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UNIT 2 STRATEGIES AND MANAGEMENT
CONTROL
Objectives
After studying this unit, you should be able to understand the:
Concept of strategy
Nature of corporate and business unit strategies
Inter-linkages and interface between strategies and management control
Structure
2.1 Introduction
2.2 Mission and Objectives
2.3 Concept of Strategy
2.4 Strategies and Core Competencies
2.5 Corporate Level Strategies
2.6 Business Unit Strategies
2.7 Strategies and Management Control: Interface
2.8 Radical Performance Improvement and Management Controls
2.9 Summary
2.10 Key Words
2.11 Self Assessment Questions
2.12 Further Readings
2.1 INTRODUCTION
In the control hierarchy, the focus is on strategy formulation, management control
and task control. Strategies indicate the general direction in which an organization is
moving to fulfill its mission, goals and objectives, Hence, understanding the nature of
competitive strategies is very important. There are a variety of models and
frameworks which help us in understanding the concept of strategy. They also help
us in formulation of strategies. In this unit we will deal with these models and
frameworks. Since you will be studying about the concept of strategy in greater depth
in the course on Strategic Management, in this unit, therefore, we limit ourselves to a
general introduction of the concept of strategy and various models of strategy
formulation. The basic idea in this unit is to understand the linkage between strategy
and management control.
2.2 MISSION AND OBJECTIVES
Goals are defined as "broad statements of what the organization wants to achieve in
the long run on a permanent basis" and objectives are defined as
"
specific statement
of ends, the achievement of which is contemplated within a specified time". Many
times these terms are also used interchangeably. However; both are subsumed under
the term mission, which is indicative of the `strategic intent' and `strategic direction'
of the organization. Mission is articulated on the basis of the vision of the founders or
the chief executive. Mission is achieved through a properly formulated strategy and

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action plan with appropriately in-built mid-course correction system. Mission, vision
and action indicate the interactive relationship between strategy and management
control.
In the case of business organizations, an important goal is the Return-on-Investment
(ROI). The concept of ROI is defined as follows:

Thus, ROI is a product of two factors viz. Profit margin in % terms and investment
turnover. ROI can be improved either by increasing the profit margin or by
increasing the productivity of capital by improving the turnover ratio or by improving
both.
As an illustration, consider the case of ABC with revenues as Rs. 50,000, expenses as
Rs. 48,000 and investment as Rs. 10,000. Its ROI is as follows:



ROI can be improved either by increasing profit margin from the current level of 4%
or by improving efficiency of usage of assets i.e. by increasing turnover ratio from


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existing level of 5 or by improving both. But there will be other constraints such as
business factors, managerial factors and environmental factors that would restrict the
profit margin and turnover ratio.
2.3 CONCEPT OF STRATEGY
The idea of strategy can be traced to the Greek word `strategies' meaning "the
general's art". Stanford Research Institute defines strategy as "a way in which a firm
reacts to its environment, deploys its principal resources and marshals its main efforts
in pursuit of its purpose". It may be observed that "Pursuit of Purpose" is a key word
in this definition. Therefore, for strategies to be meaningful, a firm should articulate
its Purpose.
The concept of corporate strategy was initially formulated by Kenneth R. Andrews:
Strategy formulation is a process that senior executives use to evaluate a company's
strengths and weaknesses in the light of the opportunities and threats present in the
environment and then decide on strategies that would fit the company's competencies
with environmental opportunities. In this concept, SWOT analysis is at the heart of
strategy formulation. In SWOT analysis focus is on company's strengths and
weaknesses and on the opportunities and threats coming from environment/
competition. SWOT analysis is an exercise in `internal analysis' i.e. identifying
strengths and weaknesses and `environmental analysis' i.e. identifying opportunities
and threats. Once this is done, appropriate strategies are formulated to achieve a fit
between the organization and environment. Thus, strategy formulation is essentially a
"fitting" process to find appropriate fit between organization and environment.
There are four "fitting" responses. Figure 2.1 presents these responses. A discussion
on these responses is as follows:
Response I
Matching strengths with environmental opportunities: This calls for an aggressive
approach to strategy because the company has many strengths and many
opportunities. If these opportunities are not tapped, they would become missed
opportunities.
Response II
Coping with threats from the position of strength: When the company has several
strengths but it faces a number of threats, the response strategy is one of
diversification. Through diversification it can minimize the adverse impact of threats
Response III
Market offers opportunities but the company has several weaknesses: In such a
situation, company should be put into a turnaround gear. It should focus on
overcoming its weaknesses so that it can tap the opportunities to its advantages.
Response IV
There are many threats and the company has several weaknesses: This is the case of
losing battle. Company can focus an protecting its territory through a defensive
approach. Unless a `strategic surgery' is done, company will have to divert and say
quits to the business.

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SWOT analysis is a useful tool for positioning the company with respect to the
environmental conditions. This analysis can also be applied to the product-market
strategies. Products have their strengths and weaknesses, markets offer opportunities
and threats.
There are four positioning strategies:
1) Product has many strengths and Market offers opportunities: Skim the
market, increase the market share.
2) Product has strengths but Market is full of threats: Highlight the product's
strengths to maintain the market share.
3) Product has weaknesses but Market offers opportunities: Improve the product
to the requirements of the market.
4) Product has weaknesses and Market has threats: This is an ICU (Intensive
Care Unit) syndrome. Be prepared to say quits both to the product and to the
market.
2.4 STRATEGIES AND CORE COMPETENCIES
The idea of core competence was formulated by Prahald and Hammer in their article,
"Core Competence of the Corporation". "A core competence is what a firm excels at
and what adds significant value for customers". From this definition of core-
competence, it may be observed that core competence essentially means strengths of
the company. Thus, the concept of core competence draws our attention to the first
factor of SWOT analysis i.e. the strengths factor. "Strategy should be based on
strength", is an ancient quote, used in the context of war between two kingdoms. In
competency-based strategy, we find an echo of this ancient wisdom.
The idea of core competence when matched with the opportunities and threat
analysis, provides a contour for strategic directions for the organization. Herein lies
the importance and usefulness of the idea of core competence. Since different
organizations possess different core competencies, each organization must identify its
core competencies and build them further for matching with market opportunities and
overcoming the market threats.
Activity 1
a) Explain the concept of ROI.
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b) Define the meaning of the word strategy?
.....
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c) Explain, what is SWOT analysis?
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d) Define "core competence". In what ways is it linked with SWOT analysis?
.....
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2.5 CORPORATE LEVEL STRATEGIES
It has been said that, "A new strategy sometimes succeeds and may sometimes fail.
Unless we try it out we will not know about its success or failure". This wiS
'
dom of
the practitioners is important in formulating strageties. Strategies help us in
identifying the "general direction in which an organization plans to move to achieve
its mission, goals and objectives". The general direction is indicated by the portfolio-
mix of the businesses. Why the current portfolio mix should change? What should be
the new portfolio mix? These are the questions of importance in formulating
Corporate Level Strategy.
In the case of army, strategy implies "deployment of resources". Similarly, in
corporate level strategy, the key idea is about the "deployment of resources" and the
choice of "right mix of businesses" including the right choice of the "basket of
products"
At the corporate level, the strategy issues involve the following decisions:
Remain a single industry firm
Diversify in related businesses
Diversify in unrelated businesses
A single industry firm operates in one line of business. Many IT industry firms are
single industry firms, for example, Infosys. A related diversified firm has business
units in related businesses, while in unrelated diversified context, firm operates in
very diverse businesses. Tata and Birla are often cited as business houses
(conglomerates) that have in their portfolio mix, a number of unrelated businesses.
All the three types of firms can be observed in real life. Each has its own advantages
and disadvantages. Research has yet to conclusively prove the efficacy of one type
over the other, in terms of value to shareholders and value to stakeholders.
The advantage of related diversification lies in firm's ability to transfer its core
competencies from one set of business to another. In conglomerates, such flexibility
in transfer of core competencies is not easily available because the businesses and
their core competencies are not inter-related. Complete autonomy to businesses is an

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Management Control:
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effective way of running such businesses. In Birla organizations, such an autonomy is
ensured through a "Padta system", wherein only cash flows are monitored and
complete autonomy is given for decision making to the chief executive of the
respective . businesses.
It may be indicated that core competencies can be classified in following two
categories:
Transferable core competencies
Non-transferable core competencies
In case of single industry firm, core competencies are easily transferable from one
business unit to another, from one location to another. In case of related diversified
firm, core competencies can also be transferred from one business unit to another.
However, in case of non-related diversified firms, it becomes difficult to transfer core
competencies across the entire business spectrum. Transferability of the core
competencies provides flexibility to corporate management to respond well to the
opportunities and threats.
2.6 BUSINESS UNTT STRATEGIES
While strategies are formulated at the headquarters, battles are fought at the field.
This metaphor has implications for the business organizations. Corporate level
strategies determine the overall strategic direction of the organization, the battle for
survival and market shares takes place at the level of the business units. Therefore,
business unit mission and business unit strategy assume significance in the overall
scheme of things.
Business units of an organization have to face the "competition heat" at the market
place. In case of single industry firm, the heat of competition is felt both at the
corporate level and the business unit level. In case of diversified firms intensity of
competition heat is felt more at the business unit level. In both situations, business
units must gear itself to face the competition. In essence, it should focus on creating a
competitive advantage for itself.
The following models help us in formulating business unit strategies:
The BCG Model
BCG (Boston Consulting Group) model is an important analytical tool for anlyzing
the business unit strategies. The model provides a 2 x 2 matrix based on market share
and market growth as a criteria to classify various businesses. The model not only
classifies the business but also identifies the strategies for each category. Figure 2.2
presents the BCG model.



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Strategic and
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The following are the metaphors used in BCG matrix to classify various businesses:
1) High market share, high market growth Star
2) High market share, low market growth - Cash cow
3) Low market share, high market growth - Question mark
4) Low market share, low market growth Dog
It may be indicated that BCG matrix is essentially an extension / application of
SWOT analysis to product and markets. High market share and low market share are
indicative of the strengths and weakness of the company and high market growth and
low market growth are indicative of the opportunities and threats.
BCG matrix suggests that if a company/business unit is in "star" position, the strategy
should be to hold on to this position. This is referred to as "hold" strategy. If
company is in a "cash cow" position, it should milk the cash cow. This is referred to
as "harvest" strategy. If company is in "question mark" position, it should try to
increase the market share. This is referred to as "build strategy". If the company is in
"dog" situation, it should think of getting out of such a business. This is referred to as
"divest strategy".
General Electric (GE) Planning Model
The General Electric Planning model considers business strength and industry
attractiveness as criteria for categorizing businesses. This model uses a 3 x 3 matrix
for classifying businesses in terms of categories such as winners, question marks,
average businesses, profit producers and losers. The model is presented in Figure 2.3.

When we compare the GE model with BCG model, we can observe that market share
is indicative of the competitive position or business strength and market growth rate
is indicative of the attractiveness of the industry.
In fact, we can reduce 3
x
3 matrix of GE model into a 2 x 2 matrix and refer It as
modified GE model. The model is presented in Figure 2.4.

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Management Control:
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Improving Competitive Advantage
An important aspect of business unit strategy relates to improving competitive
advantage. For this Porter's five force model is useful to get an understanding of the
industry structure. The five forces identified by Porter are as follows:
1) "The intensity of rivalry among existing competitors. Factors affecting direct
rivalry are industry growth, product differentiability, number and diversity of
competitors, level of fixed costs, intermittent over capacity, and exit barriers.
2) The bargaining power of customers. Factors affecting buyer power are:
number of buyers, buyer's switching costs, buyer's ability to integrate
backward, impact of the business unit's product on buyer's total costs,
impact of the business unit's product on buyer's product quality/performance,
and significance of the business unit's volume td buyers.
3) The bargaining power of suppliers. Factors affecting suppler power are
number of suppliers, supplier's ability to integrate forward, presence of
substitute inputs, and importance of the business unit's volume to suppliers.
4) Threat from substitutes. Factors affecting substitute threat are relative price/
performance of substitutes, buyer's switching costs, and buyer's propensity to
substitute.
5) The threat of new entry. Factors affecting entry barriers are capital
requirements, access to distribution channels, economies of scale, product
differentiation, technological complexity of product or process, expected
retaliation from existing firms and government policy".
Porter's five force model is presented in Figure 2.5.

Figure 2.5: Porter's Five Force Model


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The intensity of these forces is indicative of the attractiveness of the industry and
competitive pressures within the industry. The five force analysis helps us in focusing
our attention on the opportunities and threats in the external environment. Porter
suggests two strategies for responding to the opportunities and threats, viz., cost
leadership and differentiation.
In cost leadership route to competitive advantage, the focus is on gaining competitive
advantage through cost advantage. If per unit costs are low because of the economies
of scale, cost control, experience, curve advantage, etc., then the firm gains a cost
advantage at the market place.
In product differentiation route to competitive advantage, the focus is on
differentiating the product in terms of product features, product design and product
identity. The idea is to "create something that is perceived by customers as being
unique".
In the third route to competitive advantage, both the cost leadership and product
differentiation are combined together. This route to competitive advantage is referred
to as cost-dum-differentiation because it combines both the cost advantage and the
product differentiation advantage. Hence, it represents the most attractive competitive
position.
Activity 2
a) Explain the basic idea behind BCG matrix.

b) What is the difference between GE Planning model and BCG matrix?

c) Identify the forces of Porter's five force analysis of an industry and offer your
comments.

2.7 STRATEGIES AND MANAGEMENT CONTROL:
INTERFACE
There is a close interface between strategies and management control. This interface
is indicated by the concept of "interactive control" formulated by Simons (1995).
Control system is essentially a strategy implementation tool. When viewed from this
perspective, strategy and control systems are coupled with each other. Information
generated from the control system is useful in formulating new strategies. When
control system generates meaningful and useful information for thinking about new
strategies, such a control system is referred to as "interactive control". The
information from such a control system has a learning value for the managers and the
organization as a whole.

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Management Control:
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Because of "strategic uncertainties" such as changes in technologies, competiton,
lifestyles, Customer preferences etc., it is important that control system should throw
up information relating to indicators of strategic uncertainties and indicators of
troubles. Then such a control system has learning value for all the employees leading
to a proper "learnign environment". Such a control system also makes the
organization a "learning centre". Thus a strong interface between the strategy and
control system makes the organizations learning organization. The learning loop
between strategy and control system is depicted in Figure 2.6.

Activity 3
a) Explain the idea of "interactive control" given by Simons.

d) How control systems can make an organization a "learning organization".

2.8 RADICAL PERFORMANCE IMPROVEMENT AND
MANAGEMENT CONTROLS
The idea of Radical Performance Improvement (RPI) has been suggested by
Sumantra Ghoshal et. al., in their book, Managing Radical Change. They consider
managerial function as "learning to cook sweet and sour". For achieving radical
improvements in performance, managers should effectively manage the sour task of
improving resource productivity and the sweet task of creating and exploiting new
opportunities. In a way, this approach is similar to Simons "interactive controls"
wherein strategy and control systems are coupled to generate the synergy. While
control systems could represent the sour side, strategy represents the sweet side, as it
involves looking for opportunities. However, at times, strategy could also go sour. If
both control system and strategy go sour, there will be catastrophic under-p
rformance leading to sickness.
In the RPI framework, three stages of competition have been identified, viz.
Competition for dreams, Competition for the resources and competencies and
Competition for markets. Competition for dreams involves articulating vision for
future markets, indicating the corporate ambition and providing an overall sense of
purpose to the business. Competition for resources and competencies includes
competition for technology, quality people, brands etc. Competition for markets
implies articulation of competitive strategy through industry analysis, segmentation
and positioning, cost leadership and product differentiation, etc. Figure 2.7 presents
this framework.


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For translating the framework of Radical Performance Improvement into an action
plan, resources and competencies should be matched with business and opportunities.
This is similar to the SWOT analysis, wherein strengths and opportunities are
matched. Strengths are indicative of the resources and competencies, while
opportunities implies "baskets of businesses". Existing resources and competencies
could be expanded by adding new resources and competencies. Similarly, an
organization could look for new businesses and new opportunities. RPI framework
suggests that managers should leverage the existing and new resources and
competencies by exploiting the existing and new markets and opportunities. Figure
2.8 presents this approach.

Source: Ghoshal et.al., Managing Radical Change, 2000, Penguin Books, p.87
Through the case studies of Indian companies, Ghoshal et.al., suggest many
innovative ways of "cooking sour and sweet" to achieve a breakthrough in
performance. They also suggest a fundamental shift in management thought from 3Ss
to 3Ps, wherein 3Ss stand for Strategy, Structure and Systems and 3Ps stand for
Purpose, Process and People. In fact, we need an integrative approach wherein 3Ss
and 3Ps play a complementary role. They should not be in contradiction to each other
but should mutually support each other. Wepresent this integrative approach in
Figure 2.9.

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In effective organizations, interaction between three Ss and three Ps is managed to
achieve a synergy between them, thereby ensuring radical performance Management
Control Systems should be designed to facilitate this interaction. Herein lies the
linkage between Radical Performance Improvement (RPI) and the Management
Control Systems (MCS).
Activity 4
a) Which are the three stages of competition suggested by Ghoshal et. al.?

....
b) Identify the three Ss and three Ps in the RPI model and highlight their importance
for radical performance improvement.

....
2.9 SUMMARY
Concept of strategy is fundamental to survival and growth of an organization.
Strategies should be well articulated in consonance with Purpose, Mission, Goals and
Objectives. SWOT analysis is an important analytical tool that managers use in
formulating strategies. BCG matrix and GE planning model, are analytical models for
deciding about the "basket of businesses" or "basket of products" that a business
entity should carry in its portfolio. Porter's five force model is alse helpful in
analyzing the attractiveness of an industry. These models help managers in
concretizing their business strategies. Interface between strategies and management
control can be strengthened through "interactive controls". This in turn can make an
organization as a "learning organization". The unit concluded with the concept of
Radical Performance Improvement and role of control systems in facilitating Radical
Performance Improvement.
2.10 KEY WORDS
Goals: Broad statements of what the organization wants to achieve in the long
run
Strategy: A way in which a firm reacts to its environment deploys its
resources and marshals its main efforts in pursuit of its purpose.
SWOT Analysis: An analytical tool for strategy formulation indicating Strengths,
Weaknesses, Opportunities and Threats.
Core Competence: A core competence is what a firm excels at and what adds
significant value for customers.
BCG Matrix: A 2 x 2 matrix based on market growth and market share. It classifies


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Management Control


business in terms of "stars", "cashcows", "question marks" and "dogs"
GE Planning Model: A 3 x 3 matrix based on industry attractiveness and business
strength for classifying businesses in various categories.
Interactive Control: When control system generates meaningful and useful
information for thinking about new strategies such a control system is referred to as
"interactive control".
Three Stages of Competition: Competition for Dreams, Competition for Resources
and Competencies and Competition for Markets and Opportunities.
2.11 SELF ASSESSMENT QUESTIONS
1) Define the concept of strategy. Show how SWOT analysis is used in formulating
strategies.
2) Explain the BCG model, highlighting its usefulness in formulating business unit
level strategies.
3) Explain Porter's five force model and its importance for strategy formulation.
4) How can interface between strategies and management controls be
strengthened?
5) Explain the concept of Radical Performance Improvement (RPI) and the role of
Management Control Systems in facilitating RPI.
2.12 FURTHER READINGS
Andrews, Kenneth R, 1980, The Concept of Corporate Strategy, Richard D.Irwin.
Anthony, R.N. and Govindrajan V, 1994, Management Control Systems, Tata
McGraw Hill (Chap.2).
Ghoshal, Sumantra Gita Piramal and Christopher A Bartlett, 2000, Managing Radical
Change: What Indian Companies Must Do To Become World-Class, Penguin Books
(Chap. 4&14).
Merchant, Kenneth A 1998, Modern Management Control Systems: Text and Cases,
Prentice Hall.
Porter Michael, 1985, Competitive Advantage, The Free Press.
Sharma, Subhash 1988, Management Control Systems, Text and Cases; Tata
McGraw Hill (Chap.2).