, 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.
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). Competitive advantage leads to
increased profitability, and this maximizes a company’s chances of surviving in the fast-changing,
global competitive environment that characterizes most industries today.
Faced with a constantly changing environment, each business unit needs to develop a marketing
information system to track trends and developments, which can be categorized as an opportunity
or a threat. The company has to review its strength and weakness in the background of
environment’s opportunities and threat, i.e., an organization’s SWOT analysis.
Potential Resource
Strengths and
Competitive
Capabilities
Potential Resource
Weaknesses and
Competitive
Deficiencies
A B
Potential Company
Opportunities
Potential External
Threats to
Company’s Well-
Being
C D
Figure: SWOT Analysis: What to Look for in Sizing Up a Company’s Strengths, weaknesses,
Opportunities, and Threats.
A. Potential Resources Strengths and Competitive Capabilities
♦ A powerful strategy supported by competitively valuable skills and experience in key
areas.
♦ A strong financial condition; ample financial resources to grow the business.
♦ Strong brand name, image/company reputation.
Strategic Analysis

3.15
♦ A widely recognized market leader and an attractive customer base.
♦ Ability to take advantage of economies of scale and/or learning and experience curve
effects.
♦ Proprietary technology/ superior technological skills/ important patents.
♦ Superior intellectual capital relative to key rivals.
♦ Cost advantages.
♦ Strong advertising and promotion.
♦ Product innovation skills.
♦ Proven skills in improving product processes.
♦ Sophisticated use of e-commerce technologies and processes.
♦ Superior skills in supply chain management.
♦ A reputation for good customer service.
♦ Better product quality relative to rivals.
♦ Wide geographic coverage and/or strong global distribution capability.
♦ Alliances/joint ventures with other firms that provide access to valuable technology,
competencies, and/or attractive geographic markets.
B. Potential Resource Weaknesses and Competitive Deficiencies
♦ No clear strategic direction.
♦ Obsolete facilities.
♦ A weak balance sheet, burdened with too much debt.
♦ Higher overall unit costs relative to key competitors.
♦ Missing some key skills or competencies/lack of management depth/ a deficiency of
intellectual capital relative to leading rivals.
♦ Subpar profitability; no cost control measures or cost accounting practices.
♦ Plagued with internal operating problems.
♦ Falling behind rivals in putting e-commerce capabilities and strategies in place.
♦ Too narrow a product line relative to rivals.
Strategic Management

3.16
♦ Weak brand image or reputation.
♦ Weaker dealer network than key rivals and/or lack of adequate global distribution
capability.
♦ Subpar e-commerce systems and capabilities relative to rivals.
♦ Short on financial resources to fund promising strategic initiatives.
♦ Lots of underutilized plant capacity.
♦ Behind on product quality and/or R&D and/or technological know-how.
♦ Not attracting new customers as rapidly as rivals.
C. Potential Company Opportunities
♦ Serving additional customer groups or expanding into new geographic markets or
product segments.
♦ Expanding the company’s product line to meet a broader range of customer needs.
♦ Utilizing existing company skills or technological know-how to enter new product lines or
new businesses.
♦ Using the internet and e-commerce technologies to dramatically cut costs and/or to
pursue new sales growth opportunities.
♦ Integrating forward or backward.
♦ Falling trade barriers in attractive foreign markets.
♦ Openings to take market share away from rivals.
♦ Ability to grow rapidly because of sharply rising demand in one or more market
segments.
♦ Acquisition of rival firms or companies with attractive technological expertise.
♦ Alliances or joint ventures that expand the firm’s market coverage or boost its
competitive capability.
♦ Openings to exploit emerging new technologies.
♦ Market openings to extend the company’s brand name or reputation to new geographic
areas.
Strategic Analysis

3.17
D. Potential External Threats to Company’s Well-Being
♦ Likely entry of potent new competitors.
♦ Loss of sales to substitute products.
♦ Mounting competition from new Internet start-up companies pursuing e-commerce
strategies.
♦ Increasing intensity of competition among industry rivals – may cause squeeze on profit
margins.
♦ Technological changes or product innovations that undermine demand for the firm’s
product.
♦ Slowdowns in market growth.
♦ Adverse shifts in foreign exchange rates and trade policies of foreign governments.
♦ Costly new regulatory requirements.
♦ Growing bargaining power of customers or suppliers.
♦ 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.
SWOT Analyses at Moser Baer
Strengths Weaknesses
♦ Integrated manufacturing allowing cost
efficiencies and enhanced speed to market.
♦ Lower capital investment, manpower and
overhead costs allow cost leadership.
♦ Strong focus on R&D and engineering to
constantly innovate products and reduce
costs.
♦ Committed shareholders add strength,
longevity and sustainability to future plans.
♦ Need to scale up operations and evolve
internal controls to meet exponential
growth.
♦ Need to constantly expand capacities,
requiring continuing capital investment.
Opportunities Threats
♦ Exploding DVD-R market: With world-class
capacities, existing top-tier customer base
♦ Emerging technologies: In a dynamic
technology environment, the Company’s
Strategic Management

3.18
and efficient in-house technology, the
Company is well positioned to tap this
opportunity.
♦ Domestic market: India has one of the
largest movie industries in the world and
customers are shifting to CDs for audio and
DVDs for video requirements.
♦ Blu-ray/HD-DVD: Efforts are on worldwide
to define and develop the next-gen storage
format and Moser Baer is part of that effort.
business could be threatened from more
efficient emerging technologies. However,
the extent of the threat is mitigated by the
explosive growth in digital content, low cost
and ease of storage on optical media, the
huge installed base of read/write drives and
time to market for a new format.
♦ Anti-dumping and anti-subsidy levies: The
Company derives a significant part of its
revenues from international markets. These
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. However, the Company
continues to keep a close watch on this
front and take necessary steps to minimize
any fallout.
♦ Fall in product prices: As products move
into the mature phase in their life-cycle,
they start to emulate commodity-type
characteristics. Also, as the industry is
characterized by high volumes, large
capacities and investments, a sharp
reduction in product pricing can impact
performance. Pricing could fall due to
oversupply, low demand, cost reduction
due to reduction in input costs or setting up
of capacities in low-cost regions
About Moser Baer: Moser Baer, incorporated in 1983, is one of India’s leading technology
companies and ranks among the top three media manufacturers in the world. Based in New Delhi,
India. it has a broad and robust product range of floppy disks, compact discs (CDs) and digital
versatile discs (DVDs). (Source: http://moserbaer.com/investor_swot.asp)
6. TOWS MATRIX
Heinz Weihrich has developed a matrix called TOWS matrix by comparing strengths and weaknesses
of organization with that of market opportunities and threats. It has been criticized that after
conducting the SWOT Analysis managers frequently fail to come to terms with the strategic choices
Strategic Analysis

3.19
that the outcomes demand. In order to overcome this, Piercy argues for the TOWS Matrix, which,
while using the same inputs (Threats, Opportunities, Weakness and Strengths) reorganizes them and
integrates them more fully into the strategic planning process. The matrix is outlined below:
Figure : The TOWS Matrix (Source: Weihrich, H)
7. PORTFOLIO ANALYSES
In order to analyse the current business portfolio, the company must conduct portfolio analysis (a
tool by which management identifies and evaluates the various businesses that make up the
company). In portfolio analyses top management views its product lines and business units as a
series of investments from which it expects returns. A business portfolio is a collection of
businesses and products that make up the company. The best business portfolio is the one that
best fits the company’s strengths and weaknesses to opportunities in the environment.
Portfolio analysis can be defined as a set of techniques that help strategists in taking strategic
decisions with regard to individual products or businesses in a firm’s portfolio. It is primarily used
for competitive analysis and corporate strategic planning in multi product and multi business firms.
They may also be used in less-diversified firms, if these consist of a main business and other minor
complementary interests. The main advantage in adopting a portfolio approach in a multi-product,
Strategic options
Organizational
strengths
Organizational
weaknesses
Internal
External
Elements
Environmental
opportunities
(and risks)
Environmental
threats
SO : strengths can be
used to capitalize or
build upon existing or
emerging opportunities
ST : strengths in the
organization can be
used to minimize
existing or emerging
threats
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, cope with threats
existing or emerging threats
Strategic Management

3.20
multi-business firm is that resources could be channelised at the corporate level to those
businesses that posses the greatest potential. For instance, a diversified company may decide to
divert resources from its cash-rich businesses to more prospective ones that hold promise of a
faster growth so that the company achieves its corporate level objectives in an optima manner.
In order to design the business portfolio, the business must analyse its current business portfolio
and decide which business should receive more, less, or no investment. Depending upon analyses
businesses may develop growth strategies for adding new products or businesses to the portfolio.
There are three important concepts, the knowledge of which is a prerequisite to understand
different models of portfolio analysis:
Strategic business unit: 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. The SBU can
be a company division, a product line within a division, or even a single product or brand. SBUs are
common in organisations that are located in multiple countries with independent manufacturing and
marketing setups. An SBU has following characteristics:
♦ Single business or collection of related businesses that can be planned for separately.
♦ Has its own set of competitors.
♦ Has a manager who is responsible for strategic planning and profit.
After identifying SBUs the businesses have to assess their respective attractiveness and decide
how much support each deserves.
There are a number of techniques that could be considered as corporate portfolio analysis
techniques. The most popular is the Boston Consulting Group (BGC) matrix or product portfolio
matrix. But there are several other techniques that should be understood in order to have a
comprehensive view of how objective factors can help strategists in exercising strategic choice.
Experience Curve: Experience curve is an important concept used for applying a portfolio
approach. The concept is akin to a learning curve which explains the efficiency increase gained by
workers through repetitive productive work. 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. The implication is that larger firms in an industry would tend to have lower
unit costs as compared to those for smaller companies, thereby gaining a competitive cost
advantage. Experience curve results from a variety of factors such as learning effects, economies
of scale, product redesign and technological improvements in production.
The concept of experience curve is relevant for a number of areas in strategic management. For
instance, experience curve is considered a barrier for new firms contemplating entry in an industry.
It is also used to build market share and discourage competition. In the contemporary Indian two
Strategic Analysis

3.21
wheeler market, the experience curve phenomenon seems to be working in favour of Bajaj Auto,
which for the past decade has been selling, on an average, 5 lakh scooters a year and retains
more than 60 per cent of the market. Its only serious competitor is LML Vespa Ltd., which has a far
lesser share of the market. The primary strategic advantage that Bajaj Auto has is in terms of
costs. Other competitors like Gujarat Narmada and Kinetic Honda find it extremely difficult to
compete due to the cost differentials that currently exist. The likely strategic choice for underdog
competitors could be a market niche approach or segmentation based on demography or
geography.
Product Life Cycle: Another important concept in strategic choice is that of product life cycle (PLC).
It is a useful concept for guiding strategic choice. Essentially, PLC is an S-shaped curve which
exhibits the relationship of sales with respect of time for a product that passes through the four
successive stages of introduction (slow sales growth), growth (rapid market acceptance) maturity
(slow down in growth rate) and decline (sharp downward drift). If businesses are substituted for
product, the concept of PLC could work just as well. The main advantage of PLC is that it can be
used to diagnose a portfolio of products (or businesses) in order to establish the stage at which
each of them exists. Particular attention is to be paid on the businesses that are in the declining
stage. Depending on the diagnosis, appropriate strategic choice could be made. For instance,
expansion may be a feasible alternative for businesses in the introductory and growth stages.
Mature businesses may be used as sources of cash for investment in other businesses which need
resources. A combination of strategies like selective harvesting, retrenchment, etc. may be
adopted for declining businesses. In this way, a balanced portfolio of businesses may be built up
by exercising a strategic choice based on the PLC concept.
Figure: Product Life Cycle
7.2 Boston consulting group (BCG) growth-share matrix
The BCG growth-share matrix is the simplest way to portray a corporation’s portfolio of
investments. Growth share matrix also known for its cow and dog metaphors is popularly used for
Sales
Introduction
Growth
Decline
Time
Maturity
Strategic Management

3.22
resource allocation in a diversified company. Using the BCG approach, a company classifies its
different businesses on a two-dimensional growth-share matrix. In the matrix:
♦ The vertical axis represents market growth rate and provides a measure of market
attractiveness.
♦ The horizontal axis represents relative market share and serves as a measure of company
strength in the market.
Using the matrix, organisations can identify four different types of products or SBU as follows:
♦ Stars are products or SBUs that are growing rapidly. They also need heavy investment to
maintain their position and finance their rapid growth potential. They represent best
opportunities for expansion.
♦ Cash Cows are low-growth, high market share businesses or products. They generate cash
and have low costs. They are established, successful, and need less investment to maintain
their market share. In long run when the growth rate slows down, stars become cash cows.
Figure: BCG Growth-Share Matrix
♦ Question Marks, sometimes called problem children or wildcats, are low market share
business in high-growth markets. They require a lot of cash to hold their share. They need
Relative Market Share
R & D
Question Marks
Cash Cows Dogs
Stars
High Low
Low
Market Growth Rate
? ?
?
High
Strategic Analysis

3.23
heavy investments with low potential to generate cash. Question marks if left unattended are
capable of becoming cash traps. Since growth rate is high, increasing it should be relatively
easier. It is for business organisations to turn them stars and then to cash cows when the
growth rate reduces.
♦ Dogs are low-growth, low-share businesses and products. They may generate enough cash to
maintain themselves, but do not have much future. Sometimes they may need cash to survive.
Dogs should be minimised by means of divestment or liquidation.
Once the organisations have classified its products or SBUs, it must determine what role each will
play in the future. The four strategies that can be pursued are:
1. Build: Here the objective is to increase market share, even by forgoing short-term earnings
in favour of building a strong future with large market share.
2. Hold: Here the objective is to preserve market share.
3. Harvest: Here the objective is to increase short-term cash flow regardless of long-term
effect.
4. 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; however, there are
problems and limitations with the method. BCG matrix can be difficult, time-consuming, and costly
to implement. Management may find it difficult to define SBUs and measure market share and
growth. It also focuses on classifying current businesses but provide little advice for future
planning. They can lead the company to placing too much emphasis on market-share growth or
growth through entry into attractive new markets. This can cause unwise expansion into hot, new,
risky ventures or giving up on established units too quickly.
7.3 Ansoff’s product market growth matrix
The Ansoff’s product market growth matrix (proposed by Igor Ansoff) is a useful tool that helps
businesses decide their product and market growth strategy. With the use of this matrix a business
can get a fair idea about how its growth depends upon it markets in new or existing products in
both new and existing markets. Companies should always be looking to the future. One useful
device for identifying growth opportunities for the future is the product/market expansion grid. The
product/market growth matrix is a portfolio-planning tool for identifying company growth
opportunities.
Market Penetration: Market penetration refers to a growth strategy where the business focuses on
selling existing products into existing markets. It is achieved by making more sales to present
Strategic Management

3.24
customers without changing products in any major way. Penetration might require greater spending
on advertising or personal selling. Overcoming competition in a mature market requires an
aggressive promotional campaign, supported by a pricing strategy designed to make the market
unattractive for competitors. Penetration is also done by effort on increasing usage by existing
customers.
Market Development: Market development refers to a growth strategy where the business seeks
to sell its existing products into new markets. It is a strategy for company growth by identifying and
developing new markets for current company products. This strategy may be achieved through
new geographical markets, new product dimensions or packaging, new distribution channels or
different pricing policies to attract different customers or create new market segments.
Product Development: Product development is refers to a growth strategy where business aims
to introduce new products into existing markets. It is a strategy for company growth by offering
modified or new products to current markets. This strategy may require the development of new
competencies and requires the business to develop modified products which can appeal to existing
markets.
Diversification: Diversification refers to a growth strategy where a business markets new products
in new markets. It is a strategy by starting up or acquiring businesses outside the company’s
current products and markets. This strategy is risky because it does not rely on either the
company’s successful product or its position in established markets. Typically the business is
moving into markets in which it has little or no experience.
As market conditions change overtime, a company may shift product-market growth strategies. For
example, when its present market is fully saturated a company may have no choice other than to
pursue new market.
Existing
Products New Products
Existing
Markets
Market
Penetration
Product
Development
New Markets Market
Development Diversification
Figure: Ansoff’s Product Market Growth Matrix
7.4 ADL matrix
The ADL matrix has derived its name from Arthur D. Little is a portfolio analysis method that is
based on product life cycle. The approach forms a two dimensional matrix based on stage of
Strategic Analysis

3.25
industry maturity and the firms competitive position, environmental assessment and business
strength assessment. Stage of industry maturity is an environmental measure that represents a
position in industry’s life cycle. Competitive position is a measure of business strengths that helps
in categorization of products or SBU’s into one of five competitive positions: dominant, strong,
favorable, tenable, weak. It is 4 by five matrix as follows:
Stage of industry maturity
Competitive
position Embryonic Growth Mature Ageing
Dominant
Fast grow
Build barriers
Act offensively
Fast grow
Attend cost
leadership
Renew
Defend position
Act offensively
Defend position
Attend cost
leadership
Renew
Fast grow
Act offensively
Defend position
Renew
Focus
Consider
withdrawal
Strong Differentiate
Fast grow
Differentiate
Lower cost
Attack small
firms
Lower cost
Focus
Differentiate
Grow with industry
Find niche
Hold niche
Harvest
Favourable
Differentiate
Focus
Fast grow
Focus
Differentiate
Defend
Focus
Differentiate
Harvest
Find niche
Hold niche
Turnaround
Grow with industry
Hit smaller firms
Harvest
Turnaround
Tenable
Grow with
industry
Focus
Hold niche
Turnaround
Focus
Grow with
industry
Withdraw
Turnaround
Hold niche
Retrench
Divest
Retrench
Weak
Find niche
Catch-up
Grow with
industry
Turnaround
Retrench
Niche or
withdraw
Withdraw
Divest Withdraw
Figure: Arthur D. Little Strategic Condition Matrix
Strategic Management

3.26
The competitive position of a firm is based on an assessment of the following criteria:
Dominant: This is a comparatively rare position and in many cases is attributable either to a
monopoly or a strong and protected technological leadership.
Strong: By virtue of this position, the firm has a considerable degree of freedom over its choice of
strategies and is often able to act without its market position being unduly threatened by its
competitions.
Favourable: This position, which generally comes about when the industry is fragmented and no
one competitor stand out clearly, results in the market leaders a reasonable degree of freedom.
Tenable: Although the firms within this category are able to perform satisfactorily and can justify
staying in the industry, they are generally vulnerable in the face of increased competition from
stronger and more proactive companies in the market.
Weak: The performance of firms in this category is generally unsatisfactory although the
opportunity for improvement do exist.
7.5 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. However, there are differences. Firstly,
market attractiveness replaces market growth as the dimension of industry attractiveness, and
includes a broader range of factors other than just the market growth rate. Secondly, competitive
strength replaces market share as the dimension by which the competitive position of each SBU is
assessed. This also uses two factors in a matrix / grid situation as shown below:
Business Position
High Medium Low
High Invest Invest Protect
Medium Invest Protect Harvest
Market
Attractiveness
Low Protect Harvest Divest
Figure : The GE Matrix
Strategic Analysis

3.27
Each of the above two factors is rated according to criteria such as the following:
Evaluating the ability to compete:
Business position Evaluating the Market Attractiveness
Size
Growth
Share by segment
Customer loyalty
Margins
Distribution
Technology skills
Patents
Marketing
Flexibility
Organization
Size
Growth
Customer satisfaction levels
Competition: quality, types,
Effectiveness, 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. Then each SBU is rated with respect to all
criteria. Finally, overall rating for both factors are calculated for each SBU. Based on these ratings,
each SBU is labelled as high, medium or low with respect to (a) market attractiveness, and (b)
business position.
Every organization has to make decisions about how to use its limited resources most effectively.
That’s’ where this planning models can help determining which SBU should be stimulated for
growth, which one maintained in their present market position and which one eliminated.
SELF-EXAMINATION QUESTIONS
Multiple – Choice Questions
1. SWOT analysis is an evaluation of the organization’s ________ strengths and weaknesses
and its ________ opportunities and threats.
(a) external; internal
(b) internal; internal
(c) external; external
(d) internal; external
Strategic Management

3.28
2. The goal of SWOT analysis is to ________ the organization’s opportunities and strengths
while ________ its threats and ________ its weaknesses.
(a) avoid; neutralizing; correcting
(b) exploit; neutralizing; correcting
(c) avoid; capitalizing; neutralizing
(d) exploit; avoiding; ignoring
3. Which of the following does “B” stand for in the BCG Matrix?
(a) Boom
(b) Balance
(c) Bankruptcy
(d) Boston
4. Which of the following competitive position of a firm is not as per ADL Matrix?
(a) Dominant
(b) Favourable
(c) Difficult
(d) Tenable
5. In BCG matrix, the cash cows represents:
(a) High market share and Low market growth
(b) High market share and High market growth
(c) Low market share and Low market growth
(d) Low market share and High market growth
6. Boston Consulting Group Matrix consists of:
(a) Stars, Cash Cows, Cats and Rats
(b) Stars, Sun, Moon and Universe
(c) Stars, Cash Cows, Dogs and Question Marks
(d) Problems, Questions, Consultancy and Solutions.
7. DL matrix derived its name from:
(a) Arthur D. Little
(b) Arthur D. Latin
Strategic Analysis

3.29
(c) Ansoff’s D. Little
(d) Ansoff’s D. Latin
8. A ________ consists of those rival firms with similar competitive approaches and positions
in the market.
(a) Business unit
(b) Strategic group
(c) Strategic fit
(d) None of these
9. KSFs stand for:
(a) Key strategic factors
(b) Key supervisory factors
(c) Key success factors
(d) Key sufficient factors
10. TOWS matrix has been developed by:
(a) Heinz Ulwrick
(b) Ulwrick Scholes
(c) Scholes and Jhonson
(d) Heinz Weihrich
11. External opportunities and threats are usually:
(a) the minor cause of organizational demise or success
(b) least important for CEOs and the board of directors
(c) not as important as internal strengths and weaknesses
(d) uncontrollable activities outside the organization
Objective Type Question
State with reasons which of the following statements are correct/incorrect:
(a) Industry is a group of firms whose products have same and similar attributes such that
they compete for the same buyers.
Strategic Management

3.30
(b) Industry is any business organization engaged in manufacturing activities.
(c) SWOT analysis is an evaluation of the organization’s external strengths and weaknesses
and its internal opportunities and threats.
(d) “C” in BCG Matrix stands for commitment.
Short answer questions
1. What is a key success factor?
2. What is product development?
3. Explain dogs in BCG matrix?
Essay type questions
1. Why organisations undertake portfolio analyses? Discuss any one model of portfolio
analysis in detail.
2. What is TOWS matrix? Is it same as SWOT analysis? Discuss.
Case Study
The Managing Director of Big Ltd. called an internal meeting of senior managers to discuss issues
involved in acquiring Small Ltd. for about Rs. 350 crores. He started the meeting with following
observations:
‘After acquiring Small, we will become the second largest consumer goods company in India with
sales of over Rs. 4500 crores. We will have more money for marketing initiatives, product
launches and aggressive price-cuts. The key reason behind buying Small is to create shareholder
value over and above that of the sum of the two companies. Recent years have been tough for
both the companies with strong competition. The merged company hopes to gain a greater market
share and achieve greater efficiency.’
Different issues were discussed between the managers. Pertinent points that were raised were as
follows:
Head Production. ‘Although, I am involved little, till now, in the discussion regarding the acquisition,
I have closely studied various production facilities available to both the companies. I feel production
facilities of both the companies need to be synergised. There is also need to close down
production facilities of two locations out of seven locations of Small. The costs of production of
these locations is very high and also they are located in eastern India, whereas our major sales is
in south and west.’
Strategic Analysis

3.31
Head Marketing. We need to analyse it further. The market of the products is in mature phase with
low growth rate. Small Ltd. has little presence in some regions and is not a major competitor for us.
Further, there is marginal gap between our existing third position and second position. We can
easily achieve second position if we are able to fully utilise our capacities.
(a) In a low growth product what are the different options available to a company.
(b) If you are appointed as a consulted, advise the Big Ltd. how to proceed before arriving at
decision to acquire any company.
(c) Conduct SWOT analysis from the facts given in the case.
Answers- Multiple Choice Questions
1. (d), 2. (b), 3. (d), 4. (c), 5. (a), 6. (c), 7. (a), 8. (b), 9. (c), 10. (d), 11. (d)
CHAPTER 4
STRATEGIC PLANNING
LEARNING OBJECTIVES
♦ Learn the meaning of strategic intent and vision.
♦ Understand the process of strategy formulation.
♦ Know the different stages of strategy-formulation-implementation process.
♦ Have knowledge of different generic strategies as taken up by corporates.
♦ To have a basic knowledge of alternative growth/directional strategies.
Chance favors the prepared mind.
Louis Pasteur
Far better an approximate answer to the right question, which is often vague, than an
exact answer to the wrong question, which can be made precise.
John Tukey, Statistician
Strategy is a deliberate search for a plan of action that will develop a business
competitive advantage and compound it.
Bruce D. Henderson
1. INTRODUCTION
Generally, the strategic planning process culminates in the formulation of corporate strategy.
The strength of the entire process of strategic planning is tested by the efficacy of the strategy
finally forged by the firm. The ultimate question is whether the strategy ironed out is the
appropriate one-whether it would take the firm to its objectives. Corporate strategy is the game
plan that actually steers the firm towards success. The degree of aptness of this game plan
decides the extent of the firm’s success. That is why formulation of corporate strategy forms
the crux of the strategic planning process
Strategic Management
4.2
2. CORPORATE STRATEGY
At an initial level, the concept of strategy has been discussed in the second chapter. Now we
will take the concept forward. Corporate strategy is basically the growth design of the firm; it
spells out the growth objective of the firm - the direction, extent, pace and timing of the firm’s
growth. It also spells out the strategy for achieving the growth. Thus, we can also describe
corporate strategy as the objective-strategy design of the firm. And, to arrive at such an
objective-strategy design is the basic burden of corporate strategy formulation.
2.1 Nature, scope and concerns of corporate strategy
Corporate strategy is basically concerned with the choice of businesses, products and
markets. The following points will clarify the corporate strategy.
♦ It can also be viewed as the objective-strategy design of the firm.
♦ It is the design for filling the firm’s strategic planning gap.
♦ It is concerned with the choice of the firm’s products and markets; it actually denotes the
changes / additions / deletions in the firm’s existing product-market postures. It spells out
the businesses in which the firm will play, the markets in which it will operate and the
customer needs it will serve.
♦ It ensures that the right fit is achieved between the firm and its environment.
♦ It helps build the relevant competitive advantages for the firm.
♦ Corporate objectives and corporate strategy together describe the firm’s concept of
business.
2.2 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. It serves as the design for filling the strategic
planning gap. It also helps build the relevant competitive advantages. Masterminding and
working out the right fit between the firm and its external environment is the primary
contribution of corporate strategy. Basically the purpose of corporate strategy is to harness
the opportunities available in the environment, countering the threats embedded therein. 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 is obvious that responding to environment is part and parcel of a firm’s existence. The
question is how good or how methodical is the response. This is where strategy steps in.
Strategy is the opposite of adhoc responses to the changes in the environment-in competition,
consumer tastes, technology and other variables. It amounts to long-term, well thought-out
and prepared responses to the various forces in the business environment.
Strategic Planning
4.3
2.3 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. 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. This part of management’s
game plan is deliberate and proactive, 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.
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. Things happen that cannot be fully anticipated or planned for. When market and
competitive conditions take an unexpected turn or some aspect of a company’s strategy hits a
stone wall, some kind of strategic reaction or adjustment is required. Hence, a portion of a
company’s strategy is always developed on the fly, coming as a reasoned response to
unforeseen developments-fresh strategic maneuvers on the part of rival firms, shifting
customer requirements and expectations, new technologies and market opportunities, a
Company Experiences,
Know-how, Resource
Strength & weaknesses,
and Competitive
Capabilities
Actual
Company
Strategy
New initiatives plus ongoing strategy
features continued from prior periods
Adaptive reactions to Changing
circumstances
REACTIVE STRATEGY
PLANNED STRATEGY
Strategic Management
4.4
changing political or economic climate, or other unpredictable or unanticipated happenings in
the surrounding environment. But apart from adapting strategy to changes in the market, 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. 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.
2.3 Dealing with strategic uncertainty
Strategic uncertainty, uncertainty that has strategic implications, is a key construct in strategy
formulation. A typical external analysis will emerge with dozens of strategic uncertainties. To
be manageable, they need to be grouped into logical clusters or themes. It is then useful to
assess the importance of each cluster in order to set priorities with respect to Information
gathering and analysis.
Sometimes the strategic uncertainty is represented by a future trend or event that has inherent
unpredictability. Information gathering and additional analysis will not be able to reduce the
uncertainty. In that case, scenario analysis can be employed. Scenario analysis basically
accepts the uncertainty as given and uses it to drive a description of two or more future
scenarios. Strategies are then developed for each. One outcome could be a decision to create
organizational and strategic flexibility so that as the business context changes the strategy will
adapt.
Impact of a strategic uncertainty: Each strategic uncertainty involves potential trends or events
that could have an impact on present, proposed, and even potential strategic business units
(SBUs). For example, a trend toward natural foods may present opportunities for juices for a
firm producing aerated drinks on the basis of a strategic uncertainty. The impact of a strategic
uncertainty will depend on the importance of the impacted SBU to a firm. Some SBUs are
more important than others. The importance of established SBUs may be indicated by their
associated sales, profits, or costs. However, such measures might need to be supplemented
for proposed or growth SBUs for which present sales, profits, or costs may not reflect the true
value to a firm. Finally, because an information-need area may affect several SBUs, the
number of involved SBUs can also be relevant to a strategic uncertainty’s impact.
3. THE STAGES OF CORPORATE STRATEGY FORMULATIONIMPLEMENTATION
PROCESS
Crafting and executing strategy are the heart and soul of managing a business enterprise. 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:
Strategic Planning
4.5
1. Developing a strategic vision of where the company needs to head and what its future
product-customer-market-technology focus should be.
2. Setting objectives and using them as yardsticks for measuring the company’s
performance and progress.
3. Crafting a strategy to achieve the desired outcomes and move the company along the
strategic course that management has charted.
4. Implementing and executing the chosen strategy efficiently and effectively.
5. Monitoring developments and initiating corrective adjustments in the company’s longterm
direction, objectives, strategy, or execution in light of the company’s actual
performance, changing conditions, new ideas, and new opportunities.





Figure: The Stages of Corporate Strategy Formulation- Implementation Process
Stage 1 : Developing a strategic vision
First a company must determine what directional path the company should take and what
changes in the company’s product – market – customer – technology – focus would improve
Developing a
Strategic Vision Setting
Objectives
Crafting a
Strategy to
Achieve the
Objectives and
Vision
Implementing &
Executing the
Strategy
Monitoring
Developments,
Evaluating
performance
and Making
Corrective
Adjustments
Revise as Needed in light of actual performance, changing
conditions, new opportunities and new ideas
Stage 1 Stage 2 Stage 3 Stage 4 Stage 5
Strategic Management
4.6
its current market position and its future prospect. Deciding to commit the company to one
path versus another pushes managers to draw some carefully reasoned conclusions about
how to try to modify the company’s business makeup and the market position it should stake
out. Top management’s views and conclusions about the company’s direction and the productcustomer-
market-technology focus constitute a strategic vision for the company. A strategic
vision delineates management’s aspirations for the business and points an organization in a
particular direction, charts a strategic path for it to follow in preparing for the future, and molds
organizational identity. A clearly articulated strategic vision communicates management’s
aspirations to stakeholders and helps steer the energies of company personnel in a common
direction.
Mission and Strategic Intents: Managers need to be clear about what they see as the role of
their organization, 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, in broad
terms, how it expects to do so. At this level, 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 concern here is overall strategic direction.
The managers of a subsidiary, charged with developing a strategy for that business, also need to
be clear where they fit into the corporate whole. As Hamel and Prahalad have highlighted, 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. In the absence of this, there is a risk of the different parts of the organization, different
levels of management, indeed all members of the organization, pulling in different directions.
Decisions on overall mission in a major corporation will exercise constraints elsewhere. Does
the corporation aspire to short-term profits or long-term growth; to a focused set of highly
related businesses or a more diversified set of businesses; to global coverage or the focus on
selected countries; to investment in internal innovation and new products, or the acquisition of
other businesses? These are, of course, all matters of strategic choice, but they are unlikely to
change regularly. The overall stance of the corporation with regard to such matters may
develop over many years, but by being made explicit it can help direct strategic choice.
Stage 2 : Setting objectives
Corporate objectives flow from the mission and growth ambition of the corporation. Basically,
they represent the quantum of growth the firm seeks who achieve in the given time frame.
They also endow the firm with characteristics that ensures the projected the growth. Through
the objective setting process, the firm is tackling the environment and deciding the locus it
should have in the environment. The objective provides the basis for it major decisions of the
firm and also said the organizational performance to be realised at each level. The managerial
purpose of setting objectives is to convert the strategic vision into specific performance targets
Strategic Planning
4.7
– results and outcomes the management wants the achieve - and then use these objectives as
yardsticks for tracking the company’s progress and performance.
Ideally, managers ought to use the objective-setting exercise as a tool for truly stretching an
organization to reach its full potential. Challenging company personnel to go all out and deliver
big gains in performance pushes an enterprise to be more inventive, to exhibit some urgency
in improving both its financial performance and its business position, and to be more
intentional and focused in its actions.
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. Unless a company is in deep
financial difficulty, such that its very survival is threatened, 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. 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, ideally, give it a growing
competitive advantage over rivals. 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.
A need for both short-term and long-term objectives: As a rule, a company’s set of financial and
strategic objectives ought to include both short-term and long-term performance targets. Having
quarterly or annual objectives focuses attention on delivering immediate performance
improvements. Targets to be achieved within three to five years prompt considerations of what to
do now to put the company in position to perform better down the road. A company that has an
objective of doubling its sales within five years can’t wait until the third or fourth year to begin
growing its sales and customer base. By spelling out annual (or perhaps quarterly) performance
targets, management indicates the speed at which longer-range targets are to be approached.
Long-term objectives: To achieve long-term prosperity, strategic planners commonly establish
long-term objectives in seven areas.
♦ Profitability.
♦ Productivity.
♦ Competitive Position.
♦ Employee Development.
♦ Employee Relations.
♦ Technological Leadership.
♦ Public Responsibility.
Long-term objectives represent the results expected from pursuing certain strategies,
Strategies represent the actions to be taken to accomplish long-term objectives. The time
frame for objectives and strategies should be consistent, usually from two to five years,
Strategic Management
4.8
Qualities of Long-Term Objectives
♦ Acceptable.
♦ Flexible.
♦ Measurable.
♦ Motivating.
♦ Suitable.
♦ Understandable.
♦ Achievable.
Objectives should be quantitative, measurable, realistic, understandable, challenging,
hierarchical, obtainable, and congruent among organizational units. Each objective should
also be associated with a time line. Objectives are commonly stated in terms such as growth
in assets, growth in sales, profitability, market share, degree and nature of diversification,
degree and nature of vertical integration, earnings per share, and social responsibility. Clearly
established objectives offer many benefits. They provide direction, allow synergy, aid in
evaluation, establish priorities, reduce uncertainty, minimize conflicts, stimulate exertion, and
aid in both the allocation of resources and the design of jobs,
Short-range objectives can be identical to long-range objectives if an organization is already
performing at the targeted long-term level. For instance, if a company has an ongoing
objective of 15 percent profit growth every year and is currently achieving this objective, then
the company’s long-range and short-range objectives for increasing profits coincide. The most
important situation in which short-range objectives differ from long-range objectives occurs
when managers are trying to elevate organizational performance and cannot reach the longrange
target in just one year. Short-range objectives then serve as stair-steps or milestones.
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. 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, often against long odds. A
company’s strategic intent can entail becoming the dominant company in the industry,
unseating the existing industry leader, delivering the best customer service of any company in
the industry (or the world), or turning a new technology into products capable of changing the
way people work and live. Ambitious companies almost invariably begin with strategic intents
that are out of proportion to their immediate capabilities and market positions. But they are
undeterred by a grandiose objective that may take a sustained effort of 10 years or more to
achieve. So intent are they on reaching the target that they set aggressive stretch objectives
and pursue them relentlessly, sometimes even obsessively.

Strategic Planning
4.9
The need for objectives at all organizational levels: objective setting should not stop with top
management’s establishing of companywide performance targets. Company objectives need
to be broken down into performance targets for each separate business, product line,
functional department, and individual work unit. Company performance can’t reach full
potential unless each area of the organization does its part and contributes directly to the
desired companywide outcomes and results. This means setting performance targets for each
organization unit that support-rather than conflict with or negate-the achievement of
companywide strategic and financial objectives.
The ideal situation is a team effort in which each organizational unit strives to produce results
in its area of responsibility that contribute to the achievement of the company’s performance
targets and strategic vision. Such consistency signals that organizational units know their
strategic role and are on board in helping the company move down the chosen strategic path
and produce the desired results.
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. Ideally, the pieces
and layers of a company’s strategy should fit together like a jigsaw puzzle. To achieve this
unity, the strategizing process generally has proceeded from the corporate level to the
business level and then from the business level to the functional and operating levels. 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. Anything less than a unified collection of
strategies weakens company performance.
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. Cohesive strategy making down
through the hierarchy becomes easier to achieve when company strategy is distilled into pithy,
easy-to-grasp terminology that can be used to drive consistent strategic action throughout the
company. The greater the numbers of company personnel who know, understand, and buy in
to the company’s basic direction and strategy, 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. Good
communication of strategic themes and guiding principles thus serves a valuable strategyunifying
purpose.
A company’s strategic plan lays out its future direction, performance targets, and strategy.
Developing a strategic vision, setting objectives, and crafting a strategy are basic directionsetting
tasks. They map out the company’s direction, its short-range and long-range
performance targets, and the competitive moves and internal action approaches to be used in
Strategic Management
4.10
achieving the targeted business results. Together, they constitute a strategic plan for coping
with industry and competitive conditions, the expected actions of the industry’s key players,
and the challenges and issues that stand as obstacles to the company’s success.
In making strategic decisions, inputs from a variety of assessments are relevant. However, the
core of any strategic decision should be based on three types of assessments. The first
concerns organizational strengths and weaknesses. The second evaluates competitor strengths,
weaknesses, and strategies, because an organization’s strength is of less value if it is
neutralized by a competitor’s strength or strategy. The third assesses the competitive context,
the customers and their needs, the market, and the market environment. These assessments
focus on determining how attractive the selected market will be, given the strategy selected.
The goal is to develop a strategy that exploits business strengths and competitor weaknesses
and neutralizes business weaknesses and. competitor strength. The ideal is to compete in a
healthy, growing industry with a strategy based on strengths that are unlikely to be acquired or
neutralized by competitor. Figure below summarizes how these assessments combine to
influence strategy.





Figure: Structuring Strategic Decisions
Organizational
Strengths and
Weaknesses
Market Needs,
Attractiveness, and
Key Success
STRATEGIC DECISION
• Strategic Investment
• Functional Area Strategies
• Sustainable Competitive Advantage
Competitor
Strengths and
Weaknesses
Strategic Planning
4.11
Stage 4 : Implementing & executing the strategy
Managing strategy implementation and execution is an operations-oriented, activity aimed at
shaping the performance of core business activities in a strategy-supportive manner. It is
easily the most demanding and time-consuming part of the strategy-management process. To
convert strategic plans into actions and results, a manager must be able to direct
organizational change, motivate people, build and strengthen company competencies and
competitive capabilities, create a strategy-supportive work climate, and meet or beat
performance targets.
In most situations, managing the strategy-execution process includes the following principal
aspects:
♦ Staffing the organization with the needed skills and expertise, consciously building and
strengthening strategy-supportive competencies and competitive capabilities, and
organizing the work effort.
♦ Developing budgets that steer ample resources into those activities critical to strategic
success.
♦ Ensuring that policies and operating procedures facilitate rather than impede effective
execution.
♦ Using the best-known practices to perform core business activities and pushing for
continuous improvement.
♦ Installing information and operating systems that enable company personnel to better
carry out their strategic roles day in and day out.
♦ Motivating people to pursue the target objectives energetically
♦ Tying rewards and incentives directly to the achievement of performance objectives and
good strategy execution.
♦ Creating a company culture and work climate conducive to successful strategy
implementation and execution.
♦ Exerting the internal leadership needed to drive implementation forward and keep
improving strategy execution. When the organization encounters stumbling blocks or
weaknesses, management has to see that they are addressed and rectified quickly.
Good strategy execution involves creating strong "fits" between strategy and organizational
capabilities, between strategy and the reward structure, between strategy and internal
operating systems, and between strategy and the organization’s work climate and culture.
Stage 5 : Monitoring developments, evaluating performance and making corrective
adjustments
A company’s vision, objectives, strategy, and approach to strategy execution are never final;
managing strategy is an ongoing process, not an every now and then task. The fifth stage of
Strategic Management
4.12
the strategy management process – evaluating the company’s progress, assessing the impact
of new external developments, and making corrective adjustments – is the trigger point for
deciding whether to continue or change the company’s vision, objectives, strategy, and/or
strategy-execution methods. So long as the company’s direction and strategy seem well
matched to industry and competitive conditions and performance targets are being met,
company executives may decide to stay the course. Simply fine-tuning the strategic plan and
continuing with ongoing efforts to improve strategy execution are sufficient.
But whenever a company encounters disruptive changes in its external environment,
questions need to be raised about the appropriateness of its direction and strategy. If a
company experiences a downturn in its market position or shortfalls in performance, then
company managers are obligated to ferret out whether the causes relate to poor strategy, poor
execution, or both and then to take timely corrective action. A company’s direction, objectives,
and strategy have to be revisited anytime external or internal conditions warrant. It is to be
expected that a company will modify its strategic vision, direction, objectives, and strategy
over time.
Proficient strategy execution is always the product of much organizational learning. It is
achieved unevenly – coming quickly in some areas and proving nettlesome and problematic in
others. Periodically assessing what aspects of strategy execution are working well and what
needs improving is normal and desirable. 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.
4. STRATEGIC ALTERNATIVES
We have learnt a few generic strategies in the second chapter. In this chapter we will see a
few more strategic alternatives from the perspective of planning.
4.1 Michael Porter’s Generic Strategies
According to Porter, strategies allow organizations to gain competitive advantage from three
different bases: cost leadership, differentiation, and focus. Porter calls these base generic
strategies. Cost leadership emphasizes producing standardized products at a very low per-unit
cost for consumers who are price-sensitive. Differentiation is a strategy aimed at producing
products and services considered unique industry wide and directed at consumers who are
relatively price-insensitive. Focus means producing products and services that fulfill the needs
of small groups of consumers.
Porter’s strategies imply different organizational arrangements, control procedures, and
incentive systems. Larger firms with greater access to resources typically compete on a cost
leadership and/or differentiation basis, whereas smaller firms often compete on a focus basis.
Porter stresses the need for strategists to perform cost-benefit analyses to evaluate “sharing
opportunities” among a firm’s existing and potential business units. Sharing activities and
Strategic Planning
4.13
resources enhances competitive advantage by lowering costs or raising differentiation. In
addition to prompting sharing, Porter stresses the need for firms to “transfer" skills and
expertise among autonomous business units effectively in order to gain competitive
advantage. Depending upon factors such as type of industry, size of firm and nature of
competition, various strategies could yield advantages in cost leadership differentiation, and
focus.
Figure: Michael Porter’s Generic Strategy
Cost Leadership Strategies
A primary reason for pursuing forward, backward, and horizontal integration strategies is to
gain cost leadership benefits. But cost leadership generally must be pursued in conjunction
with differentiation. A number of cost elements affect the relative attractiveness of generic
strategies, including economies or diseconomies of scale achieved, learning and experience
curve effects, the percentage of capacity utilization achieved, and linkages with suppliers and
distributors. Other cost elements to consider in choosing among alternative strategies include
the potential for sharing costs and knowledge within the organization, R&D costs associated
with new product development or modification of existing products, labor costs, tax rates,
energy costs, and shipping costs.
Striving to be the low-cost producer in an industry can be especially effective when the market
is composed of many price-sensitive buyers, when there are few ways to achieve product
STRATEGIC ADVANTAGE
FOCUS
DIFFERENTIATION
OVERALL
COST
LEADERSHIP
Uniqueness perceived by
the customer Low cost position
Industry wide
STRATEGIC
TARGET
Particular
Segment Only
Strategic Management
4.14
differentiation, when buyers do not care much about differences from brand to brand, or when
there are a large number of buyers with significant bargaining power. The basic idea is to
under price competitors and thereby gain market share and sales, driving some competitors
out of the market entirely.
A successful cost leadership strategy usually permeates the entire firm, as evidenced by high
efficiency, low overhead, limited perks, intolerance of waste, intensive screening of budget
requests, wide spans of control, rewards linked to cost containment, and broad employee
participation in cost control efforts. Some risks of pursuing cost leadership are that
competitors may imitate the strategy, thus driving overall industry profits down; that
technological breakthroughs in the industry may make the strategy ineffective; or that buyer
interest may swing to other differentiating features besides price.
Differentiation Strategies
Different strategies offer different degrees of differentiation. Differentiation does not guarantee
competitive advantage, especially if standard products sufficiently meet customer needs or if
rapid imitation by competitors is possible. Durable products protected by barriers to quick
copying by competitors are best. Successful differentiation can mean greater product
flexibility, greater compatibility, lower costs, improved service, less maintenance, greater
convenience, or more features. Product development is an example of a strategy that offers
the advantages of differentiation.
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. 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. Special features that differentiate one’s product can include superior service,
spare parts availability, engineering design, product performance, useful life, gas mileage,
or ease of use.
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. When this happens, a cost leadership strategy
easily will defeat a differentiation strategy. Another risk of pursuing a differentiation strategy is
that competitors may develop ways to copy the differentiating features quickly. Firms thus
must find durable sources of uniqueness that cannot be imitated quickly or cheaply by rival
firms.
Strategic Planning
4.15
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.
Focus Strategies
A successful focus strategy depends on an industry segment that is of sufficient size, has
good growth potential, and is not crucial to the success of other major competitors. Strategies
such as market penetration and market development offer substantial focusing advantages.
Midsize and large firms can effectively pursue focus-based strategies only in conjunction with
differentiation or cost leadership-based strategies. All firms in essence follow a differentiated
strategy. Because only one firm can differentiate itself with the lowest cost, the remaining
firms in the industry must find other ways to differentiate their products.
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.
Risks of pursuing a focus strategy include the possibility that numerous competitors will
recognize the successful focus strategy and copy it, or that consumer preferences will drift
toward the product attributes desired by the market as a whole. An organization using a focus
strategy may concentrate on a particular group of customers, geographic markets, 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
Common Organizational
Requirements
Overall Cost
Leadership
♦ Sustained capital investment
and access to capital
♦ Process engineering skills
♦ Intense supervision of labour
♦ Products designed for ease
in manufacture
♦ Low-cost distribution system
♦ Tight cost control
♦ Frequent, detailed control
reports
♦ Structured organization and
responsibilities
♦ Incentive based on meeting
strict quantitative targets
Strategic Management
4.16
Differentiation
♦ Strong marketing abilities
♦ Product engineering
♦ Creative flair
♦ Strong capability in basic
research
♦ Corporate reputation for
quality or technological
leadership
♦ Long tradition in the industry
or unique combinations of
skills drawn from other
business
♦ Strong cooperation from
channels
♦ Strong coordination among
function in R & D, product
development, and marketing.
♦ Subjective measurement and
incentives instead of
quantitative measures
♦ Amenities to attract highly
skilled labour, scientists, or
creative people.
Focus
♦ Combination of the above
policies directed at the
particular strategic target
♦ Combination of the above
policies directed at the
particular strategic target
4.2 Best-Cost Provider Strategy
The new model of best cost provider strategy is a further development of above three generic
strategies.
Strategic Planning
4.17
Type of Competitive Advantage Being Pursued



Figure: The Five Generic Competitive StrategiesDistinctive 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 crosssection
of the
market
♦ Valueconscious
buyer
♦ A narrow market
niche where
buyer needs and
preferences are
distinctively
different from the
rest of the market
Overall Low-Cost
Leadership Strategy Broad
Differentiation
Strategy
Focused
Low-Cost Strategy
Focused
Differentiation
Strategy
Best-Cost
Provider
Strategy
Lower Cost Differentiation
A Broad
Cross-
Section of
Buyers
A Narrower
Buyer Segment
(or Market
Niche)
MARKET TARGET
Strategic Management
4.18
♦ Basic of
competitive
advantage
♦ Lower costs
than
competitors
♦ An ability to
offer buyers
something
different from
competitors
♦ More value for
the money
♦ Lower cost in
serving the niche
(focused low
cost) or special
attributes that
appeal to the
tastes or
requirements of
niche members
(focused
differentiation)
♦ 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
Strategic Planning
4.19
♦ Sustaining
the strategy
♦ Offer
economical
prices/good
value
♦ Aim at
contributing
to a
sustainable
cost
advantagethe
key is to
manage
costs down,
year after
year, in
every area
of the
business
♦ 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; tout
them to create
a reputation
and brand
image.
♦ Develop
unique
expertise in
simultaneously
managing
costs down
and upscaling
features and
attributes
♦ Remain totally
dedicated to
serving the niche
better than other
competitors; don’t
blunt the firm’s
image and efforts
by entering other
segments or
adding other
product
categories to
widen market
appeal.
♦ Product line
♦ A good
basic
product with
few frills
(acceptable
quality and
limited
selection)
♦ Many product
variations, wide
selection,
strong
emphasis on
differentiating
features
♦ Good-toexcellent
attributes,
several-tomany
upscale
features
♦ Features and
attributes that
appeal to the
tastes and/or
special needs of
the target
segment
♦ Product
emphasis
♦ A
continuous
search for
cost
reduction
without
sacrificing
acceptable
quality and
essential
features
♦ Creation of
value for buyer;
strive for
product
superiority
♦ Incorporation
of upscale
features and
attributes at
low cost
♦ Tailor-made for
the tastes and
requirements of
niche members
Strategic Management
4.20
4.3 Grand strategies/directional strategies Various strategy alternatives are available to a
firm for achieving its growth objective. Here we shall see what these alternatives are, how they
have been classified into a few broad categories, We shall also analyse the scope of each of
these alternatives, since it is in view of their scope that firms choose the particular alternative.
The corporate strategies a firm can adopt have been classified into four broad categories:
stability, expansion, retrenchment and combination known as grand strategies. Grand
strategies, which are often called master or business strategies, are intended to provide basic
direction for strategic actions. They are seen as the basic of coordinated and sustained efforts
directed toward achieving long-term business objectives.
















Figure: Grand Strategies
Strategy Alternatives
Stability Expansion Retrenchment Combination
Intensification Diversification
Market
Penetration
Market
Development
Product
Development
Vertically
Integrated
Concentric
Diversificatio
Conglomerate
Diversification
Forward Backward
Strategic Planning
4.21
The basic features of the grand strategies is as follows:
Strategy Basic Feature
Stability The firm stays with its current businesses and product markets;
maintains the existing level of effort; and is satisfied with
incremental growth.
Expansion Here, the firm seeks significant growth-maybe within the current
businesses; maybe by entering new business that are related to
existing businesses; or by entering new businesses that are
unrelated to existing businesses.
Retrenchment The firm retrenches some of the activities in a given business
(es), or drops the business as such through sell-out or
liquidation.
Combination The firm combines the above strategic alternatives in some
permutation/combination so as to suit the specific requirement
of the firm.
Characteristics and Scope of Various Grand Strategies
A. Stability strategy:
♦ A firm opting for stability strategy stays with the same business, same productmarket
posture and functions, maintaining same level of effort as at present.
♦ The endeavour is to enhance functional efficiencies in an incremental way, through
better deployment and utilization of resources. The assessment of the firm is that
the desired income and profits would be forthcoming through such incremental
improvements in functional efficiencies.
♦ Naturally, the growth objective of firms employing this strategy will be quite modest.
Conversely, only firms with modest growth objective will vote for this strategy.
♦ Stability strategy does not involve a redefinition of the business of the corporation.
♦ It is basically a safety-oriented, status quo-oriented strategy.
♦ It does not warrant much of fresh investments.
♦ The risk is also less.
♦ It is a fairly frequently employed strategy.
♦ With the stability strategy, the firm has the benefit of concentrating its resources
and attention on the existing businesses/products and markets.
♦ But the strategy does not permit the renewal process of bringing in fresh
investments and new products and markets for the firm.
Strategic Management
4.22
B. Expansion strategy:
♦ Expansion strategy is the opposite of stability strategy. While in stability strategy,
rewards are limited, in expansion strategy they are very high. In the matter of risks,
too, the two are the opposites of each other.
♦ Expansion strategy is the most frequently employed generic strategy.
♦ Expansion strategy is the true growth strategy. A firm with a mammoth growth
ambition can meet its objective only through the expansion strategy.
♦ Expansion strategy involves a redefinition of the business of the corporation.
♦ The process of renewal of the firm through fresh investments and new
businesses/products/markets is facilitated only by expansion strategy.
♦ Expansion strategy is a highly versatile strategy; it offers several permutations and
combinations for growth. A firm opting for the expansion strategy can generate
many alternatives within the strategy by altering its propositions regarding products,
markets and functions and pick the one that suits it most.
♦ Expansion strategy holds within its fold two major strategy routes: Intensification
Diversification
♦ Both of them are growth strategies; the difference lies in the way in which the firm
actually pursues the growth.
♦ With intensification strategy, the firm pursues growth by working with its current
businesses.
♦ Intensification, in turn, 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.
♦ It has two components – forward integration and backward integration.
♦ The firm remains vertically within the given product-process sequence; the
intermediaries in the chain become new businesses.
Strategic Planning
4.23
♦ In concentric diversification, too, the new products are connected to the firm’s
existing process/technology. But the new products are not vertically linked to the
existing ones. They are not intermediates. They serve new functions in new
markets. A new business is spinned off from the firm’s existing facilities.
♦ In conglomerate diversification too, a new business is added to the firm’s portfolio.
But, it is disjointed from the existing businesses; in process/ technology/function,
there is no connection between the new business and the existing ones. It is
unrelated diversification.
C. 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.
♦ Divestment is to be viewed as an integral part of corporate strategy without any
stigma attached.
♦ Like expansion strategy, divestment strategy, too, involves a redefinition of the
business of the corporation.
♦ Compulsions for divestment can be many and varied, 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. Stability strategy is adopted because:
♦ It is less risky, involves less changes and people feel comfortable with things as
they are.
♦ The environment faced is relatively stable.
♦ Expansion may be perceived as being threatening.
♦ Consolidation is sought through stabilising after a period of rapid expansion.
B. Expansion strategy is adopted because:
♦ It may become imperative when environment demands increase in pace of activity.
♦ Psychologically, strategists may feel more satisfied with the prospects of growth
from expansion; chief executives may take pride in presiding over organizations
perceived to be growth-oriented.
♦ Increasing size may lead to more control over the market vis-a-vis competitors.
Strategic Management
4.24
♦ Advantages from the experience curve and scale of operations may accrue.
C. Retrenchment strategy is adopted because:
♦ The management no longer wishes to remain in business either partly or wholly due
to continuous losses and unviability.
♦ The environment faced is threatening.
♦ Stability can be ensured by reallocation of resources from unprofitable to profitable
businesses.
D. Combination strategy is adopted because:
♦ The organization is large and faces complex environment.
♦ The organization is composed of different businesses, each of which lies in a
different industry requiring a different response.
Expansion Strategy
Expansion or growth strategy can either be through intensification or diversification. Igor Ansoff
gave a framework as shown which describe the intensification options available to a firm.
Figure: Product-Market Expansion Greed
Market Penetration
The most common expansion strategy is market penetration/concentration on the current
business. The firm directs its resources to the profitable growth of a single product, in a single
market, and with a single technology.
I. 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. Product development
Add product features, product
refinement
Develop a new-generation
product
Develop new product for the
same market
III. Market development
Expand geographically
Target new segments
IV. Diversification involving new
products and new markets
Related
Unrelated
Strategic Planning
4.25
Market Development
It consists of marketing present products, to customers in related market areas by adding different
channels of distribution or by changing the content of advertising or the promotional media.
Product Development
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.
Diversification Strategy
Diversification endeavours can be related or unrelated to existing businesses of the firm.
Based on the nature and extent of their relationship to existing businesses, diversification
endeavours have been classified into four broad categories:
(i) Vertically integrated diversification
(ii) Horizontally integrated diversification
(iii) Concentric diversification
(iv) Conglomerate diversification
Vertically integrated diversification
In vertically integrated diversification, firms opt to engage in businesses that are related to the
existing business of the firm. The firm remains vertically within the same process. 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. The characteristic feature of
vertically integrated diversification is that here, the firm does not jump outside the vertically
linked product-process chain. The example of Reliance Industries provided at the close of this
chapter illustrates this dimension of vertically integrated diversification.
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, by-products or taking
over competitors’ products.
Figure: Related Diversification Options For A Manufacturer
RELATED DIVERSIFICATION
• Exchange or share assets or competencies,
thereby exploiting
• Brand name
• Marketing skills
• Sales and distribution capacity
• Manufacturing skills
• R&D and new product capability
• Economies of scale
UNRELATED DIVERSIFICATION
• Manage and allocate cash flow.
• Obtain high ROI.
• Obtain a bargain price.
• Refocus a firm.
• Reduce risk by operating in multiple product
markets.
• Tax benefits.
• Obtain liquid assets.
• Vertical integration.
• Defend against a takeover.
Strategic Management
4.26

Figure : Motivations for DiversificationConcentric diversification
Concentric diversification too amounts to related diversification. In concentric diversification,
the new business is linked to the existing businesses through process, technology or
marketing. The new product is a spin-off from the existing facilities and products/processes.
This means that in concentric diversification too, there are benefits of synergy with the current
operations. However, concentric diversification differs from vertically integrated diversification
in the nature of the linkage the new product has with the existing ones. While in vertically
integrated diversification, the new product falls within the firm’s current process-product chain,
in concentric diversification, there is a departure from this vertical linkage. 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.
Raw6 m a terials
manufacture
Components
Manufacture
Machinery
Manufacture
Product/Process
research/design
Raw materials
supply
Components supply Machinery
supply Financing
Transport
Competitive
products
Complementary
products
Manufacturer By-products
Distribution outlets Transport Marketing
information
Repairs and
servicing
BACKWARD INTEGRATION
HORIZONTAL INTEGRATION
FORWARD INTEGRATION
Strategic Planning
4.27
Conglomerate diversification
In conglomerate diversification, no such linkages exist; the new businesses/ products are
disjointed from the existing businesses/products in every way; it is a totally unrelated
diversification. In process/technology/function, there is no connection between the new
products and the existing ones. Conglomerate diversification has no common thread at all with
the firm’s present position.
Retrenchment, Divestment and Liquidation Strategies
Retrenchment grand strategy is followed when an organization substantially reduces the
scope of its activity. This is done through an attempt to find out the problem areas and
diagnose the causes of the problems. Next, steps are taken to solve the problems. These
steps result in different kinds of retrenchment strategies. If the organization chooses to focus
on ways and means to reverse the process of decline, it adopts at turnaround strategy. If it
cuts off the loss-making units, divisions, or SBUs, curtails its product line, or reduces the
functions performed, it adopts a divestment (or divestiture) strategy. If none of these actions
work, then it may choose to abandon the activities totally, resulting in a liquidation strategy.
We deal with each of these strategies below.
Turnaround Strategies
Retrenchment may be done either internally or externally. For internal retrenchment to take
place, emphasis is laid on improving internal efficiency, known as turnaround strategy.
There are certain conditions or indicators which point out that a turnaround is needed if the
organization has to survive. These danger signs are:
♦ Persistent negative cash flow
♦ Negative profits
♦ Declining market share
♦ Deterioration in physical facilities
♦ Overmanning, high turnover of employees, 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. A workable action plan for turnaround should
include:
Analysis of product, market, production processes, competition, and market segment
positioning.
Clear thinking about the market place and production logic.
Strategic Management
4.28
Implementation of plans by target-setting, feedback, and remedial action.
A set of ten elements that contribute to turnaround are:
♦ 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, or a major
division, profit centre or SBU. 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. The option of a turnaround may even be ignored if it is obvious that divestment
is the only answer.
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.
♦ Persistent negative cash flows from a particular business create financial problems for
the whole company, creating the need for divestment of that business.
♦ Severity of competition and the inability of a firm to cope with it may cause it to divest.
♦ Technological upgradation is required if the business is to survive but where it is not
possible for the firm to invest in it, a preferable option would be to divest.
♦ A better alternative may be available for investment, causing a firm to divest a part of its
unprofitable businesses.
Strategic Planning
4.29
Liquidation Strategies
A retrenchment strategy considered the most extreme and unattractive is liquidation strategy,
which involves closing down a firm and selling its assets. It is considered as the last resort
because it leads to serious consequences such as loss of employment for workers and other
employees, termination of opportunities where a firm could pursue any future activities, and
the stigma of failure. Many small-scale units, proprietorship firms, and partnership ventures
liquidate frequently but medium-and large-sized companies rarely liquidate in India. The
company management, government, banks and financial institutions, trade unions, suppliers
and creditors, and other agencies are extremely reluctant to take a decision, or ask, for
liquidation.
Selling assets for implementing a liquidation strategy may also be difficult as buyers are
difficult to find. Moreover, the firm cannot expect adequate compensation as most assets,
being unusable, are considered as scrap.
Liquidation strategy may be unpleasant as a strategic alternative but when a "dead business is
worth more than alive", it is a good proposition. For instance, the real estate owned by a firm
may fetch it more money than the actual returns of doing business. When liquidation is evident
(though it is difficult to say exactly when), an abandonment plan is desirable. Planned
liquidation would involve a systematic plan to reap the maximum benefits for the firm and its
shareholders through the process of liquidation. Under the Companies Act, 1956, liquidation
(termed as winding up) may be either by the court, voluntary, or subject to the supervision of
the court.
SELF-EXAMINATION QUESTIONS
Multiple – Choice Questions
1. An organisation diversifies in backward sequence in the product chain and enters specific
product/process to be used in existing products. It is:
(a) Forward diversification.
(b) Vertical diversification.
(c) Horizontal diversification.
(d) Reactive diversification.
2. In Michael Porter’s generic strategy _____________ emphasizes producing standardized
products at a very low per unit-cost for consumers who are price sensitive.
(a) Cheap leadership.
(b) Inferior product leadership.
Strategic Management
4.30
(c) Cost leadership.
(d) Cost benefit.
3. Focus strategies are _________ when consumers have _________ preferences and
when rival firms are not attempting to specialize in the same target segment.
(a) effective, no
(b) effective, distinctive
(c) ineffective, clear
(d) fragmented, fragmented
4. Concentric diversification amounts to _______ diversification.
(a) related
(b) unrelated
(c) non integrated
(d) uninitiated
5. If a firm attempts to gain a competitive advantage primarily by reducing its economic
costs below its competitor, it is pursuing:
(a) Cost leadership strategy
(b) Differentiation strategy
(c) Divisionalization
(d) None of these
6. Major dimensions while taking strategic decisions includes:
(a) top management decisions
(b) allocation of large amounts of company resources
(c) issues related to future oriented
(d) All the above
(e) None of these
7. Corporate strategy includes:
(i) expansion and growth, diversification, takeovers and mergers
(ii) Vertical and horizontal integration, new investment and divestment areas
(iii) determination of the business lines, research and development projects
Strategic Planning
4.31
From the combinations given below select a correct alternative:
(a) (i) and (ii)
(b) (ii) and (iii)
(c) (iii) and (iv)
(d) (i), (ii) and (iii)
8. Which one of the following is totally an unrelated diversification?
(a) Conglomerate diversification
(b) Concentric diversification
(c) Vertical diversification
(d) Horizontal diversification
9. Which strategy is implemented after the failure of turnaround strategy?
(a) Liquidation strategy
(b) Retrenchment strategy
(c) Divestment strategy
(d) All the above
10. Expansion strategy is opposite to:
(a) stability strategy
(b) divestment strategy
(c) liquidation strategy
(d) diversification strategy
11. What are the three different bases given by Michael Porter’s Generic Strategies to gain
competitive advantage?
(a) differentiation, integration and compensation
(b) integration, focus and differentiation
(c) compensation, integration and focus
(d) cost leadership, differentiation and focus
Strategic Management
4.32
Objective Type Question
State with reasons which of the following statements are correct/incorrect:
(a) In vertically integrated diversification, firms enter specific product/process that are
forward or backward in the chain, as new businesses for the firm.
(b) Objectives should be quantitative, challenging and associated with time line.
(c) Successful differentiation can mean greater product flexibility.
Short answer questions
1. What do you understand by focus strategy?
2. What is differentiation strategy?
3. Explain conglomerate diversification.
Essay type questions
1. Strategy is partly proactive and partly reactive. Discuss.
2. Discuss various stages in strategic formulation and implementation process.
3. Discuss strategic alternatives with reference Michael Porter’s strategies.
Case Study
Cool Garments is exploring options of picking up a strategic equity stake in north based Jazzy
Wear, a Kanpur -based garment manufacture catering to gents segment. The takeover may
boost its production of premium garments. This will also increase Cool Garments’ presence in
the North.
The size of the acquisition would be small — within Rs 50 crore — compared to Cool
Garments recent big deals in other states. Jazzy Wear special products fit perfectly into Cool
Garment’s future plans. Acquiring Jazzy will give it a bigger product portfolio and also a
considerable presence in the north Indian market.
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. They feel that if
a deal is striked it would also be in their favour. However, they are not clear how to formulate
right strategy for the Jazzy Wear.
If you are appointed as strategic consultant by the Jazzy Wear, explain to their top managers
the process of strategy formulation.
Discuss the nature of strategy for both the companies.
Answers - Multiple Choice Questions
1. (b), 2. (c), 3. (b), 4. (a), 5. (a), 6. (d), 7. (d), 8. (a), 9. (c), 10. (a), 11. (d)
CHAPTER 5
FORMULATION OF FUNCTIONAL STRATEGY
LEARNING OBJECTIVES
 Understand how functional strategies are formulated.
 To have a fair idea about the role of marketing strategy in implementation.
 Learn different aspects of financial strategy.
 Know how to formulate production, logistics, human resource and other important
functional strategies.
Most of the time, strategists should not be formulating strategy at all; they should be
getting on with implementing strategies they already have.
Henry Mintzberg
1. INTRODUCTION
Once higher level corporate and business strategies are developed, management need to
formulate and implement strategies for each functional area. Strategy of one functional area
can not be looked at in isolation, because it is the extent to which all of the functional tasks
are interwoven that determine the effectiveness of the major strategy.
For effective implementation, strategists have to provide direction to functional managers
regarding the plans and policies to be adopted. In fact, the effectiveness of strategic
management depends critically on the manner in which strategies are implemented.
Functional strategies provide details to business strategy & governs as to how key activities of
the business will be managed. Functional strategies play two important roles. Firstly, they
provide support to the overall business strategy. Secondly, they spell out as to how functional
managers will work so as to ensure better performance in their respective functional areas.
Functional area strategy such as marketing, financial, production and Human Resource are
based on the functional capabilities of an organisation. For each functional area, first the
major sub areas are identified and then for each of these sub functional areas, content of
functional strategies, important factors, and their importance in the process of strategy
Strategic Management
5.2
implementation is identified.
In terms of the levels of strategy formulation, functional strategies operate below the SBU or
business-level strategies. Within functional strategies there might be several sub-functional
areas. Functional strategies, are made within the higher level strategies and guidelines therein
that are set at higher levels of an organization. Functional managers need guidance from the
business strategy in order to make decisions. Operational plans tell the functional managers
what has to be done while policies state how the plans are to be implemented.
Major strategies need to be translated to lower levels to give holistic strategic direction to an
organization. The reasons why functional strategies are needed can be enumerated as
follows:
 The development of functional strategies is aimed at making the strategies-formulated at
the top management level-practically feasible at the functional level.
 Functional strategies fecilitate flow of strategic decisions to the different parts of an
organization.
 They act as basis for controlling activities in the different functional areas of business.
 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.
 Functional strategies help in bringing harmony and coordination as they remain part of
major strategies.
 Similar situations occurring in different functional areas are handled in a consistent
manner by the functional managers.
Thus, strategies need to be segregated into viable functional plans and policies that are
compatible with each other. In this way, strategies can be implemented by the functional
managers. Environmental factors relevant to each functional area have an impact on the choice
of functional strategies. Organizational strategies affect the choice of functional strategies.
However, the actual process of choice is influenced by objective as well as subjective factors.
Functional strategies affect, and are affected by, the resource allocation decisions.
2. MARKETING STRATEGY FORMULATION
Marketing is a social and managerial process by which individuals and groups obtain
what they need and want through creating, offering and exchanging products of value
with others.
Philip Kotler
Formulation of Functional Strategy
5.3
Ordinary marketing is an activity performed by business organizations. However, it is not
necessarily confined only to business enterprises. It is an activity that creates and sustains
exchange relationships among those who are willing and able to buy and sell products,
services, satisfaction and even ideas. In the present day for business, 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 marketing it is more important to do what is
strategically right than what is immediately profitable.
The term marketing constitutes different processes, functions, exchanges and activities that
create perceived value by satisfying needs of individuals. Marketing induces or helps in
moving people closer to making a decision to purchase and facilitate a sale.
Marketing in recent decades has assumed an astounding importance. It is an immediate
cause and effect of rapid economic growth, globalization, technological upgradation,
development of ever-increasing human needs and wants and increasing purchasing power.
A business organization faces countless marketing variables that affect the success or failure
of strategy implementation. Some examples of marketing decisions that may require special
attention are as follows:
1. The kind of distribution network to be used. Whether to use exclusive dealerships or
multiple channels of distribution.
2. The amount and the extent of advertising. Whether to use heavy or light advertising.
What should be the amount of advertising in print media, television or internet.
3. Whether to limit or enhance the share of business done with a single or a few customer.
4. Whether to be a price leader or a price follower.
5. Whether to offer a complete or limited warranty.
6. Whether to reward salespeople based on straight salary, straight commission, or on a
combination of salary/commission.
2.1 Delivering value to Customer: Marketing alone cannot produce superior value for the
consumer. It needs to work in coordination with other departments to accomplish this.
Marketing acts as part of the organizational chain of activities. Marketers are challenged to
find ways to get all departments to think with focus on customer. In its search for competitive
advantage, the firm needs to look beyond its own chain of activities and into the chains of its
suppliers, distributors, and ultimately customers. This “partnering” will produce a value
delivery network.
Strategic Management
5.4
Figure 5.1 : Value Delivery Network
Connecting with consumers
To succeed in today’s competitive marketplace, companies must be customer centered. They
must win customers from competitors and keep them by delivering greater value. Since
companies cannot satisfy all consumers in a given market, they must divide up the total
market (market segmentation), choose the best segments (market targeting), and design
strategies for profitably serving chosen segments better than the competition (market
positioning).
2.2 The Marketing Process
 Once the strategic plan has defined the company’s overall mission and objectives,
marketing plays a role in carrying out these objectives.
 The marketing process is the process of analyzing market opportunities, selecting
target markets, developing the marketing mix, and managing the marketing effort.
 Target customers stand at the center of the marketing process.
2.3 Marketing mix
Marketing mix forms an important part of overall competitive marketing strategy. The
marketing mix is the set of controllable marketing variables that the firm blends to produce the
response it wants in the target market. The marketing mix consists of everything that the firm
can do to influence the demand for its product. These variables are often referred to as the “4
Ps.” The 4 Ps stand for product, price, place and promotion. 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. The 4 Ps are from a
marketer’s angle. When translated to buyers angle they may be termed as 4 Cs. Product may
be referred as customer solution, price as customer cost, place as convenience and promotion
as communication.
Company’s Chain
of Activities
Distributors
Customers Suppliers
Formulation of Functional Strategy
5.5
 Product stands for the “goods-and-service” combination the company offers to the target
market. Strategies are needed for managing existing product over time adding new ones
and dropping failed products. Strategic decisions must also be made regarding branding,
packaging and other product features such as warrantees.
Products and markets are infinitely dynamic. An organization has to capture such
dynamics through a set of policies and strategies. Some products have consistent
customer demand over long period of time while others have short and fleeting life spans.
There are products that have wide range of quality and workmanship and these also
change over time. There are industrial or consumer products, essentials or luxury
products, durables or perishables.
Products can be differentiated on the basis of size, shape, colour, packaging, brand
names, after-sales service and so on. Organizations seek to hammer into customers’
minds that their products are different from others. It does not matter whether the
differentiation is real or imaginary. Quite often the differentiation is psychological rather
than physical. It is enough if customers are persuaded to believe that the marketers
product is different from others.
Organizations formalize product differentiation through christening ‘brand names’ to their
respective products. These are generally reinforced with legal sanction and protection.
Brands enable customers to identify the product and the organization behind it. The
products’ and even firms’ image is built around brand through advertising and other
promotional strategies. Customers tend to develop strong brand loyalty for a particular
product over a period of time.
 Price stands for the amount of money customers have to pay to obtain the product.
Necessary strategies pertain to the location of the customers, price flexibility, related
items within a product line and terms of sale. The price of a product is its composite
expression of its value and utility to the customer, its demand, quality, reliability, safety,
the competition it faces, the desired profit and so on.
In an industry there would be organizations with low cost products and other organizations
with high costs. The low cost organizations may adopt aggressive pricing strategy as they
enjoy more freedom of action in respect of their prices. They may also afford selective
increase in costs to push their sales.
Theoretically, organizations may also adopt cost plus pricing wherein a margin is added to
the cost of the product to determine its price. However, in the competitive environment
such an approach may not be feasible. More and more companies of today have to accept
the market price with minor deviations and work towards their costs. They reduce their
cost in order to maintain their profitability.
Strategic Management
5.6
For a new product pricing strategies for entering a market needs to be designed. In pricing
a really new product at least three objectives must be kept in mind.
(a) Making the product acceptable to the customers.
(b) Producing a reasonable margin over cost.
(c) Achieving a market that helps in developing market share.
For a new product an organization may either choose to skim or penetrate the market. In
skimming prices are set at a very high level. The product is directed to those buyers who
are relatively price insensitive but sensitive to the novelty of the new product. For example
call rates of mobile telephony were set very high initially. Even the incoming calls were
charged. Since the initial offtake of the product is low, high price, in a way, helps in
rationing of supply in favour of those who can afford it. In penetration firm keeps a
temptingly low price for a new product which itself is selling point. A very large number of
the potential consumer may be able to afford and willing to try the product.
 Place stands for company activities that make the product available to target consumers.
One of the most basic marketing decision is choosing the most appropriate marketing
channel. 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, the
system(s) by which goods are moved from where they are produced from they are
purchases by the final customers. Strategies applicable to the middleman such as
wholesalers and retails must be designed.
The distribution policies of a company are important determinants of the functions of
marketing. The decision to utilize a particular marketing channel or channels sets the
pattern of operations of sales force. We will learn more about place when we study
logistics later in this chapter.
 Promotion stands for activities that communicate the merits of the product and persuade
target consumers to buy it. Strategies are needed to combine individual methods such as
advertising, personal selling, and sales promotion into a coordinated campaign. In
addition promotional strategies must be adjusted as a product move from an earlier
stages from a later stage of its life.
Modern marketing is highly promotional oriented. Organizations strive to push their sales
and market standing on a sustained basis and in a profitable manner under conditions of
complex direct and indirect competitive situations. Promotion also acts as an impetus to
marketing. It is simultaneously a communication, persuasion and conditioning process.
There are at least four major direct promotional methods or tools – personal selling,
advertising, publicity and sales promotion. They are briefly explained as follows:
Formulation of Functional Strategy
5.7
(i) Personal Selling: Personal selling is one of the oldest forms of promotion. It
involves face-to-face interaction of sales force with the prospective customers and
provides a high degree of personal attention to them. In personal selling, oral
communication is made with potential buyers of a product with the intention of
making a sale. It may initially focus on developing a relationship with the potential
buyer, but end up with efforts for making a sale. Personal selling suffers from a very
high costs as sales personnel are expensive. They can physically attend only one
customer at a time. Thus it is not a cost-effective way of reaching a large number of
people.
(ii) Advertising: Advertising is a non-personal, highly flexible and dynamic promotional
method. The media for advertisings are several such as pamphlets, brochures,
newspapers, magazines, hoardings, display boards, radio, television and internet.
Choice of appropriate media is important for effectiveness of the message. The
media may be local, regional, or national. The type of the message, copy,
illustration are a matter of choice and creativity. Advertising may be directed
towards consumers, middlemen or opinion leaders. Advertising is likely to succeed
in promoting the sales of an organization but its effectiveness in respect to the
expenditure can not be directly measured. Sales is a function of several variables
out of which advertising is only one.
(iii) Publicity: Publicity is also a non-personal form of promotion similar to advertising.
However, no payments are made to the media as in case of advertising.
Organizations skillfully seek to promote themselves and their product without
payment. Publicity is communication of a product, brand or business by placing
information about it in the media without paying for the time or media space directly.
Thus it is way of reaching customers with negligible cost. Basic tools for publicity
are press releases, press conferences, reports, stories, and internet releases.
These releases must be of interest to the public.
(iv) Sales promotion: Sales promotion is an omnibus term that includes all activities that
are undertaken to promote the business but are not specifically included under
personal selling, advertising or publicity. Activities like discounts, contests, money
refunds, installments, kiosks, exhibitions and fairs constitute sales promotion. All
these are meant to give a boost to the sales. Sales promotion done periodically may
help in getting a larger market share to an organization.
Expanded Marketing Mix: Typically, all organizations use a combination of 4 Ps in some form
or the other. However, the above elements of marketing mix are not exhaustive. It is pertinent
to discuss a few more elements that may form part of an organizational marketing mix
strategy. They have got more currency in recent years. Growth of services has its own share
for the inclusion of newer elements in marketing. A few new Ps are as follows:
Strategic Management
5.8
 People: all human actors who play a part in delivery of the market offering and thus
influence the buyer’s perception, namely the firm’s personnel and the customer.
 Physical evidence: the environment in which the market offering is delivered and where
the firm and customer interact.
 Process: the actual procedures, mechanisms and flow of activities by which the product /
service is delivered.
2.4 Marketing Analysis: Marketing analysis involves a complete analysis of the company’s
situation. A company performs analysis by identifying environmental opportunities and threats.
It also analyzes its strengths and weaknesses to determine which opportunities the company
can best pursue.Marketing Analyses has three components as planning implementation and
control. Through analyses organization feed information and other inputs to each of the other
marketing management functions.
Marketing Planning
Marketing planning involves deciding on marketing strategies that will help the company
attains its overall strategic objectives. A detailed plan is needed for each business, product, or
brand. A product or brand plan may contain different sections: executive summary, current
marketing situation, threats and opportunity analysis, objectives and issues, marketing
strategies, action programs, budgets, and controls.
 The executive summary is a short summary of the main goals and recommendations to
be presented in the plan.
 The current marketing situation is the section of a marketing plan that describes the
target market and the company’s position in it. Important sections include:
 A market description.
Figure: Managing the marketing effort
Formulation of Functional Strategy
5.9
 A product review.
 Analysis of the competition.
 A section on distribution.
 In the threats and opportunities section, managers are forced to anticipate important
developments that can have an impact, either positive or negative, on the firm.
 Having studied the product’s threats and opportunities, the manager can set objectives
and consider issues that will affect them. The objectives should be stated as goals that
the company would like to attain during the plan’s term.
 Marketing strategy is the marketing logic by which the business unit hopes to achieve its
marketing objectives. Strategies should be created for all marketing mix components.
 The marketing budget is a section of the marketing plan that shows projected revenues,
costs, and profits.
 The last section of the marketing plan outlines the controls that will be used to monitor
progress. This allows for progress checks and corrective action.
Dealing with the Marketing Environment
The company must carefully analyze its environment in order to avoid the threats and take
advantage of the opportunities. Areas to be analyzed in the environment normally include:
 Forces close to the company such as its ability to serve customers, other company
departments, channel members, suppliers, competitors, and publics.
 Broader forces such as demographic and economic forces, political and legal forces,
technological and ecological forces, and social and cultural forces.
Marketing strategy techniques
 Social Marketing: It refers to the design, implementation, and control of programs
seeking to increase the acceptability of a social ideas, cause, or practice among a target
group. For instance, the publicity campaign for prohibition of smoking in Delhi explained
the place where one can and can’t smoke in Delhi.
 Augmented Marketing. 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, on-line computer repair services, secretarial services, etc. Such
innovative offerings provide a set of benefits that promise to elevate customer service to
unprecedented levels.
 Direct Marketing: Marketing through various advertising media that interact directly with
consumers, generally calling for the consumer to make a direct response. Direct
Strategic Management
5.10
marketing includes Catalogue Selling, Mail, Telecomputing, Electronic Marketing,
Shopping, and TV shopping.
 Relationship Marketing: The process of creating, maintaining, and enhancing strong,
value- laden relationships with customers and other stakeholder. For example, British
Airways offers special lounges with showers at 199 airports for frequent flyers. Thus,
providing special benefits to select customers to strength bonds. It will go a long way in
building relationships.
 Services Marketing: It is applying the concepts, tools, and techniques, of marketing to
services. Services is any activity or benefit that one party can offer to another that is
essentially intangible and does not result in the, banking, savings, retailing, educational
or utilities.
 Person Marketing: People are also marketed. Person marketing consists of activities
undertaken to create, maintain or change attitudes or behavior towards particular people.
For example, politicians, sports stars, film stars, professional i.e., market themselves to
get votes, or to promote their careers and income.
 Organization Marketing: It consists of activities undertaken to create, maintain, or
change attitudes and behavior of target audiences towards an organization. Both profit
and nonprofit organizations practice organization marketing.
 Place Marketing: Place marketing involves activities undertaken to create, maintain, or
change attitudes and behavior towards particular places say, business sites marketing,
tourism marketing.
 Enlightened Marketing: A marketing philosophy holding that a company’s marketing
should support the best long-run performance of the marketing system; its five principles
include customer-oriented marketing, innovative marketing, value marketing, sense-ofmission
marketing, and societal marketing.
 Differential Marketing: A market-coverage strategy in which a firm decides to target
several market segments and designs separate offer for each. For example, Hindustan
Lever Limited has Lifebuoy, Lux and Rexona in popular segment and Liril and Pears in
premium segment.
 Synchro-marketing: When the demand for the product is irregular due to season, some
parts of the day, or on hour basis, causing idle capacity or over-worked capacities,
synchromaketing can be used to find ways to alter the same pattern of demand through
flexible pricing, promotion, and other incentives. For example woollens or coolers; or
hospitals underbooked on weekend or end of the week.
 Concentrated Marketing: A market-coverage strategy in which a firm goes after a large
share of one or few sub-markets.
Formulation of Functional Strategy
5.11
 Demarketing: Marketing strategies to reduce demand temporarily or permanently-the
aim is not to destroy demand, but only to reduce or shift it. This happens when there is
overfull demand. For example, buses are overloaded in the morning and evening, roads
are busy for most of times, zoological parks are over-crowded on Saturdays, Sundays
and holidays. Here demarketing can be applied to regulate demand.
3. FINANCIAL STRATEGY FORMULATION
The financial strategies of an organization are related to several finance/accounting concepts
considered to be central to strategy implementation. These are: acquiring needed
capital/sources of fund, developing projected financial statements/budgets, management/
usage of funds, and evaluating the worth of a business. Strategists need to formulate
strategies in these areas so that they are implemented. Some examples of decisions that may
require finance/accounting policies are:
1. To raise capital with short-term debt, long-term debt, preferred stock, or common stock.
2. To lease or buy fixed assets.
3. To determine an appropriate dividend payout ratio.
4. To extend the time of accounts receivable.
5. To establish a certain percentage discount on accounts within a specified period of time.
6. To determine the amount of cash that should be kept on hand.
Acquiring capital to implement strategies / sources of funds
Successful strategy implementation often requires additional capital. Besides net profit from
operations and the sale of assets, two basic sources of capital for an organization are debt
and equity. Determining an appropriate mix of debt and equity in a firm's capital structure can
be vital to successful strategy implementation. Theoretically, 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. In low earning periods, too much
debt in the capital structure of an organization can endanger stockholders' return and
jeopardize company survival. Fixed debt obligations generally must be met, regardless of
circumstances. This does not mean that stock issuances are always better than debt for
raising capital. Some special stock is issued to finance strategy implementation, ownership
and control of the enterprise are diluted. This can be a serious concern in today's business
environment of hostile takeovers, mergers, and acquisitions.
The major factors regarding which strategies have to be made are: capital structure;
procurement of capital and working capital borrowings; reserves and surplus as sources of
funds; and relationship with lenders, banks and financial institutions. Strategies related to the
sources of funds are important since they determine how financial resources will be made
available for the implementation of strategies. Organizations have a range of alternatives
Strategic Management
5.12
regarding the sources of funds. While one company may rely on external borrowings, another
may follow a policy of internal financing.
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. This type of analysis can be used to forecast the impact of various
implementation decisions (for example, to increase promotion expenditures by 50 percent to
support a market-development strategy, to increase salaries by 25 percent to support a
market-penetration strategy, to increase research and development expenditures by 70
percent to support product development, or to sell common stock to raise capital for
diversification). Nearly all financial institutions require a projected financial statements
whenever a business seeks capital. A pro forma income statement and balance sheet allow an
organization to compute projected financial ratios under various strategy-implementation
scenarios. When compared to prior years and to industry averages, financial ratios provide
valuable insights into the feasibility of various strategy-implementation approaches.
Primarily as a result of the Enron collapse and accounting scandal, companies today are being
much more diligent in preparing projected financial statements to "reasonably rather than too
optimistically" project future expenses and earnings.
A financial budget is also a document that details how funds will be obtained and spent for a
specified period of time. Annual budgets are most common, although the period of time for a
budget can range from one day to more than ten years. Fundamentally, financial budgeting is
a method for specifying what must be done to complete strategy implementation successfully.
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.
Financial budgets can be viewed as the planned allocation of a firm's resources based on
forecasts of the future.
There are almost as many different types of financial budgets as there are types of
organizations. Some common types of budgets include cash budgets, operating budgets,
sales budgets, profit budgets, factory budgets, capital budgets, expense budgets, divisional
budgets, variable budgets, flexible budgets, and fixed budgets. When an organization is
experiencing financial difficulties, budgets are especially important in guiding strategy
implementation.
Financial budgets have some limitations. First, budgetary programs can become so detailed
that they are cumbersome and overly expensive. Over budgeting or under budgeting can
cause problems. Second, financial budgets can become a substitute for objectives, A budget
is a tool and not an end in itself. Third, budgets can hide inefficiencies if based solely on
precedent rather than on periodic evaluation of circumstances and standards. Finally, budgets
Formulation of Functional Strategy
5.13
are sometimes used as instruments of tyranny that result in frustration, resentment,
absenteeism, and high turnover. To minimize the effect of this last concern, managers should
increase the participation of subordinates in preparing budgets.
Management / usage of funds
Plans and policies for the usage of funds deal with investment or asset-mix decisions. The
important factors regarding which plans and policies are to be made are: capital investment;
fixed asset acquisition; current assets; loans and advances; dividend decisions; and
relationship with shareholders. Usage of funds is important since it relates to the efficiency
and effectiveness of resource utilization in the process of strategy implementation.
Implementation of projects in pursuance of expansion strategies typically results in increase in
capital work in progress and current assets. If plans and policies are not clear, the usage of
funds is inefficient, leading to less than an optimum utilization of resources. An example is of
Modi Cement, which followed a deliberate policy of generous capital investment in setting up
its plant based on the latest technology. As compared to its competitor Jaypee Rewa's plant,
which cost Rs 120 crore, Modi's plant had an investment of Rs 153 crore. The result was high
interest liability and depreciation, causing a serious dent in profitability in the initial years.
Other factors of usage of funds are also considered by companies to attract and retain
shareholders' interest. Payout policies for dividends and bonus distribution play an important
role in the usage of funds.
The management of funds is an important area of financial strategies. It basically deals with
decisions related to the systemic aspects of financial management. The major factors
regarding which plans and policies related to the management of funds have to be made are:
the systems of finance, accounting, and budgeting; management control system; cash, credit,
and risk management; cost control and reduction; and tax planning and advantages.
The management of funds can play a pivotal role in strategy implementation as it aims at the
conservation and optimum utilization of funds objectives which are central to any strategic
action. Organizations that implement strategies of stability, growth or retrenchment cannot
escape the rigours of a proper management of funds. In fact, good management of funds often
creates the difference between a strategically successful and unsuccessful company. For
instance, Gujarat Ambuja Cements, currently a highly profitable cement company in the
country, has achieved tremendous financial success primarily on the basis of its policies of
cost control. This company has been particularly successful in maintaining a low cost for
power, which is a major input in cement manufacturing.
Financial plans and policies, however, present a dilemma before management. The priorities
of management may often conflict with those of shareholders. It is the responsibility of the
strategists to minimize the conflict of interest between the management and the shareholders.
Strategic Management
5.14
Evaluating the worth of a business
Evaluating the worth of a business is central to strategy implementation because integrative,
intensive, and diversification strategies are often implemented by acquiring other firms. Other
strategies, such as retrenchment may result in the sale of a division of an organization or of
the firm itself. Thousands of transactions occur each year in which businesses are bought or
sold in the United States. In all these cases, 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. Net worth represents the sum of common stock, additional paid-in
capital, and retained earnings. After calculating net worth, add or subtract an appropriate
amount for goodwill and overvalued or undervalued assets. This total provides a
reasonable estimate of a firm's monetary value. If a firm has goodwill, it will be listed on
the balance sheet, perhaps as "intangibles".
 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 net profits. A conservative rule of thumb is to establish a business's worth
as five times the firm's current annual profit. A five-year average profit level could also be
used. When using the approach, remember that firms normally suppress earnings in their
financial statements to minimize taxes.
 The third approach, letting the market determine a business's worth, involves three
methods. First, base the firm's worth on the selling price of a similar company. A potential
problem, however, is that sometimes comparable figures are not easy to locate, even
though substantial information on firms that buy or sell to other firms is available in major
libraries. The second approach is called the price-earnings ratio method. To use this
method, 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 can be called the outstanding shares method. To use this method,
simply multiply the number of shares outstanding by the market price per share and add a
premium. The premium is simply a per-share amount that a person or firm is willing to pay
to control (acquire) the other company. As indicated in the Global Perspective, European
firms aggressively are acquiring American firms, using these and perhaps other methods
for evaluating the worth of their target companies.
4. PRODUCTION STRATEGY FORMULATION
The strategy for production are related to the production system, operational planning and
control, and research and development (R&D). The strategy adopted affects the nature of
Formulation of Functional Strategy
5.15
product/service, the markets to be served, and the manner in which the markets are to be
served. All these collectively influence the operations system structure and objectives which
are used to determine the operations plans and policies. Thus, a strategy of expansion
through related diversification, for instance, will affect what products are offered to which
market and how these markets are served. The operations system structure, which is
concerned with the manufacturing/ service and supply/delivery system, and operations system
objectives, which are related to customer service and resource utilisation, both determine what
operations, plans and policies are set.
Production System
The production system is concerned with the capacity, location, layout, product or service
design, work systems, degree of automation, extent of vertical integration, 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.
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.
For example, Excel Industries, a pioneering company in the area of industrial and agro
chemicals, adopts a policy of successive vertical integration for import substitution. It starts
with the end product and then integrates backward to make raw materials for it. Another
example is of Lakshmi Machine Works, where operations policy related to the product range is
aimed at the successive enlargement of its textile machinery range. This is done through a
policy of mastering the process of production by absorption of technology, indigenisation, and
adaptation to customer needs.
Operations Planning and Control
Strategies related to operations planning and control are concerned with aggregate production
planning; materials supply; inventory, cost, and quality management; and maintenance of
plant and equipment. Here, the aim of strategy implementation is to see how efficiently
resources are utilized 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 organizational activity that is
aimed at translating the objectives into reality. For instance, Instrumentation Ltd is a public
sector company engaged in the business of process control and automation and is currentlyfollowing
a strategy of expansion and diversification. Operations planning and control at this
company is based on the policy of ancillarisation. There are about 259 ancillary units that
supply sub-assemblies and components. The company's centralized production is at Kota in
Rajasthan and its operations plans are based on the plans of its ancillary units. The
centralized production provides all the basic inputs to ancillaries and performs the functions of
testing, standardizing, and fabricating the equipment.
Strategic Management
5.16
Some companies use quality as a strategic tool. The operations policies at KSB Pumps Ltd lay
a great emphasis on quality aspects. In implementing its strategy of stable growth, KSB
Pumps has built a solid reputation for its quality products. Structurally, it has a separate
department of quality assurance having two groups of quality inspection and quality
engineering. Thus, quality is a consideration not only at the inspection stage but is built into
the design itself.
5. LOGISTICS STRATEGY
Management of logistics is a process which integrates the flow of supplies into, through and
out of an organization to achieve a level of service which ensures that the right materials are
available at the right place, at the right time, of the right quality, and at the right cost.
Organizations try to keep the cost of transporting materials as low as possible consistent with
safe and reliable delivery.
Supply chain management helps in logistics and enables a company to have constant contact
with its distribution team, which could consist of trucks, trains, or any other mode of
transportation. Given the changes that affect logistics operations such as emerging
technologies and industry initiatives, developing and using a formal logistics strategy is very
important. 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?
 What modes of transportation should be used for various products.
 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. These savings can
also reveal in the profits of the company. Some examples of how logistics can help a business
are as follows:
 Cost savings
 Reduced inventory
 Improved delivery time
 Customer satisfaction
 Competitive advantage
Formulation of Functional Strategy
5.17
5.1 Supply Chain Management
The way businesses were conducted in the yesteryears is entirely different as they are
conducted now. Today, organisations work in highly turbulent environment. There are several
changes in business environment that have contributed to the development of supply chain
networks. The technology has made impact on all spheres of business activities.
Organisational systems have improved. Even the available infrastructure is improving.
Technological changes and reduction in information communication costs with increase in its
speed has led to changes in coordination among the members of the supply chain network.
Availability of newer technologies have resulted in creation of innovative products with shorter
product life cycles.
Traditionally companies have been managing themselves by taking orders, buying supplies,
manufacturing products and shipping them from their warehouses. Such organisations may
lose out the businesses that strongly lay their focus on key areas of marketing, branding and
delivering value to the customer and outsourcing the rest. Today organisations and individual
customers have become more demanding. They desire customised products that are made
according to their needs. They also aspire that these should be available at lower costs.
5.2 What is Supply Chain Management?
The term supply chain refers to the linkages between suppliers, manufacturers and customers.
Supply chains involve all activities like sourcing and procurement of material, conversion, and
logistics. Planning and control of supply chains are important components of its management.
Naturally, management of supply chains include closely working with channel partners –
suppliers, intermediaries, other service providers and customers.
Supply chain management is defined as the process of planning, implementing, and
controlling the supply chain operations. It is a cross-functional approach to managing the
movement of raw materials into an organization and the movement of finished goods out of
the organization toward the end-consumer who are to be satisfied as efficiently as possible. It
encompasses all movement and storage of raw materials, work-in-process inventory, and
finished goods from point-of-origin to point-of-consumption. Organizations are finding that they
must rely on the chain to successfully compete in the global market.
Modern organizations are striving to focus on core competencies and reduce their ownership
of sources of raw materials and distribution channels. These functions can be outsourced to
other business organizations that specialize in those activities and can perform in better and
cost effective manner. In a way organizations in the supply chain do tasks according to their
core-competencies. Working in the supply chain improve trust and collaboration amongst
partners and thus improve flow and management of inventory.
Strategic Management
5.18
5.3 Is logistic management same as supply chain management
Supply chain management is an extension of logistic management. However, there is
difference between the two. Logistical activities typically include management of inbound and
outbound goods, transportation, warehousing, handling of material, fulfilment of orders,
inventory management, supply/demand planning. Although these activities also form part of
Supply chain management, the latter has different components. Logistic management can be
termed as one of its part that is related to planning, implementing, and controlling the
movement and storage of goods, services and related information between the point of origin
and the point of consumption.
Supply chain management includes more aspects apart from the logistics function. It is a tool
of business transformation and involves delivering the right product at the right time to the
right place and at the right price. It reduces costs of organizations and enhances customer
service.
5.4 Implementing Supply Chain Management Systems
Successful implementing supply management systems requires a change from managing
individual functions to integrating activities into key supply chain processes. It involves
collaborative work between buyers and suppliers, joint product development, common
systems and shared information. A key requirement for successfully implementing supply
chain will be network of information sharing and management. The partners need to link
together to share information through electronic data interchange and take decisions in timely
manner.
Implementing and successfully running supply chain management system will involve:
1. Product development: Customers and suppliers must work together in the product
development process. Right from the start the partners will have knowledge of all Involving all
partners will help in shortening the life cycles. Products are developed and launched in
shorter time and help organizations to remain competitive.
2. Procurement: Procurement requires careful resource planning, quality issues, identifying
sources, negotiation, order placement, inbound transportation and storage. Organizations
have to coordinate with suppliers in scheduling without interruptions. Suppliers are involved in
planning the manufacturing process.
3. Manufacturing: Flexible manufacturing processes must be in place to respond to market
changes. They should be adaptive to accommodate customization and changes in the taste
and preferences. Manufacturing should be done on the basis of just-in-time (JIT) and minimum
lot sizes. Changes in the manufacturing process be made to reduce manufacturing cycle.
4. Physical distribution: Delivery of final products to customers is the last position in a
marketing channel. Availability of the products at the right place at right time is important for
Formulation of Functional Strategy
5.19
each channel participant. Through physical distribution processes serving the customer
become an integral part of marketing. Thus supply chain management links a marketing
channel with customers.
5. Outsourcing: Outsourcing is not limited to the procurement of materials and
components, but also include outsourcing of services that traditionally have been provided
within an organization. The company will be able to focus on those activities where it has
competency and everything else will be outsourced.
6. Customer services: Organizations through interfaces with the company's production
and distribution operations develop customer relationships so as to satisfy them. They work
with customer to determine mutually satisfying goals, establish and maintain relationships.
This in turn help in producing positive feelings in the organization and the customers
7. Performance measurement: There is a strong relationship between the supplier,
customer and organisation. Supplier capabilities and customer relationships can be correlated
with a firm performance. Performance is measured in different parameters such as costs,
customer service, productivity and quality.
6. RESEARCH AND DEVELOPMENT
Research and development (R&D) personnel can play an integral part in strategy
implementation. These individuals are generally charged with developing new products and
improving old products in a way that will allow effective strategy implementation. R&D
employees and managers perform tasks that include transferring complex technology,
adjusting processes to local raw materials, adapting processes to local markets, and altering
products to particular tastes and specifications. Strategies such as product development,
market penetration, and concentric diversification require that new products be successfully
developed and that old products be significantly improved. But the level of management
support for R&D is often constrained by resource availability.
Technological improvements that affect consumer and industrial products and services
shorten product life cycles. Companies in virtually every industry are relying on the
development of new products and services to fuel profitability and growth. Surveys suggest
that the most successful organizations use an R&D strategy that ties external opportunities to
internal strengths and is linked with objectives. Well formulated R&D policies match market
opportunities with internal capabilities. R&D policies can enhance strategy implementation
efforts to:
 Emphasize product or process improvements.
 Stress basic or applied research.
 Be leaders or followers in R&D.
 Develop robotics or manual-type processes.
Strategic Management
5.20
 Spend a high, average, or low amount of money on R&D.
 Perform R&D within the firm or to contract R&D to outside firms.
 Use university researchers or private sector researchers.
There must be effective interactions between R&D departments and other functional
departments in implementing different types of generic business strategies. Conflicts between
marketing, finance/accounting, R&D, and information systems departments can be minimized
with clear policies and objectives.
Many firms wrestle with the decision to acquire R&D expertise from external firms and develop
R&D expertise internally. The following guidelines can be used to help make this decision:
 If the rate of technical progress is slow, the rate of market growth is moderate, and there
are significant barriers to possible new entrants, then in-house R&D is the preferred
solution. The reason is that R&D, if successful, will result in a temporary product or
process monopoly that the company can exploit.
 If technology is changing rapidly and the market is growing slowly, then a major effort in
R&D may be very risky, because it may lead to the development of an ultimately obsolete
technology or one for which there is no market.
 If technology is changing slowly but the market is growing quickly, there generally is not
enough time for in-house development. The prescribed approach is to obtain R&D
expertise on an exclusive or nonexclusive basis from an outside firm.
 If both technical progress and market growth are fast, 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. The first strategy
is to be the first firm to market new technological products. This is a glamorous and exciting
strategy but also a dangerous one. Firms such as 3M and General Electric have been
successful with this approach, but many other pioneering firms have fallen, with rival firms
seizing the initiative.
A second R&D approach is to be an innovative imitator of successful products, thus
minimizing the risks and costs of start up. This approach entails allowing a pioneer firm to
develop the first version of the new product and to demonstrate that a market exists. Then,
laggard firms develop a similar product. This strategy requires excellent R&D personnel and
an excellent marketing department.
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. As a new product accepted by customers,
price becomes increasingly important in the buying decision. Also, mass marketing replaces
personal selling as the dominant selling strategy. This R&D strategy requires substantial
Formulation of Functional Strategy
5.21
investment in plant and equipment, but fewer expenditures in R&D than the two approaches
described earlier.
7. HUMAN RESOURCE STRATEGY FORMULATION
The job of human resource manager is changing rapidly as there companies that downsize
and reorganize. 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. This plan must consider
how best to manage spiralling healthcare insurance costs. Employers’ health coverage
expenses consume an average 26 percent of firms' net profits, even though most companies
now require employees to pay part of their health insurance premiums. The plan must also
include how to motivate employees and managers.
The human resource department must develop performance incentives that clearly link
performance and pay to strategies. 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. Linking company and personal benefits is a major new strategic responsibility of human
resource managers. Other new responsibilities for human resource managers may include
establishing and administering an employee stock ownership plan (ESOP), instituting an
effective childcare policy, and providing leadership for managers and employees in a way that
allows them to balance work and family.
A well-designed strategic-management system can fail if insufficient attention is given to the
human resource dimension. 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, (2) failure to match individuals' aptitudes with implementation tasks, and (3)
inadequate top management support for implementation activities.
Strategy implementation poses a threat to many managers and employees in an organization.
New power and status relationships are anticipated and realized. New formal and informal
groups' values, beliefs, and priorities may be largely unknown. Managers and employees may
become engaged in resistance behaviour as their roles, prerogatives, and power in the firm
change. Disruption of social and political structures that accompany strategy execution must
be anticipated and considered during strategy formulation and managed during strategy
implementation.
A concern in matching managers with strategy is that jobs have specific and relatively static
responsibilities, although people are dynamic in their personal development. Commonly used
methods that match managers with strategies to be implemented include transferring
managers, developing leadership workshops, offering career development activities,
promotions, job enlargement, and job enrichment.
Strategic Management
5.22
A number of other guidelines can help ensure that human relationships facilitate rather than
disrupt strategy-implementation efforts. Specifically, managers should do a form of chatting
and informal questioning to stay abreast of how things are progressing and to know when to
intervene. Managers can build support for strategy-implementation efforts by giving few
orders, announcing few decisions, depending heavily on informal questioning, and seeking to
probe and clarify until a consensus emerges. Key thrusts that needed should be rewarded
generously and visibly.
It is surprising that so often during strategy formulation, individual values, skills, and abilities
needed for successful strategy implementation are not considered. 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. The need to
match individual aptitudes with strategy-implementation tasks should be considered in strategy
choice.
Inadequate support from strategists for implementation activities often undermines
organizational success. Chief executive officers, small business owners, and government
agency heads must be personally committed to strategy implementation and express this
commitment in highly visible ways. 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, stress created by inconsistency can cause
uncertainty among managers and employees at all levels.
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. Although time-consuming, this approach builds understanding, trust, commitment
and ownership and reduces resentment and hostility. The true potential of strategy formulation
and implementation presides in people.
The firm’s external opportunities and threats on the one hand and its internal strengths and
weaknesses on the other. In Human Resource Strategic management, the strategist tries to
achieve a competitive advantage for his organization. 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. 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. To quote Charles Greer,
In a growing number of organizations, human resources are now viewed as a source of
competitive advantage. There is greater recognition that distinctive competencies are obtained
through highly developed employee skills, distinctive organizational cultures, management
processes and systems.
Formulation of Functional Strategy
5.23
The role of human resources in enabling the organization to effectively deal with the external
environmental challenges, 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, employment, training, appraisal and
rewarding of personnel. An organization’s recruitment, selection, training, performance
appraisal, and compensation practices can have a strong influence on employee competence
is very important. The following points should be kept in mind :
1. Recruitment and selection: The workforce will be more competent if a firm can
successfully identify, attracts, and select the most competent applicants.
2. Training. The workforce will be more competent if employees are well trained to perform
their jobs property.
3. Appraisal of Performance. The performance appraisal is to identify any performance
deficiencies experienced by employees due to lack of competence. Such deficiencies,
once identified, can often be solved through counselling, coaching or training.
4. Compensation. 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. This
practice enables organizations to attract and retain the most capable people.
Strategy and Human Resource Management
The human resource strategy of business should reflect and support the corporate strategy.
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 optimal contribution is ensured. This implies selecting the best available
personnel, ensuring a ‘fit’ between the employee and the job and retaining, motivating and
empowering employees to perform well in direction of corporate objectives.
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. The success of an
organization depends on its human resources. This means how they are acquired, developed,
motivated and retained organization play an important role in organizational success. This
presupposes an integrated approach towards human resource functions and overall business
functions of an organization.
The Human Resource Management practices of an organization may be an important source
of competitive advantage. For this strategic focus should be given in the following points:
 Pre-selection practices including human resource planning and job analysis.
 Selection practices meant to staff various positions in the organization. Both recruitment
and selection policies and procedures should be designed keeping in view the mission
and the purpose of the organization.
Strategic Management
5.24
 Post-selection practices to maintain and improve the workers job performance levels.
Human Resources decisions related to training and development, performance appraisal,
compensation and motivation should be based on corporate strategy of the organization.
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
beginning. 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.
Goals of an organization states the very purpose and justification of its existence.
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.
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.
2. Creating competitive atmosphere: Present’s globalized market maintaining a competitive
gain is the object of any organization. There are two important ways of business can achieve a
competitive advantages over the others. The first is cost leadership which means the firm aims
to become a low cost leader in the industry. 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. Putting these strategies into effect carries a heavy premium on
having a highly committed and competent workforce.
3. Facilitation of change: The Human resource will be more concerned with substance rather
than form, accomplishments rather than activities, and practice rather than theory. The
personnel function will be responsible for furthering the organization not just maintaining it.
Human resource management will have to devote more time to promote changes than to
maintain the status quo.
4. Diversion of workforce: In the modern organization management of diverse workforce is a
great challenge. Workforce diversity can be observed in terms of male and female workers,
young and old workers, educated and uneducated workers, unskilled and professional
employee, etc. Moreover, many organizations also have people of different castes, religious
and nationalities. The workforce in future will comprise more of educated and self conscious
workers. They will ask for higher degree of participation and avenues for fulfilment. Money will
no longer be the sole motivating force for majority of the workers. Non-financial incentives will
also play an important role in motivating the workforce.
5. Empowerment of human resources: Empowerment means authorizing every member of a
society or organization to take of his/her own destiny realizing his/her full potential. It involves
Formulation of Functional Strategy
5.25
giving more power to those who, at present, have little control what they do and little ability to
influence the decisions being made around them.
6. Building core competency: The human resource manager has a great role to play in
developing core competency by the firm. A core competence is a unique strength of an
organization which may not be shared by others. This may be in the form of human resources,
marketing, capability, or technological capability. If the business is organized on the basis of
core competency, it is likely to generate competitive advantage. Because of this reason, many
organization have restructured their businesses by divesting those businesses which do not
match core competence. Organization of business around core competence implies leveraging
the limited resources of a firm. It needs creative, courageous and dynamic leadership having
faith in organization’s human resources.
6. Development of works ethics and culture: Greater efforts will be needed to achieve
cohesiveness because workers will have transient commitment to groups. As changing work
ethic requires increasing emphasis on individuals, jobs will have to be redesigned to provide
challenge. Flexible starting and quitting times for employees may be necessary. Focus will
shift from extrinsic to intrinsic motivation. 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. Far reaching changes with the help of technical knowledge will be
required for this purpose.
SELF-EXAMINATION QUESTIONS
Multiple Choice Questions
1. Read the following statements:
(i) Functional-level managers are responsible for the specific business functions.
(ii) Functional-level managers take decisions related to human resources, purchasing,
product development, customer service, and so on.
Select the correct alternative:
(a) Both (i) and (ii) truly explain features of functional-level manager.
(b) Only (i) truly explains features of functional-level manager.
(c) Only (ii) truly explains features of functional-level manager.
(d) None of (i) and (ii) truly explains features of functional-level manager.
2. The process of creating, maintaining, and enhancing strong, value- laden relationships
with customers and other stakeholder is:
(a) Social marketing
(b) Augmented marketing
Strategic Management
5.26
(c) Direct marketing
(d) Relationship marketing
3. A core competence is a ________ of an organization which may not be shared by others.
(a) Unique strength
(b) Unique opportunity
(c) Unique product
(d) None of the above
4. If both technical progress and market growth are fast, R&D expertise should be obtained
through:
(a) Acquisition of a technologically sound and well-established firm.
(b) In-house development.
(c) Hiring management consultant
(d) None of the above.
5. Functional managers need ________ from the business strategy in order to _______.
(a) to function, control
(b) guidance, make decisions
(c) money, purchase raw material.
(d) None of the above
Objective type Question
State with reasons which of the following statements are correct/incorrect
(a) Penetration means keeping prices very low.
(b) A core competence of an organization is shared uniformly within the industry.
(c) Functional strategies help in bringing harmony and coordination.
Short answer questions
1. Write a short note on marketing mix?
2. Write a short note on evaluating worth of a business.
3. How proper logistics management helps business.
Essay type questions
1. What is human resource management? Discuss its role in implementation of strategy.
Formulation of Functional Strategy
5.27
2. Discuss the concept of production strategy formulation
3. 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. Two years back Clean Head Ltd started selling their shampoo at
an affordable price of Rs 10 for 40 ml bottle. The price of 100 ml and 200 bottles were
retained at Rs 45 and 85 respectively. The product was aggressively pushed in small and
mofussil towns. The company expected that the existing customers would continue with the
convenience of bigger bottles and purchase them. Contrary to the expectations, big cities also
witnessed a shift towards smaller size bottles. There was some increase in the volumes, but
squeeze in the margins tremendously reduced the profits. Moreover, the turnover did not
increase as forecasted.
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. At this moment, sustainable but
profitable growth is sacrosanct for us, but may prove to be elusive. We are not in a position to
offer lower-priced shampoos with declining profits. If we continue like this, gradually the
company may start incurring losses. Our competitors have also followed us by reducing their
prices. My dilemma is if we roll back our prices, our competitors may not do so.”
(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.
Answers – Multiple Choice Questions
1. (a), 2. (d), 3. (a), 4. (a), 5. (b)
CHAPTER 6
STRATEGY IMPLEMENTATION AND CONTROL
LEARNING OBJECTIVES
♦ Learn the concept of strategy implementation.
♦ Understand why strategy implementation is more difficult than strategy formulation.
♦ Understand the importance of organizational structure in strategy implementation.
♦ Understand how to establish strategic Business Units.
♦ Understand the role of leadership in the execution of strategy.
♦ Learn how to build a supportive corporate culture.
Winning companies know how to do their work better
– Michael Hammer and James Champy
A management truism says structure follows strategy. However, this truism is often
ignored. Too many organizations attempt to carry out a new strategy with an old
structure.
– Dale McConkey
1. INTRODUCTION
Strategic-management process does not end when the firm decides what strategies to pursue.
There must be a translation of strategic thought into strategic action. Translation requires
support of all managers and employees of the business. Implementing strategy affects an
organization from top to bottom; it affects all the functional and divisional areas of a business.
2. INTERRELATIONSHIPS BETWEEN STRATEGY FORMULATION AND
IMPLEMENTATION
Strategy implementation concerns the managerial exercise of putting a freshly chosen strategy
into place. Strategy execution deals with the managerial exercise of supervising the ongoing
pursuit of strategy, making it work, improving the competence with which it is executed and
showing measurable progress in achieving the targeted results. Strategic implementation is
concerned with translating a decision into action, with presupposes that the decision itself (i.e.,
the strategic choice) was made with some thought being given to feasibility and acceptability.
Strategic Management
6.2
The allocation of resources to new courses of action will need to be undertaken, and there
may be a need for adapting the organization’s structure to handle new activities as well as
training personnel and devising appropriate system.
The basic elements of strategic management are summarized in the figure below:
Figure: A summary model of the elements of strategic management
Source : Johnson and Scholes (1988)
Many managers fail to distinguish between strategy formulation and strategy implementation.
Yet, it is crucial to realize the difference between the two because they both require very
different skills. Also, a company will be successful only when the strategy formulation is sound
and implementation is excellent. There is no such thing as successful strategic design per se.
This sounds obvious, but in practice the distinction is not always made. Often people, blame
the strategy model for the failure of a company while the main flaw might lie in failed
implementation. Thus organizational success is a function of good strategy and proper
Expectations
&
purposes Resources,
competences &
capability
The
environment
Strategic
analysis
Strategic
choice
Strategic
implementation
Bases of
Strategic
choice
Organization
Structure &
design
Strategic
options
Strategic
evaluation
&
selection
Managing
strategic
change
Resource
allocation &
control
Strategy Implementation and Control
6.3
implementation. The matrix in the figure below represent various combination of strategy
formulation and implementation:
Figure: Strategy formulation and implementation matrix
The Figure shows the distinction between sound/flawed strategy formulation and excellent/
weak strategy implementation. 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.
Square A is the situation where a company apparently has formulated a very competitive
strategy, but is showing difficulties in implementing it successfully. This can be due to various
factors, such as the lack of experience (e.g. for startups), the lack of resources, missing
leadership and so on. In such a situation the company will aim at moving from square A to
square B, given they realize their implementation difficulties.
Square D is the situation where the strategy formulation is flawed, but the company is showing
excellent implementation skills. 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.
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.
Their path to success also goes through business model redesign and
implementation/execution readjustment.
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. This gives us the notion of competitive position.
Strategy implementation
A
B
(Success)
D
C
Strategy formulation
Weak Excellent
Flawed Sound
Strategic Management
6.4
It needs to be emphasized that ’strategy’ is not synonymous with ’long-term plan’ but rather
consists of an enterprise’s attempts to reach some preferred future state by adapting its
competitive position as circumstances change. While a series of strategic moves may be
planned, competitors’ actions will mean that the actual moves will have to be modified to take
account of those actions.
In contrast to this view of strategy there is another approach to management practice, which
has been common in many organizations. In organizations that lack strategic direction there
has been a tendency to look inwards in times of stress, and for management to devote their
attention to cost cutting and to shedding unprofitable divisions. In other words, the focus has
been on efficiency (i.e. the relationship between inputs and outputs, usually with a short time
horizon) rather than on effectiveness (which is concerned with the organization’s attainment of
goals - including that of desired competitive position). While efficiency is essentially
introspective, effectiveness highlights the links between the organization and its environment.
The responsibility for efficiency lies with operational managers, with top management having
the primary responsibility for the strategic orientation of the organization.
Figure: Principal combinations of efficiency and effectiveness
An organization that finds itself in cell 1 is well placed and thrives, since it is achieving what it
aspires to achieve with an efficient output/input ratio. In contrast, an organization in cell 2 or 4
is doomed, unless it can establish some strategic direction. The particular point to note is that
cell 2 is a worse place to be than is cell 3 since, in the latter, the strategic direction is present
to ensure effectiveness even if rather too much input is being used to generate outputs. To be
Effective Ineffective
Die
Slowly
Survive
Strateg
Die
Quickly
Efficient Thrive
Inefficient
Operational
Management
1 2
3 4
Strategic
management
Strategy Implementation and Control
6.5
effective is to survive whereas to be efficient is not in itself either necessary or sufficient for
survival.
In crude terms, to be effective is to do the right thing, while to be efficient is to do the thing
right. An emphasis on efficiency rather than on effectiveness is clearly wrong. But who
determines effectiveness? Any organization can be portrayed as a coalition of diverse interest
groups each of which participates in the coalition in order to secure some advantage. This
advantage (or inducement) may be in the form of dividends to shareholders, wages to
employees, continued business to suppliers of goods and services, satisfaction on the part of
consumers, legal compliance from the viewpoint of government, responsible behaviour
towards society and the environment from the perspective of pressure groups, and so on.
Even the most technically perfect strategic plan will serve little purpose if it is not
implemented. Many organizations tend to spend an inordinate amount of time, money, and
effort on developing the strategic plan, treating the means and circumstances under which it
will be implemented as afterthoughts! Change comes through implementation and evaluation,
not through the plan. A technically imperfect plan that is implemented well will achieve more
than the perfect plan that never gets off the paper on which it is typed.
Successful strategy formulation does not guarantee successful strategy implementation. It is
always more difficult to do something (strategy implementation) than to say you are going to
do it (strategy formulation)! Although inextricably linked, strategy implementation is
fundamentally different from strategy formulation. Strategy formulation and implementation
can be contrasted in the following ways:
Strategy formulation Strategy implementation
♦ Strategy formulation is positioning forces
before the action.
♦ Strategy implementation is managing
forces during the action.
♦ Strategy formulation focuses on
effectiveness.
♦ Strategy implementation focuses on
efficiency.
♦ Strategy formulation is primarily an
intellectual process.
♦ Strategy implementation is primarily an
operational process.
♦ Strategy formulation requires good
intuitive and analytical skills.
♦ Strategy implementation requires special
motivation and leadership skills
♦ Strategy formulation requires
coordination among a few individuals
♦ Strategy implementation requires
combination among many individuals.
Strategy - formulation concepts and tools do not differ greatly for small, large, for-profit, or
non-profit organizations. However, strategy implementation varies substantially among
different types and sizes of organizations. Implementing strategies requires such actions as
Strategic Management
6.6
altering sales territories, adding new departments, closing facilities, hiring new employees,
changing an organization’s pricing strategy, developing financial budgets, developing new
employee benefits, establishing cost-control procedures, changing advertising strategies,
building new facilities, training new employees, transferring managers among divisions, and
building a better management information system, These types of activities obviously differ
greatly between manufacturing, service, and governmental organizations.
It is to be noted that the division of strategic management into different phases is only for the
purpose of orderly study. In real life, the formulation and implementation processes are
intertwined. Two types of linkages exist between these two phases of strategic management.
The forward linkages deal with the impact of the formulation on implementation while the
backward linkages are concerned with the impact in the opposite direction.
Forward Linkages: The different elements in strategy formulation starting with objective setting
through environmental and organizational appraisal, strategic alternatives and choice to the
strategic plan determine the course that an organization adopts for itself. With the formulation
of new strategies, or reformulation of existing strategies, many changes have to be effected
within the organization. For instance, the organizational structure has to undergo a change in
the light of the requirements of the modified or new strategy. The style of leadership has to be
adapted to the needs of the modified or new strategies. In this way, the formulation of
strategies has forward linkages with their implementation.
Backward Linkages: Just as implementation is determined by the formulation of strategies, the
formulation process is also affected by factors related with ’implementation. While dealing with
strategic choice, remember that past strategic actions also determine the choice of strategy.
Organizations tend to adopt those strategies which can be implemented with the help of the
present structure of resources combined with some additional efforts. Such incremental
changes, over a period of time, take the organization from where it is to where it wishes to be.
lt is to be noted that while strategy formulation is primarily an entrepreneurial activity, based
on strategic decision -making, the implementation of strategy is mainly an administrative task
based on strategic as well as operational decision-making. The next section focuses on the
various issues involved in the implementation of strategies.
3. ISSUES IN STRATEGY IMPLEMENTATION
The different issues involved in strategy implementation cover practically everything that is
included in the discipline of management studies. A strategist, therefore, has to bring to his or
her task a wide range of knowledge, skills, attitudes, and abilities. The implementation tasks
put to test the strategists’ abilities to allocate resources, design structures, formulate
functional policies, and take into account the leadership styles required, besides dealing with
various other issues.
Strategy Implementation and Control
6.7
♦ The strategic plan devised by the organization proposes the manner in which the
strategies could be put into action. Strategies, by themselves, do not lead to action. They
are, in a sense, a statement of intent: implementation tasks are meant to realise the
intent. Strategies, therefore, have to be activated through implementation.
♦ Strategies should lead to plans. For instance, if stability strategies have been formulated,
they may lead to the formulation of various plans. One such plan could be a
modernization plan. Plans result in different kinds of programmes. A programme is a
broad term, which includes goals, policies, procedures, rules, and steps to be taken in
putting a plan into action. Programmes are usually supported by funds allocated for plan
implementation. An example of a programme is a research and development programme
for the development of a new product.
♦ Programmes lead to the formulation of projects. A project is a highly specific programme
for which the time schedule and costs are predetermined. It requires allocation of funds
based on capital budgeting by organizations. Thus, research and development
programmes may consist of several projects, each of which is intended to achieve a
specific and limited objective, requires separate allocation of funds, and is to be
completed within a set time schedule.
♦ Projects create the needed infrastructure for the day-to-day operations in an
organization. They may be used for setting up new or additional plants, modernising the
existing facilities, installation of newer systems, and for several other activities that are
needed for the implementation of strategies.
Implementation of strategies is not limited to formulation of plans, programmes, and projects.
Projects would also require resources. After that is provided, it would be essential to see that
a proper organizational structure is designed, systems are installed, functional policies are
devised, and various behavioural inputs are provided so that plans may work.
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
Strategic Management
6.8
But it should be noted that the sequence does not mean that each of the foIIowing activities
are necessarily performed one after another. Many activities can be performed
simultaneously, certain other activities may be repeated over time; and there are activities,
which are performed only once.
In all but the smallest organizations, the transition from strategy formulation to strategy
implementation requires a shift in responsibility from strategists to divisional and functional
managers. 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.
Managers and employees are motivated more by perceived self-interests than by
organizational interests, unless the two coincide. Therefore, it is essential that divisional and
functional managers be involved as much as possible in strategy-formulation activities. Of
equal importance, strategists should be involved as much as possible in strategyimplementation
activities.
Management issues central to strategy implementation include establishing annual objectives,
devising policies, allocating resources, altering an existing organizational structure,
restructuring and reengineering, revising reward and incentive plans, minimizing resistance to
change, matching managers with strategy, developing a strategy-supportive culture, adapting
production/operations processes, developing an effective human resource function and, if
necessary, downsizing. Management changes are necessarily more extensive when strategies
to be implemented move a firm in major new direction.
Managers and employees throughout an organization should participate early and directly in
strategy-implementation decisions. Their role in strategy implementation should build upon
prior involvement in strategy-formulation activities. Strategists’ genuine personal commitment
to implementation is a necessary and powerful motivational force for managers and
employees. Too often, strategists are too busy to actively support strategy-implementation
efforts, and their lack of interest can be detrimental to organizational success. The rationale
for objectives and strategies should be understood clearly communicated throughout an
organization. Major competitors’ accomplishments, products, plans, actions, and performance
should be apparent to all organizational members. Major external opportunities and threats
should be clear, and managers and employees’ questions should be answered. Top-down flow
of communication is essential for developing bottom-up support.
Firms need to develop a competitor focus at all hierarchical levels by gathering and widely
distributing competitive intelligence; every employee should be able to be benchmark her or
his efforts against best-in-class competitors so that the challenge becomes personal. This is a
challenge for strategists of the firm. Firms should provide training for both managers and
employees to ensure that they have and maintain the skills necessary to be world-class
performers.
Strategy Implementation and Control
6.9
4. ORGANIZATION AND STRATEGY IMPLEMENTATION
The ideal organizational structure is a place where ideas filter up as well as down,
where the merit of ideas carries more weight than their source, and where participation
and shared objectives are valued more than executive order.
– Edson Spencer
Changes in strategy often require changes in the way an organization is structured for two
major reasons. First, structure largely dictates how objectives and policies will be established.
For example, objectives and policies established under a geographic organizational structure
are couched in geographic terms. Objectives and policies are stated largely in terms of
products in an organization whose structure is based on product groups. The structural format
for developing objectives and policies can significantly impact all other strategyimplementation
activities.
The second major reason why changes in strategy often require changes in structure is that
structure dictates how resources will be allocated. If an organization’s structure is based on
customer groups, then resources will be allocated in that manner. Similarly, if an
organization’s structure is set up along functional business lines, then resources are allocated
by functional areas.
Changes in strategy lead to changes in organizational structure. Structure should be designed
to facilitate the strategic pursuit of a firm and, therefore, follows strategy. Without a strategy or
reasons for being (mission), companies find it difficult to design an effective structure.
Chandler found a particular structure sequence to be often repeated as organizations grow
and change strategy over time. There is no one optimal organizational design or structure for
a given strategy or type of organization. What is appropriate for one organization may not be
appropriate for a similar firm, although successful firms in a given industry do tend to organize
themselves in a similar way. For example, consumer goods companies tend to emulate the
divisional structure-by-product form of organization. Small firms tend to be functionally
structured (centralized). Medium-size firms tend to be divisionally structured (decentralized).
Large firms tend to use an SBU (strategic business unit) or matrix structure. As organizations
grow, their structures generally change from simple to complex as a result of linking together
of several basic strategies.
Strategic Management
6.10
Figure: Chandler’s Strategy-Structure Relationship
Numerous external and internal forces affect an organization; no firm could change its
structure in response to every one of these forces, because to do so would lead to chaos.
However, when a firm changes its strategy, the existing organizational structure may become
ineffective. Symptoms of an ineffective organizational structure include too many levels of
management, too many meetings attended by too many people, too much attention being
directed toward solving interdepartmental conflicts, too large a span of control, and too many
unachieved objectives. Changes in structure can facilitate strategy-implementation efforts, but
changes in structure should not be expected to make a bad strategy good, to make bad
managers good, or to make bad products sell.
Structure undeniably can and does influence strategy. Strategies formulated must be
workable, so if a certain new strategy required massive structural changes it would not be an
attractive choice. In this way, structure can shape the choice of strategies. But a more
important concern is determining what types of structural changes are needed to Implement
new strategies and how these changes can best be accomplished. We examine this Issue by
focusing on seven basic types of organizational structure: functional, divisional by geographic
area, divisional by product, divisional by customer, divisional process, strategic business unit
(SBU), and matrix.
4.1 The Functional Structure
A widely used structure in business organisations is functional type because of its simplicity
and low cost. A functional structure groups tasks and activities by business function, such as
production/operations, marketing, finance/accounting, research and development, and
management information systems. Besides being simple and inexpensive, a functional

New strategy is
formed

New administrative
problems emerge
Organizational
performance
declines
Organizational
performance
improves
A new
organizational
structure is
established
Strategy Implementation and Control
6.11
structure also promotes specialization of labour, encourages efficiency, minimizes the need for
an elaborate control system, and allows rapid decision making.
Some disadvantages of a functional structure are that it forces accountability to the top,
minimizes career development opportunities, and is sometimes times characterized by low
employee morale, line/staff conflicts, poor delegation of authority, and inadequate planning for
products and markets. Most large companies abandoned the functional structure in favour of
decentralization and improved accountability.
Figure: Functional Organization Structure
A competitive advantage is created when there is a proper match between strategy and
structure. Ineffective strategy/structure matches may result in company rigidity and failure,
given the complexity and need for rapid changes in today’s competitive landscape. Thus,
effective strategic leaders seek to develop an organizational structure and accompanying
controls that are superior to those of their competitors.
Selecting the organizational structure and controls that result in effective implementation of
chosen strategies is a fundamental challenge for managers, especially top-level managers.
This is because companies must be flexible, innovative, and creative in the global economy if
they are to exploit their core competencies in the pursuit of marketplace opportunities.
Companies must also maintain a certain degree of stability in their structures so that day-today
tasks can be completed efficiently.
Access to reliable information is imperative if executives are to reach decisions regarding the
selection of a structure that is sufficiently flexible and stable. Useful information contributes to
the formation and use of effective structures and controls, which yield improved decision
making.
Chief Executive Officer
Corporate
R&D
Corporate
Human
Resource
Corporate
Finance
Strategic
Planning
Corporate
Marketing
Finance Production Engineering Accounting Sales &
Marketing
Human
Resources
Strategic Management
6.12
In order to implement and manage strategies that have been formulated, all companies-need
some form of organizational structure. And, as companies formulate new strategies, increase
in size, or change their level of diversification, new organizational structures may be required.
Organizational structure is the company’s formal configuration of its intended roles,
procedures, governance mechanisms, authority, and decision-making processes.
Organizational structure, influenced by factors such as an organization’s age and size, acts as
a framework which reflects managers’ determination of what a company does and how tasks
are completed, given the chosen strategy. The most important issue is that the company’s
structure must be congruent with or fit with the company’s strategy.
Simple organizational structure is most appropriate for companies that follow a singlebusiness
strategy and offer a line of products in a single geographic market. 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 ownermanager
makes all major decisions directly and monitors all activities, while the company’s
staff merely serves as an executor.
Little specialization of tasks, few rules, little formalization, unsophisticated information systems
and direct involvement of owner-manager in all phases of day-to-day operations characterise
the simple structure. In the simple structure, communication is frequent and direct, and new
products tend to be introduced to the market quickly, which can result in a competitive
advantage. Because of these characteristics, few of the coordination problems that are
common in larger organizations exist.
A simple organizational structure may result in competitive advantages for some small
companies relative to their larger counterparts. These potential competitive advantages
include a broad-based openness to innovation, greater structural flexibility, and an ability to
respond more rapidly to environmental changes. However, if they are successful, small
companies grow larger. As a result of this growth, the company outgrows the simple structure.
Generally, there are significant increases in the amount of competitively relevant information
that requires processing. 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).
Thus, 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.
To coordinate more complex organizational functions, companies should abandon the simple
structure in favour of the functional structure. The functional structure is used by larger
companies and by companies with low levels of diversification.
Strategy Implementation and Control
6.13
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,
accounting, marketing, R&D, engineering, and human resources. The functional structure
enables the company to overcome the growth-related constraints of the simple structure,
enabling or facilitating communication and coordination.
However, compared to the simple structure, there also are some potential problems.
Differences in functional specialization and orientation may impede communications and
coordination. Thus, the chief executive officer must integrate functional decision-making and
coordinate actions of the overall business across functions. Functional specialists often may
develop a myopic (or narrow) perspective, losing sight of the company’s strategic vision and
mission. When this happens, this problem can be overcome by implementing the
multidivisional structure.
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
day-to-day operations and business unit strategy to division managers. By such delegation,
the corporate office is responsible for formulating and implementing overall corporate strategy
and manages divisions through strategic and financial controls.
The multidivisional or M-form structure was developed in the 1920s, in response to
coordination- and control-related problems in large firms. Functional departments often had
difficulty dealing with distinct product lines and markets, especially in coordinating conflicting
priorities among the products. Costs were not allocated to individual products, so it was not
possible to assess an individual product’s profit contribution. Loss of control meant that
optimal allocation of firm resources between products was difficult (if not impossible). Top
managers became over-involved in solving short-run problems (such as coordination,
communications, conflict resolution) and neglected long-term strategic issues.
The new, innovative structure called for
♦ Creating separate divisions, each representing a distinct business
♦ Each division would house its functional hierarchy;
♦ Division managers would be given responsibility for managing day-to-day operations;
♦ 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.
This would enable the firm to more accurately monitor the performance of individual
businesses, simplifying control problems, facilitate comparisons between divisions, improving
the allocation of resources and stimulate managers of poorly performing divisions to seek
ways to improve performance.
Strategic Management
6.14
When the firm is less diversified, strategic controls are used to manage divisions. Strategic
control refers to the operational understanding by corporate officers of the strategies being
implemented within the firm’s separate business units.
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, which enables
corporate officers to manage the cash flow of the divisions through budgets and an emphasis
on profits from distinct businesses.
However, because financial controls are focused on financial outcomes, they require that each
division’s performance be largely independent of the performance of other divisions. So the
Strategic Business Units come into picture.
4.2 The Divisional Structure
As a small organization grows, it has more difficulty managing different products and services
in different markets. Some form of divisional structure generally becomes necessary to
motivate employees, control operations, and compete successfully in diverse locations. The
divisional structure can be organized in one of four ways: by geographic area, by product or
service, by customer, or by process. With a divisional structure, functional activities are
performed both centrally and in each separate division.
Cisco Systems discarded its divisional structure by customer and reorganized into a functional
structure. CEO John Chambers replaced the three-customer structure based on big
businesses, small business, and telecoms, and now the company has centralized its
engineering and marketing units so that they focus on technologies such as wireless
networks. Chambers says the goal was to eliminate duplication, but the change should not be
viewed as a shift in strategy. Chambers’ span of control in the new structure is reduced to 12
managers reporting directly to him from 15.
Kodak reduced its number of business units from seven by-customer divisions to five byproduct
divisions. As consumption patterns become increasingly similar worldwide, a byproduct
structure is becoming more effective than a by-customer or a by geographic type
divisional structure. In the restructuring, Kodak eliminated its global operations division and
distributed those responsibilities across the new by-product divisions.
Strategy Implementation and Control
6.15
Figure : Divisional Structure
A divisional structure has some clear advantages. First and perhaps foremost accountability is
clear. That is, divisional managers can be held responsible for sales and profit levels. Because
a divisional structure is based on extensive delegation of authority, managers and employees
can easily see the results of their good or bad performances. As a result, employee morale is
generally higher in a divisional structure than it is in centralized structure. Other advantages of
the divisional design are that it creates career development opportunities for managers, allows
local control of local situations, leads to a competitive climate within an organization, and
allows new businesses and products In be added easily.
The divisional design is not without some limitations, however. Perhaps the most important
limitation is that a divisional structure is costly, for a number of reasons. First, each division
requires functional specialists who must be paid. Second, there exists some duplication of
staff services, facilities, and personnel; for instance, functional specialists are also needed
centrally (at headquarters) to coordinate divisional activities. Third, managers must be well
qualified because the divisional design forces delegation of authority better-qualified
individuals require higher salaries. A divisional structure can also be costly because it requires
Chief Executive
Corporate Finance Corporate Legal/PR
General Manager
Division A
General Manager
Division B
Marketing
Production
Personnel
Marketing
Production
Personnel
Strategic Management
6.16
an elaborate, headquarters-driven control system. Finally, certain regions, products, or
customers may sometimes receive special treatment, and It may be difficult to maintain
consistent, company wide practices. Nonetheless, for most large organizations and many
small firms, the advantages of a divisional structure more than offset the potential limitations.
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. This type of structure can be most appropriate for organization that have
similar branch facilities located in widely dispersed areas. A divisional structure by geographic
area allows local participation in decision making and improved coordination within a region.
The divisional structure by product (or services) is most effective for implementing strategies
when specific products or services need special emphasis. Also, this type of structure is
widely used when an organization offers only a few products or services, when an
organization’s products or services differ substantially. The divisional structure allows strict
control over and attention to product lines, but it may also require a more skilled management
force and reduced top management control. General Motors, DuPont, and Procter & Gamble
use a divisional structure by product to implement strategies.
When a few major customers are of paramount importance and many different services are
provided to these customers, then a divisional structure by customer can be the most effective
way to implement strategies. This structure allows an organization to cater effectively to the
requirements of clearly defined customer groups. For example, book-publishing companies
often organize their activities around customer groups such as colleges, secondary schools,
and private commercial schools. Some airline companies have two major customer divisions:
passengers and freight or cargo services. Merrill Lynch is organized into separate divisions
that cater to different groups of customers, including wealthy individuals, institutional
investors, and small corporations.
A divisional structure by process is similar to a functional structure, because activities are
organized according to the way work is actually performed. However, a key difference
between these two designs is that functional departments are not accountable for profits or
revenues, whereas divisional process departments are evaluated on these criteria.
4.3 The Strategic Business Unit (SBU) Structure
As the number, size, and diversity of divisions in an organization increase, controlling and
evaluating divisional operations become increasingly difficult for strategists. Increases in sales
often are not accompanied by similar increases in profitability. The span of control becomes
too large at top levels of the firm. Because of limits to an individual chief executive officer’s
ability to process complex strategic information, problems related to isolation of functional
area managers, and increasing diversification, the structure of the company needs to change.
In these instances, the SBU structure is most appropriate. Also in multidivisional
organizations, an SBU structure can greatly facilitate strategy implementation efforts.
Strategy Implementation and Control
6.17
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. By such delegation, the corporate office is
responsible for formulating and implementing overall corporate strategy and manages SBUs
through strategic and financial controls. Hence, 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. This change in structure can
facilitate strategy implementation by improving coordination between similar divisions and
channelling accountability to distinct business units. In the ninety-division conglomerate just
mentioned, the ninety divisions could perhaps be regrouped into ten SBUs according to
certain common characteristics, such as competing in the same industry, being located in the
same area, or having the same customers.
Two disadvantages of an SBU structure are that it requires an additional layer of
management, which increases salary expenses, and the role of the group vice president is
often ambiguous. However, these limitations often do not outweigh the advantages of
unproved coordination and accountability.
Figure: SBU Structure
This enables the company to more accurately monitor the performance of individual
businesses, simplifying control problems. It also facilitates comparisons between divisions,
President
Corporate
R&D
Corporate
Human
Resource
Corporate
Finance
Strategic
Planning
Corporate
Marketing
Strategic
Business
Unit A
Strategic
Business
Unit B
Strategic
Business
Unit C
Strategic
Business
Unit D
Division Division Divisio Division Division Division
Strategic Management
6.18
improving the allocation of resources and can be used to stimulate managers of poorly
performing divisions to seek ways to improve performance.
A strategic business unit (SBU) structure consists of at least three levels, with a corporate
headquarters at the top, SBU groups at the second level, and divisions grouped by
relatedness within each SBU at the third level.
This means that, within each SBU, divisions are related to each other, as also that SBU
groups are unrelated to each other. Within each SBU, divisions producing similar products
and/or using similar technologies can be organised to achieve synergy. 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.
For example, Sony has been restructuring to match the SBU structure with its ten internal
companies as organised into four strategic business units. Because it has been pushing the
company to make better use of software products and content (e.g., Sony’s music, films and
games) in its televisions and audio gear to increase Sony’s profitability. By its strategy, Sony
is one of the few companies that have the opportunity to integrate software and content across
a broad range of consumer electronics products. It will implement this strategy through the
SBU structure.
For General Electric, this structure will enable the company to "walk, talk and think" like
smaller companies by making decisions and introducing innovative products more rapidly.
GE’s SBU form is made up of 10 strategic business units which should enable it to act quickly
and more effectively. 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.
Newer Forms of Organization Structures
As companies successfully implement business-level strategies and achieve above average
returns, 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. Following such diversification, companies generally
formulate and implement a corporate-level strategy and business-level strategies for individual
units.
However, 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. Increased levels of diversification
call for newer structures that enable fast decision making and where other structures do not
seem to be working properly.
Strategy Implementation and Control
6.19
4.4 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. The matrix structure, in contrast, may be very appropriate when
organizations conclude that neither functional nor divisional forms, even when combined with
horizontal linking mechanisms like strategic business units, are right for their situations. In
matrix structures, functional and product forms are combined simultaneously at the same level
of the organization. Employees have two superiors, a product or project manager and a
functional manager. The "home" department − that is, engineering, manufacturing, or sales −
is usually functional and is reasonably permanent. People from these functional units are often
assigned temporarily to one or more product units or projects. The product units or projects
are usually temporary and act like divisions in that they are differentiated on a product-market
basis.
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). In contrast,
functional and divisional structures depend primarily on vertical flows of authority and
communication. A matrix structure can result in higher overhead because it more management
positions. Other characteristics of a matrix structure that contribute to overall complexity
include dual lines of budget authority (a violation of the unity command principle), dual
sources of reward and punishment, shared authority, dual reporting channels, and a need for
an extensive and effective communication system.
Despite its complexity, the matrix structure is widely used in many industries, including
construction, healthcare, research and defence. Some advantages of a matrix structure are
that project objectives are clear, there are many channels of communication workers can see
the visible results of their work, and shutting down a project is accomplished relatively easily.
In order for a matrix structure to be effective, organizations need Planning, training, clear
mutual understanding of roles and responsibilities, excellent internal communication, and
mutual trust and confidence. The matrix structures used more frequently by American
businesses because firms are pursuing strategies add new products, customer groups, and
technology to their range of activities. Out of these changes are coming product managers,
functional managers, and geographic managers, all of whom have important strategic
responsibilities. When several variables such as product, customer, technology, geography,
functional area, and line of bus II have roughly equal strategic priorities, a matrix organization
can be an effective structural form.
The matrix structure was developed to combine the stability of the functional structure with the
flexibility of the product form. The matrix structure is very useful when the external
environment (especially its technological and market aspects) is very complex and
changeable. It does, however, produce conflicts revolving around duties, authority, and
Strategic Management
6.20
resource allocation. To the extent that the goals to be achieved are vague and the technology
used is poorly understood, a continuous battle for power between product and functional
mangers is likely. 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, 2) Resources are scarce and 3) Abilities to process information and to make
decisions need to be improved.
Figure: Matrix Organization Structure
Changing organizational design
Old Organizational Design New Organizational Design
♦ One large corporation ♦ Mini-business units & cooperative
relationships
♦ Vertical communication ♦ Horizontal communication
♦ Centralised top-down decision making ♦ Decentralised participative decision making
Top Management
Manufacturing Sales Finance Personnel
Manufacturing
unit
Manufacturing
unit
Manufacturing
unit
Manufacturing
unit
Sales
unit
Sales
unit
Sales
unit
Sales
unit
Finance
unit
Finance
unit
Finance
unit
Finance
unit
Personnel
unit
Personnel
unit
Personnel
unit
Personnel
unit
Strategy Implementation and Control
6.21
♦ Vertical integration ♦ Outsourcing & virtual organizations
♦ Work/quality teams ♦ Autonomous work teams
♦ Functional work teams ♦ Cross-functional work teams
♦ Minimal training ♦ Extensive training
♦ Specialised job design focused on
individual ♦ Value-chain team-focused job design
For development of matrix structure Davis and Lawrence, have proposed three distinct
phases:
1. Cross-functional task forces: Temporary cross-functional task forces are initially used
when a new product line is being introduced. A project manager is in charge as the key
horizontal link.
2. Product/brand management: If the cross-functional task forces become more permanent,
the project manager becomes a product or brand manager and a second phase begins. In
this arrangement, function is still the primary organizational structure, but product or brand
managers act as the integrators of semi permanent products or brands.
3. Mature matrix: The third and final phase of matrix development involves a true dualauthority
structure. Both the functional and product structures are permanent. All
employees are connected to both a vertical functional superior and a horizontal product
manager. Functional and product managers have equal authority and must work well
together to resolve disagreements over resources and priorities.
However, the matrix structure is not very popular because of difficulties in implementation and
trouble in managing.
4.5 Network Structure
A newer and somewhat more radical organizational design, the network structure is an
example of what could be termed a "non-structure" by its virtual elimination of in house
business functions. Many activities are outsourced. A corporation organized in this manner is
often called a virtual organization because it is composed of a series of project groups or
collaborations linked by constantly changing non-hierarchical, cobweb-like networks. The
network structure becomes most useful when the environment of a firm is unstable and is
expected to remain so. Under such conditions, there is usually a strong need for innovation
and quick response. Instead of having salaried employees, it may contract with people for a
specific project or length of time. Long-term contracts with suppliers and distributors replace
services that the company could provide for itself through vertical integration. Electronic
markets and sophisticated information systems reduce the transaction costs of the
Strategic Management
6.22
marketplace, thus justifying a "buy" over a "make" decision. Rather than being located in a
single building or area, an organization’s business functions are scattered worldwide. The
organization is, in effect, only a shell, with a small headquarters acting as a "broker",
electronically connected to some completely owned divisions, partially owned subsidiaries,
and other independent companies. In its ultimate form, the network organization is a series of
independent firms or business units linked together by computers in an information system
that designs, produces, and markets a product or service.
Companies like Nike, 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. It allows a company to concentrate on its distinctive competencies, while
gathering efficiencies from other firms who are concentrating their efforts in their areas of
expertise. The network does, however, have disadvantages. The availability of numerous
potential partners can be a source of trouble. Contracting out functions to separate
suppliers/distributors may keep the firm from discovering any synergies by combining
activities. If a particular firm overspecialises on only a few functions, it runs the risk of
choosing the wrong functions and thus becoming non-competitive.
The new structural arrangements that are evolving typically are in response to social and
technological advances. While they may enable the effective management of dispersed
organizations, there are some serious implications, such as those faced by DuPont, the
world’s largest chemical company. With new organizational forms, many workers become
deskilled-that is, they cannot perform well in a new structure that often demands constant
innovation and adaptation. The learning organization that is a part of new organizational forms
requires that each worker become a self motivated, continuous learner. Employees may lack
the level of confidence necessary to participate actively in organization-sponsored learning
experiences. 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. Combined, the conditions above may create stress for
many employees.
5. STRATEGIC BUSINESS UNITS & CORE COMPETENCE
At this juncture, it is pertinent to introduce the concept of Strategic Business Unit (SBU). In
modern times, most corporations organise their businesses into appropriate SBUs. And in
their internal appraisal they carry out an assessment of their SBUs. The student must have a
good grasp of this concept, since it is a vital idea in the strategic planning and strategic
management endeavour. In fact, reference to this idea will keep recurring in our subsequent
discussions in this text.
Strategy Implementation and Control
6.23
The concept is relevant to multi-product, multi-business enterprises. It is impractical for an
enterprise with a multitude of businesses to provide separate strategic planning treatment to
each one of its products/businesses; 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. 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, which is amenable to composite planning
treatment. As per this concept, a multi-business enterprise groups its multitude of businesses
into a few distinct business units in a scientific way. The purpose is to provide effective
strategic planning treatment to each one of its products/businesses.
Historically, large, multi-business firms were handling business planning on a territorial basis
since their structure was territorial. And in many cases, such a structure was the outcome of a
manufacturing or distribution logistics. Often, the territorial structure did not suit the purpose of
strategic planning.
When strategic planning was carried out treating territories as the units for planning, it gave
rise to two kinds of difficulties: (i) since a number of territorial units handled the same product,
the same product was getting varied strategic planning treatments; and (ii) since a given
territorial planning unit carried different and unrelated products, products with dissimilar
characteristics were getting identical strategic planning treatment.
The concept of strategic business units (SBU) breaks away from this practice. It recognises
that just because a firm is structured into a number of territorial units, say six units, it is not
necessarily in six different businesses. It may be engaged in only three distinct businesses. It
is also possible that it is engaged in more than six businesses. 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.
The principle underlying the grouping is that all related products-related from the standpoint of
"function"-should fall under one SBU. In other words, the SBU concept helps a multi-business
corporation in scientifically grouping its businesses into a few distinct business units. Such a
grouping would in its turn, help the corporation carry out its strategic management endeavour
better. 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.
The attributes of an SBU and the benefits a firm may derive by using the SBU idea.
♦ A scientific method of grouping the businesses of a multi-business corporation which
helps the firm in strategic planning.
♦ An improvement over the territorial grouping of businesses and strategic planning based
on territorial units.
Strategic Management
6.24
♦ An SBU is a grouping of related businesses that can be taken up for strategic planning
distinct from the rest of the businesses. Products/businesses within an SBU receive
same strategic planning treatment and priorities.
♦ The task consists of analysing and segregating the assortment of businesses/portfolios
and regrouping them into a few, well defined, distinct, scientifically demarcated business
units. Products/businesses that are related from the standpoint of "function" are
assembled together as a distinct SBU.
♦ Unrelated products/businesses in any group are separated. If they could be assigned to
any other SBU applying the criterion of functional relation, they are assigned accordingly;
otherwise they are made into separate SBUs.
♦ Grouping the businesses on SBU lines helps the firm in strategic planning by removing
the vagueness and confusion generally seen in grouping businesses; it also facilitates
the right setting for correct strategic planning and facilitates correct relative priorities and
resources to the various businesses.
♦ Each SBU is a separate business from the strategic planning standpoint. In the basic
factors, viz., mission, objectives, competition and strategy-one SBU will be distinct from
another.
♦ Each SBU will have its own distinct set of competitors and its own distinct strategy.
♦ Each SBU will have a CEO. He will be responsible for strategic planning for the SBU and
its profit performance; he will also have control over most of the factors affecting the
profit of the SBU.
The questions posed at the corporate level are, first, whether the corporate body wishes to have
a related set of SBUs or not; and if so, on what basis. 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.
♦ SBUs might be serving similar or different markets. Even if technology or products differ,
it may be that the customers are similar. For example, the technologies underpinning
frozen food, washing powders and margarine production may be very different; but all are
sold through retail operations, and U nil ever operates in all these product fields.
♦ Or it may be that other competences on which the competitive advantage of different
SBUs are built have similarities. Unilever would argue that the marketing skills
associated with the three product markets are similar, for example.
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.
♦ Has its own set of competitors.
Strategy Implementation and Control
6.25
♦ Has a manager who has responsibility for strategic planning and profit performance, and
who has control of profit-influencing factors.
The identification of SBUs is a convenient starting point for planning since once the company’s
strategic business units have been identified, the responsibilities for strategic planning can be
more clearly assigned.
The Value Chain Analysis
Value chain analysis has been widely used as a means of describing the activities within and
around an organization, and relating them to an assessment of the competitive strength of an
organization (or its ability to provide value-for-money products or services). Value analysis
was originally introduced as an accounting analysis to shed light on the ’value added’ of
separate steps in complex manufacturing processes, in order to determine where cost
improvements could be made and/or value creation improved. These two basic steps of
identifying separate activities and assessing the value added from each were linked to an
analysis of an organization’s competitive advantage by Michael Porter.
One of the key aspects of value chain analysis is the recognition that organizations are much
more than a random collection of machines, money and people. 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. In other
words, 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.
Porter argued that an understandIng of strategic capability must start with an identification of
these separate value activities.
Figure: Value Chain (Michael Porter)
Firm infrastructure
Human Resource Management
Technology Development
Procurement
Inbound
Logistics
Operations Outboun
d
Logistics
Marketin
g & Sales
Service
Margin
Margin
Support
Activities
Primary Activities
Strategic Management
6.26
The primary activities of the organization are grouped into five main areas: inbound logistics,
operations, outbound logistics, marketing and sales, and service.
♦ Inbound logistics are the activities concerned with receiving, storing and distributing the
inputs to the product/service. This includes materials handling, stock control, transport
etc.
♦ Operations transform these various inputs into the final product or service: machining,
packaging, assembly, testing etc.
♦ Outbound logistics collect, store and distribute the product to customers. For tangible
products this would be warehousing, materials handling, transport, etc. In the case of
services, it may be more concerned with arrangements for bringing customers to the
service if it is a fixed location (e.g. sports events).
♦ Marketing and sales provide the means whereby consumers/users are made aware of
the product/service and are able to purchase it. This would include sales administration,
advertising, selling and so on. In public services, communication networks which help
users’ access a particular service are often important.
♦ Service are all those activities, which enhance or maintain the value of a product/service,
such as installation, repair, training and spares.
Each of these groups of primary activities are linked to support activities. 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). As such, it occurs in many parts of
the organization.
♦ Technology development: All value activities have a ’technology’, even if it is simply
know-how. The key technologies may be concerned directly with the product (e.g. R&D
product design) or with processes (e.g. process development) or with a particular
resource (e.g. raw materials improvements).
♦ Human resource management: This is a particularly important area which transcends all
primary activities. It is concerned with those activities involved in recruiting, managing,
training, developing and rewarding people within the organization.
♦ Infrastructure: The systems of planning, finance, quality control, information
management, etc. are crucially important to an organization’s performance in its primary
activities. Infrastructure also consists of the structures and routines of the organization
which sustain its culture.
Strategy Implementation and Control
6.27
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.
Although a threshold competence in all of these activities is necessary to the organization’s
successful operation, it is important to identify those competences which critically underpin the
organization’s competitive advantage. 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. For example, consider how small shops compete with supermarkets
in grocery retailing. All shops need to have a threshold competence in the basic activities of
purchasing, stocking, display, etc. However, the major supermarkets are pursuing strategies
which provide lower prices to consumers through their core competences in merchandising,
securing lower cost supplies and managing in-store activities more efficiently. This gives a
supermarket competitive advantage over smaller shops: it is difficult for smaller shops to
imitate these competences, since they are underpinned by key resources such as
computerised stock/ordering systems and own brand labels. So the typical ’corner shop’
grocery store gains competitive advantage over supermarkets by concentrating more on
convenience and service through different core competences - the personal service to
customers, extended opening hours, informal credit, home deliveries, etc. The key resources
for the successful corner shop are the style of the owner and the choice of location. These
aspects of service are valued by some consumers and are difficult for the supermarkets to
imitate without substantially increasing their costs.
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. They are necessary
resources and threshold competences to survive as a supermarket. 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). In this industry,
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 development of global competition in the automobile industry over recent decades also
illustrates this issue well. During the 1950s and 1960s, 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. Meanwhile, Japanese manufacturers
were developing competences in defect-free manufacture. By the mid-1970s they were
Strategic Management
6.28
significantly outperforming Ford on quality and reliability - which became critical success
factors in allowing them to achieve global sales. By the mid-1980s, both Ford and the major
Japanese companies had achieved similar competence in these two areas of global networks
and quality. 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, the production and supplier management activities underpinning quality (reliability)
were becoming threshold competences. The competitive arena then switched to competences
which would create some uniqueness of product in an increasingly ’commodity-like’ industry.
The new core competences became the ability to provide unique product designs/features at
low volumes of manufacture - 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.
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, as illustrated in this example. Core competences may also be the
basis on which the organization stretches into new opportunities. So, in deciding which
competences are core, this is another criterion which should be used - the ability to exploit the
competence in more than one market or arena. 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 once traditional markets are mature or saturated.
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, 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. However,
in order to do this, 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.
Managing linkages
Core competences in separate activities may provide competitive advantage for an
organization, but nevertheless over time may be imitated by competitors. 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 is
the management of these linkages which provides ’leverage’ and levels of performance which
are difficult to match.
Strategy Implementation and Control
6.29
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.
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. However, it often results in
a set of activities which are incompatible − different departments pulling in different directions
- 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. For example, a decision
to hold high levels of finished stock might ease production scheduling problems and
provide for a faster response time to the customer. However, it will probably add to the
overall cost of operations. 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.
♦ It is easy to miss this issue of managing linkages between primary activities in an
analysis if, for example, the organization’s competences in marketing activities and
operations are assessed separately. The operations may look good because they are
geared to high-volume, low-variety, low-unit-cost production. However, at the same time,
the marketing team may be selling speed, flexibility and variety to the customers. So high
levels of competence in separate activities are not enough if, as here, the competences
are incompatible: that is, they are not related to the same view of what value for money
means to the customer.
♦ The management of the linkages between a primary activity and a support activity may be
the basis of a core competence. It may be key investments in systems or infrastructure
which provide the basis on which the company outperforms competition. Computer-based
systems have been exploited in many different types of service organization and have
fundamentally transformed the customer experience. Travel bookings and hotel
reservation systems are examples which other services would do well to emulate. They
have created within these organizations the competence to provide both a better service
and a service at reduced cost. They have allowed the organizations to create genuinely
new services from these core competences or to expand rapidly into new markets.
♦ Linkages between different support activities may also be the basis of core competences.
For example, 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
Strategic Management
6.30
technologies. Many companies have failed to become competent in managing this
linkage properly and have lost out competitively.
In addition to the management of internal linkage, competitive advantage may also be gained
by the ability to complement/co-ordinate the organization’s own activities with those of
suppliers, channels or customers. Again, this could occur in a number of different ways:
♦ Vertical integration attempts to improve performance through ownership of more parts of
the value system, making more linkages internal to the organization. However, 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.
♦ A more recent philosophy has been total quality management, which seeks to improve
performance through closer working relationships between the specialists within the
value system. For example, many manufacturers will now involve their suppliers and
distributors at the design stage of a product or project.
♦ The merchandising activities which manufacturers undertake with their distributors are
now much improved and are an important
6. LEADERSHIP AND STRATEGIC IMPLEMENTATION
Weak leadership can wreck the soundest strategy; forceful execution of even a poor
plan can often bring victory.
– Sun Zi
A leader lives in the field with his troops.
– H. Ross Perot
The litany of good strategic management is simple enough: craft a sound strategic plan,
implement it, execute it to the fullest, adjust as needed, win! But it’s easier said than done. A
strategy manager has many different leadership roles to play: visionary, chief entrepreneur
and strategist, chief administrator, culture builder, resource acquirer and allocator, capabilities
builder, process integrator, crisis solver, spokesperson, negotiator, motivator, arbitrator, policy
maker, policy enforcer, and head cheerleader. Sometimes it is useful to be authoritarian and
Strategy Implementation and Control
6.31
hardnosed; sometimes it is best to be a perceptive listener and a compromising decision
maker; sometimes a strongly participative, collegial approach works best; and sometimes
being a coach and adviser is the proper role. Many occasions call for a highly visible role and
extensive time commitments, while others entail a brief ceremonial performance with the
details delegated to subordinates.
For the most part, major change efforts have to be top-down and vision-driven. Leading
change has to start with diagnosing the situation and then deciding which of several ways to
handle it. Managers have five leadership roles to play in pushing for good strategy execution:
1. Staying on top of what is happening, closely monitoring progress, ferreting out issues,
and learning what obstacles lie in the path of good execution.
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.
3. Keeping the organization responsive to changing conditions, alert for new opportunities,
bubbling with innovative ideas, and ahead of rivals in developing competitively valuable
competencies and capabilities.
4. Exercising ethics leadership and insisting that the company conduct its affairs like a
model corporate citizen.
5. Pushing corrective actions to improve strategy execution and overall strategic
performance.
For example:
N. R. Narayan Murthy, Infosys, is a celebrated leader because of the value he has added over
his tenure at the company. 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. Mr. Murthy whom some consider the
master strategic leader, truly focuses on developing human capital.
Mr. Dhirubhai Ambani, Reliance Group, was an icon in himself because of his ability to
conceptualise and communicate sweeping strategies, knowledge of operations to reach
financial goals, and proficiency in implementing a new vision for the company. Mr. 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.
Strategic Management
6.32
Leadership role in implementation
The changes confronting strategic leaders above provide obvious examples of the importance
of strategic leadership, their effects on organizational outcomes, and the great challenges
faced by strategic leaders. This indicates that effective strategic leaders must be able to use
the strategic management process effectively by guiding the company in ways that result in
the formation of strategic intent and strategic mission, facilitating the development of
appropriate strategic actions and providing guidance that results in strategic competitiveness
and earning above-average returns.
Figure : Strategy Design and Implementation: Interrelationship of Elements
Strategic leadership entails the ability to anticipate, envision, maintain flexibility, and empower
others to create strategic change as necessary. In other words, strategic leadership
represents a complex form of leadership in companies. A manager with strategic leadership
skills exhibits the ability to guide the company through the new competitive landscape by
influencing the behaviour, thoughts, and feelings of co-workers, managing through others and
successfully processing or making sense of complex, ambiguous information by successfully
Leadership
Environment
al Scanning
Organization
Information
Systems
Management
Control
Reward
System
Strategic
Planning
Policy
Formulation
Feedback
Management
Development
Design
Implementation
Strategy Implementation and Control
6.33
dealing with change and uncertainty.
Figure: Effective Strategic Leadership
Strategic leaders are those at the top of the company (in particular, the CEO), but other
commonly recognised strategic leaders include members of the board of directors, the top
management team, and division general managers. The ability to manage human capital may
be the most critical skill that a strategic leader possesses.
In the today’s competitive landscape, strategic leaders are challenged to adapt their frames of
reference so that they can deal with rapid, complex changes. A managerial frame of reference
is the set of assumptions, premises, and accepted wisdom that bounds a manager’s
understanding of the company, the industry in which it competes, and the core competencies
that it exploits in the pursuit of strategic competitiveness (and above-average returns). In other
Implementation of
Strategies
Effective Strategic
Leadership
Strategic Intent Strategic Mission
Successful
Strategic Actions
Formulation of
Strategies
Strategic Competitiveness
Above-Average Returns
Influence
Shapes the formulation of
Strategic Management
6.34
words, a manager’s frame of reference is the foundation on which a manager’s mindset is
built.
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.
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.
The strategic leader has several responsibilities, including the following:
♦ Managing human capital (perhaps the most critical of the strategic leader’s skills).
Effectively managing the company’s operations.
♦ Sustaining high performance over time.
♦ Being willing to make candid, courageous, yet pragmatic, decisions.
♦ Seeking feedback through face-to-face communications.
♦ Having decision-making responsibilities that cannot be delegated.
Thus, the strategic leadership skills of a company’s managers represent resources that affect
company performance. And these resources must be developed for the company’s future
benefit.
7. BUILDING A STRATEGY-SUPPORTIVE CORPORATE CULTURE
Every business organisation has a unique organizational culture. Each business has its own
philosophy and principles, its own ways of approaching problems and making decisions, its
own work climate. A organisation has its own embedded patterns of how to do things. its own
ingrained beliefs, behaviour and thought patterns, and practices that define its corporate
culture.
Corporate culture refers to a company’s values, beliefs, business principles, traditions, ways of
operating, and internal work environment.
Where Does Corporate Culture Come From?
An organization’s culture is bred from a complex combination of socio-logical forces operating
within its boundaries. A company’s culture is manifested in the values and business principles
that management preaches and practices, in its ethical standards and official policies, in its
stakeholder relationships (especially its dealings with employees, unions, stockholders,
vendors, and the communities in which it operates), in the traditions the organization
maintains, in its supervisory practices, in employees’ attitudes and behaviour, in the legends
people repeat about happenings in the organization, in the peer pressures that exist, in the
organization’s politics, and in the "chemistry" and the "vibrations" that permeate the work
environment. All these sociological forces, some of which operate quite subtly, combine to
Strategy Implementation and Control
6.35
define an organization’s culture, beliefs and practices that become embedded in a company’s
culture can originate anywhere: from one influential individual, work group, department, or
division, from the bottom of the organizational hierarchy or the top
The role of stories: Frequently, 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.
Culture: ally or obstacle to strategy execution?
An organization’s culture is either an important contributor or an obstacle to successful
strategy execution. The beliefs, vision, objectives, and business approaches and practices
underpinning a company’s strategy may be compatible with its culture or they may not. When
they are, the culture becomes a valuable ally in strategy implementation and execution. When
the culture is in conflict with some aspect of the company’s direction, performance targets or
strategy, the culture becomes a stumbling block that impedes successful strategy
implementation and execution.
How culture can promote better strategy execution?
Strong cultures promote good strategy execution when there’s fit and hurt execution when
there’s negligible fit. A culture grounded in values, practices, and behavioural norms that
match what is needed for good strategy execution helps energize people throughout the
company to do their jobs in a strategy-supportive manner, adding significantly to the power
and effectiveness of strategy execution. For example, a culture where frugality and thrift are
values strongly shared by organizational members is very conducive to successful execution
of a low cost leadership strategy. A culture where creativity, embracing change, and
challenging the status quo are pervasive themes is very conducive to successful execution of
a product innovation and technological leadership strategy. A culture built around such
business principles as listening to customers, encouraging employees to take pride in their
work, and giving employees a high degree of decision-making responsibility is very conducive
to successful execution of a strategy of delivering superior customer service.
A tight culture-strategy alignment acts in two ways to channel behaviour and influence
employees to do their jobs in a strategy-supportive fashion.
A work environment where the culture matches the conditions for good strategy execution
provides a system of informal rules and peer pressure regarding how to conduct business
internally and how to go about doing one’s job. Strategy-supportive cultures shape the mood,
temperament, and motivation the workforce, positively affecting organizational energy, work
habits and operating practices, the degree to which organizational units cooperate, and how
customers are treated.
A strong strategy-supportive culture nurtures and motivates people to do their jobs in ways
conducive to effective strategy execution; it provides structure, standards, and a value system
Strategic Management
6.36
in which to operate; and it promotes strong employee identification with the company’s vision,
performance targets, and strategy. All this makes employees feel genuinely better about their
jobs and work environment and the merits of what the company is trying to accomplish.
Employees are stimulated to take on the challenge of realizing the company’s vision, do their
jobs competently and with enthusiasm, and collaborate with others as needed to bring the
strategy to fruition.
The Perils of Strategy-Culture Conflict
When a company’s culture is out of sync with what is needed for strategic success, the culture
has to be changed as rapidly as can be managed – this, of course, presumes that it is one or
more aspects of the culture that are out of whack rather than the strategy. While correcting a
strategy-culture conflict can occasionally mean revamping strategy to produce cultural fit,
more usually it means revamping the mismatched cultural features to produce strategy fit. The
more entrenched the mismatched aspects of the culture, the greater the difficulty of
implementing new or different strategies until better strategy-culture alignment emerges. A
sizable and prolonged strategy-culture conflict weakens and may even defeat managerial
efforts to make the strategy work.
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. It is the strategy implementer’s task, once
strategy is chosen, to change whatever facets of the corporate culture hinder effective
execution. Once a culture is executed, it is difficult to change.
Changing a problem culture
Changing a company’s culture to align it with strategy is among the toughest management
tasks--easier to talk about than do. Changing problem cultures is very difficult because of the
heavy anchor of deeply held values and habits-people cling emotionally to the old and familiar.
It takes concerted management action over a period of time to replace an unhealthy culture
with a healthy culture or to root out certain unwanted cultural obstacles and instil ones that are
more strategy-supportive.
The first step is to diagnose which facets of the present culture are strategy supportive and
which are not. Then, managers have to talk openly and forthrightly to all concerned about
those aspects of the culture that have to be changed. The talk has to be followed swiftly by
visible, aggressive actions to modify the culture-actions that everyone will understand are
intended to establish a new culture more in tune with the strategy. The menu of culturechanging
actions includes revising policies and procedures in ways that will help drive cultural
change, altering incentive compensation (to reward the desired cultural behaviour), visibly
praising and recognizing people who display the new cultural traits, recruiting and hiring new
managers and employees who have the desired cultural values and can serve as role models
Strategy Implementation and Control
6.37
for the desired cultural behaviour, replacing key executives who are strongly associated with
the old culture, and taking every opportunity to communicate to employees the basis for
cultural change and its benefits to all concerned.
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, strategy implementers have to
convince all those concerned that the culture-changing effort is more than cosmetic. Talk and
symbolism have to be complemented by substantive actions and real movement. The actions
taken have to be credible, highly visible, and unmistakably indicative of the seriousness of
management’s commitment to new strategic initiatives and the associated cultural changes.
There are several ways to accomplish this. One is to engineer some quick successes that
highlight the benefits of strategy-culture changes, thus making enthusiasm for the changes
contagious. However, instant results are usually not as important as having the will and
patience to create a solid, competent team psychologically committed to pursuing the strategy
in a superior fashion. The strongest signs that management is truly committed to creating a
new culture include replacing old-culture traditionalist managers with "new-breed" managers,
changing long-standing policies and operating practices that are dysfunctional or that impede
new initiatives, undertaking major reorganization moves that bring structure into better
alignment with strategy, tying compensation incentives directly to the new measures of
strategic predominance, and making major budgetary reallocations that shift substantial
resources from old-strategy projects and programs to new-strategy projects and programs.
Implanting the needed culture-building values and behaviour depends on a sincere, sustained
commitment by the chief executive coupled with extraordinary persistence in reinforcing the
culture at every opportunity through both word and deed. Neither charisma nor personal
magnetism is essential. However, personally talking to many departmental groups about the
reasons for change is essential; organizational changes are seldom accomplished
successfully from an office. Moreover, creating and sustaining a strategy-supportive culture is
a job for the whole management team. Major cultural change requires many initiatives from
many people. Senior officers, department heads, and middle managers have to reiterate
values, "walk the talk," and translate the organization’s philosophy into everyday practice. In
addition, for the culture-building effort to be successful, 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. Until a big
majority of employees join the new culture and share an emotional commitment to its basic
values and behavioural norms, there’s considerably more work to be done in both instilling the
culture and tightening the culture strategy fit.
The task of making culture supportive of strategy is not a short-term exercise. It takes time for
a new culture to emerge and prevail; it’s unrealistic to expect an overnight transformation. The
Strategic Management
6.38
bigger the organization and the greater the cultural shift needed to produce a culture-strategy
fit, the longer it takes. In large companies, changing the corporate culture in significant ways
can take two to five years. In fact, it is usually tougher to reshape a deeply ingrained culture
that is not strategy-supportive than it is to instill a strategy-supportive culture from scratch in a
brand-new organization.
SELF-EXAMINATION QUESTIONS
Multiple Choice Questions
1. Select a distinguishing feature between divisional and functional structure?
(a) Both functional departments and divisional process departments are accountable
for profits or revenues.
(b) Functional departments are not accountable for profits or revenues, whereas
divisional process departments are evaluated on these criteria.
(c) None of functional departments and divisional process departments are
accountable for profits or revenues.
(d) Both the structures are same.
2. Strategy formulation is primarily an _______________ process and strategy
implementation is primarily an _____________ process.
(a) intellectual, operational
(b) operational, intellectual
(c) intelligent; interim
(d) intellectual; intellectual
3. When strategic management is ineffective and operational management is efficient,
organization will:
(a) Thrive.
(b) Survive.
(c) Die Slowly.
(d) Die Quickly.
4. When a set of product groups are superimposed across functional departments, this
creates a ________ type of organization design.
(a) Matrix
(b) M-form
Strategy Implementation and Control
6.39
(c) U-form
(d) Virtual
5. Strategic implementation activities include:
(a) Accomplishing annual objectives
(b) Measuring performance
(c) Preparing a TOWS matrix
(d) Conducting research
6. For a new product, an organization may chose:
(a) Skimming pricing strategy
(b) Penetration pricing strategy
(c) Both (a) and (b)
(d) None of these
7. An strategic business units is a grouping of ________ businesses.
(a) unrelated
(b) differentiated
(c) related
(d) None of these.
Objective type question
State with reasons which of the following statements are correct/incorrect:
(a) Core competences in separate activities may provide competitive advantage for an
organization.
(b) Strong cultures promote good strategy execution.
(c) Modern Marketing is highly promotional oriented.
Short answer questions
1. What is corporate culture?
2. Compare newer form of organisational structure with the traditional structure.
3. Explain the concept of backward linkages in strategy formulation and implementation.
Strategic Management
6.40
Essay type questions
1. What is strategic implementation? How far is it different from strategy formulation?
2. What is a Strategic Business Unit?
3. Explain the concept of Value Chain Analysis.
Case Study
Speed Technologies is an Indian company with three major divisions: (1) notebooks, (2)
desktops and (3) accessories. Its total revenue for the last year approximated Rs. 1130
crores, and its net operating income was Rs. 53 crores.
The organizational structure of the company is considered to be quite formal. Each division
operates as an independent unit and is responsible for its own activities, with only modest
direction from the corporate office. It also has offices located in Nepal and Sri Lanka. These
offices function as liaising office for local importers. The monthly requisitions from the
importers are directly despatched by the corporate office. The sales of the company from
these two countries is marginal and their market share in markets is also low. However, there
is huge potential. Considering this, the company intends to expand its network in both the
countries with little control from the head office. It intends to increase the workforce and setup
local assembling units.
(a) Is the present structure of Speed Technologies functional or divisional? Discuss.
(b) What kind of structure will you suggest in two countries?
Answers – Multiple Choice Questions
1. (b), 2. (a), 3. (c), 4. (a), 5. (a), 6. (c), 7. (c)
CHAPTER 7
REACHING STRATEGIC EDGE

LEARNING OBJECTIVES
♦ Learn how Business Process Reengineering can be used as a strategic tool.
♦ Learn basic of TQM and how it leads to organizational success.
♦ Learn the concept of six sigma quality standards
♦ Have an overview of some of contemporary issues in strategic management.
Even if you’re on the right track, you’ll get run over if you just sit there.
− Will Rogers, Humorist

1. INTRODUCTION
Business organizations evolve different kind of strategies in response to the environmental
forces. 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. Then the basic ideology of businesses shifted from diversification to
core-competencies. There are several such changes in strategic ideology. With the changes in
the environment of the business, strategic management is also evolving. In this chapter we
will discuss some of the recent and evolving issues in the subject.
2. BUSINESS PROCESS REENGINEERING
Waiting in a queue in a post office or bank, a person may feel need for improvement in
processes. In case of queue the process begins with your stepping into the queue, and ends
with receiving the desired items or service and leaving the place. 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. There are other business processes such as
purchasing raw material, logistic movements of finished products, developing new products,
Strategic Management
7.2
etc. that are much more tricky to deal with. Business processes are simply a set of activities
that transform a set of inputs into a set of outputs for another person or process.
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. What is a
business process and how it differs from other processes is question that may come to mind.
Business process or business activities are not discrete or unrelated pieces of work. They are
parts of recurrent work processes within which they are located, sequenced and organized.
What is a Business Process? A process is a set of logically related tasks or activities oriented
towards achieving a specified outcome. “A process is a collection of activities which creates
an output of value to the customer and often transcends departmental or functional
boundaries. For example, one common process found almost in every organization is the
order fulfilment. Order fulfilment begins with procuring an order and ends with delivery of
goods to the customer. It also includes all other related activities in between. Likewise other
basic processes may include developing a new product or service, launching a new product in
the market, procuring goods from suppliers, preparing the organization’s budget, processing
and paying insurance claims, and so on.
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. The structural elements that constitute a process provide the basis for
its analysis, appraisal, and redesign for achieving higher levels of efficiency and effectiveness,
economy and speed, and quality and output.
A set of interconnected processes comprise a business system. The performance of business
firm is, thus, the outcome of the interrelated operation of its constituent work processes. The
redesign of processes, therefore, provides a powerful basis for improving the performance of a
business enterprise.
Some processes turn out to be extremely critical for the success and survival of the enterprise.
BPR focuses on such critical business processes out of the many processes that go on in any
company. These are the core business processes of the company. A core business process
creates value by the capabilities it provides to the competitiveness. Core business processes
are critical in a company’s evaluation by its customers. They are vital for success in the
industry sector within which the company is positioned. They are crucial for generating
competitive advantages for a firm in the marketplace.
Reaching Strategic Edge
7.3
While some core business processes are easily identifiable, some core Business processes
may not always be immediately apparent. The following instances serve to show that core
processes need to be identified carefully in terms of their bearing on a firms competitiveness:
♦ In the insurance industry, the actual work that leads to a balance of competitive premium
for customers, and profit after claims for the company, is a core business process.
♦ In the banking industry, the activities that help mobilise deposits and generate funds for
advances to customers, is a core business process.
♦ In a fast moving consumer goods industry marketing and brand management is a core
process.
♦ In the electronics and semi-conductor industries, new product development is a core
process.
The core processes of a company may change over a period of time according to the shifting
requirements of its competitiveness. Since the objective of reengineering is to provide
competitive advantage to the enterprise, it is extremely important to identify those core
processes which need to be focussed for achieving excellence. In order to do this we have to
necessarily start from the organization’s business vision, and drive from there the processes
that have to be best in the world in order to realize that vision.
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. Seldom there has been any serious effort to systematically analyse the
processes and measure their effectiveness towards the organizational efficiency. 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. This may result in a sub-optimal
performance for the organization as a whole. The overall business processes in an
organization extending over several departments may be quite lengthy, time consuming, costly
and inefficient. Also “the existing business processes and work patterns are largely obsolete
and irrational.
Fragmentation of work processes makes it difficult to improve the quality of work performance
and also develops a narrow vision among the employees. 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. This results in piecemeal accomplishment of tasks without looking at
the overall goal. As the small fragments of work move from person to person and from unit to
unit, delays keep on mounting and it enhances the chances of errors. 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.
Strategic Management
7.4
We must remember that, most of the existing work processes were developed before the
advent of computers and IT revolution. Even after the massive penetration of information
technology, 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. This has resulted only in some sort of mechanization of the
existing work methods without bringing in any appreciable change in the process and output.
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. It has been possible to double the speed of normal production, utilize
assets several times more productively and respond to customers’ needs and expectations
much more rapidly. This could be achieved by effecting a total change in the process instead
of a piecemeal change. It is, therefore, imperative that for many organizations on the decline,
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. Issues that emerge from the foregoing discussions on the need for
change form the underlying premises of Business Process Reengineering (BPR). They may be
briefly outlined as follows:
♦ The operational excellence of a company is a major basis for its competitiveness.
♦ The business strategy of a company should be oriented towards leveraging its operational
excellence into the marketplace.
♦ A customer-focussed organization needs to be realigned in terms of a process orientation.
♦ Process need to managed, not functions.
♦ For considering totally new ways of redesigning processes, each and every concept,
assumption, purpose, and principle, needs to abandoned temporarily.
♦ Continuous improvement is a deficient approach when a company is far behind the
industry standards, and needs rapid quantum leaps in performance.
♦ Dramatic improvement in performance is the prerequisite for overcoming competition.
♦ How to compete is more important than deciding about where to compete.
Definition of BPR
Business Process Reengineering (BPR) refers to the analysis and redesign of workflows and
processes both within and between the organizations. The orientation of the redesign effort is
radical, i.e., it is a total deconstruction and rethinking of a business process in its entirety,
unconstrained by its existing structure and pattern. Its objective is to obtain quantum gains in
the performance of the process in terms of time, cost, output, quality, and responsiveness to
customers. The redesign effort aims at simplifying and streamlining a process by eliminating
all redundant and non-value adding steps, activities and transactions, reducing drastically the
Reaching Strategic Edge
7.5
number of stages or transfer points of work, and speeding up the work-flow through the use of
IT systems.
BPR is an approach to unusual improvement in operating effectiveness through the
redesigning of critical business processes and supporting business systems. It is revolutionary
redesign of key business processes that involves examination of the basic process itself. It
looks at the minute details of the process, such as why the work is done, who does it, where is
it done and when it is done. BPR focuses on the process of producing the output and output of
an organization is the result of its process.
“Business process reengineering means starting all over, starting from scratch.”
Reengineering, in other words, means pulling aside much of the age-old practices and
procedures of doing a thing developed over hundred years of management experience. It
implies forgetting how work has been done so far, and deciding how it can best be done now.
Reengineering begins with a fundamental rethinking. In doing reengineering people must ask
some most basic questions about their organizations and about their operations. 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, assumptions and operational processes as obsolete and redundant. Reengineering
does not begin with anything given or with any assumptions. The thinking process in
reengineering begins with a totally free state of mind without having any preconceived notion.
Reengineering first determines what a company must do. And then it decides on how to do it.
Reengineering ignores what the existing process is and concentrates on what it should be. If
something is not required to be done it is outright discarded.
Another key element in the reengineering involves radical redesigning of process. Radical
redesigning means going to the root of the problem areas and not attempting to make any
superficial changes. Radical redesign involves completely discarding all existing structures
and procedures and evolving completely new ways of doing the work. “Reengineering is about
business reinvention – not business improvement, business enhancement, or business
modification.”
The next key concept that lies behind reengineering is that it aims at achieving dramatic
improvement in performance. If an organization feels the need for marginal improvement in
any area of operation at any point of time, the same can be achieved by conventional methods
of adjustments in operating processes and reengineering is not the answer. Reengineering is
meant for replacement of the old process by altogether new one to achieve dramatic
improvement in the performance.
It follows from the above and also from the characteristics of the definition of reengineering
that its main focus is on the process. In an attempt to improve performance. Most people in
business focus their attention on tasks, jobs, people, structure, but fail to pay adequate
attention on the process. Business process, as already mentioned earlier, has been defined as
Strategic Management
7.6
the series of activities that utilizes various inputs to create output that are valued by
customers. Not all the processes in an enterprise enjoy equal importance in creating
customers value. 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. “The generic business
processes of a firm needing redesign may be classified into three broad categories as follows:
♦ Processes pertaining to development and delivery of product(s) and/or services. These
may include research, design, engineering, manufacturing, and logistics, besides
purchasing / procurement and materials management.
♦ Process involving interface(s) with customers. These usually include marketing,
advertising, order fulfilment, and service.
♦ Process comprising management activities: These include strategy formulation, planning
and budgeting, performance measurement and reporting, human resource management,
and building infrastructure.
In the context of these generic business processes, 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.
Over the last decade several factors have accelerated the need to improve business
processes. The most obvious is technology. New technologies (like Information Technology)
are rapidly bringing new capabilities to businesses, thereby raising the strategical options and
the need to improve business processes dramatically.
After opening up of Indian economy companies have been forced to improve their business
processes because of increased competition. More companies have entered the market place,
and competition has become harder and harder. In today’s market place, major changes are
required to just stay even. It has become a matter of survival for most companies.
Customers are also demanding better products and services. If they do not receive what they
want from one supplier, they have many others to choose from. They are ready to try new
brands.
Implementing BPR in organizations
In a crude sense, companies began business process improvement with a continuous
improvement model. This model attempts to understand and measure the current processes,
and make performance improvements. However, some companies make reengineering efforts
under the assumption that the current processes are wrong and irrelevant. Under such
Reaching Strategic Edge
7.7
perspectives designers of business process disassociate themselves from existing processes.
This helps in looking at the problem with a clean mind, free of any biases.
The approach to BPR begins with defining the scope and objectives of the reengineering
project. Persons entrusted with the tasks of BPR have to undertake research in the light of
scope and objectives. They have to go through a learning process. They have to research
customers, employees, competitors, new technology, etc. 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. They also create a plan of action based on the gap between the current and
proposed processes, technologies and structures. 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. This will
provide the required focus, direction, and motivation for the redesign process. It helps in
building a comprehensive foundation for the reengineering process.
Identify Customers and Determine their Needs: The designers have to understand
customers - their profile, their steps in acquiring, using and disposing a product. The purpose
is to redesign business process that clearly provides added value to the customer.
Study the Existing Process: The existing processes will provide an important base for the
redesigners. The purpose is to gain an understanding of the ‘what’, and ‘why’ of the targeted
process. However, as discussed earlier, some companies go through the reengineering
process with clean perspective without laying emphasis on the past processes.
Formulate a redesign process plan: The information gained through the earlier steps is
translated into an ideal redesign process. Formulation of redesign plan is the real crux of the
reengineering efforts. Customer focussed redesign concepts are identified and formulated. In
this step alternative processes are considered and the best is selected.
Implement the redesign: It is easier to formulate new process than to implement them.
Implementation of the redesigned process and application of other knowledge gained from the
previous steps is key to achieve dramatic improvements. It is the joint responsibility of the
designers and management to operationalise the new process.
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. Various studies
have conclusively established the role of information technology in the transformation of
business processes. That information technology is going to play a significant role in changing
the business processes during the years to come, has been established beyond doubt.
Strategic Management
7.8
A reengineered business process, characterised by IT-assisted speed, accuracy, adaptability
and integration of data and service points, is focussed on meeting the customer needs and
expectation quickly and adequately, thereby enhancing his/her satisfaction level.
Globalization and competition call for better management, faster response to change and
adherence to globally accepted standards of quality and services.
♦ Impact of IT-systems are identified as:
♦ Compression of time
♦ Overcoming restrictions of geography and/or distance
♦ Restructuring of relationships.
IT-initiatives, thus, provide business values in three distinct areas:
♦ Efficiency – by way of increased productivity,
♦ Effectiveness – by way of better management,
♦ Innovation – by way of improved products and services
All these can bring about a radical change in the quality of products and services, thereby
improving the competitiveness and customer satisfaction. Information technology (IT) is a
critical factor in the success of bringing this change.
Central Thrust of BPR:
Improvement on quality and cost follows after improvement on thrust area. 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.” 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. Even after redesigning of a
process, BPR maintains a continuous effort for more and more improvement.
Figure : Customer Time cycle
Customer need satisfier is
provided by the organization
Customer Cycle Time
Time
Customer need is
recorded by the
organization
Reaching Strategic Edge
7.9
Reengineering does not mean any partial modification or marginal improvement in the existing
work processes. Reengineering is a revolutionary approach towards radical and total
redesigning of the business processes. While reengineering may lead to restructuring of
organization, 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. Reengineering
does not have any scope for any partial modification or marginal improvement in the
existing business processes. It aims at achieving excellence and a breakthrough in
performance by redesigning the process entirely and radically. Obviously it requires
challenging the necessity of existing rules and procedures and discarding the same to
evolve altogether new processes.
♦ BPR approach recognizes that most of the existing rules and procedures of work methods
are based on certain assumptions about technology, people and the goals of the
organization. These assumptions may not be valid any more. Besides many of these
systems and procedures have failed to reap the benefit of massive development of
information technology during the past few years. BPR recognizes “the” vast and
expanding potential of IT for the most rational, simple, and efficient redesign of work
structure.” BPR aims at utilizing information technology for evolving a new process,
instead of automating the existing process.
♦ While reengineering starts with the process it does not end there. 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. Reengineering requires
viewing a process from cross-functional perspective. Reengineering effort, therefore,
focuses on a multidimensional approach disregarding the constraints of organizational
structure departmental boundaries.
♦ “BPR efforts involves managing massive organizational change.” Reengineering is not just
changing the process. The change in process is almost always accompanied by a whole
lot of changes in other areas too. Work changes from task oriented to process oriented.
People have the choice of making their own decisions instead of being directed.
“Functional departments find their existence as redundant. Practically every aspect of the
organization changes beyond recognition.”
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.
Also faster and efficient redesigned business processes provide a firm with many more
opportunities for trying, testing, modifying and learning.
Strategic Management
7.10
Problems in BPR
Reengineering is a major and radical improvement in the business process. Only a limited
number of companies are able to have enough courage for having BPR because of the
challenges posed. It disturbs established hierarchies and functional structures and creates
serious repercussions and involves resistance among the work-force. Reengineering takes
time and expenditure, at least in the short run, that many companies are reluctant to go
through the exercise. Even there can be loss in revenue during the transition period. Setting
of targets is tricky and difficult. If the targets are not properly set or the whole transformation
not properly carried out, reengineering efforts may turn-out as a failure.
3. BENCHMARKING
Two men were passing through a jungle. They saw a tiger at a distance. One of them
immediately started running away. ‘No use’ the other claimed ‘We cannot outrun him. We are
sure to be killed’. The first person replied ‘I need to outrun you and not him’.
Similarly, in cut-throat competition it is important for organizations to gain an edge over their
competitors. Benchmarking helps organization to get ahead of competition. The organizations
possess a large amount of information that helps them in taking strategic and other important
decisions. Companies that translate this information to knowledge and use it in their planning
and decision making are the winners.
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. In this sense, at a
naïve level, it may be compared to the concept of control as the similarities do exist. However,
the concept of benchmarking is much broader than mere controlling as there are major
strategic dimensions involved. 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.
The scientific studies conducted by Frederick Taylor in the latter part of the nineteenth century
represent an early use of the benchmarking concept. However, the term got popularity much
later in the seventh decade of twentieth century. Initially, the concept evolved in companies
operating in an industrial environment. Over a period of time it covered other spheres of
business activity. In recent years, different commercial and non-commercial organizations are
discovering the value of benchmarking and are applying it to improve their processes and
systems.
What is Benchmarking?
In simple words, benchmarking is an approach of setting goals and measuring productivity
based on best industry practices. It developed out of need to have information against which
performances can be measured. For example, a customer support engineer of a television
manufacturer attends a call within forty-eight hours. If the industry norm is that all calls are
Reaching Strategic Edge
7.11
attended within twenty-four hours, then the twenty-four hours can be a benchmark.
Benchmarking helps in improving performance by learning from best practices and the
processes by which they are achieved. It involves regularly comparing different aspects of
performance with the best practices, 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.
Benchmarking is not a panacea for all problems. Rather, it studies the circumstances and
processes that help in superior performance. Better processes are not merely copied. Efforts
are made to learn, improve and evolve them to suit the organizational circumstances. Further,
benchmarking exercises are also repeated periodically so that the organization does not lag
behind in the dynamic environment.
Benchmarking is a process of continuous improvement in search for competitive advantage. It
measures a company’s products, services and practices against those of its competitors or
other acknowledged leaders in their field. 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. Subsequently ALCOA, Eastman
Kodak, IBM adopted benchmarking. 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. However, common elements are as follows:
(1) Identifying the need for benchmarking and planning: This step will define the
objectives the benchmarking exercise. It will also involve selecting the type of
benchmarking. Organizations identify realistic opportunities for improvements.
(2) Clearly understanding existing business processes: This step will involve compiling
information and data on performance. This will include mapping processes.
Information and data is collected by different methods for example, interviews, visits
and filling of questionnaires.
Strategic Management
7.12
(3) Identify best processes: Within the selected framework, best processes are identified.
These may be within the same organization or external to them.
(4) Compare own processes and performance with that of others: While comparing gaps
in performance between the organization and better performers is identified. Further,
gaps in performance is analysed to seek explanations. Such comparisons have to be
meaningful and credible. Feasibility of making the improvements in the light of the
conditions that apply within the organization is also examined.
(5) Prepare a report and Implement the steps necessary to close the performance gap: A
report on the Benchmarking initiatives containing recommendations is prepared.
Such a report includes the action plan(s) for implementation.
(6) 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. It
also periodically evaluates and reset the benchmarks in the light of changes in the
conditions that impact the performance.
4. TOTAL QUALITY MANAGEMENT (TQM)
The Total Quality Management movement (or simply TQM, as it is more commonly known) has
caught on in essentially every corner of industry. The TQM philosophy is a guiding force in all
industrialized nations like USA, European nations, Japan, etc.
What is TQM? A definition of total quality was endorsed in 1992 by the chairs and CEOs of
nine major U.S. 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.
TQM is a total system approach (not a separate area or program) and an integral part of highlevel
strategy; it works horizontally across functions and departments, involves all employees,
top to bottom, and extends backward and forward to include the supply chain and the
customer chain. TQM stresses learning and adaptation to continual change as keys to
organizational success.
To understand this concept fully, it makes sense first to understand some of the underlying
concepts of quality management that have guided industrial development. The concept of
quality control as a distinct discipline emerged in the United States in the 1920s. At the time,
quality control was intended simply to control, or limit, the creation of defective items in
industrial processes. There are numerous disadvantages to this sorting process, especially if
the sorting is performed by different people from those manufacturing the product, Pioneering
work by Shewhart, Deming, Juran, Feigenbaum, Crosby, and others indicated that perhaps
better ways to approach the quality control concept existed. Perhaps simply sorting good
Reaching Strategic Edge
7.13
products from bad, they reasoned, was not the most efficient way to assure a quality output. A
more effective management philosophy might focus on actions to prevent a defective product
from ever being created, rather than simply screening it out. Also, these and other men soon
recognized that the concept of quality control need not be restricted only to manufacturing
processes. The idea of assuring quality could also be applied to administrative processes
service industries and all sphere of organization activity.
The TQM philosophy greatly emerged under Deming’s guidance, who is regarded by many as
the father of TQM. Interestingly, Deming’s quality management philosophies were first
developed in the years prior to World War II. Deming believed quality management should be
pervasive, and should not focus on merely sorting good products from bad. He believed that
the responsibility for quality should be shared by everyone in an organization. Perhaps most
significantly, Deming recognized that most quality problems were system-induced and were
therefore not related to workmanship. But Deming’s work only saw limited application in the
United States prior to World War II, 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. Deming’s message had essentially fallen on deaf ears in the United States,
but not so in Japan.
Japan, then as now, was an island nation that had to import all its raw materials. But Japan,
as a formerly industrialized nation, had to rebuild its industrial base from essentially nothing.
The Japanese had no preconceived approaches about sorting defective products from
acceptable ones. They were willing to learn. What followed in Japan during the ensuing
decades has been well studied and is now well known. The Japanese dominated almost every
market they chose to enter: electronics, cameras, automobiles, steel, shipbuilding,
motorcycles, and several others. Superior quality became a common theme of Japanese
market dominance. Much of the Japanese quality superiority occurred as a result of statistical
manufacturing methods and other management philosophies now recognized as Total Quality
Management. The Japanese made additional contributions to the TQM philosophy, most
notably in the areas of variability reduction, problem solving, teamwork, and defining and
satisfying customer expectations: Taguchi and Ishikawa contributed heavily to these
disciplines.
4.1 Principles guiding TQM
Implementing TQM requires organization wide support. There are several principles that guide
success of TQM. 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. If an organization is serious
about implementing TQM, the commitment to do so has to start at the top, and the
organization’s senior management has to be unwavering in its commitment to quality.
Strategic Management
7.14
Almost any organization’s senior managers will claim they are committed to quality, but
how they act at the end sets the tone for the entire organization. If management allows a
defective product leave the premises of the organisation in order to make sales, then all
the talk about quality won’t make a difference to the people making the product. If
management is willing to take a sales hit if quality levels are not up to requirements, the
rest of the organization will understand the commitment to quality is real.
♦ Focusing on the customer: According to Lee Iacocca had only three rules: Satisfy the
customer, satisfy the customer, and satisfy the customer. This sums up the importance of
customer focus in the TQM philosophy. Ultimately it the satisfaction of the customers that
determines the success of an organisation.
♦ Preventing rather than detecting defects: TQM is a management philosophy that seeks
to prevent poor quality in products and services, rather than simply to detect and sort out
defects. "An ounce of prevention is worth a pound of cure." A little precaution before a
crisis occurs is preferable to a lot of fixing up afterward. This also saves cost and time.
♦ Universal quality responsibility: Another basic TQM precept is that the responsibility for
quality is not restricted to an organization’s quality assurance department, but is instead a
guiding philosophy shared by everyone in an organization. TQM requires that everyone
takes responsibility for quality. As quality improves, the quality assurance department gets
smaller. In fact, world over, a few companies fully committed to TQM have done’ away
completely with their quality assurance organizations.
Quality measurement: The quality measurement aspect of TQM asks the question:
Where are we and where are we going? A basic TQM concept is that quality is a
measurable commodity, and in order to improve, we need to know where we are (or
stated differently, what the current quality levels are), and we need to have some idea
where we are going (or what quality levels we aspire to). This is an extremely important
concept
♦ Continuous improvement and learning: TQM espouses a philosophy of continuous
improvement in all areas of an organization. This philosophy ties in closely with the quality
measurement and universal quality responsibility concepts mentioned above. Quality
measurement is needed in order to focus improvement efforts appropriately.
Continuous improvement is part of the management of all systems and processes.
Achieving the highest levels of performance requires a well-defined and well-executed
approach to continuous improvement and learning. "Continuous improvement" refers to
both incremental and "breakthrough" improvement. Improvements may be of several
types:
! Enhancing value to the customer through new and improved products and services;
! Developing new business opportunities;
Reaching Strategic Edge
7.15
! Reducing errors, defects, and waste;
! Improving responsiveness and cycle time performance; and
! Improving productivity and effectiveness in the use of all resources.
"Learning" refers to adaptation to change, leading to new goals or approaches.
Improvement and learning need to be embedded in the way an organization operates.
This means they should be a regular part of daily work, seek to eliminate problems at their
source, and be driven by opportunities to do better as well as by problems that need to be
corrected.
♦ Root cause corrective action: Most of us have experienced instances in which problems
we thought were corrected continued to occur. TQM seeks to prevent this by identifying
the root causes of problems, and by implementing corrective actions that address
problems at the root cause level.
♦ Employee involvement and empowerment: Another fundamental TQM concept is that
employees must be involved and empowered. 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 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
Strategic Management
7.16
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. TQM requires
patience when embarking on its journey.
4.2 TQM and traditional management practices
TQM is quite different from traditional management practices, requiring changes in
organizational 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
Reaching Strategic Edge
7.17
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 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.
Strategic Management
7.18
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 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.
Reaching Strategic Edge
7.19
GE’s Key Concepts of Six Sigma
At its core, Six Sigma revolves around a few key concepts.
Critical to Quality: Attributes most important to the customer
Defect: Failing to deliver what the customer wants
Process Capability: What your process can deliver
Variation: What the customer sees and feels
Stable Operations: Ensuring consistent, predictable processes to improve what
the customer sees and feels
Design for Six Sigma: Designing to meet customer needs and process capability
Source: http://www.ge.com/sixsigma/sixsigstrategy.html
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.
♦ Measure: The existing processes are measured to facilitate future comparison.
Six sigma experts collect process data by mapping and measuring relevant
processes.
♦ Analyze: Verify cause-and-effect relationship between the factors in the
processes. Experts need to identify the relationship between the factors. They
have to make an comprehensive analyses to identify hidden or not so obvious
factor.
♦ Improve: On the basis of the analysis experts make a detailed plan to improve.
♦ Control: Initial trial or pilots are run to establish process capability and transition
to production. Afterwards continuously measure the process to ensure that
variances are identified and corrected before they result in defects.
Strategic Management
7.20
2. DMADV: DMADV is again acronym for the steps followed in implementing six sigma. It
is a strategy for designing new products, processes and services.
♦ 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.
♦ Measure: Next identify the factors that are critical to quality (CTQs). Measure
factors such as product capabilities and production process capability. Also
assess the risks involved.
♦ Analyze: Develop and design alternatives. Create high-level design and evaluate
to select the best design.
♦ Design: Develop details of design and optimise it. Verify designs may require
using techniques such as simulations.
♦ Verify: Verify designs through simulations or pilot runs. Verified and implemented
processes are handed over to the process owners.
5.3 What’s New About Six Sigma?
In the 1980s, Total Quality Management (TQM) was popular. It too was an improvementfocused
program, but it ultimately died a slow and silent death in many companies. What
makes Six Sigma different?
Three key characteristic separate Six Sigma from other quality programs of the past. .
1. Six Sigma is customer focused. It’s almost an obsession to keep external customer
needs in plain sight, driving the improvement effort. (External customers are mostly those
who buy business’s products and services.)
2. Six Sigma projects produce major returns on investment. GE’s CEO, Jack Welch, wrote
in the annual report that in just three years, Six Sigma had saved the company more than
$2 billion.
3. Six Sigma changes how management operates. Six Sigma is much more than
improvement projects. Senior executives and leaders throughout a business are learning
the tools and concepts of Six Sigma: new approaches to thinking, planning, and
executing to achieve results. In a lot of ways, Six Sigma is about putting into practice the
notions of working smarter, not harder.
Six Sigma has produced some impressive numbers. But reaching them requires a great deal
of organizational teamwork. It means having the systems to provide customers what they want
when they want it. It means providing employees with the time and training to tackle work
challenges with some basic, and some sophisticated, analytical tools.
Reaching Strategic Edge
7.21
When a business violates important customer requirements, it is generating defects,
complaints, and cost. The greater the number of defects that occur, the greater the cost of
correcting them, as well as the risk of losing the customers. Ideally, your company wants to
avoid any defects and the resulting cost in money and customer satisfaction.
But if a company have lots of customers, some defects are bound to slip through, right? The
problem is that even a seemingly low percentage of defects can mean a lot of unhappy
customers. If company processed 250,000 credit card bills a month and operated at 99.38
percent accuracy (4 sigma), we would have about 1,550 unhappy customers every month.
The goal of Six Sigma is to help people and processes aim high in aspiring to deliver defectfree
products and services. The notion of zero defects is not at work here; Six Sigma
recognizes that there’s always some potential for defects, even in the best run processes or
best-built product. But at 99.9997 percent performance, Six Sigma sets a performance target
where defects in many processes and products are almost nonexistent.
Also defects can lead to lost customers, and turned-off customers tell others about their
experiences, making it that much more difficult to recover from defects. As customers get
more and more demanding and impatient, these high levels of defects put a company in
serious risk. But keeping customers happy is good and profitable for the business. A 5 percent
increase in customer retention has been shown to increase profits more than 25 percent. It is
estimated that companies lose 15 percent to 20 percent of revenues each year to ineffective,
inefficient processes-although some might suggest that it’s even higher. Six Sigma provides a
goal that applies to both product and. service activities and that sets attainable, short-term
goals while striving for long-range business objectives.
5.4 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. When Jack Welch introduced the Six Sigma program at GE, he told senior
executives that 40 percent of their annual bonus would be based on their involvement and
success in implementing Six Sigma.
That focused executive attention on turbo-charging Six Sigma in their individual divisions.
Training 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,
Strategic Management
7.22
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 data-driven 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-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.
Reaching Strategic Edge
7.23
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:
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 ecommerce
has changed the character of the market, created new driving forces and key
success factors and 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’
Strategic Management
7.24
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
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.
Reaching Strategic Edge
7.25
♦ 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 Europe, Japan, and North America and what the leading companies in
these areas are doing.
♦ The e-commerce environment demands that companies move swiftly: In the
exploding e-commerce world, speed is a condition of survival. New developments on first
Strategic Management
7.26
one front and then another occur daily. Market and competitive conditions change very
quickly. Late movers are doomed.
♦ 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, slicing inventory
costs and allowing production to match demand. It allows more accurate demand
forecasting. Tight supply chain management starting with customer orders and going all
the way back to components production, coupled with the use of enterprise resource
planning (ERP) software and manufacturing execution system (MES) software, can make
custom manufacturing just as cheap as mass production, and sometimes cheaper. The
impact of e-commerce technology on industry and company value chains is profound,
paving the way for fundamental changes in the ways business is conducted both internally
and with suppliers and customers.
♦ The Internet can be an economical means of delivering customer service: The
Internet provides innovative opportunities for handling customer service activities.
Companies are discovering ways to deliver service online, thus curtailing the need to keep
company personnel at the facilities of major customers, reducing staffing levels at
telephone call centers, and cutting the time required for service technicians to respond to
customer faxes and e-mail messages.
♦ The capital for funding potentially profitable e-commerce businesses is readily
available: In the Internet age, e-commerce businesses have found it relatively easy to
raise hundreds of millions, even billions, 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, an attractive business model, 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, many are pursuing competitive advantage
based on the expertise and intellectual capital of their personnel and on their
organizational competencies and capabilities. 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. E-commerce firms are thus competing aggressively for
talent and intellectual capital; individuals with attractive qualifications and know-how can
command premium compensation, including equity ownership or lucrative stock options in
start-up enterprises.
Reaching Strategic Edge
7.27
It is that growing use of e-commerce technology can produce important shifts in an industry’s
competitive forces – intensified rivalry, greater entry threats, a blurring of traditional industry
and geographic boundaries, shifts in the balance of bargaining power both between sellers
and their suppliers and between sellers and their customers, and incentives for all kinds of
seller-supplier and seller-customer collaboration.
Internet technology and newly emerging products and services that enable e-commerce
further have the effects of altering industry value chains, spawning substantial opportunities
for increasing efficiency and reducing costs, and affecting a company’s resource strengths and
weaknesses. Moreover, the pace of technological change is rapid and its direction is often
uncertain. Market developments occur swiftly, compelling companies to make decisions at
Internet speed or risk getting left behind in the dust.
6.2 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. A commercial organization has profit as its main aim. We can find many
organizations around us, which do not have any commercial objective of making profits. Their
genesis may be for social, charitable, or educational purposes. Examples of non-commercial
organizations can be The Institute of Chartered Accountants of India, municipal corporations,
non-governmental organizations such as Help-Age or Child Relief and You. Their main aim is
to provide services to members, beneficiaries or public at large. A non-commercial
organization comes to existence to meet the needs not met by business enterprises. These
organizations may not have owners in true sense.
The strategic-management process is being used effectively by countless non-profit
governmental organizations. Many non-profit and governmental organizations outperform
private firms and corporations on innovativeness, motivation, productivity, and strategic
management.
Compared to for-profit firms, non-profit and governmental organizations often function as a
monopoly, produce a product or service that offers little or no measurability of performance,
and are totally dependent on outside financing. Especially for these organizations, strategic
management provides an excellent vehicle for developing and justifying requests for needed
financial support.
Educational institutions
Educational institutions are using strategic-management techniques and concepts more
frequently. Richard Cyert, president of Carnegie-Mellon University, says, "I believe we do a far
better job of Strategic management than any company I know ". The significant change in the
competitive climate has taken place in the educational environment. Hence, they are adopting
different strategies for attracting best students.
Strategic Management
7.28
The academic institutions have also joined hands with industries in order to deliver education
to make graduates more employable. The educational delivery system has also undergone
considerable changes with the introduction of computers and internet technologies. The first
all-Internet law school, Concord University School of Law, boasts nearly two hundred students
who can access lectures anytime and chat at fixed times with professors. Online college
degrees are becoming common and represent a threat to traditional Colleges and universities.
Medical organizations
Hospitals are creating new strategies today as advances in the diagnosis and treatment of
chronic diseases are undercutting that earlier mission. Hospitals are beginning to bring
services to the patient as much as bringing the patient to the hospital. Pathological
laboratories have started collecting door-to-door samples. Chronic care will require daytreatment
facilities, electronic monitoring at home, user-friendly ambulatory services,
decentralized service networks, and laboratory testing.
A successful hospital strategy for the future will require renewed and deepened collaboration
with physicians, who are central to hospitals’ well being, and a reallocation of resources from
acute to chronic care in home and community settings.
Backward integration strategies that some hospitals are pursuing include acquiring ambulance
services, waste disposal services, and diagnostic services. Millions of persons research
medical ailments online, which is causing a dramatic shift in the balance of power between
doctor, patient, and hospitals.
The whole strategic landscape of healthcare is changing because of the Internet. Intel recently
began offering a new secure medical service whereby doctors and patients can conduct
sensitive business on the Internet, such as sharing results of medical tests and prescribing
medicine. The ten most successful hospital strategies today are providing free-standing
outpatient surgery centers, outpatient surgery and diagnostic centers, physical rehabilitation
centers, home health services, cardiac rehabilitation centers, preferred provider services,
industrial medicine services, women’s medicine services, skilled nursing units, and psychiatric
services.
Governmental agencies and departments
Central, state, municipal agencies, Public Sector Units, departments are responsible for
formulating, implementing, and evaluating strategies that use taxpayers’ money in the most
cost-effective way to provide services and programs. Strategic-management concepts
increasingly are being used to enable some organizations to be more effective and efficient.
But strategists in governmental organizations operate with less strategic autonomy than their
counterparts in private firms. Public enterprises generally cannot diversify into unrelated
businesses or merge with other firms. Governmental strategists usually enjoy little freedom in
altering the organizations’ missions or redirecting objectives. Legislators and politicians often
Reaching Strategic Edge
7.29
have direct or indirect control over major decisions and resources. Strategic issues get
discussed and debated in the media and legislatures. Issues become politicized, resulting in
fewer strategic choice alternatives.
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, objectives, strategies, and policies. In addition,
government agencies are using a strategic management approach to develop and substantiate
formal requests for additional funding.
SELF-EXAMINATION QUESTIONS
Multiple – Choice Questions
1. BPR stands for:
(a) Business practices reinstatement.
(b) Business process removal.
(c) Better process reaffirmation.
(d) Business process reengineering.
2. 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.
(b) Traditional controlling is same as benchmarking.
(c) Benchmarking helps in setting goals and measuring productivity based on best
industry practices.
(d) Benchmarking solves all business problems.
3. The following statistical technique forms base of six sigma:
(a) Mean and Median.
(b) Correlation.
(c) Index Numbers
(d) Probability and normal distribution.
4. The focus of six sigma is on:
(a) Customer.
(b) Supplier.
Strategic Management
7.30
(c) Shareholders.
(d) Government.
5. Which of the following statements is true:
(a) Internet has no strategic relation with an organisation engaged in manufacturing.
(b) Internet has no strategic relation with an organisation in service sector.
(c) Internet has opened up new opportunities for organisations engaged in
manufacturing activities.
(d) Use of Internet is restricted to sending and receiving mails in business
organisations.
6. BPR is an unusual improvement in operating effectiveness through the redesigning of
________ business process and supporting business systems.
(a) usual
(b) common
(c) critical
(d) none of these
7. BPR is a multi-dimensional approach in improving the business performance, but its
thrust area is:
(a) improvement on quality of product/service
(b) reducing the costs
(c) reducing the cycle time
(d) All the above
8. Reengineering means:
(a) partial modifications
(b) marginal improvement
(c) restructuring with slight changes
(d) redesigning with a revolutionary approach
9. Six sigma can implement in:
(a) improving the existing product, process or service.
(b) designing the new products, processor service.
Reaching Strategic Edge
7.31
(c) Both (a) and (b)
(d) none of these
Objective type question
State with reasons which of the following statements are correct/incorrect:
(a) Reengineering has no relation with strategic management
(b) E–Commerce has intensified competition.
Short answer questions
1. Define process.
2. What is product development?
3. Explain dogs in BCG matrix?
Essay type questions
1. What is TQM? Compare it with traditional management practices.
2. Explain business process reengineering. How can it be implemented?
Case Study
High Growth Enterprises, a business owned by Ram Swaroop and his brothers posted a two
fold rise in net profit at Rs. 60 crore in the third quarter of the current financial year as against
Rs. 20 crore during the corresponding period last year. Sales during the period climbed 90 per
cent at Rs. 663 crore. The company in the first nine months of the current year posted a net
profit of Rs. 145.7 crore.
Ram Swaroop attributed the good performance and ongoing improvement in quality in
manufacturing processes. 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.
Ram Swaroop felt that the existing focus on quality is good enough as it was giving good
results.
(a) Do you agree with Ram Swaroop to keep focus on quality? Why.
(b) What is six sigma? How can it be useful to the company?
Answers - Multiple Choice Questions
1. (d), 2. (c), 3. (d), 4. (a), 5. (c), 6. (c), 7. (c), 8. (d), 9. (c)
APPENDIX − CASES
In the study material of strategic management the theory that you study helps you in acquiring
sound educational base. At the end of each chapter a small case has also been included. In
this subject the learning can be reinforced, made more meaningful and given practical
dimensions with the help of practical cases. In management schools it is normal practice to
teach this subject largely with the help of cases. Therein students interact amongst
themselves and with subject experts to discuss cases and find solutions to the case problems
and other questions. However, your course on account of being distance education course
makes it difficult to follow such a methodology. You have to evolve an ideal strategy for
yourselves to assimilate this subject as intended. You can have following approach.
The first and foremost important thing in a case analyses is not to look for ideal solutions.
There cannot be any one best answer to questions that are in the nature of a case study.
Case must be analysed and answers written on the basis of the subject matter covered, the
interpretation of the facts, and the conclusions that can be drawn logically. Any answer with
sound reasoning can be appropriate.
Thus, you should also try to answer them on your own. Analysing cases and writing their
solutions require certain abilities that would be generated only when you actually do them. In
examinations it is improbable to get the cases that are available in this study material or in
other books. Thus you need to develop abilities to analyse cases and write answers to the
questions posed, rather than knowing suggested solutions.
You can also form a group of likeminded friends and discuss cases extensively. We suggest
that you form a small group to discuss cases and other issues in this subject. In a group you
will be able to identify different issues. But at the end do write the answers with pen on paper.
What is case study?
Case study method was first developed in the 1871 by Christopher Langdell at the Harvard
Law School to keep students to learn for themselves by independent thinking and by
discovering in the ever tangled skein if human affairs, principles and ideas which have lasting
validity and general applicability. A collateral object is to keep them to develop skills in using
their knowledge.
The method is based upon the belief that managerial competence can best be attained
through the study, contemplation and discussion of concrete cases. The case method is
indeed learning by doing. Cases offer a viable substitute by bringing a variety of business
Strategic Management
2
organisational problems and permitting students to assume the managers role. Cases,
therefore, provide the readers with a kind of experimental exercise through which they
enhance their ability to apply textbook knowledge.
‘Case’ is a written description that presents issues and problems calling for solutions or
actions on the part of students. When the case is given, students are asked to analyse,
identify the problems and to recommend tentative solutions for the same. This method offers
to them matter for reflection and brings home to them a sense of complexity of life as opposed
to theoretical simplifications and practices in decision-making process. It diagnoses and deals
with real life situations. A case study is primarily useful as a technique of developing decisionmaking
skills as well as communication skills and for broadening the perspective of students.
In case study method students are expected to:
1. Master the facts of the case.
2. Define the objectives sought in dealing with the issues in the case.
3. Identify the problems in the case and uncover their probable causes.
4. Develop alternative courses of action.
5. Screen the alternatives using the objectives as the criteria.
6. Select the alternative that is most suitable in keeping with stated objectives.
7. Define the controls needed to make the action effective.
8. To ‘role play’ the action to test its effectiveness.
OBJECTIVE OF THE CASE METHOD
Case studies provide an excellent opportunity of developing confidence in problem solving
amongst the students. It serves following objectives :
1. It helps the students/trainees to acquire the skills of putting textbook knowledge about
strategic management in practice.
2. Getting them out of the habit of being receiver of facts and get into the habit of
diagnosing problems, analysing and evaluating alternatives and formulating workable
solutions.
3. It trains them to work out answers and solutions, as opposed to rely upon others.
4. Provides them with exposure to a range of practical situations thus offering them a basis
for comparison when they begin their own career.
If they understand that these are the objectives of the case method of study, then they are not
Appendix–Cases
3
likely to be bothered by something that puzzles some of them - ‘What is the answer to this
case?’. Thus the purpose of cases is not to learn specific answers but to become skilled in the
process of designing a workable and hopefully effective plan of action after evaluating various
alternatives and approaches.
Briefly stated the purpose of case method is to inculcate in students ways of thinking
strategically and exercising responsible judgement.
PREPARING A WRITTEN CASE ANALYSIS
There is no iron-clad procedure for preparing a written case analysis. With a bit of exposure
students can arrive at their own preferred method of writing up a case and learn to adjust their
approach to the unique aspects that each case presents. However it is typical for a
comprehensive written case analysis to emphasise three points :
Identification: It is essential that answers reflect a sharply focused diagnoses of strategic
issues and key problems and further demonstrate good business judgement in sizing up the
present situation.
Analysis and evaluation : This is the most significant and difficult part. Analysis is hard work.
In doing this students should bear in mind the following points:
1. They must offer supporting evidence for their views and judgements. They should not
rely upon unsupported opinions and over generalisations.
2. They should point out key factors which are crucial.
3. Some information in the case is well established fact, some may be in the form of
opinions, judgements and beliefs. Some may be inaccurate. You are expected to assess
the correctness/validity of such information.
4. Students should clearly demonstrate that their interpretation of the evidence is
reasonable, logical and objective.
Recommendations : The last part in written cases should consist of recommendations or plan
of action. The recommendations should be logical and consistent with the analysis and make
sure that the company is financially sound to carry out what has been recommended.
Furthermore recommendations should be in detail to be meaningful. Finally, students should
indicate how their plan should be implemented. Here they may give some attention to
leadership styles, psychological approaches, motivation and incentive which may bring
desired result.
Students should give special attention to the points given below to avoid common errors in the
Case Analysis :
1. Inadequate definition of the problem : Students must begin with a focus on key issues
Strategic Management
4
and problems. Do not make the error of analysing symptoms without determining and
defining the root problems.
2. Search for the answer : Remember there is no one ‘correct’ answer to a case. There are
always several reasonable alternative solutions.
3. Avoid generalities : In answering specific recommendations, use of generalities should be
avoided. Try to be specific.
4. Narrow vision: Cases are often classified as a specific type such as ‘Manpower
Planning’, ‘Recruitment’, ‘Job Evaluation’, ‘Leadership Style’ etc. But it should not mean
that other human variables should be ignored.
5. Unrealistic solution: Solutions should not be unrealistic. Such as a wage increase is
suggested which is beyond the capacity of the company.
6. Rehashing the case material: Students waste time and effort in rewriting unnecessary
long history of the company as given in the case. This should be avoided as it is
superfluous.
7. Hasty conclusions : Students jump to the conclusion after the first reading of the case.
This is not correct.
SOLVED CASES
Case 1
Read the following case and answer the questions given at the end:
Indian Railways (IR), the monopoly provider of Cargo and passenger services by Rail in India,
is a departmental undertaking under the Ministry of Railways, Government of India. IR, “which
was declared to be heading towards bankruptcy as per the Expert Group on Indian Railways in
2001, is today the Second largest profit making Public Sector Undertaking after ONGC. The
fund balance (i.e., net revenue) crossed Rs. 12,000 crores in 2005-06, which had reached a
low of just Rs. 149 in 1990-2000.” The net revenue is to increase to Rs. 15,000 crores in
2006-07 and is estimated at Rs. 16,022 crores for 2007-08.
Mr. Lalu Yadav (a turnaround specialist), Minister for Railways, presented the budget of IR for
the year 2007-08 on 26th February, 2007 in the Parliament (fourth in a row). It was the time
when-Bofors issue came back to limelight, the UPA was to lost elections in Punjab and
Uttarakhand (and did lost the next day), inflation was causing sleepless nights to the
Government, and crucial State elections were to take place in Uttar Pradesh, Gujarat, Goa
and Delhi in the near future.
The Minister reduced passenger fares across the board-for the sleeper class fares by 4%, a
token reduction of Rs. 2 in the ordinary class, and Re. one per season ticket for daily
commuters; for AC First Class by 6% in lean season, and 3% in peak season; for AC II Tier by
Appendix–Cases
5
4% in lean season and 2% in peak season; and for AC III Tier by 8% in lean season and 4% in
peak season. However, the share of higher class remains stagnant at 18% in the total
passenger revenue. IR will introduce 800 newly designed high capacity coaches (which will
have 84 seats instead of 72 now) for Sleeper Class and various AC Classes to maximise
revenue. The lowering of fares will no doubt help IR in fighting competition from low cost
airlines. But the low cost airlines opine that it would not blunt their competitive edge. For
Internet Savvy-e-ticket charges have been brought down considerably. The wooden seats in
unreserved Second Class coaches would be converted into cushioned seats. Every new train
would get six unreserved Second Class coaches instead of four at present. Senior Citizens
and Women above 45 years will have enhanced quota of lower berths in AC and Sleeper
Classes. Students going for UPSC and Central SSC by rail would be entitled to 50%
concession. Of the total receipts (Rs. 56,752 crores) during 2005-06, the passenger segment
contributed 29% (Rs. 15,126 crores). In the passenger traffic – on the short haul the bus
service and on the long haul the low cost airlines are other important players. The Minister
said that there was no inherent conflict between Social obligations and Commercial objectives
of IR. ‘Most of the trains introduced lead to Uttar Pradesh and Bihar’.
The Minister, instead of increasing freight rates, announced cut in tariffs for Diesel, Petrol,
Ammonia, Iron ore, Limestone and Cement; and kept them unchanged for others. During the
last three years freight income has risen because of reclassification of goods for levy of
freight. He also announced empty-flow rebate for open wagons, thus providing concessions for
Wheat, Fertilisers and Cement in specific sectors. An analysis of commodity-wise freight traffic
shows an increase in the share of revenues from non-bulk traffic in recent years. However, the
IR loses business to Roads Transportation because the Truckers offer door-to-door service,
provide time guarantee to move and deliver the Cargo and for many consumer durables and
perishables, road transport is the best bet. IR would build triple-stack container trains for
diesel powered routes and double-stack container trains on electric routes to enhance
capacity. 2007-08 budget targets growth in freight traffic at 17%, similar to ’06-07.
The Minster also announced that Public Private Partnership (PPP) options would be explored
to modernise Metro and Minimetro Stations with world class passenger amenities, and to
construct Multimodal Logistic Parks, Warehouses and Budget Hotels.
The estimates announced for 2007-08 state-the revenue growth at 12.8% (as against 16% for
2006-07); the net revenue to increase by 7.7% (45% in 2006-07), the operating ratio to be
around 80% (98.3% in 2000-01 and 78.7% in 2006-07); and freight loading to increase by 8.1
% (8.9% in 2006-07).
Strategic Management
6
Questions:
(i) Of which components of the external business environment the budget has taken care
of?
(ii) With whom IR is facing competition in the passenger segment?
(iii) With whom IR is facing competition in the Cargo segment?
(iv) What is the basic strategy of IR to increase revenue from Cargo and passenger
segments in 2007-08 and onwards?
(v) During the last 3 years IR has been achieving increasing growth rate, but estimates
are lower for the year 2007-08. What is the reason?
(vi) To fulfill social responsibility towards poor sections of society –what steps have been
proposed in the Budget?
ANSWER 6
(i) The rail budget has considered all major components of its external business
environment:
(a) Economic environment: The economic environment includes the factors and
forces in the industry to which the enterprise belongs. The rail budget makes an
attempt to reduce inflation by reducing both passenger fares and freight rates.
Having different fares for peak and lean season and reducing fares for higher
classes will make railways competitive against low cost airlines. To meet
increasing funds requirement option of public private partnership is proposed to
be explored. To lower the cost, emphasis on ‘outsourcing’ is also proposed.
(b) Technological Environment: Technology environmental factors include
dynamics of product and process technology, research and development
activities in the industry and elsewhere, innovations in products and processes,
technological obsolescence and so on. To affect costs, profitability, growth and
development, the budget has proposed new coaches with higher capacity (84
seats as compared to existing 72); containers having triple-stack and doublestack;
and world class facilities-oriented metro and mini metro stations.
(c) Political-legal environment: It includes such factors as the general state of
political development, the degree of politicalisation of business and economic
issues, the law and order situation, stability, fiscal, monetary policy and so on.
Measures to overcome inflation in the rail budget also have political dimensions.
Proposals conducive to senior citizens and women above 45 years of age;
reduction of ordinary class and daily commuters; and conversion of wooden
Appendix–Cases
7
seats to cushioned seats in unreserved coaches may also be reflecting more on
the political ideologies of government than on the commercial reasons.
(d) Socio-cultural environment: It is a complex of factors such as general
population dynamics, urbanisation, social traditions, values and beliefs, literacy
and education, ethical standards, and so forth. The budget contains several
measures to different sections of the society. There are measures for lower
strata as well as higher strata of the society. Measures such as cushioned seats
should address the emerging need of comfort with the passengers.
(ii) In the passenger segment the railways is facing competition from two other modes of
transport as follows:
(a) For short distances bus services are competing with the railways.
(b) For long distances low cost airlines are giving tough competition to them.
(iii) In the cargo segment, IR has to face competition from the truckers, who are able to
offer door-to-door services, time guarantee to move and deliver the cargo, and a better
mode transportation of consumer durables and perishables.
(iv) The basic strategy being followed in both the segments is to increase the volume to
maximize the revenue. Competitive pricing, increasing capacity and its better utilization
will ultimately have positive bearing on the volumes that the Indian Railway is able to
generate.
(v) Indian Railway is expecting that overall growth will be maintained, however, at a lower
rate. It may be on account of cautious approach of the budgeters. It is also possible
that the railway has used major portion of the slack in the system and generated
additional revenue out of the existing capacity.
(vi) To serve the poor sections of the society the budget contains several measures such
as:
♦ Number of ordinary class unreserved coaches are to increase in the new trains.
♦ Reduction of Rs 2 per ticket for ordinary class and reduction of Re 1 for season
tickets.
♦ Conversion of wooden seats into cushioned seats.
♦ Introduction of many trains from metro cities to places in UP and Bihar to benefit
labourers.
Case 2
DD is the India’s premier public service broadcaster with more than 1,000 transmitters
covering 90% of the country’s population across an estimated 70 million homes. It has more
Strategic Management
8
than 20,000 employees managing its metro and regional channels. Recent years have seen
growing competition from many private channels numbering more than 65, and the cable and
satellite operators (C & S). The C & S network reaches nearly 30 million homes and is growing
at a very fast rate.
DD’s business model is based on selling half-hour slots of commercial time to the programme
producers and charging them a minimum guarantee. For instance, the present tariff for the
first 20 episodes of a programme is Rs. 30 lakhs plus the cost of production of the programme.
In exchange the producers get 780 seconds of commercial time that he can sell to advertisers
and can generate revenue. Break-even point for producers, at the present rates, thus is Rs.
75,000 for a 10 second advertising spot. Beyond 20 episodes, the minimum guarantee is Rs.
65 lakhs for which the producer has to charge Rs. 1,15,000 for a 10 second spot in order to
break-even. It is at this point the advertisers face a problem – the competitive rates for a 10
second spot is Rs. 50,000. Producers are possessive about buying commercial time on DD.
As a result the DD’s projected growth of revenue is only 6-10% as against 50-60% for the
private sector channels. Software suppliers, advertisers and audiences are deserting DD
owing to its unrealistic pricing policy.
DD has three options before it. First, it should privatise, second, it should remain purely
public service broadcaster and third, a middle path.
The challenge seems to be to exploit DD’s immense potential and emerge as a
formidable player in the mass media.
(i) What is the best option, in your view, for DD?
(ii) Analyse the SWOT factors the DD has.
(iii) Why to you think that the proposed alternative is the best?
Suggested Solution
(i) For several years Doordarshan was the only broadcaster of television programmes in
India. After the opening of the sector to the private entrepreneur (cable and satellite
channels), the market has witnessed major changes. The number of channels have
increased and also the quality of programmes, backed by technology, has improved. In
terms of quality of programmers, opportunity to advertise, outreach activities, the
broadcasting has become a popular business. Broadcasters too have realised the great
business potential in the market. But for this, policies need to be rationalised and be
opened to the scope of innovativeness not only in term of quality of programmes. This
would not come by simply going to more areas or by allowing bureaucratic set up to
continue in the organisation.
Strategically the DD needs to undergo a policy overhaul. DD, out of three options,
namely privatisation, public service broadcaster or a middle path, can choose the third
Appendix–Cases
9
one, i.e. a combination of both. The whole privatisation is not possible under the
diversified political scenario. Nor it would be desirable to hand over the broadcasting
emotively in the private hand as it proves to be a great means of communication of many
socially oriented public programmers. The government could also think in term of
creating a corporation (as it did by creating Prasar Bharti) and provide reasonable
autonomy to DD. So far as its advertisement tariff is concerned that can be made fairly
competitive. However, at the same time cost of advertising is to be compared with the
reach enjoyed by the doordarshan. The number of viewers may be far more to justify
higher tariffs.
(ii) The SWOT analyses involves study of strengths, weaknesses, opportunities and threats
of an organisation. SWOT factors that are evidently available to the Doordarshan are as
follows:
S – Strength
• More than 1000 transmitters.
• Covering 90% of population across 70 million homes against only 30 million home
by C & S.
• More than 20,000 employees.
W – Weakness
• Rigid pricing strategy.
• Low credibility with certain sections of society.
• Quality of program’s is not as good as compared to C & S network
O – Opportunities
• Infrastructure can be leased out to cable and satellite channel.
• Digital terrestrial transmission.
• Regional focused channels.
• Allotment of time, slots to other broadcasters.
T – Threats
• Desertion of advertisers and producers may result in loss of revenues.
• Due to quality of program the reach of C & S network is continuously expanding.
• As the C & S network need the trained staff, some employees of DD may switchover
Strategic Management
10
and take new jobs.
• Best of the market-technology is being used by the private channels.
(iii) It is suggested that the DD should adopt a middle path. It should have a mix of both the
options. It should economise on its operational aspects and ensure more productivity in
term of revenue generation and optimisation of use of its infrastructure.
Wherever, the capacities are underutilised, these may be leased out to the private
operations. At the same time quality and viewership of programmes should be improved.
Bureaucracy may reduce new strategic initiatives or make the organisation less
transparent. Complete privatisation can fetch a good sum and may solve many of the
managerial and operational problems. However, complete public monopoly is not
advisable because that denies the government to fully exploit the avenue for social and
public use. The government will also lose out as it will not be able to take advantage of
rising potential of the market.
CASES FOR PRACTISE
1. Home Ease Ltd is a major manufacturer of home appliances in the country. The
company manufactures water purifier, electric ovens, irons, juicers and choppers.
Last two years have not been good for the company. It has lost its market share to its
competitors and imports. The Chief Executive Officer, Kawaljit, is worried as the
company has underperformed in its key financial indicators. Cheap Chinese products
have also threatened the survival of the company. Opening of economy has also
brought in manufacturers from around the world who also possess new technology
and designs. The customers are attracted to these designs.
To discuss the matters Kawaljit called Gopinath, and Premnath to his office. Gopinath
is a bright Chartered Accountant and is acting as head of Finance Department in the
company. Premnath an engineer and MBA with twelve years of experience in
marketing of electronic goods. He has joined company around six months back and is
acting as head of marketing division and managing things at national level
Premnath felt that the company is facing problems as it has been too complacent. It
has not responded to the changing environmental conditions and has not undertaken
any formal strategic planning. He also felt that in the past the company has pursued
objectives that have been conflicting to each other. In order to bring competitive
advantage, Premnath suggested involving people from all levels in the organisation
for developing business strategy. He also said that the sales people who are in touch
with the customers and retailer should also be involved and greater emphasis should
Appendix–Cases
11
be placed on understanding the external environment. Then the company can assess
and formulate ways to have competitive advantage using unique combination of
resources, skills and capabilities within the environment.
However, Gopinath outlined the benefits of more formal top down approach to
planning. Premnath argued that in the dynamic environment in which the company is
operating involving too many people would be waste of time. The company has to
incur huge cost and such an approach will only result in more confusion and chaos.
Read the above case and answer the following questions:
(a) Do you think that involving too many people in the planning exercise would be
a waste of time? Discuss.
(b) If Kawaljit hires you as an consultant which approach will you advocate? Why?
2. Soft Breads Ltd, a bread manufacturer from south, entered into the business of bread
manufacturing in the northern India in the year 1995 by acquiring brand name
‘Delicious’ from a local baker ‘Kuldeep Sodhi’ in Chandigarh known for his quality
breads. The baker kept on preparing and selling breads, however, now with a
different name – ‘healthy’ in changed package.
Soft Breads Ltd invested heavily in the machinery and equipment. In fact, it invested
a sum of rupees thirty-five crores over a period of five years. It got immediate
acceptance from the market as Delicious, a household name, was well known for its
quality. Gradually, it captured major markets in adjoining cities of Haryana and
Punjab. In the year 2005 its total turnover was 10 crores per annum with 50% market
share in Chandigarh.
Meantime, ‘Healthy’ also got some recognition and was able to grow. Some of the
loyal customers of ‘Delicious’ shifted to ‘Healthy’ realising that the baker has changed
the name of the product. Its market share, in 2005 stood at 15% in the Chandigarh
city. Inspired by the success of ‘Delicious’ the baker joined with his two rich friends to
form a partnership by the name of ‘Healthy Foods’ in the year 2006. They acquired
automatic modern plant to manufacture breads. The plant was better than that of Soft
Breads Ltd. They were able to reduce their costs and started selling breads at one
rupee cheaper than the competitors. They also introduced new products such as
whole wheat bread, breads enriched with vitamins, bread for kids in chocolate flavour.
In short span of their market share grew to 35% in Chandigarh. In the year 2007 their
turnover was 12 crores against 18 crores of Soft Breads Ltd. Now they plan to enter
into business of cakes and biscuits on a large scale.
Read the above case and answer the following questions:
(a) Discuss the strategy of Soft Breads Ltd.
Strategic Management
12
(b) Discuss the strategy of Healthy Foods.
(c) Perform a SWOT analysis for Soft Breads Ltd.
(d) Do you think that Soft Breads Ltd has missed something while acquiring the
brand name?
(e) What are the alternatives before the Soft Breads Ltd?
3. AO Swift (Pvt) Ltd. was promoted nineteen years back as company manufacturing
automobile parts with an investment of Rupees 5 crores by Abhishek Oberai. He took
over as its chief executive and is occupying the same position till date. Abhishek an
automobile engineer himself possessed rich experience of working abroad and in
Hindustan Motors Ltd in India. He is dynamic and ready to take risk. He always
emphasized on maintaining high quality standards.
Initially the products were supplied to automobile service centers all across the
country. The market was small and the company suffered some losses. Eight years
after its inception the company entered into an agreement with Maruti Udyog Ltd to
manufacture and supply specific components for their small car. These were earlier
being imported by Maruti Udyog Ltd from Japan.
This agreement was a turning point for the company. Later the company was able to
enter agreements with other companies entering India. The company is able to
manage a growth rate of over 20% in last five years. Its turnover in the last financial
year exceeded 800 crores. The overall market is also witnessing a very high growth
rate.
Abhishek also possessed strong behavioural skills and allowed some autonomy and
discretion to the senior managers of the company. A year back in an internal meeting
Abhishek felt that the company can grow still faster if it enters other markets outside
India. Various options were analysed and efforts were made to discuss and negotiate
with major manufacturers of the world. Getting some response from two
manufacturers in European Union the company opened an office in London.
Abhishek closely monitored the day-to-day working of this office. Having strategic
implications all major decisions were taken by himself. He will also visit London every
month to have first hand information about its working. However, as the company is
growing it is becoming increasing difficult for him to manage this office. He also wants
to expand further. He called a meeting with head of various department. In the
meeting following alternatives were considered for foreign market:
♦ Continue to manufacture products in India and export them to other countries.
♦ Initiate manufacturing activities in other countries.
Appendix–Cases
13
♦ Take over existing manufacturers of the products.
Answer the following questions:
(a) Write a note on reasons for AO Swift Ltd to open office in London?
(b) What should be the strategy of the company in a high growth market? Why?
(c) Make an analysis of various alternatives that are being considered for expanding
in foreign markets?
4. Sweet Drinks Ltd is a drinks company whose core business is manufacturing and
selling soft drinks to 80,000 outlets throughout India. The business of the company is
good with annual turnover exceeding three billon of rupees. Profits are good and
shareholders are often rewarded with lucrative dividends and bonuses.
Four years back the company has diversified into the alcoholic drinks industry and has
taken-over two small breweries located in western India. The company has also
diversified into hotels with purchase of twenty-five hotels of three/four star category
across the country. To its advantage the company has been able to obtain a monopoly
for the sale of its soft drinks in its hotels and is beginning to establish itself as a brand
name in the brewery industry.
Part of the strategy of the company is to continue to purchase hotels, particular by
targeting National Capital Region of Delhi where tourism is likely to pick up with the
forthcoming Commonwealth Games . The company also intends to construct a five star
hotel in Gurgoan to take tax advantage.
Everything was going on well until recently, when a Public Interest Litigation from NGO
accused the company of indulging in surrogate advertising of its brewery products. In
fact the company has similar brand names for its soft drinks and brewery products. This
triggered a lot of protests and demonstrations against the company. Newspapers were
flooded with the articles against the company. There were also some demonstrations
and some small incidents of stone pelting in a few of its hotels.
(a) Discuss the factors related to SWOT analyses for the company?
(b) Explain how Sweet Drinks Ltd is achieving synergy?
(c) Explain the nature of diversification adopted by the company.