MB0052

Strategic Management and Business Policy
Unit 1
Unit 1
Structure
Understanding Corporate Strategy
1.1 Introduction 1.2 Caselet Objectives 1.3 What is Strategy? 1.4 Strategic Window 1.5 Corporate Strategy in Different Types of Organizations 1.6 Lack of Strategic Management in Some Companies 1.7 Ten Principles of Strategy 1.8 Case Study 1.9 Summary 1.10 Glossary 1.11 Terminal Questions 1.12 Answers 1.13 References
1.1 Introduction
Any discussion on business and management today is incomplete without discussing two major forces: one is competition, and the other is strategy. Both these forces coexist or are correlated; in simple words, we can say that it is competition that drives strategy. For an organization to survive and grow, it is important to have a strategy. You must have seen or read about the well-known Fortune 500 list, an annual list compiled and published by Fortune magazine that ranks the top 500 US companies. Every year, some new names are added and some others are deleted from this prestigious list. One common reason, which explains both the inclusions and the deletions, is the strategy of the respective companies. So, strategy plays a vital role in organizations. Let us try to understand what strategy is. Strategy is a concept that is used universally but understood differently, and, therefore, defined differently. In fact, strategy as a concept is better described and more easily put into practice than defined. Most companies recognize that strategy is central to business and management. It is also recognized that it is strategy that makes the difference between success and failure of many companies and businesses. Yet, there is always a lack of conceptual clarity about what strategy is. In this unit define and explain strategy
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to make the understanding of the concept and its application clear and meaningful. In this unit, we will discuss corporate strategy, its definition and nature, as well as its levels in an organization. You will be able to understand corporate strategy in different types of organizations, why some organizations do not practice strategic management and the principles of strategic management.
1.2 Caselet
Every organization, big or small, follows a certain strategy to achieve its goals, which are specific to its market. For example, for a long time, the oil company Shell had focused on selling oil only. Thus, selling oil was its corporate strategy. For the past few years, the company, like other major oil producers, has found itself at the heart of the debate over climate change. The companys operations alone led to carbon emissions that account for some 3.6 per cent of global fossil-fuel CO2 emissions in any yeara total greater than that of the entire United Kingdom. In response to this situation, Shell took an early position on the issue and started adopting strategies to address climate change. The company engaged in actions that began to manage its carbon footprint. These actions have earned the company credibility and a powerful voice within policy, advocacy and market circles.
Objectives
After studying this unit, you should be able to: Explain strategy, its nature and levels of strategy Discuss the concept of strategic window Describe corporate strategy in different types of organizations Explain why some organizations do not undertake strategic management List ten principles of strategy
1.3 What is Strategy?

The word strategy comes from Greek strategies, which refers to a military general and combines stratus (the army) and ago (to lead). The concept and practice of strategy and planning started in the military, and, over time, it entered business and management. The key or common objective of both business
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strategy and military strategy is the same, i.e., to secure competitive advantage over the rivals or opponents. We will discuss the similarity between business and military strategies in detail later.
1.3.1 Evolving Definitions of Strategy

Seven definitions of strategy are given below which have evolved over a period of more than 30 years (196296). During this evolutionary process, different authors have focused on different aspects of the definition of strategy. Let us see these definitions. Chandler (1962): The determination of the basic long-term goals and objectives of an enterprise and the adoption of the courses of action and the allocation of resources necessary for carrying out these goals.
Source: A Chandler, Strategy and Structure: Chapter in the History of the American Enterprise (MIT Press, 1962).
Andrews (1962): The pattern of objectives, purpose, goals and the major policies and plans for achieving these goals stated in such a way so as to define what business the company is or is to be and the kind of company it is or is to be.
Source: K R Andrews, The Concept of Corporate Strategy (Homewood: Jones Irwin, 1995)
Ansoff (1965): The common thread among the organizations activities and product-markets ... that defines the essential nature of business that the organization was or planned to be in future.
Source: H I Ansoff, Corporate Strategy (New York: McGraw-Hill, 1965).
Glueck (1972): A unified, comprehensive and integrated plan designed to assure that the basic objectives of the enterprise are achieved.
Source: W F Glueck, Business PolicyStrategy Formation and Management Action (New York: McGraw-Hill, 1976).
Mintzberg (1987): A pattern in a stream of decisions and action. (Mintzberg distinguishes between intended strategies and emergent strategies. These are discussed in Unit 2).
Source: H Mintzberg, Crafting Strategy, Harvard Business Review (SeptemberOctober, 1987).
Ansoff (1984): Basically, a strategy is a set of decision-making rules for the guidance of organizational behaviour.
Source: H I Ansoff, Implementing Strategic Management (London: Prentice Hall International, 1984). Sikkim Manipal University Page No. 3
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Porter (1996): Developing and communicating the companys unique position, making trade-offs, and, forging fit among activities.
Source: M E Porter, What is Strategy. Harvard Business Review (NovDec, 1996), 6178.
1.3.2 Business Strategy and Military Strategy

As mentioned in the beginning, in many respects, business strategy is similar to military strategy. Both business and military organizations try to use their strengths to exploit the weaknesses of their competitors. If the strategy is not commensurate with the strengths and weaknesses of the organization, efficiency in operation and implementation may not lead to success. This is true of both business and military organizations. Business or military success is not the result of any accidental strategies. Rather, success is the outcome of continuous attention to internal and external conditions and formulation and implementation of strategies to suit those conditions. The element of surprise or unforeseen situations provides a challenge as well as an opportunity for both military and business strategy; in both the cases, information and data on opponents or competitors strategies and resources are vital inputs for success. There is, however, a basic difference between military strategy and business strategy. Business strategy is formulated, implemented and evaluated with an assumption of competition, but military strategy is based on the assumption of conflict. Also, military strategies are implemented in the field (front or border) but, business strategies are implemented in the marketplace. Nevertheless, military conflict and business competition are so similar that many strategic management techniques apply equally to both. Superior strategy in both can overcome an opponents superiority in resources and numbers. Both business and military organizations must adapt to change and constantly improve or innovate to be successful. Often, companies and military organizations do not change their strategies when the environment and competitive conditions warrant a change. This may lead to failure. Here is a good military example of such a situation: When Napoleon won, it was because his opponents were committed to the strategy, tactics and organizations of earlier wars. When he lostagainst Wellington, the Russians and the Spaniardsit was because he, in turn, used tried-and-true strategies against enemies who thought a fresh, who were developing the strategies not of the last war but the next.1
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1.3.3 Levels of Strategy

Strategies exist at different levels in an organization. Three different levels of organizational strategy can be clearly distinguished (Figure 1.1).
Figure 1.1 Levels of Strategy
Corporate-level strategies are concerned with overall purpose or objective of the organization; for example, diversification through joint venture, merger or acquisition. Business unit-level strategies address themselves to issues of a particular business unit or product group of an organizationstrategies for product development and/or identification and exploitation of new market opportunities. Functional strategies (sometimes, called operational strategies) concentrate on particular functional or operational areas like manufacturing, marketing, logistics, etc. For single-business companies, corporate-level strategies and business unit-level strategies may not be much different. But for multi-business companies like Unilever (or its subsidiary Hindustan Unilever), business unit-level strategies would be quite distinct from corporate-level strategies. Functional-level strategies, however, would be common in both single-business and multiple-business companies. The three levels of strategy are not isolated: these strategies support, complement or reinforce each other for the achievement of organizational objectives. We will be discussing these strategies in more detail in the next unit. Activity 1 The Indian car market is becoming increasingly competitive with the entry of foreign players like Hyundai, Ford, General Motors and Honda. Do a field or online survey/ research on any of the companies and highlight the steps taken by the company to establish and increase its market share. Focus on strategic planning and implementation. For information you may visit the company website and consult the annual reports.
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Self-Assessment Questions
1. The key or common objective of both business strategy and military strategy is to secure competitive advantage over the rivals or the opponents. (True/False) 2. A unified, comprehensive and integrated plan designed to assure that the basic objectives of the enterprise are achieved. This definition of strategy was given by________. 3. Business strategy is formulated, implemented and evaluated with an assumption of__________ , but military strategy is based on the assumption of_________. 4. For single-business companies, corporate-level strategies and business unit-level strategies would be quite distinct. (True/False)
1.4 Strategic Window

Companies need to evolve and adapt to changing situations, as is clear from the example of Shell that you read in the beginning of the unit. They should always look for opportunities and make the best of them at the right time. Here, we are referring to strategic windows, the concept which was introduced by Abell (1978). The basic idea behind the concept of a strategic window is this: there are only limited periods during which the fit or the match between the key requirements of a market and the particular competencies of the firm are at the optimum. Companies should exploit such optimum opportunities or windows. Strategic windows arise as a result of business or market evolution. Businesses and markets are never static. They are constantly evolving. Businesses and markets may evolve because of Development of new product (new demand); Emergence of new competing technologies; and Market redefinition or changes. Due to such evolution, it is recommended that investment in a product line or market area should be made to coincide with the period(s) during which a strategic window is open. Companies which do this, optimize returns. For example, Maruti-Suzuki entered the Indian car market at the right time. The strategic window was open because of the obsolescence of technology of Premier Padmini (earlier Fiat), which was the only available passenger car in
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the market. (There was also Ambassador, but that was used more as an official car). Even after Marutis entry, the strategic windows for cars remained open, and other car companiesGeneral Motors, Tata Motors, Ford, Honda, Hyundai all entered the Indian car market. Maruti, however, was the first mover and continues to be the market leader. Strategic windows are also important for timing the exit from a product or a market. There are times when it is advisable, and also possible, to divert a business which a company cannot operate profitably any longer. This means that the strategic window for exit is open, that is, there are buyers or companies, who are willing to acquire the business, and, the company should act on it. This is what Hindustan Unilever did. They hived off their vanaspati (Dalda) business to the US-based Bunge Ltd, who had plans to relaunch the product. If a company does not exit in time, the strategic window may get closed; there may not be any buyer, and the business may have to be closed down at considerable losses.
5. The opportunities that companies should always look for and seize or exploit at the right time are called _________. 6. Strategic windows arise as a result of _________. 7. Businesses and markets may evolve because of (a) Development of new product (new demand) (b) Emergence of new competing technologies (c) Market redefinition or changes (d) All of these 8. Strategic windows are not so important for timing the exit from a product or a market. (True/False)
1.5 Corporate Strategy in Different Types of Organizations

A well-formulated strategy is vital for growth and development of any organizationwhether it is a small business, a big private enterprise, a public sector company, a multinational corporation or a non-profit organization. But, the nature and focus of corporate strategy in these different types of organizations will be different, primarily because of the nature of their operations and organizational objectives and priorities.
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Small businesses, for example, generally operate in a single market or a limited number of markets with a single product or a limited range of products. The nature and scope of operations are likely to be less of a strategic issue than in larger organizations. Not much of strategic planning may also be required or involved; and, the company may be content with making and selling existing product(s) and generating some profit. In many cases, the founder or the owner himself forms the senior/top management and his (her) wisdom gives direction to the company. In large businesses or companieswhether in the private sector, public sector or multinationalsthe situation is entirely different. Both the internal and the external environment and the organizational objectives and priorities are different. For all large private sector enterprises, there is a clear growth perspective, because the stakeholders want the companies to grow, increase market share and generate more revenue and profit. For all such companies, both strategic planning and strategic management play dominant roles. Multinationals have a greater focus on growth and development, and also diversification in terms of both products and markets. This is necessary to remain internationally competitive and sustain their global presence. For example, multinational companies like General Motors, Honda and Toyota may have to decide about the most strategic locations or configurations of plants for manufacturing the cars. They are already operating multi location (country) strategies, and, in such companies, roles of strategic planning and management become more critical in optimizing manufacturing facilities, resource allocation and control. In public sector companies, objectives and priorities can be quite different from those in the private sector. Generation of employment and maximizing output may be more important objectives than maximizing profit. Stability rather than growth may be the priority many times. Accountability system is also very different in public sector from that in private sector. There is also greater focus on corporate social responsibility. The corporate planning system and management have to take into account all these factors and evolve more balancing strategies. In non-profit organizations, the focus on social responsibilities is even greater than in the public sector. In these organizations, ideology and underlying values are of central strategic significance. Many of these organizations have multiple service objectives, and the beneficiaries of service are not necessarily the contributors to revenue or resource. All these make strategic planning and
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management in these organizations quite different from all other organizations. The evaluation criteria also become different. Johnson and Scholes (2005) have given a good and detailed exposition of strategic management in various types of organizations mentioned above. Activity 2 The print media, that is, newspapers and magazines, have long served the information needs of people all over the world. The rise of radio and television offered some competition. But, with the advent of the Internet and availability of news and information online, the service offered by the print media is no longer as valuable as before. Imagine that you are the managing editor of a leading daily. Suggest some major strategic changes that you feel are needed at this stage to sustain and grow your company. Visit the websites of some leading newspapers and see how they are adapting new strategies to survive and grow.
9. The nature and focus of corporate strategy in different types of organizations are different primarily because of the nature of their operations and organizational objectives and priorities. (True/False) 10. As they are operating multi location (country) strategies, roles of strategic planning and management become more critical in _______ companies for optimizing manufacturing facilities, resource allocation and control.
1.6 Lack of Strategic Management in Some Companies

Some companies do not undertake strategic planning and management. Some other companies do strategic planning, but receive no support from managers and employees. In some other cases, managers and employees do not get enough support from the top management. A number of such and other reasons explain why certain companies do not take to strategic planning and management. David (2003) has mentioned various reasons for poor or no strategic planning and management by companies. These are discussed below: 1. Poor reward structure: When an organization achieves success, it often fails to reward its managers or planners. But when failure occurs, the company may punish the managers concerned. In such a situation, it is
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better for individual managers to do nothing than to risk trying to achieve something, fail and be punished. 2. Content with success: If an organization is generally successful, the top management or individual managers may feel that there is no need to plan and strategize because everything is fine. However, they forget that success today does not guarantee success tomorrow. 3. Overconfidence: As managers gain experience, they may rely less on formalized planning and more on individual initiative and decisions. But, this is not appropriate. Overconfidence or overestimating experience leads to complacency and ultimately can bring downfall. Forethought and planning are the right virtues and are signs of professionalism. 4. Fire-fighting: An organization may be so deeply engrossed in crisis management and fire fighting that it may not have time to plan and strategize. This happens with many companies and is a clear sign of nonprofessionalization. 5. Waste of time: Some organizations view planning as a waste of time because no tangible marketable products are produced through planning. But they forget that time spent on planning is an investment, and there would be returns, both tangible and intangible, in due course. 6. Too expensive: Some organizations are culturally opposed to spending resources on matters like planning which do not produce instant or immediate results. They feel that spending on planning is a wasteful expenditure. 7. Previous bad experience: Managers may have had previous bad experience with planning, that is, cases in which plans have been cumbersome, impractical or inflexible. There could be experience of failures also. They would like to avoid recurrence of this. 8. Honest difference of opinion: Some managers may sincerely think that a plan is not correct. They may see the situation from a different viewpoint, or, they may have aspirations for themselves or the organization, which are different from those envisaged in the plan. Different people in different jobs in the same organization may have different perceptions of the same situation, and this may lead to difference of opinions among them and eventually to lack of planning due to lack of consensus. 9. Self-interest: When management has achieved status, privilege or selfesteem through effectively using an old system, it often sees a new plan or a new system as unnecessary or a threat.
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10. Fear of the unknown: Managers may not be sure of their abilities to learn new skills or take on new roles or adapt to new system. This is basically inertia against change or fear for change. 11. Fear of failure: Whenever something new or different is attempted, there is a chance of success, but, there is also some risk of failure. Many companies and managers may like to avoid strategic planning and management for fear of failure. 12. Suspicion: Employees may not trust management, or, the management may not have enough confidence in the managers. This gives rise to mutual suspicion.2
11. All companies undertake strategic planning and management. (True/False) 12. Both overconfidence and fear of failure are among the reasons for not adopting strategic planning and management. (True/False)
1.7 Ten Principles of Strategy

Duro and Standstrom3 have mentioned about 10 principles of strategy, which are drawn from the military rule or warfare, but are equally applicable to business. These are given in the following: 1. Set a goal and stick to it. 2. Maintain good morale (good leadership is aprecondition for this). 3. Accumulate forces. 4. Act aggressively. 5. Aim for surprise. 6. Make sure your own forces are secure. 7. Use your forces economically. 8. Coordination (either through chain of command or through cooperation). 9. Try to be adaptable. 10. Simplicity (clear and simple plans and concise orders/instructions).
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OveLiljedahl4 has discussed the relevance and applications of the aforementioned principles to business strategy and has given examples from the Scandinavian Airline Systems (SAS) as pronounced by their MD. 1. Set a goal and stick to it SAS: We will be the best airline in Europe. 2. Maintain good morale SAS: The personality of the leader; motivation courses 3. Accumulate forces SAS: Concentration on profitable European routes 4. Act aggressively SAS: Investing its way out of the crisis in a stagnating market 5. Aim for surprise SAS: While competitors pay 100 million kroners for a new DC9a, SAS repaints and changes interiors of all its 80 planes for 50 million kroners 6. Make sure your own forces are secure SAS: Delegate responsibility for results; each unit ensures its own security 7. Use your forces economically SAS: Personnel and fleet tailored to suit the need for resources 8. Coordination SAS: The aim is known and understood by all employees 9. Try to be adaptable SAS: Adaptation to new threats from outside; adapting to deteriorating sales opportunities in the airline industry advising aircraft manufacturers on how to build modern fleet aircraft. 10. Simplicity SAS: Single strategy; instead of getting 100 per cent better on one point, get 1 per cent better on 100 points. All concerned with strategyplanners and managers at different levels would do well to learn and remember the 10 principles. The SAS example shows how they can be real life business strategies.
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13. For strategy building, one should set a goal and stick to it. (True/ False) 14. Good leadership is a precondition for maintaining good morale of a strategy. (True/ False)
1.8 Case Study

Modi Xerox Defines its Corporate Strategy Modi Xerox was incorporated in 1983 in technical and financial collaboration with Rank Xerox, UK, equipped with state-of-the-art manufacturing facility at Rampur, UP, India. Since 1983, it has come a long way. Modi Xerox, with a market share of 58 per cent, is the leader in the Indian photocopier market. The companys strategic objective is to capture the incremental document volume and successfully ride the shift in documentation modes. This is where the strategy comes in. Recognizing the shift in doctrination mix, Xerox has developed an intelligent digital platform. It is emerging as a document company, covering document in any form, that is, digital, CDROM, multimedia and paper. Modi Xeroxs strategy closely follows this. To be a recognized document company, Modi Xerox had launched intensive advertising. An advertising campaign, worldwide, announced Xeroxs alignment with digital technology. Subsequently, new digital models have been launched in India. Modi Xeroxs Vision 2000 was to develop, manufacture, market and finance a range of document products and solutions to enhance customer productivity, make the document persuasive and efficient by making them automated. Following Vision 2000 was Vision 2002, which targeted a sales turnover of $1 billion in India. To achieve this, the company had to develop innovative thinking and plan. Modi Xeroxs innovative thinking has given birth to the companys new micro marketing plan. This involves segmenting the user market vertically on the standard industrial classification and horizontally by splitting the market into private organizations, public companies and jobbers. The company has conducted user census in 48 cities to draw up a micro-marketing plan. Modi Xeroxs key strategies are based on the marketing plan, and the plan is based on four corporate objectives:
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1. Return on assets 2. Customer satisfaction 3. Employees motivation and satisfaction 4. Market share
Costumers are divided into segments and respective accounts are handled by specialized account managers, global accountant, local accountant and general and mass market managers. The rest of the customers are handled by sales promotion agents (dealers and partners). The company also has telemarketing and telesales programmes. Telemarketing plays a support role, marketing mostly to small organizations with around 20 employees. The telesales team is able to access the target customer in different locations through its computer network. Modi Xerox is a quality company. Quality is its basic business principle or philosophy. Quality means providing customers innovative products and services which fully satisfy their requirements. Quality improvement is the job of every Modi Xerox employee, whether a staff or a manager. Leadership through quality is both a strategy (continuous pursuit of quality improvement) and a process (a fundamental business principle on which all work processes are based). Leadership through quality is fostered by the management at all levels and is pursued as a proactive approach rather than are active approach. This reflects positiveness in the companys strategy.
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1.9 Summary
Let us recapitulate the important concepts discussed in this unit: Strategy or corporate strategy is better described, and more easily put into practice than defined. However, strategy, as mostly used or understood, is an action plan or, a scheme of action or design of execution of a plan. Business strategy is similar to military strategy. Both business and military organizations try to use their strengths to exploit the weaknesses of their competitors or opponents to win or succeed. There is, however, a significant difference between the two. Business strategy is formulated based on the assumption of competition, military strategy is based on the assumption of conflict. Like strategy, strategic management has also been defined differently by different authors and strategy analysts. However, the common elements in most of the definitions are organizational objectives, the environment, formulation of strategy, implementation and control. In any organization, strategy can exist or operate at three levelscorporate level, business unit level and functional level. In single business companies, corporate-level strategies and business unit-level strategies may not be much different. But, for multi-business companies (like Unilever or ITC), strategies at two levels would be quite distinct. Functional-level strategies, however, would be common to both types of companies. Companies should always look for opportunities, and seize or exploit opportunities at the right time. In other words, they should be constantly aware of strategic windows. This is what Maruti (Suzuki) did. They entered the Indian car market at the right time, i.e., when the strategic window was open because of the obsolescence of Premier Padmini (earlier Fiat). Some companies do not undertake strategic planning and management. Some of the common reasons for this are poor reward structure, previous bad experience, contentment with success, too expensive, overconfidence, honest difference of opinion, fire fighting, self-interest or self-esteem, waste of time, fear of the unknown, fear of failure, and suspicion. Duro and Standstrom have mentioned 10 principles of strategy, which are drawn from the military rule or warfare, but are equally applicable to business. These are: 1. Set a goal and stick to it; 2. Maintain good morale
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(good leadership is a precondition for this); 3. Accumulate forces; 4. Act aggressively; 5. Aim for surprise; 6. Make sure your own forces are secure; 7. Use your forces economically; 8. Coordination (either through chain of command or through cooperation); 9. Try to be adaptable; 10. Simplicity (clear and simple plans and concise orders/instructions).
1.10 Glossary
Competitive advantage: Advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices. Fortune 500: A list of top companies around the world compiled annually by Fortune magazine, which ranks publicly listed corporations according to their revenues. Multilocation: The state of being in more than two places at the same time Strategic window: Short time period between specific events during which there is an opportunity to capitalize on a market Strategy: A plan, method, or series of maneuvers or stratagems for obtaining a specific goal or result.
1.11 Terminal Questions

1. What is strategy? Mention the different definitions of strategy. 2. What is the relationship between business strategy and military strategy? What are the similarities and differences between the two types of strategies? 3. Distinguish between the major levels of a strategy in an organization. 4. What is strategic window? Explain with some examples. 5. Explain the corporate strategy in different types of organizations. 6. Why do some companies not use strategic management? Mention some common reasons.
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1.12 Answers Answers to Self-Assessment Questions

1. True 2. Glueck (1972) 3. Competition, conflict 4. False 5. Strategic windows 6. Market evolution 7. (d) 8. False 9. True 10. Multinational 11. False 12. True 13. True 14. True
Answers to Terminal Questions

1. The word strategy comes from Greek strategos, which refers to a military general and combines stratus (the army) and ago (to lead). Several definitions of strategy have evolved over a period of more than 30 years (19621996). Refer to Section 1.3 and 1.3.1 for further details. 2. Business strategy is similar to military strategy in many respects. Both business and military organizations try to use their strengths to exploit the weaknesses of the competitors. Refer to Section 1.3.2 for further details. 3. Strategies exist at different levels in an organization. Three different levels of organizational strategy can be clearly distinguished -- corporate-level strategies, business unit-level strategies and functional strategies. Refer to Section 1.3.3 for further details.
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4. Companies should always look for opportunities, and seize or exploit opportunities at the right time. These opportunities, during which there is a chance to capitalize on a market, are called strategic windows. Refer to Section 1.4 for further details. 5. The nature and focus of corporate strategy in different types of organizations will be different primarily because of the nature of their operations and organizational objectives and priorities. Refer to Section 1.5 for further details. 6. Some companies do not undertake strategic planning and management. A number of reasons explain why certain companies do not take to strategic planning and management. Refer to Section 1.6 for further details.
1.13 References
1. Abell, D F. 1978. Strategic Windows. Journal of Marketing 42(2). 2. Alkhafaji, A F. 2003. Strategic Management. New York: Harworth Press. 3. David, F R. 2003. Strategic Management: Concepts and Cases. 9th ed., Indian Reprint. New Delhi: Pearson Education. 4. Glueck, W F. 1980. Business Policy and Strategic Management. New York: McGraw-Hill. 5. Porter, M E. What is Strategy. Harvard Business Review 72(6), 1996. 6. Thompson, AA, Jr, and A J Strickland. 2001. Strategic Management: Concepts and Cases. New Delhi: Tata McGraw-Hill. E-references http://www.shell.com/home/content/aboutshell/our_strategy/ http://www.source2update.com/Company-History/Modi-XeroxMODXER.html Endnotes
1 2 3
F Glueck, Taking the mystique out of planning, Across the Board (July August, 1985). F R David, Strategic Management , 9th ed. (Pearson Education, 2003), 17 18. International Management Institute (IMI), Supplementary Readings in Competitive Analysis and Marketing Strategy , in R-CAMS ,S.No. 9 (New Delhi, 2000). International Management Institute (IMl).
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Unit 2
Structure
Strategic Management Process
2.1 Introduction 2.2 Caselet Objectives 2.3 Strategic Management Model 2.4 Approaches to the Strategic Management Process 2.5 Levels in SMP 2.6 Participants in SMP 2.7 Strategic Drift 2.8 Case Study 2.9 Summary 2.10 Glossary 2.11 Terminal Questions 2.12 Answers 2.13 References
2.1 Introduction
In the previous unit, we had defined corporate strategy and strategic management. In defining strategic management, we had mentioned the external environment, formulation of strategy and also implementation and control. Strategic planning and management should actually start with organizational mission and objectives, consider internal competences and resources, various strategy alternatives and the competitive situation and, then proceed with formulation and implementation of the strategy. All these constitute the strategic management process (SMP). And, this would be the subject matter of our analysis in the various units starting with Unit 5. In this unit, we shall give an overview of the strategic management process in terms of different approaches, levels in SMP, planned or intended and realized strategies, the people involved, roles of the chief executive, board of directors and consultants, among others. We shall also discuss concepts like strategic drift and the learning organization and their relevance and roles in the strategic management process.
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2.2 Caselet
Every organization follows a strategic management model, which depends on its size, products and other factors. The organizational structure of the company is built on the basis of this model. Hindustan Unilever (HUL) is a fast moving consumer goods (FMCG) company that markets about 100 products/brands grouped into different categories. The different categories of products require different organizational structure. Therefore, the company has adopted a hybrid organizational structure based on functions and product divisionalization. Like most organizations, strategies at HUL also operate at three levels: corporate, SBU and functional. These will be discussed in more detail in the unit.
Objectives
After studying this unit, you should be able to: Explain the different approaches to the strategic management process Illustrate the strategy-making hierarchy in an organization Describe the various participants in the strategic management process Explain the meaning and nature of strategic drift
2.3 Strategic Management Model

The strategic management process consists of four distinct steps or stages: (a) Defining organizational mission, objectives or goals (b) Formulation of strategy/strategic plan (c) Implementation of strategies (d) Strategy evaluation and control For understanding these four stages, a company has to consider a number of other factors like organizational competence and resources, the environment, various strategy alternatives available, strategy selection criteria, etc. All these are internal parts of SMP. The strategic management process may best be illustrated in the form of a model. We can call this the strategic management model. Relationships among the major components of the strategic management process are shown in the model (Figure 2.1).
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Companies may or may not follow the strategic management process as rigidly as shown in the model. Generally, application of SMP is more formal and model driven in large, well-structured organizations with many divisions, products, markets, different priorities for investmhent, etc. Smaller businesses or companies tend to be less formal. In other words, formality in SMP refers to the extent to which participants in SMP, their responsibilities, authority and roles/ duties are clearly specified. Also, in practice, strategists may not always follow the strategic management model as rigid steps or chains in the management process. Situations may not always warrant this. It would also depend on a companys approach to SMP. Figure 2.1 Illustrates the Strategic Management Model.
CORPORATE STRATEGY
Understanding strategy
Strategy formulation
Strategy analysis
Strategy selection
Strategy implementation
Strategy evaluation control
Understanding corporate strategy (Ch. 1)
Strategic management process (Ch.2)
Corporate strategy and corporate governance (Ch. 3)
Mission. goal, objectives (Ch. 4)
Internal competences resources (Ch. 5)
External environment (Ch. 6)
Structural implementation (Ch. 2)
Functional implementation (Ch. 13)
Behavioural implementation (Ch. 14)
Strategy evaluation and control (Ch. 15)
Stability Strategies (Ch. 7)
Strategy for change (Ch. 8)
Expansion strategies (Ch.9)
Industry & competition analysis (Ch.10)
Selection & activation of strategy (Ch.11)
Figure 2.1 Strategic Management Model
1. The _____process consists of four distinct steps or stages Defining organizational mission, objectives or goals; formulation of strategy/ strategic plan; implementation of strategies; and strategy evaluation and control. 2. Organizational competence and resources, the environment, various strategy alternatives available, strategy selection criteria, etc., are _____ parts of SMP.
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3. Application of SMP is more formal and model driven in small businesses. (True/False) 4. In practice, strategists may not always follow the strategic management model as rigid steps or chains in the management process as, situations may not always warrant this. (True/False)
2.4 Approaches to the Strategic Management Process

There are different approaches to the strategic management process (some call these modes of strategy making). These approaches lay varying emphasis on different elements of the strategic management process, primarily because of differences in the nature and forms of organizations. Approaches to strategy making or the strategic management process have been differently enunciated by different authors and strategy analysts. Mintzberg (1973) has classified various approaches into three modes. He calls these the three modes of the strategy-making process. These are: Entrepreneurial mode Adaptive mode Planning mode Steiner and others (1982) have classified various approaches into five forms or categories. These are: Formal-structured approach Entrepreneurial-opportunistic approach Intuitive-anticipatory approach Incremental approach Adaptive approach Three modes of Mintzberg and five approaches of Steiner and others have some commonness or similarities in terms of the content. Therefore, the two sets of approaches can be regrouped into more coherent forms for the purpose of analysis. For example, Mintzbergs planning mode resembles the formal-structured approach of Steiner and others, incremental and adaptive approaches have common features (adaptive is common in both). Entrepreneurial-opportunistic approach is essentially based on opportunities,
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intuition and anticipation. Therefore, entrepreneurial-opportunistic and intuitiveanticipatory approaches of Steiner and others can be analysed together. So, the two sets of approaches may be restated in the forms of three basic approaches: 1. Entrepreneurial-opportunistic 2. Formal-structured and 3. Adaptive
2.4.1 Entrepreneurial-opportunistic Approach

An entrepreneur is a creative thinkeran individual who combines the roles of an innovator and risk taker. He is tough and pragmatic in decision making and is constantly driven by an insatiable urge for creation and achievement. He is characterized by an active search for opportunities in a generally unfriendly or unfavourable environment. In the entrepreneurial-opportunistic approach, the focus is on exploiting opportunities against environmental odds rather than problem solving. In this approach, power rests with one person, the owner and chief executive, who is capable of taking bold decisions on the basis of personal power and charisma. Bold decisions are taken many times in situations of uncertainty. The most dominant goal in this approach is creation and expansion of assets, markets and market share. The strategy is to move forward with unusual leaps or discontinuous growth for achieving entrepreneurial success or profits. Many companies have successfully used this approach. The entrepreneurial-opportunistic approach is suitable for organizations in which the key strategistssometimes a single individualare visionaries. Also, they have complete control over formulation and implementation of a strategy and have very high stake in the outcome of the strategy. They lead the organization from front and by example. These are the reasons why many such organizations outperform their more professional counterparts adopting formalstructured approach. The advantages of this approach may, however, turn into disadvantages if the strategists are found lacking in what they do or in righteousness. Since there are hardly any checks and controls, the entrepreneurs/strategists should have the right vision backed by the right strategy and resources. Otherwise, the strategy may easily lead to failure. There are many such cases of failures.
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2.4.2 Formal-structured Approach

In the formal-structured approach (also called the planning mode), the strategic management process depends largely on the planning system. Planning is based on organizational objectives and priorities, values of the top management, the companys strengths and weaknesses, external opportunities and threats (including risks) and alternative options or strategies available. This implies the application of scientific techniques and tools of analysis in the planning process. The roles of planners are, therefore, very important in this approach. Suitability of the formal-structured approach depends on the size of the organization, management styles, complexity of environment, etc. Steiner (1969) has identified six factors which determine the degree of formalization of the strategic management process. These are organization, management style, environment, production process, nature of problems and purpose of planning system. Most of the large companies, including multinationals, follow the formalstructured approach because it suits their organizational structure and the decision-making process. Many companiesUnilever, for example, started with the entrepreneurial-opportunistic approach during the initial years of incorporation when the company was guided by the vision of the promoter. But, after years of growth when the company became large and, also global in nature, it switched over to the formal-structured approach because, at this stage, more planning and checks and balances are required to sustain growth. A basic advantage of this approach is that it generates enough information and, employs scientific tools of analysis which enable planners and decision makers to find solutions even in complex situations. However, when the planning and management system becomes too formalized and highly structured, the decision-making process becomes slow. Such a system also generally discourages new initiative and unconventional decision making which may be warranted by emerging competitive situations.
2.4.3 Adaptive Approach

The adaptive approach is essentially a balancing strategy. It is more remedial and reconciliatory, and, therefore, more reactive than proactive as a decisionmaking process. Decisions are made in sequential and incremental steps necessitated by internal or environmental changes. Different interest groups and stakeholders put pressure on the decision-making process to protect their own interests. The basic orientation in this approach, therefore, is to maintain flexibility to adapt to pressing needs and circumstances. This also means that
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the final decision, many times, is a compromised one, which may be at the cost of organizational effectiveness or success. The adaptive approach typically suits large public sector companies, where there is greater focus on accountability than on growth. There are also important pressure groups in the form of the controlling ministry and other related government departments and ministries. In such companies, current problem solving (with necessary adaptation and compromise) always has higher priority than future planning. All large public sector companies in India like ONGC, SAIL, BHEL, IOC, MMTC, STC and, also in other parts of the world, follow the adaptive approach. The degree of adaptability and compromise on strategic planning and decision making would depend on the progressiveness of the companies and the concerned controlling ministries. The adaptive approach also suits follower companies (in the private sector) rather than leaders in the industry. Followers or imitators are companies that avoid the risk of innovation and are content with producing and selling products that have already been established in the market. They only concentrate on market share.
2.4.4 Combination Approach

Many companies realize that adopting a single approach exclusively may not be the most judicious course. Stakeholders stakes/interests are increasing (including stock options), the marketplace is ever changing and the business environment is never fully predictable. Due to these factors, the strategic management process of a company has to cope with a large number of complex variables or factors, and a single approach may not be sufficient to secure competitive advantage. A combination of approaches may be the appropriate strategy. A dominant entrepreneurial-opportunistic approach may be combined with the formal-structured approach for better results. Similarly, a formal-structured approach may be combined with some elements of entrepreneurial-opportunistic approach. And, environmental (both internal and external) adaptability should be a common element in these approaches. As Sumantra Ghoshal puts it: It may be useful for Reliance (following entrepreneurial approach) to think whether it should follow a bit of Hindustan Levers structured processes, just as much as it may be productive for Hindustan Lever to consider ways of broadening its systems and culture to the entrepreneurial approach.1
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Hindustan Unilever, like many other companies, has also realized the need for infusing entrepreneurial approach into their dominant formal-structured approach for developing more effective business strategies. According to its former Chairman, Keki Dadiseth, Hindustan Lever has grown in size. While it has its own obvious benefits, it also has some drawbacks. What we need to master is the art of creating and preserving the entrepreneurial ability and connectedness of a small company within a large company.2 There are different ways in which the three approaches can be combined. Individual companies have to work out the right combination based on growth alternatives, investment opportunities or priorities, stakeholders pressures and top managements style of functioning. Activity 1 We have mentioned four different entrepreneurial-opportunistic approaches (Reliance, Dell, Sony, Hero Honda) to the strategic management process. Make a comparative analysis of these four approaches.
5. ________ has classified various approaches to SMP into three forms, calling it the three modes of the strategy-making process entrepreneurial mode, adaptive mode and planning mode. 6. In the ______ approach, the focus is on exploiting opportunities against environmental odds rather than problem solving. 7. In the __________ approach, the strategic management process depends largely on the planning system. 8. Which of these approaches is essentially a balancing strategy more remedial and reconciliatory, and, therefore, more reactive than proactive as a decision-making process? (a) Entrepreneurial-opportunistic (b) Formal-structured (c) Adaptive approach (d) Combination approach
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2.5 Levels in SMP

We had mentioned the three levels of strategy in Unit 1. We shall now elaborate on these strategies with respect to the strategic management process. To do this, let us first define a strategic business unit (SBU). A strategic business unit is a division or a product/product group unit which operates as a separate profit centre having its own set of market and competitors and its own marketing strategies. The company or the corporate organization consists of related businesses and/or products grouped into different SBUs. The SBUs are homogeneous enough to manage and control most factors which affect their performance. Resources are allocated to SBUs in relation to their contributions to the corporate objectives, growth and profitability. Three levels in the strategic management process, as mentioned in Unit 1, are: the corporate level, the business unit or SBU level and the functional level. These three levels of strategy distinctly exist only in multiple SBU firms. For single-business companies, corporate-level strategy and SBU-level strategy are not really distinguishable because all the organizational level strategies for resource allocation or growth or market diversification are formulated with respect to the particular product or business of the company (only in the case of product diversification, corporate-level strategy and single business unit-level strategy may/would be different). Relationships among corporate level, business unitlevel and functional-level strategies in single SBU and multiple SBU firms are shown in Figures 2.2 and 2.3. We can also call these alternative strategic management structures.
Corporate/business strategy Top/Senior management
Functional strategy
Middle management
Operations strategies
Marketing strategies
Financial strategies
HR strategies
Figure 2.2 Corporate/Business Level and Functional Strategies in Single SBU Company Sikkim Manipal University Page No. 27
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Corporate strategy
Corporate management
SBU 1 strategy
SBU 2 strategy
SBU 3 strategy
SBU top management
Operations strategies
Marketing strategies
Financial strategies
Personnel strategies
Middle management
Figure 2.3 Corporate/Business Level and Functional Strategies in Multiple SBU Company
2.5.1 Corporate, SBU and functional level

Corporate-level strategy sets the long-term objectives of an organization and broad policies and controls within which an SBU operates. The corporate-level strategies also help an SBU to define its scope of operations and also limit or enhance SBUs operations through resources the corporate management allocates for securing competitive advantage. Functional-level strategies follow from, and also support, SBU-level strategies. Strategies at the functional level are often described as tactical. Such strategies are guided and controlled by overall SBU strategies. Functional strategies are more concerned with implementation of corporate-and SBU-level strategies rather than formulation of strategies. Strategic management process at three levels also involves decision making. But, the types of decision making, their scope and impact are different at different levels. The characteristics of decision making at three levels may be more clearly understood in terms of major dimensions of decision making. These are shown in Table 2.1.
Table 2.1 Characteristics of Strategic Decisions at Corporate, SBU and Functional Levels
Level of Strategy Dimension Type of decision Investment implication Risk involved Time horizon Impact Flexibility Adaptability Corporate Conceptual/policy High High Long term Critical High Low SBU Policy/operational Medium Medium Medium term Major Medium Medium Functional Operational Low/Nil Low Short term Minor Low High
A distinction can be made between functional-level or functional-area strategies and operating strategies. Functional-area strategies involve
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approaches, actions and practices to be undertaken for managing particular functions or business processes or key activities within a business marketing strategy. Operating strategies in comparison, are relatively narrow strategies for managing different operating units (plants, distribution centres in different geographic locations, etc.,) and specific operating activities of strategic significance (advertising campaigns, management of particular brands, website sales and operations, etc).3 Operating strategies provide more specific details about functional-area strategies and render completeness to functional-level strategies and also to overall corporate strategy. Hindustan Unilever (HUL) is a multi-SBU fast moving consumer goods (FMCG) company. It markets about 100 products/brands. It has grouped its big range of products into three categories: home and personal care, foods and beverages and, industrial and agricultural. In addition to domestic marketing, it is also engaged in export which is a separate SBU. The company has adopted a hybrid organizational structure based on functions and product divisionalization. Like most organizations, strategies at HUL also operate at three levels: corporate, SBU and functional. The strategic management process in HUL is shown below as a model structure (Figure 2.4).
HUL
Corporate level Resource mibilization Resource deployment Merger and acquisition divestment Appropriation of earnings
Business level (SBU) Beverages Personal products detergents Ice cream and frozen dessels Export Functional level Technical Marketing Finance Human resources Research Corporate affairs Legal & secretarial
Flow of decision Flow of support
Figure 2.4 Strategic Management Process at HUL Sikkim Manipal University Page No. 29
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9. A ________ is a division or a product/product group unit which operates as a separate profit centre having its own set of market and competitors and its own marketing strategies. 10. Strategies at the functional level are often described as_____, and such strategies are guided and controlled by overall SBU strategies. 11. Corporate-level strategy sets the short-term objectives of an organization and broad policies and controls within which an SBU operates. (True/False) 12. Operating strategies in comparison are relatively narrow strategies for managing different operating units. (True/False)
2.6 Participants in SMP

The fact that the strategic management process involves strategy making at the corporate level, SBU level and functional level also implies that managers at different levelstop, senior and middleparticipate in the strategic planning and management process. In addition to the managers, the board of directors also play a definite role. Many times, management consultants also play important roles in the strategic planning and management of a company. So, there may be five major participants in the strategic management process of a company although they may play quite different roles. The five participants are: 1. Board of directors 2. Chief Executive Officer (CEO) 3. Corporate planning staff 4. Other managers 5. Consultants
2.6.1 Role of Board of Directors

In any organizational hierarchy, the board of directors is the apex/highest level body. The board is the final authority in managing the affairs of a company, strategic or non-strategic. They perform these functions according to or subject to the memorandum of association and articles of association of the company. The role of a board member depends on his (her) degree of involvement in the strategic process; and the degree of involvement of a member depends partly
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on the management philosophy of a company and partly on the interest a particular board member takes in the affairs of the company. The levels of involvement and, therefore, the roles of the board members can vary widely. Wheelan and Hunger4 have analysed the role of board members in terms of a continuum as shown in Table 2.2.
Table 2.2 Degree of Involvement of Board Members in Strategic Management
Low (Passive/ phantom) Never knows what to do Rubber Stamp Permits executives to make all decisions and approves what they decide Minimal review Reviews selected issues brought to him/her Normal participation Involved to a limited degree to review managements performance, decisions or programmes Active participation Questions, reviews and makes final decisions on mission, objectives, strategy, policies; performs fiscal and management audit High (Active/ catalyst) Takes the leading role in establishing and modifying mission, objectives, strategy and policies; has very active strategy committee
Source: T L Wheelen, and J D Hunger (1983), 49
Given the progressive management philosophy of a company, professional boards can play very effective roles in the strategic management process. Boards of Hindustan Unilever, L&T, ITC, Tata Motors, Tata Steel, for example, are quite effective and take active part in the strategy-making processes of these companies. They participate in setting and reviewing corporate objectives, formulation of longterm strategies, examination and review of proposals for new investment, appointment of chief executives and other key personnel, etc. According to a survey conducted by AIMS Research5 on the practice of boards of directors and their roles in company management, the boards of Hindustan Unilever, Tata Motors, Bajaj Auto, HDFC and L&T are considered the best in India. On the other extreme, as shown in Table 2.3, there are boards or board members who play only passive roles. In such cases, strategic decisions are taken mostly outside the board. Strategy and decision makers may be a powerful family group or a powerful CEO or the top management committee, overseas parent company in the case of subsidiaries of multinationals or bureaucrats or ministers in the case of public sector companies. Between the passive boards and the extraordinarily participative ones, there are boards which are more common in companies. These boards play a balancing role between the strategy-making process in the companies and the shareholders. Major strategic functions performed by these boards are:
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Approval of the corporate budget and resource allocation for strategic investments Periodic review of the strategic planning process Monitoring the chief executives role in the strategic management process Triggering discussion on growth possibilities and alternatives Guiding the chief executive in formulating organization-level strategies Review of strategy implementation with respect to results or profitability
2.6.2 Role of Chief Executive

The chief executive plays the most important role in the strategic management process of a company. Major management functions of a chief executive, however, can be broadly divided into two categories; strategic and non-strategic. Every chief executive should clearly distinguish between his/her strategic functions and non-strategic or operational functions so that he can appropriately allocate his time and concentrate more on strategic functions. Strategic and non-strategic functions of a chief executive in selected basic organizational areas are given in Table 2.3.
Table 2.3 Strategic and Non-strategic Functional Activities of Chief Executives
Function Basic organizational area Setting goals and priorities Strategic Deciding organizational mission and objectives, setting major policies, priorities, etc. Providing direction and leading the process Providing directions Leading organizational resource development team Non-strategic Minimal or nil
Long-term planning Short-term planning Developing resources
Constitute the planning team Reviewing results Developing human and physical resources
Allocation of work and major resources
Allocating major resources Designing organizational to strategic functions and structure and projects preparing/approving corporate budget Committing new projects or Developing control criteria resources; discommiting projects, resources Negligible or nil Measurement of performance against plans; measuring organizational and managerial effectiveness Maintaining good PR for better governance
Committing resources
Evaluating results / performance appraisal
Relationship with internal and external stakeholders
Mobilizing support
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It may be interesting to see how chief executives prioritize their major functions or roles. T Thomas, the former CEO of Hindustan Unilever visualizes three major roles6 of the chief executive: Managing relationship with the environment Managing the board Long-term planning It is to be noted that Thomas was holding the positions of the chief executive and also of the chairman of the company. If the two positions are delinked as happens in many companies, the chief executives primary role is to assist the board rather than manage it. Managing the board would be the chairmans job. Some empirical studies have highlighted the relative importance of major functions (both strategic and non-strategic) performed by a chief executive. Results of a study7 of 125 Indian CEOs are summarized in Table 2.4.
Table 2.4 Major Functions of a Chief Executive
Function 1. 2. 3. 4. 5. 6. 7. 8. Long-term planning External relationship Review and control of organizational performance Personnel development Short-term planning Performance appraisal Meetings in the organization Review of organizational relations Degree of importance* 4.8 4.5 4.0 3.4 3.2 3.0 2.8 2.6 Time spent (per cent) 18.0 30.0 20.0 7.0 8.0 5.0 6.0 6.0 100.0
* Degree of importance of a function has been measured on a 5-point scale Source: R K Shah, Top Managerial Effectiveness (1990).
Effectiveness of the strategic role of the chief executive determines the direction and pattern of growth of most of the companies. An effective chief executive is a practical/realistic visionary a dreamer who also does. He becomes a catalyst in the strategic management process and, mobilizes resources, managers and supports the board to accelerate the growth process. Effective chief executives are successful leaders; they lead by example and charter a new growth trajectory for the company. Jack Welch of GE, Lee Iacocca of Chrysler Corporation, Michael Dell of Dell Computers, Bill Gates of Microsoft, Keki Dadiseth of Hindustan Unilever, P N Haksar of ITC, Dhirubhai Ambani of Reliance, Aditya Birla of Hindalco Industries, Azim Premji of Wipro and N R Narayanamurthy of Infosys have led their companies to unprecedented heights.
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2.6.3 Role of Corporate Planning Staff

Every chief executive needs the support of his corporate planning staff. With increasing volatility of the competitive environment, the strategic planning and management process is becoming more complex. Also, with the introduction of new tools, techniques and planning models, the planning system is also becoming more technical and specialized. Therefore, almost all large companies and multinationals have created a separate corporate planning division or unit. This division or unit is equipped with specialized planning staff who forms the nucleus of strategic planning activities of a company. In many companies, this division or unit functions directly under the charge of the chief executive. The corporate planning division performs various functions mostly of a strategic nature. Major functions of the corporate planning staff may be summarized as follows: Assisting the chief executive in developing and formalizing fundamental concepts or divisions about organizational growth and diversification. Scanning the environment and identifying new business opportunities. Analysing cost benefits of alternative investment opportunities and allocating resources to various activities/projects. Integrating SBU plans (and, sometimes, also functional plans) into corporate plans. Monitoring progress of strategic plans at corporate level, SBU level and functional levels. Undertaking mid-term review of plans and strategies and, suggesting changes, if and when necessary. Evaluating plan performancemeasuring the degree of success (or failure) of strategic plans and reporting to the chief executive for any necessary action. Vaswani (1990) of Gujarat University conducted a study8 on the strategic management process in India based on a cross-section of Indian companies. The study included 12 public sector, 26 FERA9 and 24 private sector companies. One of the study findings focussed on the role or functions of the corporate planning staff. These are shown in Table 2.5.
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Table 2.5 Functions of Corporate Planning Staff: Relative Importance

Functions Getting top management participation in development of plan assumptions Integrating the plans Monitoring plan progress Communicating the plans Issuing planning guidelines Converting physical plans into financial plans Interpreting the plans Monitoring and reviewing strategic plans Negotiating plan targets Verification of plan activities Monitoring performance of operating units Providing continuous staff assistance to chief executive for planning activities Recommending and monitoring allocation of resources to various organizational units 14. Identification of new business opportunities 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Weightage* 2.7 2.3 2.3 2.2 2.2 2.1 2.1 2.0 2.0 2.0 1.6 1.6 1.5 1.4
* Weightage is on a four-point scale Source: P Vaswani, Strategic Management Process in India (1990).
2.6.4 Role of Senior Managers

Not only the corporate planning staff but other managers, particularly the senior managers, also play an important role in the strategic management process of a company. The senior managers include SBU heads and also functional heads. Some of these heads are at the level of directors who are represented on the board. The senior managers are members of different management committees, including top management committees which are involved in strategic planning and management. Some of these committees consider and evaluate proposals for new investment, restructuring, diversification, etc. In all these committees some corporate planning staff members are also represented. ITC has constituted a Corporate Management Committee (CMC) which consists of five full-time directors and five senior managers, besides company secretary. MRF has divided its senior managers into five strategic groups dealing with products and markets, environment, technology, resources and manpower. Each group, headed by a leader, prepares position papers (which includes initiation of strategy proposals, feedback and implementation reports) for the board. Voltas undertakes strategy implementation through a Corporate Executive Committee (CEC) headed by the President (Chief Executive) and consisting of Senior VPs and VPs of different functional areas.
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2.6.5 Role of Consultants

Management consultants can play very useful roles in the strategic planning process of a company. Consultants render services in different functional areas of management including the strategic planning and management process. In companies with no separate planning division or unit, consultants can fill that gap. They can undertake planning and strategy exercises as and when the company management feels the need for such exercises or consultancies. Even in companies with a corporate planning division/unit, consultants may provide specialized inputs or insights into identified management or strategy areas. Top strategic consultants like McKinsey & Company use or develop latest tools, techniques or models to work out solutions to specific strategic management problems or issuesbe it productivity, cost efficiency, restructuring, long-term growth or diversification. Consultants bring with them diversified skills (most of the consulting companies are multidisciplinary) and experience from various companies which may not be available internally in a single company. This is the reason why even large multinational companies hire consultants for achieving their goals or objectives. There are many international consultants who are in demand in different countries. There are also national consultants. Leading international consultants, in addition to McKinsey & Company, are Boston Consulting Group (BCG), Arthur D Little and Accenture (formerly Anderson Consulting). Prominent Indian consulting companies are A F Ferguson, Tata Consultancy Services (TCS) and ABC Consultants. Consultants, sometimes have a difficult or delicate role to play. In many companies, a situation develops when the chief executive or the top management needs to bank upon the support of an external agency like a consultant to push through a strategic change in the organizational structure or management system of the company. It may be for growth and development or downsizing. In both cases, many companies face internal resistance to change. The resistance is more if it is downsizing even when it is required for turning around a company. This happens particularly in public sector companies where implementing change is always difficult. Consultants are engaged to support or substantiate the companys point of view (in the form of their recommendations) so that change is more easily acceptable to the internal stakeholders of the company. Consultants role may become delicate and, sometimes, tricky in such cases, and they should carefully weigh the ethical implication of their participation.
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13. Managers at different levelstop, senior and middleparticipate in the strategic planning and management process. (True/False) 14. The _______ plays the most important role in the strategic management process of a company. 15. Most large companies and multinationals have created a separate _____unit, which is equipped with specialized planning staff who form the nucleus of strategic planning activities of a company. 16. In companies with no separate planning division or unit, ______can fill that gap.
2.7 Strategic Drift

In the strategic management process of every company, there is a risk of strategic drift. In simple terms, strategic drift is the widening gap between demand for change by the environmental forces and actual strategic change in a company. If there is a pressure for change, managers usually look for what is familiar. But, this creates problems when managing strategic change, because the action required may be outside the present system or paradigm, and organizations may be required to change significantly their core assumptions and strategies. The situation may be one of declining performance. To arrest the decline, company management may first seek to improve implementation of the existing strategy. This can be through tightening controls and improving the monitoring system. If this is not effective, a change of strategy may take place, but, a change which may still be within the existing paradigm. For example, the management may seek to expand the market but, may assume that it will be similar to its existing market and, therefore, plan for managing the new project in much the same way as it has been used to. This is the strategy of incremental change. But, this may not be enough. Such processes or strategies may not be adaptive enough to the environmental changes over time. This may give rise to strategic drifta mismatch between the environmental needs and strategic actionas shown in Figure 2.5.
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Environmental change Strategic change Amount of change 5 3
2 1 4
Phase 1 incremental change
Phase 2 Flux
Phase 3/4 Transformational change or demise
Time
Figure 2.5 Strategic Drift in the Management Process
As shown in the Figure 2.6, an organizations strategy gradually moves away from or neglects the forces at work in its environment. Sometimes, the strategic drift is difficult to detect and reverse. This happens because not only changes are being made in strategy, but also such changes may achieve some short-term improvement in performance tending to legitimize the action taken. But, with time, either the drift becomes evident or the environmental change increases, and the performance is affected. Strategy development is then likely to go into a state of flux (Phase 2), with no clear direction, further damaging the performance. Eventually, more transformational change may be required (Phase 3) if the demise of the organization (Phase 4) is to be avoided.10 The above description of strategic drift conforms to a situation of lack of fit or match with the environment. The lack of fit can happen in another way also. Those organizations, which tend to stretch their competences to create new opportunities, may also get into problems. In this case, a transformational change may be attempted through development of entirely new products or services not previously in existence. This can succeed and create a shift in the market in accordance with the intended strategy. However, there is a risk that such an organization can find itself ahead of its environment (Phase 5 in Figure 2.5). The strategy and the environment may eventually realign (as shown in the
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figure), but, this may not often happen in reality; and, even if it happens, the time lag in the realignment process can cause significant problems of performance in the organizations. Strategic drifts of this nature are, however, not very common. More common drifts in organizations are the ones where the strategic process lags behind the environmental forces. But, all this emphasizes the delicate balance that an organization needs to maintain in developing its strategy. It has internal pressurescultural or managerialwhich tend to constrain strategy development, and environmental forces, including markets and competitors, which it must cope with for a particular strategic process to succeed. Every organization has to constantly endeavour to align or realign these two forces to avoid the occurrence of a strategic drift.
2.7.1 The Learning Organization

The risk of strategic drift implies that there is not much justification in pursuing formalized planning approaches with predetermined objectives, analyses and strategies. The environment is too complex and changes too rapidly for such approaches to produce desired results. Such uncertainty in the environment requires that strategy should be managed in a more unconventional, discontinuous way and not through incremental changes. Managers should not regard their experience as fixed and unalterable; on the other hand, they should try to develop an organization in which they continually challenge past experience and practices and strive for new, innovative ways. In other words, they should develop a learning organization. Senge (1990) gives a good exposition of the art and practice of the learning organizations. Managers in a learning organization have a questioning mind. They start by questioning the past and the present. For this to happen, companies need to develop organizations which are pluralistic, i.e., organizations in which different and even conflicting ideas and views are encouraged, and discussions, debates and experimentations are the norms. In this way, all strategic solutions and decisions emerge through a critical, but progressive process. The job of the top management is to create such an organization and build teams which can work in a pluralistic environment. This can be done in a number of ways; for example, through development of different types of organizational structure or through development of organizational culture. Suitability of the organizational type is important. The learning organization is also an evolving organization.
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Activity 2 In every organization, there is a chance of strategic drift. Progressive organizations try to prevent strategic drift through advance planning and preventive strategies. Assume that you are the strategic planning manager of one such company. Give your analysis of preventive planning and strategies.
17. The widening gap between demand for change by the environmental forces and actual strategic change in a company is referred to as ______. 18. The risk of strategic drift implies that there is not much justification in pursuing formalized planning approaches with predetermined objectives, analyses and strategies. (True/False) 19. Managers in a learning organization have a __________mind. 20. The learning organization is also an evolving organization. (True/False)
2.8 Case Study

Strategic Management Process At Hindustan Unilever (HUL) Hindustan Unilever (HUL) is a partly owned (majority holding) subsidiary of Unilever Ltd. For quite some years, Unilever was on the lookout for expansion opportunities for its group companies/ businesses in India. When the opportunity came its way with Indias e conomic liberalization in the 1990s, Unilever acted fast, achieved a big expansion in each of its major businesses in the country, regrouped and integrated its companies. Unilever worked out its corporate strategy for India in line with its objectives. To achieve its objectives, HUL formulated a strategy which had three distinct components:
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1. A strategy for expansion of businesses 2. A strategy for regrouping and integrating the group companies 3. A strategy for consolidation of ownership and control by the parent company in the Indian operations by acquiring majority equity in them. For expansion of its business, HUL exploited a whole range of strategic possibilities. It used takeovers/ acquisitions, mergers, strategic alliances and joint ventures. In some cases, it employed the start-up route as well. It, however, relied heavily on the takeover route for its expansions. There were valid reasons for this. By relying on the takeover route for its expansion, Unilever was in a position to avoid the time lags. Along with the expansion of its various businesses, Unilever carried out the regrouping/integration of its existing businesses/companies in the country. Its idea was to integrate all its companies in India into a single mega firm. It used mergers for accomplishing the objective and carried it out in stages. It took two companies at a timetwo companies of the group which enjoyed the closest synergy were merged at a time into a single entity, and the merged entity in turn was subsequently merged with another company of the group to form a much larger entity. The process continued till it reached the stage where Unilever had just a single company in India. Unilever merged four companiestwo of its existing companies, Doom Dooma India and Tea Estates India, two taken-over companies, Kissan and Kothari General Food (KGF), into Brooke Bond. The merging of Doom Dooma and Tea Estates served two purposes. It furthered the objective of integrating the group companies. It also helped Unilever to acquire majority equity in Brooke Bond with an incremental new investment. Unilever then merged Brooke Bond and Lipton into a single entityBrooke Bond Lipton India Ltd (BBLIL). Then TOMCO, which had been taken over earlier, was merged with HLL. Subsequently, the combined entity, Brooke Bond Lipton India Ltd (BBLIL) was merged with Hindustan Lever. Consolidation of ownership and control by the parent company was the third part of Unilevers strategic process with respect to its Indian operations. Unilever acquired majority stake and consolidated its position in all its companies in India. The company acquired 51 per cent or more equity in each of its companies in India, and it managed this at attractive prices and with minimal new investment. This was accomplished through a chain of moves involving mergers of companies and incremental new investments.
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2.9 Summary
Let us recapitulate the important concepts discussed in this unit: There are different approaches to the strategic management process. These approaches can be regrouped into three basic approaches: entrepreneurial-opportunistic, formal-structured and adaptive. Many companies use a predominantly entrepreneurial-opportunistic approach and combine this with the formal-structured approach. Similarly, a formal-structured approach may be combined with some elements of adopting predominantly a formal-structured approach with elements of entrepreneurial-opportunistic approach. Corporate-level strategies, SBU-level strategies and functional-level strategies all involve decision making. But, the types of decision making, their scopes and impacts are different at different levels. For example, corporate-level strategies are generally long term, SBU-level strategies are generally medium term and functional level strategies are short term. Managers at different levelstop, senior and middleparticipate in the strategic management process. In addition, the board of directors plays an important role. Consultants also have a role to play. In all, there are five major participants in SMP: board of directors, chief executives (CEO), corporate planning staff, other managers and consultants. In the strategic management process of every company, there is a risk of strategic drift. Strategic drift is the gap between demand for change by the environmental forces and actual strategic change taking place in a company. In learning organizations, managers constantly challenge past experience and practices and, strive for new innovative ways. In such organizations, strategy is managed in a more unconventional, discontinuous way and, not through incremental changes.
2.10 Glossary
Merger: The combining of two or more companies into one, through a purchase acquisition or a pooling of interests Strategic business unit: A division or a product/product group unit which operates as a separate profit centre having its own set of market and competitors and its own marketing strategies
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Strategic drift: The widening gap between demand for change by the environmental forces and actual strategic change in a company Strategic management process: An ongoing process that entails specifying the organization's mission, vision and objectives, developing policies and plans, often in terms of projects and programs, which are designed to achieve these objectives, and then allocating resources to implement the policies and plans, projects and programmes.

1. Explain the strategic management process (SMP). Discuss it in terms of the strategic management model. 2. Distinguish between the entrepreneurial-opportunistic approach, formalstructured approach and the adaptive approach in strategic management. Would you generally recommend each of these approaches in isolation or in some combination for a company? 3. What are the different levels in SMP? Are there any interrelations among them? Explain. 4. Who are the major participants in SMP? Do you feel all these participants play equal roles? 5. Compare the roles of the board of directors and the chief executives in the strategic management process. 6. What is the role consultants play in the strategic planning and management process of a company? Is it an essential role? 7. What is strategic drift? Explain graphically. 8. Which is a learning organization? What is the mindset of managers in a learning organization?

1. Strategic management 2. Internal 3. False
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4. True 5. Mintzberg (1973) 6. entrepreneurial-opportunistic 7. formal-structured 8. (c) 9. Strategic business unit 10. tactical 11. False 12. True 13. True 14. Chief executive 15. Corporate planning unit 16. Consultants 17. Strategic drift 18. True 19. Questioning 20. True

1. The strategic management process may best be illustrated in the form of a model. Refer to Section 2.3 for further details. 2. Three modes of Mintzberg and five approaches of Steiner and others have some commonness or similarities in terms of the content. Refer to Section 2.4 for further details. 3. Three levels in the strategic management process are the corporate level, the business unit or SBU level and the functional level. Refer to Section 2.5 for further details. 4. There may be five major participants in the strategic management process of a companyboard of directors, chief executive officer (CEO), corporate planning staff, other managers and consultants. Refer to Section 2.6 for further details.
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5. The board of directors is the final authority in deciding the affairs and direction of a company; the chief executive plays the most important role in the strategic management process of a company. Refer to Section 2.6 for further details. 6. Management consultants can play very useful roles in the strategic planning process of a company. Refer to Section 2.6.5 for further details. 7. Strategic drift is the widening gap between demand for change by the environmental forces and actual strategic change in a company. Refer to Section 2.7 for further details. 8. Due to the fear of strategic drift, every company should be a learning organization. In learning organizations, managers constantly challenge past experience and practices and, strive for new innovative ways. Refer to Section 2.7.1 for further details.
2.13 References
1. Hill, C W L, and G R Jones. 1997. Strategic Management: An Integrated Approach. 2nd edn. Boston: Houghton Mifflinco. 2. Johnson, G, and K Scholes. 2005. Exploring Corporate Strategy. 6th edn. London: Pearson Education. 3. Mintzberg, H. 1973. Strategy Making in Three Modes. California Management Review, Winter. 4. Senge, P. 1990. The Fifth Discipline: The Art and Practice of the Learning Organization. New York: Doubleday Century. 5. Thomas, J. 1981. Managing a Business in India. New Delhi: Allied Publishers. 6. Wheelen, T L, and J D Hunger. 1983. Strategic Management and Business Policy. Massachusetts: Addison-Wisley. 7. Wright, P, C Pringle, and M Kroll. 1998. Strategic Management: Text and Cases. Boston: Allyn and Bacon. Endnotes
1
Sumantra Ghoshal, Collectors of Great People, Economic Times, Supplement (August 20, 1999). Keki Dadiseth, Business Growth Through People Growth: Our Blueprint for the New Millennium , Chairman s Speech (Mumbai: Annual General Meeting of the Company, April 20, 2000).
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A A Thompson Jr, A J Strickland III, and J E Gamble, Crafting and Executing Strategy: The Quest for Competitive Advantage, 14th ed. (New Delhi: Tata McGraw-Hill, 2005) 34. T L W heelen, and J D, Hung er, Strategic Management and Business Policy (Massachusetts: Edition Wesley, 1983), 49. AIMS Research Survey, Best Boards, Business Today (March 7 21, 1999). T Thomas, Managing a Business in India (New Delhi: Allied Publications, 1981), l. R K Shah, Top Management Effectiveness, unpublished PhD Dissertation (South Gujarat University, 1990). P Vaswani, Strategic Management Process in India , PhD Thesis Surat: South Gujarat University, 1990. Companies covered under the Foreign Exchange Regulation Act (FERA). FERA has now been replaced with Foreign Exchange Management Act (FEMA). G Johnson, and K Scholes, Exploring Corporate Strategy (1999), 77.
5 6 7
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Unit 3
Unit 3
Structure
Business Policy, Strategic Management and Business Continuity Planning
3.1 Introduction 3.2 Caselet Objectives 3.3 Policy, Strategy, Tactics 3.4 Strategic Management 3.5 Strategic Planning and Strategic Management 3.6 Benefits of Strategic Management 3.7 Business Ethics and Strategic Management 3.8 Planning for Business Continuity 3.9 Case Study 3.10 Summary 3.11 Glossary 3.12 Terminal Questions 3.13 Answers 3.14 References
3.1 Introduction
A common debate found in strategic management literature is whether policy comes before strategy or vice versa and what is the interrelation between the two. The present unit throws light on this by considering the definitions and features of both. The definitions and role of tactics are also dealt with. Different definitions of strategic management are also given for clearer understanding of the concept and process. The classification of management functions into strategic and operational categories has been done. Four important topics strategic planning, strategic management, limitations of strategic management and business ethics have also been discussed. An extension of strategic planning is business continuity planning. This is a recent development in policy and strategic management. It essentially deals with the damages due to a disaster to a businessnatural or manmade. Appropriate planning and strategies are required to handle such damages or disasters. Implementation issues are also involved. All these have been discussed in this unit.
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3.2 Caselet
Birla Sun Life Insurance is one of the few Indian companies to have a fully operational business continuity plan (BCP). It consists of a response plan to restore and recover operations for critical processes within a predetermined time after a disaster. The plan would ensure minimal impact to the organization, its people, and most importantly, its customers. The objective is to have a planned response in the event of any contingency, ensuring recovery of critical activities within agreed time frames. The plans would comply with various regulatory requirements and minimize the potential business impact to the company. Additionally, it helps to create a system that fosters continuous improvement of business continuity management. Highlights of the plan are as follows: Crisis Management and incident response Data back-up, data and system recovery as documented in the Disaster recovery plan Recovery of all critical business functions and supporting systems Alternate recovery sites if primary location is unavailable Communication with customers, employees and other stakeholders Assurance to customers that they will continue to receive optimum customer services at all times
Source: http://insurance.birlasunlife.com/Pages/Individual/About-Us/BusinessContinuity-Plan.aspx
Objectives
After studying this unit, you should be able to: Distinguish between policy, strategy and tactics Differentiate between strategic planning and strategic management Discuss the benefits and limitations of strategic management Explain the role of business ethics in strategic management Describe business continuity planning in terms of all aspects
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3.3 Policy, Strategy, Tactics

We start with five definitions of strategy given by Mintzberg and Quinn (1991). The five definitions or descriptions are: plan, ploy, pattern, position and perspective. Strategy as a plan is a consciously intended course of action to deal with a situation. These action plans may be general or specific. For example, a strategy to gain competitive advantage in the market through differentiation is a general strategy, but a strategy to offer low price and higher value for the customer in a particular market may be considered a specific strategy. As a ploy, strategy is a specific manoeuvre intended to outwit an opponent or a competitor. Strategy as a pattern is visible in the consistency of action, intended or unintended, that a company undertakes from time to time to strengthen its position in the marketplace. Strategy as a position involves developing a match between the organization and its external environment by reacting or responding to change in the market environment. Tata Motors, responding to the emergence of a Japanese light commercial vehicle (LCV) in the Indian market and introducing its own LCV to become a market leader, is an example. Finally, strategy as a perspective involves creating a shared view or perspective of the environment by the management and other managers at different levels in the organization. There are many such definitions of strategy in strategic management literature. If we have to give one single definition of strategy, we would like to quote the one given by Thompson and Strickland (2001): A companys strategy consists of the combination of competitive moves and business approaches that managers employ to please customers, compete successfully, and achieve organizational objectives.1 As the above definition suggests, and as mostly used or understood, strategy is an action plan or a scheme of action or design of execution of a plan. Porter, one of the greatest exponents of strategy, has a slightly different approach to the definition. He describes strategy as: ... developing and communicating the companys unique position, making trade-offs, and, forging fit among activities.2 For an organization, unique position indicates choice of activities which are different from those of its competitors or performing similar activities in different ways to exhibit its uniqueness. Trade-off is required when some of the activities followed by a company may not be compatible with each other or with organizational objectives or goals.
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Forging or creating fit among different activities is necessary to ensure that they relate to or reinforce each other. Policy is different from strategy. Policy is derived from the Greek word politeia, meaning polity, that is, the state and its citizens, and Latin polotis meaning polished, that is, clear. According to the New Webster Dictionary, policy means the art or manner of governing a nation or the principle on which any measure or course of action is based. This definition implies that policy is a prescribed guideline for governing actions of an organization with respect to given objectives. Kotler has given a clear definition of policy: Policies define how the company will deal with stakeholders, employees, customers, suppliers, distributors and other important groups. Policies narrow the range of individual discretions so that employees act consistently on important issues.3
3.3.1 Different Features of Policy

On the basis of this definition, certain features of policy can be identified. These are: Policies should follow from organizational objectives and should be formulated in consistency with such objectives. Policies provide guidelines to managers/members in an organization for deciding a course of action, and these limit their discretion or freedom in choosing the course of action. Policy formulation is generally the function of senior or top management of a company, and not the job of all managers. Policies are commonly expressed in qualitative terms in a general way. Sometimes, policies can also be stated in a conditional or more specific way. In any organization, a policy will remain in vogue for sometime till it is reviewed, and a change in the policy is made or the policy is replaced by a new one4. This means that policies do not change frequently. To make the concept or meaning of policy clearer, some examples are given below. A company will not consider any cost reduction measures if it means compromising on the quality of its product(s).
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A company decides to grow only through retained earnings and not resort to capital issue or market borrowing. A company will not consider adding any new products with less than 10 per cent return on investment. A company sells on cash terms and also on credit terms. A rental company charges a deposit for renting materials. A car company charges extra money for delivering the car to the buyers premises. A company hires personnel with experience only. A company has guidelines on how to collect outstanding amounts from its customers. A company responds to 50 per cent of customer enquiries within three working days. A company does not question the return of goods by customers that were purchased during last one month. A company does not give any discount on price. A company gives 10 per cent discount on price if payment is made in cash.
3.3.2 Policy vs Strategy

The difference between policy and strategy should now be clear. Policy is broader or more generalmore in the form of guidelines or principles. Strategy is more specific with reference to a particular situation, target or objective. Policy generally comes first; strategy comes later, and, sometimes, follows from or is subject to policy. Let us explain this with an example. A company wishes to achieve greater cost efficiency. This is the objective. The company also has a policy of not retrenching any of its existing employees. So, a strategy will be worked out, which is subject to or consistent with this policy. The strategy may relate to economies of scale or measures for increasing productivity or identifying and eliminating wasteful expenditure in some area(s) of operation. Some policy analysts and strategic thinkers do not make much distinction between policy and strategy. According to them, the relationship between policy and strategy is an evolutionary phenomenon. Over a period of time, because of pressure of business and growing competition, business policies of many companies evolved into specific strategic processes. The paradigm shift between
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policy and strategy has been well enunciated by Hofer and others (1984). This is shown below. First Phase: Till the mid-1930s: (Ad hoc policy) Ad hoc policy making necessitated by the expansion of American firms in terms of product, markets and customers; and, the consequent need for replacing informal controls by framing functional policies to guide managers. Second Phase: 1930s and 1940s (Planned policy) Planned policy formulation instead of ad hoc policy making and shift of emphasis to integration of function areas caused by environmental changes. Third Phase: 1960s (Strategy) Rapid pace of environmental changes and increasing complexity of management necessitating a critical look at business in relation to environment and the need for strategic decisions. Fourth Phase: 1980s and later (Strategic management) Shift of focus to strategic processes and the responsibility of management in resolving strategic issues. The evolutionary aspect gives a good perspective to the difference between policy and strategy.
3.3.3 Strategy and Tactics

Strategy and tactics are also different although they appear to be the same. From an overall strategy, a number of sub-strategies follow. These are tactics. Let us explain this. Suppose an industrial products company wants to increase its market share. Different strategies can be used for this. The company may decide to adopt the strategy of increasing customer focus or improving buyer management (other strategies can relate to quality or price). During the implementation of the overall customer focus strategy, day-to-day responses to the market (or customer) constitute tactics. Tactics are used more in individual cases for example, giving a quantity discount to a particular customer, offering a credit package to another customer, a special service to a third customer, etc. The distinction between strategy and tactics is subtle, like the differentiation between marketing and selling. Sometimes, the distinction between strategy and tactics may depend on the level at which it is being used. For example, an additional discount given to a large or important customer may be a strategic decision for the salesperson, but for the VP (Marketing), this may be a tactical
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decision. The distinction, or rather the relationship, between strategy and tactics can be made clear in terms of five major factors or characteristics which relate to both of them. These are given below: 1. Significance: Strategies have more significance or greater consequences for an organization than tactics because strategies or strategic decisions generally affect the entire organization or a significant part of the organization. Tactics may affect only a particular supplier or vendor, a particular sale or a customer. 2. Level of formulation or conduct: Because of their significance, strategies are formulated at senior or top management level. Within an overall strategy, tactics are employed by middle and lower levels of management including salespersons in the field. 3. Information base: Since strategies are of major consequence to an organization, these should be carefully worked out based on adequate information about a companys resource, operations, environment, competitors, customers or some or all of these. Information requirements for tactical decisions would be much less. 4. Objectivity/subjectivity: Strategies are generally worked out by teams and not by individual managers (except the CEO sometimes.) This, along with the fact that those are based on carefully analysed information/data, renders enough objectivity to strategies or strategic decisions. Tactics, by their nature, are more subjectivesometimes left to the discretion of individual managers. 5. Periodicity or time horizon: Strategies are not made or changed too frequently. It takes time for a strategy to fully work itself out and to determine its effectiveness or success or failure. Strategies, therefore, have larger periodicity or time frame. Strategies, which are changed too frequently, are bad strategies. Tactics, on the other hand, can change quite frequently. If we consider policy, strategy and tactics together, it becomes clear that policy comes before strategy and strategy comes before tactics. All the three concepts are closely interrelated and play vital roles in the business or management process of a company. As a sequence or conceptual chain in the management process, policy, strategy and tactics can be written as: Policy Strategy Tactics
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Activity 1 Today, with increasing awareness about the threat to the environment, many companies are adopting eco-friendly policies in various ways. Give an example of a company that has changed its policies or adopted new policies to make itself eco-friendly. Mention the specific steps taken.
1. The five definitions of _______ given by Mintzberg and Quinn (1991) are plan, ploy, pattern, position and perspective. 2. When some of the activities followed by a company may not be compatible with each other or with organizational objectives or goals, ________ is required. 3. Policy is the same as strategy. (True/False) 4. According to the New Webster Dictionary, ________ means the art or manner of governing a nation or the principle on which any measure or course of action is based. 5. Policy generally comes first; strategy comes later, and, sometimes, follows from or is subject to policy. (True/False) 6. Strategy and tactics are also the same although they appear to be different. (True/False)
3.4 Strategic Management

Like strategy, strategic management also has been defined differently by different authors and strategy analysts. We give below three definitions of strategic management, which together give completeness to the concept of strategic management. Strategic management is that set of decisions and actions which leads to the development of an effective strategy or strategies to help achieve corporate objectives.5
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Strategic management is defined as the set of decisions and actions in formulation and implementation of strategies designed to achieve the objectives of an organization:6 Strategic management is primarily concerned with relating the organization to its environment, formulating strategies to adapt to that environment, and, assuming that implementation of strategies takes place.7 All the management functions of a company can be broadly classified into two categories: strategic and operational. Strategic functions are performed more at the senior and top management level, and operational functions are discharged more by middle and lower management levels. In other words, it can be said that, as the level of management moves up, the managers perform more strategic functions and less operational functions. Also, in any company, operational functions constitute a higher percentage of total management functions than strategic functions (Figure 3.1).
Level of management Top Management function Nature of function
Strategic orientation
Broad and coreative
Middle
Somewhat creative
Supervisory
Operational orientation
Figure 3.1 Nature of Functions at Different Management Levels
Operational functions or operational management, as the name implies, is concerned with routine matters of day-to-day management like efficient production of goods, management of a sales team or sales force, monitoring of financial performance, etc. Strategic management would be concerned with, say, devising or innovating methods for improving financial performance of the company. The major differences between strategic management and operational management are shown in Table 3.1.
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Table 3.1 Characteristics of Strategic Management and Operational Management

Strategic management Higher level Innovative Imprecise Complex Organizationwide Consequential Result driven Long-term implication Operational management Lower level Routinized More precise Less complex/simple Operationally specific Task driven Productivity driven Short-term/immediate implication
Strategic management consists of three distinct steps or stages. These are: strategy formulation, strategy implementation and evaluation and control. In sequential order, these three stages may be shown as Strategy formulationStrategy implementationEvaluation and control Some call these three the basic elements of strategic management. These three elements can be considered individually, but, they are closely interrelated and must be integrated in the total management process.
7. All the management functions of a company can be broadly classified into two categories __________and _________. 8. Strategic functions are performed more at the senior and top management level, while operational functions are discharged more by _______ management levels. 9. Strategic management consists of three distinct steps or stages formulation, strategy implementation, and evaluation and control. (True/False) 10. Operational functions or operational management, as the name implies, is concerned with routine matters of day-to-day management. (True/False)
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3.5 Strategic Planning and Strategic Management

Plan or planning should precede action. And, strategic planning should precede strategic management. Strategic planning (also called corporate planning) provides the framework (some call it a tool) for all major decisions of an enterprisedecisions on products, markets, investments and organizational structure. In a successful organization, strategic planning or strategic planning division acts as the nerve centre of business opportunities and growth. It also acts as a restraint or defence mechanism that helps an organization foresee and avoid major mistakes in product, market, or investment decisions. A strategic plan, also called a corporate plan or perspective plan, is a blueprint or document which incorporates details regarding different elements of strategic management. This includes vision/mission, goals, organizational appraisal, environmental analysis, resource allocation and the manner in which an organization proposes to put the strategies into action. The concept and role of strategic planning would be clear if we mention the major areas of strategic planning in an organization. First, strategic planning is concerned with environment or rather, the fit between the environment, the internal competencies and business(es) of a company. Second, it is concerned with the portfolio of businesses a company should have. More specifically, it is concerned with changesadditions or deletionsin a companys product-market postures. Third, strategic planning is mostly concerned with the future or the long-term dynamics of an organization rather than its day-to-day tasks or operations. Fourth, strategic planning is concerned with growthdirection, pattern and timing of growth. Fifth, strategy is the concern of strategic planning. Growth priorities and choice of corporate strategy are also its concerns. Finally, strategic planning is intended to suggest to an organization, measures or capabilities required to face uncertainties to the extent possible. All large organizations formulate strategic plans. In 1997, All India Management Association (AlMA) conducted a study to find out about business plans, strategies, techniques and tools adopted by various Indian companies. The study results were published in Business Today. The study showed that 56 per cent of the total number of companies (160) surveyed had published strategy. In terms of planning horizon, the period covered in the strategic plan was less than 3 years by 44 per cent of the companies, 35 years by 40 per cent of the companies and more than 5 years by 16 per cent. Analysed in terms of company size, bigger companies planned for a longer period. For 45 per cent of the large
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companies, the planning period was more than 5 years, but for 70 per cent of the small companies, the period was less than 3 years. A characteristic feature of the starting plans of many large Indian companies is that the long-term planning horizons of these companies generally coincide with the national planning period. This means that many of these companies follow a five-year planning period which synchronizes with the 5year plans of the country. This is particularly true of public sector enterprises in the core sector. For example, companies like BHEL, SAIL, NTPC and NHPC have formulated corporate plans which are linked to the national plans. The 5 year planning period of these companies, however, is not a generalization. Corporate plans of some of these companies are linked to the national plans, but, not necessarily of exactly 5-year duration; the duration can be a multiple of 5 years. For example, SAIL had prepared an ambitious corporate plan with a planning horizon of 15 years (19852000). Such plans are more appropriately called perspective plans. Marico Industries, the maker of Parachute coconut oil, had prepared a strategic business plan for the period, 199196. For the preparation of the plan, a strategic planning team was formed consisting of six managers from different functional areas/disciplines. The planning team made some forecasts about the general macroeconomic environment during 199196 and how the Indian economy would perform during the period in terms of aggregate demand, technology development and availability of raw materials. In addition to these, the company had considered other environmental factors also. Based on an analysis of the major strengths and weaknesses of the company and the environmental factors (opportunities and threats), a detailed SWOT analysis (discussed later in Unit 6) of the company was undertaken. The objective of SWOT analysis was to identify growth and expansion possibilities in existing and new products/businesses. These were finally translated into projected volumes, turnover and profitability. Once a strategic plan is prepared, the same is submitted to the senior management/top management for their consideration and approval. In Marico Industries also, the strategic business plan prepared by the planning group was submitted to the senior management and finally to the top management (CEO). Deliberations took place at different levels and the business plan was finalized. This became more like an annual plan which was to be revised and updated every year during the reference period (199196) as per the strategic business
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plan. Maricos target was to increase its turnover to `300 crore by 199596. The business plan also stipulated that Marico should add a new product to its portfolio every year and seek technology tie-up for introduction of new products. Strategic planning and strategic management are intimately related to each other. Where strategic planning ends, strategic management takes over; but, both are complementary to each other. They form vital links in an integrated chain in corporate management. Both are continuous processes. Strategic management may be more continuous, because it involves implementation and monitoring also.
11. A ________is a blueprint or document which incorporates details regarding different elements of strategic management. 12. Strategic planning is concerned with environment or rather, the fit between the environment, the internal competencies and business(es) of a company. (True/False)
3.6 Benefits of Strategic Management

An organization can derive many benefits from strategic management. Strategic management allows an organization to be more proactive than reactive in shaping its own future. It allows an organization to initiate and influence rather than just respond to activities or situations; and, this enables the organization to exercise control over its present activities and give directions to growth and development. Small business owners, CEOs and managers of many profit and non-profit organizations have recognized the benefits of strategic management. The benefits of strategic management can be both financial and non-financial. Different research studies indicate that organizations using strategic management are more profitable and successful than those which do not.8 Companies using strategic management techniques show significant improvement in productivity, sales and profitability compared to the ones without systematic planning. High-performing companies do more systematic planning to prepare for future changes in the environmentboth internal and external. Companies with properly organized planning system and strategic management generally show superior long-term performance relative to the industry average.
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High-performing companies usually have more informed decision-making system with good anticipation of both short-term and long-term consequences. Companies, which perform poorly, often remain busy in activities that are shortsighted and do not reflect good forecasting of future conditions. Planners of low-performing organizations are often preoccupied with resolving internal problems and conflicts and meeting routine or paper deadlines. They tend to underestimate their competitors strengths and overestimate their own strengths overlooking the weaknesses. They often attribute their poor financial performance to uncontrollable factors such as a stagnant economy, poor industrial climate, technological change and domestic or foreign competition. Reports indicate that more than 1,00,000 businesses in the US fail annually resulting in substantial financial losses. These business failures include bankruptcies, foreclosures and liquidations. Although many factors contribute to business failure, strategic planning and management can help in the prevention of failures in many cases by anticipating situations or developments and recommending or taking appropriate timely actions. In addition to the financial benefits, companies can derive a number of non-financial benefits from strategic management such as better awareness of external threats, clearer understanding of competitors strategies, reduced resistance to change, better analysis of performance-reward relationship, etc. Strategic management may renew confidence in the current business strategy or focus on the need for corrective actions. It helps managers to view change as an opportunity rather than threat. Greenley (1986) has analysed various non-financial benefits of strategic management. He has enunciated the benefits of strategic management as given below: It provides for an objective view of management problems. It allows for identification, prioritization and exploitation of opportunities. It allows for more effective allocation of time and resources to identified opportunities. It provides a framework for improved coordination and control of activities. It minimizes the effects of adverse conditions and changes. It scans resources and time to be devoted to correcting erroneous or ad hoc decisions. It enables major decisions to support established objectives and priorities better.
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It provides a framework for improved coordination and control of activities. It helps to integrate the behaviour of individuals into a total effect. It provides a cooperative and integrated approach to tackling problems and opportunities. It creates a framework for internal communication among managers. It encourages forward thinking. It imparts a degree of discipline, formality and positiveness to the management of a business. It encourages a favourable attitude towards change.
13. Strategic management allows an organization to be more _____ than reactive in shaping its own future. 14. The benefits of strategic management are purely financial. (True/False)
3.7 Business Ethics and Strategic Management

Every company or business has moral or ethical responsibility towards its shareholders. Therefore, strategic management should be ethical and socially responsible. To be ethical and socially responsible does not mean satisfying only legal requirements. It also signifies going beyond the law and discharging responsibilities to the stakeholders and the society as a whole. The strategic management team should display a high level of integrity and should evolve right and responsible plans and actions to implement the plan. For example, the strategists may take the shareholders interest into consideration and try to give them adequate returns on investment. But, at the same time, they should also take into account the concern of the employees and protect or promote their interests. This also implies that there should be focus on transparency. Almost all strategy formulations, implementation and evaluation decisions have ethical implications. Strategists are responsible for developing, communicating and also enforcing the code of business conduct or ethics for their organization. The responsibility for ethical conduct and behaviour, should not, however, rest only with the strategists. It should be the responsibility of all managers. Managers, particularly senior managers, hold positions which enable them to influence and educate many others in the organization. This makes
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managers at different levels responsible for developing and practising ethical decision making and management. In other words, ethical values and standards should be an integral part of any corporate functioning. For example, Citicorp has developed a business ethics game, called The Work Ethic, which is played by 40,000 employees in 45 countries.9 The objective of the game is to create and sustain an ethical culture across the organization. The strategists can be and should be the focal point of this culture. Explosion of the Internet and its dominance in the workplace has given rise to many ethical issues in many organizations today. Studies like the ECommerce Perspective focus on the business ethics issues related to the Internet. Millions of computer users are worried about the privacy and security on the Internet. Given the global nature of Internet and e-commerce, corporate planners and strategists have to continually strive for ensuring privacy and security of the Internet as a strategic management tool. We will discuss more about corporate culture, values and ethics in Unit 4 with respect to corporate governance and, also, in Unit 15 with particular reference to implementation of corporate strategy. Activity 2 Give an example of business ethics practised by a company and write a report on it.
15. Every company or business has _______ responsibility towards its shareholders. 16. Almost all strategy formulations, implementation and evaluation decisions have ethical implications. (True/False)
3.8 Planning for Business Continuity

Businesses need to be planned not only for today, but also for tomorrow, that is, for the future. This implies business continuity and the need for sustainability. Sustainability requires understanding and analyzing the environment. Besides business fluctuations or business cycles, business interruptions occur because of natural disasters like floods, earthquakes, cyclones, etc. To safeguard against such threats or disasters, planning for business continuity is essential.
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3.8.1 What is Business Continuity Planning?

Business continuity planning means proactively working out a means or method of preventing or mitigating the consequences of a disasternatural or manmade (sabotage or terrorism) and managing it to limit to the level or degree that a business unit can afford.
3.8.2 Need or Importance of Business Continuity Planning (BCP)

As indicated in the definition, businesses today can be exposed to different types of threats natural or man-made. Major threats are: Natural disasters such as floods or earthquakes or accidents Man-made threats like sabotage or terrorism Financial crisis or disaster can be partly man-made and partly due to environmental factors. BCP prepares companies to prevent or respond to such situations so that the damages or losses are minimized and the business or company survives. Thus, BCP plays a critical role in a businessits survival and sustainability.
3.8.3 Business Impact Analysis

Business impact analysis is the process of identifying major functions in an organization which have impacts of different degrees on the business of the organization. The analysis is usually done for each major function to determine its criticality for the business. This is done through impact questions. Relevant impact questions are: How important is the function in terms of business policy of the company? What is the role or criticality of the function in the business strategy of the company? How much the rest of the functions would be affected by absence of the function the operational impact? How much may be the revenue loss for the company in the absence of the function the financial impact? How long can the function be in operative without causing any major impact or losses? Whether the absence or in operation of the function affects market or industry ranking of the company loss of competitiveness?
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Is the function critical for relationships with customers loss of customer confidence or satisfaction? Can the absence of the function lead to loss of future sales or revenue future growth problem? The answers to these questions determine the magnitude of impact of a particular function. In terms of importance or criticality, business functions can be classified into four categories. These are: (i) Critical functions: Functions, if interrupted or unavailable for some time, can put the business in complete disorder, and, may result in heavy losses. (ii) Essential functions: Functions, whose absence or interruptions, would badly affect the regular functioning of the organization. (iii) Necessary functions: Functions without which an organization can continue functioning, but its operational efficiency would be affected. (iv) Desirable functions: The absence of these functions does not affect the operational effectiveness, but the presence of these functions would be beneficial to the organization. Impact analysis enables an organization to rank or prioritize business functions, and determine the order or priority in which those should be developed or maintained. This also indicate recovery priorities, i.e., the speed or priority with which a function should be restored or recovered once the function is disturbed, interrupted or suspended.
3.8.4 Strategies for Business Continuity Planning10

Because of the possibility of different kinds of impacts, and depending on the nature of damage or disaster, appropriate strategies should be developed and used to deal with particular situations. Five different strategies should be developed for five different situations/actions. These are: 1. Prevention 2. Response 3. Resumption 4. Recovery 5. Restoration
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1. Prevention Conventionally, prevention is the best strategy; this means taking steps or actions to prevent or minimize the chances of occurring of a disaster. Companies can adopt many preventive control measures as safeguards. Common preventive control measures are: (a) Security controls: These involve controls by setting up barriers to protect the site and prevent unauthorized entry into the premises. This means, in other words, manned surveillance at the location. (b) Infrastructure controls: These include appropriate infrastructural facilities like UPS/back-up power, smoke/fire detectors, fire extinguishers, weather forecasting systems , etc. (c) Personnel controls: Skilled/trained personnel are posted to man sensitive zones where key or critical resources may be located. (d) Software controls: These involve modern methods of controls through computerized systems or software. These include authentication, encryption, firewall, intrusion detection systems, etc. 2. Response Prevention is a pre-emptive measure; response is a reactive step. If prevention is not possible, fast response is the next best alternative strategy. After an interruption or damage has taken place, the BCP team should immediately inform the management and the Damage Assessment Team. Two other teams would also be involved: the Technical Team and the Operations Team. The Damage Assessment Team would assess the nature and magnitude of the damage. More specifically, the team should investigate into: The cause of disruption or damage The scope for preventing additional damage What can be salvaged What repairs, restorations and replacements are required Based on the report of the Damage Assessment Team, the Technical Team and Operations Team should get into action. The Technical Team is the key decision maker for further actions of the BCP and the Operations Team executes the actual damage control operations of BCP.
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3. Resumption In this, the strategy is for resumption of normal or pre-damage activities of the organization. Activities now shift to the command centre. The command centre is different from the location of the normal business activity. Both resumption and recovery actions are planned and coordinated from the command centre. The centre should have required communication facilities, systems and equipments for effective functioning of the BCP/Technical team. The first decision to be taken by the Technical Team is whether important or critical business operations can be resumed at the present site or those have to move to an alternative location. If the present site is badly damaged and, is not accessible for immediate use, operations may have to move to an alternative site. Different kinds or types of alternatives may be available based on infrastructure and facilities and the Technical Team has to choose the most appropriate site. 4. Recovery Along with the resumption of critical operations either at the original site or an alternative location, the recovery process also begins. Recovery essentially means reinstallation of the operating and control system. Necessary critical operations are restored. As this happens, information restoration from back-up tapes or offsite storage also begins. As soon as information/data restoration is complete, critical business functions can resume. 5. Restoration Restoration means restoration of the original site for normal functioning. The restoration process is initiated simultaneously with the recovery work. In fact, recovery and restoration teams are often common. The five strategies mentioned above have to be planned and executed within a time span usually decided by the top management in consultation with the BCP team. The time span or duration of the process would depend on the magnitude of the damage or disaster, recovery/restoration goals and the speed with which different teams " BCP, Technical and Operational " can function. 3.8.5 Developing a Business Continuity Plan and Implementation
Plans and strategies work together. A plan is also essential for implementation of a strategy or strategies. A separate plan can be made for each of the five strategies, i.e., prevention, response, resumption, recovery and restoration or an integrated plan can be prepared incorporating or dealing with all the strategies.
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In either case, a plan would have four important aspects or elements. These are: (a) Objective: What exactly is to be done or achieved (b) Assumptions: These indicate availability of back-up services, trained team to handle operations, vendors, etc. (c) Team: The BCP team entrusted with the project their sub-teams roles and responsibilities should be specified (d) Scope and limitations: The role of the BCP team should be clearly defined. Any limitations in their functioning, including resources, are to be mentioned
3.8.6 Implementation
Implementation of business continuity plans are mostly technology driven. Implementation involves development and testing of IT system or solution. The software and/or hardware elements are built into the systems. Implementation of the mechanical and physical processes of restoration/recovery also take place simultaneously. In fact, technology and other systems have to be harmonized for proper implementation of a business continuity plan. During continuity planning and implementation, care should also be takes to ensure that the organizations business process does not come to a complete halt when there is a disruption of the normal process flow. This is ensured through planning or building redundancy, i.e., incorporating back-up service elements which may be redundant during normal course of business. An example will make this clear. A bank may be selling fixed deposits to its account holders or customers through net banking. But, the bank can also keep phone banking facility ready as a standby so that this can be availed of by the customers if net services break down. There can also be emergency phone numbers which customers can use in case of failure of normal communication services. 3.8.7 Technology versus Business Business continuity planning and implementation predominantly involve technologyIT and software systems. But, it must not be forgotten that technology is used for protection or restoration of business, and, therefore, focus on business has to be simultaneous. Also, operational aspects of BCP involves technology, but, technology is not all or sufficient. Other knowledge areas or activities are equally important.
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These include risk management, crisis management, impact analysis, costbenefit analysis, storage management, network management, recovery planning, coordination and communication.11 This implies that business continuity planning teams should be cross-functional or multi disciplinary so that all required knowledge inputs or expertise are available. Organizations should develop and engage such multi disciplinary teams for successful business continuity planning and its implementation.
17. To safeguard against natural or man-made disasters, ________is essential. 18. ________is a pre-emptive measure, while _____response is a reactive step.
3.9 Case Study

Oriental Insurance Company: Growth With Stability* Oriental Insurance Co. (OIC), a subsidiary of General Insurance Corporation (GIC), is one of the oldest (established in 1947) insurance companies in India. OIC conducts all forms of non-life insurance businesses. These businesses range from small rural insurance covers to big national projects.
OICs corporate policy is to contribute to the socioeconomic objectives of the nation by being a vibrant and viable organization catering to the growing insurance needs of the community.
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Towards this end, the company will strive for effective management of business operations. With headquarters based in Delhi, OIC has 21 regional offices, 311 divisional offices and 635 branch offices in various parts of Indiametropolitan cities, large, medium and small towns and some rural locations. The company has overseas operations in Nepal, Kuwait and Dubai. OIC is managed by a team of professionally qualified and experienced managers. These managers have vast experience in conducting general insurance business, both nationally and internationally. The company has a dedicated project cell at headquarters and also major cities of India. A special R&D team has been dedicated to work out special/innovative insurance covers like stockbrokers policies, special package policies, etc. OIC specializes in devising special covers for large projects like power plants, steel plants, chemical plants and petrochemicals. It has a highly technically qualified team of professionals to render high quality customer service. The company has special reputation in the reinsurance market. OIC follows a strategy of growth with stability. The company maintains a steady growth in its premium income as well as investment income. During the last 10 years, both premium income and investment income increased by 810 per cent. Even capital and reserve funds grew by about the same percentage. OIC generally follows a policy/strategy of concentration in the existing products and markets, i.e., on its popular policies which are major revenue earners. The company also adapts its policies/strategies to emerging environmental and market changes to remain contemporary.
* Based on S Lomash and P K Mishra, Business Policy and Strategic Management (New Delhi: Vikas Publishing House, 2009), 36971 (Case IX).
3.10 Summary
Let us recapitulate the important concepts discussed in this unit: Business policy or policy is different from strategy and strategy is different from tactics. If we consider policy, strategy and tactics together, policy comes before strategy and strategy comes before tactics as a sequence or conceptual chain in the management process: PolicyStrategy Tactics. But, all the three concepts are closely interrelated.
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Plan or planning should precede action and strategic planning should precede strategic management. Strategic planningalso called corporate planningprovides the framework (some call it a tool) for all major decisions of an enterprisedecisions on products, markets, investment and organizational structure. Benefits of strategic management are manyboth financial and nonfinancial. Studies have shown that organizations using strategic management are more profitable and successful than those which do not. Strategic management has its limitations alsoanalysing a complex environment; plans, frameworks and systems mean rigidity; limitation in implementation; and inadequate appreciation by the management. Every company or business has moral or ethical responsibility towards its shareholders. Therefore, strategic management should be ethical and socially responsible. Business continuity planning means proactively working out a means or method of preventing or mitigating the consequences of a disaster natural or man-made (sabotage or terrorism) and managing it to limit to the level or degree that a business unit can afford.
3.11 Glossary
Business continuity planning: Proactively working out a means or method of preventing or mitigating the consequences of a disaster natural or man-made (sabotage or terrorism) and managing it to limit to the level or degree that a business unit can afford. Policy: The art or manner of governing a nation or the principle on which any measure or course of action is based. Strategic management: Set of decisions and actions which leads to the development of a corporate organization. Strategic plan (also called a corporate plan or perspective plan): A blueprint or document Strategy: The combination of competitive moves and business approaches that managers employ to please customers, compete successfully, and achieve organizational objectives which incorporates details regarding different elements of strategic management.
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1. Explain the difference between policy, strategy and tactics. 2. Explain strategic management. How is it different from operations management? 3. Specify the interrelationship between strategic planning and strategic management. Which comes first? 4. Mention the major benefits of strategic management; state in terms of both financial and non-financial benefits. 5. Does strategic management have any ethical implications? If so, explain them. 6. What is business continuity planning? Explain in terms of strategies and implementation.

1. Strategy 2. Trade-off 3. False 4. policy 5. True 6. False 7. Strategic, operational 8. middle and lower 9. True 10. True 11. strategic plan 12. True 13. Proactive 14. False
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17. moral or ethical 18. True 19. Business continuity planning 20. Prevention, response

1. Policy is broader or more generalmore in the form of guidelines or principles. Refer to Section 3.3 for further details. 2. All the management functions of a company can be broadly classified into two categoriesstrategic and operational. Refer to Section 3.4 for further details. 3. Plan or planning should precede action. And, strategic planning should precede strategic management. Refer to Section 3.5 for further details. 4. An organization can derive many benefits from strategic management. Refer to Section 3.6 for further details. 5. Every company or business has moral or ethical responsibility towards its shareholders. Therefore, strategic management should be ethical and socially responsible. Refer to Section 3.7 for further details. 6. Businesses need to be planned not only for today , but also for tomorrow, that is, for the future. This implies business continuity and the need for sustainability. Refer to Section 3.8 for further details.
3.14 References
1. Glueck, W F. 1980. Business Policy and Strategic Management. New York: McGraw-Hill. 2. Hofer, C A, E R Murray, R A Pitts, and Ram Charan. 1984. Strategic ManagementA Casebook in Policy and Planning. 2nd ed. Minnesota: West Publishing. 3. Mintzburg, H, and J B Quinn. 1991. The Strategy Process: Concepts, Contests and Cases. New Jersey: Prentice Hall. 4. Ramesh, P, Business Continuity Planning, Technology Review 2002-04, Tata Consultancy Services, July 2002.
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5. Steiner, G A, J B Miner, and E R Gray. 1982, Management Policy and Strategy. New York: Macmillan. 6. Thompson, A A, Jr, and A J Strickland. 2001. Strategic Management: Concepts and Cases. New Delhi: Tata McGraw-Hill. Endnotes
1
A A Thompson Jr, and A J, Strickland, Strategic Management: Concepts and Cases (New Delhi: Tata McGraw-Hill, 2001) 3. M E Porter, W hat is strategy, Harvard Business Review (November December, 1996), 61 78. P Kotler, Marketing Management (New Delhi: Prentice Hall of India, 2000), 66. A F Alkhafaji, Strategic Management (New York: The Haworth Press, 2003), 8. W F Glueck, Business Policy and Strategic Management (New York: McGraw-Hill, 1980), 6. J A Pearce, and R B Robinson, Strategic Management (Singapore: McGraw-Hill, 2000), 6. G A Steiner, J B Miner, and E R Gray, Management Policy and Strategy (New York: Macmillan, 1982), 25. C C Miller, and L B Cardinal, Strategic Planning and Firm Performance: A Synthesis of More than Two Decades of Research, Academy of Management Journal 6, no. 27 (1994); M Peel, and J Bridge, How Planning and Capital Budgeting Improve SME Performance, Long Range Planning (October, 1998); J Smith, Strategies for Startups, Long Range Planning (October, 1998). F R David, Strategic Management (2003), 20. This sub-section is based on P Ramesh, Business Continuity Planning , Technology Review 2002 04, Tata Consultancy Services, July 2002, pp. 5 10. P Ramesh (2002), p. 37.
3 4 5
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Unit 4
Unit 4
Structure
Corporate Strategy and Corporate Governance
4.1 Introduction 4.2 Caselet Objectives 4.3 Definitions: Corporate Strategy and Corporate Governance 4.4 Growing Importance of Corporate Governance 4.5 Corporate Strategy and Corporate Governance: Complementarity and Conflict 4.6 Code of Best Practice 4.7 Strategic Audit 4.8 Board and CEO Relationship 4.9 Managed Corporation 4.10 Governed Corporation 4.11 Corporate Strategy and Corporate Governance: Need for more Integrative Relationship 4.12 Case Study 4.13 Summary 4.14 Glossary 4.15 Terminal Questions 4.16 Answers 4.17 References
4.1 Introduction
Corporate strategy and corporate governance are two important tools that help in the functioning of any company. They are not the same, but generally complementary to each other. Corporate governance is more operational, and no strategy can succeed without operational support. Similarly, no governance can achieve organizational objectives without a strategy or strategic management system. A close link or relationship also exists between corporate strategy and corporate governance through the roles of the board of directors and the CEO. Both the board and the CEO have strategic roles to play. The two also have important roles to play in the governance of a company. There is, however, a basic difference between the roles of the board and the CEO and other managers of a company. The board represents the interest
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of the shareholders who are the owners of a company whereas the CEO and other managers represent the management of the company. The distinction between ownership and management is very important, because, most of the issues in the interrelation between corporate strategy and corporate governance revolve round the relationship, and sometimes, conflict between the two. Most of the analysis in this unit will be around this theme. In doing so, we will discuss the definitional aspects of corporate strategy and corporate governance, growing importance of corporate governance, stakeholders expectations, major issues between corporate strategy and corporate governance, code of corporate governance, empowerment of the board, role of professional directors, code of best practice, strategic audit, boardCEO relationship, the managed corporation and the governed corporation.
4.2 Caselet
The year 2001-02 saw the collapse of several high-profile and large corporations, many of which were involved in accounting fraud. These corporations included Enron and MCI in the US and One. Tel in Australia. These events attracted the attention of the respective governments on the issue of corporate governance. While the US government passed the Sarbanes-Oxley Act in 2002, the CLERP 9 reforms were passed in Australia. Today, any discussion of corporate governance makes reference to principles raised in three documents released since 1990: The Cadbury Report (UK, 1992), the Principles of Corporate Governance (OECD, 1998 and 2004), the Sarbanes-Oxley Act of 2002 (US, 2002).
Objectives
After studying this unit, you should be able to: Explain the conceptual difference between corporate strategy and corporate governance Discuss the growing importance of corporate governance Analyse the complementarities and conflicts between corporate strategy and corporate governance Explain the code of best practice, strategic audit, board and CEO relationship Distinguish between the managed corporation and the governed corporation
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4.3 Definitions: Corporate Strategy and Corporate Governance

We had defined corporate strategy in Unit 1. We will now define corporate governance. Often, corporate governance is equated with corporate management, which is not correct. As has been pointed out above, corporate governance is concerned with serving the interest of the owners (stockholders) and, is much broader in perspective than corporate management. Corporate management is a part of or can be a useful partner in corporate governance. There is some confusion about the concept and meaning of corporate governance. Two definitions given below may give some clarity to the meaning and the role of corporate governance.
Corporate governance ensures that long-term strategic objectives and plans are established and that the proper management structure (organization, systems and people) is in place to achieve those objectives while at the same time, making sure that the structure functions to maintain the corporates integrity, reputation and responsibility to its various constituencies.1 Corporate governance denotes direction and control of the affairs of the company. The role of corporate governance is to ensure that the directors of a company are subject to their duties, obligations and responsibilities to act in the best interest of their company, to give direction and remain accountable to their shareholders, and other beneficiaries for their action.2
The Organization for Economic Cooperation and Development (OECD) describes corporate governance as a system. The complete OECD definition, which is fairly elaborate, gives some additional perspectives on corporate governance:
Corporate governance is the system by which business corporations are directed and controlled. A corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation such as board members, shareholders and other stakeholders, and, spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which company objectives are set and means of attaining those objectives and monitoring performance are spelt out. OECD (1993).3
If we compare the definitions of governance and corporate strategy (given in Unit 1), some important aspects of commonness and contrasts between the two emerge.
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First, both corporate governance and corporate strategy start with organizational objectives. In the case of corporate governance, the objectives have more governance orientation; in the case of corporate strategy, the objectives have more strategic focus. Second, corporate governance is primarily guided by the shareholders. Good governance should result in good returns on investment of shareholders and their happiness. Corporate strategy focuses more on market share, long-term growth and development. Third, corporate governance concentrates on organizational structure, rules, procedures and systems for better governance. Corporate strategy is also concerned with structures and systems but focuses more on strategic planning and resource allocations. Fourth, corporate governance attempts to streamline operations for good governance; corporate strategy depends more on strategic functions (manufacturing, finance, marketing and HR) and strategic implementation. Fifth, the guiding force behind corporate governance is the shareholders, i.e., the owners; but, corporate strategy is dictated by the market, competition and customers. Finally, effectiveness of corporate governance is judged mostly by financial results (return on investment or profit) in addition to some social responsibilities; effectiveness or success of a corporate strategy is assessed in terms of both financial and non-financial indicators or measures of performance and, also, in terms of a balanced scorecardbalancing financial performance with strategic performance (discussed in detail later in Unit 16).
1. The system by which business corporations are directed and controlled is called________. 2. Corporate governance is primarily guided by the_______. 3. It is correct to equate with corporate management with corporate governance. (True/False) 4. Both corporate governance and corporate strategy start with organizational objectives. (True/False)
4.4 Growing Importance of Corporate Governance

The affairs of a company are directed and controlled through the board of directors who represent the shareholders of the company. The extent to which the board discharges its trustee responsibilities and its commitment to run a
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transparent organization depends on many factors, including the roles played by the more progressive elements within the corporate sector. A strong demand for evolving a good corporate governance system is emerging from the corporate sector itself. Over the years, organizations have witnessed frequent violations of organizational and governmental regulations, increase in unethical and corrupt corporate practices and also scams. Owing to these and related developments, the need for proper corporate governance is being increasingly felt. Shareholders are also becoming more demanding and more conscious about their rights and privileges. They expect efficient management, good governance, high profit and large dividends. They look for transparency and public image to maximize shareholders value. In many companies, they are voicing their concerns in annual shareholders meetings. Also, institutional investors are becoming an important segment of stockholders and are influencing company management and corporate governance. Since the 1970s, institutional investors have been increasing their participation, and are presently holding more than 50 per cent of many corporate stocks. For example, 63 per cent of Ford Motor Company stock, 81 per cent of Digital Equipment Corporation, 79 per cent of Kmart and 72 per cent of Citicorp are held by institutions. These investors like to see the value of their stocks increase. Therefore, they have started playing a more active role in governing the companies in which they hold stocks. After Exxons 1989 oil spill in Alaska, public pension funds persuaded the company to include an environmentalist on its board.4 If the institutional investors are not happy with corporate performance, they convey their dissatisfaction to the company management. In 1987, Roger Smith, chairman, General Motors, had to face a group of institutional investors, because the group was annoyed that GM had made a $700 million hush mail payment to H R Perot when he left the GM board. They also reprimanded Smith for declining profits and market share, weak stock price, low productivity and big bonuses received by senior executives. Eventually, GM announced a series of major policy changes including stock buybacks and capital spending cuts.5
4.4.1 Different Models of Corporate Governance

All this suggests the need for an appropriate corporate governance framework or system for every company. The corporate governance system should clearly address the three major issues of an organization: what is the purpose
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corporate objective or philosophy or goal of an organization; whom the organization should be serving; and, how best to serve their interests. There are different ways to handle (or manage) these issues, and different companies in different countries have adopted different models of corporate governance to address various organizational issues. Some selected corporate governance models with their strengths and weaknesses are shown in Table 4.1.
Table 4.1 Different Corporate Governance Models: Strengths and Weaknesses
Anglo-Saxon Model (US and UK) Strengths Dynamic market orientation Fluid capital Internationalization possible approach Weaknesses Volatility and instability Short-term approach Inadequate governance structure
European Model (Germany) Strengths Long-term industrial strategy Very stable capital Strong governance procedures Weaknesses Internationalization difficult Vulnerability of companies to global market
Asian Model (Japan) Strengths Long-term industrial strategy Stable capital Overseas investments Weaknesses Growth of institutional investor activism Growth of financial speculation Secretive procedures
Source: T Clarke, and E Monkhouse, eds., Re-Thinking the Company, adap. (London: Financial Times/Pitman Publishing, 1994)
5. The affairs of a company are directed and controlled through the ______ who represent the shareholders of the company. 6. The _____ system should clearly address the three major issues of an organizationcorporate objective; whom the organization should be serving; and, how best to serve their interests.
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4.5 Corporate Strategy and Corporate Governance: Complementarity and Conflict

We have mentioned earlier that stakeholders expectations not only warrant good corporate governance, but also effective corporate strategies. Simultaneous focus on both is important, because only good governance and effective strategies can lead to simultaneous achievement of organizational objectives like profitability, growth and diversification and stakeholders expectations like high return on their capital, transparency, employee motivation and customer satisfaction. If we look at the total management activities of modern organizations, we can clearly see the complementary roles of corporate governance and strategies in smooth and efficient functioning of organizations. This is shown in Figure 4.1.
INPUTS 2 PROCESSING 2
Resources and Capabilities Financial Human Technological Materials Information 3
Planning: Understand the company and its environment Determine goals and objectives of future organizational performance Select a course of action to achieve objectives Allocate corporate resources
1 Controlling Monitor activities and make corrections if needed Use reporting and control measures 1 Leading (creating shared vision, culture, and values) Empower employees Use certain techniques to motivate employees to follow OUTPUTS 3
Organizing (how to accomplish the plan) Find the appropriate arrangement to assign responsibility to people in the organization Create supportive culture and leadership Modify or reorganize if plan changes
Outcome Deliver quality products/ services Achieve goals and objectives efficiently and effectively 1. Dominantly governance activity 2. Dominantly strategic activity
3. Mix of governance and strategic activities
Figure 4.1 Management Activities in Modern Organizations: Input-output Chain Source: A F Alkhafaji, Strategic Management, adap. (2003), 28.
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Figure 4.1 shows all the major management activities in a company (inputoutput chain) and relationship among them. Activities like input (resources and capabilities) management and processing have been shown as dominantly of governance nature; and, activities like organizing (accomplishing the plan) and output (outcome) have been classified as mix of both strategic and governance factors. In fact, even in leading an activity of dominantly governance nature, use of different motivational techniques involves strategies. Similarly, resource and capability management, perceived primarily as strategic management of human and financial resources, has major governance implications. We can also see the interrelationship or interdependence between governance and strategy through a chain in the reporting system in organizations. We can more appropriately call this governance through report or documentation system. A typical reporting system is shown in Figure 4.2.
Reports received Beneficiaries Limited reports Trustees Limited investment performance reports Investment managers Accounts Analysts' reports Company briefings Board Budgets/qualitative reporting Executive directors Budgets/qualitative reporting Senior executives Budgets/other operating reports Managers
Figure 4.2 Chain of Corporate Governance: Typical Reporting System Source: G Johnson, and K Scholes, Exploring Corporate Strategy, 6th ed. (Pearson Education, 2005), 196 (Exhibit 5.2). Sikkim Manipal University Page No. 82
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The reporting system/structure in Figure 4.2 shows the linkage between ultimate beneficiaries of corporate governance or company performance and the managers who drive the strategic management process. But, the reporting structure also shows the distance between the two. It is even possible that many beneficiaries may either be ignorant or indifferent to the details of managerial activities or strategies of the company. Individual managers and/or directors may adopt strategies which may mean effective management but, may not be in the best interests of the beneficiaries. Also, as we have mentioned above, all beneficiaries or shareholders do not have the same or common interests; their interests may often clash. All these may lead to conflicts between corporate governance and strategic actions. Table 4.2 shows some of these conflicting situations.
Table 4.3 Some Common Conflicts Between Corporate Strategy and Corporate Governance Corporate
Strategic Long-term growth Development/diversification to require additional funding (share issue or loans) Conflict Governance
Sacrifice of short-term profitability, cash flow and pay levels/hikes Financial independence may be sacrificed More openness and accountability from the management Job losses in the organization Decline in quality standards Owners may lose control
Expanding capital base: public ownership of shares Cost efficiency through technology or new investment
Expanding into mass market; product and price strategy Family businesses to grow; induction of professional manager
Table 4.3 shows some typical conflict situations between strategy and governance. These include conflicts between growth and profitability; growth and control/independence, cost efficiency and jobs; volume/mass production and quality/specialization; and, the problems of sub-optimization, i.e., development of one part of an organization at the expense of another.6 Many of these situations also reflect conflicts of stakeholder interests or expectations. For example, shareholders want cost efficiency, higher productivity and profit, but, this may lead to job losses and clash with employees interests.
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Activity 1 Take a company of your choice and design the role of corporate governance in the company. You may describe the corporate governance in terms of organizational structure, rules, procedures and systems.
7. Corporate governance and strategies play ________ roles in the smooth and efficient functioning of organizations. 8. The interrelationship or interdependence between governance and strategy can be seen through a chain in the ______ in organizations. 9. Activities like input (resources and capabilities) management and processing have been shown as dominantly of _______nature 10. Activities like organizing (accomplishing the plan) and output (outcome) have been classified as mix of both _____and _____factors.
4.6 Code of Best Practice

In strategic analysis, we consider benchmarking and best practices mostly with reference to securing competitive advantage in the market. In governance analysis, we not only talk of code of corporate governance, but also of code of best practice for superior performance. For a company, the code of best governance practice and best strategic practice may actually complement each other for improving the overall organizational performance. The Cadbury Committee has prescribed a code of best practice to serve as a guideline to those companies which want to achieve higher standards of corporate governance. The objective of the code of best practice is to balance responsibility, authority and accountability in the governance process. Three major constituents of the code prescribed by the Cadbury Committee are: Separate positions of chairman and CEO: In every company, there should be a separate CEO and chairman of the board of directors. When the same person assumes the two roles, it vests too much authority with one person with very little check on the use of such power. Separate positions of chairman and CEO help balancing of authority. Role clarity of chairman and CEO: Chairmans function should be to manage the affairs of the board, including hiring and firing of the CEO of
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the company. The CEO, on the other hand, is responsible for day-to-day management of the organization. The day-to-day management function of the CEO consists of planning, organizing and implementation of policies, programmes and strategies approved by the board. Professional inputs from independent directors: Every company should have non-executive directors, who bring to the board their professional experience and expertise. The argument is that these experienced professional directors, already in senior/top executive positions in other companies or independent consultants, would supplement the efforts of the fulltime executive directors on the board. Their involvement would also provide a validity check and balance the ways in which executive directors tend to influence governance and strategic decisions at the board level.7 We will discuss benchmarking and best practices in the strategic perspective in detail later in Unit 12.
11. The ________has prescribed a code of best practice to serve as a guideline to those companies which want to achieve higher standards of corporate governance. 12. One of the constituents of the code prescribed by the Cadbury Committee are: (a) Higher pay for directors (b) Separate positions of chairman and CEO (c) Greater role of chairman in decision making (d) Lesser role of chairman in decision making
4.7 Strategic Audit

With increasing pressure on boards from external stakeholders to be more active, many directors are seeking more practical ways to conduct strategic overview of company management without getting directly involved in it. Donaldson (1995) has suggested strategic audit as a new tool for systematic review of strategy by board members without directly involving themselves with management of companies.
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Strategic audit is a formal strategic-review process, which imposes its own discipline on both the board and the management very much like the financial audit process8. But, it is different from management audit, which is undertaken in many companies by the senior/top management on the progress and outcome of important corporate activities. To understand strategic audit in the correct perspective, one needs to analyse this in terms of its various elements. Donaldson has specified five elements of strategic audit. These are: 1. Establishing criteria for performance 2. Database design and maintenance 3. Strategic audit committee 4. Relationship with the CEO 5. Alert to duty (by board members) The performance criteria should be simple, well-understood and wellaccepted measures of financial performance. A number of measures of financial performance are available. One common measure, used by many companies, is return on investment (ROI). The ROI can be analysed like this: profit per unit of sales (profit margin); sales per unit of capital employed (asset turnover); and, capital employed per unit of equity invested (leverage). If these three ratios are multiplied together, the resultant ratio will give profit per unit of equity. This criterion would fulfil two objectives: first, sustainable rate of return on shareholder investment, and, second, to decide whether the return is less, or equal to or more than returns on alternative investments with comparable risk, i.e., whether the companys chosen strategy is justifiable or not. To calculate different performance ratios and monitor performance criteria, a proper database is essential. This involves both database design and maintenance. This has to be a regular and an ongoing process. Data on financial performance can sometimes be sensitive to the managers/ employees of a company. It is, therefore, suggested that financial and related data design, maintenance and analyses should be entrusted to the auditors of the company or outside consultants. For effective strategic audit, a strategic audit committee should be constituted. According to Donaldson, outside directors should select three of their own members to form the committee. This will impart regularity and more commitment to the strategic audit process. The committee would decide on the frequency of their meeting, periodicity of interaction with the CEO or top management of the company and,
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also when they should make presentation to or hold discussion with the full board. A sensitive issue is the strategic audit committees relationship with the CEO. Any CEO would be generally apprehensive of such a committee. The strategic audit committee needs to create and maintain an atmosphere of mutuality. It is true that whenever a question or a discussion on the strategic direction of a company comes up in a board meeting, it is perceived by many CEOs as an implicit criticism of the current strategy and leadership of the company. It is also true that regular strategic process involving the CEO reduces chances of unpleasant or confronting situations. In fact, ideally, the functioning of the strategic audit committee should be seen as a low-key operation, positive in approach, designed to lend support and credibility to company leadership and management. The strategic audit committee and also the board should always be alert and vigilant to ensure that there are no slippages. Business cycles indicate that period of success may be followed by a period of slump. The strategic audit committee and the board should be alert enough to get signals so that they can act in time. This is necessary because complacence develops after success both in the board and in the management. If properly conceived, designed and conducted, strategic audit, more than management audit, can be a powerful tool for monitoring the strategic process of a company and also strike a good balance between corporate strategy and corporate governance.
13. _________is a new tool for systematic review of strategy by board members without directly involving themselves with management of companies. 14. A performance criteria commonly used as a measure by many companies, is _________.
4.8 Board and CEO Relationship

We have just discussed the sensitivity of the relationship between the board and the CEO. In fact, this is part of a broader and more significant relationship
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between the two. We have given below three observations on the boards role and the boardCEO relationship. The Board is responsible for the successful perpetuation of the corporation. That responsibility cannot be relegated to management9John G Surale, non-executive chairman, General Motors (GM). The success of the non-executive chairman arrangement is heavily dependent on the chairmans relationship with the CEO. If the chemistry is not good, the relationship isnt going to work10 Sir Denys Henderson, former chairman and CEO of Imperial Chemical Industries (ICI) and presently non-executive chairman. How can outside directors constructively review managements strategy if they dont have a deep knowledge of the business?11Bernard Marcus, Chairman, the Home Depot (a retail chain in the US). Managers and directors in most companies agree that the board should be an effective watchdog without undermining the managements ability to run the business. They also feel that boards should determine/decide how to distance themselves from their CEOs in the course of normal management of business, but at the same time, maintain a constructive and positive relationship with them. This means striking a balance between management strategy and governance of a company. In connection with this, directors and CEOs have raised many fundamental questions or issues. Some of the major questions or issues are mentioned below. Should the CEO be involved only with management of a company, or should he (she) be also concerned with governance? What role should the board (dominated by outside directors) play in formulating and reviewing a companys strategy? What are the advantages and disadvantages of splitting chairmans and CEOs job instead of entrusting them to one person? Should outside directors obtain information about the companyits management and governanceon their own bypassing the CEO? What should be the right mechanism for boards to evaluate management, particularly the CEO? How does a board ensure that its members have the necessary expertise to judge managements performance or evaluate the strategic decisionmaking process?
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We shall try to give some possible answers to these questions in terms of thoughts, guidelines and practices in General Motors. The board of General Motors has developed several guidelines which cover boardCEO relationship and, also answer some of the issues raised above. These guidelines have evolved out of GM boards interactions with the management during the last few years and, not issued by the board for taking control over the management or the company. GM guidelines clearly stipulate that the management of the company is separate from the board. The board does not involve itself in management decisions. The management team led by Jack Smith has full authority and, of course, also the responsibilities for day-to-day operations of General Motors. Activity 2 Choose a company that you are familiar with and design on double (CEO and chairman) or single (either CEO or chairman) role of the chief executive. Students should choose any other company and compare with Nestle.
15. The Board is not responsible for the successful perpetuation of the corporation. 16. The board should be an effective watchdog without undermining the managements ability to run the business. (True/False)
4.9 Managed Corporation

The debate also implies the managed corporation and the governed corporation. Pound (1995) analyses both the managed corporation and the governed corporation, makes a comparison between the two and, suggests the governed corporation as a model of successful corporate governance. We shall first discuss the managed corporation and then the governed corporation. The managed corporation is more like the traditional model of a company or corporation. This is the model of governance where focus is on power equations between management and control, boardCEO relationship or strategy and governance conflict. In the managed corporation, senior managers are responsible for leadership and decision making. Board function is to hire the top-level managers, monitor them and fire them if they do not perform.
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Shareholders role is to throw out the board if the company or the corporation does not perform.12 Emergence and growth of the managed corporation can be traced in two factors; first, change in the shareholding patterndispersion or distribution of ownership among many shareholders (including the public) and, second, emergence of a new class of professionals who were neither major stockholders nor founders nor owners of companies. Because shareholders were dispersed, they could not be directly involved in formulating corporate policy and strategy. Therefore, there was the need for managers and leaders who could formulate policies and strategies and promote organizational growth. The managed corporation has dominated the corporate arena for decades. The managed corporation model can be found in any modern organization; only the actual form may vary from one organization to another. In the managed corporation, boards and shareholders are kept away from strategy formulation and policy making. A significant business proposal or a major investment project may be discussed at the board level but, the managers would be given the freedom to formulate and implement business strategies. Board members are expected to intervene in business policies and strategies if there is performance failure or the managers are found incompetent or corrupt. If this happens, that is, if the directors have to get involved in corporate strategies, may be it is time for the board to look for a new CEO. If the major cause of corporate failure is management incompetence, the governance system in the managed corporation may work. But, many performance failures or crises are not results of incompetence, but are failures of judgement. Managers tend to be biased towards strategies and decisions which reflect their individual strengths. Managers also make mistakes. The managed corporation model permits or ignores mistakes to go uncorrected till they lead to major crisis or catastrophes. In the US, throughout the 1980s, boards allowed flawed retail strategy to be followed in spite of clear evidence that managers lacked retail skills. Some board members later admitted that it was a mistake to allow company managements to pursue incorrect retail policies and strategies. But, they did not intervene because they were following the managed corporation model.
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Box 4.1: Nestl Debate: Double C or Single C

One aspect of the debate on the boardCEO relationship is whether the positions of both CEO and chairman should be combined in one person. The Nestl debate is one of the latest to throw contrasting views on this. Nestl shareholders voted Peter Brabeck Letmathe, the CEO, to the chairmanship of the company as an additional responsibility. The majority shareholders rejected the arguments of those who opposed a dual role for Brabeck. In a statement before the Annual General Meeting (AGM), Nestl said it sought the double C-level status for Brabeck in the interest of the investors as it assured strategic continuity and long-term value. According to the company, the Austrian-born Brabeck, who had spent his entire working life with Nestl, was the best person for the charimans job. But some institutions had an opposite view. The Ethos Foundation, which represents 83 Swiss pension funds in campaigning for good corporate governance and the US-based Institutional Shareholder Services had protested against the plan to combine the double power in one person at the worlds biggest food group. They and others, who opposed the move, said that a double mandate was acceptable in special cases, such as turnaround processes where prompt action was needed but, that was not the case with Nestl. However, unlike Britain, where separation of the two top jobs is the norm, in Switzerland, a combined top role is not uncommon. For example, heads of drug companies Novartis and Roche hold dual positions of CEO and chairman. Brabeck assumed the dual role after his predecessor, Rainer Gut, retired. I accept this mandate with a bit of disappointment because of the circumstance in which it has been bestowed on me, Now, Brabecks main challenge lies in making the company grow amidst the upheaval and controversy that has surrounded him. Only time can tell whether the double C is justified in case of Brabeck or not.
Source: Adapted from C D Team, Just Two Much, Economic Times (Corporate Dossier), (April 29, 2005).
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17. The governed corporation has dominated the corporate arena for decades. (True/False) 18. Managers tend to be biased towards strategies and decisions which reflect their individual strengths. (True/False)
4.10 Governed Corporation

The answer to problems of corporate failure in the managed corporation lies in the governed corporation. In the governed corporation, the focus is not on powernot monitoring or controlling the managersbut, on improving decision making. The objective is to minimize chances of mistakes; and, even if they occur, to mutually work out effective ways to rectify the mistake rather than fire the management. The result is a positive change in the way companies discuss, decide and review policy. Major differences in approach between the managed corporation and the governed corporation in terms of boards role, characteristics and policies are shown in Table 4.3. To create the governed corporation, companies should start rethinking about the role of directors, and, also, of shareholders. Both the directors and shareholders should be proactive, and, not reactive in the policymaking process. Managers will continue to play their roles. This means that there are three critical constituents of the governed corporation: the board or directors, the managers and shareholders. Directors should guide managers to take best possible decisions; major shareholders should be able to communicate directly with the senior managers/CEO and, also the directors about what they think of corporate policies and decisions. With shareholders and board/ directors participating in policy and decision making, and, the managers already involved, the corporation is governed rather than managed because all the three critical constituents (managers, directors and shareholders) have a voice in the governance of the company.13
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Table 4.3 The Managed Corporation vs the Governed Corporation: Boards Role, Characteristics and Policies
The Managed Corporation Boards Role Boards role is to hire, monitor and, when necessary, change failed management. Board Characteristics Power sufficient to control the CEO and the performance-evaluation process. Independence to ensure that the CEO is impartially evaluated and that directors are not compromised or co-opted by management. Board methods and procedures to allow outside directors to evaluate managers independently and effectively. Policies Separate the CEO and chairman (or lead outside director). Board meeting may take place without CEO being present. Committee of independent directors to evaluate the CEO. Independent financial and legal advisors available to outside directors. Measurable norms or yardsticks for judging CEOs performance. The Governed Corporation Boards Role Boards role is to foster effective decisions and monitor and reverse failed policies. Board Characteristics Expertise sufficient to allow the board to add value to the decision-making process and performance. Incentives to ensure that the board is committed to create organizational value.
Methods and procedures to foster open debate and keep the board apprised of shareholders concerns. Policies Vital areas of expertise must be represented on the board such as core industry and finance. Minimum time commitment by the board members (may be two days in a month). Designated committee to evaluate new policy proposals. Regular meetings shareholders with large shareholders. Board members free to ask for information from any employee.
Source: Adapted from J Pound, The Promise of the Governed Corporation, Harvard Business Review (MarchApril, 1995)
Pound has suggested five major changes in the managed corporation for it to evolve into a governed corporation. First, board members should be experts, i.e., well versed with the companyits products, structure, functioning, policies and practicesthe industry and environmental influences and governmental regulations; second, board meetings should focus on discussions on new policies, decisions and strategies, and not just on reviews of past performance; third, directors should have better access to information on products, customers, competitors, market conditions and critical strategic and organizational issues; fourth, directors should devote a significant proportion of their professional time
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to the company or the corporation to have more meaningful and effective involvement in decision making; fifth, board members should have proper incentive to develop and show the right commitment to the company. Directors cannot be expected to take serious interest in formulation and implementation of company policies and strategies unless they are sufficiently compensated for it. The transition from the managed corporation to the governed corporation may be slow. Such change may take years, particularly in companies which are governed by individuals (managers, CEOs and directors) who have been subscribing to the managed philosophy for decades. But, changes are taking place. Many companies are moving in the right direction. Companies like General Motors, IBM, Compaq Computer and Westinghouse have already taken steps to become governed corporations.14
19. In the governed corporation, the focus is not on powernot monitoring or controlling the managersbut, on ___________. 20. _________ has suggested five major changes in the managed corporation for it to evolve into a governed corporation.
4.11 Corporate Strategy and Corporate Governance: Need for more Integrative Relationship
The analysis so far has focused on different aspects or characteristics of corporate strategy and corporate governance, the way they are differentiated and, also, areas of complementarities and some possible conflicts between the two. The starting point of both are the same, i.e., achievement of organizational objectives. But, it is also here that some difference begins between the two and also is the source of some possible conflict. The most important objective of corporate governance is to protect the interests of the stockholders whose primary concern is maximization of return on investment or short-term profitability. The objective of corporate strategy is more to focus on long-term growth and profitability, which gives sustenance to the company. This, however, is a common organizational conflict in many companies, i.e., matching or balancing the shortterm and long-term goals of the organization. Balancing the stockholder interests and stakeholder expectations is another issue. This also relates to strategygovernance relationship. Stakeholders include,
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in addition to stockholders, a number of other interest groupsboth internal and external. Employees/managers are important internal stakeholders; creditors and customers are vital external stakeholders, who strongly influence the course or direction of a company. To serve the interests of all major stakeholders, good corporate governance is not enough; effective corporate strategy is required in important functional areas of manufacturing, finance and marketing to deal with competition, market and business development. In corporate governance, there is a growing emphasis on inclusiveness or inclusive governance, i.e., focusing on the society, community and environmental development. The strategic management processes of companies are also trying to find ways to strike a balance between corporate social responsibility (CSR) and profitability (discussed in Unit 4), realizing that, ideally, both should coexist for optimal/proper organizational growth. This is one area where both corporate strategy and governance are showing a common focus. Companies like Bajaj Auto, Tata Motors and Nirma are good examples. This is possible if the board and the CEO work in close unison. In fact, this implies another vital aspect of strategygovernance balancing, i.e., board CEO relationship. The board represents the owners; the CEO represents the management. Therefore, there can be a conflict or, at least, sensitivity between the two. But, in many companies, managers (CEO) and directors (board) realize/ agree that the board should only be a watchdog without undermining the managements ability to run the business. The board should also decide how to distance itself from the CEO in the course of normal management of business and, at the same time, maintain a positive and constructive relationship. This means striking a balance between management, the strategy and the governance of a company. This can be illustrated by the boardCEO relationship in General Motors. This relationship is based on certain guidelines jointly evolved and not issued by the board. The boards basic responsibility is to ensure that the company is managed properly, in order to sustain the business and also serve the interest of the owners. In other words, it acts as a monitor of management. The CEO gives annually a management development report to the board. The management realizes that a strong board (highly experienced professionals/ experts) can be a source of strength to the management and, also helpful in building and sustaining competitive advantage of the company. All this implies that, for effectiveness and success, the managed corporation and the governed corporation should be as closely aligned as possible. In other words, a company should be as much a managed company
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as a governed company. This is the optimal way to serve both the stockholders and the interest of the larger group of stakeholders.
21. The starting point of both corporate strategy and governance are the same, i.e., achievement of organizational objectives. (True/False) 22. In corporate governance, there is a growing emphasis on inclusiveness or inclusive governance, i.e., focusing on the society, community and environmental development. (True/False)
4.12 Case Study

Gray Line Corporation: Role of Ethics in Governance* Corporate values and ethics are in a state of flux today, in India as well as globally, which is illustrated by this case of Gray Line Corporation: When S. Khopekar, the regional manager, had joined Gray Line Corporation as the purchase manager, he had gone through the discipline and conduct guidelines of the companys purchase department. A clause against acceptance of gifts by staff of the purchase department had attracted his attention. The clause read as follows: Purchase department employees shall not accept gifts from vendors. This is to ensure that no vendor is given any special treatment and employees work only in the best interest of the firm at all times. Any deviation from the above will be dealt with severely and can mean dismissal from the firm. Khopekar made a note of this. Months passed by and the New Year, a time for gifts, was approaching. The rule in Gray Line was that no gift worth more than `50 should be accepted by any employeepresumably an old rule that had not been revised. One day, one of the vendors brought three wall clocksone for the Managing Director (MD), one for the Vice-president (VP) procurement, and one for Khopekar. The vendor, who had a long association with Gray Line, was aware of the companys rule. He explained that the cost of the clocks was `50 each, and therefore, there should be no problem in accepting them as gifts. Khopekar found it very hard to believe that the clocks would cost only `50 each. He decided to take the matter to the MD. The MD had
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a look at the clock and asked his secretary to hang it on the wall in his office. He asked Khopekar to distribute the other two as desired by the vendor. He also mentioned that the clocks could cost `50 each if bought in bulk. As per the MDs instruction, Khopekar sent one to the VP and took one home and put it up in his living room. Khopekar later accepted many gifts in Gray Line which were of different values, but always presented as costing not more than `50. Gradually, he also stopped feeling uneasy or bad about receiving the gifts. In fact, he was getting used to it and, also started looking forward to the New Year. He, however, knew very well that none of the gifts were worth less than `2000. The next new year, Natarajan, executive secretary to the MD, came to Khopekar. He wanted to know if gifts had started coming.
Natarajan clarified that it had been the practice with the earlier purchase managers also to accept gifts from vendors and distribute them among important officials of the company. He cautioned against discussing the gifts with the MD, who would be annoyed and take action against him. Khopekar thought about integrity and ethics, but a bigger test was waiting for him. Within few days, a vendor came with six baskets, each with bottles of Scotch whisky, return air tickets for two to any destination in India and three-night stay at a five-star hotel. The total value of each of the gift baskets was not less than `1 lakh. The MDs secretary told Khopekar that such gifts were not unusual. Khopekar was faced with a dilemma: to get reconciled to such practices or look for a change? It is not an easy decision to make for any manager in todays volatile business environment.
* Based on U C Mathur, Case study 24, (Textbook of Strategic Management) (New Delhi: Macmillan India, 2005), 337. Names have been changed because of the sensitive nature of the subject.
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4.13 Summary
Let us recapitulate the important concepts discussed in this unit: Corporate strategy and corporate governance are the two important tools of functioning of any company. Corporate governance has more to do with ownership of a company; corporate strategy has more to do with management of a company. They are generally complementary to each other, but, there can be conflicts between the two. In companies, simultaneous focus on good corporate governance and effective corporate strategies is important, as only this can lead to simultaneous achievement of organizational objectives like profitability, growth and diversification and stakeholder expectations like high return on their capital, transparency, employee motivation and customer satisfaction. To resolve the conflicts between corporate strategy and corporate governance, empowerment of the board may be a useful tool. The board, by virtue of its position, is the single entity which can influence both corporate strategy and corporate governance and try to strike a balance between their conflicting demands. Pound has distinguished between the managed corporation and the governed corporation. The managed corporation is more like the traditional model of a company or corporation. This is the model of governance where the focus is on the power equations between management and control, boardCEO relationship or strategy and governance conflict.
4.14 Glossary
Best practice: A technique or methodology that, through experience and research, has been proven to reliably lead to a desired result. Corporate governance: The framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in a company's relationship with its all stakeholders. Corporate strategy: The overall scope and direction of a corporation and the way in which its various business operations work together to achieve particular goals
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Inclusive governance: Governance that focuses on the society, community and environmental development Strategic analysis: Considers how an organization attempts to best combine its own capabilities with the opportunities in the marketplace in seeking to accomplish its overall objectives. Strategic audit: A new tool for systematic review of strategy by board members without directly involving themselves with management of companies. Strategic governance: The technique by which companies are directed and managed. It means carrying the business as per the stakeholders desires.

1. What is corporate governance? Explain the difference between corporate strategy and corporate governance. 2. Discuss the growing importance of corporate governance. 3. Explain the complementarities and conflicts between corporate strategy and corporate governance. 4. What is strategic audit? Explain its relevance to corporate strategy and corporate governance. 5. What is a managed corporation? Illustrate the main features of a managed corporation. 6. Define a governed corporation. Distinguish between the managed corporation and the governed corporation in terms of boards role, major characteristics and policies of a company.

1. Corporate governance 2. Shareholders 3. False 4. True
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5. board of directors 6. corporate governance 7. Complementary 8. reporting system 9. governance 10. Strategic, governance 11. Cadbury Committee 12. (b) 13. strategic audit 14. return on investment (ROI) 15. False 16. True 17. False 18. True 19. improving decision making 20. Pound 21. True 22. True

1. Corporate governance is concerned with serving the interest of the owners (stockholders) and, is much broader in perspective than corporate management. Refer to Section 4.3 for further details. 2. A strong demand for evolving a good corporate governance system is emerging from the corporate sector itself. Refer to Section 4.4 for further details. 3. As stakeholders expectations not only warrant good corporate governance, but also effective corporate strategies, simultaneous focus on both is important. Refer to Section 4.6 for further details. 4. Donaldson (1995) has suggested strategic audit as a new tool for systematic review of strategy by board members without directly involving
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themselves with management of companies. Refer to Section 4.7 for further details. 5. The managed corporation is more like the traditional model of a company or corporation. Refer to Section 4.9 for further details. 6. There are major differences in approach between the managed corporation and the governed corporation in terms of boards role, characteristics and policies. Refer to Section 4.10 for further details.
4.17 References
1. Donaldson, G. A New Tool for Boards; Strategic Audit. Harvard Business Review, JulyAugust, 1995. 2. Harvard Business Review on Corporate Governance, 2000. Boston: Harvard Business School Press. 3. Johnson, G and K Scholes. 2005. Exploring Corporate Strategy. 6th edn. Pearson Education. 4. Kumar, S. 2000. Corporate Governance: A Question of Ethics. New Delhi: Galgotia Publishing Co. 5. Lorsch, J W. Empowering the Board. Harvard Business Review, January February, 1995. 6. Mathur, U C. 2005. Corporate Governance and Business Ethics: Text and Cases. New Delhi: Macmillan India. 7. Pound, J. The Promise of the Governed Corporation, Harvard Business Review, MarchApril, 1995. Endnotes
1
Definition given by the Advisory Board of the National Association of Corporate Directors (NACD) New Delhi, reproduced in S Kumar, Corporate Governance (2000), 3 Definition given by Chandratre reproduced in S Kumar, Corporate Governance (2000), 4. Reproduced in U C Mathur, Corporate Governance and Business Ethics: Text and Cases (New Delhi: Macmillan India, 2005), 4. J H, Dobrzynski, M Schroeder, G L Miles, and J Weber, Taking Charge, Business Week 3113 , (1989): 66. A F Alkhafaji, Strategic Management (2003), 27. G Johnson, and K Scholes, Exploring Corporate Strategy, 4 th ed. (New Delhi: Prentice Hall of India, 1999), 195. U C Mathur, Corporate Governance and Business Ethics: Text and Cases (2005), 6163.
2 3
5 6
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G Donaldson, A New Tool for Boards: Strategic Audit, Harvard Business Review (July August, 1995). Harvard Business Review on Corporate Governance (Harvard Business School Press, 2000), 188. Ibid . Ibid. J Pound, The Promise of the Governed Corporation, Harvard Business Review (March April, 1995). J Pound, The Promise of the Governed Corporation , Harvard Business Review (March April,1995). J Pound, The Promise of the Governed Corporation, Harvard Business Review (March April, 1995).
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Unit 5
Structure
Corporate Mission, Objectives and Responsibility
5.1 Introduction 5.2 Caselet Objectives 5.3 Definition of Business 5.4 Mission Statement 5.5 Corporate Philosophy 5.6 Corporate Objectives and Goals 5.7 Strategic Intent 5.8 Company Responsibility 5.9 Corporate Social Responsibility 5.10 Social Audit 5.11 Case Study 5.12 Summary 5.13 Glossary 5.14 Terminal Questions 5.15 Answers 5.16 References
5.1 Introduction
For formulation of corporate strategy, an organization needs to consider three major things: first, the corporate mission and objectives; second, its internal competence; and third, the external environment. We shall discuss corporate mission and objectives in this unit. Internal competence and resources and the environmental factors will be analysed in the next two units. The starting point for the formulation of any strategy is the mission statement of a company. The mission statement actually starts with a definition of business of the company. Related to mission is vision. Also related to mission statement or development is corporate philosophy. From mission statement and corporate philosophy follow corporate objectives, goals and also strategic intent. In developing its mission and objectives, a company has certain responsibility to
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its stakeholders and the society. This is expressed in stakeholders approach to company responsibility and corporate social responsibility. Corporate social responsibility also implies social audit. We will discuss all these in this unit.
5.2 Caselet
No corporation functions without a strategy; and the starting point for the formulation of any strategy is the mission statement of a company. Microsoft Corporation, an American multinational corporation, is no exception. The largest and most well known software corporation in the world, it is best known for its extremely popular Windows operating system and Microsoft Office software. The company has a mission statement:
At Microsoft, we work to help people and businesses throughout the world realize their full potential. This is our mission. Everything we do reflects this mission and the values that make it possible.
The mission continues to guide Microsoft.
Objectives
After studying this unit, you should be able to: Define what is business Explain the terms corporate mission and corporate vision Define what is corporate philosophy Discuss the corporate objectives and goals of a company Explain strategic intent and company responsibility Explain the concept of corporate social responsibility Discuss social audit as a tool to measure companies social performance
5.3 Definition of Business

It may appear very simple or obvious as to what a companys business is. A steel mill makes steel; an engineering company makes engineering products; an electronic manufacturer makes electronic goods; a courier company delivers letters and parcels; a bank lends money, etc. But, it may not be as simple as this. In fact, defining the business of a company precisely is a difficult job. Let us explain this. A textile manufacturer makes textiles goods; but, this may mean suitings, shirtings, sarees or inner garments; it may be cotton textiles, silk or
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synthetics; it may be high-priced or premium product, medium-priced or average product or low-priced or discount product. To define a companys business with precision is the job or responsibility of the planners and strategists. Precise or correct definition of business of a company is the foundation for mission statement, objectives, priorities, plans, strategies and work and resource allocations; and, therefore, along with the top management, the strategists have an important role to play in this. Many companies and managers are not clear about the exact nature of their business, nor are they always aware of the significance of this. Precise definition of the business of a company should be based on four major factors or considerations: i. product, ii. technology, iii. customer segment and iv. market competitiveness (Figure 5.1).
Product
Technology
Business definition
Market competitivenes
Customer segment
Figure 5.1 Business Definition of an Organization
Management thinkers like Peter Drucker feel that business definition should strongly focus on the customer. According to Drucker, in defining the business, the following questions about the customer should be asked1: Who is the customer? o Where is the customer located? o How does the customer buy? o How can the customer be reached? What does the customer buy? What does the customer consider value? In addition to focussing on customer behaviour, answers to these questions also indicate the nature and quality of the product, production process or
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technology and market environment or competitiveness. We can also see how companies define their businesses. Business definitions of Hindustan Unilever, Hero Honda, Kodak India and Hero Cycles are given in Table 5.1.
Table 5.1 Business Definitions of Hindustan Unilever, Hero Honda, Kodak India and Hero Cycles
Company Business definition
Hindustan Unilever To meet everyday needs of Indian people everywhere with branded products Hero Honda Kodak India Hero Cycles World class auto products which provide the highest level of customer satisfaction A high quality photographic system for the customer who desires instant photography Functionally valuable bicycle which common people can afford to buy
The above business definitions show that some generality in definition remains. To remove the generality or make business definition more meaningful, this should be read with mission statement and corporate objectives or goals. These together give definiteness to the business of a company.
1. To define a companys business with precision is the job or responsibility of the _________and _________. 2. Management thinkers like Peter Drucker feel that business definition should strongly focus on the__________.
5.4 Mission Statement

A business is not defined by its name, statutes or articles of incorporation. It is defined by the business mission. Only a clear definition of the mission and the purpose of the organization makes possible clear and realistic business objectives. Peter Drucker But ... business mission is so rarely given adequate thought is perhaps the most important single cause of business frustration. Peter Drucker
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This emphasizes the need for organizations to take their mission statement seriously and formulate it properly. What is a mission statement? Or, what is a company mission? The mission statement of a company is variously called a statement of philosophy, a statement of beliefs, a statement of purpose and, a statement of business principles. A mission statement is many in one. It embodies the business philosophy of a companys decision makers, implies the image the company wishes to project for itself, reflects the companys self-concept; indicates the companys principal product or service areas and, the customer needs the company seeks to satisfy. In short, it describes the companys product, market and technological focus; and it does so in a way that reflects the values and priorities of the companys strategic decision makers.2 The mission statement should be as explicit or comprehensive as possible. Some feel that the mission statement should have seven dimensions or serve seven different purposes or objectives. These are: To ensure unanimity of purposes within the organization To develop a basis or standard for allocating organizational resources To provide a basis for motivating the use of the organizations resources To establish a general culture or organizational climate; for example, to suggest a business-like approach To facilitate the translation of objectives and goals into jobs and responsibilities and assignment of tasks to responsible segments within the organization To serve as a focal point for those who can identify themselves with the organizations purpose and business To specify organizational purposes and inspire translation of these purposes into goals in such a way that cost, time and performance parameters can be assessed and controlled.3
5.4.1 Mission and Vision

Sometimes, mission and vision of a company are used synonymously or interchangeably. This is not correct. A clear distinction exists between the two. Mission is concerned more with the present; the vision more with the future. The mission statement answers the question: What is our business? The vision statement answers the question: What do we want to become or, which way should we be going? The mission statement focusses on the present strategic
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thrust, while the vision statement outlines the strategic path. All visionary companies have a vision statement. The vision of Microsoft (since 1999) has been to broadbase its outlook to empower people through great software anytime, anywhere and on any device including the PC and an incredibly rich variety of digital devices accessing the power of the Internet. Most progressive companies develop both a mission statement and a vision statement. Indian Oil Corporation (IOC) is a good example. Vision and mission statements of IOC4 are: Vision: Indian Oil aims to achieve international standards of excellence in all aspects of energy and diversified business with focus on customer delight through quality products and services. Mission: Maintaining national leadership in oil refining, marketing and pipeline transportation. Vision and mission statements can be generally found in the beginning of annual reports of companies. These statements are also seen in the corporate or long-term strategic plans of companies. These also appear in many company reports or documents like customer service agreements, loan requests, labour relations contracts, etc. Many companies also display them at prominent points or locations in company premises.
5.4.2 Mission Statements of Some Companies

Mission statements of individual companies vary widely. We give below, as examples, mission statements of two Indian companiesTata Steel and Hero Honda Motorsand, two US companiesPepsico and Dell computer. All these companies are in different kinds of business. Tata Iron and Steel Company (TISCO) The fundamental mission of TISCO (Tata Iron and Steel Company Limited; now Tata Steel) is to strengthen Indias industrial base through increased productivity, effective utilization of manpower and material resources, and continued application of modern scientific managerial methods as well as through systematic growth in keeping with the national aspirations. The company recognizes that while honesty and integrity are the essential ingredients of a strong and stable enterprise, profitability provides the main spark for economic activity. It affirms its faith in democratic values and in the importance of success of individuals, collective and corporate enterprise for the emancipation and prosperity of the country. Guided by its basic philosophy, the company believes
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in discharging its responsibility towards shareholders, employees, customers and the community. Hero Honda Motors It is our mission to strive for synergy between technology, systems and human resources to produce products and services that meet the quality, performance and price aspirations of our customers. While doing so, we maintain the highest standards of ethics and societal responsibilities. This mission is what drives us to new heights in excellence and helps us to forge a unique and mutually beneficial relationship with all our stakeholders. We are committed to moving ahead resolutely on this path. Pepsico Pepsicos mission is to increase the value of our shareholders investment. We do this through sales growth, cost controls and wise investment resources. We believe our commercial success depends upon offering quality and value to our consumers and customers; providing products that are safe, wholesome, economically efficient and environmentally sound and, providing a fair return to our investors while adhering to the highest standards of integrity. Dell Computer Dell Computers mission is to be the most successful computer company in the world at delivering the best customer experience in markets we serve. In doing so, Dell will meet customer expectations of the highest quality with leading technology, competitive pricing, individual and company accountability, best-inclass service and support, flexible customization capability, superior corporate citizenship and financial stability. Some companies combine their mission statements with statements of values and guiding principles of the organization. Ford Motor Company is an excellent example of this. Fords mission statement combined with statements of values and guiding principles is presented in Box 5.1.
Box 5.1: Fords Mission, Values and Guiding Principles

Mission Ford Motor Company is a worldwide leader in automotive and automotiverelated products and services as well as in newer industries such as aerospace, communications and financial services. Our mission is to improve continually our products and services to meet our customers needs,
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allowing us to prosper as a business and to provide a reasonable return for our stockholders, the owners of our business. Values How we accomplish our mission is as important as the mission itself. Fundamental to success for the Company are these basic values: PeopleOur people are the source of our strength. They provide us corporate intelligence and determine our reputation and vitality. Involvement and teamwork are our core human values. ProductsOur products are the end result of our efforts, and they should be the best in serving customers worldwide. As our products are viewed, so are we viewed. ProfitsProfits are the ultimate measure of how efficiently we provide customers with the best products for their needs. Profits are required to survive and grow. Guiding Principles Quality comes firstTo achieve customer satisfaction, the quality of our products and services must be our number one priority. Customers are the focus of everything we doOur work must be done with our customers in mind, providing better products and services than our competition. Continuous improvement is essential to our successWe must strive for excellence in everything we doin our products, in their safety and value and in our services, our human relations, our competitiveness and our profitability. Employee involvement is our way of lifeWe are a team. We must treat each other with trust and respect. Dealers and suppliers are our partnersThe Company must maintain mutually beneficial relationships with dealers, suppliers and our other business associates. Integrity is never compromisedThe conduct of our Company worldwide must be pursued in a manner that is socially responsible and commands respect for its integrity and for its positive contributions to society. Our doors are open to men and women alike without discrimination and without regard to ethnic origin or personal beliefs.
Source: Ford Motor Company
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Activity 1 Conduct a comparitive analysis of the mission and vision statements of any three companies of your choice.
3. The ________of a company is variously called a statement of philosophy, a statement of beliefs, a statement of purpose and, a statement of business principles. 4. Mission is concerned more with the ________; the vision more with the__________.
5.5 Corporate Philosophy

Corporate or company philosophy is sometimes called company creed, and the statement of corporate philosophy is called the creed statement. Normally, the corporate philosophy statement accompanies or appears as part of the mission statement. It envisages the basic beliefs, values, aspirations and philosophical priorities of a company which the management or strategic decision makers are committed to. The mission statement should reflect the corporate philosophy of an organization as clearly demonstrated in the mission statements of companies like Ford. Generally, corporate philosophies should not vary widely from one company to another. But, in practice, corporate philosophy statements of some companies may appear quite different or contrasting in terms of the guiding values or principles. ITC, the Indian multinational and Nissan Motor Manufacturing (UK) are two such examples. Corporate philosophy of ITC highlights concerns for various stakeholders whereas Nissan UKs philosophy focuses on two basic principles: people principles and key corporate principles. Statements of corporate philosophies of both the companies are given in Box 5.2.
Box 5.2: Corporate Philosophies of ITC and Nissan Motor (UK)

Corporate Philosophy of ITC 1. Concern for their ultimate customersmillions of customers. 2. Concern for their intermediate customersthe trade.
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3. Concern for their suppliersthe source of raw materials and ancillaries. 4. Concern for their employeestheir most valued assets. 5. Concern for their competitors whom they wish wellfor healthy competition ultimately benefits the customers. 6. Concern for the national aspirationIndias future. Corporate Philosophy of Nissan Motor (UK) People Principles (All other objectives can only be achieved by people) Selection: Hire the highest calibre people; look for technical capabilities and emphasize attitude. Responsibility: Maximize the responsibility; staff by devolving decision making. Teamwork: Recognize and encourage individual contributions with everyone working towards the same objectives. Flexibility: Expand the role of the individual: multiskilled, no job description, generic job titles. Kaizen: Continuously seek 100.1 per cent improvements; give ownership of change. Communications: Every day, face to face. Training: Establish individual continuous development programmes. Supervisors: Regard as the professionals at managing the production process; give them much responsibility normally assumed by individual departments; make them the genuine leaders of their teams. Single status: Treat everyone as a first class citizen; eliminate all illogical differences. Trade unionism: Establish single union agreement with AEU emphasizing the common objective for a successful enterprise. Key Corporate Principles Quality: Building profitably the highest quality car sold in Europe. Customers: Achieve target of No. 1 customer satisfaction in Europe. Volume: Always achieve required volume. New Products: Deliver on time, at required quality, within cost.
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Suppliers: Establish long-term relationships with single-source suppliers; aim for zero defects and just-in-time delivery; apply Nissan principles to suppliers. Production: Use most appropriate technology; develop predictable best method of doing job; build in quality. Engineering: Design quality and ease of working into the product and facilities; establish simultaneous engineering to reduce development time.
Source: ITC Limited and Business Horizons, January-February, 1995, 51
5. Corporate or company philosophy is sometimes called company creed. (True/False) 6. Generally, the corporate philosophy statements of most companies appear quite similar. (True/False)
5.6 Corporate Objectives and Goals

The mission statement of an organization is more generalized; corporate objectives are more focused and specific and generally have a clear time frame or period during which objectives should be fulfilled. Mission statements are qualitative; objectives are usually quantitative. Most of the objectives should be measurable in terms of results or achievements. But, the link between the mission statement and objectives should be quite intimate; objectives should follow from the mission statement or, be fully consistent with it. Corporate objectives and goals are similar, but, a distinction is generally made between the two. There is also difference of opinion among strategy analysts about what should be the correct distinction, or, rather, relationship, between the two. Ackoff has defined or distinguished the two as follows:
Desired states or outcomes are objectives. Goals are objectives that are scheduled for attainment during planned period.5
One need not make too much of a distinction between the two, which may become only a theoretical exercise without much of practical relevance. It is evident that objectives and goals have overlapping connotations. We will generally use the two terms synonymously with the only stipulation or rider that goals may be of longer term than objectives. Objectives can sometimes be purely short term.
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All businesses or companies have at least two common objectives: first, to make profit and, second, to offer to the owners reasonable rate of return on their capital. Most of the other objectives of a company either follow from or are related to these two basic objectives. These objectives may sometimes be tempered by some social or welfare factors or considerations, which may be included as additional input(s) in the objective statement. Details of objectives, however, including even profit objectives, can be different from one company to another. For example, some companies may seek short-term profit maximization or maximization of immediate financial returns; some other companies may decide to sacrifice short-term profit in the interest of long-term profitability. Some others may choose to have low profit on a sustained basis for competitive survival. Various company objectives can be broadly classified into three types or categories: strategic, tactical or operational. Strategic objectives are generally long term; tactical objectives are similar to strategic objectives, but, less strategic in nature; operational strategies are purely short term or operational as the name indicates. Examples of these three types of objectives are given below. Strategic Objectives Achieving a predetermined overall rate of return on capital employed Becoming a market leader in a particular product/market group Increasing shareholders earnings per share as far as possible Reducing companys dependence on borrowed capital Improving employee relations (particular focus on industrial relations) Tactical Objectives Increasing market share in some market segments Opening a subsidiary in a particular country within a specific period Extending the companys range of products or brands Introducing a new technology or a new manufacturing process Revising the organizational structure of one of the companys divisions or SBUs Operational Objectives Improving plant utilization Undertaking cost-cutting programmes
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Increasing sales during the next quarter Managing cash inflows/outflows Improving credit control or plant utilization measures6 Another way to distinguish among objectives is in terms of corporate objectives and unit objectives, because these indicate different levels of objectives with different characteristics. Corporate objectives, more correctly called corporate-level objectives, relate to the entire organization and are primarily expressed in financial termsprofitability, rates of growth of sales or turnover, dividend rates, share valuations, etc. Corporate-level objectives can also be of non-financial nature such as technology improvement or innovation, productmarket diversifications, objectives relating to stakeholders like customers, suppliers, employees or the community. But, many of these objectives also generally have a financial connotation. Unit objectives or unit-level objectives relate to individual units or SBUs and, not the entire organization. Unit-level objectives can be financial as well as non-financial, but, they always pertain to the individual units. Most of the unitlevel objectives generally follow from the corporate-level objectives. For example, an SBU may have a profit objective, but, this will be a translation of the corporate profit objective into the business unit-level objective. Many unit-level objectives are of an operational nature; and, because operations are many, multiple objectives are more common at the unit level than at the corporate level.
5.6.1 Organizational Life Cycle, Objectives and Strategy

Glueck and Jauch (1984) have mentioned about organizational life cycles and the linkages between life cycles, objectives and strategic focus of organizations. They have distinguished seven stages in organizational life cycle: birth, infancy, youth, youth adult, adult, maturity and old age. At each stage of the life cycle, there is a thrust on a particular objective, which is most important at that stage of the life cycle. Depending on the objective at each stage, the strategic focus of the organization will vary. Organizational life cycles vary from industry to industry and from company to company. Generally, high technology industries and companies will have shorter life cycles than low technology or labour-intensive industries and companies. Most of the industrial products and consumer durables, particularly consumer electronics, fall in the first category; consumer non-durables, particularly FMCGs, fall in the second category.
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But, it is a fundamental fact that every organization passes through a life cycle. And, during different stages of the life cycle, the predominant objectives will be different and, so also organizational strategies or strategic focus. The way to prolong the life cycle is to adopt newer technologies or to innovate. This is what steel and engineering companies do. Tata Steel is a good example.
7. Corporate objectives are more focused and specific compared to the_____. 8. Birth, infancy, youth, youth adult, adult, maturity and old age are part of the ______.
5.7 Strategic Intent

From corporate objective, we now move on to strategic intent. If a particular objective of a company becomes extremely focused and directed towards a specific target, the company is showing a strategic intent. To be a strategic intent, the objective has to be both ambitious and aggressive. The phase strategic intent was coined by Hamel and Prahalad (1989). According to Hamel and Prahalad, strategic intent goes beyond the conventional model of matching internal competence and resources with company objectives or targets. Strategic intent indicates a stretch; it involves setting goals or targets which demand stretching of the present resource base and capabilities for their fulfilment. Strategic intent may often mean challenging or overtaking the market leader. Some of the examples are: Toyota vs General Motors; British Airways vs Pan Am; Sony vs RCA; Komatsu vs Caterpillar and Titan vs HMT. Komatsus strategic intent in challenging Caterpillar is analysed in Box 5.3.
Box 5.3: Komatsus Strategic Intent to Challenge Caterpillar

Komatsus strategic intent to challenge Caterpillar embodies the companys changing mission, goal and objective. Today, Komatsu is the second largest producer of earth-moving equipment in the world next only to its arch-rival Caterpillar of US. The company has progressed to this position over a long
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period of timea period characterized by clear strategic intent, goal redefinition and evolving objective. In the 1950s, Komatsu was producing a limited range of low-quality products and, with a protected home market, had little or no incentive to improve. This position changed almost dramatically when Japan opened its market to foreign competition in the early 1960s. In 1964, Kawai succeeded his father as the chairman of Komatsu and announced the goal of Maru C: to encircle Caterpillar. This statement of strategic intentto concentrate all its efforts on surpassing Caterpillarwas to be the driving force behind the companys goal for more than two decades. Komatsu focussed initially on the objective of improving product quality to stop loss of sales in its home market. The company then signed licensing agreements with Caterpillars competitors to gain access to the latest American technology. This move enabled the company to expand its product range which made it more attractive to dealer networksvital for Komatsu to build up sales volume. The next step towards its goal was to enter secondary export markets such as China and eastern Europe which helped to build the critical mass required to challenge Caterpillar in the main markets of Europe and the US. By the 1980s, Komatsu was very successful: its growth from a regional producer of low-quality products to the second largest producer was impressive, and this was primarily attributed to its goal of challenging and encircling Caterpillar. But, the goal and strategy which had served the company so well for over two decades were beginning to be challenged by the changing business environment. Komatsus sales began to fall as demand for heavy earthmoving equipment decreased and competition intensified. But, Komatsu was less focussed on its market needs and continued to concentrate on outdoing Caterpillar. This strategy was beginning to be questioned, but, not the strategic intent of the company. As a response to environmental changes, Katada, Komatsus third president, changed the companys emphasis from providing construction equipment to being a total technology enterprise, and the new goal of Growth, Global, Groupwide was adopted. In three years since the new goal was introduced, Komatsu has reversed its sales decline and registered a 40 per cent growth in its non-construction equipment business. Komatsus strategic intent of Maru C continues.
Source: Adapted from G Johnson and K Scholes, Exploring Corporate Strategy (Prentice Hall of India, 1999), 245.
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Strategic intent of a company is clear about the end or the target, but, it is flexible with regard to the means and leaves room for creativity and improvization. Pursuit of a strategic intent may initially create a misfit between targets or ambitions and resources. This becomes a challenge to the top management of a company. The management strives to bridge the gap by relentlessly building new capabilities or strategic advantages. The essence of the strategy here lies in creating competitive advantage faster than the target competitor or the leader.
9. The phase ________indicates a stretch; it involves setting goals or targets which demand stretching of the present resource base and capabilities for their fulfilment. 10. The phase strategic intent was coined by ________and _________. 11. If a particular objective of a company becomes extremely focused and directed towards a specific target, the company is showing a strategic intent. (True/False) 12. Strategic intent does not mean challenging or overtaking the market leader. (True/False)
5.8 Company Responsibility

In developing mission statements, corporate objectives and goals and, business strategies, organizations must constantly remind themselves about certain responsibilities. These responsibilities are towards various stakeholders and the society at large. If companies have to balance various stakeholder expectations, many times, they may have to sacrifice short-term profit. Sometimes, profit objective may lead to the neglect of corporate governance and responsibilities. Examples are: Exxons oil leak in Alaska ; defective tyres of Firestone; Ford recalling many of their trucks; Union Carbide gas leak in India (Bhopal gas tragedy), etc. Companies, therefore, need to carefully examine the economic and social impacts of their missions, objectives and strategies.
5.8.1 Stakeholder Approach to Company Responsibility

We had defined stakeholders in the previous unit. But, many authors and practitioners of strategic management define stakeholders in a very broad sense.
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In the broadest sense, a stakeholder of a company is anybody or any organization who/which has something to do with the company. In this sense, stakeholders will include competitors, the government and the general public in addition to those mentioned in Unit 4. All these stakeholders have their expectations from the company and their own notions about company responsibility towards them. An illustrative statement of stakeholders view of company responsibility in terms of stakeholders claims is presented in Table 5.3.
Table 5.3 Stakeholders view of Company Responsibility
Stakeholder Stockholders Expectations/Claims
Sharing of profits; additional stock offerings; assets on liquidation; inspection of company books; transfer of stock; election of board of directors; and applicable additional rights. Creditors Interest payments as due and return of principal amount; security of pledged assets; relative priority in the event of liquidation; management and ownership prerogatives if conditions exist with the company (such as default of interest payments). Employees Attractive compensation package; job satisfaction; freedom from arbitrary behaviour on the part of company officials; share in fringe benefits; freedom to join union and participate in collective bargaining; satisfactory working conditions. Customers Competitive price; service provided with the product; suitable warranties; R&D leading to product improvement; facilitation of credit on attractive terms. Suppliers Continuing business; timely payment and servicing of credit obligations; professional relationship in contracting for purchasing and receiving goods and services. Governments Taxes (income, excise, sales, etc.); adherence to public policy dealing with the requirement of fair and free competition; discharge of legal obligations of business people (and business organizations); adherence to business law (MRTP, FEMA, etc). Unions Recognition as the negotiating agent for employees; to be recognized as a participant in the business organization; managements cooperation in fair wage settlement. Competitors Observation of the norms for competitive conduct established by the industry and society; ethical business practices; no price war. Local communities Place for productive and healthy employment; participation of company officials in community affairs; provision of regular employment; fair play; interest in and, support of, local government; support of cultural and charitable projects. The general public Participation in, and contribution to, society as a whole; assumption of some proportion of the burden of government and society; fair price for products and generating healthy competition.
Source: Adapted from Pearce and Robinson (2000), 50 (Figure 2.3)
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As shown in Table 5.3, each interest group of stakeholders has multiple expectations or claims. For all the stakeholders taken together, the expectations/ claims are too many and varied. Many of them are conflicting. So, if an organization attempts to incorporate all the interests of various stakeholder groups in the mission statements or objectives, it becomes almost an impossible task. Therefore, before attempting such an exercise, companies should do proper stakeholder analysis. Four steps or tasks are involved in such analysis: (a) Identification of important internal and external stakeholders (b) Understanding stakeholders specific claims (c) Reconciliation of stakeholders claims and prioritizing them (d) Matching stakeholder claims with other inputs or elements of the company mission or objectives. Every business or company faces different types of stakeholder groups which vary in number, size, influence and importance. Planners and strategy makers must identify all the important stakeholder groups and assess their relative weights and claims and their ability to affect companys performance and success. This would also involve understanding or analysing stakeholders claims carefully. Since claims can be too many, prioritization of claims is necessary. After prioritization, the problem of reconciliation comes. Reconciliation is essential to resolve the competiting, conflicting and contradicting claims of stakeholders. Finally, the distilled stakeholder claimsprioritized and reconciledhave to be matched or coordinated with other principal elements of the mission statement or objectives. These elements relate to the business for which the organization exists and, the product-market situation. When all these factors or elements are combined in a harmonized way, the mission statement, objective and strategies would be internally consistent and are likely to produce desired results. Methodologically, this is presented in Figure 5.2.
Internal stakeholders Board of directors Executive officers Stockholders Employees Union* Business/ product-market External stakeholders Customers Suppliers Creditors Government Union* Competitors General public
Company mission
Objectives
Figure 5.2 Stakeholders Chains, Company Mission and Objectives *Union is shown both as internal and external stakeholder because there is a difference of opinion on this. Sikkim Manipal University Page No. 120
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13. Corporates have responsibilities towards various stakeholders and the society at large. (True/False) 14. The competitors, government and the general public are all ______of a company.
5.9 Corporate Social Responsibility

As mentioned above, external stakeholders of an organization are too many and varied and many of them represent different sections or social groups. This implies that organizations should be socially responsible; that is, in addition to the interests of the shareholders, businesses or companies should also serve the society. This is corporate social responsibility (CSR). Corporate social responsibility can be defined as the alignment of business operations with social values. The conflict between internal and external stakeholders can go much further than mentioned so far. Some feel that this is the most problematic issue in deciding company responsibility. External stakeholders argue that internal stakeholders demand be made secondary to the greater need of the society; that is, greater good of the external stakeholders. Many of them feel that issues like pollution, waste disposals, environmental safety and conservation of natural resources should be the overriding considerations for formulation of policy and strategic decision making. Internal stakeholders, on the other hand, think that the competing or social claims of external stakeholders should be balanced in such a way that it protects the company mission, objectives and profitability. The debate continues. Strong exponents of CSR also talk of social policy for companies. They feel that social responsibilities of companies should be clearly enunciated and declared as social policy. Social policies may directly affect a companys products and services, technology, markets, customers and self-image. According to these thinkers, an organizations social policy should be integrated into all management activities including the mission statement and objectives. Many feel that corporate social policy should be articulated during strategy formulation, administered during strategy implementation and reaffirmed or changed during strategy evaluation.7
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5.9.1 CSR Practices in Corporates

Worldwide, companies are trying to integrate corporate social responsibility into their business operations and strategies. Microsoft, Coca-Cola, McDonalds, FedEx, IBM and Johnson & Johnson are some of the leading companies. In India also, many companies are integrating CSR into their business practices and making significant contributions to society. Companies like Infosys, Wipro, Hero Honda, ITC, Dr. Reddys, Godrej, Mahindra & Mahindra and Tata Steel are the foremost among them. Some of these companies have also established foundations to cater to the needs of society. Infosys and Wipro are two new-age companies which have integrated CSR initiatives into their business capabilities and have achieved stronger brand recognition through it. The Infosys Foundation works for both economic and social upliftment of the villages it has adopted. The foundation focusses on an overall development of the village. The developmental activities range from conducting rehabilitation to construction of orphanages, setting up libraries and promoting art and culture. Hero Honda has adopted a number of villages in and around its plant in Dharughera (near Delhi) for integrated rural development. ITCs E-choupals have not only helped to meet the information requirements of rural households, but also immensely contributed to the establishment of better relations with customers and rural suppliers. This has helped the process of integrated rural development. Many banks and financial institutions along with FMCG companies like Hindustan Unilever have recognized the importance of development of the rural sector. At the global level, CSR initiatives of companies are observed with interest. The Wall Street Journal has rated top 15 companies in terms of their social responsibility.8 These companies are 1. Johnson & Johnson 2. Coca-Cola 3. Wal-Mart 4. Anheuser Bush 5. Hewlett-Packard 6. World Disney 7. Microsoft 8. IBM 9. McDonalds 10. 3M 11. UPS 12. FedEx 13. Target 14. Home Depot 15. General Electric
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It should be noted that there is a difference in focus between CSR initiatives of Indian companies and the western companies. In India, CSR initiatives are mostly designed for the upliftment of the economically backward classes or sections of society with particular emphasis on the rural sector. In companies in developed countries, the focus is more on adoption of environment-friendly measures or schemes. A poll carried out by the American Society for Quality (ASQ) in 2006 for the ISO 26,000 Social Responsibility standards shows growing interest in CSR among organizations. Integration of CSR into business is likely to receive greater thrust with the creation of ISO 26,000 standards. The ISO 26,000 would provide guidelines on social responsibility of corporations and other organizations. This would help preparation of a road map by companies wishing to align their business activities with social initiatives.9
5.9.2 Corporate Social Responsibility and Profitability

Milton Friedman said in 1962: Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible. Capitalism and Freedom, 1962 Even after four decades since Friedman said this, corporate social responsibility has remained a contentious issue. Managers are struggling to decide to what extent they should adopt CSR in their strategy-building process. The debate or dichotomy is clear: Should a company behave in a socially responsible manner and make the profitability policy follow from this; or, should a company aim at profit maximization and try to be as socially responsible as possible. Exponents of CSR argue that business depends on, exists to serve and, cannot be separated from the environment; the environment is represented by external stakeholders like customers, competitors, suppliers, government agencies, local communities and society in general. Proponents of profit maximization like Friedman, on the other hand, think that a company has responsibility only for the financial well-being of its stockholders; and other objective or policy may threaten the health and prosperity of the company. The relationship between CSR and profit is complex. Although the two are not mutually exclusive, neither of them is a prerequisite for the other. Advocates of corporate pragmatism suggest that CSR and profit need not necessarily be viewed as two competing concepts. It may be more rational to include CSR as a factor or component in the strategy-building process of the
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business which should determine, along with other objectives, how to increase or maximize profit. Several research studies10 have been undertaken to determine the relationship between corporate social performance and financial performance. But, none of these studies has been able to establish the precise nature of relationship between the two. There may be a number of reasons for this. One reason may be that there is no significant correlation between social and financial performance. Another reason may be that the benefits of CSR are offset by its negative effect on profitability with no consequentially visible financial impact on the company. Other reasons include methodological weaknesses or drawbacks and/or problems with operational definitions or inadequacy of the conceptual models used in the studies. A general conclusion from these studies, however, is that certain relationship between CSR and profitability may exist, but, the nature of the relationship is not clear. Activity 2 Choose any five companies that are well known for their CSR practices. You may choose the companies mentioned in the text above. Write a report on each of the companys CSR activities.
15. _________can be defined as the alignment of business operations with social values. 16. In India, CSR initiatives are mostly designed for the upliftment of the economically backward classes or sections of society with particular emphasis on the rural sector. (True/False)
5.10 Social Audit

Exponents of CSR do not just want companies to be socially responsible. They also want to know how much or how far have they shown their social responsibility, that is, what is their social performance against stated social objectives. This can be measured through social audit. Social audit and social accounting are sometimes used synonymously. But, there is a distinction between the two. Social accounting is the process of selecting firm level performance variables, measures and measurement procedures; systematically
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developing information useful for evaluating the firms social performance to concerned social groups, both within and outside the firm.11 Social audit, on the other hand, is more specific or focussed; as just mentioned, social audit evaluates or measures a companys performance against planned or laid down social objectives or goals. A social audit should be like a financial audit or a commercial audit. Some even feel that social audit should be based on a social balance sheet with a "credit" side and a "debit" side ("inputs" and "outputs" or "costs" and "benefits").12 A social audit may be undertaken internally by companies; or, they may engage outside consultants to conduct the audit. But, as with financial audit, an outside consultant or agency minimizes organizational biases and brings more credibility to the evaluation process and the company. Social audit is important not only because a company wants to ensure that it has implemented CSR policy as planned or committed, but, also because it improves its public image and social standing. Also, social audit is conducted by some companies not only to evaluate their social performance, but, also for other purposes which are connected with their corporate performance and image building. Some companies, for example, use social audit to scan the external environment and determine their vulnerabilities to it; some others conduct social audit to improve their relations with the government and public bodies. Others use social audit to institutionalize CSR within their companies.
17. The social performance of companies can be measured against the stated social objectives through_________. 18. A social audit is always undertaken internally by companies. (True/False)
5.11 Case Study

Corporate Social Responsibility: Tata Group Goes Green* In India, many companies are integrating corporate social responsibility (CSR) into their business practices and are making significant contributions to society. Some of them have also set up foundations to cater to the needs of the society. Tata Group of companies, along with some others, are foremost among them. As an extension of CSR practices, Tata Group companies are going green. From being on the fringe for some time, the
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green movement is gaining momentum within the group. The movement covers all the major companies of the group, namely, Tata Steel, Tata Motors, Tata Chemicals and Indian Hotels. Tata Steel is planning to reduce carbon dioxide emissions at its Jamshedpur plant from the current 1.8 tonne to 1.7 tonne per tonne of liquid steel made by 2012. The ideal global benchmark though is 1.5. Tata Motors is setting up an eco-friendly showroom using natural building materials for its flooring and energy-efficient lights. The project is in its initial stages. The Indian Hotels Company, which runs the Taj Chain, is in the process of creating eco rooms, which will have energy-efficient minibars, organic bed linen and napkins made from recycled paper. There will not be any carpets since chemicals are used to clean these. And when it comes to illumination, the rooms will have CFLs or LEDs. About 5 per cent of the total rooms at a Taj hotel would sport a chic eco-room design.
Another eco-friendly consumer durable product that is in the works is Indica EV, an electric car that will run on polymer lithium ion batteries. Tata Motors plans to introduce the Indica EV soon. The groups large companies such as Tata Steel, Tata Motors, Tata Chemicals and Tata Consultancy Services contribute 80 per cent of the groups overall emissions and a panel, headed by Tata Sons Director J J Irani, has been formed to address this issue. Several companies have already implemented or are in the process of implementing clean development mechanism (CDM) projects. Tata Steel says it is currently working on more than 17 CDM projects with Ernst & Young and these projects are at various stages of approval at United Nations Framework
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Convention on Climate Change. Tata Power has said that of the total power, it would generate in the next 10 years, 25 per cent would be from renewable energy sources. Tata Motors is collecting environmental and energy data across its dealer and supply chain to compute their carbon footprint and indentify opportunities for cutting down on carbon dioxide emission. This initiative will enable sharing and deployment of ideas throughout the value chain. One of the most interesting innovations has come in the form of a biogasbased power plant at Taj Green Cove in Kovalam, which uses the waste generated at the hotel to meet its cooking requirements. Indian Hotels Management has mentioned that all of its domestic and international hotels would now be certified by Green Globe, an international agency. Tata Group Chairman Ratan Tata had said during the launch of Swatch, a low-cost water purifier made form natural ingredients: We have embarked on a group-wise initiative to create awareness and implement eco-friendly process wherever it is possible and in fact, look at some of our older processes to see how we can ensure that they are in compliance with the stateof- the-art exhibits. This is going to be long and expensive journey and we are fairly committed to it. This summarizes well the Tata Groups initiatives to promote the green movement.
* Mostly based on Going green: Tatas new mantra, The Times of India (Times Business), January 4, 2010.
5.12 Summary
Let us recapitulate the important concepts discussed in this unit: To define a companys business with precision is the job or responsibility of the planners and strategists. Precise or correct definition of business of a company is the foundation for the mission statement, objectives, plans, strategies and work and resource allocations. A mission statement is many in one. It embodies the business philosophy of a companys decision makers, implies the image the company wishes to project, reflects the companys self-concept, indicates the companys principal product or service areas and the customer needs the company seeks to satisfy.
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Corporate or company philosophy is sometimes called company creed; it envisages the basic beliefs, values, aspirations and philosophical priorities of a company. Corporate objectives are more focussed and specific compared to corporate mission. The mission statement is more general and qualitative; corporate objectives are usually quantitativemost of the objectives should be measurable in terms of results or achievements. But, corporate objectives should be fully consistent with the mission statement for its performance. Glueck and Jauch (1984) have mentioned about organizational life cycles and the linkages between life cycles, objectives and strategic focus of organizations. They have distinguished seven stages in organizational life cycle; birth, infancy, youth, youth adult, adult, maturity and old age. Worldwide, companies are trying to integrate corporate social responsibility into their business operations and strategies. Microsoft, Coca-cola, McDonalds, FedEx, IBM and Johnson & Johnson are some of the leading companies.
5.13 Glossary
Corporate mission: The business philosophy of a company, declaring what business the company is in and who its customers are. It provides focus and direction for the corporate development. Corporate philosophy: The beliefs, values, aspirations and philosophical priorities of a company which the management or strategic decision makers are committed to. Corporate vision: Refers to a companys specific intentions that are broad, all-intrusive and forward-thinking. Organizational life cycle: A model which proposes that over the course of time, business firms move through a fairly predictable sequence of developmental stages. Strategic intent: Setting goals or targets which demand stretching of the present resource base and capabilities for their fulfilment.
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1. How would you properly define a business? Explain with a diagram. 2. What is a mission statement? Differentiate between a mission statement and a vision statement. 3. Specify seven stages of organizational life cycle. Discuss the linkages between organizational life cycle, corporate objectives and strategy. 4. What is strategic intent? How is strategic intent different from corporate objective? Explain strategic intent with some examples. 5. What is corporate social responsibility (CSR)? Which are the issues involved in analysis of CSR? Name three companies with high CSR rating. 6. Explain the concept of social audit. Discuss Tata Steels social audit. Would you recommend social audit for every company?

1. Planners, strategists 2. Customer 3. mission statement 4. present, future 5. True 6. False 7. mission statement 8. Organizational life cycle 9. strategic intent 10. Hamel, Prahalad 11. True 12. False 13. True
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14. stakeholders 15. Corporate social responsibility 16. True 17. social audit 18. False

1. To define a companys business with precision is the job or responsibility of the planners and strategists. Refer to Section 5.3 for further details. 2. The mission statement of a company is variously called a statement of philosophy, a statement of beliefs, a statement of purpose and, a statement of business principles. Refer to Section 5.4 and 5.4.1 for further details. 3. Glueck and Jauch (1984) have distinguished seven stages in organizational life cycle: birth, infancy, youth, youth adult, adult, maturity and old age. Refer to Section 5.4 and 5.7 for further details. 4. The phase strategic intent was coined by Hamel and Prahalad (1989). Refer to Section 5.7 for further details. 5. Organizations should be socially responsible; that is, in addition to the interests of the shareholders, businesses or companies should also serve the society. Refer to Section 5.8 for further details. 6. A companys social performance against stated social objectives can be measured through social audit. Refer to Section 5.9 for further details.
5.16 References
1. Aupperle, K E, A B Carroll, J D Hatfield. 1985. An Empirical Examination of the Relationship between Corporate Social Responsibilities and Profitability. Academy of Management Journal. 28 June. 2. CarrolL, A, and F Hoy. Integrating Corporate Social Policy into Strategic Management. 1984. Journal of Business Strategy 4, Winter. 3. Drucker, P F. 1974. Management: Tasks, Responsibilities and Practices. New York: Harper & Row. 4. Ghosh, P K. 2003. Strategic Planning and Management. New Delhi: Sultan Chand & Sons.
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6. Hamel, G, and C K Prahalad. 1989. Strategic Intent, Harvard Business Review, MayJune. 7. Pearce, J R, and R B Robinson. 2000. Strategic Management. 7th ed. New Delhi: McGraw Hill. Endnotes
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P F Drucker, Management: Tasks, Responsibilities and Practices (New York: Harper & Row, 1974), 63. J R Pearce, and R B Robinson, Strategic Management, 7 th ed. (Mc Graw-Hill, 2000), 27. W R King, and D I Cleland, Strategic Planning and Policy (New York: Van Nostrand Reinhold, 1978), 124. An Interview with M A Pathan, Chairman, IOC, Financial Express, August 30, 1999 R Ackoff, A Concept of Corporate Planning (New York: John Wiley, 1970). R Bennett, Corporate Strategy , 2nd ed. (Financial Times/Pitman Publishing, 1999), 1819. A Carroll, and F Hoy, Integrating Corporate Social Policy into Strategic Management, Journal of Business Strategy, 4, No. 3 (Winter 1984). R Alsop, Perils of Corporate Philanthrophy, Wall Street Journal (January 16, 2002). Trying to Make a Difference, Financial Times (New Delhi: Times Publishing House, April 7, 2006). Two important studies are: K E Aupperle, A B Carroll, and J D Hatfield, An Empirical Examination of the Relationship between Corporate Social Responsibility and Profitability, Academy of Management Journal, (1985) 446 63; W N Davidson, and D L Worrell, A Comparison and Test of the Use of Accounting and Stock Market Data in Relating Corporate Social Responsibility and Financial Performance, Akron Business and Economic Review, 21 (Fall 1990), 7 1 K V Ramanathan, Theory of Corporate Social Accounting, Accounting Review (July, 1976): 516 28. C C Abt, The Social Audit for Management (New York: AMA, 1977): 44 45.
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Unit 6
Structure
Internal Competences and Resources
6.1 Introduction 6.2 Caselet Objectives 6.3 Competence Analysis 6.4 Resource Analysis 6.5 Value Chain Analysis 6.6 Cost Analysis 6.7 Financial Competence Analysis 6.8 External Sources of Competence 6.9 Case Study 6.10 Summary 6.11 Glossary 6.12 Terminal Questions 6.13 Answers 6.14 References
6.1 Introduction
For effectiveness, all management strategies should be based on or be commensurate with the internal competences of a company or its organizational capabilities. A number of theories or models have been put forward about internal capabilities or core competences which companies must acquire or use to survive in todays competitive market. Another way to put this is: the strategy a company adopts should depend on its competence level in terms of resources. Time and again, companies have discovered and/or experienced this, and they have achieved results. From 1980 to 1988, Canon grew by 264 per cent and Honda by 200 per cent. Canons personal copiers, Hondas entry into four-wheeler market, Casios small-screen colour LCD television, Yamahas digital pianoall were developed by respective core competencies. In India, Greaves introduced Garuda (the three-wheeler diesel auto) making use of its competence in diesel engines; IFB-Bosch entered the washing machine segment making use of its fine blanking technology. Dabur, with its expertise in traditional Indian medicine, has entered into food products (juice, honey, mint, etc.).
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6.2 Caselet
Core competence is the combination of processes and technologies that a company possesses. It includes the knowledge and experience of operations, the activities that bring the company high returns and the qualities that are considered central to the success of the organization. Core competence gives a company its competitive advantage by enabling it to deliver value to its customers. Changing core competence requires key skills and abilities in a new job or field of operations. Xerox is an example of a company that diversified and adopted new core competence to enable it to compete in a different market. In the early 20th century the company came into being with the invention of xerography, which was the precursor of photocopying technology. Through innovation, the company invented Ethernet technology, which helped prepare the foundation for the Internet of today. The shift from hard copy to digital technology required new core competence. Any core competence developed by a company stays with it for a long time.
Source: http://smallbusiness.chron.com/examples-changing-core-competencies18422.html
Objectives
After studying this unit, you should be able to: Define competence of an organization and the various types of competences Describe resource analysis Explain the concept and practice of value chain analysis Analyse the financial competence of an organization through cost analysis Discuss external sources of competence, including strategic outsourcing
6.3 Competence Analysis

Competence is the ability to perform a task or achieve some objectives. Competence levels vary across organizations, and, also, within an organization from time to time. Difference in performance among companies in the same market and product category is, due to the difference in their competence levels. This happens because only some companies are able to demonstrate the
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competences demanded by particular competitive situations. This applies to a particular company also. Just for survival, a company needs to possess a particular level of competence; but, for clear competitive advantage or sustained growth, a company would require a different level or type of competence. Four major types or levels of competence may be distinguished: 1. Core competence 2. Distinctive competence 3. Strategic competence 4. Threshold competence
6.3.1 Core Competence

Core competence of a company is one of its special or unique internal competence. Core competence is not just a single strength or skill or capability of a company; it is interwoven resources, technology and skill or synergy culminating into a special or core competence. Core competence gives a company a clear competitive advantage over its competitors. Sony has a core competence in miniaturization; Xeroxs core competence is in photocopying; Canons core competence lies in optics, imaging and laser control; Hondas core competence is in engines (for cars and motorcycles); 3Ms core competence is in sticky tape technology; JVCs in video tape technology; ITCs in tobacco and cigarettes and Godrejs in locks and storewels. Hamel and Prahalad, two of the greatest exponents of core competence, argue in The Core Competence of the Corporation (HBR, 1990) that the central building block of the corporate strategy is core competence. Hamel and Prahalad defined core competence as the combination of individual technologies and production skills that underlie a companys product lines. According to them, Sonys core competence in manufacturing allows the company to make everything from the Sony walkman to video cameras to notebook computer. Canons core competence in optics, imaging and microprocessor controls have enabled it to enter markets as seemingly diverse as copiers, laser printers, cameras and image scanners. To achieve core competence, a particular competence level of a company should satisfy three criteria: (a) It should relate to an activity or process that inherently underlies the value in the product or service as perceived by the customer. This is important because managers often take an internal view of value and either miss or deliberately overlook the customer perspective.
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(b) It should lead to a level of performance in a product or process which is significantly better than those of competitors. Benchmarking is a good way and is generally recommended for undertaking performance standard and also for differentiating between good and bad performance. (We will be discussing benchmarking in Unit 11). (c) It should be robust, i.e., difficult for competitors to imitate. In a fast changing world, many advantages gained in different ways (like a superior product feature, a new marketing campaign or an innovative price policy/strategy) are not robust and are likely to be short lived. Core competence is not about such incremental changes or improvements, but, about the whole process through which continuous change and improvement take place which lead to or sustain clearly differentiated advantage.1
6.3.2 Distinctive Competence

Core competence may not be enough, because it focuses predominantly on the product or process and technology, or, as Hamel and Prahalad put it; The combination of individual technologies and production skills. There are two problems with this. First, strong and aggressive competitors may develop, either through parallel innovations or imitations, similar products or processes which are highly competitive. This is what Japanese companies have done in the fields of electronics and automobiles, and now South Korea is doing to Japanese electronics; IBMs core computer technology is also facing the same problem. Second, to secure competitive advantage, only product, process or technology or technological innovation may not be enough; this has to be amply supported by special capabilities in the related vital areas like resource or financial management, cost management, marketing, logistics, etc. Hamel and Prahalad themselves have said later (1994):
We have to look at the organization as a portfolio of competencies, of underlying strengths, and, not just a portfolio and business unit .... We must also identify those core competencies that would allow us to create new products; and we must ask ourselves what we can leverage as we move into the future, and what we can do that other companies might find difficult.2
Distinctive competences may provide an answer to some of these points. Distinctive competence is based on the assumption that there are different alternative ways to secure competitive advantage and not only special technical and production expertise as emphasized by core competence.
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Distinctive competence includes core competence as one of the alternatives. But, there are other alternatives that are also based on organizational capabilities. So, distinctive competence is more broad based. Thompson and Strickland (1992) have defined distinctive competence as:
Distinctive competence is the unique capability that helps an organization in capitalizing upon a particular opportunity; the competitive edge it may give a firm in the marketplace.3
So, the focus in distinctive competence is on exploiting a market opportunity. And, depending on the market or competitive situation, one or some of the alternative competences may work ; for example, product or process superiority (core competence), product differentiation (situational or adaptability), cost effectiveness or cost efficiency to support a price strategy, special capability in marketing or distribution, etc. Under given circumstances, one of these, or a combination of some of these, will produce a distinctive competence which would be appropriate or best suited to exploit the opportunity and produce desired results. Since resources are limited, identification of distinctive competence may also help efficient allocation of resources. Reliance Industries, for example, has developed its distinctive competence in conceiving, implementing and managing large scale projects and mobilizing requisite resources for that. They do not think in terms of core competence. Mukesh Ambani, Chairman and MD, has described it like this:
We do not believe in core competence; we believe in building competence around people and processes to create value.4
6.3.3 Strategic Competence Strategic competence coexists with, or supports, core competence and distinctive competence. Strategic competence is the competence level required to formulate, implement and produce results with a particular strategy, for example, to outwit competitors. Hindustan Unilever did this. In the mid- and the late 80s, they used their strategic competence to out manoeuvre Nirma (which was launched very aggressively) and re-establish their leadership in the detergent market. Strategic competence may also involve combination or convergence of different capabilities as in the case of Hindustan Unilever.
6.3.4 Threshold Competence

Threshold competence is the competence level required just for survival in the market or business. The competence level of a company may be weaker than
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many of its competitors. Threshold competence may be adopted by No. 5 or No. 6 player in the market or those struggling to survive. Companies with threshold competence can, over time, graduate to a higher level of competence. But, continued threshold competence can also lead to closure of business. Multi-product or multi-SBU companies may often possess a portfolio of competences. In some product or business, they may have core competence, but, not in all. ITCs core competence is in tobacco and cigarettes, but, they have distinctive competence in hospitality business and agri-business. Hindustan Unilever has distinctive competence and strategic competence in many businesses. But, they had been surviving with threshold competence in vanaspati business (Dalda) for some time, and finally, they exited from that business. A conceptual portfolio of organizational competence consisting of core competence, distinctive competence, strategic competence and threshold competence is shown in Figure 6.1.
Figure 6.1 Portfolio of Organizational Competence
Activity 1 Now that you know what is core competence, choose any three companies and compare their core competence. Write a comparative analyis on the same.
1. The ability to perform a task or achieve some objectives is called ______. 2. Sonys competence in miniaturization; Xeroxs competence in photo copying; Canons competence in optics, imaging and laser control are examples of _______competence.
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3. The unique capability that helps an organization in capitalizing upon a particular opportunity; the competitive edge it may give a firm in the marketplace is called: (a) Strategic competence (b) Core competence (c) Distinctive competence (d) None of these 4. The competence level required to formulate, implement and produce results with a particular strategy, say, to outwit competitors, is known as strategic competence . (True/False)
6.4 Resource Analysis

Resources create competences. Resources also limit competences because for developing certain types or levels of competences or capabilities, commensurate resources may not always be forthcoming. This shows that competence analysis and resource analysis are intrinsically related. Resources do not mean only financial resources. In strategic management analysis, organizational resources can be classified into four major categories: Physical resources Financial resources Human resources Intangible resources Physical resources are buildings (factory or office), machines or production capacity. The nature and quality of physical resources depend on the age, condition, location and capability of these resources. Financial resources include cash, capital, debtors, creditors and suppliers of funds (shareholders, banks, financial institutions, etc.). Financial resources are the source of all investments of a company. Human resources are people. Human resources include skills, knowledge applications and adaptability of people or employees in an organization. In knowledge-based economies and todays complicated business management systems, human resource has become the most valuable asset. Intangible resources are also called intellectual capital, and, of late, are being recognized as of strategic importance to companies. Intangible resource includes knowledge or intellectual capital in the form of patents, brands, business systems, customer databases and relationships with strategic partners. Intangible resource
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or intellectual capital also includes goodwill or corporate image of an organization which helps immensely during business transactions. Intellectual capital forms an important asset of many organizations, and, there are thoughts to find ways of assessing and accounting for value of intangibles.5 Like competences, resources can also be of different levels of adequacy or effectiveness. For example, threshold resources, like threshold competences, are resources required to stay in business or in a market or segment. Threshold resources may sometimes be the minimum level required for market entry. But to stay in business, the threshold level has to increase over time because of the actions of the competitors and/or new entrants. So, the threshold resource level is always relative to the market position of a particular product. In contrast, unique resources like core competence or distinctive competence enable an organization to establish or sustain its product or business better than competitors resources. Uniqueness of the resources also makes these difficult to imitate. Resources may have to be continuously developed and/or adjusted to competence levels to secure or sustain competitive advantage. Due to the development of technology and changes in competition levels, some resources may become redundant at some point of time. Unless organizations are able to dispose of or abandon redundant resources and develop new resources, they may not be able to stay in competition. Banking sector is a good example. In the US and Europe, many traditional banks are still operating with a large number of branches. However, in the new technology world, many new competitors do not have any branches and have invested heavily in call centres and Internet banking. In 2000, average transaction cost with branch operation was 1 compared with 54 p through telephones and only 15 p through the Internet. Also branch transaction costs are rising as volumes are falling and more customers are switching to e-banking.6 So, the message is clear. Organizations may have to change their resource base as competitive situation demands.
5. In strategic management analysis, organizational resources can be classified into categories: (a) Physical and non-physical resources (b) Financial and human resources
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(c) Physical, financial and human resources (d) Physical, financial, human and intangible resources 6. Knowledge or intellectual capital in the form of patents, brands, business systems, customer databases and relationships with strategic partners is classified as ________resource. 7. In order to secure or sustain competitive advantage, _________ may have to be continuously developed and/or adjusted to competence levels. 8. Absence of _____may lead to underutilization or wastage of resources.
6.5 Value Chain Analysis

Various competences and resources of an organization can be integrated into a chain of activities which an organization performs to meet customer demand. Since each of these activities is expected to create value when it is performed, the chain can appropriately be called a value chain. Michael Porter (1985) introduced the concept of value chain analysis. Now, it has become common for professional companies to do this analysis. Value chain analysis helps in understanding how value is created in organizations through various activities. These activities can be divided into two broad categories: primary activities and support activities. Primary activities are directly concerned with the creation or delivery of a product or service or customer value. Support activities, as the name indicates, support the primary activities, or, more, correctly, help to improve the effectiveness or efficiency of primary activities. Primary activities can be divided into five major areas: inbound logistics, operations, outbound logistics, marketing and sales and service. Inbound logistics: These are activities concerned with receiving, storing and distributing raw materials and inputs to the production or service division. Inbound logistics also include materials handling, stock control, transportation of inputs, etc. Operations: These are activities involved in transforming various inputs into final product or service. Operations also include machinery, packaging, assembly, testing, etc. Outbound logistics: These include collecting, storing and distributing or delivering final products to customers. For tangible products (industrial or
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consumer goods), this would include warehousing, materials handling, transportation, etc. In the case of service, these may be more concerned with arrangements for bringing customers close to the service location. (e.g., sports events, entertainment events, etc.). Marketing and sales: These comprise activities such as advertising, sales promotion, selling, sales force management, pricing, channel selection, channel management, etc. Marketing and sales provide the most important link between the company and the customer. Service: These include activities which maintain or enhance value of a product or service such as installation, repair, training, supply of spares and prompt after-sales service, etc. Support activities can be divided into four categories: procurement, technology development, human resource management and organizational infrastructure. Procurement: This relates to the processes for acquiring or purchasing various resource inputs like raw materials, intermediate inputs, equipment, machinery, etc. Procurement primarily supports inbound logistics and operations. Technology development: Technology is involved in all value creations. Key technologies are concerned directly with the product, (e.g., R&D, product design, quality control, etc.,) or with processes, (e.g.,process development). Technology development is fundamental to the innovative capacity of an organization. Technology mainly supports operations. Human resource management: This provides support to all primary activities in the value chain. More specifically, HRM is concerned with recruiting, managing, training and developing people within the organization. Infrastructure: This is the organizational system including finance, MIS, general management, strategic planning, etc. Infrastructure also comprises organizational structures, values and culture. Infrastructure, directly or indirectly, supports all primary activities. Figure 6.2 shows the value chain in an organization in terms of primary activities and support activities and the value or margin these activities are expected to create. Primary activities and support activities may appear to be two separate blocks, but, in reality, they are all interconnected activities in a cohesive value chain.
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Figure 6.2 Value Chain in an Organization Source: M E Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York: The Free Press, 1985).
Competences or activities in the value chain can contribute to customer value in two ways. First is competences in individual activities (for example, operations or production or marketing). Second is the competence in linking activities together. This includes the ability to integrate all the separate activities (both primary and support activities) to deliver some customer value, and, thereby ensure that they do not contribute to conflicting goals. An organization may have core competence in manufacturing processes that produce engineering products of unique specifications very difficult for competitors to match or imitate. But, the company may not be able to gain competitive advantage from this unless it is able to take care of its inbound logistics, outbound logistics and marketing and sales. It is the combined effect of all these activities which creates or destroys value. Organizations can effectively use value chain analysis to identify the weak links (and also the strong links) in the chain for further analysis, review and necessary action. In using the value chain, an organization should concentrate on two aspects. First, it should ascertain how different activities, both primary and support, are being performed so that contribution of each activity to organizational objectives or goals can be measured. If a particular activity is not contributing satisfactorily, required changes can be made in that. This is the job of strategic management. The second aspect is the coordination or integration of various activities into a cohesive value chain. Many companies perform individual activities efficiently, but, in the absence of a proper coordination mechanism, their overall effectiveness is low. The solution to this is integrated value chain. Many companies are re-engineering their organizational processes for performing various activities in their value chain in an integrated way.7 Value chain analysis of Hero Cycles is given as an example in Box. 6.1.
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Box 6.1: Value Chain Analysis of Hero Cycles

Hero Cycles is a single product company and concentrates exclusively on manufacturing bicycles. Hero Cycles has positioned its product as lowpriced, functionally useful and suitable for mass marketing. Its strategy is based on overall cost leadership and has adopted commensurate strategies for all activities in the value chain to become the most competitive in the industry. Value chain analysis of Hero Cycles is given here in terms of primary activities and support activities. Primary Activities The first primary activity in the value chain is inbound logistics. This involves inward movement of different types of materials. These materials are divided into three categories: raw materials (mostly steel); components requiring further machining at the companys plant; and, components and parts (like tyres, tubes and other accessories) which can be assembled without any further processing. The company saves cost in inbound logistics in several ways. First, except for some critical components, it procures components from small-scale manufacturers in the neighbourhood which enjoy cost advantage in terms of lower overhead and also transportation. Second, the company pays its vendors in cash and enjoys cash discount. Third, the company has trained many component manufacturers and because component manufacturing does not involve high technology, they produce quality components at reasonable cost. In operations, the company saves cost through higher productivity which is achieved through motivated and loyal workers. In few cases like rim manufacturing, automation helps higher productivity. In outbound logistics, Hero Cycles has adopted just-in-time approach for finished products in which bicycles are transported within one week of their manufacturing. The company has appointed stockists in almost all cities of the country to make outbound logistics more effective. In marketing and sales, the company has reduced the number of intermediaries in its distribution channel and goes directly to the stockists and, through the stocktists, to customers. The company believes that in the present competitive environment, satisfied customers are the best source of publicity and promotion. This way, marketing and selling cost of the company is very low, if not negligible.
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In service, the company does not have to do much in terms of managing the activity because bicycle requires very little after-sales service. Support Activities Hero Cycles conducts various support activities in such a way that it either saves cost on these activities directly or they provide strong support to primary activities. Firm infrastructure which includes general management, finance, accounts, etc., performs efficiently. The company is able to achieve significant cost saving in finance area. Since it is a cash rich and debt-free company, it does not have to bear any interest burden in contrast to some others in the industry. In human resource management, the company is far superior to its industry competitors, and its HR policies and practices can even be the envy of many organizations outside the bicycle industry. The companys HRM practices are based on one basic value: employees even at the lowest level are treated at par with owners and shareholders and top-level managers. Even the chairman remembers the names of workers and calls each of them by his/her name. This infuses a feeling of belongingness among the employees. In technology development, the company has adopted a policy of informalization rather than structuring too many processes and systems. Its R&D activities are always aimed at making bicycles more functionally useful rather than adding styles and colours which are reserved for cycles for the export market. In procurement, there are two centralized systems; one for human resource, and the other for physical resource. Procurement system for physical resources gives ample support to inbound logistics. In conclusion, it can be said that Hero Cycles value chain provides high value to its customers and also to the organization. This differentiates the company from its competitors. Activity 2 Having read the value chain analysis of Hero Cycles, choose another company and compare its value chain with that of Hero Cycles.
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9. The chain of activities that an organization performs to meet customer demand is called _________. 10. The various activities in a value chain can be divided into two broad categories: (a) primary and secondary activities (b) primary and support activities (c) high-level and low-level activities (d) priority and non-priority activities 11. Inbound logistics, operations, outbound logistics, marketing and sales and service are classified under (a) primary activities (b) secondary activities (c) tertiary activities (d) support activities 12. Activities that help to improve the effectiveness or efficiency of primary activities are known as _______.
6.6 Cost Analysis

Price or market competitiveness of a product or business depends on its cost competitiveness. Cost competitiveness itself is a competence or capability. Therefore, cost management becomes a very important strategic function of an organization. Cost competitiveness implies two thingscost efficiency and cost effectiveness. Both may appear same or similar as concepts, but analytically the difference between the two is quite significant. Efficiency is an input-output relationshiphow much has been produced or achieved per unit of input or cost. Given an input or cost level, higher the output, more efficient is the production process. Conversely, cost efficiency may be defined as the level of resources or cost required to produce a particular output or create a given value. So, lesser the resources or cost, more efficient is the value creation process. Effectiveness is more plan-output relationshiphow much of the plan has been fulfilled or realized given a resource level or cost. Effectiveness,
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therefore, is the ability to contribute to the defined level of objectives or goals or to produce results. Both cost efficiency and cost effectiveness are important dimensions of cost management. Cost efficiency and cost effectiveness are not exclusive to each other. So, companies can simultaneously aim at cost efficiency and cost competitiveness which can lead to cost competence. Cost competence, achieved through proper cost management, can also contribute to cost efficiency and cost effectiveness (Figure 6.3).
Figure 6.3 Cost Management, Cost Competences, Cost Efficiency and Cost Effectiveness
6.6.1 Cost Efficiency

Various factors contribute to cost efficiency in an organization. These may even include factors which are not directly related to cost or cost management like general work environment or culture in the organization, motivation levels of managers, approach of the top management, etc. However, here we shall consider the factors that are directly related to cost competence or cost efficiency. Four major factors may be identified: economies of scale, supply cost or cost of raw materials and inputs, product or process design, and experience or experience effect (Figure 6.4).
Figure 6.4 Sources of Cost Efficiency Source: G Johnson, and K Scholes, (2005), 166. Sikkim Manipal University Page No. 147
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Economies of scale: We know from economics that economies of scale are the most conventional and, also a very important source of cost efficiency. In manufacturing organizations, fixed cost (per unit of output), which initially remains very high, starts going down progressively as output increases. Because of this, average cost of output decreases as output increases, or the scale of operations increases. This also means increase in capacity utilization of plant and machinery. In non-manufacturing organizations or non-manufacturing activities, economies of scale can be effected through mass advertising, mass marketing, extensive distribution, etc. Economies of scale can also be achieved through global partnering and global networks. Many MNEs sustain their competitiveness in the market through scale advantage. Supply cost: Costs of raw materials and various inputs constitute supply cost. Inputs generally include raw material inputs or intermediate inputs and energy inputs. In an extended sense, these inputs can include factor inputs like labour also. In highly raw material-intensive industries like steel, cement and non-ferrous metals, supply costs constitute a very high proportion of total cost of the product and, therefore, become a very important determinant of the level of cost efficiency. In these industries, location influences supply cost because transportation becomes a significant component of total raw material cost. This is the reason why, in these industries, many plants are located near the raw material source or mines. This gives cost advantage to companies. In such industries, ownership of raw material can also give definite cost advantage. This is why steel manufacturers like Tata Steel and nonferrous metal manufacturers, like NALCO, BALCO, and HINDALCO, have their own captive sources of raw materials (ores). In fact, NALCO, primarily because of its captive sourcing of high quality bauxite, is one of the lowest cost producers of aluminum in the world. Even in those industries which are not highly raw material-intensive, supply cost management becomes an important determinant of cost advantage or cost disadvantage. Inventory (of raw materials, components and spares) planning and management are also part of this. Companies are becoming increasingly aware of this. The automobile sector is a good example. All Japanese automobile manufacturers have established close linkages with their vendors suppliers of automobile ancillariesthrough different kinds of partnerships and alliances and implementation of JIT principles. Maruti in India is also a very good example. Companies are also reducing the number of vendors to make the raw material supply chain more cohesive and cost efficient. Product/process design: Product design starts at the R&D stage even if it is an imitation. Many feel that product design is the first step in efficient cost management, because the nature of the product determines, to a large extent,
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the raw material and other input requirements and supply cost. Cost efficiency in production processes can be achieved through better process engineering, increase in productivity (depends partly on the technology level) and better working capital management. Many companies have achieved cost efficiency through these methods. Cost competitiveness through product design need not, however, be confined to manufacturing or production process alone. Innovative product design can lead to cost saving through its influence on other parts of the value chain also like distribution or after-sales service. Canon proved this in its battle with Xerox. Xeroxs competitive advantage was built on its service and support network. Canon designed a copier which needed far less servicing8 and, through this, made one of the strong competence areas of Xerox largely redundant. In the process, Canon also achieved cost efficiency by spending much less on its service network. Experience: Experience in any activity in an organization can be an important source of cost advantage or cost efficiencybe it manufacturing or any other functional area. Many studies have been conducted to establish the relationship between cumulative experience gained in an organization and its unit cost. The relationship is generally expressed as an inverse relationship between cumulative output and unit costunit cost decreases as cumulative output increases. This is shown in the experience curve (Figure 6.5).
Figure 6.5 The Experience Curve
The experience curve is the result of two major factors, namely, the learning effects and economies of scale. Learning effects refer to cost saving which comes from learning by doing. Labour, for example, learns through repetitive processes, how to perform a task more efficiently on the shop floor or in assembly
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lines. Due to this, labour productivity increases and this leads to cost reduction or cost efficiency. Similarly, in a new production process, management learns over time, how to manage the new operations more efficiently; and, management efficiency eventually leads to cost efficiency. Same applies to operations like logistics. Economies of scale as mentioned above contribute to cost reduction by distributing fixed cost over larger output. Learning effects, however, may die out after some time. Some feel that learning effects are really important during the start-up period of a new process. Even if it is a complex assembly process, workers may almost reach perfection after a few years, and all effects on the experience curve may cease after two or three years. Any further downward slope of the curve (that is, cost reduction) may occur only because of economies of scale which can continue over larger output. In a cost-conscious organization, all the four major factors, i.e., economies of scale, supply cost, product/process design and experience may play active roles for achieving cost efficiency. However, economies of scale and experience effect can occur only after an organization has been in operation for sometime. Newly launched companies or products must concentrate on product/ process design and supply cost and try to reduce the experience cycle through a more efficient management system.
13. Cost competitiveness implies two things_______and __________. 14. Factors like economies of scale, supply cost or cost of raw materials and inputs, product or process design, and experience or experience effect contribute to __________in an organization. 15. The more the resources or cost, more efficient is the value creation process. (True/False) 16. Companies that achieve cost efficiency and cost competitiveness also achieve _________.
6.7 Financial Competence Analysis

Financial competence or financial health of an organization can be analysed with the help of various financial ratios. Financial ratios are computed from a companys income statement and balance sheet. Comparison of ratios over time, and with industry averages, give meaningful statistics which can be used
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to identify and analyse or evaluate financial strengths and weaknesses. Various financial ratios of an organization can be classified into five major categories: (a) Liquidity ratios (b) Leverage ratios (c) Activity ratios (d) Profitability ratios (e) Growth ratios Liquidity ratios relate to current assets and liabilities and indicate an organizations short-term obligations. Leverage ratios pertain to debts and show the extent to which an organization has been financed by debt. Activity ratios relate turnover to resources and measure how effectively an organization is using its resources. Profitability ratios pertain to returns and margins and show different measures of returns/margins on sales and investment. Growth ratios relate to organizational growth indicators and measure an organizations growth in sales, income, etc. Ten key financial ratios for a company are given below: 1. Current ratio 3. Inventory turnover ratio 5. Gross profit margin 7. Return on total assets (ROA) 9. Earnings per share 2. Debt-to-equity ratio 4. Total assets turnover ratio 6. Net profit margin 8. Return on equity (ROE) 10. Price-earnings ratio
Generally speaking, higher the values (or percentages) of the above ratios (except debt-equity ratio), better are they as indicators of financial competence or health of a company. The most desirable ratios for a company would depend on factors like nature of the companys business, market or competitive situation and the industry average. Financial ratio analysis should be carried out by financial analysts in the company or the strategic planning group or outside consultants. Such analysis should not be done in isolation; this should be done in relation to other resources and competences to optimize overall internal competence of an organization. Financial ratio analysis, however, is not without limitations. Financial ratios are based on accounting data, and, companies differ in their treatment of items like depreciation, inventory valuation, reserves, tax provisions, R&D expenditures, etc. These factors can affect comparative ratios. Therefore, conformity to industry ratios does not automatically mean that a company is performing well. Similarly,
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deviations from industry averages also do not indicate that a company is doing badly. For example, a high inventory turnover ratio can indicate efficient inventory management and, a strong working capital position, but, it can also mean a serious inventory shortage and a weak working capital position.9
17. Financial ratios are computed from a companys ________statement and balance sheet. 18. Financial ratio analysis should be done in relation to other resources and competences to optimize overall internal competence of an organization. (True/False)
6.8 External Sources of Competence

Not many companies can hope to possess all the competences required to survive in todays highly complex and rapidly changing market. Many organizations are, therefore, entering into alliances, joint ventures or network relationships with others within their business system to overcome identified internal weaknesses. Studies conducted by the Nordic Business Schools on the performance of Swedish firms in international markets revealed that many companies faced a competence inadequacy situation, e.g., not owning appropriate technology or not having the marketing skills to enter a new market segment. And many of these companies sought solutions to this problem by entering into network relationships with other companies (Hakansson, 1989). Studies also showed that one of the commonest forms of business networking was forming alliances to achieve faster rates of product and/or process innovation. Conway (1987) has constructed a framework in an attempt to define various potential participants (or actors) whom a company might like to bring together for formation of a network to overcome an identified innovation competency problem. These include : (a) Upstream innovators found among the companys suppliers. (b) Downstream actors found within the companys customer base. (c) Horizontal actors found from companies within the same market system.
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(d) Knowledge participants such as universities and research institutes. (e) Regulatory actors, e.g., governments or statutory bodies. (f) Environmental actors, e.g., environmental pressure groups. The implications of the Conway framework are that the company which feels that internal innovation competences are not sufficient to adequately support future business plan, is now able to consider the formation of external alliances to overcome this problem.
6.8.1 Strategic Outsourcing

Capability sourcing is becoming the new trend. It is no longer a companys ownership of capabilities which matters, but, what matters is its ability to make the most of available critical capabilities whether they reside inside or outside the company. Outsourcing is becoming so sophisticated that even core functions like engineering, R&D, manufacturing and marketing canand often should be moved outside. And, this trend is changing the way companies think about their organizations, their value chains and, their competitive position.10 Experience of companies like Chrysler, American Express and 7-Eleven (the US retailer) have shown that strategic outsourcing can significantly improve a companys competitive position. Gottfredson, Puryear and Phillips (2005) have suggested a framework for capability sourcing or strategic outsourcing. To complete the outsourcing process, a company has to move progressively in three steps. The first step is to identify the competences or capabilities of business, which constitute the core of the core of a company. These are activities which the company does better and cheaper than its rivals. For 7-Eleven, the core of the core is in store merchandising and product ordering; for Pfizer, it is developing and marketing pharmaceutical compounds; for American Express, it is identifying customer segments and card offering tailored to them. Everything exists in the company to support the core of the core. In deciding what to outsource, and what not to, a company should consider two factors; first, whether a capability is proprietary, that is, possessed only by the company and, also unique to itself and second, whether it is common enough and possessed by many in the industry. Based primarily on these two factors, a company should decide which capabilities have high outsourcing potential and which should remain under the companys control. This can be seen more clearly in a sourcing probability map. This is given in Figure 6.6. The vertical axis of the
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map depicts how proprietary a process or function or capability is; the horizontal axis shows how common a process or function is. The less proprietary and more common a process or capability is, the stronger a candidate it is for outsourcing.
Figure 6.6 Outsourcing Probability Map Source: M Gottfredson, R Puryear, and S Phillips, Strategic Sourcing: From Periphery to the Core, Harvard Business Review (February, 2005), 138.
Activities or capabilities which appear in the lower left segment of the map are strong prospects for captive sourcing. Such capabilities may even be candidates for insourcing, that is, if a company feels that it is really the best at/ in a given process or capability, it should have an opportunity to perform the activity for other companies also. A good example of successful insourcing is FedEx. FedEx plans and manages inbound transportation for more than 1500 product suppliers into 26 General Motors power train facilities. This capability puts FedEx at the leading edge of the $225 billion logistics outsourcing industry.11 Capabilities, which fall in the upper right segment of the map, are strong candidates for outsourcing. Capabilities, which fall in the middle of the sourcing
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map, generally require more detailed analysis of the company and the industry. An organization needs to consider such factors as substitute products, standards and regulations to make out how these capabilities will shape in the future. A decision for outsourcing should be based on these considerations. The second step in the capability sourcing process is for a company to decide how it should outsource the identified capabilities. There is a cost for capability sourcing: there is a quality angle also. How does a company decide on these factors? A capability assessment map (Figure 6.7) can be a good guide.
Figure 6.7 A Capability Sourcing Map Source: M Gottfredson, R Puryear, and S Phillips, Strategic Sourcing: From Periphery to the Core, Harvard Business Review (February, 2005), 138.
The map depicts each capability according to its cost and quality relative to the top-performing competitors or suppliers (industry median). This map helps a company decide which key capability gaps it should fill. For example, activities or capabilities which fall in the upper-left segment (relatively high cost capabilities whose quality levels exceed requirements) should be outsourced to low-cost providerseven if it means a reduction in quality.
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The third and final step in capability sourcing is a reality check or more a feasibility check in terms of location or physical proximity of the capability to be outsourced. For example, if it is a tangible product or technology, physical proximity becomes an important factor because of cost and time implications. But, for intangibles like R&D, design, engineering, etc., physical proximity may be much less important. A company, however, has to look into this reality or feasibility aspect. According to Gottfredson, Puryear and Phillips, if a company goes through the proposed three-step process, it will have the right framework for a comprehensive capability sourcing strategy.
19. One of the commonest forms of business networking is forming ______to achieve faster rates of product and/or process innovation. 20. In order to improve their competitive position, companies are adopting ______, that is, moving one or more of the functions in the value chain outside.
6.9 Case Study

Southwest Airlines: Excellence through Integrated Cost Management According to many, Southwest Airlines is the best airline in the US and one of the best in the world. Analysts and even competitors attribute this to Southwests low-cost strategy. But, closer analysis reveals that it is integrated cost management or leadership which gives the company its competitive position in the global airlines industry and is also the source of its profitable operations. Six strategic factors contribute to Southwests integrated cost management leadership. These are: very low ticket prices; limited passenger service (for example, no meals, no baggage transfers); lean and highly productive ground and gate crews; frequent, reliable departures; high aircraft utilization; and short-haul, point-to-point routes between mid-sized cities and secondary airports.* These factors or activities are linked in a kind of value chain that leads to highly effective cost management. This also results in high profitability.
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It is often asked, how does Southwest make high profits? The answer is to be found, in addition to other factors, in price risk management or hedging of aviation fuel price. Southwest has concluded hedging agreements till 2009 with hedge price not exceeding $35 per barrel for at least 25 per cent of its annual fuel requirements. It can also exercise option for about 25 per cent of its fuel needs for $26 per barrel. In a highly volatile crude oil/ fuel oil market, price hedging gives very significant cost advantage to a company. Due to its successful integrated cost management, Southwest has become highly competitive in the airline industry. Many full service airlines have tried to adopt Southwests cost strategy, but they have remained unsuccessful, primarily because they have not been able to properly emulate or integrate various cost management actions/ functions. Kelly, Southwests CEO, said: I feel very good about our competitive position as long as we continue to improve. In Southwest Airlines, cost management, competitive action and growth are closely interlinked. Integration of, and fit among, critical activities is key to sustainable competitive advantage of all Companies, including Southwest Airlines. Porter describes it like this:
Strategic fit among many activities is fundamental not only to competitive advantage, but also the sustainability of that advantage. It is harder for a rival to match an array of interlocked activities than merely to imitate a particular ... approach.** * Hitt et al, Management of Strategy (Cengage Learning, India Edition, 2007), 107. ** M E Porter, What is Strategy? Harvard Business Review, 74, no. 6 (1996).
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6.10 Summary
Let us recapitulate the important concepts discussed in this unit: For effectiveness, all management strategies should be commensurate with internal competencies or capabilities of a company. Four major types or levels of competence are: core competence, distinctive competence, strategic competence and threshold competence. Resources create competences. Resource also limits competences because of resource crunch. In strategic management analysis, organizational resources can be classified into four major categories: physical resources, financial resources, human resources and intangible resources. Various competences and resources of an organization can be integrated into a chain of activities which performs to meet customer demand. This chain of activities is a value-creating process and is more appropriately described as a value chain. Activities in the value chain are divided into primary activitiesactivities directly concerned with the creation of a product or customer valueand support activities. Price or market competitiveness of a product on business depends on cost competitiveness, Cost competitiveness itself is a competence or capability. Cost competitiveness implies two thingscost efficiency and cost effectiveness. Financial competence or financial health of an organization can be analysed with the help of five categories of financial ratios: liquidity ratios (relate to current assets and liabilities), leverage ratios (pertain to debts), activity ratios (relate turnover to resource), profitability ratios (returns/ margins on investment/sales) and growth ratios (growth indicators). Capability sourcing is becoming the new trend and it can significantly improve competitive position.
6.11 Glossary
Competence: The ability to perform a task or achieve some objectives. Core competence: The special or unique internal competence of a company.
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Distinctive competence: The combination of individual technologies and production skills of a company. Economies of scale: Reduction in cost per unit resulting from increased production, realized through operational efficiencies. Liquidity ratios: Ratios that measure a firm's ability to meet its shortterm financial obligations on time, such as the ratio of current assets to current liabilities. Outsourcing: When a company or corporation will either buy products it intends to resell or hire another company to perform certain functions that would cost them too much to do themselves Strategic competence: The competence level required to formulate, implement and produce results with a particular strategy, say, to outwit competitors. Threshold competence: The competence level required just for survival in the market or business. Value chain: Various competences and resources of an organization that can be integrated into a chain of activities which an organization performs to meet customer demand.

1. Distinguish between core competence, distinctive competence, strategic competence and threshold competence. Use examples. 2. Distinguish between different kinds of resources. Which are intangible resources? 3. What is a value chain? Analyse the roles of primary activities and support activities in a value chain. 4. Explain the concept of cost efficiency of an organization. Analyse the major determinants of cost efficiency. 5. State five major categories of financial ratios of a company. Explain each of them. 6. Explain an outsourcing probability map. Use a diagram. 7. What is a capability sourcing map? Illustrate with a diagram.
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1. Competence 2. Core 3. (c) Distinctive competence 4. True 5. Intangible 6. (d) Physical, financial, human and intangible resources 7. Resources 8. resource analysis or audit 9. value chain 10. (b) primary and support activities 11. (a) primary activities 12. support activities 13. cost efficiency, cost effectiveness 14. cost efficiency 15. False 16. cost competence 17. income 18. True 19. Alliances 20. strategic outsourcing

1. Four major types or levels of competence are: core competence, distinctive competence, strategic competence and threshold competence. Refer to Section 6.3 for further details. 2. Organizational resources can be classified into four major categories physical, financial, human and intangible resources. Refer to Section 6.4 for further details.
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3. Various activities which an organization performs to meet customer demand can appropriately be called a value chain. Refer to Section 6.5 for further details. 4. Various factors contribute to cost efficiency in an organization. Refer to Section 6.6.1 for further details. 5. The various financial ratios of an organization can be classified into five major categories: liquidity ratios, leverage ratios, activity ratios, profitability ratios and growth ratios. Refer to Section 6.7 for further details. 6. To complete the outsourcing process, a company has to move progressively in three steps. Refer to Section 6.8.1 for further details. 7. A capability assessment map (Figure 6.10) can be a good guide for a company to decide how should it.outsource the identified capabilities. Refer to Section 6.8.1 for further details.
6.14 References
1. Aaker, D A. 1995. Strategic Market Management. 4th edn. New York: John Wiley & Sons. 2. Gottfredson, M, R Puryear, and S Phillips. Strategic Sourcing: From Periphery to the Core. Harvard Business Review, February, 2005. 3. Hamel, G, and C K Prahalad. The Core Competence of the Corporation. Harvard Business Review, MayJune, 1990. 4. Hamel, G, and C K Prahalad. 1994. Competing for the Future. Boston: Harvard Business School Press. 5. Porter, M E. 1985. Competitive Advantage: Creating and Sustaining Superior Performance. New York: The Free Press. 6. Thompson, A A, and A J Strickland. 1994. Strategic Management: Concepts and Cases. Texas: Business Publications. Endnotes
1
G Johnson, and K Scholes, Exploring Corporate Strategy, 6 th ed. (Pearson Education, 2005), 157. G Hamel, and C K Prahalad, Competing for the Future, (Boston: Harvard Business School Press, 1994). A A Thompson, and A J Strickland, Strategic Management: Concepts and Cases, (1994), 77.
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A V Desai, A Rival of Your Size, BusinessWorld (October 9, 2000), 16. V Baruch, HR Accounting : The Issue Can No Longer be Ignored, The International Journal of Applied Human Resource Management 1, no. 1 (2000). G Johnson, and K Scholes, Exploring Corporate Strategy, 6 th ed. (Pearson Education, 2005), 154. M Hammer, and J Champy, Re-engineering the Corporation (New York: Harper Business, 1993). G Johnson, and K Scholes, Exploring Corporate Strategy (2005), 167. F R David, Strategic Management: Concepts and Cases (2003), 140. M Gottfredson, R Puryear, and S Phillips, Strategic Sourcing: From Periphery to the Core, Harvard Business Review (February, 2005), 132. M Gottfredson, R Puryear, and S Phillips, Harvard Business Review (2005), 139.
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Unit 7
Structure
External Environmental Factors
7.1 Introduction 7.2 Caselet Objectives 7.3 Environmental Factors 7.4 Scanning of Environment 7.5 Environment Forecasting 7.6 Environmental Opportunity and Threat Analysis 7.7 SWOT Analysis 7.8 Case Study 7.9 Summary 7.10 Glossary 7.11 Terminal Questions 7.12 Answers 7.13 References
7.1 Introduction
Companies have internal competences or capabilities that enable them to face, among others, the external environment for formulating and implementing corporate strategies. The external environment does not refer only to the macroeconomic environment or broad macro-parameters like socio-economic factors, government policy and legislations; it also includes technology, competitors, intermediaries and suppliers; in short, all those factors or forces which together constitute the market environment within which a company operates. Analysis of the external environment consists of identification of opportunities and threats, and exploiting opportunities and meeting threats based on organizational strengths and weaknesses. Companies that do this effectively on a regular basis become successful. Companies that ignore the environment or do not analyse or scan the environment properly, could face disastrous results. We have many examples of companies that ignored the changing environment and perished as a result. Hindustan Motors and Premier Automobiles lost their pre-eminent market position to Maruti Udyogs Maruti 800. Mahindra and Mahindra was shaken by Marutis Gypsy petrol jeeps. Television giants like Nelco, Weston, Crown, Bush, etc., lost to companies and brands like Onida
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and Videocon and new brands like LG and Samsung. Titan watches shook the giant HMT. The Surf and Nirma story is well known.
7.2 Caselet
The Nirma success story of how an Indian entrepreneur took on the big MNCs and rewrote the rules of business: It was in 1969 that Dr. Karsanbhai Patel started Nirma and went on to create a whole new segment in the Indian domestic detergent market.During that time, the domestic detergent market only had the premium segment and there were very few companies, mainly the MNCs. Karsanbhai Patel used to make detergent powder in the backyard of his house in Ahmedabad and then carry out door-to-door selling of his handmade product. He gave a money back guarantee with every pack that was sold. Karsanbhai Patel managed to offer his detergent powder for `3 per kg when the cheapest detergent at that time was `13 per kg and so he was able to successfully target the middle and lower middle income segment. Sabki Pasand Nirma Karsanbhai Patel had good knowledge of chemicals and he came up with Nirma detergent which was a result of innovative combination of the important ingredients. Indigenous method was used, and also the detergent was more environment friendly. Consumers now had a quality detergent powder, having an affordable price tag.
Source: http://toostep.com/insight/success-story-of-nirma
Objectives
After studying this unit, you should be able to: Analyse the major factors of environment that impact a business Explain the techniques of environmental scanning Discuss environment forecasting Distinguish between environmental threat and opportunity (ETOP) analysis and SWOT analysis Conduct organizational SWOT analysis using different approaches
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7.3 Environmental Factors

All these and many other such cases point to an important facet of business sensitivity of strategy to the external environment. The major environmental factors a business strategist should reckon with are: Political factors Economic factors Sociological factors Government policies/controls Technology Competition Intermediaries Suppliers Competition analysis would be undertaken in detail in Unit 11. Competition is not just an element or factor of the environment. It has more direct and vital implications for an organizations business and strategy. This is the reason why competition or competitors would be analysed separately in a more comprehensive way. We shall, however, make references here about competition as a factor of environment. All other major environmental factors mentioned above are discussed below.
7.3.1 Political Factors

Political factors or political conditions can have significant impact on industry, business and the corporates. Political stability improves business environment and encourages economic and business activities. Political instability produces the opposite effects. Political factors do not refer to only national political conditions or relations, but also to international relations. Improved political relations between the US and China in the mid-70s resulted in trade agreement between the two countries. The trade agreement provided opportunities to US electronics manufacturers to commence operations in China. There are many instances where deteriorating political relations between countries (India and Pakistan), have affected business conditions. Rubock (1971) has developed an analytical framework for identifying and assessing political risks which may affect business conditions. Sources of political risks can be many. Major risk factors identified by Rubock are: electoral majority
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of the party in power; internal dissensions within the ruling party; strengths of the parliamentary opposition parties; conflicting political ideologies; insurgencies in border areas, international power alignments and alliances, etc. Given below are two contrasting Indian examples of the impact of political environment on business. The progressive political philosophy of Chandrababu Naidu during his tenure as the chief minister of Andhra Pradesh led to the creation of Cyberabad. IT companies have found Hyderabad, nicknamed by the media as Cyberabad, to be the most hospitable location for development of IT, mostly because of highly supportive political climate. Chandrababu had taken keen personal interest in IT; and, had encouraged and ensured use of IT in governance by simplifying rules and procedures, offering concessions and building good supportive infrastructure. The Ayodhya-Babri Masjid episode became a political issue and provoked violence in different parts of the country, and caused serious law and order problems during December,1992 and January 1993. Apart from the apprehensions of political instability, the events disrupted transport, slowed down industrial production and growth of exports, and, also reduced government revenue.1
7.3.2 Economic Factors

Economic environment is an amalgam; it comprises all aspects or areas of economic activitynational income (GDP or GNP), the manufacturing sector, the services sector, capital or financial sector, investment, savings, etc. All these areas or sectors together influence the structure and trends of the economy and determine the economic environment. The major economic factors, which influence any market system, are: (a) GDP or GNP (b) Income distribution or income levels (c) Business cycles or different phases of the cycle like boom, recession, depression and recovery (d) Price levels of goods and services, i.e., whether the trend is inflationary or deflationary (e) Rate of interest on market borrowing Each of these and other such macroeconomic factors can be an opportunity or a threat to a company depending on how it reacts to or exploits
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the factor. For example, inflationary trends can generally pose a serious threat to a companys competitiveness in terms of input costs and selling prices. But a smart company with a definite strategy may use this as an opportunity or challenge to analyse all its cost drivers (activities which affect the cost structure) to minimize cost and increase competitiveness. Porter (1980) has identified a number of cost drivers: Economies of scale Pattern of capacity utilization Linkages with suppliers and channels Coordination among different activities Interrelationships with other business units within a company Timing of an activity Management of institutional factors like government regulations, tax holidays/rebates, tariffs, etc.
7.3.3 Sociological Factors

Sociological factors include demographic factors or population profiles, value system in society and lifestyles of individuals. Demographic factors or population profiles reflect age and sex composition of the population, occupational patterns, literacy levels, etc. Demographic parameters are a very intimate component of the market environment because they directly affect consumer behaviour. For example, today there is a lot of focus on the youth and many products and brands are promoted for the young generation. Apart from Pepsi (which has been specially positioned on the age factor), mobikes Hero Honda, TVS Suzuki and Kawasaki Bajajall are focusing on this segment. Readymade garment companies are invading the childrens sector. Many FMCG brands are targeted at women of particular age groups. Occupational patterns and literacy levels are also influencing consumption patterns of males and females. Besides demographic factors, changes in the value system and lifestyles greatly affect purchasing patterns. Strong family bonding and love for family have been a big influencing factor in the Indian market. The Vicks Vaporub theme (the child with cough and cold and the mothers concern for him) is a very good example of exploiting core Indian values for marketing communications.
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The international exposure of Indian consumers is increasing and changing lifestyles are getting reflected in preferences for international brands of readymade garments (Peter England Pizza Hut, Baskin Robbins, etc). These are important environmental developments for the strategists in the FMCG and services sector.
7.3.4 Government Policies and Controls

Government policies have a more direct impact on business decision and marketing strategies than macroeconomic indicators like GDP or GNP. Government regulations and controls have even more immediate impact than government policies. Policies and controls can be of three types as shown in Figure 7.1.
Government Policy
Monetary policy
Fiscal policy
Physical policy controls)
Bank rates
Credit controls
Taxes
Subsidies
Investment and production
Prices and distribution
Figure 7.1 Government Policies and Controls
At any point of time, the corporate tax structure, various lending rates of banks and financial institutions, monetary controls like the bank rate, price controls, etc., offer a particular economic or business climate. An extension of the regulatory controls is to be found in economic or business legislation. Two good examples of this are the Foreign Exchange Regulation Act (FERA) and Monopolies and Restrictive Trade Practices (MRTP) Act. Given these policies and controls, the corporate management has to match these through appropriate strategies for cost control and effectiveness, pricing strategy, marketing efficiency, etc.
7.3.5 Technology
Technology, as an environmental factor, influences strategic planning and management in a number of ways. Technological changes lead to the shortening of product life cycles and create new sets of consumer expectations. Electronic products are a good example. This sector is experiencing the most rapid changes today. One can
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clearly see the technological revolution in the colour TV market. Sometimes, advance signals on technological developments are available through research and development and industry/trade journals and magazines. Companies in the pharmaceutical industry, for example, are continuously aware of developments in new formulations and drugs in the world through medical journals and periodicals. Developments in information technology are greatly affecting the competitive position of companies. In a different way, technological developments affect a companys raw material, packaging, operations, products and services. For example, developments in the plastics and packaging industry have brought in new packaging in the form of tetrapacks, pet bottles, cellophane, etc. This has made the packing more attractive, carrying of the product more convenient and has definitely reduced the cost of packaging and the product. Similarly, containerized movement of cargo, deep freezers and trawlers have influenced the operations of the companies. Technological development also provides an opportunity to companies to develop new products. On the other hand, companies which ignore these developments face a crisis and eventually may even face extinction. The Indian automobile industry gives a good illustration. With the introduction of Maruti 800 which caught the imagination of consumers, Hindustan Motors (Ambassador) and Premier Automobiles (Padmini) had to improve their vehicle performances in terms of fuel efficiency, driving comfort, aesthetic appeal, etc. But what they did was to bring in peripheral changes only and those were not enough. The result: Padmini is extinct today with Ambassador following suit (some extension of life has been given to Ambassador by the government and the public sector).
7.3.6 Intermediaries
The primary role of intermediaries is to link the producers to the end-user market in those cases where the latter are unable or unwilling to manage the delivery or the distribution process. Intermediaries play a really big role in consumer goods2, particularly in FMCGs. FMCG majors such as Kelloggs, Heinz and Unilever (Hindustan Unilever in India) and many other companies utilize the services of large supermarket chains to distribute their products to households. The selection of appropriate intermediaries is a matter of marketing choice and strategy. A company has to take into account a number of factors while
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selecting an intermediary or a channel. First, a company should take into account the purchase behaviour or pattern within the end-user market. For example, consumers may be prepared to travel up to 50 or 100 km to buy a specific brand of furniture but may be unwilling to exhibit the same behaviour while purchasing a packet (or box) of detergent. So, the location of the intermediary is important. Second is the willingness of the intermediaries to carry their goods. The problem currently faced by many FMCG companies in the US and Europe is that the supermarket chains want to expand sales of their own-label products and brands and, therefore, reduce the number and volume of equivalent branded items of other companies in their stores. Another problem may be the supermarket chains preference or commitment to promote some other companys brands. The third factor is the capability of an intermediary to provide appropriate support services to the market. There are many discount retailers who are not willing to offer installation or repair services on the electrical goods they sell, and this almost boils down to negative marketing. It is important for companies to identify shifts in consumer behaviour and emerging trends in customer-buying patterns and the intermediaries willingness to service the changing end-user market. An example of consumer behaviour shift and changing expectations is the field of personal computers (PC). In the PC market in the US, many large customer organizations now expect distributors to go beyond just selling boxes and give advice on selection, installation and post-sales operations of sophisticated computer systems. A number of distributors, known as value added resellers (VARs) are now available who specialize in supplying certain types of systems and/or serving particular market segments. In the late 1980s, IBMs policy of dealing directly with the industrial customers might have resulted in their being rather slow in building strong relationships with leading VARs. Many feel that because of such a decision, sales were adversely affected particularly in those sectors which preferred to purchase their systems through VARs instead of dealing directly with computer manufacturers.
7.3.7 Suppliers
Suppliers to a company can be raw material suppliers, energy suppliers, suppliers of labour and capital; and the suppliers can affect the competitive position and business capabilities and therefore, the corporate strategy of a company. According to Porter, the relationship between suppliers and a company represents a power equation between them. The equation is based on, or
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governed by, the market environment, industry conditions and the extent to which one is dependent on the other. The buyer company has better bargaining power under the following conditions: The buyer is a monopolist (single seller) or a monopsonist (single buyer) and buys large volumes relative to sellers sales. The buyer can easily switch vendors it has a choice of alternative sources of supplies. The suppliers product is not very important to buyers finished products/ services. The supplier has stronger bargaining power in the following situations: The supplier is a monopolistic or an oligopolistic firm. The suppliers product is a significant input to the buyers finished product. The buyer is not an important customer of the supplier. The suppliers products are well differentiated and it has built up significant switching costs. A company should evaluate the two sets of strengths or bargaining powers and ascertain where it stands in the power equation with a particular supplier and then decide on the choice of the supplier depending on the cost effectiveness, indispensability, etc. This is the general or classical prescription. But, the trend is changing. Now the slogan is: collaborate with the suppliers. Companies are taking equity in supplier companies; some are even taking part in the management of the vendor companies. The Japanese are leading the way. But, even in such cases, the initial choice of the supplier may depend on the relative power equation.
1. The national income (GDP or GNP), the manufacturing sector, the services sector, capital or financial sector, investment, savings, etc., constitute the ________environment. 2. Occupational patterns and literacy levels are also influencing _______ patterns of males and females. 3. Technological changes lead to the shortening of product _______ and create new sets of consumer expectations.
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4. In which condition does the buyers company have better bargaining power (a) When the buyer is a monopolist (single seller) (b) The buyer can easily switch vendors (c) The suppliers product is not very important to buyers finished products/services. (d) All the above
7.4 Scanning of Environment

In any business or product category, a companys task of finding market opportunities is generally constrained by lack of sufficient information about the environmentgovernment policies and controls, the customers, the competitors, channel members, etc. Therefore, understanding the environment and properly analysing or scanning it are vital for the formulation of any strategy and, more so, for the success of it. Scanning is a continuous process because it involves analysing changes and sometimes even forecasting the impact of developments in the environment. Some call it external audit.3 Various environmental factors or influences are generally expressed in one or more of four forms events, trends, issues and expectations. Events are specific occurrences which take place from time to time like elections, formation of government, bilateral trade talks or negotiations, etc. Trends are prevailing tendencies, courses of action or events taking place over time like movements in national income, inflationary tendencies, growth in industrial production, etc. Issues are current concerns about events and/or trends like high/low growth of national income, high rate of inflation, low rate of savings, stagnant industrial production, etc. Expectations are hopes or demands of different interest groups like the government expects companies to be constantly aware of their tax obligations and social responsibilities. So, while planning environmental scanning, organizations should analyse each important environmental factor in terms of events, trends, issues and expectations (as applicable). The task involved in scanning the environment is to assess the possible impact of various environmental factors in an interaction matrix or an impact linkage matrix. Such a matrix is shown in Figure 7.2.
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Strategy Factor
Env. Factor
Government Policy
Rate of Interest
Controls
Technology
Customer Choices and Preferences Competition
Liberal credit for important customers Price cut/Discount Increasing dealer network Focus on customer satisfaction Intensifying advertising New product launch
High Impact Linkage
Impact Linkage Normal
Weak or Minimal Impact Linkage
Figure 7.2 Environmental Impact Linkage Matrix
The matrix in Figure 7.2 has been constructed for six major environmental factors and six business strategy factors. The matrix can be extended to more number of factors (by using a computerized model) to make it more comprehensive. Such matrix should be developed by the strategic planning group. Establishing the impact linkages correctly is difficult and involves objective assessment of various factors and working of linkage values as far as possible. Judgemental factor of the planning team, however, cannot be completely ruled out. But, once constructed, the matrix builds the right linkages between the environment and corporate strategies or action plans. On the basis of this, the possible outcome of a particular strategy can be more easily anticipated or worked out.
7.4.1 Sources of Information for Environmental Scanning

The first step in scanning the environment is to identify proper sources of information to be used for scanning. Because environmental factors are too diverse, even for scanning the relevant or operating environment, an organization has to tap the right sources of information. Sources of information can be primary or secondary; internal or external; formal or informal; written or verbal. Even market gossip can be a good source of information or signal for possible changes in the environment. Various sources of information for environmental scanning
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can be classified into some major types or categories. These are mentioned below in terms of primary and secondary sources and internal and external sources. Secondary or Published Sources 1. Internal: Annual reports, corporate strategic plans, company files and documents. 2. External: Different types of publications like books, journals, magazines, newspapers, government publications, industry association reports and newsletters, annual reports of competitors, etc. Primary Sources 1. Internal: MIS, special databases, managers/employees 2. External: Stakeholders like customers, competitors, marketing intermediaries or channel members, suppliers; and also industry trade associations, government agencies, etc. Mass media like radio, television and the Internet Special studies conducted (for the company) by consultants, market research agencies, educational institutions, etc. Surveillance or intelligence by ex-employees of the company, employees or ex-employees of competitors, industrial espionage agencies, etc. Activity 1 Choose a company an automobile, cell phone or FMCG producer and conduct an environmental scanning on its behalf. You will need to express various environmental factors in terms of events, trends, issues and expectations in an interaction matrix.
5. ________is a continuous process that involves analysing changes and sometimes even forecasting the impact of developments in the environment. 6. Scanning is also called______by some people.
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7. Prevailing tendencies, courses of action or events taking place over time like movements in national income, inflationary tendencies, growth in industrial production, etc., are known as _______. 8. The first step in scanning the environment is to identify proper sources of ________to be used for scanning.
7.5 Environment Forecasting

To understand the emerging or evolving environment better, some have suggested environmental forecasting. Any forecasting is a hazardous job; and, so is environmental forecasting. But, forecasting is a better approximation than not knowing anything about the future. That is the reason why forecasting has become inseparable from economic and business analysis. In environmental forecasting, planners have to start by answering a basic question: how far ahead should they look, that is, the time horizon for forecasting. An approach which has been found quite useful is determining the time horizon is Gap Analysis. Gap analysis should logically be the starting point for environmental forecasting. The gap analysis projects over time, the gap between the desired change in strategic parameters like sales, profitability, market share, etc., and actual change with continuation of present strategy, that is, not responding to changes in the environment. Gap analysis is shown in Figure 7.3.
Strategic Parameter: sales, profit, capacity
A1 Gap A2
3 Time
Figure 7.3 Gap Analysis for Strategic Forecasting
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In Figure 7.3, A1 shows the desired change in strategic parameter, say, growth in sales (as per company objective or target). A2 shows projected growth in sales with continuation of present strategy. (A1 A2) is the gap in achievement of the target, and the gap starts emerging after the second year. This gap has been created because of a new product or brand (like Nirma was introduced and a gap was created in sales of Surf), product/brand or market expansion by a competitor, slump in the market, etc. In the case of Hindustan Unilever, they not only did not foresee the entry of Nirma, they had even ignored it for sometime. That is why the battle was so long for Surf to regain its position. Correct and timely forecasting of the environment and introduction of necessary changes in the strategy can help to eliminate or reduce the gap. Based on gap analysis, an appropriate technique can be chosen for environmental forecasting. Different authors have suggested different methods or techniques. Detailed description and analysis of different techniques can be found in the works of these authors. Two such works or names of authors should be mentioned here. Lebell and Krasner (1977) have described nine techniques which range from highly mathematical or statistical techniques to structured and unstructured opinion methods. Fahey, King and Narayanan (1988) have mentioned 10 techniques, mostly quantitative, in their survey of environmental scanning and forecasting. These include scenario writing, simulation and game theory.
7.5.1 Scenario Building

Forecasting has its limitations. All forecasting is based on certain assumptions and some database, both of which can be incorrect or imperfect. Therefore, achieving exactness in forecasting is hardly possible. Forecasters also realize this. That is why, instead of exact forecasting, many have suggested alternative scenario development which is quite common in forecasting exercises. A scenario is a detailed and probable view of how the business environment of an organization may develop in the future based on the analysis of key environmental influences and factors of change about which there is a high degree of uncertainty.4 Planners and strategists should develop alternative scenarios and, should try to indicate the most probable scenario. Or, else, decision makers may have to decide the right alternative. Scenario building has to be a systematic process and it should be completed in stages. Four major steps should be followed:
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1. Identify the key environmental factors or forces which should form the basis for scenario building. For example, three such factors for scenario building for competitive environment may be market growth rate, competitive situation in the industry and likely move or behavior of the market leader. Number of factors would be, in most situations, more than three, but, this would depend on the environmental situation to be projected. 2. Formulate or write down the key assumptions for scenario building assumptions about the future pattern of environmental forces which have been identified. In the above example, a relevant assumption can be that there would be no dramatic change in the structure of the industry. It is advisable to keep the assumptions low because complexity in scenario building generally increases as the number of assumptions increases. 3. Understand the historical trend in environmental factors or forces which have been used in assumptions. Also consider their impact on present market conditions and likely future impact. This analysis is done to establish a logic for the assumptions and, also to make inferences based on the assumptions. 4. Build scenarios which are internally consistent. Build alternative scenarios; may be, an optimistic future, a pessimistic future and a mainline or mean future. Experts feel that two to four scenarios are generally appropriate. Some have suggested a more elaborate, step-by-step, process for scenario development. One such sequential process is given in Figure 7.4.5 Shells long-term scenario building for the oil industry (favourable and unfavourable) is given in Box 7.1.
Figure 7.4 Sequential Scenario Development Process
9. The logical starting point for environmental forecasting should be _______. 10. Achieving exactness in forecasting is always possible. (True/False)
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11. A ______is a detailed and probable view of how the business environment of an organization may develop in the future. 12. Planners and strategists should develop _______scenarios and, should try to indicate the most probable scenario.
7.6 Environmental Opportunity and Threat Analysis

The objective of environmental analysis or scanning or even scenario building is to identify opportunities and threats in the environment and formulate strategies accordingly. This can be done more directly through environmental appraisal, that is, assessing the environment for clearly identifying major opportunities and threats. There are many methods for environmental appraisal. One such method, suggested by Glueck (1984), is preparation of an environmental threat and opportunity profile (ETOP) of an organization. Preparation of ETOP involves dividing the total environment into different factors or sectors, and, analysing the impact of each sector on the organization. A more detailed ETOP requires dividing each environmental sector further into subsectors and, then, assessing the impact of each subsector on the organization. A summary ETOP, however, may only show the major factors. An example of ETOP is given in Table 7.1 This example is for a sports cyclemanufacturing company operating both in the domestic market and export market. The example relates to a hypothetical company but, is realistically based on the current Indian business environment.6 An actual ETOP of BHEL is given Table 7.2. Preparation of ETOP enables planners and strategists to identify specific sectors or subsectors which have clear impact on the organization either as an opportunity or a threat. ETOP can also help to analyse the nature and intensity of impact of different sectors or subsectorsfavourable or unfavourable. Based on ETOP, an organization can formulate appropriate strategies to exploit the opportunities and counter the threats from the environment. Conclusion : Sports cycle manufacturing is a recommended business because the environment provides many opportunities; there is only one threat (international).
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Table 7.1 Environmental Threat and Opportunity Profile (ETOP) for a Sports Cycle Manufacturer
Environmental Sector Market Nature of impact Sector position/development Industry growth rate for bicycles 7 to 8 per cent per annum; growth rate for sports cycles 30 per cent; largely unsaturated demand Technological upgradation in the industry in progress; import of machinery simple Mostly ancillaries and associated companies supply parts and components; imported raw materials easily available Growing affluence among urban consumers; export potential promising Bicycle industry a thrust area for exports No significant factor Customer preference for sports cycles; durable and easy to ride Emerging threats from cheap imports from China
Technological Supplier
Economic Regulatory Political Socio-cultural International
indicates favourable impact or opportunity ; indicates unfavourable impact or threat; indicates neutral impact.
Table 7.2 Environmental Threat and Opportunity Profile (ETOP) for BHEL
BHEL : ETOP
Environmental sector Socio-economic Impact (+) Opportunity/() Threat (+) Continued emphasis on infrastructural development which inc ludes power supply for indus try, trans port and domes tic consumption. () Severe resource constraints. (+) High growth envisaged in industrial production and technology upgradation. () Sources of technology will become scarce due to forma-tion of technology cartels. (+) Liberalization of technology import policy. () Customers will become more discerning in their requirements due to an increasing role of power plant consultants. () Public sector will find it increasingly difficult to retain specialists and highly qualified personnel.
Technological Supplier Government Competition
Source: Bharat Heavy Electricals Ltd (BHEL)
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Box 7.1: Long-term Scenario Building by Shell for the Oil Industry
Every two or three years, the Central Planning Group of Shell prepares scenarios about the future of the oil industry on behalf of the Shell Group. The process generates two scenarios. The objective of scenario generation is to sensitize decision makers in the group to receive signals for possible changes in the global environment. The logic is that a more timely and appropriate business response can take place instead of changes coming as a surprise. For formulating strategies for 25 years between 1995 and 2020, the Shell Group has developed two global scenarios projecting the future of the oil industry in two different ways. These two scenarios can be termed as favourable or optimistic and unfavourable or pessimistic. Favourable or Optimistic In this scenario, economic and political liberalization increases wealth creation in the countries which adopt them. However, big upheavals are also experienced as long-standing barriers are dismantled, and economically weak countries assert themselves claiming a larger role in world economic activity and growth. High economic growth of 56 per cent is sustained in these developing countries. But, there is slow erosion of wealth of the developed world which produces its own problems. Big companies find themselves increasingly challenged as cheaper capital and fewer international barriersboth tariff and non-tarifflead to an environment of relentless competition and innovation. This creates a high level of oil and energy demand, and substantial new resource development and improvement in efficiency are required to propel this growth. Growth should be high enough so that demand does not outstrip supply, and there are no inflationary trends. Stagflationary tendencies should also be curbed. Unfavourable or Pessimistic In this scenario, liberalization is resisted because people fear that they might lose what they need mostjobs, power, autonomy, cultural identity. This creates a world of regional, economic and cultural conflict in which international business cannot operate efficiently. Markets are difficult for outsiders to enter as reforms are structured to help insiders. Oil prices are depressed because of instability and, also, uncertainty; oil prices also suddenly shoot up as trouble flares up in the Middle East. There is increasing divergence between rich and poor economies as many developing countries
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become marginalized mostly because of lack of foreign investment. In the developed world, due to convergence of or conspiracy by green and other political interests, energy is regarded as something bad and polluting. The unfavourable investment climate which this produces is reinforced by high disparities around the world. Widespread poverty and environmental problems are experienced in poorer countries. The richer countries face problems of shrinking labour force and ageing population. These become their major concerns.
Source : Adapted from G Johnson, and K Scholes, Exploring Corporate Strategy, 3rd ed., 4th ed and 6th ed. (Prentice Hall of India and Pearson Education, 1995, 1999 and 2005), 8687, 105 and 109.
13. The objective of environmental analysis or scanning or even scenario building is to identify ______ and ________in the environment and formulate strategies accordingly. 14. The preparation of an environmental threat and opportunity profile (ETOP) of an organization was suggested by_________.
7.7 SWOT7 Analysis

ETOP and EFEM focus only on the opportunities and threats from the environment. But, to exploit an opportunity or to consider a threat, a company should have required strengths or competence. A company also needs to know its weaknesses in terms of competence, because weaknesses may affect its capability to take advantage of an opportunity or negotiate a threat. So, simultaneously with environmental analysis or appraisal, organizations also need to assess their internal strengths and weaknesses. This is done through SWOT analysis. Companies have been using SWOT analysis for long, whether for general business strategy or for marketing strategy. In SWOT, S and W relate to internal competence factors, and O and T pertain to external environment factors: S Strengths Internal competence factor W Weaknesses
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O Opportunities T Threats
External environmental factors
A strength is a resource, skill, capability or any other advantage relative to competitors and in relation to markets. A weakness is a limitation or deficiency in resource, skills and capabilities or any other disadvantage relative to competitors which impedes performance of an organization. SWOT analysis can be a useful tool to analyse the extent to which strategy of an organization and its more specific strengths and weaknesses are capable of dealing with the changes in the business environment. And, this would decide whether a particular factor in the environment is an opportunity or threat to the organization with reference to the particular strategy. For systematic SWOT analysis, major strengths and weaknesses of the organization for the strategy should be worked out. Then, the important factors in the environment relevant to this strategy should be identified. Finally, the strengths and weaknesses should be matched with the environmental factors through matching analysis or a matrix. Some potential or likely strengths, weaknesses, opportunities and threats are shown in Table 7.3, and a hypothetical SWOT analysis for an international retail chain is presented in Table 7.4.
Table 7.3 Potential/ Likely Strengths, Weaknesses, Opportunities and Threats
Potential Strengths Abundant financial resources Well-known brand name # 1 ranking in the industry Economies of scale Proprietary technology Patented processes Lower costs (raw materials or processes) Respected, company/product/brand image Superior management talent Better marketing skills Superior product quality Alliances with other firms Good distribution skills Committed employees Potential Opportunities Rapid market growth Rival firms are complacent Changing customer needs/tastes Opening of foreign markets Mishap of a rival firm New uses for product discovered Economic boom Government deregulation New technology Demographic shifts Other firms seek alliances High brand switching Sales decline for a substitute product New distribution methods
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Potential Weaknesses Lack of strategic direction Limited financial resources Weak spending on R&D Very narrow product line Limited distribution Higher costs (raw materials or processes) Out-of-date products or technology Internal operating problems Internal political problems Weak market image Poor marketing skills Alliances with weak firms Limited management skills Undertrained employees
:
Potential Threats Entry of foreign competitors Introduction of new substitute products Product life cycle in decline Changing customer needs/tastes Rival firms adopt new strategies Increased government regulation Economic downturn New technology Demographic shifts Foreign trade barriers Poor performance of ally firm
Source: OC Ferrell, M D Hartline, and G H Lucas Jr, Marketing Strategy , 2nd ed. (Thomson South Western,Vikas Publishing House), 2003, p. 57.
Table 7.4 SWOT Analysis for an International Retail Chain Seeking Entry into the Indian Market
KEY ENVIRONMENTAL FACTORS Strength/Weaknesses New Technology Customer Choices Competition Market & Preferences Growth International Exposure
Major Strengths Capacity to innovate O Market research Global base/international brands O Major Weakness New in India/Developing countries Existing brand suited for US/European markets High cost products T O (Opportunity) 2 T (Threats) 1 OT 1 indicates neither opportunity nor threat
O O O
O O O
O O O
O O O
T T T 3 3 0
T T T 3 3 0
O O T 5 1 4
O O O 6 0 6
In SWOT analysis in Table 7.4, opportunities far outweigh threats (O T = 11)shown in the last row. On this basis, it can be said that the environment is project or strategy friendly and the project is recommended. If threats are more than opportunities, the environment is to be considered hostile unless some threats can be converted into opportunities by working on the weaknesses.
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If opportunities are equal to threats, the matter should be put to vote of the senior/top management for decision. The matrix in Table 7.4 can also be presented in a more clear quantitative form by assigning numbers in places of O and T. Numbers would indicate relating significance of opportunities and threats . Opportunities will have positive signs; threats will have negative signs. On this basis, the matrix and the outcome of SWOT analysis can be reformulated as shown in Table 7.5.
Table 7.5 SWOT Analysis for an International Retail Chain Seeking Entry into the Indian Market
KEY ENVIRONMENTAL FACTORS Strength/Weaknesses Major Strengths Capacity to innovate Market research Global base/International brands Major Weaknesses New in India/Developing countries Existing brand suited for the US/European markets High cost products O (Opportunity) T (Threats) OT New Technology 3 2 Customer Choice Competition & Preferences 2 3 2 2 2 2 Market International Growth Exposure 2 2 1 2 2 3
1 5 1 4
3 2 2 7 7 0
2 2 3 6 7 1
1 1 1 7 1 6
1 2 1 11 0 11
indicates neither opportunity nor threat
Pearce and Robinson (2002) have suggested an alternative form of SWOT analysis more directly in terms of strategy. Based on four different combinations of strengths and weaknesses and opportunities and threats, four strategic situations develop. These four strategic situations imply four different strategic actions: aggressive strategy, diversification strategy, defensive strategy and turnaround type strategy. These are shown in Figure 7.5. Cell 1 is the most favourable situation ; there are several environmental opportunities and the organization has substantial internal strengths to exploit opportunities. Such condition suggests aggressive growth strategies to take advantage of the favourable match between strengths and opportunities. IBMs intensive market development strategy in the PC market was driven by a favourable match between its strengths (reputation and resources) and ample opportunity for market growth. In Cell 2, an organization with key strengths faces an unfavourable environment.
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In such situation, strategists should use current strength to create opportunities in other products/ markets, that is, to go for diversification. An organization in Cell 3 has plenty of market opportunities, but, is constrained by major internal weaknesses. Businesses in this cell are like question marks in the BCG Matrix. The focus of strategy here should be to remove internal weaknesses to capitalize on existing opportunities, that is, to follow some kind of a turnaround strategy. Cell 4 is the least favourable situation with the environment posing major threats and the organization suffering from major weaknesses. The most immediate strategy in this situation is to defend or sustain current position. Organizations in this cell should also work on internal weaknesses or competences to be able to negotiate environmental threats as Chrysler Corporation did in the 1980s when analysis revealed that the company was in Cell 4.
Numerous environmental opportunities
Critical internal weaknesses
Cell 3: Supports a turnaroundoriented strategy Cell 4: Supports a defensive strategy
Cell 1: Supports an aggressive strategy Cell 2: Supports a diversification strategy
Substanial internal strengths
Major environmental threats
Figure 7.5 SWOT Analysis and Recommended Strategies Source: I A Pearce II, and R B Robinson Jr, Strategic Management, 3rd ed. (Irwin Series in Management, Reprint India, 2002), 274.
All the four strategies mentioned above, i.e., aggressive or offensive strategy, defensive strategy, turnaround strategy and diversification strategy would be discussed in details in the later units.
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SWOT analysis, as presented in Tables 7.4 and 7.5 and also Figure 7.5 involves subjectivity. Judgement of the strategic planning group or SWOT analysis team plays a very important role. Therefore, no SWOT analysis should be taken as exact. This should be understood as a good approximation to matching a companys strengths and weaknesses with key environmental factors as opportunities or threats. This should be always done with respect to a particular business (e.g., entry of an international retail chain in India as shown above). Such analysis, however, is an essential starting point for a more detailed and rigorous exercise on strategic investment decisions in terms of costs and returns and organizational objectives and priorities. As mentioned, SWOT analysis gives the initial signalspositive or negativefor launching of a project or product, market entry, etc. Even if initial SWOT analysis is not favourable, i.e., threats outweigh opportunities, this does not mean that the project has to be abandoned. This, in fact, provides basis for re-examination of the strengths and weaknesses and the possibility of converting some weaknesses into strengths by investing more resources and improving skills and capabilities. This would make possible conversion of some of the threats into opportunities so that matching improves (Figure 7.6) and the project can still be considered on the basis of investment levels and costs and returns analysis.
Figure 7.6 SWOT Analysis: a Continuing Process Source: F R David, Strategic Management: Concepts and Cases (2003), 111.
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Activity 2 Choose a company or organization that you are familiar with and conduct a SWOT analysis for it. Analyse the results.
15. A _______is a resource, skill, capability or any other advantage relative to competitors and in relation to markets. 16. A _________is a limitation or deficiency in resource, skills and capabilities or any other disadvantage relative to competitors which impedes performance of an organization.
7.8 Case Study

General Motors: Slow Response to Environmental Demand In the 1970s, General Motors (GM) was the largest automobile manufacturer in the world, with a market share of more than 50 per cent. In 2005, GMs market share was just about 25 per cent and it was still declining. GM remained (in 2005) the largest automobile manufacturer in the world, but, Toyota (No. 2) was fast catching up because of its competitiveness in terms of quality and differentiated products. According to one automobile analyst: GM has found itself stuck in second gear for a quarter of a century. Another analyst observed: The bedrock principle upon which GM was builtoffering a car to feed every market segmenthas degraded into a series of contrived brands, most with little identity and bland, overlapping product lines. GMs problems are too many. Managerial ego or lethargy (which often leads to inaction or inefficiency) is one of the more important ones. The company failed to quickly adapt to earlier demand for compact cars and more recent trend towards hybrid vehicles. It has negotiated badly with unions incurring massive costs and creating future liabilities. Due to such commitments and costs, the company has made compromises in car design and engineering. The result has been automobiles with outdated designs unable to compete with more modern and attractive models from competitors like Toyota and others.*
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GM has also become quite bureaucratic in its management approach implying slow systems and proceduresoften non-responsive to situations. GMs senior executives have shown a tendency for poor strategic decisions and inability to capitalize on opportunities in the market. Here is an example. GM was an early mover into China. It invested more than $1 billion in China since 1998. But, because of intense competition, it suffered a 35 per cent decline in sales during 2005 in Shanghai, the largest automarket in China. In contrast, Hyundai and a local company, Chery, increased their sales substantially during this period. This means that those competitors have outweighed GM in designing and manufacturing cars which Chinese buyers want.** Because of organizational inertia for response to changing environmental conditions, GM has landed itself into the present serious situation. An important development took place for GM in 2009. Billionaire investor Kirk Kerkorian increased his stake in GM to approximately 9 per cent. To ensure adequate return on his investment, Kerkorian might urge GMs Board of Directors to sell off non-core assets, cut costs or restructure the bloated auto business faster than current management appears inclined to do. But, can GM do it? And, if so, how soon? We must remember that we are in the auto generation of 2010. Speed and adaptability are vital for survival and success. * M A Hitt et al., Management of Strategy, Indian Edition (Cengage Learning, 2007), 139. **M A Hitt et al., (2007), 139.
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7.9 Summary
Let us recapitulate the important concepts discussed in this unit: The external environment consists of a large number of factors which influence a companys business. Major environmental factors are: political factors, economic factors, sociological factors, government policies/ controls, technology, competition intermediaries and suppliers. Organizations should be generally concerned with relevant environment and operating environment. The operating environment, also known as competitive environment consists of factors in the immediate competitive situation like customer profile, level of competition, the industry structure, technology, any specific regulations affecting the company or industry, etc. Since the environment is too diverse, scanning of environment (some call it external audit) is necessary to elicit information relevant to a particular organization. Environmental information occurs in one or more of four forms; events, trends, issues and expectations. To understand the emerging or evolving environment better, some have suggested environmental forecasting. For environment forecasting, Gap analysis is a good starting point. Forecasting is a hazardous exercise, and exactness in forecasting is hardly possible. That is why many have suggested alternative scenario building for the futuresay, optimistic, pessimistic and mean scenario. Shells long-term scenario building for the oil industry is a good example. For identifying opportunities and threats in the environment, organizations should undertake environmental appraisal, i.e., assessing the environment for clearly identifying major opportunities and threats. One method for environment appraisal, suggested by Glueck, is preparation of an environmental threat and opportunity profile (ETOP). Simultaneously with environmental analysis or appraisal (ETOP or EFEM), organizations also need to assess their internal strengths and weaknesses to exploit opportunities and negotiate threats. This is done through SWOT analysismatching organizational strengths and weaknesses with environmental opportunities and threats.
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7.10 Glossary
Forecasting: Estimate or prediction of future developments in business such as sales, expenditures, and profits. Gap analysis: Projections, over time, of the gap between the desired change in strategic parameters like sales, profitability, market share, etc., and actual change with continuation of present strategy, that is, not responding to changes in the environment. Scenario: A detailed and probable view of how the business environment of an organization may develop in the future based on the analysis of key environmental influences and factors of change about which there is a high degree of uncertainty. SWOT analysis: A tool used by organizations to match their internal strengths and weaknesses with factors of the environment.

1. Enumerate major environmental factors. Which of these, according to you, are more important and why? 2. What is scanning of environment? Mention the major sources of information for environmental scanning. 3. What is gap analysis ? Explain its relevance to environmental forecasting. 4. What is ETOP? Prepare an ETOP for a sports cycle manufacturing company. 5. What is SWOT analysis? Explain SWOT analysis in the form of a matrix. 6. Explain Pearce and Robinsons form of SWOT analysis. Use the relevant diagram for the analysis.

1. Economic 2. Consumption 3. life cycles
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4. (d) All the above 5. Scanning 6. external audit 7. Trends 8. Information 9. Gap analysis 10. False 11. Scenario 12. Alternative 13. Opportunities, threats 14. Glueck (1984) 15. Strength 16. Weakness

1. The external environment consists of a large number of factors which influence a companys business. Refer to Section 7.3 for further details. 2. Scanning of environment (some call it external audit) is necessary to elicit information relevant to a particular organization. Refer to Section 7.4 for further details. 3. Gap analysis refers to the projections, over time, of the gap between the desired change in strategic parameters like sales, profitability, etc., and actual change with continuation of present strategy. Refer to Section 7.5 for further details. 4. Environmental threat and opportunity profile (ETOP) is one of the many methods for environmental appraisal. It was suggested by Glueck (1984). Refer to Section 7.6 for further details. 5. SWOT analysis is a tool used by organizations to match their internal strengths and weaknesses with factors of the enviroment. Refer to Section 7.7 for further details. 6. Pearce and Robinson have suggested a form of SWOT analysis more directly in terms of strategy. Refer to Section 7.7 for further details.
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7.13 References
1. David, F R. 2003. Strategic Management: Concepts and Cases, 9th ed. New Jersey: Pearson Education. 2. Fahey, L, W R King, and V K Narayanan. 1983. Environmental Scanning and Forecasting in Strategic Planningthe State of the Art. In The Truth about Corporate Planning: International Research into the Practice of Planning, edited by D Hussey. Oxford: Pergamon Press. 3. Mandell, T S. 1983. Future Scenarios and Their Uses in Corporate Strategy. In The Strategic Management Handbook, edited by K J Abert. New York: McGraw Hill. 4. Pearce, II, J A, and R B Robinson Jr. 2004. Strategic Management. 7th ed. McGraw Hill/Irwin, Ch.6. 5. Porter, M.E. 1980.Competitive Strategy: Techniques for Analyzing Industry and Competition. New York: The Free Press. Endnotes
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P K Ghosh, Strategic Planning and Management, 10 th ed. (New Delhi: Sultan Chand & Sons, 2003), 106. In many industrial markets and some consumer goods markets, intermediaries may be absent because companies decide to deal directly with the end users. Here, we are talking of personal selling or direct marketing. R David, Strategic Management: Concepts and Cases (Pearson Education, 2003), 80. G Johnson, and K Scholes, Exploring Corporate Strategy , 9 th ed. (2005), 107 T S Mandel, Future Scenarios and Their Uses in Corporate Strategy in The Strategic Management Handbook , ed. K J Albert (McGraw Hill, 1983), 10 11. A Kazmi, Business Policy and Strategic Management, 2 nd ed . (New Delhi: Tata McGraw Hill, 2002), 125. Some prefer to use C in place of W , C standing for Constraints because Weaknesses sounds discouraging or negative. So, instead of SWOT , it is called SCOT analysis.
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Unit 8
Structure 8.1 Introduction 8.2 Caselet Objectives 8.3 What is Stability Strategy? 8.4 BCG Portfolio Model 8.5 Four Generic Strategies 8.6 Mass Customization 8.7 Strategies for Industry Leaders 8.8 Concentration Strategy 8.9 Corporate Parenting 8.10 When Best to Pursue Stability Strategy 8.11 Stability Strategies in Practice 8.12 Case Study 8.13 Summary 8.14 Glossary 8.15 Terminal Questions 8.16 Answers 8.17 References
Stability Strategies
8.1 Introduction
Definition of corporate mission, objectives or goals, analyses of internal competences and resources and the external environment lead to the generation of business strategies or strategic alternatives. In strategic management literature, various corporate strategies are mentioned and analysed. Some of these strategies are corporate-level strategies; some are business-level strategies. Some of these strategies are more appropriate under certain circumstances than in others. All these strategies are available to organizations to consider, adopt or pursue. All such strategies can be broadly classified into three categories: stability strategies, strategies for managing change and growth or expansion strategies. These are also called master, grand, generic or basic strategies. These three strategies along with their major elements or components are shown in Figure 8.1. We shall discuss stability strategies in this chapter. In this, we shall analyse portfolio models and other generic strategies, strategies for industry leaders,
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strategies for challengers or runner-up companies, strategies for followers, simulation strategy, concentration strategy, corporate parenting, etc. We shall discuss strategies for managing change and strategies for growth and diversification in Units 9 and 10 respectively.
Figure 8.1 Corporate Strategies: Stability Strategy, Strategy for Change and Expansion Strategy
8.2 Caselet
It has been rightly pointed out that if an organization aims for growth, it may at least achieve stability. Companies have to regularly review their competence levels, resource base, product portfolios, cost structure or cost management and, react or respond timely to market developments. Such an approach has helped Maruti maintains its leadership in the market. The year 1984 saw the beginning of the biggest success story in the Indian automobile industry. It all started with the launch of the Maruti 800, a car that revolutionized the car market in India. The company has not looked back since then, having sold more than 2.5 million 800s and becoming Indias best selling car. Having attained leadership position, a leaders most strategic concern is to maintain stability or defend its market position for continuing dominance in
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the industry. Maruti, too, has not rested on its laurels several new brands have been launched, including the Maruti 1000, Indias first sedan. Examples of innovative initiatives include the Maruti Driving School, partnership with State Bank of India to launch an auto finance scheme and insurance services at low premium schemes. It is these innovations that have helped Maruti retain its leadership in the industry and continue its success story.
Objectives
After studying this unit, you should be able to: Discuss the concept and meaning of stability strategies Analyse the portfolio model the BCG Differentiate among four generic strategies and modern modifications Analyse defensive strategies for a leader Illustrate the concept of corporate parenting
8.3 What is Stability Strategy?

Stability strategy is most commonly used by organizations. But, the nomenclature, stability strategy often creates confusion among managers, planners and strategists. Stability does not mean static. Most organizations, which follow stability strategy, look for growth and do not remain stable or static for a long period of time. Therefore, some prefer to call it stable growth strategy. The basic approach in stability is to maintain present course; steady as it goes. Stability strategy can be defined as below:
In an effective stability strategy, companies will concentrate their resources where the company presently has or can rapidly develop a meaningful competitive advantage in the narrowest possible product market scope consistent with the firms resources and market requirements.1
As the definition indicates, stability strategy implies that an organization will continue in the same or similar business as it currently pursues with the same or similar objectives and resource base. Three distinctive features of a stability strategy are: 1. No major change takes place in the product, market, service or functions; 2. Focus is on developing and maintaining competitive advantage consistent with present resources and market requirements;
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3. The strategy thrust is not only on maintenance of the present level of performance, but also on ensuring that the rate of improvement achieved in the past is sustained.2 In following stability strategies, companies pursue certain objectives which are consistent with overall corporate stability. Companies generally have one or more of the four objectives in view: 1. Incremental growth: Small incremental growth in sales or market share, sometimes to offset the effects of inflation, is quite consistent with general corporate stability. This is different from quantum or discontinuous growth targeted in expansion strategies. 2. Profitability: The purpose is to sustain profitability if it is tending to drift. The objective is to achieve stability, if not increase in profit. 3. Sustainability in growth: Past growth in sales or revenue should be maintained so that the company does not become static. 4. Pause or caution: Stability is a phase of caution or consolidation before an organization embarks on expansion strategies. This can also be a period of pause or rest after a blistering pace of expansion. Organizations follow stability strategies because they neither go for any major internal changes or restructuring nor embark upon any ambitious expansion strategies. But, stability or sustenance also is neither simple nor to be taken for granted. It is often said, and correctly too, that if an organization aims for growth, it may at least achieve stability, but, if it aims at stability, it is most likely to slip into deceleration. Companies have, therefore, to regularly review their competence levels, resource base, product portfolios, cost structure or cost management and, react or respond timely to market developments. Many models, techniques or strategies pertaining to these are available which can be important ingredients of stability strategies. We shall now discuss such techniques or strategies. At the end, we shall make more observations on stability strategies with reference to these models or techniques and, also as final remarks on the use of these (stability strategies).
1. The basic approach in _________is to maintain present course; steady as it goes. 2. In stability strategy, the focus is on _____and _______competitive advantage consistent with present resources and market requirements.
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3. Organizations that follow stability strategy remain stable or static for a long period of time. (True/False) 4. Organizations follow stability strategies because they neither go for any major internal changes or restructuring nor embark upon any ambitious expansion strategies. (True/False)
8.4 BCG Portfolio Model

The Boston Consulting Group (BCG) model is a growth-market share matrix, depicting a companys competitiveness (cash flow generation or profitability) in terms of market growth rate, and, its relative market share. The model is also known as a portfolio matrix because, on the basis of the BCG matrix, a company can determine its optimal product portfolio on the basis of cash flow or profitability analysis of each of its products or product groups in terms of two dimensions, i.e., market growth and market share. The BCG model is based on the assumption that relative market share is a good indicator of profitability of a product or product group. The BCG model was originally conceived and developed in the early 1970s for analysis of performance or cash flow generation of strategic business unit (SBU) of a company. A strategic business unit is a division or a product/product group unit which operates as a separate profit centre that has its own set of market and competitors and its own business strategies. The company or the corporate unit consists of related businesses and/or products grouped into SBUs which are homogenous enough to manage and control most factors which affect their performance. Resources are allocated to the SBUs in relation to their contributions to the corporate objectives, growth and profitability. The original BCG formulation had used cash use for growth rate3 and cash generation for market share. Four performance situations of product groups of SBUs were identified as four quadrants in the matrix, namely, stars, cash cows, question marks (also called wild cats or problem children) and dogs. The BCG matrix is shown in the Figure 8.2. Stars are high market share products or SBUs operating in high-growth markets. The model predicts that stars will have very strong need to support their growth. But, because they are in a strong competitive positionthey are, in fact, the highest-share competitorsit is assumed that they will produce high margin and generate large amounts of cash. Therefore, they will be both users and generators of large cash flows. On balance, they should generally be selfsupporting with respect to their cash needs.
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Figure 8.2 The BCG Matrix: Stars, Cash Cows, Questions Marks, Dogs
Cash cows are high-share products or SBUs operating in a low-growth market. Because of their market position, their cash generation should be high, but, because the market is assumed to be mature, their cash investment needs to be small. And these products or businesses should be a source of substantial amounts of cash which can be channelled to other areas or businesses. Question marks/problem children are low-share businesses in high-growth markets. They are assumed to have cash needs because they need to finance growth. But, they generate little cash. If a question marks/problem childs market share cannot be changed, it will continue to absorb cash. If, however, market share can be adequately improved, a question mark/problem child can be converted into a star. Usually, such a strategy will require heavy investment in the short run. Improved position should enable it to generate cash, become a star and ultimately a cash cow. Dogs are low-share businesses in low-growth markets. Because of their low share, it is assumed that their progress is low and, therefore, their profits will also be low or non-existent. Since growth is low, expansion of share is assumed to be very costly. Dogs are cash users and probably even cash traps products or businesses that perpetually absorb cash.
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Activity 1 Choose a multi-business company and construct a BCG model for this company.
5. In the BCG model, BCG stands for (a) Business contact group (b) Boston Consulting Group (c) Boston Communication Group (d) Business Consulting Group 6. The BCG model is also known as _________. 7. The BCG model was originally conceived and developed in the early _____ for analysis of performance or cash flow generation of strategic business unit. 8. In a BCG model, _______are high-share products or SBUs operating in a low-growth market, while __________are low-share businesses in lowgrowth markets.
8.5 Four Generic Strategies

Porter (1985) evolved the theory that there are four generic strategic options available to companies. These are: Cost leadership Focused cost leadership Differentiation Focused differentiation Porters theory is based on the concepts of niche marketing and mass marketing and product proposition to be offered by different companies. Two dimensions of the strategy analysis are market coverage and basis of product performance. Porters theory or the strategy option matrix is shown in Figure 8.3.
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Figure 8.3 Porters Four Strategy Options Matrix
Cost leadership strategy is based on exploiting some aspects of the production process, which can be executed at a cost significantly lower than that of competitors. There can be various sources of this cost advantage: i. lower input costs, (e.g., the price paid by New Zealand timber mills for the logs produced by the countrys highly efficient forestry industry or cheap source of high quality bauxite for National Aluminium Company (NALCO) in India from its mines); ii. in-plant production costs, (e.g., lower labour costs enjoyed by Japanese companies locating their video assembly operations in Thailand); iii. lower delivery cost because of proximity of key markets, (e.g., the practice of major beer producers in Europe to locate micro-breweries in or around major metropolitan cities). Focused cost leadership exploits the same advantages as in cost leadership strategy, but the company occupies a specific niche or niches serving only a part of the total market. For example horticulture enterprise, which operates an onsite farm shop, offers low-priced fresh vegetables to the inhabitants in the immediate neighborhood area. Porter has mentioned that cost leadership and focused cost leadership represent a low scale advantage because it is quite likely that eventually a companys capabilities will be eroded by rising costs (labour cost in particular) or its market position will be challenged by an even lower cost producer of goods, (e.g., Russias post-Perestroika entry in the world arms market offering extremely competitive prices). Differentiation strategy is based on offering superior performance, and Porter argues that this is a high scale advantage because, first, the producer can usually command a premium price for its product and, second, competitors are less of a threat, because to be successful, they must be able to offer an even higher performance product. Focused differentiation, which is typically a strategy of smaller and most specialist companies, is also based on superior performance. The only difference is that in this strategy, a company specializes in serving the needs of a specific
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market or markets. For, e.g., the Cray Corporation supplies super computers to the aerospace and defence industries.
8.5.1 Best-cost Strategy

Thompson, Strickland and Gamble (2005) have extended Porters four strategic options framework to include a fifth generic strategy, i.e., best-cost provider strategy. Best-cost provider strategy is deemed to be a central strategy striking a middle course between low-cost advantage and differentiation advantage on the one hand and broad or mass market and narrow or niche market, on the other (Figure 8.4). Best-cost provider strategy is designed to provide customers more value for money by incorporating good-to-excellent product features at lower cost than competitors; the objective is to offer the lowest (best) costs and prices with same or comparable product attributes as those offered by rivals.
Figure 8.4 Five Generic Competitive Strategies Source: A A Thompson Jr, A J Strickland III, and J E Gamble, Executing Strategy: The Quest for Competitive Advantage (New Delhi: Tata McGraw Hill, 2005), 116.
Box 8.1: Toyotas Best-cost Strategy for Its Lexus Models

Toyota is widely known as a low-cost producer among motor car manufacturers of the world. Toyota has achieved low-cost leadership, simultaneously with its product quality, because it has developed considerable skills in supply chain management and low-cost assembly capabilities. Its models are also positioned in the low-to-medium end of the price spectrum where high production volume can lead to low unit cost.
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When Toyota decided to launch its new Lexus models to compete in the luxury car market, it adopted a best-cost provider strategy and, not a low cost strategy. Toyota took four significant steps for designing and implementing its Lexus strategy: 1. Designing and incorporating a series of high performing characteristics and upscale features into the Lexus models. This made these car comparable in performance and luxury to other high-end models like Mercedes, BMW, Jaguar, Cadillac and others in the same category. 2. Transferring the companys capabilities in making high-quality Toyota models at low cost to making premium quality Lexus models at a cost lower than those of luxury car manufacturers. Toyotas supply chain capabilities and low-cost assembly know-how allowed it to incorporate high-tech performance features and upscale quality into Lexus models at substantially less cost than Mercedes and BMW. 3. Establishing a new price point for Lexus by using Toyotas relatively lower manufacturing cost and beating Mercedes and BMW on pricing. Toyota believed that with its cost advantage, it could price Lexus cars low enough to attract price-conscious buyers away from Mercedes and BMW and also induce dissatisfied Lincoln and Cadillac users (or potential buyers) to move up to Lexus. 4. Establishing a new network of Lexus dealers, separate form Toyota dealers, dedicated to providing personalized customer service unmatched in the industry. This was a very innovative differentiation. Lexus models have consistently been ranked among the top 10 models in J D Power and Associates quality survey. In terms of cost and price competitiveness, Lexus models are several thousand dollars cheaper than those of comparable Mercedes and BMW models. This is a clear indication that Toyota has succeeded in becoming a best cost producer with its Lexus cars.
Source: Adapted from A A Thompson Jr, A J Strickland III, and J E Gamble (2005), 131 (Illustration Capsule 5.3).
9. In Porters theory the four generic strategic options available to companies include cost leadership, focused cost leadership, differentiation and ______.
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10. Porters theory is based on the concepts of ______ and mass marketing and product proposition to be offered by different companies. 11. Differentiation strategy is based on offering superior performance. (True/False) 12. Best-cost provider strategy is deemed to be a central strategy striking a middle course between low-cost advantage and differentiation advantage on the one hand and broad or mass market and narrow or niche market, on the other. (True/False)
8.6 Mass Customization

Porters four strategic options matrix provides a good conceptual framework. It can be the basis or starting point for formulation of competitive strategies by companies. But, because of its simple form, the usefulness of the model today, as a practical tool of analysis, may be rather limited. Also, the model may involve major risks if the users act on the assumption that the four alternative strategic propositions are mutually exclusive, which has been presumed in the model. It is true that in the 1980s, many western companies assumed that one should strive to be either a low-cost leader or the producer or supplier of differentiated goods. Thus, German companies concentrated on premium price, superior goods market segments. In Spain, on the other hand, lower labour cost stimulated the establishment of manufacturing processes for serving downmarket pricesensitive sectors. But, this is in sharp contrast to the situations in the Pacific Rim countries like Japan and South Korea. In these countries, introduction of flexible manufacturing processes enabled companies to develop products which offer both high standards of performance and a low price. Through appropriate cost performance (technology) mix, these companies succeeded in gaining major market share in product areas such as cars, televisions, VCRs, video cameras and watches and, thus gave rise to strategic options not postulated in the Porterian model. One such option is mass customization. More and more companies are now adopting flexible manufacturing processes and mass customization as strategy. Motorola offers more than 29 million different combinations of pager features to suit specific customer needs. L&T is one of the engineering companies to adopt flexible manufacturing technologies. Even McGraw Hill, the book publishing company, customizes specialized textbooks in quantities or numbers of 100 or more.
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On the basis of such developments, it is logical to argue that companies can increase the nature and number of strategic options available to them by adding the choices of multi-performance and mass customization to traditional Porterian strategic options matrix. Such modified matrix may increase the number of options from four to nine. Chaston (2000) has suggested one such expanded matrix. This is shown in Figure 8.5.
Figure 8.5 An Expanded Strategic Options Matrix Source: I Chaston, New Marketing Strategies (New Delhi: Response Books, 2000), 55.
13. Development of products which offer both high standards of performance and a low price has been made possible through (a) appropriate technology mix (b) mass customization (c) flexible manufacturing processes (d) All the above 14. The usefulness of Porters model today, as a practical tool of analysis, may be rather limited because of its (a) simple form (b) complex form (c) flexibility (d) None of the above
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8.7 Strategies for Industry Leaders

Industry or market leaders typically employ proven strategies linked either to low cost or differentiation or best cost or mass customization; these strategies are, in turn, based on their core competence or distinctive competence or capabilities. We have many examples of companies which have demonstrated this: Walmart, Microsoft, McDonalds, Gillette, Nokia, AT&T, Intel, Dell Computer, Kodak, Levi Strauss, Sony, Maruti, Hindustan Unilever, Titan and others. Stability strategies are very relevant for industry leaders. Having attained leadership position, a leaders most strategic concern is to maintain stability or defend its market position for continuing dominance in the industry. Leaders generally employ one of the four defensive strategies (Figure 8.6). Position defence Counter offensive Retreat Pre-emptive defence
Figure 8.6 Four Defensive Strategies Source: I Chaston, New Marketing Strategies (Response Books, 2000), 80.
We shall discuss each of these strategies below with particular focus on pre-emptive strategies.
8.7.1 Defensive Strategies

The classic form of retaining existing (civil) territory is to mount a position defence by constructing strong ramparts to keep out the enemy. In business, position defence is typically built by developing high levels of customer loyalty. But, the
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problem with many organizations is that the defender often becomes complacent and, does not realize that the enemy is making slow, but steady, inroads into the customer base. One of the unfortunate examples of this situation is IBM. The company built a big global business in the computer industry based on unmatched customer loyalty. But, IBM ignored the threats, may be unknowingly, posed by the advent of the networked PC and more powerful operating systems. The company realized, rather late in the 1990s, that customer loyalty had been completely eroded by competitors who were more strongly committed to fulfilling the changing needs of customers. Counter-offensive strategy has a different advantage. It has the advantage of not having to respond before one measures up the real nature of the competitive threat. Nevertheless, it is a belated response, and there is always the risk that by waiting until you see the whites of the enemys eyes, a company may be forced to spend massive resources to recover lost grounds. Xerox Corporation is an example. Xerox had been forced to make large investments in R&D, technology, manufacturing process and organizational structure during the last few years to regain some of the lost ground in the photocopier market to competitors such as Canon. Retreat is sometimes a good defence. After a careful review of circumstances, if it is evident that the competitor has the potential to overwhelm the company, then there may be very little logic in defending a position which will be eventually lost to the enemy. Under these conditions, the defender may well withdraw to a more protected segment of the market; and in the meantime, try to determine how the development of new superior product/service packages might make a recovery of the lost market position possible at a later stage. Lotus is a good example of this. During the 1980s, Lotus lost its dominant position in the computer-based spreadsheet market to new software products such as Microsofts excel package. After being acquired by IBM, Lotus is now using its world beating Lotus Notes as a platform from where it can reposition itself as the leading provider of Internet-based group ware communication systems.
8.7.2 Pre-emptive Strategies

Attack is the best form of defence is the basis of pre-emptive defence strategies. As the name indicates, in pre-emptive defence strategies, companies, after having identified a possible threat, take action ahead of competitors. An excellent example of this strategy is Microsoft. Microsoft watches advances made by competitors in the software industry and quickly moves to introduce another upgrade to sustain its market leadership position.
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Pre-emption is considered by many as one of the smartest strategies. Pre-emption, as a strategy, requires a close understanding of the planned and potential moves of competitors for slowing down or blocking those moves. To develop pre-emptive strategies, companies need to consider five steps. 1. Ascertain where the market or competitors are moving or might move; 2. Identify potential strategies for getting there first or for blocking the competitors moves; 3. Ascertain whether these strategies are consistent with the companys current strategic goals; 4. Determine whether these strategies are feasible in terms of resources and competences; 5. Determine whether and how far they are likely to affect the competitors objectives, actions and reactions. The ability to pre-empt requires companies to be creative or innovative. In fact, creativity or innovation is often a key resource in pre-emption. It allows companies to see the unexpected opportunity, threat or competition and design the strategy in advance.
15. In business, _______is typically built by developing high levels of customer loyalty. 16. When companies, after having identified a possible threat, take action ahead of competitors, it is called________. 17. Brainstorming sessions, analogies and war games and simulations are aids or approaches for generating _____strategies (through creativity). 18. _______involve analysis of analogous situations in other markets, products, industries and countries.
8.8 Concentration Strategy

We have enumerated above a number of models, techniques and strategies, which can be used by companies to remain in business or sustain stability, and, also to secure growth (incremental). Different companies may adopt different strategies or some combinations of these strategies depending on the particular
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product, market and environmental situations. The use of these strategies should help companies to concentrate better in their present markets. One of the commonest stability strategies is concentration on the current business. An organization directs its resources to the profitable growth of a single product, in a single market and with a single technology4 or a narrowly defined product and market focusing on a dominant technology.5 The concentration strategy works under certain specific environmental conditions. First is a market condition in which the demand for the product is stable and the industry is resistant to major technological change. Paper manufacturing, for which the basic technology has not changed for almost a century, is a good example. A second favourable situation for concentration strategy is when a companys product markets are sufficiently distinctive, and, the company is strong enough to retaliate if a potential competitor plans to invade its territory. John Deere abandoned its plans for entering into the construction machinery business when mighty Caterpillar threatened to enter farm machinery business, Deeres mainstay, in retaliation. A third favourable condition for concentration growth exists when a company has stable sourcing of inputs in terms of price, quantity and timely availability. Maryland-based Giant Foods is able to concentrate on the grocery business largely because of its stable long-term arrangements with suppliers of private label goods. A fourth situation for favourable concentrated growth prevails if market generalists are effective operators and thrive on general market segments leaving particular pockets or segments for the specialists. For example, hardware store chains like, Home Depot, concentrate mostly on routine household repairs and leave special solutions to the specialists. This also gives the generalists a big customer base. Finally, concentrated growth becomes successful if the market is stable and, not subject to seasonal or cyclical fluctuations. Many products like seeds, pesticides, fertilizers and agricultural equipment have a seasonal demand and manufacturers of these products may need to diversify into other products and markets.6 Many companies have been successful by following a concentration strategy. We have given some examples above. Some other examples are McDonalds, Dominos Pizza, Good year and Apple Computers. Small and medium enterprises (SMEs ) are generally more successful with concentration strategy because they have a clearly defined market and are mostly content with it. Under stable conditions, concentrated growth poses lower risk than any other strategy, but, in a changing market environment, this may not produce desired results. Concentrating in a single-product market segment makes a
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company vulnerable to changes in that segment. In the fast changing computer software market, manufacturers of IBM clones faced such a problem when IBM adopted OS/2 operating system for its PC line. The change made existing clones out of date. If the strategic management team feels that the combination of their current product(s) and market(s) will no longer provide the basis for achieving organizational objectives or goals, they have two options which involve both cost and risk: market development and product development. These are discussed later in Unit 10.
19. The _______strategy works under market condition in which the demand for the product is stable and the industry is resistant to major technological change. 20. _______enterprises are generally more successful with concentration strategy.
8.9 Corporate Parenting

In multi-business or multi-SBU organizations, corporate parenting becomes an important subject for analysis because of its bearing on stability strategies (and also strategies for change and expansion strategies). Corporate parenting relates to the manner in which the corporate headquarters or centre manages and nurtures individual businesses or SBUs. Corporate parent can also be described as the level(s) of management above business units, and, without direct interaction with customers and competitors. In corporate parenting, the total organization is viewed in terms of resources and capabilities which can be used to develop individual business, and, also create synergies among businesses. The objective of corporate parenting is to focus on value creation from the relationship between the parent and the SBUs. For strategic corporate parenting, Campbell and others have suggested that multi-SBU corporations should address three issues: (a) Which businesses should the corporation own and why? (b) What organizational structure, management systems and strategies would ensure superior performance of the SBUs? (c) What should be the proper relationship or fit between the parent corporation and the business units?
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On the basis of the answers to these questions, a parenting fit matrix may be constructed to depict the positive contributions and negative effects of parenting characteristics and SBU success factors. Such a matrix is shown in Figure 8.7. SBU performance is presented through critical success factors (CSFs). Critical success factors, also called key success factors, are those which are vital for organizational success. Strategists consciously look for or identify such factors to become successful. For example, one of the CSFs for Tata Motors for Indica is to capture the tourist vehicle segment. As can be seen in Figure 8.7, there are five types of business possibilities or fit (or misfit) situations: Heartland businesses, edge-of-heartland businesses, ballast businesses, value-trap businesses and alien territory businesses.
Figure 8.7 A Parenting Fit Matrix Source: Adapted from M Alexander, A Campbell, and M Goold, A New Model for Reforming the Planning Review, Planning Review (JanFeb 1995), 17.
Heartland businesses are ideal businesses in terms of parenting fit businesses where the fit between parenting opportunities and parenting characteristics is high and the fit between critical success factors and parenting characteristics is also high. Such businesses should have strong influence on formulation of corporate strategy because the parent understands their CSFs well and good opportunities exist for the parent to make improvements. Expansion strategies are recommended for heartland businesses. Stability strategies can be used only as a pause.
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Edge-of-heartland businesses show some parenting characteristics which fit the business well but others do not. The parent has to understand and analyse these businesses further. With additional investment in terms of resources and capabilities, such businesses may elevate to heartland category . In the case of such businesses, the parent has a special responsibility for value addition. Ballast businesses fit well with parenting characteristics but, do not provide enough opportunities to the parent for improvement. These are somewhat like cash cows. Ballast businesses are those which have been established for long and contribute well to corporate revenue. Such businesses should generally adopt stability strategies, but, care should be taken to ensure that these do not slip to alien territory. Value trap businesses fit reasonably well with parenting opportunities, but fit poorly with parents understanding of business units CSFs. This may mean two things; either these businesses do not match the core competences of the corporation or organizational capabilities or the CSFs need re-examination. If the CSFs cannot be redefined or reworked, these businesses should be milked, and, eventually divested. Such businesses can adopt stability strategies for prolonging the period of milking. Alien territory businesses show very little promise or opportunity because there is a misfit between parenting characteristics and business units and also, poor fit between parenting opportunities and characteristics. Such businesses can often be the results of misguided diversifications in the past and, are best candidates for withdrawal or divestment. As shown in Figure 8.7 and explained above, if there is lack of fit between parenting opportunities and characteristics and, also between business units CSFs and parenting characteristics, corporate parenting may not add value to businesses. In fact, a story is told in a major multinational corporation that, historically, there had never been a business within their portfolio which, having been divested, had not done better on its own or with someone else.7 This implies that activities of corporate parents may not always be moving in the right directions. If parenting does not add enough value to businesses, the parent may become a cost to those businesses, and may reduce or destroy value created by them instead of adding to it. There is a clear difference of opinion among strategic management analysts on whether parenting adds value or destroys it.
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21. The manner in which the corporate headquarters or centre manages and nurtures individual businesses or SBUs is called________. 22. Ideal businesses in terms of parenting fit are_________. 23. _______businesses fit well with parenting characteristics but, do not provide enough opportunities to the parent for improvement. 24. _________businesses show very little promise or opportunity because there is a misfit between parenting characteristics and business units.
8.10 When Best to Pursue Stability Strategy

Good parenting can help SBUs to follow any strategy effectively including stability strategies. In large multi-business organizations, some SBUs may follow stability strategy; some other SBUs may have to adopt strategy for internal change and restructuring; other SBUs may pursue expansion strategy. Stability strategies are followed by organizations as corporate-level strategy also. In fact, most organizations (single business or multi-business) follow stability strategies for a period of time; some organizations follow this for a longer period than others. It has been generally observed that as companies/corporations grow older, they get more rooted in structures and systems and, are more likely to follow a stability strategy. L&T is an example. We can also identity some specific situations when it is best to pursue stability strategy: (a) Perception of management about performance: If the management is satisfied with present performance and, is not willing to take market risks, they may like to adopt stability strategy and continue with it. The management may consider change of strategy only if results are not forthcoming. (b) Slowness to change: Some organizations are slow to change or resistant to change. This is particularly true of public sector companies. Many such companies are not organizationally equipped for fast or sudden change and lack the ability to cope with risk and uncertainty inherent in such change. (c) Frequent past changes: If a company had made frequent strategic changes in the past, it should follow stability strategy for some period for more
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efficient management. In fact, it is always recommended that, after a period of internal change and restructuring or expansions, stability strategy should be pursued as a pause or rehabilitation. Otherwise, the organization may show signs of destabilization. (d) Strategic advantage: If an organizations strategic advantage lies in the present business and market, it should pursue stability strategy. If, for example, an organization has high market share, it can continue in the same business and defend its position through incremental strategic changes. (e) Profit objective/maximization: Every company has some profit objective which is commensurate with the level of investment, output level, market structure, willingness to take risk, etc. If the stability strategy helps the company achieve its profit objective, the company should stick to this. Sometimes, stability strategy may even help in profit maximization. (f) Stable environment: Given the organizational resources and capabilities, the nature of environment determines, to a large extent, the kind of strategy to be followed by a company. If the environment is generally stable in terms of macroeconomic situation, government policy regulations and competition, stability strategy may be the best. The particular strategy to be followed depends on the precise nature of the environmental impact. If the environment is hostile or volatile, stability strategy is not recommended.
25. Sometimes, stability strategy may even help in profit_________. 26. Stability strategy is not recommended if the environment is _______or_______.
8.11 Stability Strategies in Practice

In practice, many companies in India and various other countries follow stability strategies. The reasons or situations can be those mentioned above. Such factors and circumstances relate to conditions in a particular country. In India, in addition to the situations mentioned above, reasons for pursuit of stability strategy by companies are of three types:
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1. Overcapacity or underutilization of capacity; 2. Regulatory restrictions or controls; 3. Lack or withdrawal of budgetary support for expansion. The steel industry, cement industry and coal industry in India have overcapacity. This is one of the most important reasons why companies like SAIL, Coal India and ACC are adopting the stability strategy. Such companies cannot go for expansion strategies. Instead, they are concentrating on improving their operational efficiency. Cigarette and alcoholic beverages industries are subject to regulatory restrictions and there is strict control over expansion of these industries. Companies in the cigarette industry, like ITC, are going for growth and diversification in agri business, hospitality business and export. Many companies in the public sector are forced to adopt stability strategy because of governments policy of privatization or divestment and curtailing or stopping budgetary support for any expansion programme. Many public sector companies in India also adopt stability strategies because of their size, slowness to change, unwillingness to take risk and the accountability system. Examples are many: BHEL, BPCL, HPCL, IOC, HCL, RCF, STC, MMTC, etc., in addition to SAIL and Coal India. Activity 2 Many examples of stability strategies have been given in the unit. Choose any two companies and compare the nature of their stability strategies.
27. The steel industry, cement industry and coal industry in India pursue stability strategy because they have _______. 28. Many companies in the public sector are forced to adopt stability strategy because of governments policy of __________.
8.12 Case Study

Larsen and Toubro: Growth with Stability Larsen & Toubro (L&T), founded in 1938, is one of the largest engineering companies and one of the top five private sector companies in India. Over the years, L&T has acquired a very high reputation for its capabilities in
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executing engineering projects. In 1994, Kulkarni took over as the CEO of L&T and announced that the company would fulfil its mission of being a `10,000 crore entity by the end of the century. An independent survey named L&T to be one of the best managed companies in Asia and another by Business India mentioned L&T as one of the most transparent companies and a leader in corporate governance. The company adopts a combination business strategycombination of growth strategy and stability strategy or growth with stability.
L&T has been setting new challenges in defining core capabilities and core competence. Generally speaking, core competence of the company lies in its ability to synthesize, integrate and harmonize its diverse world-class engineering, manufacturing, procurement, construction and fabrication skills around turnkey projects mostly in core sectors. This is backed by a world class vendor base, high quality technological alliances, excellent IT infrastructure, sophisticated fabrication facilities and its people. People L&Ts dedicated team of managers/employeesstand for one of the companys key capabilities. L&T implements its vision and business philosophy through effective management approaches. In terms of structure, the company adopts decentralized decision making and a less hierarchical system. The concept of SBUs is actively encouraged and implemented. Budget allocations are made in the beginning of a financial year and SBUs are assigned responsibilities, along with necessary delegation of powers to achieve the targets. The CEO directly gets involved only in matters like diversification, restructuring, business divestment, etc.
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The company strongly believes in empowerment, teamwork and continuous training of employees. According to Kulkarni: Only through empowerment and decentralized decision making can a highly diversified company like L&T be managed. The TQM movement, initiated in 1993, has taken firm roots in L&T. Training of a large number of employees has facilitated the launch of many quality improvement programmes. A large number of managers and staff have participated in continuous improvement (Kaizen) and small group activities. Several cross-functional teams regularly operate in the area of design, manufacturing, marketing and services. The principles of TQM are applied to customer service also. The TQM Awareness Programmes have also been extended to the stockists and vendors to bring improvement in operations and customer service. L&T is consolidating its business in four major areasengineering, construction, cement and equipment manufacture. The company has identified Engineering Project Construction (EPC) as a thrust business for the future. In the EPC business, major domestic competitors are BHEL, Punj & Lloyd and RITES. The core infrastructure sectors such as power, telecom, and roads are the key focus areas for the country. Most players in project/construction business have specific competences which cater to specialized areas. L&T is perhaps the only company which competes in almost every sector by virtue of its diversified technical competence and expertise. L&Ts achievement so far has been highly impressive. It has set a good example of growth with stability. Its growth has hardly been unbalanced. However, there are some points of caution or concern. First is global competition. In international EPC business, the company faces tough competition from global majors, like Hyundai, Kematsu and Caterpillar. L&T has partially overcome this through strategic and technological alliances with major international players. Some of its alliances in certain countries are even with companies like Caterpillar and Marubeni, which are competitors in other countries. Another area of concern for L&T is its low productivity in certain businesses compared to international benchmarks. Lack of strong/ enough cost competitiveness or cost efficiency is another relatively weak area. The company needs to take necessary corrective measures to remain strong in its growth trajectory.
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8.13 Summary
Let us recapitulate the important concepts discussed in this unit: Organizations follow stability strategies because they neither go for any major internal changes or restructuring nor embark upon any ambitious expansion strategies. In following stability strategies, companies pursue certain objectives which are consistent with overall corporate The BCG model is a growthmarket share matrix, a matrix depicting a companys competitiveness (cash flow generation or profitability) in terms of market growth rate and, its relative market share. The model is also known as a portfolio matrix, a company can determine its optimal product portfolio in terms of stars, cash cows, question marks and dogs. Porter (1985) evolved the theory that there are four generic strategic options available to companies cost leadership (mass market), focused cost leadership (niche market), differentiation (mass market) and focused differentiation (niche market). Thompson, Strickland and Gamble have extended Porters framework to include a fifth generic strategy, i.e., best-cost provider strategy. Best-cost strategy strikes a middle course between the mass market and niche market on the one hand and, low-cost advantage and differentiation advantage, on the other. Stability strategies are very relevant for industry leaders. Having attained leadership position, a leaders strategic concern is to maintain stability or defend its market position for continuing dominance in the industry. Leaders generally employ one of the four defensive strategies: position defence, counter-offensive, retreat and pre-emptive defence. Concentration strategy is one of the commonest stability strategies. In concentration strategy, an organization directs its resources to the profitable growth of a single product in a single market and with a single technology or, a narrowly defined product and market focusing on a dominant technology. Corporate parenting relates to the manner in which the corporate headquarters or centre in amulti-business organization manages and nurtures individual businesses or SBUs. A corporate parent may be value adding or value destroying.
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8.14 Glossary
BCG matrix (Boston Consulting Group model): A growth-market share matrix, depicting a companys competitiveness (cash flow generation or profitability) in terms of market growth rate, and, its relative market share. Cash cows: High-share products or SBUs operating in a low-growth market. Dogs: Low-share businesses in low-growth markets. Pre-emptive defence strategy: A strategy under which a company, after having identified a possible threat, takes action ahead of competitors. Question marks/problem children: Low-share businesses in highgrowth markets. Stability strategy: A strategy in which companies will concentrate their resources where the company presently has or can rapidly develop a meaningful competitive advantage in the narrowest possible product market scope consistent with the firms resources and market requirements. Strategic business unit: A product/product group unit which operates as a separate profit centre that has its own set of market and competitors and its own business strategies.

1. Define stability strategy. Does stability mean being static? Explain with reference to the objectives of stability strategy. 2. What is the BCG model? Explain stars, cash cows, question marks, and dogs in the context of this model. 3. What are the four generic strategies? What is the best-cost provider strategy? Explain. 4. What is the general strategy for the industry leader? Explain, with examples, the four defensive strategies. 5. What is concentration strategy? Is concentration strategy a stability strategy? Explain with details. 6. Define corporate parenting. Illustrate both the value-adding role and the value-destroying role of corporate parent.
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7. Discuss six situations when it is good/best to pursue stability strategy. Give some Indian examples.

1. Stability 2. Developing, maintaining 3. False 4. True 5. Boston Consulting Group 6. portfolio matrix 7. 1970s 8. Cash cows, dogs 9. Focused differentiation 10. niche marketing 11. True 12. True 13. (d) 14. (a) 15. position defence 16. pre-emptive defence strategies 17. pre-emptive 18. Analogies 19. Concentration 20. Small and medium 21. Corporate parenting 22. Heartland businesses 23. Ballast 24. Alien territory 25. maximization
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26. Hostile, volatile 27. Overcapacity 28. privatization or divestment

1. Stability strategy implies that an organization will continue in the same or similar business as it currently pursues with the same or similar objectives and resource base. Refer to Section 8.3 for further details. 2. The Boston Consulting Group (BCG) model is a growth-market share matrix, depicting a companys competitiveness in terms of market growth rate, and, its relative market share. Refer to Section 8.4 for further details. 3. Porter (1985) evolved the theory that there are four generic strategic options available to companies. Refer to Section 8.5 for further details. 4. Industry or market leaders typically employ proven strategies linked either to low cost or differentiation or best cost or mass customization. Refer to Section 8.7 for further details. 5. One of the commonest stability strategies is concentration on the current business. Refer to Section 8.8 for further details. 6. Corporate parenting relates to the manner in which the corporate headquarters or centre manages and nurtures individual businesses or SBUs. Refer to Section 8.9 for further details. 7. There are some specific situations when it is best to pursue stability strategy. Refer to Section 8.10 for further details.
8.17 References
1. Campbell, A, M Goold, and M Alexander. 1994. Corporate Level Strategy: Creating Value in the Multibusiness Company. New York: John Wiley & Sons. 2. Hasperlag, P. Portfolio PricingUses and Limits. Harvard Business Review, JanFeb, 1982. 3. Nag, A. 2008. Strategic Marketing. New Delhi: Macmillan India.
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4. Pearce II, J A, and R B Robinson Jr. 2005. Strategic Management: Formulation, Implementation and Control. 9th edn, New Delhi: Tata McGraw Hill. 5. Porter, M. 1980. Competitive Strategy: Techniques for Analysing Industries and Competitors. New York: The Free Press. 6. Thompson, Jr, A A, A J Strickland III, and J E Gamble. 2005. Crafting and Executing Strategy: The Quest for Competitive Advantage. New Delhi: Tata McGraw Hill. Endnotes
1 2
R L Katz, Management of Total Enterprise (New Jersey: Prentice Hall, 1970). P K Ghosh, Strategic Planning and Management (New Delhi: Sultan Chand & Sons, 2003), 204 5. More cash would be required to support high growth and less cash would be used to finance low growth J A Pearce II, and R B Robinson Jr, Strategic Management: Strategy Formulation and Implementation (New Delhi: AITBS Publishers and Distributors, 2002), 251. J A Pearce II, R B Robinson Jr, Strategic Management: Strategy Formulation and Implementation and Control , 9 th ed. (New Delhi: Tata McGraw Hill, 2005), 203. J A Pearce, and R B Robinson Jr (2005), 201 02. G Johnson and K Scholes, Exploring Corporate Strategy (2005), 270.
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Unit 9
Structure
Strategy for Managing Change
9.1 Introduction 9.2 Caselet Objectives 9.3 Corporate Restructuring 9.4 Divestment Strategy 9.5 Liquidation Strategy 9.6 Turnaround Strategy 9.7 Managing Radical Change 9.8 Strategic Change in the Public Sector 9.9 Some Strategic Guidelines for Managing Change 9.10 Case Study 9.11 Summary 9.12 Glossary 9.13 Terminal Questions 9.14 Answers 9.15 References
9.1 Introduction
We had distinguished between stability strategies, strategies for managing change and expansion strategies in Figure 8.1 (in the previous unit). This distinction should be clearly understood, because, change is involved in almost all strategies, including stability strategies and expansion strategies. However, by change, we here mean internal organizational change. Many companies, during different phases of organizational life cycles, reach a stage when organizational change becomes essential for survival and growth. Analysis of such changes, and various issues related to these, is the subject matter of this unit. Organizations have to adopt appropriate strategies for managing the change. Companies commonly adopt one of the four major strategies: corporate restructuring, divestment, liquidation and turnaround strategies. Besides these, organizations use strategies to manage radical change and also during period of uncertainties. Companies may sometimes adopt a doomsday management approach. Some have also suggested change during good times for progressive companies. Some of these changes are reactive, some are proactive (Figure 9.1) We will discuss all these in this unit.
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Managing Change
Reactive
Proactive
Divestment Corporate restructuring
Liquidation Corporate turnaround
Managing radical change
Managing uncertainty
Doomsday management
Change curing good times
Figure 9.1 Managing Organizational Change: Reactive and Proactive
9.2 Caselet
Immediately after the announcement of liberalization measures by the Government of India in July 1991, the Tata Group in 1992 embarked on a restructuring programme in the form of a strategic plan. The objective was to create a system of integrated planning, rationalize companies or businesses, create synergy among overlapping units and consolidate holdings in the group companies. The strategic plan or the restructuring programme aimed at reducing the existing 25 businesses and 107 operating companies to 12 businesses and less than 30 operating units. In 1996, the group hired McKinsey & Co to prepare a detailed restructuring plan. As a sequel to the restructuring plan, the group has divested, over the years, companies/businesses such as Goodlass Nerolac, Tata Oil Mills (soaps, hair oils and other consumer products), Lakm and TISCOs (now Tata Steel) cement division. Simultaneously, the group has strengthened businesses like cement and tea through consolidation. Future plans of the group include investment in new economy businesses like B2B Internet service and cellular telephony.
Objectives
After studying this unit, you should be able to: Analyse corporate restructuring as a strategy Discuss restructuring in the Indian corporate sector
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Discuss corporate turnaround strategy: surgical and non-surgical Analyse divestment as a strategy Focus on managing radical change Discuss strategic guidelines for managing change
9.3 Corporate Restructuring

Corporate restructuring means organizational change to create a more efficient or profitable enterprise. Similar terms which are used for restructuring are revamping, regrouping, rationalization or consolidation. Corporate restructuring has three meanings or connotations: organizational restructuring, business-level restructuring and financial restructuring. Organizational restructuring means changes in the structure of the organization changing or reducing hierarchies or delayering, down sizing, i.e., reducing the number of employees, redesigning positions, reallocation of jobs or portfolios or changing the reporting system. Business-level restructuring (applies to multibusiness organizations) deals with changes in the composition of a companys businesses or product portfolios. The changes are done on the basis of movements in market share or performance of different businesses or products to improve efficiency or profitability at the corporate level. Financial restructuring is concerned with changes in financial management in terms of equity pattern or equity holdings, debt-equity ratio, borrowing pattern, debt servicing schedule, etc. More common forms of restructuring are organizational restructuring and business-level restructuring. Sometimes, when major crisis develops, restructuring may be comprehensive, which may simultaneously involve, rather combine, business-level restructuring, organizational restructuring and even financial restructuring. This may happen more during a turnaround situation (discussed later). Restructuring is essentially an adaptation strategy. It is about adaptation to change and is mostly incremental in nature. In contemporary business, most companies are in the process of constant change. Often older companies require more restructuring than the newer ones. This may happen for a number of reasons. First, those companies might have over-diversified including diversification into unrelated areas; second, the organizational structure might be very hierarchical not fitting into a dynamic market environment; third, there might be a conservative financial management system in relation to funds flow and investments.
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A survey by the All India Management Association (AIMA) shows that corporate restructuring is a continuous process, and, in India, it accelerated after 1991 with the initiation of the liberalization process. The main objective of restructuring in the Indian companies was to gain customer focus.1 Another research study on corporate restructuring revealed that most of the restructuring exercises carried out by the Indian companies after 1991 were at business portfolio level followed by changes in ownership or shareholding structure. The instruments of restructuring in these companies were primarily joint ventures, mergers and acquisitions and diversification into newly opened sectors like power and telecom. These are actually expansion strategies and are discussed in detail in the next unit. The conclusion of the study is that large traditional business houses, medium-sized enterprises of recent origin and public sector enterprises are the major participants in restructuring, their primary concern being delivering better shareholder value.2
9.3.1 Restructuring in the Indian Corporate Sector3

We had mentioned above that restructuring processes are more commonly observed in large diversified companies. Restructuring programmes in some Indian companies in the private corporate sector, including multinationals and public sector are mentioned below. The companies are: Hindustan Unilever, L&T, Tata Industries, SAIL and SBI (The restructuring by the Tata Group has been discussed in the caselet above). Hindustan Unilever Hindustan Unilevers restructuring plan was christened Project Millennium. This was primarily a project on business restructuring. This was a comprehensive transformation programme to restructure the company from being a large, diversified conglomerate to becoming a configuration of empowered virtual companies, each built around a single category of products. The objective was to reduce or regroup over 50 existing businesses into 18 businesses grouped under seven major divisions: detergents, beverages, personal products, frozen foods, culinary products, agribusiness and oil-fats. The restructuring programme envisaged a combination of different strategies including acquisition in the identified core business, dairy products, animal feeds and specialty chemicals. Larsen and Toubro (L&T) L&T had developed Vision 2005 as the basis for its restructuring. The company had a minor restructuring in 1993 in which it divested non-core businesses like
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shipping and shoe manufacturing. The objective of Vision 2005 was to focus on its core businesses and deliver better shareholder value. The core businesses were re-identified as engineering projects, construction and software. As part of the restructuring programme, the company had planned for entering into joint ventures for cement, tractors and earth-moving equipment businesses. Divestments are to continue for minor businesses like glass bottles and crown caps. Steel Authority of India (SAIL) SAIL had made massive investments in modernization programmes undertaken during 199293. The investments later turned out to be untimely, and also the modernization project suffered from cost overruns and also problems of financial cost-benefits. This had affected the financial and operations management of SAIL. Subsequent to this, revival efforts were initiated primarily in terms of financial restructuring of the company. Restructuring also aimed at business restructuring focussing on the core business of SAIL, that is, steel, and intensification of strategies for four steel plantsDurgapur, Bhillai, Bokaro and Vizagto improve operational efficiency. The restructuring programme also involved divestment of non-core subsidiaries like stainless steel and alloy steel or operating them as joint ventures. State Bank of India (SBI) Like many other companies, including L&T and Tata Group, SBIs restructuring plan was also induced by the liberalization measures initiated by the government in 1991. In 1993, SBI had commissioned McKinsey & Company to prepare a restructuring plan for the bank. Restructuring was aimed at developing an international perspective for SBI and making it a world class bank. Corporate restructuring consisted of both organizational restructuring and business restructuring. The restructuring process was to focus on profitable areas or operations to improve corporate profitability. To achieve this objective, SBI was restructured into different banking groups on SBU model. These groups are: corporate banking, national (retail and other commercial) banking, international banking, and associate and subsidiary banking. Restructuring sometimes involves a retrenchment strategy. Retrenchment strategy means that a company is aiming at contraction of its activities or operations through significant reduction or elimination of one or more of its businesses to improve organizational performance or efficiency.
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Retrenchment is not just incremental contraction; contraction here is more significant. Retrenchment actually involves trimming the fat and creating a leaner and fitter organization devoid of unprofitable or unproductive businesses or activities. In many cases, retrenchment implies a divestment strategy which is discussed in the following section. Activity 1 Carry out a research on corporate restructuring and write a case study of an organization that undertook corporate restructuring to emerge as a more efficient or profitable enterprise. You can use reference books or the Internet for your research.
1. Organizational change to create a more efficient or profitable enterprise are referred to as _________. 2. Downsizing, redesigning positions, reallocation of jobs or portfolios or changing the reporting system is known as ________. 3. Often newer companies require more restructuring than the older ones. (True/False) 4. A company aiming at contraction of its activities or operations through significant reduction or elimination of one or more of its businesses to improve organizational performance or efficiency (a) adopts retrenchment strategy (b) changes product portfolios (c) changes the terms of equity pattern (d) undertakes divestment
9.4 Divestment Strategy

Divestment, also called divestiture, means selling a part of a companya major division or an SBU. Divestment is usually a part of corporate restructuring or rehabilitation programme as indicated above. Divestment can be part of an overall downsizing or retrenchment strategy of an organization to get rid of businesses which are unprofitable or which require too much capital or which
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do not fit well with the companys other existing businesses or activities.4 Divestment is many a time used to raise capital for new acquisitions or investment. Sometimes divestment becomes a forced option when an attempt has been made to turnaround the business, but, has not been successful. Divestment can be done in two ways: selling a business outright or spinning it off as an independent company. Selling a business outright is the more commonly used form of divestment. A business becomes a good candidate for spinning off as an independent company if it possesses sufficient resource strength to compete successfully on its own. Spinning off business into a separate company may be done because of some strategic reason; may be, it does not fit well with the core business of the company. If a company decides to spin off a business, one important decision the corporate parent has to take is whether to retain partial ownership in the divested business. Retaining partial control is generally recommended if the business to be divested has good profit prospects. Spinning off a business, with or without partial ownership, may be done either by selling shares to the public through an initial public offering (IPO) or by distributing shares of the new company to the existing shareholders of the corporate parent.5 Selling a business outright involves finding a suitable buyer. Finding a suitable buyer may be easy or difficult depending on the nature of the business to be divested. It also depends on the structure, size and growth of the industry or market. Many times, businesses are sold not necessarily because they are unprofitable, but because of strategic or environmental reason, say, emerging competitive threat. Parle Products sold its profitable soft drinks business to Coca-Cola because the company did not want to get involved into a marketing warfare with giants like Coke and Pepsi. Also, while selling a business, the seller company should look for a buyer who finds the business a good fit with their existing product mix or product portfolio. For example, for Coca-Cola, buying the soft drink business of Parle Products was a perfect strategic fit. This way the seller company also gets a good price, that is, the divestment becomes profitable. Divestments are common in corporate functioning of multi-business organizations including multinational companies. From time to time, large companies sell or spin off businesses and add or acquire new businesses in conformity with environmental changes and organizational objectives or goals. The underlying driving force is competitiveness. Given below are some examples of recent divestments (Table 9.1).
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Table 9.1 Selected Recent Divestments

Parent company Procter & Gamble Dell Computer Citigroup General Motors DuPont Voltas Tatas Hindustan Unilever Voltas Tatas Part/business divested Jif peanut butter Web-hosting division Citi Capital Hughes Electronics Drug Division Chemicals TOMCO Vanaspati (Dalda) Air conditioners, Refrigerators Lakm Acquiring company J M Smucker FON Group GE Capital Fleet Services EchoStar Communications Bristol-Myers-Squibb Ralechem Hindustan Unilever Bunge Ltd Electrolux Hindustan Unilever
5. Divestment means (a) reducing the number of employees (b) redesigning positions (c) reallocation of jobs (d) selling a part of a company 6. Divestment can be done in two ways: _______or spinning it off as an independent company. 7. Many times, profitable businesses are sold because of ______or environmental reasons. 8. The underlying driving force behind divestment is ____________.
9.5 Liquidation Strategy

Liquidation means closing down a company and selling its assets. Liquidation can also be defined as selling of a companys assets, in parts, for their tangible worth.6 This should be the strategy of last resort when no other alternatives like turnaround, restructuring or divestment are applicable or workable. Liquidation is actually a recognition of defeat. But, at some stage of the organizational life cycle, it is advisable to cease operating than continue to operate and accumulate losses.
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Liquidation should be planned. Liquidation may be the toughest decision for a company, but, if it is unavoidable/inevitable, it should be done at the right time and, in a planned manner. Planned liquidation involves a systematic process for maximum benefits for the company and its shareholders. If liquidation is unplanned or haphazard, the company may incur avoidable or unnecessary losses. In India, liquidation is governed by the Companies Act, 1956. In the Companies Act, liquidation is officially termed as winding. The Act defines winding up of a company as the process whereby its life is ended and its property administered for the benefit of its creditors and members. The Act stipulates appointment of a liquidator who handles the liquidation process. The liquidator takes control of the company, collects its assets, pays its debts and, finally, distributes any surplus among the members, according to their rights.7 According to the Act, liquidation or winding up may be done in three ways: (a) Voluntary winding up; (b) Voluntary winding up under supervision of the court; (c) Compulsory winding up under an order of the court The Act also provides for dissolution of a company in which case it ceases to exist as a corporate entity for all practical purposes and, all its operations remain suspended for a period of two years. During these two years, the company may be liquidated. Part VII (Sections 425 to 560) of the Act deals comprehensively with various legal aspects of liquidation including dissolution. Thousands of small businesses in different countries, developed and developing, liquidate every year because of unviable operations. Liquidation, however, is not confined to small business only. General Motors terminated production of its Chevrolet Camera and Pontiac Firebind in 2002 and closed the Canadian manufacturing plant when the operation became totally unviable. In India, Navsari Mills and Swadeshi Mills (both of Tata Group), Binny, Shri Ambica, Sriram and India United are some of the companies whose products/brands were quite popular at one time, but, ultimately, had to be closed down. Many jute mills in eastern India had the same fate. In China and Russia, thousands of government-owned businesses liquidate as these countries try to privatize and consolidate industries. Under certain situations, liquidation is particularly recommended. David (2003) has suggested three situational guidelines for liquidation to be an effective strategy: 1. An organization has pursued both a retrenchment strategy and a divestment strategy, but, neither has been successful;
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2. For an organization, only alternative left is bankruptcy; liquidation, in this case, represents an orderly and planned means of obtaining maximum possible cash for the organizations assets. A company can legally declare bankruptcy and then liquidate various divisions or businesses to raise funds or capital; 3. The stockholders of a company can minimize their losses by selling the companys assets through liquidation.8
9. Closing down a company and selling its assets is known as ________. 10. In India, liquidation is governed by the _________. 11. The Companies Act stipulates appointment of a _______who handles the liquidation process. 12. The stockholders of a company can minimize their losses by selling the companys assets through liquidation. (True/False)
9.6 Turnaround Strategy

Corporate turnaround may be defined as organizational recovery from business decline or crisis. Business decline for a company means continuous fall in turnover or revenue, eroding profit, or accrual or accumulation of losses. So, business or organizational decline, like business performance, is understood in relative terms, that is, compared with the past. But, some strategy analysts describe business decline in terms of current comparisons also; for example, relative to industry rates or averages or even relative to economic growth of the country. Corporate crisis means deepening or perpetuation of a decline. Turnaround strategies are usually required for crisis situations. If organizational decline is not continuous or severe, corporate restructuring can provide the solutions. That is why turnaround strategy may be said to be an extension of restructuring strategy. When restructuring is very comprehensive and leads to corporate recovery, it almost becomes a turnaround strategy as mentioned above in the case of Voltas. Corporate or business decline manifests itself in many forms or symptoms, including profitability. These symptoms are actually different performance criteria of companies. Major symptoms or criteria or situations which signal towards the need for a turnaround strategy are:
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Steadily declining market share; Continuous negative cash flow; Negative profit or accumulating losses; Accumulation of debt; Falling share price in a steady market; Mismanagement and low morale. With some or all these symptoms becoming clearly visible (these symptoms are generally interrelated) for a company, a turnaround or recovery becomes highly imperative. But, the situation should be carefully reviewed to assess the extent of recovery possible before undertaking any such programmes. Given a strategy, in some situations, recovery may be more or less successful than in others. Slatter (1984) contends that there are four recovery situations in terms of feasibility or success. These situations are: (a) Realistically non-recoverable situation; (b) Temporary recovery situation; (c) Sustained survival situation ; (d) Sustained recovery situation. Realistically non-recoverable situation is one in which chances of survival are very little, because the company is not competitive, the potential for improvement is low, clear cost disadvantage exists and demand for the companys product is in decline stage. In such a situation, divestment or liquidation may be a better option. Temporary recovery situation exists when there can be initial successful recovery, but, sustained turnaround is not possible. This can happen because repositioning of the product is possible. Some cost reduction programmes may be successful, and revenue generation is also possible at least for some time. Sustained survival situation means that recovery is possible but potential for future growth does not exist. This may happen primarily because the industry is in a declining phase (say, black and white TV, audio cassettes, VCR). A company in such an industry or situation can either go for divestment or turnaround if it foresees or can create a niche in the industry and if the growth prospects can be created. Sustained recovery situation is one in which successful turnaround is possible for sustained growth. In such cases, business decline might have been
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caused by internal organizational factors or external or environmental conditions which the company is able to deal with effectively. Inherently, the company is strong in terms of competence.9 Surgical Turnaround and Non-surgical Turnaround Generally, there are two methods of corporate turnaround: surgical and nonsurgical. The surgical method, more commonly practiced in the West, involves sweeping changes like firing of staff, managers, wholesale reshuffling of portfolios, closing down operations, etc. Some call it bloodbath or bloodshed. Non-surgical turnaround adopts the opposite approach, that is, peaceful meansrevamping or recovery through meetings, discussions, persuasions, consensus, etc. The operations in surgical turnaround are like this: the first step is to replace the chief executive of the ailing company by a new iron chief. The new chief promptly gets into action; he asserts his authority. He issues pre-emptory orders, centralizes functions and spears some convenient scapegoats. Then he goes about firing employees en masse and auctioning/selling whole plants and divisions until the fat is satisfactorily cut to the bone. The bloodbath over, the product mix is revamped, obsolete machinery is replaced, marketing is strengthened, controls are toughened, accountability for performance is focussed and so on. How bloody this sort of turnaround can be may be seen from the examples of companies like the US video games manufacturer Atari, which, among other actions, cut its labour force by two-thirds to 3500 to turn itself around. At British Leyland, 84,000 employees (40 per cent) were axed to complete the surgery. At GE, 1,00, 000 of a workforce of 4,00, 000 lost their jobs; at Imperial Chemical Industries (ICI), the labour force was reduced from 90,000 to 59, 000; half the staff at Chrysler Corporation disappeared; at British Steel, half the companys production capacity and 80 per cent of workforce were gone.10 Turnaround management of the humane type may involve negotiated and humane layoffs and divestiture, but, not a bloodbath. This type of turnaround also is generally brought about by the new helmsman. But, he spends a great deal of time in trying to understand organizational problems and deliberating on them. He takes all the stakeholders including unions into confidence; forms groups within the organization to brainstorm together on what needs to be done to get over the crisis; tries to create a new work culture; and, generally infuses a strong sense of participation among the employees and many critical decisions become participative decisions. There are many examples of successful turnarounds of the humane type including Enfield, Volkswagen, Lucas, Air India, SPIC, BHEL and SAIL.
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We give here the example of SAIL, the Indian public sector steel giant. Its losses were about `100 crore during 198283 and `200 crore in 198384. A price rise during 198485 saw SAIL break even in that year. But, rapid increases in coal prices and freight rates threatened a loss in 198586. The steel ministry and SAIL management then called for another price hike. Krishnamurthy entered the scene as Chairman, SAIL in mid-1985. He promptly lobbied against price increase on the ground that efficiency had to be improved. Indian steel was already the costliest in the world and any further increase in steel price would have ruinous effects on the economy, contended Krishnamurthy. He spent several months talking to small groups of executives, officials, staff and workers in SAIL. He estimates that he talked to over 25,000 employees to identify operating problems, got perception of how the company was doing and what employees thought should be done to improve performance and turn around the company. The turnaround strategy finally emerged from discussions at all levels.
13. Organizational recovery from business decline or crisis is known as _______. 14. Turnaround strategies are usually required for _________situations. 15. A situation in which recovery is possible but potential for future growth does not exist is called_________. 16. Generally, there are two methods of corporate turnaround: _______and _______.
9.7 Managing Radical Change

Turning corporates around is like implementing or managing radical change. There is, however, one difference. Corporate turnarounds, as we have just discussed, are prompted by business decline or crisis. But, all radical changes do not take place because of crisis situations only. Radical change also takes place when an apparently insignificant new entrant grows radically to take on an industry giant or the undisputed leader. Radical changes are also implemented and managed when a small marginal player grows almost dramatically to become one of the most dominant players in the industry. Ghoshal and others (2002) deal extensively with the phenomenon of radical change and how visionary companies manage them. We shall analyse here management of radical change
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with reference to three companies in three different industry situations. These companies are Hastings Jute Mills, Canon and Electrolux. 9.7.1 Hastings Jute Mills
The management of Hastings Jute Mills (Kajaria brothers) made jute business attractive by defying the conventional rules of jute business through innovation, entrepreneurship and transforming the employee-management relationship. The company has been successful in radically improving productivity and creating innovative products which have found new use in international markets.11 The jute industry in West Bengal has, for long, been characterized by sick units and closures. The industry represents one of the worst cases of adverse relations between the owners and the unions which have been destroying the jute business. Added to this are stagnant or obsolete technology and falling market prices. Amidst this highly hostile environment, the Kajaria brothers took over the management of Hastings Jute Mills in 1994. In the jute industry, wages are almost 40 per cent of the cost of production; raw material constitutes 35 per cent; power accounts for 8 per cent; stores 7 per cent; and, other costs are 10 per cent. Kajaria brothers knew that, to be competitive, manufacturing cost had to be slashed. They also realized that, as they themselves put: ... to improve productivity and reduce the processing costs, we needed the cooperation of labour, and, for this, we had to build a very different mindset. Hastings had 14 trade unions. The first task of the new management was to convince the trade unions and the individual workers that, unless both the management and the unions/workers adopted a win-win attitude, the mill might close down. The unions were initially sceptical because they always have apprehensions about the management. But, a major breakthrough in trust building was achieved when the company regularized about 700 ghost workers. The goodwill and confidence created by this gesture yielded some result; the union leaders came to the negotiating table. Their hostility gradually gave way to understanding; both sides agreed on enhanced productivity norms and incentive schemes. But, the biggest achievement of the management was an innovative training scheme for young workers. The scheme was born out of necessity. At Hastings, about 200 workers retired every year and the annual gratuity bill was about `1 crore. But, the company was not earning enough to spend so much. Instead, the management promised to employ one member of the family of the retiring worker. In addition to this, the company would train a young member of
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the retiring employees family for three years. The management also guaranteed that the new trained worker would be a regular employee of the company. This worked well with the unions and the worker community. The feeling of togetherness and sharing a common destiny by the management and the workers did not come about easily. It was achieved at a significant cost. It took four years, two strikes, a lockout and hundreds of meetings. But, eventually, the results achieved were stupendous. Wage cost declined from 40 per cent to 33 per cent (from 52 man-days per tonne to 42) and a saving of `5 lakh per month. In 1998, the Indian jute industry comprised 73 composite mills of which 22 were sick, 25 per cent of installed capacity was idle and productivity was generally low. But, at Hastings, every mill was busy and productivity in some section of the mill was 90 per cent against laid down norms. Turnover accelerated from about `13 crore during 199495 to `43 crore in 199596 and to about ` 91 crore during 199697. Profits also increased steadily from `0.9 crore during 199495 to about `3.50 crore during 199697. Kajarias summarize their changed management success strategy at Hastings like this: One can buy peace for some time, but, not for always. For long-term benefits, mindsets have to change and be flexible. We could do this because we did not inherit the thinking of the old jute dynasties.
9.7.2 Canon
Canon is the second largest global player in the photocopier business, closely behind the market leader Xerox. Canon is today the biggest challenger to Xerox. Since the launching of Canon as a small camera company in Japan, it has successfully stood up to the challenge of radical change or performance improvement to come to its present position. Xerox was enjoying near monopoly and almost 100 per cent market share in the global photocopier market (in 1995, it was 93 per cent). Xerox technology was protected by over 500 patents. The company had a massive marketing and service support organization working directly for Xerox in the US and for its joint ventures abroadRank Xerox in Europe, Fuji Xerox in Japan and Modi Xerox in India. The company had worldwide manufacturing infrastructure and was one of the few companies whose brand name became generic for the product. Photocopying was often referred to as Xeroxing. Canon, the small camera company from Japan, entered the photocopying business in the late 1960s. It was less than one-tenth of the size of Xerox and, had no sales and support organization to adequately service the photocopier
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market. It also did not have a process technology to bypass Xeroxs patent. To make matters worse, Canons entry took place at a time when corporate giants like IBM, Kodak and 3M were already in the market challenging Xerox. So, most of the corporate observers were sceptical about Canons plans. One investment analyst sarcastically remarked about Canon that a photocopier is not a large camera.12 But, to the amazement of many, Canon rewrote the rules of the photocopier business during the next three decades. Canon showed, in its own inimitable way, how photocopiers were to be produced and sold to shake out the market and progressively snatch market share from the king of photocopying. From almost insignificant sales, the company amassed an annual turnover of over $6 billion. It even surpassed Xerox in terms of the number of units sold. Clear evidence of such phenomenal success is visible in Xeroxing by Canon signs in photocopying shops in different parts of the world, including India.
9.7.3 Electrolux
Electrolux is the global market leader in home appliance business. Electrolux is a unique case of managing aggressive acquisitive growth. The companys achievement is spectacular considering the fact that acquisitions and mergers have a high rate of failure. Transformation of Electrolux has also been very radical. Electrolux made almost an insignificant beginning. In the early 1960s, it was a small and marginal player in home appliances business. The company had to compete with global rivals like GE in the US, Philips and Siemens in Europe and Matsushita in Japan. Its product range was very narrow consisting primarily of vacuum cleaners and absorption type refrigeratorssuch refrigerators becoming increasingly uncompetitive against technologically superior compression type refrigerators manufactured by the global competitors. With outdated production facilities and no inhouse R&D, the company was making losses. It was, in fact, fast approaching bankruptcy.13 Around this time, Wallenberg, Swedens most influencial business family, took over the ownership of Electrolux. Changes were made in top management of the company; and, the leadership of the company was handed over to Hans Werthen, who became a management legend in Sweden. During the next two decades, under the leadership of Werthen, Electrolux started rewriting corporate history. Between 1962 and 1988, the company made over 200 acquisitions in 40 countries including big names in the US, France, Italy and Sweden. Most of the acquisitions were strategic successes. In most of
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the home appliances businesses, Electrolux established dominant position in Europe and significant market shares in a number of other markets including the US, and, had achieved leadership in many technology areas. By late 1980s, the company had a diversified portfolio of 30 product lines in five business areas and it became the worlds largest manufacturer of home appliances.
17. Turning corporates around is like implementing or managing radical change. (True/False) 18. A company whose brand name became generic for the product is (a) Hastings (b) Canon (c) Xerox (d) Electrolux
9.8 Strategic Change in the Public Sector

Change during good times is not confined to the private sector only. The public sector is also realizing the advantages of this. This is always less costly in terms of resources and, more justified in terms of cost-benefits. This is the reason why big and well-performing public sector companies like ONGC, IOC, GAIL, BPCL and HPCL are implementing change during good times. Deregulation, competition and newly discovered global ambitions are prompting these PSEs to re-invent themselves as organizations which can compare with the best in the private sector (benchmarking). These PSEs realize that to move to the next level, they need to develop internal managerial talent which will embrace change. Most of these companies have undertaken a competency-based mapping of its people, and, then, devised developmental programmes based on a gap analysis.14 Several of these PSEs have engaged top-notch management consultants to guide the change process. ONGC commissioned the services of McKinsey & Co. to deliver a solution which could help in optimizing manpower and, also overhauling the existing manning norms and practice. According to Balyan, Director, HR, ONGC: We felt that though technical developments had taken place in ONGC, the people development hadnt kept
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pace. To fill this gap, Project R3roles, rosters and responsibilitywas undertaken to define each activity and number of people required for that activity, and the role of each person defined to the smallest detail. Contends Balyan: Now we have benchmarked ourselves with the best of international companies. Chairman Raha himself had been leading the change in ONGC. HPCL realizes that, for a world class future, companies need to adopt the best practices, and, follow the best thought leaders. To fulfil the dream of a world class company, HPCL is benchmarking itself against global oil majors like British Petroleum. BPCL, in collaboration with the Public Enterprises Selection Board (PSEB), has even come out with a compulsory model for Indian CEOs based on a study conducted by the Hay Group. For the company, that is the path to the future. As these PSEs negotiate change, each one of them is experimenting with and exploring new possibilities. Some are going through a process of corporate introspection since a leap to the next level should also involve an overhaul of old value systems. IOC, for example, is trying to develop a set of values which embodies the new vibrant organization that it wants to move towards. The company conducted a workshop for developing an entirely new value system from the positive stories told by people about their most moving interactions with one another. Transformation of values means that the urge to change runs deep in these organizations. Implementing change in any organization, particularly a public sector organization, is a tough task because people resist change. But, each of the PSEs has devised ways to manage the change process. As part of its organizational transformation project, HPCL has trained 20 coaches from various departments who are preaching change. This has inspired the entire organization. Everyone in HPCL wants to participate in the programmes now. ONGC has 60 change agents who are promoting change. Sentiment is similar in GAIL. According to Banerjee, CMD, GAIL: We pushed the change initiatives and we have less and less people voicing apprehension and reservations. In all these PSEs, change is giving new directions to the companies. The leaders are also finding changes satisfying and viewing them as a critical component of future strategy of their companies. The company has gone through a large transformation and a sea change not only in attitudes and appearances, but, in every little activity we do, says Banerjee. Balyan, Director, HR, ONGC, concurs with Banerjee : ONGC is changing and changing very fast. We make comparisons with other companies and, we feel proud. Whats more, peoples
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expectations have changednow they look for excellence and want to compete with the best. A common feature in managing change during good times in different companies, like a turnaround and doomsday management, is the pivotal role of the leaders in these companies. Leaders become the most important change agents: Welch in GE, Ganguly, Dutta and Dadiseth in HUL, Palmisano in IBM, Raha in ONGC, Banerjee in GAIL, etc. Activity 2 We have discussed strategic change in public sector enterprises in India. Choose any two public sector companies that have undergone such changes and carry out a comparitive analysis of the strategic changes in these companies.
19. Public sector companies are not implementing change in their organizations. (True/ false) 20. PSEs are benchmarking themselves against the best in the private sector. (True/False)
9.9 Some Strategic Guidelines for Managing Change

So far we have discussed different kinds of change and various strategies adopted by companies for managing change. We have also analysed different organizational situations, environmental factors, change agents, leadership, etc. From all these, we can formulate some general guidelines for managing change which can be followed by companies. Kanter et al. (1992) have formulated a set of comprehensive guidelines for managing organizational change. They call these 10 commandments for executing change. These are analysed below: 1. Analyse the organization and its need for change (a) Understand an organizations business and operations; (b) Analyse how the organization functions in its environment; (c) Determine what are the organizational strengths and weaknesses; and (d) Examine how the organization will be affected by proposed changes.
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2. Create a shared vision and common direction One of the first steps in engineering change is the creation of a common vision. It is like an organizational dreamit stretches the imagination and motivates people to rethink what is possible. 3. Deviate from the past (or pattern breaking) It is difficult for an organization to create or uphold a new vision for the future until it has isolated the structures, practices and routines which no longer work and has decided to move beyond them. 4. Create a sense of urgency It is critical to rally an organization for change. Sense of urgency for change does not exist in most organizations; it has to be created. 5. Support a strong leaders role Leaders, as change drivers, play a pivotal role in creating a companys vision and evolving an organizational structure which consistently rewards those who contribute towards realization of the vision. 6. Line-up support/sponsorship Leadership alone may not be able to bring about large-scale change. The leaders success depends on a broader base of support from individuals or institutions which first act as followers, then as helpers, and finally, as co-owners of change. This coalition building should include the holders of important organizational resources. 7. Design an implementation plan Changing strategy without a proper implementation plan may not succeed. Implementation involves what to do, when to do and how to do. This change plan is a road map for execution of change. 8. Develop enabling structures These may range from the symbolicsuch as changing the organizations name, logo, lay out/interiors, etc.,to the practicalsuch as setting up pilot tests, workshops, training programmes, new reward systems, etc. 9. Communicate and involve people Open communication and involvement of people (managers and staff) are effective tools for overcoming resistance and, giving employees a personal stake in the transformation process and the outcome of it.
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10. Reinforce and institutionalize change Managers and leaders should continually exhibit their commitment to the transformation process, reward risk taking and incorporate new attitudes and values. This phase refers to shaping and reinforcing a new culture that fits with the revitalized organization.15
21. The 10 commandments for executing change were given by ________. 22. One of the first steps in engineering change is the creation of a _________.
9.10 Case Study

Restructuring of Samsung Organizations in general, and multinational companies in particular, revise or reformulate their business strategies over time in response to changes in the environment or market. This has also happened in Samsung. During the Asian financial crisis in the 1990s, many Korean companies were under severe stress. Samsung was one of them. The company decided to undertake strategic changes to overcome the problems it was facing. During the planning for restructuring, Samsung was convinced that the old model, which had served the company for so long, was not relevant any more. It was looking for a new model and, therefore, a change in strategic focus. Accordingly, a change model was formulated. The major elements of the change model were as follows. From chasing market share, the model changed to seeking value creation and profitability The company needed to be innovative for creating products and markets The organization was looking for a new thought process, systems and a new set of skills The company had to build on creating brand equity and using R&D for new product development The company needed a new marketing formula in 2000; by 2001, it should become a truly global brand strategy. The cornerstone of the change model was exploitation of the digital technology. To have a global brand strategy, Samsung needed great
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products for securing sustainable competitive advantages. The thrust came from the companys leadership, since the 1980s, in digital technology. Taking advantage of the early adopters (young age people) who were open to new ideas and were changing to digital, brand building was launched with all earnestness. The company seized the opportunity by concentrating on wireless phones, digital audio, MP3 and video DVD and digital personal information management; thus digitalizing homes, mobiles and offices.
The marketing and advertising strategy laid focus on the single brand Samsung instead of several brands they were promoting earlier when each country manager/head was following his own advertising. Samsung established a single brand, a single-brand strategy and one global agency. In addition to this, it had a single central budget and a uniform brand theme. The process of change and strategic transformation faced some resistance from traditional managers who generally suffer from inertia against change. But, the top management was committed to the change and new strategy, and it was carried through. The restructuring process was successful in reestablishing brand Samsung.
9.11 Summary
Let us recapitulate the important concepts discussed in this unit: Corporate restructuring means organizational change to create a more efficient or profitable enterprise. It may involve organizational restructuring or business-level restructuring or financial restructuring, or, some or all of these simultaneously. Divestment, also called divestiture, means selling part of a companya major division or an SBU. Divestment is usually a part of corporate
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restructuring or rehabilitation programme. It can also be part of an overall downsizing or retrenchment strategy. Liquidation means closing down a company and selling its assets. Liquidation should be the strategy of last resort when no other alternative like restructuring, divestment or turnaround are applicable. Corporate turnaround may be defined as organizational recovery from business decline or crisis. Business decline for a company means continuous fall in turnover or revenue, eroding profit or accrual or accumulation of loss. Turning corporates around is like implementing or managing radical change. But, all radical changes are not prompted by business decline or crisis. Kanter et al. have formulated a set of 10 guidelines for managing strategic change. These are: (i) analyse the organization and its need for change ; (ii) create a shared vision; (iii) deviate from the past; (iv) create a sense of urgency; (v) support a strong leader; (vi) line-up support/sponsorship; (vii) design an implementation plan; (viii) develop enabling structures; (ix) communicate and involve people; and (x) reinforce and institutionalize change.
9.12 Glossary
Corporate restructuring: Organizational change to create a more efficient or profitable enterprise. Corporate turnaround: Organizational recovery from business decline or crisis. Divestment: Selling a part of a companya major division or an SBU. Liquidation: Closing down a company and selling its assets.

1. What is corporate restructuring? Analyse corporate restructuring in some Indian companies. 2. What is divestment or divestiture? Is divestment a part of corporate restructuring? Explain with examples.
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3. Explain liquidation strategy. When would you recommend liquidation of a company? 4. Define corporate turnaround. Distinguish between surgical and nonsurgical turnaround. Explain with some examples. 5. Analyse, with examples, management of radical change. Explain with special reference to Hastings Jute Mills. 6. Discuss the strategic guidelines for managing change as suggested by Kanter, et al.

1. Corporate restructuring 2. Organizational restructuring 3. False 4. (a) adopts retrenchment strategy 5. (d) selling a part of a company 6. selling a business outright 7. strategic 8. competitiveness 9. Liquidation 10. Companies Act, 1956 11. liquidator 12. True 13. Corporate turnaround 14. Crisis 15. Sustained survival 16. Surgical, non-surgical 17. True 18. (c) Xerox 19. False
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20. True 21. Kanter, et al 22. common vision

1. Corporate restructuring means organizational change to create a more efficient or profitable enterprise. Refer to Section 9.3 for further details. 2. Divestment means selling part of a companya major division or an SBU. Refer to Section 9.4 for further details. 3. Liquidation means closing down a company and selling its assets. Refer to Section 9.5 for further details. 4. Corporate turnaround may be defined as organizational recovery from business decline or crisis. Refer to Section 9.6 for further details. 5. Turning corporates around is like implementing or managing radical change. Refer to Section 9.7 and 9.7.1 for further details. 6. Kanter et al. have formulated a set of 10 guidelines for managing strategic change. Refer to Section 9.9 for further details.
9.15 References
1. Balogun, J, and V H Hailey. 1997. Exploring Strategic Change. London: Prentice Hall. 2. Dumaine, B. Let the Bad Times Roll. Business Today (Reprinted from Fortune), August, 721, 1993. 3. Ghoshal, S, G Piramal, and C A Bartlett. 2002. Managing Radical Change: What Indian Companies Must Do to Become World Class? New Delhi: Penguin Books. 4. Hamel, G, and C K Prahalad. 1994. Competing for the Future: Breakthrough Strategies for Seizing Control of Your Industry and Creating the Markets of Tomorrow. Boston: Harvard Business School Press. 5. Kanter, R, et al. 1992. The Challenge of Organizational Change. New York: The Free Press. 6. Slatter, S. 1984. Corporate Recovery: Successful Turnaround, Strategies and Their Implementation. New York: Penguin.
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Endnotes
1
National Management Forum, Corporate Restructuring ( A Survey of India Experiences ) (New Delhi: AIMA, 1995). N Venkiteswaran, Restructuring of Corporate India: The Emerging Scenario, Vikalpa 22, no.3 (1997): 7. This section is based on Corporate Restructuring by Indian Companies in A Kazmi, Business Policy and Strategic Management, 2 nd ed. (New Delhi: Tata McGraw-Hill, 2005), Ch. 6. F R David, Strategic Management: Concepts and Cases, 9 th ed. (Pearson Education, 2003), 173 A A Thompson Jr, A J Strickland III, and J E Gamble, Crafting and Executing Strategy: The Quest for Competitive Advantage (New Delhi: Tata McGraw Hill, 2005), 272. FR David (2003), 173. A Kazmi, Business Policy and Strategic Management , 2nd ed. (New Delhi: Tata McGraw Hill, 2005), 208. F R David (2003), 174. S Slatter, Corporate Recovery (Penguin, 1984). P N Khandwala, Innovative Corporate Turnaround (Sage Publications, 1996), 72. S Ghoshal, G Piramal, and C A Bartlett, Managing Radical Change (Penguin Books, 2002) 18. S Ghoshal, and others (2002), 19. S Ghoshal, and others (2002), 118. V Mahanta, and D Ganguly, Never Too Old to Rock and Roll , The Economic Times (Corporate Dossier), August 26, 2005. R Kanter, et al. The Challenge of Organisational Change (New York: The Free Press, 1992).
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Unit 10
Unit 10
Structure
Expansion Strategies
10.1 Introduction 10.2 Caselet Objectives 10.3 Ansoff Matrix 10.4 Penetration Strategy for Growth in Existing Markets 10.5 Product Development in Existing Markets 10.6 New Product Development 10.7 Market Development for Existing Products 10.8 Expansion through Diversification 10.9 Strategic Alliance 10.10 Joint Venture (JV) 10.11 Takeover or Acquisition 10.12 Merger 10.13 Integration Strategy 10.14 Case study 10.15 Summary 10.16 Glossary 10.17 Terminal Questions 10.18 Answers 10.19 References
10.1 Introduction
Securing competitive advantage, controlling market share and generating profit are not enough. Companies have to constantly look for growth and expansion because only this can give long-term sustainability in terms of market leadership or position. Growth here does not mean incremental growth or change as is understood in stability strategies; this should be more visible or distinct. Growth or expansion may be defined as distinct increase in sales or turnover or market share (and also profit). Different strategies can lead to growth or expansion. These include penetration into the existing market, product or market development, integration and diversification. Diversification can be in terms of strategic alliance, merger, joint venture and takeover or acquisition. Corporate
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strategists have to consider all alternative growth strategies which are available and choose the most appropriate one based on the companys resource base, business assets and skills and the competitive environment. We shall discuss these and related issues here. Before we proceed with the main analysis, it would be useful to define market penetration, product development, market development, diversification and integration. Market penetration takes place when an organization gains market share. Product development means that an organization supplies modified or new products to existing markets. Market development occurs when existing products are offered in new markets. Diversification means entering into new product or business and/or new markets which may also require new resources and competence. Integration takes place when a company enters into an upstream or downstream or parallel activity in the same product line/ flow. These concepts or strategies would be more clear when we discuss their applications later.
10.2 Caselet
In todays competitive world, introduction of new products or new product features has become a main source of competitive advantage. The best example of this strategy is that of Pepsi Co. For decades, Pepsi Cola and Coca Cola battled for supremacy in the cola market. In 1996, it seemed that PepsiCo had lost the cola war, and the proof was everywhere. The companys profit trailed that of its rival by 47 per cent. However, losing the cola war was the best thing that ever happened to Pepsi. It prompted Pepsis leaders to look outside the confines of their battle with Coke. PepsiCo embraced bottled water and sports drinks much earlier than its rival. Pepsis Aquafina is the No. 1 water brand, with Cokes Dasani trailing; in sports drinks, Pepsis Gatorade owns 80 per cent of the market while Cokes Powerade has 15 per cent. But Pepsis strongest business lies outside drinks altogether. Over the past ten years, the Frito-Lay division has become a powerhouse, controlling 60 per cent of the US. snack-food market. So strong is Pepsi in this arena, in fact, that many investors no longer judge it by how it stacks up against Coke. Most people think of Pepsi and Coke fighting it out, observes Eric Schoenstein, an analyst at Jensen Investment Management, which owns
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shares of both. But we dont see it that way. Pepsi isnt really a beverage company anymore: Its a food company that also sells beverages. John Carey, manager of the Pioneer fund, which has 1.6 million PepsiCo shares, says he bought the stock because of Frito-Lay: Theres no Coca-Cola in that business.
Source: http://money.cnn.com/magazines/fortune/fortune_archive/2006/02/06/ 8367964/index.htm
Objectives After studying this unit, you should be able to: Highlight alternative expansion strategies Analyse different diversification strategies Focus on joint venture and issues involved in it Discuss integration strategy: vertical and horizontal Analyse takeover or acquisition and post-takeover integration issues
10.3 Ansoff Matrix

We start with Ansoffs (1987) product-market expansion matrix which has been the basis for further research and development in growth strategies. The Ansoff matrix is shown in Figure 10.1.
Figure 10.1 Ansoffs Product Market Expansion Matrix
As shown above, expansion strategies are always worked out in terms of products or businessesexisting or new, and marketsexisting or new. Johnson and Scholes (2005) have presented alternative expansion strategies in a more specified form (Figure 10.2).
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Figure 10.2 Alternative Product Market Expansion Matrix Source: G Johnson, and K Scholes. Exploring Corporate Strategy, 6th ed. (Pearson Education, 2005), 362, (Exhibit 8.1).
1. Expansion strategies are always worked out in terms of _________or _________. 2. The ________ matrix has been the basis for further research and development in growth strategies.
10.4 Penetration Strategy for Growth in Existing Markets

A company has a number of ways for penetrating into the existing markets and generating growth. The most obvious way to grow is to increase market share. Companies like Bajaj Auto have successfully penetrated the existing market and sustained their market share. But, this generally happens in a high growth market or industry (like two-wheelers). Also, one companys share gain is another companys share loss. Therefore, market share battle increases competitive pressures, and, market share gain may soon be neutralized, or, in the least, may be difficult to sustain. An alternative strategy which may pose lesser threat from competitors (and which may also ultimately lead to increase in market share) is to increase the product usage. There are three ways to increase product usage, namely, the frequency of use, the quantity used and new applications and users. Of the
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three ways, the last one, that is, new applications and users, may be the most effective. Cadbury had shown this. Cadbury Dairy Milk Chocolate (CDM) was the market leader. But, with a market share of already 70 per cent, winning away customers from competitors in the slow-moving market was almost impossible. Cadbury found the solution in new users among parents (elderly people) who were earlier keeping away from CDM.1 The best way to identify new uses or applications is to conduct market research or surveys. Such research or survey would include ascertaining details about applications of competing products and brands, that is, substitutes. Cost of such research or studies, and, also, subsequent advertising and promotion should be taken into consideration to determine the cost effectiveness of such programmes. Investment in research should be justified by returns in terms of results or findings, and, applicability of the results. Arm & Hammer conducted more than 150 market research studies to support its programmes for development of new applications and products. Hindustan Unilever undertakes such studies for its FMCG products on a regular basis. And, many companies have achieved results. Arm & Hammer succeeded in achieving ten-fold growth in its baking soda sales by persuading people to use the product as a refrigerator deodorizer. Sales of Lipton soup increased when it included recipes for new uses on packets/boxes and in ads that say: Great meals start with Liptonrecipe soup mix-soup. A chemical process used by oil fields to separate water from oil is used by water plants to eliminate unwanted oil.
3. The most obvious way for a company to grow is to increase__________. 4. An alternative strategy which may pose lesser threat from competitors (and which may also ultimately lead to increase in market share) is to increase the _______usage. 5. The best way to identify new uses or applications is to conduct________. 6. Product usage can be increased by (a) the frequency of use (b) the quantity used (c) new applications and users (d) All the above
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10.5 Product Development in Existing Markets

Product development goes a step further than effecting increase in usage of products. A simple way of product development is to make additions to product features. Different variants of a particular car model (say Indica, Esteem or Ford Ikon) clearly show the additional benefits of augmented features which help market penetration. A company making PCs can have a built-in software as additional feature. A company making industrial products or inputs may add a special feature to the product or input to make it more tailor-made for certain customers leading to increase in sales. In services, special tour packages for individual customers are good examples. Another type of product development may be through product line extensions. This may also include developing new generation products in the same category which make the existing products obsolete in terms of technology or usage. This happens in the electronics field almost on a regular basisbe it computer, CTV or cellular phone. Introduction of disposable contact lenses by Hindustan Ciba-Geigy almost meant arrival of new generation products in the visioncare market. In product development through line extensions (additional features) or new-generation products, some issues should be considered to make the strategy workable or effective. First, is the companys R&D, manufacturing and marketing functionally integrated to undertake the proposed changes? Second, is the new product line compatible with the existing product or brand? If it is not, it may almost be like new product development, and, cost and resource implications can be quite different. Third, can the existing assets and skills be applied to the product line extension? If not, there can be asset-skill-product development mismatch. Philip-Morris underestimated the problems of applying its existing marketing skills to the 7UP business and, finally gave up because of lack of success.
7. A simple way of product development is to make additions to product features. (True/False) 8. Developing new generation products in the same category, making the existing products obsolete in terms of technology or usage is a common in the ________industry.
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10.6 New Product Development

A new product adds the third or final dimension to product development. A company may use its core competence or R&D manufacturing-marketing synergy to develop a new product which is different from the existing product lines and, generate additional sales and growth. Originally a machine tool manufacturer, HMT developed watches as a new product line. With its core competence in heavy commercial vehicles (HCVs) and light commercial vehicles (LCVs), TELCO successfully added passenger cars to its product basket. Godrej, traditionally known for its locks, storewels and refrigerators, has expanded into FMCG products including packaged tea. There are several such examples in every country. One good way of new product development is to use the existing brand image or brand equity and exploit its market strength for extending it to a new product category. This becomes particularly useful if the company has an umbrella brand like Ford, Tata, Sony, Maruti, Godrej, etc. Duracells Durabeam flashlights, Arm & Hammers oven cleaners, Sears kiosks and storesall thrived on existing brand names. Marketers should ensure that the new product does not dilute or damage the association of the brand through wrong promotions or marketing.
10.6.1 Market Testing

To ensure this, and, also, to ascertain acceptability and commercial viability of a new product, it is necessary to conduct test marketing before launching the product. In industrial products, test marketing may be comparatively easy and simple because of small number of customers. If the prototype development is successful, the new product can be immediately launched given its cost-benefits or cost-effectiveness. This may also be largely true of specialized service products. But, for most of the consumer goods, test marketing is generally more complex and difficult. In a particular market segment, test marketing should assess the likely performance of the new product against competitive offerings (present or expected) in terms of product awareness, trial rate, repeat purchase, likely market share achievement, etc. In relation to consumer response, there are four possible outcomes of a test market product as shown in Table 10.1.
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Table 10.1 Possible Alternative Test Marketing Outcomes

Situation 1 2 3 4 Trial Rate High Low High Low Repeat Rate High High Low Low Test Outcome Successful Review/Improve Terminate Rework
In situation 1, the new product can be launched almost immediately. In situation 2 , the high repeat rate means that the product appeal is positive; but the reason for low trial rate may be inadequate awareness. This can be rectified through increased consumer campaigns and promotional activity. Situation 3 is more worrying. This situation indicates that having tried the product, consumers remain unconvinced about its merit or performance and, hence, the low repeat rate. The decision in this case may be to terminate the product launch plan unless the company wants to make necessary changes in the product features (that is, go back to manufacturing) to make it more acceptable. In situation 4, the trial rate and repeat rate are both low, and, this should mean that the test marketing process is incomplete. The company might not have taken it very seriously or, there is a missing link in the test marketing process. The whole process may, therefore, have to be reworked to come to clear conclusions about the result of market testing.
9. Originally a machine tool manufacturer, HMT developed ______as a new product line. 10. To ascertain acceptability and commercial viability of a new product, it is necessary to conduct ______before launching the product.
10.7 Market Development For Existing Products

Market development for existing products can take place in two ways; first, geographic expansion in the existing market segment(s); and second, developing new market segments. Geographic expansion in the same market or customer segment would mean graduating from a local market or, from a regional market to a national market or, from a national to an international market. Nirma started with the
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western regional market but, quickly expanded to the national market achieving significant growth. Indica has moved from the national to the international market; so, also, many multinational brands like Ford, Honda, Peter England, Levi Strauss, Ray-Ban and service brands like KFC, McDonalds, Dominos Pizza, etc. Expanding into new market segments is another potential avenue for growth. This can also be more challenging. Cadburys (CDM) rejuvenation is a good example of expanding into new market segmentfrom predominantly child market to the market for parents and elders. Johnson & Johnsons baby shampoo was steadily losing market share till the company turned towards adults who use shampoo more frequently. Both the Cadbury and Johnson & Johnson examples show that the most common way to expand into new market segments is to bring the present non-users into the fold through appropriate promotion. Companies, should, however carefully assess market viability in terms of competing products and brands before making investment in the expansion programme. Federal Express (FedEx) had an unhappy experience. The company wanted to expand into the European market. But it lacked first-mover advantage in that market. DHL and some other courier companies had implemented the FedExs concept much earlier. This seriously affected FedExs competitiveness in the European market.
11. Apart from geographic expansion in the existing market segment(s), market development for existing products can take place by developing _______. 12. Cadburys rejuvenation of _____ is a good example of expanding into new market segment.
10.8 Expansion through Diversification

Diversification, as a strategy, may generate growth in a number of ways. Product development and market development are two different methods to diversify, and, we had discussed these two methods earlier. Diversification can also take place through both new products and new markets. And, a diversification strategy, whether through product development, market development or both or any other way, may, mean a new business venture of the company, a joint venture, etc. We shall discuss here the related issues of diversification and their implications.
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It is useful to distinguish between related diversification and unrelated diversification. Related diversification means that the new business has commonalities with the core business or core competence of the company; and, these commonalities provide the basis or strength for generating synergies or economies of scale or higher returns by exploiting existing resources and skills in R&D, production process, distribution process, etc. Unrelated diversification, on the other hand, is less related to the present business and skills and resources (except financial) and, may mean venturing into an entirely new area. The company may have to acquire new skills and expertise for this. The main reason or motivation for unrelated diversification may be high growth potential in terms of revenue, market share or profitability. There can be a number of other reasons also. In strategic management literature, related diversification is more commonly known as concentric diversification and unrelated diversification, as conglomerate diversification, although some analysts may like to make some distinction between the two.
10.8.1 External Expansion or Diversification

Expansion or diversification, related or unrelated (concentric or conglomerate), into new products or businesses may be internal or external, i.e., it may take place within the company without involving any other company; or, it may associate another company as part of the expansion or diversification programme. External diversification is a common characteristic of corporate strategy in the developed countries, particularly in the US. In counties like India also, such diversification is taking place. Expansion or diversification, which involves another company as part of the expansion/diversification programme, can be of four major types: 1. Strategic alliance 2. Joint venture (JV) 3. Takeover/acquisition 4. Merger Activity 1 Carry out a desk research on the diversification strategy of ITC. Mention the main features of the strategy, focusing on the different products and markets. You may use the Internet and company literature for your research.
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13. Diversification cannot take place through both new products and new markets. (True/False) 14. The kind of diversification in which new business has commonalities with the core business or core competence of the company is called_______.
10.9 Strategic Alliance

Strategic alliance may be defined as cooperation between two or more organizations with a common objective, shared control and contributions (in terms of resources, skills and capabilities) by the partners for mutual benefit. This definition can be expanded and made more comprehensive in terms of essential features or characteristics of strategic alliance. A typical strategic alliance exhibits five essential features or characteristics: (a) Two or more organizations join together to pursue a defined objective or goal during a specified period, but, remain organizationally independent entities; (b) The organizations pool their resources and investments and also share risks for their mutual (and not individual) interest/benefit; (c) The alliance partners contribute, on a continuing basis, in one or more strategic areas like technology, process, product, design, etc; (d) The relationship among the partners is reciprocal with partners sharing specific individual strengths or capabilities to render power to the alliance; (e) The partners jointly exercise control over the performance or progress of the arrangement with regard to the defined goal or objective and share the benefits or results collectively.
10.9.1 Objectives and Forms of Strategic Alliance

The basic objective behind all strategic alliances is to secure competitive or strategic advantage in the market. All strategic alliances have long-term objective or purpose. Many companies realize that they do not possess adequate resourcesfinancial and managerialto pursue an innovation, develop a new product or technology. They look towards other organizations to supplement or augment their resources or capabilities for the fulfilment of their objective. It can also be a functional area where they have very little expertise. Different authors
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have analysed the objectives or purposes or reasons for strategic alliance. Six objectives or purposes are more commonly observed: (a) Development of a new product: In the pharmaceutical industry, new product development takes place on a continuous basis, and, in this, many strategic alliances are formed between pharmaceutical companies and research laboratories and institutions for R&D. We have already given the example of Boeing and their Japanese partners. (b) Development of a new technology: Development of technology is a longterm process, and, also, many times, involves considerable cost. Collaboration leverages the resources and technical expertise of two or more companies. (c) Reducing manufacturing cost: Co-production, common in the pharmaceutical industry, is a good form of strategic alliance to reduce manufacturing cost through economies of scale. (d) Entering new markets: This is often the objective in international business. Many foreign companies enter into strategic alliances with some local companies (host country) to enter into and establish themselves in that country. Piggybacking is a common form of strategic alliance. Some of the Japanese electronic manufacturing companies like Matsushita Electricals, during their initial years, had entered into strategic alliances with some US electrical or electronic manufacturers for entering into the US market. (e) Marketing and Sales: This is common in both national and international business. Many manufacturers in India have marketing and sales arrangements with companies like MMTC and Tata Exports for both domestic and international marketing. (f) Distribution: In pharmaceutical and other industries where distribution represents high fixed cost, potential competitors swap their products for distribution in the respective markets where they have well-established distribution systems. Many such alliances exist between the US and Japanese pharmaceutical companies. Strategic alliances are non-equity based, i.e., none of the parties invest any equity capital in such alliances. But, funding is involved and funding can be by one of the parties or all of them. The nature of funding depends on the type of strategic alliance, i.e., whether new product development, technology development or transfer, marketing or sales, etc., and also the parties involved.
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For example, if research laboratories or institutions are involved, most of the funding is done by the corporate concerned. As mentioned above, many areas of businessfrom R&D to distribution provide scope for strategic alliance. In the semi-conductor industry, many companies in the US and Japan feel short-handed in their R&D, and they swap licences. In a multiple alliance, which includes both technology and operations, Samsung Electronics and IBM Korea have entered into an agreement to swap patents for design and manufacture of semiconductors. IBM and Apple Computer, have formed an alliance for development of hardware and software technology for a new generation of desktop computers. Ranbaxy has formed a strategic alliance with Eli Lilly of the US to fulfil its mission of becoming a research-based international pharmaceutical company. In the telecommunication sector, a number of strategic alliances have been formed between Indian and foreign companies: Crompton Greaves and Millicom; Usha Martin and Telekom Malaysia; SPIC group and Telstra, etc. A good example of synergistic benefits from a strategic alliance is that of Taj hotels and British Airways; both create mutual advantages through complementarity of hotel and airline services. In the field of agricultural development, Hindustan Unilever and ICICI have entered into a partnership project for contract farming of wheat and rice in MP and Haryana.
15. Cooperation between two or more organizations with a common objective, shared control and contributions by the partners for mutual benefit is called _________. 16. The basic objective behind all strategic alliances is to secure______or _______advantage in the market.
10.10 Joint Venture (JV)

If a strategic alliance involves equity participation by both (or all) the parties, it becomes a joint venture. A joint venture may be defined as a business venture in which two or more independent companies join together, contribute to equity capital in equal or agreed proportion and establish a new company. JVs are long-turn ventures formed for an indefinite period. Some JVs can also be contractual, that is, formed for a fixed period of time and dissolved at a specified date. Contractual JVs are non-equity based. They are recommended or are useful under five conditions:
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The new business is uneconomical for a single organization to undertake; The risk of the business should be distributed or shared, and, therefore, there is need for more than one participating company; The technology for the new business can be shared only through a joint venture, or, there exists a need to introduce a new technology quickly; Competence or capabilities of two or three companies can be brought together to produce synergy for better market impact, competitiveness and success of business; A joint venture is the only way to gain entry into a foreign market, particularly if the foreign government requires that, for entry into that market, a local partner has to be chosen (OTIS and Mitsubishi elevators in China). All joint ventures, formed under any of the conditions mentioned above, exhibit some common or essential characteristics. Five important characteristics are: An agreement between the parties for common long-term business objectives such as production, marketing/sales, research cooperation, financing, etc. Production joint ventures are more common; Pooling of assets and resources, like plant, machinery, equipment, finance, management know-how, intellectual property rights, etc., by the parties for achievement of the agreed objectives; Characteristics of the pooled assets and resources as contributions by the respective parties; Pursuance of the agreed objective through a new management system or structure, which is separate from the existing management systems of the parties; Sharing of profits from the joint venture between the parties usually in proportion to their capital (equity) contributions. The liabilities of the parties are also normally linked to their capital contributions.2 Joint ventures are commonly formed within the same industry. But, JVs can take place across industries also. Joint ventures can take place within the same country or between companies in two countries, or, sometimes, even more than two countries. Classified this way, five types or forms of joint ventures are possible: Between two (or more) companies in the same industry; Between two (or more) companies across different industries;
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Between a local company and a foreign company with technological capability in the home country (Maruti Udyog -Maruti Suzuki, Hero HondaKinetic Honda) Between a local company (home country) and a foreign company in the foreign country (host country); Between a local company (home country) and a foreign company in a third country.3
10.10.1 JVs in Practice

If we analyse various JVs in operation in different countries, we can classify them into three major categories: 1. JVs within the same country and within the same industry or related industries; 2. JVs between the domestic companies and foreign companies in foreign countries in the same industry or related industries; 3. JVs between the foreign companies and local companies in the domestic country in the same or related industries. JVs in the first category are very few. Most of the operating JVs are in Category 2 or Category 3. In developed countries, majority of the JVs are in Category 3. JVs between Indian companies: IPITATA Sponge Iron Ltda JV between TISCO (now Tata Steel) and IPICOL, a wholly owned company of the Government of Orissa. Neelanchal Ispata JV between MMTC and Orissa Mining Corporation for manufacturing steel; Metal Junctiona JV between SAIL and TISCO for online (Internet) trading of steel and steel scrap. There are other examples also. JVs between Indian companies and foreign companies in foreign countries: Aditya Birla Group companies in Malaysia, Indonesia, Thailand and other countries for textiles, sugar and viscose staple fibre; Tata group companies in UK, Germany, and other countries in commercial vehicles, cars and hotels; Kirloskars in Malayasia and other countries for compressors and other engineering products; Oberois in Australia and other countries for hotels and others.
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JVs between Indian companies and foreign companies in India: Maruti Udyoga JV between Government of India and Suzuki of Japan; Hero BMW between Hero Motors and BMW, AG, Germany for assembling BMW cars; Hero Hondabetween Hero group and Honda Motors for two wheelers; ThermaxFujibetween Thermax Ltd and Fuji Electric Company of Japan for manufacture of industrial boilers; HCL HPbetween Hindustan Computers (HCL) and Hewlett-Packard, US for PCs; Tata Information Systemsbetween IBM World. Trade Corporation and Tata Industries Ltdfor development of information technology. Reliance Industries and Nynex Corporation, A V Birla Group and AT&T, Tata Industries and Bell Canada, Ashok Leyland and Singapore Telecom for development of telecommunication; and others. We have given many examples of JVs which are in operation and have been working satisfactorily. But, there are many JVs which have not worked well and have resulted in failure. Several studies have found a failure rate of 30 per cent for joint ventures in developed countries and 4550 per cent in developing countries. Most of these JVs are between companies in two different countries, i.e., a foreign company and a local partner (Category C). There can be many reasons for the failure of a JV. One of the common reasons is that foreign companies set up their fully owned subsidiaries and, either withdraw from the JVs or the subsidiaries run parallel to the JVs affecting their performance. Japanese automakers like Honda, Toyota and Nissan have abandoned their European distribution partners and set up their own dealer network. BMW has done the same in Japan. In India, a number of foreign multinationals, like Pfizer, Honda Motors and ABB have established fully owned subsidiaries in addition to being JV partners. In such cases, the subsidiaries usually get more attention, including latest technology and the JVs suffer. Another very common reason for failure of JVs is conflicts between foreign and domestic partners. Conflicts can arise on many issues: sourcing of raw material inputs or components, operating procedures and controls, domestic sales versus export, etc. Some of the examples are: Tata Unysis (between Tatas and Unysis); Procter & Gamble-Godrej India (between P&G and Godrej); TDT Copper (between Tomen Corporation, Japan, Delton Cables, India and Taihan Corporation, South Korea).
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17. A strategic alliance that involves equity participation by both (or all) the parties is called a_________. 18. Joint ventures are short-term ventures formed for an definite period. (True/False)
10.11 Takeover or Acquisition

In takeover or acquisition, one company takes over another organization its resources, management and control. Another way to define or describe acquisition is that an organization develops its resources and competence by taking over another organization. Takeover or acquisition can be friendly or hostile. If the takeover is through mutual agreement between the acquiring and the acquired company, it is friendly acquisition; but, if the takeover/acquisition is through stock market operations or financial institutions against the wishes of the company, it becomes a hostile takeover. Some have suggested that takeover should be a systematic process, and the company seeking acquisition should follow a prescribed course. A sixstep procedure has been recommended: Spell out the objective or reason for takeover Work out or specify how the objectives would be fulfilled Assess management quality of the prospect Check the compatibility of business styles of the two companies Anticipate and solve takeover problems promptly so that complications do not prolong the process Treat people with care during the period of takeover.4 In reality, however, many companies do not follow a prescribed or a systematic course, particularly in cases of hostile takeover. The NEPC takeover bid for Modiluft is a good example of non-systematic hostile takeover. In this case, Modiluft management got the news of takeover from leading dailies. The takeover attempt finally got mired in controversy. Several similar takeovers India have been controversial. Peaceful or friendly takeovers are normally systematic and follow a more rational path. Some examples of friendly takeovers are given in Table 10.2.
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Table 10.2 Selected Acquisitions by Indian Companies

Acquiring company Hindustan Unilever Tata Tea Tata Tea TISCO (Tata Steel) Deepak Nitrite ICICI ICICI India Cement R.P. Goenka group R.P. Goenka group TOMCO Consolidated Coffee Asian Coffee Metal Box (Bearing Unit) Mafatlal (Dyestaff Unit) ITC Classic Finance Anagram Finance Visaka Cement Ceat Tyres Calcutta Electric Supply Corporation (CESC) Acquired company
Some of the more recent acquisitions in Indian are Sahara Airlines by Jet Air and Air Deccan by Kingfisher Airlines. Many acquisitions also take place at international level. A select list of acquisitions among foreign companies and international acquisitions is given in Table 10.3.
Table 10.3 Selected Foreign and International Acquisitions
Acquiring company Hewlett-Packard Pepsico Daimler-Benz BMW Ford Procter & Gamble Japan Airlines Volvo Ford eBay Tata steel Mittal Steel Acquired company Compaq Computer Quaker Oats Chrysler Corporation Rolls Royce (Car Division) Volvo (Auto Division) Clairol (Bristol-Myers Squibb) Japan Air System Renault (Truck Division) BMW (Rover) HomesDirect Corus Arcelor
10.11.1 Post-takeover Integration

In takeover or acquisition, post-takeover action or management becomes an important issue. This is primarily the problem of integrationintegrating the acquirer and the acquired company. Integration may take place in two ways: merging the two companies or keeping the acquired company independent and integrating it with the organizational culture, structure and functioning of the
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present company. Merger after acquisition is appropriate or recommended if it produces synergy. Majority of the friendly takeovers can lead to mergers except for strategic reasons. Some of the good examples of acquisitions (shown in Table 10.3) resulting in mergers are: ICICIITC Classic Finance and Anagram Finance for diversification in retail financing; Tata-TeaConsolidated Coffee and Asian Coffee for consolidation of tea and coffee business; Hindustan Unilever and TOMCO to strengthen consumer goods business. But, in many acquisitions, such synergy may not exist or may not be available or the two companies may be kept separate for strategic reasons, and, those have to be managed as independent entities. In such cases, the process of integration becomes more difficult. Ghoshal (1999) has suggested some measuresstepwise processfor integrating the acquired company with the existing organization. One of the important issues in post-acquisition integration is cultural fit. There are three approaches to the post-acquisition cultural fit. First is assimiliation; the parents (acquiring companys) culture will remain and effort will be made for assimilating the joiner into that culture. Second is to build a hybrid culture which should combine the features of both the organizations. This is the most difficult thing to do. Third is to keep the cultures of the two organizations separate. This is more appropriate when the reason for acquisition is financial rather than strategic, and integration of cultures and activities may not be so vital.5 There may be number of other operational problems also in postacquisition integration. Many times, benefits of synergy may not be realized because the process of integrating the new company into the activities and management style of the existing company may not be very successful because human values are involved. This actually centres around the problem of cultural fit. In cases where acquisition is used to acquire new competences, clash of cultures may be more dominant; and, consequently, the acquirer may not be able to add sufficient value to the acquisition. This is the issue of corporate parenting (discussed in Unit 8). Many acquisitions are intended to produce financial synergy or improve financial gain or performance. Company experiences show that acquisition is not an easy or guaranteed strategy for improving financial performance. It may take considerable time for the acquiring company to secure any significant financial benefits from acquisition. Research reveals that as as much as 70 per cent of acquisitions end up with lower returns to shareholders of both the organizations.6
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19. In________ or _______, one company takes over another organization its presources, management and control. 20. Takeovers always tend to be unsystematic and hostile. (True/False)
10.12 Merger
A merger is a combination of two or more organizations, in which one acquires the assets and liabilities of the other in exchange for shares or cash, or the organizations are dissolved, and a new company is formed, which takes over the assets and liabilities of the dissolved organizations and new shares are issued. So, combination or merger takes place, either through acquisition or amalgamation or consolidation. For the company which acquires another company, it is acquisition; for the company which is acquired, it is a merger. If both or more organizations dissolve themselves and form a new organization, it is amalgamation or consolidation. More common forms of mergers are through acquisition. There are many reasons why two or more organizations like to merge. There are reasons for buyer organization; there are reasons for the seller organization. Glueck and Jauch (1984) have identified several reasons both for the buyer and the seller: Why the buyer wishes to merge: (a) To increase value of the companys stock; (b) To make profitable investment and increase the growth rate; (c) To balance, complete or diversify product line; (d) To improve stability of sales and earnings; (e) To reduce or eliminate competition; (f) To acquire resources quickly; (g) To avail tax concessions/benefits; h. To take advantage of synergy. Why the seller wishes to merge: (a) To increase the value of investment and stock (b) To increase revenue and growth rate (c) To acquire resources to stabilize operations
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(d) To benefit from tax legislation (e) To deal with top management succession problems (f) To take advantage of synergy7
10.12.1 Types of Mergers

Mergers can be differentiated on the basis of activities or businesses currently pursued by the merger partners, and, also, the nature of activity or business to be added during the process of merger. Based on these, four major types of mergers may be distinguished: 1. Horizontal merger 2. Vertical merger 3. Concentric merger 4. Conglomerate merger Horizontal merger takes place when there is a combination of two or more companies in the same business or product group or product. For example, a cement company combines with another cement company or a pharmaceutical company merges with another pharmaceutical company and so on. Vertical merger takes place when there is a combination of two or more companies which are not in the same business but in related businesses or products. The combination or merger takes place to create complementarity of businesses or products. For example, a refrigerator-manufacturing company combines with a compressor-manufacturing company. Concentric merger takes place when there is a combination of two or more companies related to each other in terms of production process, technology or market. For example, a leather shoe-manufacturing company combines with a leather goods company making purses, handbags, jackets, etc. Conglomerate merger takes place when there is a combination or two or more companies which are not related to each other in terms of production process, technology or market. For example, a shoe manufacturing company merges with a pharmaceutical company or an FMCG company. As mentioned above, one of the major objectives of merger is to obtain advantages of synergy. A study has analysed synergistic benefits in different functional areas accruing from different types of mergers8 (Table 10.4).
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Table 10.4 Synergistic Advantages under Different Types of Merger

Areas of synergy (in percentage) Type of merger Conglomerate Concentric-technology Concentric-marketing Horizontal All categories Finance 100 100 100 96 100 Marketing 58 72 100 100 74 Technology 20 72 57 41 33 Production 32 57 72 29 36
Source: J Kitching, Why do Mergers Miscarry? Harvard Business Review, NovemberDecember, 1967.
We had mentioned earlier that common forms of mergers are through acquisition. We had given examples of such mergers in Table 10.2 (mergers in India) and Table 10.3 (mergers in foreign countries including international mergers). Some more examples of mergers through acquisition are: TVS Whirlpool Ltd with Whirlpool of India Ltd; Sandoz (India) Ltd with Hindustan Ciba Geigy Ltd and Polyolifin Industries with NOCIL. Mergers through amalgamation or consolidation are less common than through acquisitions. Some examples are: Nirma Detergents Ltd, Nirma Soaps and Detergenets Ltd, and Shiva Soaps and Detergents Ltd into Nirma Ltd; Hi Beam Electronics and other two companies formed Tristar Electronics subsequently named as Solidaire India Ltd; British Motor Corporation and Leyland Motors into British Leyland Motors (in UK); likely amalgamation/consolidation: United Airlines and US Airways; Delta Airlines and Continental Airlines. As mergers take place, demergers (merger in reverse) also take place, although they are not very common. Demerger means Spinning of an unrelated business/division in a diversified company into a stand-alone company along with a free distribution of its shares to the existing shareholders of that original company.9 Some examples of demergers are: Sandoz India from Sandoz renamed as Clariant India; Ciba Speciality from Ciba India and Aptech from Apple Industries.
21. A _________ is a combination of two or more organizations, in which one acquires the assets and liabilities of the other in exchange for shares or cash, or the organizations are dissolved, and a new company is formed.
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22. When there is a combination of two or more companies in the same business or product group or product, it is called _________. 23. When there is a combination or two or more companies which are not related to each other in terms of production process, technology or market, the merger is called__________. 24. Which of these mergers involves a combination of two or more companies which are not in the same business but in related businesses or products? (a) Vertical merger (b) Horizontal merger (c) Concentric merger (d) Conglomerate merger
10.13 Integration Strategy

Integrationforward, backward and also horizontalcan be used as a strategy for growth. Forward integration takes place when a company enters into a downstream activity with respect to the same product line/flowfor example, a garment manufacturer starts its own retail chain. Backward integration means moving upstreamthe same garment manufacturer enters into fabric production. Both backward and forward integration are vertical integration strategies involving a value chain. Horizontal integration takes place when a company acquires a competing business or two or more companies in competing businesses merge (Figure 10.3).
Figure 10.3 Vertical and Horizontal Integrations Sikkim Manipal University Page No. 271
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A number of factors or considerations govern the decision for diversification through integration. We can also call them integration benefits. Some of the major factors or considerations are: Improving supply chain Better control over raw material supply Strengthening marketing/distribution Operating economies Diversifying product portfolio Direct access to demand or customers Cost effectiveness Decision for integration or adoption of integration strategy can also be analysed in terms of transaction cost economics. According to transaction cost analysis, a company should take a make or buy decision during procurement of inputs and sale directly or through others for sales of finished products. Relative costs of these alternatives should be evaluated, and a decision should be taken on backward or forward integration. If, for example, the cost of making a product (input) is less than the cost of procuring it from the supplier, the company should move up the value chain and manufacture the product itself. Similarly, if the cost of selling the finished product directly is less than the price paid to other sellers to do the same thing, then, it is profitable for the company to move down in the value chain and perform the selling operation itself. In both these cases, the company is adopting an integration strategyin the former case, it is backward integration and in the latter case, it is forward integration. Companies have gained advantages through both backward and forward integrators. Hewlett- Packard lost vital time in supplying workstations to the market because a key supplier of chips delayed delivery by six months, whereas IBM, with integrated sources was on time, and, therefore, enjoyed a clear competitive advantage. To establish upstream linkages, Japanese automobile manufacturers like, Honda and Toyota participated in equity capital, and, also in the management of some of the ancillary units. To gain access to major customers, American car manufacturers, as an integration move, invested in car rental companiesFord invested in Hertz and Budget, General Motors in Avis and National, and, Chrysler owns Thrify and Snappy. In India, Modern Suitings went for both backward and forward integrationintegrating backward in the wool processing and integrating forward by diversifying into worsted suitings.
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Experience of companies shows that vertical integrationwhether backward or forward can be profitable. Buzzell (1983) analysed about 1650 businesses in the PIMS (Profit Impact of Marketing Strategy) database to ascertain the impact of vertical integration on profitability. In the study, vertical integration has been defined in terms of value addition as percentage of sales. The analysis shows that net profit (PAT), as percentage of sales, increases with vertical integration, but, net profit as percentage of investment or return on investment (ROI) does not. Activity 2 Choose a company either Tata or Godrej and analyse the integration process, either forward or backward or both.
25. _________ integration takes place when a company enters into a downstream activity with respect to the same product line/flowfor example, a garment manufacturer starts its own retail chain. 26. _______integration means moving upstreamthe same garment manufacturer enters into fabric production.
10.14 Case Study

Tata Steels Acquisition of Corus Tata Steel realized that success in the global market was not possible with greenfield plants or projects. More recently, Tata Steel showed its renewed interest in overseas acquisitions, particularly in Europe and in USA. Corus, the second largest steel producer of Europe and the fifth largest in the world, gave an inviting signal. Corus expressed its interest in China, Brazil and India for cheaper steel. This induced Tata Steel to cash in on the opportunity and decided to make a bid for Corus. Corus was also interested in setting up a modern steel distribution network in India. Tata Steel decided to leave no stone unturned to mark its European presence. Tata Steels audacious, but successful bid for Corus at an enterprise value of 6.7 billion, gives it a capacity of 28 million tonnes, including 8.7 million tonnes of its own. But, the immediate stock market reaction to Tata Steel almost running away with Corus in a head-to-head bidding with Brazils
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CSN was negative. Market participants thought Corus at 608 pence, representing a premium of 153 pence on the opening offer, was an expensive buy. Whether the Tatas were paying an inflated price for Corus would remain a subject of debate for some time. Ratan Tata was emphatic that he was not paying anything that was beyond prudence. It might not have looked so at that point, but the acquisition cost for the Tatas would be justified, as the valuation of steel assets around the world would keep on rising. Tata Steel finally acquired Corus in 2006, scoring over Brazils CSN at $12.15 billion (around `55,000 crore) in cash and made it the largest acquisition by an Indian company and the second largest in the industry after Mittal Steels $38.3 billion acquisition of Arcelor.
The acquisition of Corus by Tata Steel is consistent with Tata Steels stated objective of growth and globalization. Tata Steel has identified a number of specific benefits that it sees from a combination with Corus. Enhanced scale will position the combined group as the fifth largest steel company in the world by production, with a meaningful presence in both Europe and Asia. The powerful combination of lowcost upstream production in India with the high-end downstream processing facilities of Corus will improve the competitiveness of the European operations of Corus significantly. The combination will also allow the crossfertilization of research and development capabilities in the automotive, packaging and construction sectors, and there will be a transfer of technology, best practices and expertise of senior Corus management from Europe to India. Tata Steel also believes that between the two companies, there exists a high degree of cultural compatibility which would facilitate an effective integration of the businesses over time. Tata Steel expects to lead the enlarged group with a combined management team. The acquisition process shows that Tata Steel has largely taken care of strategic fit, organizational fit and postintegration management issues and economics of the acquisition.
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10.15 Summary
Let us recapitulate the important concepts discussed in this unit: Different strategies can lead to growth. These include market penetration, product or market development, diversification, integration, etc. Marketers have to decide on the most appropriate one based on resources, business assets and skills and the environment. Diversification, as a strategy, can generate growth in a number of ways product development, market development, both product and market development or any other. Diversification may take the form of either a new business venture of the company or strategic alliance or joint venture or acquisition or merger. Strategic alliance is cooperation between two or more organizations with a common objective, shared control and resource contributions by the partners. Strategic alliances, like all partnerships, are delicate to manage, and, alliance partners have to share their responsibilities for smooth operation of the alliance. If a strategic alliance involves equity participation by both (or all) the parties, it becomes a joint venture (JV). The JVs are long-term ventures unlike strategic alliances which are short-term for a fixed period. Takeover or acquisition means that one company takes over another companyits resources, management and control, it can be friendly or hostile. A merger is a combination of two or more organizations either through acquisition or amalgamation or consolidation. Integration, both forward and backward, can be used as a strategy for growth.
10.16 Glossary
Diversification: A growth strategy through new products and new markets. Strategic alliance: Cooperation between two or more organizations with a common objective, shared control and contributions (in terms of resources, skills and capabilities) by the partners for mutual benefit. Joint venture: A strategic alliance involving equity participation by both (or all) the parties.
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Takeover: (also called acquisition) when one company takes over another organization its resources, management and control.

1. What is Ansoff Matrix? Explain with the help of a diagram. 2. Distinguish between related or concentric diversification and unrelated or conglomerate diversification. Give some examples. 3. Define strategic alliance. Discuss the different forms of strategic alliance. 4. What is a joint venture? Give some examples of joint ventures between Indian companies and foreign companies in India. 5. Define takeover or acquisition and distinguish between friendly and hostile takeovers. Discuss the main issues in post-takeover integration. 6. Define merger and distinguish between acquisition and amalgamation. Discuss the main issues in managing a merger. 7. What is integration strategy? Explain forward integration and backward integration with examples.

1. Products, businesses 2. Ansoff 3. market share 4. product 5. market research or surveys 6. (d) all the above 7. True 8. Electronics 9. watches 10. test marketing 11. new market segments 12. Dairy Milk
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13. False 14. Related diversification 15. Strategic alliance 16. Competitive, strategic 17. Joint venture 18. False 19. Takeover, acquisition 20. False 21. Merger 22. Horizontal merger 23. Conglomerate merger 24. (a) Vertical merger 25. Forward 26. Backward

1. Ansoffs (1987) product-market expansion matrix has been the basis for further research and development in growth strategies. Refer to Section 10.3 for further details. 2. Related diversification means that the new business has commonalities with the core business or core competence of the company. Refer to Section 10.8 for further details. 3. Strategic alliance is cooperation between two or more organizations with a common objective, shared control and resource contributions by the partners. Refer to Section 10.9 for further details. 4. If a strategic alliance involves equity participation by both (or all) the parties, it becomes a joint venture (JV). Refer to Section 10.10 and 10.10.2 for further details. 5. Takeover or acquisition means that one company takes over another companyits resources, management and control. Refer to Section 10.11 and 10.11.2 for further details.
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6. A merger is a combination of two or more organizations either through acquisition or amalgamation or consolidation. Refer to Section 10.12 and 10.12.2 for further details. 7. Integration, both forward and backward, can be used as a strategy for growth. Refer to Section 10.13 for further details.
10.19 References
1. Ansoff, H I. 1987. Corporate Strategy. Harmondsworth: Penguin. 2. Buzzell, R D. Is Vertical Integration Profitable? Harvard Business Review, JanuaryFebruary, 1983. 3. Ghoshal, S. Integrating Acquisitions. Economic Times (Corporate Dossier), January 1, 1999. 4. Glueck, W F, and Jauch, L R. 1984. Business Policy and Strategic Management. 4th ed. New York: McGraw Hill. 5. Johnson, G, and K Scholes. 2002. Exploring Corporate Strategy. 6th ed. London: Prentice Hall. 6. Porter, M E. 1980.Competitive Strategy. New York: The Free Press. Endnotes
1
Cadburys rejuvenation of its Dairy Milk chocolate (CDM) in the Indian market during 199394 makes a very interesting story. Refer to A Nag, Strategic Marketing, 2nd ed. (New Delhi: Macmillan India, 2006), Ch. 9. M B Rao, Joint Venture: International Business with Developing Countries (New Delhi: Vikas Publishing House, 1999), 2-3. A Kazmi, Business Policy and Strategic Management, 2nd ed. (New Delhi: Tata McGraw Hill Publishing Co., 2002), 189. P Chandra, Financial ManagementTheory and Practice (New Delhi: Tata McGraw Hill, 1987), 660-61. G Johnson, and K Scholes (2005), 377. G Johnson, and K Scholes (2005), 377. W F Glueck, and L R Jauch, Business Policy and Strategies Management, 4th ed. (New York: McGraw Hill, 1984), 224. J Kitching, Why do Mergers Miscarry, Harvard Business Review (NovDec, 1967). N Venkiteswaran, Restructuring of Corporate India: The Emerging Scenario, Vikalpa (22) 3 : 7.
5 6 7
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Unit 11
Structure
Industry and Competition Analysis
11.1 Introduction 11.2 Caselet Objectives 11.3 Definition of Industry 11.4 Industry Types and Structure 11.5 Industry Structure and Competitive Strategy 11.6 How to Conduct Industry Analysis 11.7 Identifying Competitors 11.8 Models of Competition 11.9 Porters Competitive Threat Model 11.10 Competitive Advantage Analysis 11.11 Case Study 11.12 Summary 11.13 Glossary 11.14 Terminal Questions 11.15 Answers 11.16 References
11.1 Introduction
Selection of corporate strategy by an organization should be guided by three sets of factors: organizational mission, objectives or goals (discussed in Unit 5), internal competences and resources and the external environment factors. Given the mission, objectives or goals based on organizational philosophy or priorities, the choice of strategy should depend, among other things, on company competences or capabilities (that is, strengths and weaknesses) and the environmental factors; or, more correctly, on compatibility or balancing between the two which is attempted through SWOT analysis. The final selection of strategy, however, depends on some additional selection criteria including benchmarking and best practices. These are discussed in the next chapter. One of the most important components of the environment is competition or competitors. This would be analysed here. As we talk of competition, we also imply the industry to which the company belongs. Analysis of industry and competition leads to the determination of competitive advantage or competitive
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disadvantage of an organization. So, industry, competition and competitive advantage (or disadvantage) become three interrelated fields of analysis in an interactive cycle or circle as shown in Figure 11.1. These analyses will be undertaken in this unit.
Figure 11.1 Industry, Competition and Competitive Advantage
11.2 Caselet
There are numerous well-documented reasons why the Japanese automobile firms were able to penetrate the US market successfully, especially during the 1970s. One important reason, however, is that they were much better than U.S. firms at doing competitor analysis. David Halberstam, in his account of the automobile industry, graphically described the Japanese efforts at competitor analysis in the 1960s. They came in groups. . . . They measured, they photographed, they sketched, and they tape-recorded everything they could. Their questions were precise. They were surprised how open the Americans were. The goal of competition analysis is insight that influences the development of successful business strategies. The analysis should focus on the identification of threats, opportunities, or strategic uncertainties created by emerging or potential competitor moves, weaknesses, or strengths. Competitor analysis starts with identifying current and potential competitors.This is an exercise that was successfully done by the Japanese automobile firrms.
Source: D Halberstam, The Reckoning (New York: William Morrow, 1986), 310.
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Objectives
After studying this unit, you should be able to: Discuss the different industry types and structures Analyse industry structure and competitive strategy Show how to conduct industry analysis Identify and analyse competitors existing and potential Conduct competitive advantage analysis
11.3 Definition of Industry

An industry can be broadly defined as the group of firms producing products that are close substitutes for each other.1 There is, however, a great deal of controversy over an appropriate definition of industry. The debate or controversy mostly centers around how close substitutability needs to be in terms of product, process or geographic market boundaries.2 For example, if we take computers, desktop computers may be an industry; similarly laptop computers may be another industry. But, because there is a good deal of substitutability between desktop and laptop computers, an appropriate industry definition may be personal computer which includes both. An important point in the debate or controversy over industry definition is about overlooking latent sources of competition which may affect a company. Any definition of an industry is essentially a matter of choice about where to draw the line between established competitors and substitute products, between existing companies in the industry and potential entrants and, between existing manufacturers of the product(s) and suppliers of inputs and buyers. Drawing these lines may, many times, be a matter of degree, but, it has implications for choice of strategy by a company. Definition of an industry should not be thought to be same as definition of the business in which a company wants to compete. Industry may be broadly defined or narrowly defined. If industry is broadly defined, it does not follow that business should also be broadly defined without focus. If we take the example of personal computer industry again, some companies like Compaq were focussing their operations more on the desktop computers; companies like HP (Compaq merged with HP in 2002) and Dell computer focus on both desktop and laptop computers; others like Toshiba, Sony, IBM, concentrate more on the laptop segment. Industry in all such cases sets the product boundaries. Business
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of a company focusses on a specified product or a product category based on its technology, resources and capabilities, and accordingly, the company formulates its competitive strategy.
1. The group of firms producing products that are close substitutes for each other are known as_________. 2. Definition of an industry should not be thought to be same as definition of the ________in which a company wants to compete.
11.4 Industry Types and Structure

Industries can be of various typeseach major product group constitutes an industry (subject to the definition above). Industries can also be classified in terms of size of the constituent units or companies, state or pace of development of the industry, spread of the market, etc. These are important ways of looking at the structure of an industry. Based on such factors, various industries can be broadly classified into five categories according to Porter: 1. Fragmented industry 2. Emerging industry 3. Mature industry 4. Declining industry 5. Global industry Fragmented industry As fragmented industry is characterized by the existence of a large number of small and medium units, and, no single company has any significant market share, and, none of these units can individually affect the market or industry outcome. The uniqueness of a fragmented industry is the absence of any market leader, and, typically, the market share of the largest unit does not exceed 10 per cent. Fragmented industries are common in certain sectors of the economy including services, retailing, distribution and agricultural products. Fragmented industries in some of these sectors are characterized by product differentiation, whereas undifferentiated products more commonly exist in fragmented industries
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in other sectors. For example, computer software, television network/programme and fast food industries are characterized by products or services which are differentiated; but, agricultural produce, ATMs, dry cleaning, etc., essentially involve undifferentiated products. Fragmented industries also vary widely in technological sophistication ranging from high technology operations like solar heating to non-technological activities like retailing and distribution. Emerging industry An emerging industry is a developing or newly formed industry in which market for products initially exists in latent form, and, becomes visible later. An emerging industry may be created by technological innovations, new consumers or industrial needs for economic or sociological changes which create the environment or potential market for a new product or service. Emerging industries are being created all the time; or, to put it in other words, most of the existing industries today were emerging industries at some point of time or the other. Examples are word processors, photocopiers, computers, VCR/VCP, CTV, etc. Different emerging industries may have different structuresstructural details always vary. But, most of the emerging industries exhibit some common structural characteristics. Mature industry A mature industry is one which has passed through transition from period of fast growth to more modest or stable growth. Maturity is an important or critical phase in the industry life cycle. During this period, fundamental changes often take place in the competitive environment, and, companies are usually faced with difficult strategic decisions for survival and growth because competition becomes very intense. Industry maturity, in some cases, may be delayed or postponed because of innovations or other events or developments including environmental changes. This would mean prolonging the industry growth cycle or the transition to maturity. Transition to maturity is associated with important changes in the industry structure and competitive environment. Industry maturity is characterized by new trends or tendencies for change. Porter (1980) has identified and analysed nine such trends or tendencies. Declining industry A declining industry is one with negative growth, that is, an industry which has registered absolute decline in sales over a sustained period of time. Such decline in sales is not because of business cycles or any other short-term factors like
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strike, lockouts or material shortages. Therefore, a declining industry does not represent a short-term discontinuity, but, a trend expressed in falling industry output, sales, profitability and dwindling number of competitors. In industry life cycle, decline follows maturity. Decline sets in generally because of product obsolescence or emergence of a strong substitute product. For example, demand for oil-based laundry soaps for cloth washing declined fast because of introduction of synthetic washing materials. In-depth study of a wide cross-section of declining industries shows that industry reactions and the nature of competition during decline vary markedly. Some industries age gracefully; these industries have avoided losses by exiting either before the decline or in time during the decline. Many other industries in similar situations have got involved in bitter marketing warfare, prolonged excess capacity and heavy operating losses.3 Global industry In global industry, the strategic position of companies in different countries or national markets are governed by their overall global positions. For example, IBMs strategic position in competing for computer sales in France and Germany has improved significantly because of technology and marketing skills developed in other countries, and a worldwide manufacturing system which is well coordinated. To be called a global industry, an industrys economics and competitors in different national markets should be considered jointly rather than individually.4 Distinction should be made between an international industry and a global industry. An industry in a country may be international if it comprises a number of multinational companies. But, industries with multinational competitors are not necessarily global industries. To be a global industry, as explained above about IBM, an industry should have multi-locational manufacturing facilities, and, compete worldwide to secure global synergy or competitive advantage.
3. The existence of a large number of small and medium units is found in (a) Mature industry (b) Declining industry (c) fragmented industry (d) Emerging industry
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4. An industry that has passed through transition from period of fast growth to more modest or stable growth is known as (a) mature industry (b) declining industry (c) Emerging industry (d) None of the above
11.5 Industry Structure and Competitive Strategy

We have analysed above five types of industries: fragmented, emerging, mature, declining and global. Each of these industries has its own structure in terms of companies or competitors and the nature of competition. Let us discuss the competitive strategy in each type of industry.
11.5.1 Competitive Strategy in Fragmented Industries

Porter has suggested a framework or steps for formulating competitive strategies in fragmented industries. This is a five-step framework. The steps actually consist of finding answers to five vital questions relating to strategy formulation in fragmented industries. Table 11.1 shows the framework or steps for formulating competitive strategies in fragmented industries.
Table 11.1 Framework or Steps for Formulating Competitive Strategies in Fragmented Industries Step 1 Step 2 Step 3 Step 4 Step 5 : What is the structure of the industry and position of competitors? : Why is the industry fragmented? : Can fragmentation be overcome? How? : Is overcoming fragmentation profitable? Where should the firm be positioned to do so? : If fragmentation is inevitable, what is the best alternative for coping with it?5
The five steps or the answers to the five questions indicate a logical process for formulation of competitive strategy in fragmented industry. Step 1 consists of undertaking a thorough industry and competitor analysis to identify sources of competitive forces in the industry and positions of important competitors. Step 2 is to identify cause or sources of fragmentation. Once the causes of
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fragmentation are ascertained, it may be possible to find out if fragmentation can be overcome. This is analysed in Step 3. Step 3 consists of analysing, in detail, each of the causes of fragmentation, and, finding out if fragmentation can be overcome through strategic moves. Less fragmented a market is, more organized it is, and it becomes easier to analyse various competitive forces. The objective in Step 4 is to ascertain if fragmentation is profitable, and, if so, when and/or how a particular company should position itself to take advantage of industry consolidation or restructuring. If chances of overcoming fragmentation are remote based on analysis in Step 3, a particular company should select and adopt the best strategy from among the alternatives available to cope with fragmentation. This should be done in Step 5, and this should be commensurate with the companys resources and capabilities.
11.5.2 Competitive Strategy in Emerging Industries

Due to the structural characteristics of uncertainty and associated risk, formulation of strategy in emerging industries becomes a very difficult task. As Porter puts it: The rules of the competitive game are largely undefined, the structure of the industry unsettled and probably changing and competitors hard to diagnose.6 But, these also imply the other side of the emerging industries: lot of freedom, flexibility and leverage exist for companies in these industries for choice of strategy because the industry is in the formative stage. And, entrepreneurial and aggressive companies can exploit these leverages to formulate competitive strategies for improved operations which can lead to more efficient performance and better results. The entrepreneurial pioneer can, in fact, design the structural form, build the structure of the industry in terms of product policy, marketing approach (pricing in particular) and competition strategy in such a way that it can secure the strongest position in the long run. This is what companies like Xerox did when it emerged in the photocopier industry. The pioneering leader, however, will face problems as the industry develops, competitors emerge and the course of competition becomes unpredictable. A common problem in emerging industries is that the pioneer may spend excessive resources in defending high market share as Xerox did. It may be generally appropriate to respond to competitors aggressively in the emerging phase, but, a company should concentrate more on building its own strength and consolidating its position. In practice, as experiences show, it may not be feasible to defend a monopoly market share for long because competitors will emerge and some of them may be very strong like Canon in the photocopier
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market. In such situations, the pioneer leader should be prepared for shifts in strategy orientation including redefinition of roles of linkage agents like suppliers and distributors or distribution channels. Companies which enter emerging industries during the course of their development also have a choice to make about which industries to enter. Here, again, they often have a choice between alternative emerging industries. The choice in such cases would depend on current returns or profitability and likely future growth of the industry. The best alternative is one which promises highest long-term growth and profitability.
11.5.3 Competitive Strategy in Mature Industries

Compared to emerging industries, mature industries pose almost the opposite problem, i.e., of competitive overcrowding and its impact on formulation of strategy. During transition to maturity there is volatility in the industry in terms of emerging participants and competitive levels. But, at maturity, the industry is already overcrowded and competition is intense. In such an environment, competitive strategies of companies have to adjust to changing priorities. Focus has to shift to factors which directly contribute to efficiency and help securing competitive advantage in a low-margin market. Cost reduction, true marketing (as opposed to pure selling) in terms of product-price offerings and better customer service should receive the highest attention. Redefining or repositioning old products/brands rather than introducing new products is the recommended strategy. Less attention to creativity and more attention to improving the existing value chain is required for edging out competitors. For achieving this, to any significant extent, organizational change cultural change in particularmay also be required. There may be resistance to change, but, this has to be overcome. This raises a number of issues which companies in a mature industry have to cope with. Some of these issues relate to business performance; others relate to organizational change. Three issues or factors which should be particularly highlighted are: business growth, financial performance and profitability, and organizational discipline and recentralization.
11.5.4 Competitive Strategy in Declining Industry

In terms of strategic choice in declining industries, companies are confronted with the decision about whether to continue in the industry or harvest or divest. There are implications of both in terms of strategic details and their impacts on organizations.
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Porter has given a perspective on competitive strategies in declining industries which should be mentioned here. He has suggested four possible alternative strategies: leadership, niche, harvesting and divesting quickly (Table 11.2).
Table 11.2 Alternative Strategies in Declining Industries Leadership Seek a leadership position in terms of market share Niche Create or defend a strong position in a particular segment Harvest Manage a controlled disinvestment using strengths Divest quickly Liquidate the business or investment as early as possible
Source: M E Porter, Competitive Strategy (1980), 267 (Figure 12.1).
The leadership strategy may work out as below. In a declining industry, many unprofitable or loss-making units divest and exit. One of the remaining companieswho are not many in number may have the potential to achieve above-average profitability, and leadership position is possible for such a company. The company strives to be the only one or one of the few competitors remaining in the industry. Porter suggests a number of strategic steps for executing the leadership strategy: Investment in aggressive competitive actions in marketing (focus on pricing) and other areas to increase market share; Purchasing market share by acquiring competitors or competitors business; Purchasing and retiring competitors production capacity. This also reduces exit barriers; Reducing competitors exit barriers in different ways to induce or force them to exit; Demonstrating superior strengths through competitive moves in the market; Demonstrating a strong commitment to continue in the business through public statements or pronouncements.7 In niche strategy, it may be possible for a company to identify a segment or a sub-segment in a declining industry which will not only sustain stable demand but, may also allow high returns or margins. The company then invests to consolidate its position in this segment or sub-segment. For this, a company may also adopt some of the leadership strategies mentioned before. The primary
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objective of these strategies is to reduce exit barriers or induce exit of competitors. The company is then secure in the niche for sometime. Ultimately, however, companies adopting a leadership strategy or a niche strategy may have to switch over to a harvesting strategy or divesting strategy.
11.5.5 Competitive Strategy in Global Industries

Competition in global industries poses a different kind of challenge because it cuts across national boundaries and, international or global forces come into play. These forces create, among others, two distinctive pressures: cost pressure because of global competition and, pressure for local responsiveness, that is, adaptation to local needs or values and consumer tastes and preferences. For some products, cost pressure may be more: for some others, the need for local adaptation is more. Guided by these two factors and product type or structure, companies, which wish to compete globally, generally adopt one of the four strategies: International strategy, multi-domestic strategy, global strategy, and transnational strategy (Figure 11.2).
Figure 11.2 Four Basic Global Competitive Strategies
International strategy can be adopted for those products and services which are not available in some countries and can be transferred from other countries. These are standard products with little or no differentiation. International strategies are not very common or popular. Some examples are: Kelloggs, Indian software, and Indian handicrafts. Multidomestic strategy is almost opposite of international strategy. Multidomestic strategy involves high degree of local responsiveness or local content. Products are highly customized to suit local requirements or conditions. Because of high customization, cost pressure is less; cost effectiveness may
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be also difficult to achieve because of lack of scale economies. Examples : Asian Paints (paints in general), Indian garments. Global strategy suits companies which make highly standardized sophisticated products, and, are in a position to reap benefits of economies of scale and experience effects. These also include high technology products which have universal applicability and hardly require any local adaptation. Examples are: Intel, Motorola, Microsoft, Texas Instruments. Global retail chains like Walmart and Marks & Spencer also come under this category. Transnational strategy is the most difficult strategy to follow because this is based on a combination of two apparently contradictory factors, i.e., cost effectiveness and local adaptation. But, this may be a true global strategy because, in global business, there is always a price pressure or cost pressure; and, also the need to make the product as close to a particular countrys expectation as possible to maximize value offerings. In fact, many, including Bartlett and Ghoshal (1989), feel that the transnational strategy is the only viable competitive strategy in global business. Many companies are adopting this approach to become successful. Some good examples are : Caterpillar (taking on Komatsu and Hitachi), McDonalds, Coca-Cola, Pepsi and Dominos Pizza. Many multinational FMCG companies like Unilever and Procter & Gamble follow transnational strategies through their fully owned subsidiaries in different countries.
5. In ________ industry, the pioneering leader faces problems as the industry develops, competitors emerge and the course of competition becomes unpredictable. 6. In ________ industries, the problem faced is that of competitive overcrowding and its impact on formulation of strategy. 7. Global strategy suits companies that make highly standardized sophisticated products. (True/False) 8. Transnational strategy is quite an easy strategy to follow. (True/F alse)
11.6 How to Conduct Industry Analysis

Understanding industry structure and formulating competitive strategies imply industry analysis. But, conducting a proper industry analysis is a very big task.
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To conduct such an analysis, the industry analyst has to find answers to many important questions: What should be the starting point? Which types of data one looks for? Should one look for only published or secondary data? Or, should one also generate primary data from industry observers (participants)? What are the analytical techniques to be used for data processing and analysis? Answers to these questions would make possible an appropriate industry analysis. This is about complete or comprehensive industry analysis. If, however, one is interested in a particular aspect of an industry, say, only industry growth, one can also conduct a partial industry analysis with respect to the particular object. In that case, data requirements would be less, and data processing and analysis also would be much easier. Porter (1980) has suggested some detailed guidelines for conducting industry analysis. These are contained in How to Conduct an Industry Analysis (Appendix B) in Competitive Strategy (1980). Porter discusses sources of published or secondary data, generation or collection of primary data, various categories of data, scheme of data processing and strategy for industry analysis. He has also suggested a broad framework for industry analysis in terms of categories of data and competition. The framework is shown in Box 11.1 Industry analysis should follow a number of logical or strategic steps. These are shown below: Step 1 : Determine or specify the objective or objectives so that there is no lack of focus. Step 2 : Collect and scan through available published or secondary data. Step 3 : Identify data or information gaps for generation of primary data. Step 4 : Generate primary data (through survey, interviews, meetings, etc.,) to fill the data information gap. Step 5 : Process/tabulate various data as mentioned in Box 11.1 Step 6 : Prepare a general overview of the industry using the processed/ tabulated data/information.
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Step 7 : Prepare specific sectoral analysistechnology, product, marketing pattern, competition analysis . Step 8 : Draw inferences or conclusions to complete the analysis.
Box 11.1: A Broad Framework for Industry Analysis

Data Categories Product lines Buyers and their behaviour Complementary products Substitute products Growth Rate Pattern (seasonal, cyclical) Determinants Technology of production and distribution Cost structure Economies of scale Value added Logistics Labour Marketing and Selling Market segmentation Marketing practices Suppliers Distribution channels (if indirect) Innovation Types Sources Rate Economies of scale Compilation By company By year By functional area
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Competitorsstrategy, goals, strengths and weaknesses, assumptions Social, political, legal environment Macroeconomic environment
Source: M E Porter, Competitive Strategy (1980), 370 (Figure B-1)
The real significance of competition or competitor analysis has been shown by the Japanese companies. There are many reasons why Japanese automobile companies were able to penetrate the US market successfully in the 1970s. But, one of the most important reasons is that they were much better at doing competitor analysis than US companies. The Japanese conducted a careful and detailed analysis of the US auto matket (See Caselet). They similarly studied the European market, particularly the design and engineering of the automobile manufacturers. In contrast, the Americans were late even at recognizing the competitive threat from Japan and were never so good in analysing the competitive environment they were going to face. Competition analysis can be divided into two main parts: one, identifying the existing and potential competitors, and two, understanding and evaluating competitors. To properly structure competitor analysis, one can start with a set of questions on identifying competitors and understanding and evaluating them. A series of exploratory questions are posed below. The analysis below would be generally based on answers to these questions and related issues. Identifying Competitors Who do we usually compete against? Who are our most intense competitors? Who are less intense, but, still serious competitors? Who are makers of substitute products? Can various competitors be divided into strategic groups on the basis of their assets, skills or strategies? Who are the potential competitors or potential entrants? Is there anything that can be done to discourage them early?8 Understanding and Evaluating Competitors What are competitors objectives and strategies? What are their levels of commitment and seriousness?
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What is competitors cost structure? Do they have a cost advantage or disadvantage or cost neutrality? What is their image and positioning strategy? Who are the most successful competitors? Who are the unsuccessful ones? Why? What are the strengths and weaknesses of each competitor or competitor groups? What are the leverages competitors have over us (our strategic weaknesses, customer problems, etc.,) which they can exploit to enter the market or become stronger competitors? What are competitors special assets and skills that can be used against us? Activity 1 Choose an electronic goods industry (colour TV, cell phone, desktop or laptop computers) and carry out an industry analysis in terms of the steps and guidelines given in the text.
9. Competition analysis can be divided into two main parts: (1) identifying the existing and potential competitors, and (2) __________. 10. Japanese automobile companies were able to penetrate the US market successfully in the 1970s as they were much better at doing _______ than US companies.
11.7 Identifying Competitors

There are two different ways of identifying existing competitors: customer-based approach and strategic group approach. The customer-based approach analyses thoughts (likes, dislikes, preferences, etc.,) of customers who make their choices among competing suppliers of products. This gives a basis for grouping competitors to the extent they compete for customers choice. The strategic approach for competitor identification attempts to classify competitors into strategic groups on the basis of their competitive strategies.
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11.7.1 Customer-based Approach

Primary competitors, i.e., competitors in the same product category and, not in substitute product category, are clearly visible and more easily identifiable. For example, if one takes the Indian soft drinks market, Coca-Cola and Pepsi are the most immediate competitors followed by Thums Up, Sprite, Fanta, Limca, etc. Whenever consumers think of a soft drink, they will first think of one of these brands. But, secondary competitors, i.e., competitors in substitute product categories are not so easily visible, and, are more difficult to identify. For example, lemon soda, canned and packaged fruit drinks (like Frooti), slush, etc., also compete with soft drinks. Customers have a choice, and, many times, they ask for these products/brands in place of soft drinks, and secondary competitors compete with primary competitors. The above examples illustrate an important point. In most industries, competitors can be usefully identified in terms of how intensely they compete for the business or product which attracts or induces customers. There are several very direct competitors; others who compete less directly; and, still others who compete indirectly, but, are still relevant. A knowledge of this pattern can lead to a proper understanding of the market structure and the competitive situation.
11.7.2 Strategic Group Approach

Strategic group approach provides an alternative way of identifying competitors in an industry or market. A strategic group generally exhibits the following features: Possess similar characteristics, (e.g., size, competences, resource base, etc.) Possess similar assets and skills, (e.g., cost efficiency, quality, image, etc.) Pursue similar competitive strategies, (e.g., use of same or similar sales promotion and advertising methods, aggressive or offensive approach, etc.) In many industries or markets, there are a large number of competitors (like in monopolistic competition) and, it is difficult to analyse each of them individually. It may be possible to track the leader or one or two large competitors, but, it may not be very feasible, even cost-wise, to analyse individually, say, 30 or 40 competitors. Reducing such large numbers to small strategic groups makes
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the analysis easy and more usable from strategy formulation point of view. Let us take the Indian detergents market. In this market, Surf (with brand extensions) and Ariel may be placed in one strategic group; Tide, Rin, Wheel, Sunlight and Nirma may be classified into a second strategic group; Ghadi and similar regional brands can be in a third group; and, many local brands can be put together in the fourth group. Each of these groups will show some distinct features or characteristics like resource base, ability to compete, marketing skills, etc., and, such grouping will give a company a clear strategic perspective to analyse competition.
11.7.3 Potential Competitors

Existing competitors are the most immediate threats to a company. But, there are also potential competitors who are potential threats. Companies generally remain busy with formulating strategies or counter-strategies to meet threat from existing competitors, and, they tend to ignore potential competitors or entrants. But, this is a very short-term or short-sighted approach, because, in due course, potential competitors can become stronger than some of the existing competitors as Titan has shown to HMT. Aaker (1995) has mentioned six different types of potential competitors or potential competing situations. (a) Market expansion: Any company planning market expansion, that is, planning to enter into a new market, is a potential competitor for all those already operating in that market. Walmart, for example, has decided to enter into the Indian market through a JV with Bharti Enterprise. This is a big potential threat to the entire Indian retailing industry. (b) Product expansion: Product expansion, like market expansion, is a potential competitive threat. ITC diversified into hospitality business and agri-business, and during the planning stage of diversification, was a potential competitor for all those in agri-business and hospitality business. (c) Backward integration: Present customers can be potential sources of competition. General Motors bought many component manufacturers during the initial years of its operation in a backward integration move. Many can users like Campbell Soup have integrated backward by making their own containers. Backward integration is usually more common in business-to-business products.
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(d) Forward integration : Suppliers or vendors are also potential competitors. AST, a major computer manufacturer in the US at one time, started as a component (add-on-boards) manufacturer for IBM computers. TVS Motors (earlier Lucas-TVS), traditionally a manufacturer of electrical accessories for automobiles and motorcycles/scooters, has integrated forward by entering into manufacture of motorcycles. Like backward integration, forward integration also is more typical in business-to-business markets.
11. While identifying competitors, the ________ approach analyses the preferences of customers who make their choices among competing suppliers of products. 12. The ________ approach for competitor identification attempts to classify competitors into strategic groups on the basis of their competitive strategies. 13. Primary competitors, i.e., competitors in the same product category and, not in substitute product category, are clearly visible and more easily identifiable. (True/ false) 14. Existing competitors are the most immediate threats to a company. (True/False)
11.8 Models of Competition

In addition to analysing various factors which influence competitor actions, one can also get insight into competitors or competition through different models of competition. Competition takes various forms and can be of different intensities. Different models of competition try to analyse this. We shall discuss three important models of competition: 1. The Economic Model 2. The Life Model 3. The War Model
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11.8.1 The Economic Model

Industrial or business economists do not look at business strictly in terms of market forms. They look at business in different ways. In a competitive environment, businesses can be classified into four different categories: specialized businesses, volume businesses, fragmented businesses and stalemated businesses. Such classification is based on two factors; first, the potential size of advantage a company can derive from a particular business, and, second, the number of ways such advantage can be secured. In terms of these two factors, four business categories are shown in Figure 11.3.9
Figure 11.3 Classification of Business Based on Competitive Environment
As shown in the figure, businesses in which potential size of the advantage is large and approaches to achieve this are many, may be called specialized businesses. Most consumer products fall under this category. In such businesses, few large players dominate the market. The dominant players (national-level products/brands) control about 80 per cent of market share and the balance is shared by a number of small playersregional and local. Take the market for detergents. National brands like Surf, Ariel, Nirma, Rin, Tide and Wheel dominate the market. But there are also many regional and local detergents (branded and even non-branded) which exist in the market. Volume business consists of industrial products. Products like basic chemicals (e.g., caustic soda) and industrial raw materials which are consumed in large quantities, fall under such business. In these businesses, bigger the market share, larger is the profitability. Hence, size gives the greatest competitive advantage and the competition is mostly cost based cost efficiency through economies of scale and other factors. Businesses which have many small players, with the largest ones having less than 10 per cent market share, are fragmented businesses. In these businesses, size does not offer any great advantage. These apply primarily to service products. Hotels and restaurants (except 5-star hotels), studios
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(photographers), dry cleaning, courier services, etc., are good examples. Competition in these businesses is based on product-price packages. Stalemated businesses are those which are sort of chokedpotential size of advantage is small and the number of ways to secure competitive advantage are also limited. These are businesses which are on the decline either because of technological obsolescence or changes in consumer tastes and preferences. Examples of products in the category are radio, music records (HMV and others) black and white TV, etc.
11.8.2 The Life Model

The life model or the product life cycle (PLC) approach analyses competitive intensities during different phases of life cycles of a product. Although some management and marketing academics have raised doubts about the validity of PLC in real world, it is, nevertheless, a useful tool for analysing competition and determining appropriate strategies for competitive survival and growth during different stages of PLC: introduction, growth, maturity and decline.
Figure 11.4 Product Life Cycle (PLC): Sales and Profit
At the introduction stage, that is, when a new product enters the market, it starts as a monopoly and competition is nil. As the product moves to the growth stage, competitors start entering the market and competition begins. As the product matures, competition intensifies and competitive rivalry reaches its peak. Sales and profit also peak during this period. In the decline phase, competitive pressure decreases because sales and profit start declining, and many companies withdraw from the market or close down. Between introduction
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and growth, and, in the decline phase, competitive pressures are low, but, mortality rates of products or businesses are high (Figure 11.4). The lifespan of a product, and also speed or steepness in growth, maturity and decline vary according to its nature or category. (This is what explains the relative flatness (Figure 11.5) and relative steepness [of different PLC curves.) Most electronic products have a shorter lifespan and also a steep PLC compared to electrical or mechanical appliances. During the PLC, most markets witness one market leader, one or a couple of market challengers and a number of market followers. During the PLC, some niche players also develop in the market who stay away from mainstream competition. In the toothpaste market, Colgate is the leader, Pepsodent and Close-Up the challengers and Promise the follower. Some say Vicco and Neem are niche players, but, there may be difference of opinion on this. Different studies have hypothesized different market structures, particularly during the maturity phase, in terms of market shares of different players. These studies indicate different types and levels of competition. The first of these studies is by the Strategic Planning Institute, Cambridge, Massachusatts, popularly known as PIMS Study. The second study is by Kotler, and, the third by Boston Consulting Group (BCG). Buzzel (1981) has done consolidation and a comparative analysis of these studies. The study results for market structures in mature industries are summarized in Table 11.3.
Table 11.3 Market Structure in Mature Industries: Market Shares Market Player PIMS Market leader Market challengers Market followers Market nichers 52.7 28.8 11.6 6.9 Market Share (%) Kotler 40.0 30.0 20.0 10.0 BCG 50.0 25.0 15.0 10.0
Source: R D Buzzel, Are there Natural Market Structures? Journal of Marketing, 45 (Winter, 1981).
11.8.3 The War Model

The war model of competition is based on close parallel between military strategies for war and marketing strategies. Many marketing strategists have found close similarities between the two. Most common forms of war strategies
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are defensive warfare, offensive warfare, flanking warfare and guerrilla warfare. Ries and Trout (1986) are among the greatest exponents of marketing warfare based on military strategies. Principles of marketing warfare enunciated by them are given in the following: Principles of Defensive Warfare 1. Only the market leader should adopt a defensive strategy 2. The best defensive strategy is the courage to attack yourself 3. Strong competitive moves should always be blocked Principles of Offensive Warfare 1. The strength of the leader is the most important consideration for mounting an offensive attack 2. Find the leaders weakness and attack it 3. Launch the attack on as narrow a front as possible Principles of Flanking Warfare 1. A good flanking move is made into an uncontrolled area of the opposition 2. Tactical surprise should be an important element of the strategy 3. The pursuit is as crucial as the attack itself Principles of Guerrilla Warfare 1. Find a small segment for intermittent attack; avoid confrontation 2. However successful you may be, never act like the leader 3. Be prepared to quit/exit at very short notice Offensive and defensive strategies signify different competitive moves and are of almost universal application in strategic business management today.
15. According to classical economic theory, markets begin as _________, move towards ______, then to monopolistic competition and ultimately towards pure or perfect competition. 16. In a competitive environment, businesses can be classified into four different categories: specialized businesses, volume businesses, fragmented businesses and _______businesses.
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17. The Economic Model, Life Model and War Model are models of (a) Competition (b) Production (c) Marketing (d) Business strategy 18. Music records (HMV and others) black and white TV are examples of (a) specialized businesses (b) stalemated business (c) volume businesses (d) fragmented businesses
11.9 Porters Competitive Threat Model

A vital task of a strategist is to anticipate and/or recognize the nature of competition and potential threat from competitors and to develop appropriate response strategies. The most difficult task in this is to properly assess the magnitude of existing competition and correctly foresee the threat from new and emerging competitors. Porter (1980) in his pioneering work on competitive strategy had identified five major types of competitive threats (Figure 11.5), which are valid even today. These are:
Figure 11.5 Porters Five Forces Model Source: M E Porter, Competitive Strategy: Techniques for Analysing Industries and Competitors (New York: The Free Press, 1980). Sikkim Manipal University Page No. 302
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1. Industry (existing) competitors 2. Threat of substitutes 3. Bargaining power of buyers 4. Bargaining power of suppliers 5. Threat of new entrants Industry competitors: Various degrees or intensities of competitive rivalry exist in the market for a product. This is the battle for market share and is the most immediate concern of a company, particularly if it is a market leader or challenger. Ongoing battles between Coca-Cola and Pepsi, Surf and Ariel, Colgate and Pepsodent are good examples. Competitive intensity or rivalry depends, to a large extent, on the stage of the product life cycle. Competition is practically non-existent at the introduction stage, then starts growing steadily and becomes significant till the product enters the decline stage. Threat of substitutes: Substitute products reduce demand for a particular product or a category of products because some customers switch over to the alternatives. Substitution depends on whether an alternative product offers higher perceived value to the customers. Substitution may take three different forms: product-for-product substitution, substitution of need and generic substitution, Product-for-product substitution or substitution for the same use are same; for example, e-mail substituting for postal service or mobile phones substituting for landlines. Substitution of need means that a new product or service makes an existing product or service redundant. For example, IT has provided e-Commerce as a tool which has generally made secretarial services or printing redundant to a large extent. Generic substitution takes place when different products or services compete for a share in the same family income or household income: for example, air conditioner manufacturers competing with colour televisions or music systems or home theatres for snatching a share in fixed household income. Bargaining power of buyers: Buyers are generally in a better bargaining position. But, they can become stronger bargainers or create competition among suppliers under certain specific conditions. Some of these conditions are: i. the buyer purchases a very significant proportion of total output of the supplier can happen typically in industrial products; ii. the industry consists of a large number of small operators so that buyers can easily create competition among them; iii. cost of switching a supplier is low, i.e., substitutes are available or there is no product differentiation, or, for industrial or service products, there is no long-term contract; iv. backward integration into suppliers producta truck or car manufacturer beginning to make components or accessories like Tata
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Motors or an air conditioner manufacturer also making compressors like Carrier Aircon or a colour TV manufacturer also making picture tubes like Sony. Bargaining power of suppliers: Suppliers, or sellers, generally in a weak bargaining position, can be strong bargainers under certain conditions. Such market conditions are : i. no close substitutes available for the product offered by the supplier ; ii. the product(s) sold by the supplier(s) is an important or critical input in the buyers product; for example, ICs and chips in electronic products which can be bought only from few or selected suppliers; iii. high switching cost of changing a suppliermay be because the supplier manufactures a special product or the product is clearly differentiated; iv. forward integration into buyers product; for example, a carbon black producer entering into tyre manufacturing and competing with tyre manufacturers or TVS (earlier Lucas-TVS), traditionally a component or accessories maker, enters into production of motor cycles (TVS-Suzuki). Threat of new entrants: Many times, new entrants pose a major threat to the existing market players. Examples of entry of Toyota and Honda in the US car market (and also in the global market), Maruti Suzukis entry into the Indian car market, Vimal fabrics in the Indian textile market and Titan in the Indian watch market are well known. In fact, most of the established products and brands in consumer and industrial markets today were new entrants at some point of time. Forecasting the emergence of new entrants is very important for existing competitors and it is also one of the most difficult jobs. But, companies which fail to foresee the new entrants or ignore them may even face disastrous results. We have the examples of Padmini (earlier Fiat) cars, HMT watches, Weston TV, etc. Activity 2 Choose any FMCG or consumer durable product or brand.and analyse the competition for this product in terms of Porters five forces model.
19. Ongoing battles between Coca-Cola and Pepsi is a good example of _____ competitors. 20. Air conditioner manufacturers competing with colour televisions or music systems or home theatres for snatching a share in fixed household income is an example of ________ substitution.
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11.10 Competitive Advantage Analysis

Competitive advantage, also called strategic advantage, is essentially a position of superiority of an organization in relation to its competitors. A more formal definition of competitive advantage is:
Competitive advantage exists when there is a match between the distinctive competences of a firm and the factors critical for success within its industry that permits the firms to outperform competitors.10
The definition shows that superiority of a company over its competitors exists because the company has developed some unique competencecore competence or distinctive competencewhich matches the environmental factors or success factors in the industry in a better way than the capabilities of competitors. South (1981) has given a definition of competitive advantage which also gives a good perspective:
The process of strategic management is coming to be defined, in fact, as the management of competitive advantage, that is, a process of identifying, developing and taking advantage of enclaves in which a tangible and preservable business advantage can be achieved.11
11.10.1 Developing Competitive Advantage

Competitive advantage can be secured through two primary routes: product manufacturing and marketing route. The product manufacturing route reflects core competences, special capabilities, superior product design, etc. The marketing route reflects marketing mix application, positioning, offering a bundle of benefits or value to the customer, etc. The product-making route and the marketing route are obviously not exclusive to each other; they are, in fact, complementary to or supporting or reinforcing each other (Figure 11.6).
Figure 11.6 Competitive Advantage: Product and Marketing
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A corporate strategy can consist of various individual strategies like product strategy, pricing strategy, promotion strategy, distribution strategy, competition strategy, etc. Many forms of competition exist. But these strategies or the way a company competes is not the only key to, or the complete course for success. There are at least three other strategic factors which are essential for creation of a competitive advantage which can be sustained over time. These three factors are: how to compete (basics), i.e., business assets and skills, where to compete, i.e., productmarket selection, and whom to compete against, i.e., competitor position (Figure 11.8).
Figure 11.7 Factors Contributing to Competitive Advantage (CA)
For securing competitive advantage, corporate strategy should be based on appropriate assets, skills and capabilities. Important business assets are customer base, quality reputation, good management or company image, proper engineering or skilled staff, etc. For example, a product strategy for an industrial good without proper design, manufacturing and quality control capabilities will not deliver the results or any sustainability to the product or quality. Special assets and skills of a company can also be termed as core competence or distinctive competence of the company. According to Hamel and Prahalad (1990), advantages of companies and businesses are based on core competence of these companies, and therefore, developing and managing core competence are the keys to strategic success. Core competences, however, are not the only sources of competitive advantage. We shall see this later. The next important factor is the choice of the target product-market. A well-planned strategy duly supported by assets and skills may not succeed because it does not work in a particular market. Procter and Gambles Pringle potato chips had many assets like consistent quality, long shelf life and national distribution. But, these assets adversely affected the taste perception which was considered to be the most important factor in the market.
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The third important factor for competitive advantage is competitor position. The objective or goal here is to employ a strategy to thwart competitors who may lack strength in relevant assets and skills or is weak in some other strategic applications. For example, flight safety is important to airline passengers: so, if an airline is perceived to be strong on safety, then a competitive advantage can exist in terms of provision of flight safety or better flight security.
21. A position of superiority of an organization in relation to its competitors is called __________. 22. Various individual strategies like product strategy, pricing strategy, promotion strategy, distribution strategy, competition strategy make up the ________. strategy 23. According to Hamel and Prahalad (1990), advantages of companies and businesses are based on core competence of these companies. (True/False) 24. While securing competitive advantage, the product-making route and the marketing route are exclusive to each other. (True/ False)
11.11 Case Study

Coca-Cola and Pepsi: Is Coke falling behind in competitive rivalry? Coca-Cola and Pepsi are intense rivals in the global beverages market. In some countries, Coca-Cola is the market leader with Pepsi the challenger (No. 2); in some other markets, it is the opposite. But, competition continues with fluctuating fortunes. For quite sometime, Coca-Cola was the best-known brand in the world. But, since 1998, the company has undergone a number of unsettling developments which affected its performance and brand image. These included management mistakes; and also change in the top management. After unsuccessful, and also controversial, tenures of a couple of CEOs, Neville Isdell was called out of retirement to become Cokes CEO in 2004. During 200005, 13 highest-level executives left their jobs indicating chaos at the top of the comapny.* Coca-Cola was going flat**. In the first quarter of 2005, Coke reported a decline of 11 per cent in profits because of continuing poor sales in the US
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and Europe. In contrast, Pepsico registered a 13 per cent increase in profit. Pepsico attributed the increase to aggressive investments in North American beverages, international business operations and its plan to increase these investments in future. This may mean further trouble for Coca-Cola. Both companies are heavily dependent on their beverages businesses. The increase in Pepsicos business in North American and international markets has, at least partly, been due to Cokes declining performance, image and losses.***
Neville Isdell is fully seized with the challenges that his company is facing. He, however, claims that the system isnt broken; but, some analysts may not agree with him. One analyst pointed out that Coca-Cola has not produced a successful new soda since 1982. Consultant Tim Pirko has suggested that the company should invest heavily in developing new brands. He feels that the company needs to take some new risks, if necessary, to ensure that the consumers again become excited about Coke products. **** The company is also aware of it. Coca-Cola has been investing heavily to rejuvenate the companys stronger brands, and also in new products/drinks. During 2005, the company invested in the growing non-calorie soda market with Coca-Cola Zero; it acquired a stake from Danone in bottled water joint venture; it bought a majority stake in a milk drink company; it started distributing the Rockstar energy drink. In response to all this, Pepsi gave a big push to its new products through Pepsi One, Pepsi Lime and Propel fitness water. In this scenario, will Coca-Cola be able to recover lost grounds and fully rehabilitate itself?
* The Coca-Cola company announces changes to senior management and operating structure,www.2.coca-cola.com, March 2005. ** D Faust, Gone Flat, Business Week, December 20, 2004. *** B Morris, Coca-Cola: The Real Story, Fortune, May 17, 2004. **** B Morris (2004).
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11.12 Summary
Let us recapitulate the important concepts discussed in this unit: Competition is one of the most important components of business environment. Industries can be of various typesalmost each major product group constitutes an industry. Industries can also be classified in terms of size of the constituent units or companies, state or pace of development of the industry, spread of the market, etc. Various industries can be classified into five categories fragmented industry, emerging industry, mature industry, declining industry and global industry. Competition can be understood better by analysing competitor actions. More important factors which govern competitive action are objectives or goals, size and growth, organizational culture, strengths and weaknesses, cost structure, profitability, image and positioning, and current and past strategies. Various models of competition are mentioned in strategic marketing literature. Competition takes various forms and can be of different intensities. Different models of competition try to analyse this. Three important models of competition are: the economic model, the life model and the war model. Porters competitive threat model (Five Forces Model) analyses five major types of competitive threats a company can face in the marketplace. These are: industry (existing) competitors, threat of substitutes, bargaining power of buyers (backward integration), bargaining power of suppliers (forward integration) and threat of new entrants.
11.13 Glossary
Competitive advantage: A position of superiority of an organization in relation to its competitors Industry: A group of firms producing products that are close substitutes for each other Monopoly: A condition in which there is single seller with no close substitute product Oligopoly: A condition in which there are few sellers
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1. Describe briefly the various types of industries classified by Porter. 2. What is a fragmented industry? Analyse the main features of competitive strategy in a fragmented industry. 3. Distinguish the major characteristics of emerging industries and mature industries. Also discuss the contrasts of competitive strategies in these two types of industries. 4. What is a global industry? Explain with examples, international strategy, multi-domestic strategy, global strategy and transnational strategy. 5. Distinguish and analyse the economic model, the life model and the war model of competition. Are there any similarities among the three models? 6. Explain Porters competitive threat model (Five Forces Model). Also explain forward and backward integration.

1. Industry 2. Business 3. (c) fragmented industry 4. (d) mature industry 5. Emerging 6. Mature 7. True 8. False 9. understanding and evaluating competitors 10. competitor analysis 11. customer-based 12. strategic
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13. True 14. True 15. Monopolies, oligopoly 16. Stalemated 17. (a) Competition 18. (b) stalemated business 19. Industry 20. Generic 21. Competitive advantage 22. Corporate 23. True 24. False

1. Porter broadly classified various industries into five categories. Refer to Section 11.4 for further details. 2. Porter has suggested a framework or steps for formulating competitive strategies in fragmented industries. Refer to Section 11.5.1 for further details. 3. Formulation of strategy in emerging industries is very difficult task due to structural characteristics of uncertainty and associated risk. In contrast, mature industries pose almost the opposite problem, i.e., of competitive overcrowding. Refer to Section 11.5.2 and 11.5.3 for further details. 4. In global industry, the strategic position of companies in different countries or national markets are governed by their overall global positions. Refer to Section 11.5.5 for further details. 5. There are three important models of competition Economic Model, Life Model and the War Model. Refer to Section 11.8 for further details. 6. Porter identified five major types of competitive threats. Refer to Section 11.9 for further details.
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11.16 References
1. Aaker, D A, 1995. Strategic Market Management. 4th ed. New York: John Wiley & Sons. 2. Day, G S. 1984. Strategic Market Planning: The Pursuit of Competitive Advantage. St. Paul, Minnesota: West Publishing Co. 3. Day, G S. 1990. Market Driven Strategy. New York: The Free Press. 4. Porter, M E. 1990. Competitive Strategy: Techniques for Analysing Industries and Competitors. New York: The Free Press. 5. Porter, M E. 1990. The Competitive Advantage of Nations. New York: The Free Press. 6. Thompson Jr, A A, A J Strickland III, and J E Gamble. 2005. Crafting and Executing Strategy: The Quest for Competitive Advantage. New Delhi: Tata McGraw Hill Publishing Co. Endnotes
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M E Porter, Competitive Strategy: Techniques for Analysing Industries and Competitors (New York: The Free Press 1980). 5. M E Porter, Competitive Strategy (1980), 5 M E Porter, Competitive Strategy (1980), 255. M E Porter, Competitive Strategy (1980), 275. M E Porter, Competitive Strategy (1980), 213. M E Porter, Competitive Strategy (1980), 22930 M E Porter, Competitive Strategy (1980), 268 A Aaker, Strategic Market Management, 4th ed. (New York: John Wiley & Sons, 1995), 65. M J Xavier, Strategic Marketing: A Guide for Developing Sustainable Competitive Advantage (New Delhi: Response Books, 1999), 21314. P D Bennett, ed., Dictionary of Marketing Terms, (Chicago: American Marketing Association, 1988), 35. S E South, Competitive Advantage: The Art of Strategic Thinking, The Journal of Business Strategy, 4 (Spring 1981).
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Unit 12
Structure
Selection and Activation of Strategy
12.1 Introduction 12.2 Caselet Objectives 12.3 Process of Strategic Choice 12.4 Strategy Selection Factors or Criteria 12.5 Selection of Final Strategy 12.6 The Strategic Plan 12.7 Preparation of Strategic Budget 12.8 Allocating and Managing Resources 12.9 Case Study 12.10 Summary 12.11 Glossary 12.12 Terminal Questions 12.13 Answers 12.14 References
12.1 Introduction
In the last unit, we moved closer to selection of strategy by an organization. Various industry types and structures were analysed and important aspects of competitive strategies in these industries were discussed. Most companies belong to one of these types of industries. Competition analysis was undertaken in detail, which enables a company to understand clearly competitor signals, moves and actions which can pose competitive threats to companies. Finally, various factors which determine or affect competitive advantage or disadvantage of companies were analysed. All these give vital guidelines to companies for selection of an appropriate strategy, or a combination of strategies, under given conditions. The present unit is more like an extension of the previous one. We will discuss some additional factors or criteria here. These factors or criteria should guide a company in selecting a final strategy from among the various alternative strategies discussed in Unit 7 (stability strategies), Unit 8 (strategies for managing change) and Unit 9 (expansion strategies) or a combination of some of these strategies depending on the particular company situation and the competitive environment. These factors include the process of strategic choice, evaluation of strategic alternatives, criteria for selection of strategy, benchmarking and best practices and critical success factors (CSFs). We shall also discuss in this
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chapter various factors or issues involved in activating strategies and organizing for success.
12.2 Caselet
An organization can determine whether its current capabilities represent strengths or weaknesses in industry competition by analysing industry structure, industry competitors, cost structure, customer needs, availability of substitutes, barriers to entry, etc.,.A good example of this is the General Cinema Corporation, the largest US movie theatre operator for many years. The company reassessed that its internal capabilities in site analysis, creative financing, marketing and management of geographically dispersed operations were key strengths compared to major success factors in the soft drink bottling industry. This assessment proved correct and timely for the company. Within 10 years of entering the soft drinks bottling industry, General Cinema became the largest franchised bottler of soft drinks in the US. It was handling jobs for Pepsi, 7UP, Dr. Pepper and Sunkist.1 Objectives After studying this unit, you should be able to: Analyse the process of strategy choice or selection Discuss strategy selection factors or criteria Highlight different benchmarking practices Analyse the process of activation of strategies Discuss the process of preparation of strategic budget Focus on allocating and managing resources
12.3 Process of Strategic Choice

Choice of a final strategy or strategies from the alternative strategies available is the most critical and, also the most difficult job in the strategic planning process. Glueck and Jauch (1984) have defined strategic choice in terms of selecting the best among the alternatives.
Strategic choice is the decision which selects from among the alternative grand strategies which will best meet the enterprises objectives. The choice involves consideration of selection factors, evaluation of the alternatives against these criteria, and, the actual choice.2 Sikkim Manipal University Page No. 314
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Many companies go through the process of strategic choice or decision making, but not in a very organized or systematic way. They do not guard against the possible pitfalls, and, as a result, imperfection or mistakes may creep in. Imperfection may creep in because of four major reasons: (a) Not analysing carefully the impact of the strategic choice or decision on organizational objective. (b) Tendency to ignore problems in the false hope that those would disappear or resolve themselves. (c) Incomplete evaluation of strategy alternatives. (d) Avoidance of risk which may usually be associated with strategic planning and decision-making process. In a more positive sense, strategy choice or selection should consist of four interrelated steps. These steps actually follow from the definition given above: 1. Focussing on strategy alternatives 2. Evaluating strategy alternatives 3. Considering/using the selection factors or criteria 4. Selecting the final strategy or strategies Selection of factors or criteria should be generally objective. But, many times, subjective factors also play dominant roles. Including these factors, the process of strategic choice may be schematically shown as given in Figure 12.1.
Figure 12.1 Process of Strategic Choice
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12.3.1 Focusing on Strategy Alternatives

As discussed in the previous units, strategy alternatives available to a company are many. Most companies are faced with a dilemma: should they consider all possible alternative strategies or should they limit themselves to selected alternatives on the basis of certain given guidelines. Consideration of all possible alternatives makes the process very broad based, and, it may be theoretically recommended. But, the practical problems may be many. There is also the question of time and resources. On the other hand, if only few alternatives are considered, there is the possibility or risk of omission of some important strategies. This clearly indicates the need for a middle course in terms of the number of alternatives. A reasonable number of alternatives should be chosen initially on the basis of certain company considerations. First, every organization has a corporate mission or philosophy. This would dictate elimination of some of the strategy choices. For example, Reliance Industries, as a corporate policy, does not consider any project with outlay of less than `1000 crore. Similarly, Tata Group has decided on a policy that group companies will operate only in those industries in which they can occupy one of the first three positions. Second, investment requirements may eliminate some choices, i.e., strategy alternatives with very high investment requirements may not be considered. Third, gap analysis (discussed in Unit 6) also helps in the initial selection of some probable alternatives and exclusion of others. The gap analysis essentially shows or measures the gap between present performance and desired performance based on organizational goals or priorities. Only those strategies which are relevant for bridging the performance gap should be considered to begin with. The final selection of strategy would be made on the basis of other factors or considerations.
1. Strategic choice is the decision which selects from among the alternative grand strategies which will best meet the enterprises objectives. (True/ False) 2. Companies must consider all possible alternative strategies before making a strategic choice. (True/ False)
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12.4 Strategy Selection Factors or Criteria

Contingency strategies are exceptional strategies for exceptional situations or circumstances. Under normal circumstances, the choice of strategy has to proceed in a logical sequence or step-wise process. After evaluating various strategic alternatives in terms of company and industry/market characteristics, the next step is to use appropriate selection factors or criteria. For further evaluation of the alternatives or narrowing down the choices to more specific strategies, we shall consider two selection factors or criteria: 1. SPACE technique or approach 2. Benchmarking and best practices
12.4.1 Space Framework or Technique

Strategic Position and Action Evaluation (SPACE) matrix or framework can be considered an improvement over the portfolio analysis (various models discussed before) and more comprehensive as a technique for evaluating or selecting strategies. Compared to the two dimensions of the portfolio matrices/models, SPACE framework consists of four dimensions two internal and two external factors.
Internal Financial strength Competitive advantage External Industry strength Environmental stability
Each of these factors can be rated on a 5-point scale (05) to determine its relative effectiveness. Based on the relative effectiveness of these factors and their different combinations, different strategies can be selected (See Figure 12.2). Four quadrants in the figure represent four different postures: conservative, aggressive, defensive and competitive. The ideal quadrant is 2 (aggressive) where both the internal factors are strong and both industry strength and environmental stability are high. Companies/businesses in this quadrant should follow expansion strategies like diversification and integration. Actual or final form of the strategy may be decided based on additional factors or considerations (discussed later). Companies/businesses in quadrant 4 (competitive) possess high financial strength but, low competitive advantage; environmental stability is high but industry strength is low. Such companies/businesses should adopt merger strategy through amalgamation or consolidation to improve synergy.
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They may also undertake corporate restructuring or turnaround strategies to improve competitive advantage and become more competitive. Similarly, businesses in quadrant 1 (conservative) should predominantly adopt stability strategies. Companies/businesses in quadrant 3 are in the worst situation with both internal and external factors very weak. They should adopt strategies for divestment and liquidation.
Figure 12.2 SPACE Matrix/Framework Source: Adapted from H Rowe et al. Strategic Management and Business Policy: Methodological Approach (Reading, Massachusetts: Addison-Wesley Publishing Co., 1983), 155.
SPACE matrix/framework considers several individual factors for determining financial strength, competitive advantage, industry strength and environmental stability. These are shown in Table 12.1.
Table 12.1 SPACE Factors: Internal and External Internal Factor Financial Strength Cash flow Working capital Liquidity Return on investment Sikkim Manipal University External Factor Industry Strength Growth potential Profit potential Financial stability Technological know-how Page No. 318
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Leverage Ease of exit Risk in the business
Resource utilization Capital intensity Ease of market entry Productivity, capacity utilization
Competitive Advantage Technological know-how Product quality Product life cycle Market share Customer loyalty Competitors strengths/weaknesses Control over suppliers and distributors
Environmental Stability Technological change Competitive pressure Demand variability Rate of inflation Price change of competing products Price elasticity of demand Entry barriers
Note: Each individual factor is rated to arrive at an average or overall score between 0 and 5 for two internal factors and two external factors. Source: H Rowe et al., Strategic Management and Business Policy: Methodological Approach (Massachusetts: Addisson-Wesley Publishing Co., 1982), 15556.
12.4.2 Benchmarking and Best Practices

An organizations strategic capability or strategic choice is to be always understood in relative terms because it involves comparison with competitors or industry norms. This implies that organizations need to understand and analyse performance standards, i.e., what constitutes good and bad performance. Since performance is intrinsically related to strategy formulation and implementation, the relativity factor should be kept in mind during the process of selection of the strategy itself. A strategy, along with resource base, should be so selected that it can deliver results of high standards or standards which can compare with the best in the industry. This necessitates an analysis of benchmarking and best practices. Benchmarking is comparison with, and adherence to, prescribed norms, standards or practices. Benchmarking can also be defined in a more functional way:
Benchmarking is a process of identifying, understanding, and adopting outstanding practices from the same organization or from other businesses to help improve performance.3 Sikkim Manipal University Page No. 319
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Based on the above definitions, five important features or characteristics can be identified: (a) Benchmarking enables an organization to analyse where it stands in comparison to other organizations, where it excels or lags behind. So, benchmarking is a useful diagnostic tool. (b) Benchmarking involves identification of two things: first, what is to be compared, i.e., product, process, performance, etc.; and, second, whom to compare with, i.e., competitors, organizations in the same industry, organizations outside the industry, etc. (c) Benchmarking is applicable to all facets of business products, processes, services, methods, etc. It goes beyond traditional competitor analysis and focusses on understanding what are the best practices and, how the best practices can be emulated, if not improved upon further. (d) Benchmarking is not confined to comparison only with direct product competitors but, all those businesses or organizations which are recognized as industry leaders or the best. (e) Benchmarking is a continuous process and not just one-off initiative. Industry standards and practices constantly change, and an effective benchmarking initiative has to regularly monitor these changes and accordingly adapt itself. Types of Benchmarking Benchmarking can be broadly divided into two major types or categories: the first category is primarily based on what is to be benchmarked, and the other type is dominantly based on whom to benchmark against.
What is to be benchmarked (Dominant factor) Product benchmarking Process benchmarking Functional benchmarking Performance benchmarking Strategic benchmarking Whom to benchmark against (Dominant factor) Internal benchmarking Competitive benchmarking Generic benchmarking
Product benchmarking is a comparison of product(s) with competitors or industry leader to ascertain what customers value most. Process benchmarking
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means emulating best processes, i.e., corporate practices and methods. Functional benchmarking involves comparison of major functions production, marketing, logistics, distribution, etc., with competitors or non-competitors. Performance benchmarking is overall comparison of organizational performance including processes, functions, and results with competitors or industry participants. Strategic benchmarking is the adoption of strategybuilding system, planning process, strategic decision making, etc. Internal benchmarking involves comparison among units and developments within the same organization to improve unit level or departmental performance. Competitive benchmarking is a direct comparison of an organizationss competitive strengths and weaknesses with the best of competitors. Generic benchmarking means comparing organizational methods and practices with the best practices anywhere in any type of organization within or outside the industry. More common forms of benchmarking, however, are based on comparison with competitors and success factors within the same industry. Organizations which are more progressive and strive for excellence adopt generic benchmarking. In practice, benchmarking often involves combining different types (or more than one type) to improve organizational performance and results. Benchmarking: Comparison with Competitors A major, and very common, benchmarking practice is to develop an organizations resources and competences in comparison with existing and potential competitors. Different companies in the same industry have different financial resources, technical know-how, managerial talent, marketing skills, operating facilities, etc. These resources and competences can become relative strengths or weaknesses depending on the strategy a company chooses. In selecting a strategy, the management should compare the organizationss key capabilities with those of competitors for securing competitive advantage. Sears and GE are major competitors in home appliance industry in the US. Sears principal strength is its retail networks. But, for GE, the distribution systemthrough independent franchised dealershas been a relative weakness. On the other hand, GEs resource base, particularly financial resources, to support its modern production system, has enabled the company to maintain both cost and technological advantage over its competitors, particularly Sears. This major strength of GE is a relative weakness of Sears. Maintenance and repair services are important in the appliance business. Sears always had strength in this area because it maintains fully staffed service components and distributes the cost of components over various departments in different retail locations. GE, in contrast, has to depend on regional service
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centres and franchised local dealers. The comparison between Sears and GE shows that benchmarking efforts of the two companies should focus on distribution network, technological capabilities, operating costs and service facilities. Management in both companies, in fact, developed successful strategies based on relative benchmarking. By benchmarking each other, they have developed ways to build on relative strengths, and at the same time, avoiding dependence on capabilities in which the other company excels.4 Comparison with key competitorsessentially process benchmarking or competitive benchmarkingcan be very useful in ascertaining whether resources and capabilities of an organization are competitive strengths or weaknesses. Identification of differences (strengths and weaknesses) with competitors provide important inputs for choice and development of strategy. Also, through competitive benchmarking, a company can concentrate on those strategies which it can effectively use to its advantage. Box 11.1 illustrates how UPS used competitor comparison with FedEx to assess its strengths and weaknesses in the package transportation and delivery industry for selection of its strategy. Benchmarking against Success Factors in the Industry Industry analysis (presented in the previous unit) enables a company to identify factors which account for strategic success in a particular industry. Key determinants of success in an industry can be used to assess an organizations competitive strengths and weaknesses. By analysing industry structure, industry competitors, cost structure, customer needs, availability of substitutes, barriers to entry, etc., an organization can determine whether its current capabilities represent strengths or weaknesses in industry competition. Porters 5-forces model (discussed in the previous unit) of competitive levels/threats in an industry provide a useful framework for such analysis. A good example of this is General Cinema Corporation (see Caselet). Many other companies have successfully benchmarked industry success factors for development of competitive strategy. Avery Dennison is another example. Avery Dennison used industry evolution benchmarking against 3M to create a new successful strategy. Best-in-class Benchmarking Comparison with competitors or benchmarking against industry success factors has a major shortcoming. They only help an organization to succeed or excel within the industry. But, best methods or practices need not be confined to only within ones own industry. These can easily exist in some other business or industry which may be really exemplary. As mentioned earlier, organizations
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which aspire to be comparable to the best among all businesses or strive for excellence should adopt generic or best-in-class benchmarking. Best-in-class benchmarking is a comparison of an organizations methods and practices or performance against the best in any business or industry and adoption of the same. Best-in-class benchmarking urges organizations to search for best practices wherever those may be found. In best-in-class benchmarking, the potential for change is enhanced, and the forces and direction of change are facilitated by locating practices or forming partnerships across industries or sectors. For example, British Airways improved aircraft maintenance, refuelling and turnaround time by studying the processes used in Formula One Grand Prix motor racing pit stops.5 A police force wanting to improve the way it responds to emergency telephone calls studied call centre operations in the banking and IT sectors for benchmarking the response pattern.6 Best-in-class benchmarking becomes particularly relevant for service organizations. A characteristic feature of service organizations is that improved performance in one sectorparticularly in factors like speed and reliability raises the general level of expectations among customers about the same (speed and reliability) from all companies in all sectors. So, in the service sector, bestin-class benchmarking urges organizations to stretch their core competence or develop newer capabilities to exploit opportunities in different fields or markets. Benchmarking Practices in Indian Corporates With the increase in competitive intensities and exposure to globalization, Indian companies, like many others in different parts of the world, are constantly seeking to improve their performance. Benchmarking, therefore, is becoming a logical strategic initiative. Different companies are trying to benchmark themselves in different ways to suit their performance requirements and benchmarking objectives. Benchmarking practices followed by majority of the Indian companies can be broadly divided into three types: product or quality benchmarking, customer service benchmarking (an extension of competitive benchmarking) and comprehensive or combination benchmarking. Quality benchmarking has been adopted by companies like BHEL, NTPC, IOC, Tata Motors, JCT Electronics and Johnson & Nicholson. Companies which have used benchmarking to improve customer service are HDFC, Infosys, ModiXerox, Titan and Airtel, among others. These companies focus on those practices which help them to serve their customers better. Companies like Reliance Industries, Ranbaxy, Maruti Suzuki, Hero Honda and Honda Motors
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have resorted to comprehensive or combination benchmarking, i.e., emulating good or best practices in different areas to improve overall performance. These companies have not confined themselves to benchmarking only against Indian organizations. Many of them have gone for global benchmarking. Some, like Maruti Suzuki have benchmarked their technology suppliers; others like Hero Honda and ModiXerox have benchmarked their joint venture partners; and some others like Honda Motors (India) have benchmarked their overseas parents. Some of these companies have adopted benchmarking practices as they exist. Some others have modified or improved upon the existing practices for better results or competitive advantage; Reliance and Infosys are among such companies. Reliance has this to say about their global benchmarking: Global benchmarking has always been a mantra for all of us here at Reliance. We have now geared ourselves up to raise our levels of productivity and efficiency for capital, assets, people and the entire organization well beyond comparable global benchmarks.
12.4.3 Best Practices at Nike7

Nike can be studied as a good model of how companies grow to excellence in corporate practices through organizational evolution. Nike evolved from a poster child for irresponsibility to a leader in progressive practices. We analyse here the content of this evolution or the path to corporate responsibility. Nikes business model, like that of many othersto market high-end consumer goods produced in cost-efficient value chainswas not enough. During the past decade, the company has been grappling with complex challenges of responsible business practices trying to strike a balance between purely organizational and societal dimensions or objectives. Zadek (2004) explains this in terms of five stages of organizational learning or growth. The five stages of evolution are: Stage 1 : Its not our job to fix that; this is the defensive stage characterized by outright rejection of allegation or denial of links between the companys practices and the alleged negative outcome. Stage 2 : We will do just as much as we have to, this is the compliance stagea stage of recognition that a corporate policy must be evolved and pursued for improving practices. Compliance may be understood as a cost of doing business.
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Stage 3 : Its the business...; this is the managerial stagethe company realizes that it is facing a long-term problem which cannot be passed off with attempts at simple compliance or a public relations strategy. The company needs more fundamental changes in strategy and practices. Stage 4 : It gives us a competitive edge; this is the strategic stagethe company learns how realigning its strategy to conduct responsible business practices can give it an edge in competition and contribute to the organizations long-term success. Stage 5 : We need to make sure everybody does it: this is the civil or implemention stagethe company promotes collective action to address societys concerns. Generally, it is linked directly to organizational strategy.8 Nikes transition from corporate irresponsibility to excellence in progressive practices has been made possible through a series of measures and sequential developments. These have been well summarized by Zadek: Nikes business is based exclusively on global outsourcing. Labour activists in the early 1990s were exerting tremendous pressure on premium brand companies to incorporate proper codes of conduct in their global supply chains (appalling working conditions in some of the suppliers factories). These groups targeted Nike because of its high profile brand and not because its business practices were worse than its competitors. Labour activists actions were already affecting Nikes core and highly profitable youth markets in north America and Europe. To prevent further damage, Nike went professional in 1996 by creating its first department specifically responsible for managing its supply chain partners compliance with labour standards. And, in 1998, Nike established a Corporate Responsibility department. The CEO assembled a team of senior managers and consultants/ experts to be led by Nikes VP, Corporate Responsibility. Nike realized that it had to manage corporate responsibility as an integral or inseparable part of its business. It was also not difficult to re-engineer procurement incentives. The review team proposed that Nike should grade all factories according to their labour conditions and, then penalize or reward procurement teams based on the grade of the supplier they used. But, commercially and culturally, it was not so simple.
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Nikes efforts to secure satisfactory labour conditions were serving its immediate financial objective which was the sole focus of the majority of the companys investors. Nikes challenge was to adjust its business model to reflect responsible practicesbuilding tomorrows business success without compromising todays financial bottom line. And, to do this, it had to offset any first-mover disadvantage it had by getting both its competitors and its suppliers involved in the process. Nike is a business and is accountable to its shareholders. But, the company has taken significant steps in evolving a strategy and practice which transforms itself from being a target of civil activism to a key participant in civil society initiatives and processes. Nike has perfectly positioned itself to deal with the challenges of corporate responsibility. It rightly views the issue as integral to the realities of globalization and, a vital learning process pertinent to its core business strategy and organizational practices. Activity 1 Use the SPACE framework and analyse the strategy selection process of a company of your choice.
3. A comparison with, and adherence to, prescribed norms, standards or practices is called __________. 4. An organizations strategic capability or strategic choice is to be always understood in _______ terms because it involves comparison with competitors or industry norms. 5. A comparison of an organizations methods and practices or performance against the best in any business or industry and adoption of the same is called ________ benchmarking.
12.5 Selection of Final Strategy

The final selection of strategy by an organization may depend on judgement, bargaining or analysis.9 Evaluation of different strategy alternatives through quantitative techniques and models and application of some selection criteria
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eliminate many inappropriate alternatives. This greatly facilitates the process of strategic choice. But, the final choice of strategy still does not become easy or automatic because subjective factors (in addition to objective factors) play a very major role in any organization. Interplay of various organizational forces sometimes lead to predominance of subjective factors (judgement or bargaining) and, in some other cases, to dominance of objective or analytical factors (Figure 12.3).
Figure 12.3 Final Choice of Strategy: Interplay of Objective and Subjective Factors
Because final decision is taken by the management or the managers, strategic choice cannot be governed only by objective considerations. If strategies were selected only on the basis of objective criteria, a company would have considered the organizations mission and goals, internal competences and resources, environmental opportunities and threats analysis and evaluation of alternatives and the selection criteria discussed above. But, in actual practice, personal factors are inevitable in the choice processperceptions, biases and preferences. So, the final choice becomes the outcome of interplay of different and, sometimes, opposing forces. The resultant choice process narrows down like this:
With individual group, organizational and environmental pressures restricting strategic choice, a clear implication for the management is the necessity for strenuous efforts to maintain choice. If 360 can be conceived of as representing full choice, then previous strategic choice may have eliminated 200 degrees, environmental conditions another 80 degrees, and, management values 50 degrees leaving a potential choice range of 30 degrees or less.10
Mintzberg et al., have analysed 25 strategic decisions and arrived at certain conclusions about strategy choice by judgement, bargaining or analysis. According to them, choice by judgement is determined by decision makers power equations. Choice by bargaining also depends on similar factors, but, the choice process is more complex; the top management or the decision-making power in the organization is divided and the issue may be contentious. Choice
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of strategy by analysis is a more logical process. There is agreement among the top management on organizational goals or objectives. Choice by analysis is more commonly adopted by larger organizations with better data/information base and organizational size, and structure tends to support a more objective approach. But, even in this approach, analysis and evaluation of alternatives are influenced by managerial attitude towards risk, internal power equations, organizational culture, etc.11 Between formulation and implementation of strategy, there exists another major step. This is activation of strategies. Activation of strategy means institutionalizing the strategy and mobilizing, allocating and managing resources for execution of strategy. The starting point of activation of strategy is preparation of a strategic plan. We had mentioned about strategic planning and strategic plan in Unit 1. The actual use of a strategic plan becomes more contextual at this stage. Strategy choice or selection, preparation of a strategic plan, activation of strategy and implementation form interrelated steps or stages: Strategy selection Strategic plan Activation of strategy Implementation of strategy
6. Strategic choice cannot be governed only by _______ considerations. 7. Institutionalizing the strategy and mobilizing, allocating and managing resources for execution of strategy is known as _______ of strategy.
12.6 The Strategic Plan

Strategists sometimes differ on whether strategy comes first or plan comes before strategy. Logically speaking, organizations first decide on a broad strategy or the strategic direction. It may be a stability strategy (for pause or caution), growth or diversification strategy or a strategy for change (restructuring, turnaround, etc.). This broad strategy or strategic direction is decided by the
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CEO or the board of directors based on organizational policy or philosophy and the current company situation. Once the broad strategic move has been decided, a strategic plan is required to work out or formulate the actual form or elements of the strategy, the resource implications/allocations, environmental constraints, etc. For example, a companys strategic choice may be diversification. It may be related diversification or unrelated diversification; it may be external diversification like joint venture, takeover, or acquisition or merger. The strategic plan examines/evaluates each of these strategic options in terms of costs and benefits before the strategy in its final form is actually decided. So it can be said that the strategic plan precedes formulation of final strategy. A strategic plan is a comprehensive document and, is developed in clear sequential steps. It should contain the following (as shown in Figure 12.4).
Figure 12.4 Strategic Plan, Activation of Strategy, and Implementation
Implementation of strategy will be discussed in Units 13, 14 and 15. Steps 2 and 3 have already been dealt with in unit 5 and 6. We shall analyse here
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issues connected with activating or organizing strategy for competitive advantage or success. For activating or organizing strategy, three major factors are to be considered: 1. Preparation of strategic budget 2. Allocating and managing resources 3. Integrating resources and organizing for success
8. The strategic plan ________ formulation of final strategy. 9. Which of the factors are considered for activating or organizing strategy? (a) Preparation of strategic budget (b) Allocating and managing resources (c) Integrating resources and organizing for success (d) All the above
12.7 Preparation of Strategic Budget

Budget is the instrument for resource allocation. For strategic planning and executing strategies, an organization needs strategic budgeting. A strategic budget is different from the conventional accounting budget. In the accounting budget, emphasis is on various financial entries for expenditure of a company many of which are of an operational or routine nature; some may be of developmental nature. A strategic budget, in contrast, is prepared with particular reference to a strategic plan and its implementation. Certain assumptions are made; a number of steps and factors are involved; and strategic budget preparation is often an iterative process. A typical strategic budgeting process is illustrated in Figure 12.5. As shown in Figure 12.4 a number of steps or stages are involved in the strategic budgeting process. The starting point is the preparation of different position paperson environment, internal competence/resources and performance of past strategies. The CEO/top management may also issue some guidelines for preparation of position papers. These become inputs to the budgeting process. Based on these inputs and corporate policy or philosophy, planning objectives are set by the CEO/top management. In the next stage, strategic plan is prepared by the planning/strategy team. The next step is the
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preparation of the strategic budget subject to certain resource availability. The budget would be submitted to the CEO/top management for approval. They would also allocate resources. The budgeting process is now complete and the plan/strategy is ready for implementation. During implementation, there may be a need for budgetary review which may result in revision of the budget proposals.
Figure 12.5 Strategic Budgeting Process
In large multi-business organizations, strategic budgeting often becomes an interactive or iterative process between the corporate organization and the SBUs. The budgetary process is initiated at the corporate level with corporate goals and objectives. The SBU goals and objectives follow from, or have to be compatible with or complementary to, corporate or organizational objectives. But, the SBUs give their own planning and feedback inputs and the budgetary process starts. Both the corporate organization and the SBUs become equal partners or participants in the preparation of the final SBU budgets. The interactive budgetary process is shown in Figure 12.6.
Figure 12.6 Interactive Strategic Budgeting: Corporate and SBU Levels
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10. A strategic budget is the same as the conventional accounting budget. (True/False) 11. In large multi-business organizations, strategic budgeting often becomes an interactive or iterative process between the corporate organization and the SBUs. (True/False)
12.8 Allocating and Managing Resources

Allocation and management of resources are major factors in activation and implementation of strategy. In Figure 12.5, we have shown resource allocation as a decision of the CEO/top management. In practice, resource allocation proposals may originate from the planning/strategy team or the SBUs (as shown in Figure 12.6) based on the strategy and implementation programmes. Sometimes, the planning/strategy team may seek views of the functional/ operational managers which form important inputs in the resource allocation process. But, final approval or allocation will be always by the CEO/top management. In allocating and managing or organizing resources, three types of resources have to be considered: financial, human or managerial and technology or innovation. Some strategic management analysts feel that information resources should be considered as the fourth resource factor while organizing and managing organizational resources.12 So, issues relating to allocation and management of resources are not confined to financial resources only as is commonly perceived. We shall, however, start with management of the financial resources or strategy. All organizations face a basic decision problem as to how their businesses will be financed. An organization will have a particular financial requirement if it is planning fast growth of its business through diversification product/market development or acquisition. The funding requirement will be different if a company is trying to consolidate its business, i.e., pursuing a stability strategy. The funding requirement would also be different during different stages of development of an SBU. Ward (1993) has analysed funding strategy along with business risk and financial risk of an SBU. He has conducted the analysis by using the BCG growth share matrix (discussed in Unit 7). Wards analysis is presented in Figure 12.7.
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Figure 12.7 Funding Strategy Analysis: Use of BCG Framework Source: Adapted from K Ward Corporate Financial Strategy (Butterworth/Heinemann, 1993), Chapter 2.
The essential point emphasized in Figure 12.7 is the relationship between business risk, financial risk and funding policy or strategy of an organization. In other words, the analysis focusses on the need for matching financial risk and financial return (linked to business risk) to investors. The greater the risk to shareholders or lenders, the higher the return they expect. Debt (borrowing) has a higher financial risk than equity because of interest and also repayment obligations. If financing is through internal accruals (reserves/retained earnings) as may be in the case of cash cows (maturity phase), shareholders may not be so concerned. Businesses in maturity stage with high market share (cash cows) usually generate enough surplus which can contribute to retained earnings, which, in turn, can be reinvested. Financing can also be through a combination of equity and debt, which through surplus generation, augment retained earnings/ reserves. Debt servicing also becomes easy. If financing is through equity for growth as may be in the case of stars, the investors look for immediate returns/ profits. If it is equity in the form of venture capital which may be required for development of new business (question marks) with high business risk, the investors expect high returns. If a business is in decline, characteristically a dog, equity funding is difficult because investors may not like to risk their capital in a declining or sinking business. Financing through debt may be the only option. Terms of credit is an important factor here.
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All this makes mobilization, allocation and management of financial resources a complex job. Scarcity of investible resources is a common phenomenon and SBUs make competing demands whether for equity funds or debt funds. In practice, overstatement of resource requirements by SBUs is quite common. Also, all businesses of a company do not strictly fall in the BCG categories of stars, cash cows, question marks and dogs. For many FMCGs and consumer durables, the market may be in the maturity stage of PLC, but, all products/brands are not cash cows. There are many examples in soaps, detergents, refrigerators, etc. These businesses follow stability or incremental growth strategy. In such cases, the organization may have alternative financing options available, and, the management may have to carefully weigh the alternative costs of financing and commensurate returns. There is also a choice between short-term and long-term financing and the issue of debt servicing. An organization has to consider all these and related factors in organizing and managing financial resources. Next to finance, human resources are the most important factor in activating strategies. People can make a major difference between success and failure of a corporate strategy. Knowledge, skill and experience of people can significantly contribute to strategic success as poor human resource can hinder adoption or implementation of successful strategies. HR systems play a vital role in organizing and managing human resources. For various functional/ operational strategies to support a chosen organizational strategy, the right kind of people should be deployed in right positions or recruited to fill up the resource gap. For example, if a companys chosen strategy is diversification, and, if it involves innovative products and processes, requisite skills or expertise may not be available in the company. Here the HR department has an important role to play in hiring the right talent, providing or creating proper work environment and helping to increase managerial productivity. Talking about the role of HR, it is also necessary to distinguish between hard and soft approaches to human resource management. Hard and soft approaches in HR are like hard and soft Ss in organizations. Hard human resource approach is about how the structure, systems and procedures can be used to acquire, utilize, develop and retain people to secure strategic advantage for the organization. Organizational needs are the predominant factor here, not the people. In soft human resource management, dominant focus is on the people, individually and collectively culture, style, behaviour, etc., and how these help or hinder organizational strategies. Many organizations concentrate on the hard approach leaning too much on the structures and systems and
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overlooking or showing lack of concern for the soft factors. They tend to forget the fundamental fact of complementarity between the hard and soft approaches necessary for strategic success. In practice, HR approaches and strategies in many companies reflect adhocism because of internal and external pressures. But, this is a very shortsighted measure/solution and invariably affects activation and implementation of strategies. A more balanced approach is necessary. To ensure such an approach and to be effective, HR professionals also need to orient themselves. They should familiarize themselves with the organizations strategic process or a particular strategic initiative and human resource requirements in terms of competence and commitment. HR activities or human resource management can help in the pursuit of successful strategies in many ways. Some of the more important ones are mentioned below: HR audit to assess resource requirements and availability in terms of competence and also to analyse skills and capabilities of individual managers which can form useful inputs to the future planning and strategy building process. Fostering team-building attitude and rewarding team work approach. Individual incentives and rewards often undermine teamwork. But, most strategies require a team approach rather than individual approach. Performance assessment of individuals and teams should have a clear focus on strategic inputs rather than pure functional or operational inputs. Some have suggested a 360 degree appraisal system, i.e., appraisals from multiple perspectives or different parts or functional areas of the organization so that the full impact of an employees contribution to success or otherwise of a strategy can be more meaningfully assessed. Devising appropriate training and development programmes. Of late, there has been a shift in focus in terms of reduction of formal training programmes and increase in coaching and mentoring for selfdevelopment. These become important developmental inputs for individual managers if the organizations strategies are changing more regularly. Institutionalization of individual competence. Individual experts or highly competent people may leave the organization or retire. So, one of the objectives of HR policies should be to institutionalize such competence or expertise through proper succession planning.13
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Finance and people are two basic resources of an organization. These two are the prime drivers of operations and strategies. Technology or technological innovation renders credibility or completeness to these operations or strategies. So, as organizations have to match and manage financial and human resources, they also need to acquire, organize and manage technology to activate strategy, particularly if the strategy pertains to product innovation or new product development. Technology affects product quality, productivity and cost efficiency and can significantly contribute to strategic advantage of an organization. Coping with technological advances is necessary even if a company pursues a stability strategy, let alone a growth strategy. The relationship between corporate strategy, technology and innovation is illustrated in Figure 12.8.
Figure 12.8 Relationship between Strategy, Technology, and Innovation Source: Adapted from G Johnson, and K Scholes (2005), p. 514 (Exhibit 10.10).
12.8.1 Integrating Resources

Owning resourcesfinancial, managerial or technologicaland deploying them in isolated ways are not enough because these do not ensure strategic capability. Strategic capability, in the real sense, is concerned with how the resources are deployed, managed and controlled in a harmonious way to produce a synergistic effect. Financial planning is done primarily by the finance people; human resource deployment is by HR department; technology development/management is by R&D/production group. It is, therefore, essential to coordinate or link these
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resources and groups at the organizational level. This means integration of resources for competence building. The starting point in resource development is to obtain the threshold levels in individual resourcesfinance, human and technology. In a highly competitive environment, the threshold levels are shifting upwards. To maximize the contribution of resources, i.e., to create a unique strategic capability (core competence or distinctive competence), resources have to be combined in right proportion to create the required synergy. Enterprise resource planning (ERP) is a good method for integrating and optimizing resources. In fact, many companies are using ERP solutions to optimize resource allocation in an integrated way. To conclude, we can say that it is not enough to be competent in different resources. It is the ability of an organization to integrate these resources effectively which determines the success or failure of a particular strategy or a set of strategies. Activity 2 As discussed in the unit, every company prepares a strategic plan. Choose a company and prepare a strategic plan and analyse the same.
12. In allocating and managing or organizing resources, three types of resources have to be considered: financial, human or managerial and __________. 13. In ________ human resource management, dominant focus is on the people, individually and collectively culture, style, behaviour, etc., and how these help or hinder organizational strategies. 14. Many companies are using ______ solutions to optimize resource allocation in an integrated way.
12.9 Case Study

Crompton Greaves is a pioneer in the field of electric energy. It is Indias largest private sector enterprise in the business of electrical engineering operating for more than 50 years. Operations of the company are divided into four strategic business units (SBUs)
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1. Power systems (transformers, switchgears, etc.) 2. Industrial systems (motors, alternators, etc.) 3. Consumer products (lighting, fans, appliances, etc.) 4. Digital (industrial electronices, telecommunication informatics, etc.)
Strategic choice of business of the company emanates from its vision statement which covers implementation as well as organizational learning. The vision statement: To achieve for Crompton Greaves, the status of world class company so as to ensure Customer satisfaction Stakeholder satisfaction and pride Profitable growth Fulfilment of social obligation Perpetuity To achieve through the implementation of the best practices and continuous improvement of processes focussed on: Technology upgradation Cost effectiveness Total quality Speed Resource productivity To create an environment which encourages organizational learning and team effort where: Each individual understands his or her responsibility, makes contribution and is recognized for the same. Each individual gives his or her best to achieve the shared vision.
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During 199596, business strategy of CGL was reformulated keeping in view the increasing competition and entry of MNCs who were equipped with better technology and resources. The company changed its orientation from a business organization to a technology organization and a new corporate policy came into being with a thrust on technology organization. As a result of this orientation towards technology organization, three new facilities were established at Mandideep near Bhopal. The most important aspect of these new facilities is that they belong to that business area of CGL which the company thinks is its core competence area and wants dedicated centres to nurture and develop a technology area on which management can focus for long-term planning. Other key features of the new corporate strategy focus on the following: (a) Information technology implementation (b) Technology innovation and perpetuity (c) SBU technology cell (d) Customer satisfaction (e) Operational efficiency Right strategic choice and implementation have enabled the company to maintain robust financial health and sustain steady long-term growth.
* Based on S Lomash and P K Mishra, Business and Strategic Management, New Delhi: Vikas Publishing House, 2009
12.10 Summary
Let us recapitulate the important concepts discussed in this unit: Choice of a final strategy or strategies from alternative strategies available is the most critical and the most difficult job in the strategic planning process. Many companies go through the process of strategic choice or decision making but not in a very organized or systematic way. After evaluating various strategy alternatives in terms of company and industry/market characteristics, the next step is to use appropriate selection factors or criteria for narrowing down the choice to more specific strategies. Two important selection factors or criteria are: SPACE technique or approach, and benchmarking and best practices
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An organizations strategic capability or strategic choice is to be always understood in relative terms because it involves comparison with competitors or industry norms. This shows the relevance of benchmarking and best practices. Benchmarking means comparison with and adherence to prescribed norms, standards or practices. Final selection of strategy by an organization may depend on judgement, bargaining or analysis. Activation of strategy means institutionalizing strategy and mobilizing, allocating and managing/balancing resources for execution.
12.11 Glossary
Activation of strategy: Institutionalizing the strategy and mobilizing, allocating and managing resources for execution of strategy. Benchmarking: Comparison with, and adherence to, prescribed norms, standards or practices. Contingency strategies: Exceptional strategies for exceptional situations or circumstances

1. Explain the process of strategic choice. What are the four steps involved in the process of strategic choice? 2. What is SPACE technique or framework? Explain by using a diagram. 3. What is benchmarking? What are the different types of benchmarking? Explain with some examples. 4. Discuss the best practices at Nike. 5. What is strategic budgeting? Explain the steps involved in the process of strategic budgeting. 6. Explain Wards analysis of funding strategy along with business risk and financial risk of an SBU. Use the BCG framework.
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1. True 2. False 3. Benchmarking 4. Relative 5. Best-in-class 6. Objective 7. Activation 8. Precedes 9. (d) All the above 10. False 11. True 12. technology or innovation 13. soft 14. Enterprise resource planning (ERP)

1. Choice of a final strategy or strategies from the alternative strategies available is the most critical, and, also the most difficult job in the strategic planning process. Refer to Section 12.3 for further details. 2. Strategic Position and Action Evaluation (SPACE) matrix or framework can be considered more comprehensive as a technique for evaluating or selecting strategies. Refer to Section 12.4.1 for further details. 3. Benchmarking is comparison with, and adherence to, prescribed norms, standards or practices. Refer to Section 12.4.2 for further details. 4. Nike can be studied as a good model of corporate best practice. Refer to Section 12.4.3 for further details.
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5. For strategic planning and executing strategies, an organization needs strategic budgeting. Refer to Section 12.7 for further details. 6. Allocation and management of resources are major factors in activation and implementation of strategy. Refer to Section 12.8 for further details.
12.14 References
1. Cook, S. 1995. Practical Benchmarking: A Managers Guide to Creating Competitive Advantage. London: Kogan Page. 2. Gupta, V, K Gollakota, and R Srinivasan. 2005. Business Policy and Strategic Management: Concepts and Applications. New Delhi: Prentice Hall of India. 3. Hofer, C W, and D Schendel. 1978. Strategy Formulation: Analytical Concepts. St. Paul, Minnesota: West Publishing. 4. Murdoch, A. Lateral Benchmarking or What Formula One Taught an Airline. Management Today, November, 1997. 5. Ward, K. 1993. Corporate Financial Strategy. Oxford: ButterworthHeinemann. 6. Zadek, S. The Path to Corporate Responsibility. Harvard Business Review (Best Practice), December, 2004. Endnotes
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J A Peace II, and R B Robinson Jr (2005), 17374. The bottling operations were, however, subsequently sold to Pepsico. F Glueck and L R Jaunch, Business Policy and Strategic Managemet (New York: McGrawHill, 1984), 279 S Cook, Practical Benchmarking: A Managers Guide to Creating Competitive Advantage (London: Kogan Page, 1995). J A Pearce II, and R B Robinson Jr, Strategic Management: Formulation, Implementation, Control, 9th ed. (New Delhi: Tata McGraw Hill, 2005), 172. A Murdoch, Lateral Benchmarking or what Formula One Taught an Airline, Management Today (November, 1997), 6467. G Johnson, and K Scholes, Exploring Corporate Strategy, 6th ed. (Pearson Education, 2005), 174. This section is based on S Zadek, The Path to Corporate Responsibility, Harvard Business Review (December, 2004). S Zadek, The Path to Corporate Responsibility (Best Practice), Harvard Business Review (December, 2004), 126-27.
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P K Ghosh, Strategic Planning and Management (New Delhi: Sultan Chand & Sons, 2003), 290. C Saunders, The Process of Strategic Choice in W F Glueck, and L R Jauch, Business Policy and Strategic Management (McGraw Hill, 1984), 301. H Mintzberg, et al., The Structure of Unstructured Decision Process, Administrative Science Quarterly, 21 (1976), 24675. G Johnson, and K Scholes, Exploring Corporate Strategy (2005), 490500. G Johnson, and K Scholes, Exploring Corproate Strategy (2005), 48081.
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Unit 13
Structure
Implementation: Structures and Systems
13.1 Introduction 13.2 Caselet Objectives 13.3 Structure of an Organization 13.4 Virtual Organization 13.5 Which is the Best Organizational Structure? 13.6 Organizational Systems 13.7 Complementarity of Strategy, Structure and Systems 13.8 Case Study 13.9 Summary 13.10 Glossary 13.11 Terminal Questions 13.12 Answers 13.13 References
13.1 Introduction
In the strategic war between Hindustan Unilever and Nirma in the Indian detergent market during the mid-1980s, which factor enabled HLL to regain its market position or supremacy? Was it the brilliant strategic conception of product expansions in the form of Rin, Wheel and Sunlight or the way they were marketed? In Parle products success with the pioneering Indian mineral water Bisleri (which was selling at `10 per litre when good quality milk such as DMS was selling at `7 per litre), which was more important: innovative concept of bottled water or making the product acceptable to millions of Indians? What enabled ITC to transform the Indian rural market with the breakthrough innovation of e-choupal? Was it the brilliant idea or the execution of it? This brings us to a fundamental question: Is formulation of strategy more important or its implementation? This is a continuing debate in strategic management literature. There are exponents on either side. But, one thing is clear: the real test of a strategy is in its implementation. Only implementation can determine the success or failure of a strategy. Even the most perfect strategy or plan may fail if it is not implemented properly. It is said that a technically
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imperfect plan implemented well may deliver better results than a perfect plan which does not get off the paper.1 Many companies spend large amount of time, energy and resources in developing a strategic plan without giving enough thought to implementation. Implementation of a strategy or plan depends on three sets of organizational factors, namely, the structure of the organization, various functional areas and operations and behavioural (people) aspects. Strategic analysts, therefore, distinguish between three types or forms of implementation: structural and systems implementation, functional and operational implementation and behavioural implementation. These three forms of implementation are interrelated or interdependent (Figure 13.1). Strategy implementation, in terms of more detailed forms or components, is shown in Figure 13.2.
Figure 13.1 Strategy Implementation: Structural, Functional, Behavioural
13.2 Caselet
The e-choupal initiative started by ITC was conceived to overcome some of the challenges faced by Indian farmers such as fragmented farms, weak infrastructure and the involvement of numerous intermediaries in the sale and purchase of produce. The e-choupal initiative directly links the rural farmers with ITC for the procurement of agriculture and aquaculture products, such as soybeans, coffee, and prawns. Traditionally, these commodities were procured by ITC and other companies from mandis (major agricultural marketing centers in rural areas), and a long chain of intermediaries (middlemen) was involved in buying the produce from farmers and moving it to the mandis. Through e-choupals, these farmers can now directly negotiate the sale of their produce with ITC.
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The e-choupal model has been quite effective, not only because of its innovative concept but also because it has been well executed. Every echoupal centre is equipped with a computer and Internet connectivity, which enables the farmers to obtain information on mandi prices and good farming practices, and to place orders for agricultural inputs, such as seeds and fertilizers. This helps farmers in improving the quality of produce and obtaining better prices. Elected from the village itself, a literate farmer acts as the interface between the illiterate farmers and the computer. So, although the primary objective of the project was to bring efficiency to ITCs procurement process, an important byproduct is the increased empowerment of rural farmers where e-choupals have been established.
Source: http://siteresources.worldbank.org/INTEMPOWERMENT/Resources/ 14647_E-choupal-web.pdf
Objectives
After studying this unit, you should be able to: Discuss the structure of an organization and various structural types Use the concept and tool of the virtual organization Analyse different organizational systems Discuss the complementarity of strategy, structure and systems Identify the root organizational structure
13.3 Structure of an Organization

Structure of an organization defines the levels and roles of management in a hierarchical way. One can also say that an organizational structure spells out the way tasks, functions and responsibilities are allocated for implementing a policy or strategy. These also imply that an organizational structure facilitates or constrains how processes and relationships work.2 An organizational structure is presented through the organizational chart. The organizational chart, however, is only a visual expression of the tasks, functions responsibilities, and the links and hierarchies among them. The structure goes beyond the visible chart and signifies the mechanism through which an organization works. In practice, structural types are many more than depicted by the four stages of organizational development. In addition to the stage of development,
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structural forms or types are determined by corporate philosophy or goals, organizational concepts of control and centralization/decentralization and the nature of business or business strategy. More common structural forms are functional structure, divisional structure, SBU structure and matrix structure as shown in Figure 13.2. Major structural types or forms are mentioned below: 1. Entrepreneurial Structure 2. Functional Structure 3. Divisional Structure 4. SBU Structure 5. Matrix Structure 6. Project-based Structure
Figure 13.2 Implementation of Strategy: Structural, Functional and Behavioural
13.3.1 Entrepreneurial Structure

This is the most elementary form of structure. The entrepreneurial structure represents an organization which is owned and managed by a single individual the entrepreneur. Some call it a simple structure and contend that this is no formal structure at all.3 Organizations with such structures are typically single business product or service companies which cater to local or regional markets. This is the way most small businesses operate. The owner-entrepreneur assumes/discharges most of the responsibilities of management with some manager(s)/staff assisting him/her. The manager(s)/staff hardly exercise any authority and there is no or very little division of management responsibilities (Figure 13.3).
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Figure 13.3 Entrepreneurial or Simple Structure
Advantages and Disadvantages The entrepreneurial structure, although very simple in form, has certain advantages. The most important advantage is that decision making, including strategic decisions, is fast. This also implies prompt and timely response to environmental changes. Implementation also would be fast because authority is vested in one person and is fully centralized. Informality also is an advantage because the structure is free of procedures which often slow down matters. The entrepreneurial approach also has its disadvantages. Such a structure indicates excessive reliance on the owner-entrepreneur. There may be too much demand on the time of the entrepreneur; this may result in his/her devoting disproportionately more time to day-to-day operational matters and paying less attention to important strategic decisions. Such a structure also carries the bias of a single individual into corporate decisions because there are no checks and balances in the system.
13.3.2 Functional Structure

As an organization increases in size with expansion of business, the simple entrepreneurial system outlives its utility as a structural form. Need arises for functional specialization and also delegation of powers for efficient functioning. This implies a functional structure. A functional structure is based on differentiation and allocation of primary functions such as production, marketing, finance, and HR along with certain delegation of powers. Each of these functions is headed by a general manager or director usually at board level. Other important functions or activities like public relations and legal may be directly under the charge of CEO or MD (Figure 13.4). The functional structure is most commonly used by medium and large organizations with narrow or limited product range.
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Figure 13.4 A Typical Functional Structure
Functional Structure: Electrolux Europe4 Functional structure at Electrolux Home Products (EHP) Europe demonstrates how such a structure can help in bringing uniformity and simplicity into a business for profitable growth. Electrolux, the Swedish multinational, is a leading manufacturer of consumer durableswashing machines, refrigerators and cookers. From a humble beginning, the company has grown through various acquisitions (Electroluxs phenomenal growth has been discussed in Unit 8) to become a dominant player in Europe. But, the market in Europe was becoming fiercely competitive. To increase competitiveness and its stronghold on the market, the company needed to reduce costs and improve product and service standards. For this, the solution or strategy of Electrolux was to introduce a functional structure for the European operations to replace the geographical structure which was primarily the result of acquisitions. In 2001, EHP Europe completely realigned the organization to introduce a functional structure as part of its competitive strategy in Europe. The new structure is shown in Figure 13.5.
Figure 13.5 Functional Structure at Electrolux Europe
The functional areas/departments shown in Figure 13.5 are explained below for better understanding of the structure:
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Production and product development: This covers manufacturing and related activities including R&D. This also includes procurement of raw material inputs to ensure a seamless flow from input supplies to finished product. This was considered essential to sustain a stream of innovative and cost-effective products. Supply chain management and logistics: This function is necessary for taking products to the market and provides the link between demand/ sales forecasting and production. Marketing, product/brand management: This covers all aspects of marketing activity. This includes managing products and brands, key customer accounts, service and spare parts. Sales clusters/divisions: These are sales divisions grouped geographically into seven clusters to maximize revenue generation. The management of Electrolux explains the rationale for restructuring of EHP Europe like this: The realignment of EHP Europe is part of a programme to ensure profitable growth as the organization drives more simplicity into its business while reducing the organizational hand-offs and creating more focus on areas where increased effort is required to meet the tougher challenges of the market place.5 Advantages and Disadvantages The functional structure, as the EHP Europe example shows, can lead to efficiency by focussing on functional specialization. Allocation of work or job responsibilities also is clear and straightforward. All operational matters can be delegated to the functional groups so that the top management/CEO can concentrate more on corporate-level strategies. The functional structure also signifies that specialists are managing tasks and responsibilities at senior-andmiddle management levels. The CEO is in touch with all functions/operations through functional heads. This also reduces or simplifies the control mechanism. If reduction or simplification of the control mechanism is an advantage of the functional structure, coordination among different functions becomes difficult in such a structure and this is a disadvantage. This structure can also lead to functional conflicts, particularly between line and staff functions. Functional specialization may also lead to narrow specification and compartmentalization, which may affect organizational efficiency and growth prospects. Because of functional groupings and allocations, senior managers may often be burdened with operational or routine matters and may neglect strategic issues.
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13.3.3 Divisional Structure

A divisional structuresome call it multidivisional structureconsists of separate divisions constituted on the basis of products, services or geographical areas. Need for a divisional structure arises primarily because of inadequacy of a simple functional structure to deal with the complexities of business as an organization grows very large. The more common form of divisionalization is on the basis of product or business. Divisionalization gives focus on different divisions with separate product/market strategies. The divisional structure, however, does not do away with the functional structure. Within divisions, the functional allocations will still continue (Figure 13.6).
Figure 13.6 A Divisional Structure
Advantages and Disadvantages One distinct advantage of the divisional structure is that it enables concentration on major business areas of an organization, that is products (product-based divisions) and/or markets (geographic divisions). Since, the divisional functions are directly under the control of the divisional head, coordination and management of intra-divisional operations become easy, and this contributes to functional and operational efficiency. Such structure enables quick response to environmental changes in matters affecting the divisions business. The structure also gives enough time to top management for concentrating on strategic issues. But, in a divisional structure, there is a possibility of confusion over authority and responsibility in terms of centralization [top management/CEO and decentralization (divisions)]. There is the possibility of conflicts among the
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divisions because of differences in interest, objectives and priorities. There is also the issue of intra-divisional trading (and pricing policy) because some division may be the input supplier to some other division. If a division grows very large, problems of divisional management may arise. So, if there are too many divisions, complexity of coordination and, also of cooperation is likely to arise.
13.3.4 SBU Structure

Divisions closely approximate strategic business units (SBUs) in all large multibusiness organizations. The fundamental factor in the SBU structure is to identify independent product/market segment which requires distinct strategies. Each of these product/market segments also face a different environment, and, therefore, more is the need for separate strategies. In many companies, particularly in the public sector, the earlier divisional structure has been replaced by an SBU structure to give more focus on individual business and clearly define the role of corporate parents. A typical SBU structure is shown in Figure 13.7. Some strategic analysts feel that creation of divisions, which closely match SBUs may be difficult in practice due to size and efficiency factors because there may have to be too many divisions. So, according to these analysts, the divisional structure should be much broader with more than one SBU in each division.6
Figure 13.7 A Typical SBU Structure
GE is an interesting example of how divisions and SBUs are matched. It had 9 product groups and 48 divisions, which were reorganized into 43 SBUs. Many of these SBUs cut across product groups, divisions and profit centres. For example, three separate divisions in food appliances were merged into a single SBU to serve the houseware market and to give strategic focus.
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Advantages and Disadvantages In terms of strategic focus, the SBU structure is an improvement over the divisional structure. The structure facilitates strategic management of large and diverse organizations through SBUs. Because of clear strategic focus, the structure enables assessment/measurement of performance of individual SBUs. This also makes possible fixing of responsibility and clear accountability at the level of business units on the basis of performance and strategic positions of different businesses. It is also possible or easy to add a new business with high potential and divest unprofitable ones. All large multi-SBU organizations commonly do this. A major disadvantage of the SBU structure is that in very big multi-SBU organizations like GE with too many business units, effective management of all the units simultaneously may become a problem for the corporate organization. Also, there may be problems of defining autonomy of the SBUs and striking a proper balance between SBU autonomy and corporate parenting. As in the case of divisions, issues/problems of inter-SBU trading exists including pricing and profit policies. Also, with diverse SBUs, conflicts of interests among units are quite likely and the larger the number of SBUs, higher are the chances of such conflicts.
13.3.5 Matrix Structure

A matrix structure is a need-based or project-based structure which does not follow the conventional lines of hierarchy or control. We can call it a combination structurecombination of different divisions or functionsdesigned to form a project team for launching a new product, development of a new market or geographical operations. In the matrix structure, a project manager is appointed to coordinate and manage project activities. Functional/specialist resources are drawn from different divisions/functional areas to constitute the project team. The members of the team have dual responsibility and authorityone is project responsibility and authority and the other their line responsibility and authority in terms of hierarchy and command. Every matrix structure usually has a defined duration, that is, the project period. After the completion of the project, the managers go back to their respective divisions/functional areas. Matrix structures need not be adopted only by very large complex organizations; these can be used by many professional organizations, like construction companies, consultancy organizations, etc. A detailed matrix structure is shown in Figure 13.8. Multinational companies may use matrix structure for international trading of various products. Here the products are projects. A typical matrix structure for a multinational company is shown in Figure 13.9.
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Figure 13.8 A Matrix Structure Source: L R Jauch, R Gupta, W F Glueck, Business Policy and Strategic Management, 6th ed. (New Delhi: Frank Bros and Co. 2004), 369.
Figure 13.9 Matrix Structure of a Multinational Company (for Global Operations) Sikkim Manipal University Page No. 355
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Advantages and Disadvantages The greatest advantage of the matrix structure is that it fosters an interdisciplinary approach to organizational business and encourages/promotes teamwork. This also implies harnessing talents in the organization to optimize outcome. This means, in other words, maximum utilization of the limited resources of functional specialists in an organization. The matrix structure also makes possible timely and efficient response to different environmental situations because of built-in flexibility (loosely-knit group) and diverse talents in the project group. The structure also facilitates development of management through increased participation and involvement in organizational business and decisions. This should also generally improve the quality of decision making in all group projects/ businesses. Some disadvantages are inherent in the nature of matrix (cross-functional) structure itself because it replaces formal lines of authorities, and, this is likely to result in ambiguity of relationship, responsibility and authority. This implies lack of clarity in task and job responsibilities. Due to the team approach, decision making takes longer because consensus has to be reached in all important matters. The team approach also increases the chances or degrees of conflict among team members. This happens partly because of dual accountability system. The dual accountability system also creates confusion and difficulty for individual team members.
13.3.6 Project-based Structure

Some strategic analysts make a distinction between a matrix structure and a purely project-based structure. Most matrix structures are also project based, but, many of these structures have indefinite life like international trading operations of multinational companies. A project structure is one in which teams are created for specific purposes or projects, the project team undertakes the assigned work, and immediately on completion, the team is dissolved. Projectbased structures are more temporary than matrix structures. Such structures typically represent civil engineering/construction, IT/MIS, consultancy, event management and management development programmes. The organizational structure is a constantly changing collection of project teams created, made functional and knit together loosely by a small corporate team.7 In such a structure, there may be cross membership of teams. Project-based structures, as described above, are growing in importance because of their inherent flexibility and ability to adapt to new situations quickly.
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Such a structure particularly suits some activities or operations as mentioned above. There are, however, some practical issues and difficulties with such structures. For example, if project teams are short lived or transitory, should the team members be regular employees or contracted for specific projects because of considerations of cost and speciality skills? Or, the team members should be a combination of the two types? Also, if the teams are transitory, what unites and motivates the members to work as a well-knit group? How do they develop understanding of, and commitment to organizational strategy? Activity 1 Analyse the organizational structure of a company of your choice and also comment on whether you would suggest an alternative structure for the company.
1. The structure of an organization defines the _________and _______of management in a hierarchical way. 2. The most elementary form of structure is the _______, which represents an organization owned and managed by a single individualthe entrepreneur. 3. A _________is based on differentiation and allocation of primary functions such as production, marketing, finance, and HR along with certain delegation of powers. 4. The fundamental factor in the _____is to identify independent product/ market segment which requires distinct strategies. 5. A _______is a need-based or project-based structure which does not follow the conventional lines of hierarchy or control.
13.4 Virtual Organization

Virtual organization is one of the latest developments in evolution of organizational structures and designs. It is not an organization which exists in reality, but, performs like one. This is an organization without a formal structure. A virtual organization is like an extended network. Business Week has given a formal definition of a virtual organization/corporation which aptly summarizes its major characteristics:
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Virtual corporation is a temporary network of independent companies suppliers, customers, even erstwhile rivalslinked by information technology to share skills, costs and access to one anothers markets. It will have neither central office nor organization chart. It will have no hierarchy, no vertical integration.8 As the above definition shows, in a virtual organization, the in-house or owned resources and activities are minimized, and, most of those exist outside the organization and are outsourced. Virtual organizations are not held through formal structure or physical proximity of managers/staff, but, through partnership, collaboration and networking.9 The important point here is that such an organization appears real to clients and meets their needs almost as well as the real organization. In the telecommunication sector in India, several virtual organizations have been recently created to provide different services. Business Week has identified and focussed on five basic characteristics of a virtual organization. These are mentioned below: (a) Technology: Information networks will link up far-flung companies for working together through electronic contacts. (b) Opportunism: Partnerships will be less permanent, less formal and more opportunisticcompanies to bond together for a specific market opportunity. (c) Excellence: Each partnering company brings its core competence and special capabilities, and, it may be possible to create a best-ofclass, virtual organization. (d) Trust: Virtual organizations are based on relationship and trust. The partners share a sense of co-destiny. (e) No Borders: The virtual organization model redefines the traditional boundaries of a company. Constant cooperation among the partners makes it difficult to determine where one company ends and another begins.10 Virtual organizations, like any other organizational form or system, have their limitations, and, are facing some criticisms. Most virtual organizations represent extreme forms of outsourcing. This may result in serious strategic weaknesses in the long-run because an organization becomes devoid of its core competence and internal capabilities. This is a major concern in industries like civil engineering, publishing and IT/software solutions which have become highly dependent on outsourcing. The real concern is that short-term
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expediencies or improvements are achieved at the expense of long-term competence development and innovation.
6. The ________is an organization without a formal structure and is like an extended network. 7. The in-house resources and activities of a virtual organization are generally (a) Large (b) Outsourced (c) Maximized (d) Nil
13.5 Which is the Best Organizational Structure?

In all organizations, a logical question is: which is the best or ideal organizational structure? Or, is there any ideal structure? Stages of development theories (discussed above) suggest that certain organizational forms are uniquely or ideally suited to organizations during certain stages of their growth. Should, then, the organizational structure be linked to the stage of growth of a company? Studies, in more recent times, however, indicate that the stage of growth, although very important, is only one of the many critical factors or parameters on which an ideal organizational structure depends. These factors have complex interrelationships with each other, and also, with the conditions in the environment. To design or evolve the best/ideal organizational structure, a company has to find the best fit between these factors and strategy implementation. All organizational structures work in some companies or the other and would be quite appropriate under certain business conditions. For example, a functional structure works best under stable market/environmental conditions with less need for cross-departmental coordination and communication. The narrower the product line and markets, the more effective is the functional structure. Divisional structure or SBU structures are most effective under changing markets/environmental conditions which require more innovations and faster adaptation. The more diversified the product line and markets, the better the divisional, particularly the SBU structure, works.
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For all products/projects (including international operations) where strong cross-functional approach is required, the matrix structure (or the project structure) may be the best. It must be kept in mind, however, that an organizational structure should never be static or permanent. In fact, the illustrations given before have indicated the need for changes. For instance, as business diversifies and markets become more complex, a functional structure should be replaced by a divisional or SBU structure. If organizational strategy is for major expansion/diversification through takeover or merger, the increased size and new organizational composition may require change of structure. If the strategy is unrelated diversification, (i.e., new processes, products and markets), added complexity and diversity may necessitate change of structure. If the strategy is market penetration through cost reduction and improvement in service standards, a change of structure would give better results. We have explained earlier how Electrolux Europe replaced the geographical structure by a functional structure. Organizational restructuring may also be required if environmental or business development creates compulsions for divesting businesses. Tatas divested TOMCO and Lakm business, Voltas divested its refrigerator and air conditioner businesses; the companies restructured themselves accordingly. In conclusion, we can say that the best or ideal organizational structure is one which adapts itself perfectly to changing business and market conditions and consequent strategy requirements.
8. The structure that works best under stable market/environmental conditions with less need for cross-departmental coordination and communication is (a) functional structure (b) Divisional structure (c) Matrix structure (d) SBU structure 9. The structure that is most effective under changing markets/environmental conditions which require more innovations and faster adaptation is (a) Functional structure (b) Divisional structure
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(c) Matrix structure (d) Project structure
13.6 Organizational Systems

An organizational structure provides the mechanism for distribution of authority and responsibility among various managerial positions in the organization. This is done through organizational constituents like business units, departments, divisions, projects or networks. Through these constituents, the organization performs a set of tasks, activities or functions to achieve its goals or objectives. To do this effectively, certain organizational inputs are necessary, some linkages need to be established among the constituents and some controls have to be enforced. These are done through a series of systems. The structure and the systems complement each other in the implementation of organizational strategies. Strategy, structure and systems form the interrelated hard Ss of the organization (Figure 13.10). Six major systems are important from the strategy point of view: (a) Planning system (PS) (b) Management information system (MIS) (c) Management development system (MDS) (d) Motivation system (MS) (e) Evaluation system (ES) (f) Management control system (MCS) See the diagrammatic presentation in Figure 13.11.
Figure 13.10 Interrelated Strategy, Structure, Systems
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Figure 13.11 Organizational Structure and Organizational Systems
13.6.1 Planning System

Planning, strategy and implementation have the most direct and intimate relationship among them. We had discussed about the planning process in an organization in Unit 1. Planning system represents the planning process in its entiretyall matters related to planning. The most important factor in the planning system is the constitution of the corporate planning team and according it an appropriate position in the organizational chart/structure. In many organizations, the planning team/system is directly under the control of the CEO. In such cases, planning system or activity also includes strategy formulation except pure functional strategies which may be delegated to the functional or departmental heads. Implementation directives are also given by the centralized planning system. A good number of organization also follow a decentralized planning system. In such an organization, planning, strategy formulation and implementation are decentralized at the division or the SBU level; the parent organization confines itself to corporate directives or only corporate-level strategies. The strongest argument in favour of a decentralized planning system is that if managers are actively associated with the planning process/system, chances of successful implementation are more. Different planning systems (centralized and decentralized) suit different organizational structures. For example, in entrepreneurial structure, and, also in functional structure, a centralized planning system would be generally more appropriate with the functional areas/heads given necessary flexibility/authority
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for implementation. In a divisional or SBU structure, a decentralized planning system would be more effective with the active involvement of SBU-level managers in strategy formulation and implementation. The same applies to matrix structures and network structures also. In all such decentralized structures and systems, however, the corporate/parental organization will have its own planning cell. But, all this also indicates the need for adaptation of the planning system to organizational structure and strategy requirements.
13.6.2 Management Information System (MIS)

The planning system in any organization depends heavily on the management information system or MIS. The MIS provides critical inputs to the planning system regarding all important aspects of organizational functioning and performance. It also provides connectivity between different constituents of the organizational structure in terms of information flow and feedback. MIS helps managers in two important ways; first, it enables them to equip themselves with all relevant data/information which they may require to perform their tasks better and, second, to coordinate their activities with other managers/departments through a central organizational mechanism. Although MIS is more frequently used by middle and operating management, it also greatly helps the top management in decision making. In fact, MIS provides the foundation for design and implementation of a number of other organizational systems. Therefore, development of MIS in an organization is a critical management activity because many vital decisions are based on this. For effectiveness, development of MIS should be guided by the organizational structure and the style of management. In some organizations, MIS is part of HR; in some companies, it is part of finance; in some organizations, MlS is an independent activity reporting directly to the top management; in some companies, MIS is outsourced. But, for cohesion, MIS should be a part of the planning system as is the case in many companies. Close connectivity between the planning system and the information system should increase value addition by MIS in the organizational process. It should also facilitate strategy development and implementation.
13.6.3 Management Development System (MDS)

Management development system (MDS) is essentially concerned with the development of individual managers and preparing them better for organizational activities including planning, strategy making and implementation. The Encyclopedia of Professional Management has described MDS as a process
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of gradual, systematic improvement in the knowledge, skills, attitudes and performance of those individuals in an organization who carry management responsibilities.11 The objective of MDS is to nurture individual managers and build human capital. The focus of MDS should be the orientation and development programmes with particular reference to strategic tasks, planning skills and implementation capabilities. The nature of strategic tasks change with the change of organizational strategy or adoption of new strategy. MDS should regularly modify or update existing programmes or design new development programmes to prepare managers for changing tasks and responsibilities. Therefore, MDS has a special role to play in the strategy development and implementation process. To effectively play its role, MDS should focus or concentrate on three important functions: (a) Training and development of managers through in-house or external programmes to impart required skills to enable them to perform strategic tasks. (b) Career planning of managers to motivate and prepare them to undertake future strategic tasks and responsibilities and organizational development through this. (c) Planned positive intervention to ensure smooth transition from one strategic phase to another to minimize resistance to change; this is done through motivational programmes.12
13.6.4 Motivation System

The motivation system can greatly contribute to the management development system. Many companies work on the basis of a carrot and stick policy, i.e., reward and punishment system. But, recent trends are more towards carrot than stick; carrot here means inducement, encouragement and incentives. And, these are done through the motivation system. Incentives are the most important motivational factor. Incentives can be of two types: monetary and non-monetary. Common monetary incentives are salary increase (increments), productivity or performance bonus, profit sharing, welfare allowances, etc. Nonmonetary incentives are special rewards, certificates of excellence, nomination to a prestigious training programme, foreign tours, foreign postings, etc. Both monetary and non-monetary incentives are used by progressive organizations to motivate their employees.
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Infosys is a good example, a sort of a model, of motivation through monetary and particularly, non-monetary incentives. Infosys employees receive high salaries and salary-linked compensations compared to Indian compensation norms/practices. Infosys is also one of the few Indian companies which offer employees stock option plans (ESOP). ESOP increases financial stake of the employees and also gives them a proud feeling of ownership of a company through shareholding. It is common knowledge that most employees of Infosys become financially rich because of significant market capitalization of company stocks. But, monetary incentives/compensations are not the only motivating factors in Infosys. In fact, monetary compensations are not always enough to completely motivate the employees. As Narayana Murthy, CEO, Infosys, put it: My employees seek challenging opportunities, respect, dignity and the opportunities to learn new things ... Salary alone is a very dangerous way of rewarding capability.13 Infosys has a motivation system which goes much beyond pure monetary incentives. The company has created an environment and work culture in which employees are encouraged to communicate with each other freely and with the higher management. The CEO keeps in regular contact with the employees by sending them mails every fortnight. There are live chats also. There is a concept of chairmans list, and, based on this list, an annual excellence award is given to recognize talent.14
13.6.5 Evaluation System

Motivations are required to induce employees/managers to perform. Evaluation or appraisals are necessary to ascertain whether employees/managers are actually performing or performing satisfactorily. So, the evaluation system has a role almost parallel to the motivation system. The evaluation system assesses managerial performance in terms of organizational objectives, priorities, and strategies. The purpose of a positive appraisal system is to remind managers how they are discharging their tasks and responsibilities, particularly in relation to the strategy implementation. In a progressive organization, this is a continuous process. For the development of an effective evaluation system, choice of factors to be used for appraisal becomes a critical issue. It is generally advisable to use a number of factors or multiple criteria to make the assessment system more objective and broad based. This indicates the need for inclusion of a good number of quantitative factors in addition to the subjective or qualitative factors. Several appraisal methods are available; some are purely quantitative or objective, some are totally subjective or qualitative, and, some are mix of the two. Most of the
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actual appraisal systems are based on an appropriate mix of the two types of factors to make the system more acceptable and reliable. Also, relevance or suitability of the evaluation method to the corporate strategy adopted by an organization should be considered. For example, if a stability strategy is followed, the objective of the appraisal system should be to focus on improving efficiency in current operations. Improvement of efficiency in current operations, combined with initiative, can also help to achieve shortterm growth. For long-term growth, i.e., growth through expansion or diversification, focus should be on long-term managerial characteristics of initiative, aggressiveness, risk taking attitude, etc. The evaluation system should lay emphasis on these factors and be structured accordingly.
13.6.6 Management Control System (MCS)

The management control system (MCS) runs parallel to the evaluation system, and, also, to some extent, is complementary to the evaluation system. The objective of the control system is to ensure that implementation of strategy takes place according to plan. A properly structured MCS should consist of four steps: a. Establishing standards b. Measuring performance c. Evaluating performance against standards d. Taking corrective measures to improve performance These four steps constitute a cyclical process (see Figure 13.12).
Figure 13.12 Management Control Cycle Sikkim Manipal University Page No. 366
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Organzational standards are prescribed in terms of targeted or planned performance. Measurement of performance is done through the evaluation system discussed above. Performance of employees/managers is evaluated with respect to the prescribed standards and deviations are noted. On the basis of deviations or observed drifts in performance, corrective action is initiated so that performance improves and meets the prescribed organizational standards. This is the MCS cycle. The MCS cycle depicts a purely quantitative control system in terms of formal or measurable indicators of standards and performance. But, in many organizations, all controls are not enforced only through the formal machinery or methods; they also use informal methods. In almost every organization, there is a formal structure, which specifies the official hierarchy and reporting system in the organization. But, there is also an informal structure which shows the way systems and relationships actually work bypassing, or parallel to, the formal structure. Informal controls are apprising the managers about possible problems or lapses in strategy implementation in advance: guiding them through the implementation process; cautioning them about mistakes or repeat of mistakes; adherence to ethical norms, etc. These are done in a more unstructured way. The informal control system many times complement or reinforces the formal control system. To make the MCS more positive and successful, a good mix of formal and informal control systems is generally recommended.
10. The planning system in any organization depends heavily on the ________. 11. The __________ is essentially concerned with the development of individual managers and preparing them better for organizational activities including planning, strategy making and implementation. 12. The _________system assesses managerial performance in terms of organizational objectives, priorities, and strategies. 13. The objective of the ________system is to ensure that implementation of strategy takes place according to plan.
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13.7 Complementarity of Strategy, Structure and Systems

We had mentioned earlier (Figure 13.10) about interrelations between strategy, structure and systems. Now, this can be seen in more specific forms in terms of strategy options, structural alternatives and appropriate systems. We can also introduce environmental factors to make the exercise more contextual. Environmental factors, strategies, structures and systems can be combined in the form of a linkage matrix. This is shown in Table 13.1.
Table 13.1 Strategy Implementation, Structure and Systems: A Linkage Matrix
Environmental Characteristics
Strategy/Structure/ Systems Strategy Structure Systems Planning MIS Management development Motivation Evaluation Control Certain, stable, predictable Growth/expansion/acquisition/ divestment Entrepreneurial/divisional SBU/ matrix Participative Decision-orientation External-focussed; need-based; contingency Monetary/non-monetary Formal/informal; direct/indirect Unstable, volatile, unpredictable Stability/controlled growth Divisional/functional/holding company
Directive Efficiency-orientation Internal-focussed; programmed Monetary/non-monetary Predominantly formal/direct
Broad-based; qualitative/subjective Efficiency-based; quantitative/objective
Source: Adapted from A Kazmi, Business Policy and Strategic Management (2005), 344 (Exhibit 10.13).
Since the matrix is two-dimensional, it has limitations in terms of options or alternatives or combinations of environmental characteristics, strategies, structures and systems which can be shown. So, the combinations of strategies, structures and systems presented in the matrix are to be taken as more indicative rather than definitive. For example, for growth and expansion strategy, appropriate structural form may be divisional/SBU/matrix and the planning system should be participative. But, for the same strategy, the organizational structures can also be entrepreneurial; in that case, the planning system should be directive and not participative. In such cases, more exactness can be obtained through further analysis. But the matrix is important as a framework of analysis. This can be made more detailed or sophisticated by adding more dimensions or variables.
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Activity 2 Discuss the complementarity or otherwise of strategy, structure and systems of any of these companies: L&T, Tata Steel and Crompton Greaves. Write down your observations in a report.
14. Environmental factors, strategies, structures and systems can be combined in the form of a _______matrix. 15. The combinations of strategies, structures and systems presented in the matrix are to be taken as more _______rather than definitive.
13.8 Case Study

SBU Structure at BPCL Organizational structures evolve in response to company requirements and changes in environmental conditions. Often old functional or divisional structures give way to more modern SBU structures. This happened at BPCL also. During the 1970s, the government of India nationalized the petroleum industry and Burmah Oil Refiniries was renamed as Bharat Petroleum Corporation Ltd (BPCL). Till 1992, the Government of India held 100 per cent equity in BPCL. During this year, it sold 30 per cent stake to institutional investors. Since 1995, petroleum companies in India initiated strategic reorganization/restructuring to face emerging competition because of dismantling of the Administered Price Mechanism (APM). Government control on distribution and marketing was also relaxed by 2002 making way for more competitive marketing. Organizational restructuring in BPCL was led by Sundararajan, CMD. Sundararajan initiated the restructuring process through consultation with the top management, the board and the government. Arthur D Little was appointed as the consultant for the project. Sundararajan had formed a change teama cross-functional team of senior managersto plan and implement the restructuring process. The existing or old structure was functionally organized. There was four major functional areasrefineries, marketing, finance and personneleach
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headed by an executive director reporting to the CMD. Other support functional like corporate affairs, legal, audit, vigilance and company secretary were directly under the CMD. The change management team, top management and the consultant were unanimous in their view that the functional structure was not the appropriate form to create a customer-centric organization. The consensus was to create strategic business units (SBUs) with clear customer focus. But as happens in most organizations, particularly in public sector companies, there was inertia among the managers to change. There were apprehensions about the new structure among the senior managers. Finally, with the intervention of the CMD, the new SBU structure was approved and made acceptable. The new structure identified and separated six distinct SBUs: 1. refinery, 2. industrial/commercial, 3. lubes, 4. LPG, 5. aviation, 6. retail
The refinery, along with two new departments, IT & Supply Chain and R&D, came under the director (refineries); all the other five customer-centred SBUs were to report to the director (marketing). The corporate support functions were to remain under the direct charge of the CMD. Each SBU was to have its own support functionfinance, HR, sales, logistics, etc. During the process of formation of SBUs, delayering had also taken place the number of layers in the organization reduced from seven to four. Implementation of the new structural design involved redefinition of role and responsibilities and redeployment of more than 2,000 personnel. New roles had been created primarily to increase customer interface. Since the support functions were now located within the SBUs, the new structure included lateral linkage mechanism for better synergy.
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13.9 Summary
Let us recapitulate the important concepts discussed in this unit: Implementation of a strategy or plan depends on three sets of factors: the structure (includes systems) of the organization, various functional areas and operations, and behavioural (people) aspects. Structure of an organization defines the levels and roles of management in a hierachical way. One can also say that an organization structure spells out the way tasks, functions and responsibilities are allocated for implementing a policy or strategy. Structural forms or types, in practice, are many more than depicted by the four stages of organizational development. In addition to the stage of development, structural forms are determined by corporate philosophy or goals, organizational concepts of business or business strategy. Ten probable structural forms are: i. entrepreneurial structure, ii. functional structure, iii. divisional structure, iv. SBU structure, v. matrix structure, vi. project-based structure, vii. team-based structure, viii. network structure, ix. holding company structure, and x. intermediate structure. More common structural forms are: functional structure, divisional structure, SBU structure and matrix structure. Virtual organization is one of the latest developments in evolution of organizational structures and designs. This is an organization without a formal structure. It is a temporary network of independent companies suppliers, customers, even erstwhile rivalslinked by information technology to share skills, costs and access to one anothers markets. In the implementation of strategy, organizational structures are supported by organizational systems. Six major systems are important from the strategy point of view: planning system, management information system (MIS), management development system (MDS), motivation system, evaluation system and management control system (MCS).
13.10 Glossary
Functional structure: A structure based on differentiation and allocation of primary functions such as production, marketing, finance, and HR along with certain delegation of powers.
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Matrix structure: A need-based or project-based structure which does not follow the conventional lines of hierarchy or control. Divisional structure: A structure that consists of separate divisions constituted on the basis of products, services or geographical areas. Entrepreneurial structure: A structure that represents an organization owned and managed by a single individualthe entrepreneur. Virtual organization: A structure of an organization without a formal structure, which does not exist in reality, but, performs like one.

1. What are the factors that determine the structure of an organization? Mention six probable structural types or forms. 2. Distinguish between a divisional structure and an SBU structure. Explain SBU structure with a diagram. 3. What is virtual organization? Explain and also mention its limitations. 4. Is there any ideal or best organizational structure? Discuss in detail. 5. What is the role of organizational systems in strategy implementation? Distinguish between six major organizational systems. 6. Explain, in detail, the complementarity between strategy, structure and systems. Analyse with the help of a linkage matrix.

1. levels, roles 2. entrepreneurial structure 3. functional structure 4. SBU structure 5. matrix structure 6. Virtual organization 7. (b) Outsourced
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8. (a) functional structure 9. (b) Divisional structure 10. management information system (MIS) 11. management development system (MDS) 12. evaluation 13. control 14. linkage 15. indicative

1. The structure of an organization defines the levels and roles of management in a hierarchical way. Refer to Section 13.3 for further details. 2. A divisional structure consists of separate divisions constituted on the basis of products, services or geographical areas, while a an SBU structure, the divisions closely approximate strategic business units (SBUs). Refer to Section 13.3.3 and 13.3.4 for further details. 3. A vrtual organization is not an organization which exists in reality, but, performs like one. Refer to Section 13.4 for further details. 4. All organizational structures work in some companies or the other and would be quite appropriate under certain business conditions. Refer to Section 13.5 for further details. 5. To achieve its goals or objectives, certain organizational inputs are necessary, some linkages need to be established among the constituents and some controls have to be enforced. These are done through a series of systems. Refer to Section 13.6 for further details. 6. The interrelations between strategy, structure and systems can be seen in more specific forms in terms of strategy options, structural alternatives and appropriate systems. Refer to Section 13.7 for further details.
13.13 References
1. Jauch, L R, R Gupta, and W F Glueck. 2004. Business Policy and Strategic Management. 6th ed. New Delhi: Frank Bros & Co.
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2. Macy, B, and Izumi, H. 1993. Organisational Changes, Design and Work Innovations; A Meta Analysis of 131 North American Field Studies 1961 1991. In Research on Organisational Changes and Development, 7. 3. Salter, M S. 1970. Stages of Corporate Development. Journal of Business Society. Spring. 4. Scott, B R. The Industrial State: Old Myths and New Realities. The Business Review, MarchApril, 1973. 5. Thain, D H. 1969. Stages of Corporate Development. The Business Quarterly. Winter. 6. Thompson Jr, A A, A J Strickland III, and J E Gamble. 2005. Crafting and Executing Strategy: The Quest for Competitive Advantage. 14th ed. New Delhi: Tata McGraw-Hill. Endnotes
1 2 3 4 5 6 7 8 9 10 11 12
D McKonkey, Planning in a Changing Environment, Business Horizons (SeptOct), 66. G Johnson, and K Scholes, Exploring Corporate Strategy, 6th ed. (2005), 422. G Johnson, and K Scholes (2005) Based on The Electrolux Executive, December 2000. The Electrolux Executive, December 2000. G Johnson, and K Scholes (2005), 425 G Johnson, and K Scholes (2005), 431 The Virtual Corporation, Business Week (February 8, 1993), 98. G Johnson, and K Scholes (2005), 452. The Virutal Corporation, Business Week (February 8, 1993) 98100. L R Bittel, ed., Encyclopedia of Professional Management (New York: McGraw Hill, (1978). A Kazmi, Business Policy and Strategic Management, 2nd ed. (New Delhi: Tata McGraw Hill, 2005), 342. A Phadnis, What Money Cant Buy, Business Standard (The Strategist), December, 12, 2000. A Phadnis, What Money Cant Buy, Business Standard (The Strategist), December, 12, 2000
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Unit 14
Structure
Implementation: Functional and Operational
14.1 Introduction 14.2 Caselet Objectives 14.3 Production Policies and Plans 14.4 Marketing Policies and Plans 14.5 Financial Policies and Plans 14.6 HR Policies and Functions 14.7 MIS/IT Policies and Plans 14.8 Alternative Business Strategies and Functional 14.9 Processes or Methods 14.10 Productivity and Efficiency 14.11 Pace or Speed of Action 14.12 People Factor 14.13 Case Study 14.14 Summary 14.15 Glossary 14.16 Terminal Questions 14.17 Answers 14.18 References
14.1 Introduction
In the last unit, we had analysed the role of structures and systems in strategy implementation. In this unit, we shall discuss the roles of functions and operations in the implementation of strategy. It is necessary for an organization to have the right structures and systems; but, real implementation of strategy takes place through major functional areas of manufacturing, marketing, finance, etc. In each of these functional areas, operational implementation is equally important. Functional implementation and operational implementation are complementary to each other. One can even say that operational implementation is an extension of functional implementation (Figure 14.1).
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Figure 14.1 Strategy Implementation: Functional and Operational
We will discuss the issues related to functional implementation and operational implementation in this unit. These include defining functional strategy; understanding the role of the functional policies and plans in implementing the strategy; identifying major factors involved in formulating policies and plans in different functional areas; integrating various functional policies and plans; and, analysing all important aspects of operational implementation. A. Functional Implementation Functional implementation takes place through functional policies, plans and strategies. Functional strategy relates to a particular functional area and follows from business strategy of an organizationeither a corporate-level strategy or a business unit-level strategy (in SBU structure in Figure 12.7, we have shown different functions). We had introduced the concepts of policy, plan, strategy and tactics in Unit 1, and explained the difference between them. The analysis of functional implementation will be carried out in terms of policies, plans and strategies in different functional areas. In any organization, five major functional areas are: production, marketing, finance, HRM and MIS/IT. Some consider R&D also as an important functional area, but we shall confine ourselves to the four traditional functional areas: production, marketing, finance, HRM and the emergent area of MIS/IT. For strategy implementation, these functional areas have to have proper horizontal fit among themselves, i.e., play interdependent roles (Figure 14.2).
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Figure 14.2 Interdependent Functional Areas
14.2 Caselet
The failure of Big Bite, a much hyped product launched by Parle is an example of how wrong balancing in a products marketing mix can lead to marketing failure. In 198788, Parle Exports (then makers of Thumps Up, Limca, Gold Spot) made a high profile launch of Big Bite, a kind of burger a bun with vegetables, or chicken or mutton filling topped with different sauces. The launch was preceded by several campaigns in Mumbai with tantalizing punchlines. Mumbaiites responded overwhelmingly, and, in the first month of the launch, 90 per cent of the target customers had tried Big Bite. But, thereafter, the sales declined, and, in less than six months, it was reduced to 10 per cent. Big Bite was a big failure, and Parle had to withdraw the product. Follow-up research showed that Big Bite did not live up to customer expectations. Customers found it dry compared to its nearest rival Rolls and perceived it to be like any other burger. Their expectations were raised by the Big Bite ads, but, the product failed to rise to those levels. This was a case of product-promotion mismatch, and the case shows that wrong balance in the marketing mix can lead to marketing failure.
Source: A Nag, Strategic Marketing, 2nd ed. (New Delhi: Macmillan India, 2008), 171
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Objectives
After studying this unit, you should be able to: Analyse functional implementation functional policies, plans and strategies Identify the linkage between alternative business strategies and functional policies and plans Identify and analyse major issues in operational implementation of strategy Discuss the important role of people factor in implementation
14.3 Production Policies and Plans

Production processes typically constitute more than 70 per cent of a companys total assets1, and, therefore, have high stakes in terms of roles and activities in strategy formulation and implementation. Production policies, capabilities and limitations can significantly affect strategic planning and implementation and the attainment of organizational objectives. Production, in the core, relates to manufacturing, i.e., decisions regarding plant size, plant location or layout, product design, choice of equipment, spares and accessories, technology level/ technological innovation, inventory control, quality control, cost control, packaging, use of standards, capacity utilization, etc. But, production as a function, in a broader sense, also includes procurement of raw materials and inputs, R&D and any other operations (logistics) related to the production process. Some, therefore, prefer to call this function production/ operations. Again, production, as a function, is not confined to manufacturingrelated activities/operations only. It also extends to production of services, retailing, etc. Both manufacturing and service organizations have to formulate policies regarding capacity, technology, purchasing, etc. Similarly, retailers have to formulate policies and prepare plans for buying and sellingmay be, buy in bulk, repackage and sell in smaller packs. There have to be policies and plans for bulking also.
14.3.1 Choice of Production Process

If a company decides to manufacture the product, it has to consider some major policy issues in relation to the production process. Four major issues to be considered are:
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Size and location of plants Choice of technology Process/job specialization Mechanization of operations For all large companies and multinationals, a basic policy decision with respect to size and location of plants pertains to two alternatives: large size plant with single centralized location or small size plants in multiple locations. Both the alternatives have advantages and disadvantages. An obvious advantage of a large size plant is economies of scale as enjoyed by many companies in steel, cement, fertilizers, etc. Choice of technology is a very important factor in the production process. This assumes special significance today because of increased global competition, faster communication network and high rate of technological obsolescence. Like product life cycle, there is also technology life cycle. There are four phases in the technology life cycle: embryonic, growth, maturity and decline. In some industries (products), there is a single or highly standardized technology, and technological change is very slow. Paper is a very good example. Others are edible oil, cotton textiles, woollen textiles, etc. But for majority of the industries or products, regular technological upgradation is necessary, consumer electronics being one of the best examples. For choice of technology, companies have three options: first, in-house development Technology governs, to a large extent, the production process and also job specialization. In technologically sophisticated processes, i.e., with high focus on standardization, job specialization or division of labour becomes imperative. This, in fact, is a distinct characteristic of all large-scale manufacturing activities. Job specialization also produces the experience effect (discussed in Unit 6) which helps to increase productivity and efficiency. Related to process or job specialization is mechanization and automation of operations. Mechanization and automation are labour saving methods. Automatic spinning and weaving in textile mills, packaging of products, loading and unloading of cargo, computerization of banking and insurance operations are good examples of increased mechanization and automation but, at the same time, these cause displacement of labour. Technological advances drive mechanization and automation. Displacement of labour, on the other hand, faces resistance from workers unions and also creates employment problem. Every
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big company, therefore, needs to formulate a policy on mechanization which can balance technology advances and labour relations.
14.3.2 Quality Policy/Management

Quality of a product is closely linked to the production process, operational efficiency and the quality control system. But, above all, quality depends on the quality policy of a company. In a highly competitive market, quality of products and services determine, to a large extent, success and failure of the companies. This is particularly applicable to industrial products and consumer durables. In fact, the major developments in quality policy and quality movement pertain to industrial products (both intermediates and finished products) and consumer durable categories like automobiles. The quality movement was initiated in the US. During the post-World War II period, the concept of total quality control (TQC) was developed in the US by Armand Feigenbaum. The term, TQC, was defined as a system of integrating the quality development, maintenance, improvement efforts of various groups in an organization to enable production, marketing and service at the most economical level with full customer satisfaction.2 In the early 1960s, Japan introduced Quality Circle (QC) for quality management. A quality circle, as a tool, aims at defining, analysing and solving quality related problems in a company through a team approach. Seven to ten workers from interrelated functional or work area form a quality circle. Members of the team are given necessary training in all quality-related matters so that they can develop an effective approach to quality management. In India, many companies, including BEL, BHEL, SKF, Godrej and Mahindra & Mahindra (Jeep Division) have attempted quality control through QCs. Many other countries have introduced their own quality controls and standards. International Organization for Standardization (ISO) has taken the lead in internationalization of quality. ISO has published a series (ISO 9000 series) of quality system and standards. ISO standards have now become international quality benchmarks for all countries. All these have led to the development of Total Quality Management (TQM) as a tool for integrated quality control. Many progressive companies are now striving for Six Sigma quality standards (discussed later in Unit 16) a benchmark set by GE.
14.3.3 Inventory Policy/Management

For most of the companies, whether in consumer goods or industrial products, the planning process is:
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Planned salesplanned productionplanned procurement Any divergence between the planned and actual sales, and, therefore, between the planned and actual production is matched by inventory build-up as shown in the equation: Sales = Opening stock + Production Closing stock Ideal position is: Opening stock = Closing stock = 0 except for some operating stock. So coordination or balancing of procurement, production and sales is leveraged by inventory control and management. But, it is not only inventory management of finished goods as shown above, but also of raw materials and inputs. So, a companys inventory policy should relate to both raw materials and finished goods. Both have direct implications in terms of carrying cost. Every company, therefore, has to have an inventory policy for determination of optimum inventory levels. One of the latest or more successful approaches or methods is the justin-time (JIT) inventory system. First introduced by Toyota Motors in Japan, JIT model has been adopted by many companies in electronics and automobiles. In the JIT system, storage of material,. i.e., inventory level is almost zero. Raw materials/inputs are supplied/procured just-in-time so that the pipeline does not become dry, production continues and sales do not suffer. To make the JIT system effective or successful, many vendors have set up production facilities either in the product manufacturing site or in close proximity. The objective, and the crux of the JIT system, is to minimize the lead time for supply of raw materials and inputs. Activity 1 Choose any two companies one in the public sector and the other in the private sector and make a comparative analysis of the production policies, plans and strategies.
1. The_________is as a tool introduced in Japan, that aims at defining, analysing and solving quality related problems in a company through a team approach. 2. During the post-World War II period, the concept of total quality control (TQC) was developed in the US by ________.
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3. In some industries (products), there is a single or highly standardized technology, and technological change is very slow. Which of these is a good example of this? (a) Paper (b) Electronics (c) Food processing (d) Garments 4. In the just-in-time (JIT) inventory system the, storage of material, i.e., inventory level is (a) Very high (b) Very low (c) Always changing (d) almost zero
14.4 Marketing Policies and Plans

Marketing is the most vital function in an organization because it establishes the link between the company and the market or the customers. It is the function which generates turnover (through sales) or revenue and earns profit for the company. So, the marketing function fulfils the most important objective of a company. In the implementation of most corporate strategies, marketing has a definite role to play. Marketing policies and plans are, therefore, of great significance in implementing business plans and strategies of a company. Marketing policies and plans are expressed though the four Ps: product, price, promotion and place (distribution). Each of these Ps has a number of elements associated with it. These are shown in Table 14.1.
Table 14.1 Four Ps of Marketing and their Elements Product Quality Brand Features Packaging Warranties Services Price List price MRP Discounts Trade margin Commission Instalment Credit terms Promotion Place
Advertising Customer location Sales promotion Outlet location Personal selling Channels Test selling Warehousing Publicity Stocks Communications Delivery
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Marketing policies and plans have to be understood and analysed in terms of the four Ps and their elements as shown in the table. Many marketing strategists call this marketing mix analysis. But there is a difference; marketing mix is not just the four Ps. Marketing mix is the way the four Ps or some of the Ps (depending on the product category) are combined or blended to optimize market offerings to increase sales and market share. In this section, the main issues in marketing policies and plans will be analysed in terms of (a) Product and product mix (b) Pricing decision (c) Product promotion (d) Place (distribution) (e) Marketing mix
14.4.1 Product and Product Mix

Product design, product manufacturing (except services) and product development are primarily the task or concerns of the production function/ department (along with R&D). But, market or customer analysis is done by the marketing people; they may know better than production the nature of market demand, performance or acceptability of different products made by the company. Market reaction or feedback on a product is conveyed to the production department by the marketing group. Therefore, in every organization, marketing and production functions work in tandem in all matters relating to product planning, product making and product modification or adaptation. Formulation of product policies and plans by a company should be based on answers to certain key questions: Which products should the company market? Which products contribute faster to sales and market share? Which products contribute most to profitability? Which products make an optimal product mix? How do a companys products compare with those of competitors? How frequently should the company change the product? Let us start with product mix. To have a product mix is a common policy or strategy of most companies. The basic objective of the product mix is to balance the product portfolio. This implies or includes two more objectives; first, to
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optimize market offerings, (i.e., to cater to as large a cross section of market segments as possible) and, second, to effectively match competitors products and brands. To achieve optimality of product mix, companies have to continuously review their existing product lines and market developments. Such review pursues resource allocation to different products (existing and proposed); examines whether the rate of new product development is satisfactory; and, ascertains whether, or, to what extent, each product contributes to sales growth, market share and profitability. Different products generally contribute differently to sales, market share and profit. Drucker has mentioned that a typical portfolio may consist of six different product types: (a) Tomorrows breadwinners, i.e., new products or todays breadwinners modified. (b) Todays breadwinners, i.e., the innovations of yesterday. (c) Yesterdays breadwinners, i.e., products with high volume, but, fragmented into specials, small orders and the likes. (d) Products capable of becoming breadwinners or net contributors if major changes/improvements are made. (e) The also ransthe high hopes of yesterday, which, although did not perform well, have not become outright failures. (f) The failures of today.3
14.4.2 Pricing Decisions4

Traditionally, two limits to pricing or price policy are set by an economic or cost of production factor and the other by the market factor. A company would not normally sell its product(s) at a price less than the unit (average) cost of production, and, a customer would not pay a price more than the perceived value of the product. These two would set the limits to pricing of the product unit cost would set the lower limit and customers perceived value the upper limit. The pricing policy of a company is mostly guided by these two limits; and, in most market situations, the actual price would be settled between the two. Given these two limits, the pricing policy of a company would depend on the pricing objectives. The objective of pricing is not always to maximize profit, although this should be the ideal objective. Many companies have other overriding objectives dictated by organizational objectives and their positions in the market vis-a-vis competitors. There can be short-term objectives and long-term objectives, and there can be a dichotomy between the two. Various pricing objectives followed by companies, including the more common ones, are given below:
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(a) Maximizing growth of sales (b) Maximizing short-term profitability (c) Achieving product-quality leadership (d) Maximizing long-term profitability (e) Skimming the market (f) Creating entry barriers for competitors (g) Dumping the product and (h) Organizational survival
14.4.3 Product Promotion

There are many ways to promote a product and most companies use a mix of different promotional tools. Policy-makers and strategists should take into account the major factors which determine the choice of a particular promotion mix. These are: A. Nature of the market, i.e., market size, number of products/brands in the market, intensity of competition, etc. B. Product awareness and buyer readiness, i.e., buyers awareness of various products and their readiness to buy particular products/brands. C. Product life cycle, i.e., introduction stage, maturity stage, etc.in the introduction stage, advertising and publicity are more important while in the maturity stage, sales promotion and personal selling are more effective. D. Overall marketing strategy, i.e., whether the company likes to push the product (through marketing and distribution network) or create a pull (strong consumer demand). In the push strategy, focus is on personal selling and trade promotion; in the pull strategy, the emphasis is on advertising and consumer promotion. For many companies, overall promotional policy or strategy can be a combination of push and pull. Given these factors, companies use a variety of promotional tools today. These include promotion letters, catalogues, point of purchase (retail stores) displays, customer service programmes, sales demonstrations, contests, free samples, discounts, coupons, free offers, extras, price-offs, etc. Point-of-purchase (POP) promotion through displays in retail outlets is one of the most widely used promotional tools today. Innovative displays have become a prerequisite for product/brand success. With limited space available in retail stores, products/brands compete with one another for consumer attention
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and shelf space. In todays high intensity marketing, the retailers are virtually flooded with POP promotions from various manufactures. More and more companies are going for innovative displays to give their products/brands more visibility in shelves. When Nestl had introduced Maggi noodles in 1983, they had used a unique dispenserthe wire mesh bag. It had not only helped in product/brand identification and focus, but, also helped the retailer. The dispenser, hung from the ceiling helped the retailers save shelf space. Cadbury too came up with a dispenser. Customized racks are also being used by companies for display. Companies like Procter and Gamble, Nestl, Hindustan Unilever, Lakme and Tips and Toes make yearly bookings for display space in various stores.
14.4.4 Place (Distribution)

Place or distribution is the process by which goods and services are delivered to the customers. In industrial products and consumer goods (not for services), an important matter of policy for a company is to decide whether it should sell its products directly to consumers or through intermediaries or middlemen, i.e., channels. There can be zero channel or there can be multiple channels. Given the alternative channels, a company has to evaluate these and determine which channel suits its strategy implementation. Determination of suitability or unsuitability of a channel is based on three criteria: economic, control and adaptability. The economic criteria relate to distribution cost. Relative costs of distribution through different channel alternatives have to be considered for viability. Since the intermediaries or channel members are independent, a manufacturer has to take into account the controllability factor of these channels. A preferred channel is one which offers more controllability. Finally, adaptability of a channel is important. A channel should provide for flexibility so that changes can be introduced when situations demand. Inflexibility or rigidity may affect operational efficiency of a channel. In all multiple channels, channel management is a major task of a company. Channel management involves two issues: managing channel conflict and motivating channel members. Channel conflicts can be vertical (channel members at one level in conflict with members at higher or lower level), horizontal (conflicts between members at same channel level) or multichannel (channels get in conflict with the company). Three different types of conflicts require different types of channel management approaches. Also, it is not enough for a company to resolve or reduce channel conflict; it is necessary to keep the channel members motivated. Motivation can be achieved through both financial (higher margins,
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bonuses, extended credit limits, etc., and non-financial (contests, recognition of better performance, paid holidays, etc.,) methods. Companies like Philips, Bajaj Electrical and Parle Exports are known to publicly acknowledge and reward high performance of selected dealers. Reliance, Videocon, etc., sponsor holidays for their high-performing dealers to foreign destinations.
14.4.5 Marketing Mix

The genesis of the marketing mix is: if one manages to achieve the right product at a right price with the right promotion and in the right place, the marketing programme would be effective or successful. Therefore, assembling and managing the marketing mix (including all the elements shown in Table 14.1) is a basic marketing task and blending the marketing mix into a winning combination is a matter of strategy. The inter-connected marketing mix system is shown in Figure 14.3. Marketing success and failure depend, to a large extent, on the choice and balance of the marketing mix.
Figure. 14.3 The Inter-connected Marketing Mix System
The case of Big Bite cite in the caselet above is an example of how wrong balancing in the marketing mix can lead to marketing failure.
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5. Marketing policies and plans are expressed though the four Ps: product, price, promotion and participation. (True/False) 6. The pricing policy of a company is mostly guided by the two limits unit cost and customers perceived value. (True/False) 7. Which of these is not an element of a promotional mix? (a) Advertising (b) Sales promotion (c) Personal selling (d) Production 8. Promotion through displays in retail outlets is as a promotional tool is known as (a) Point-of-purchase (POP) (b) Demonstrations (c) customer service programmes (d) discounts
14.5 Financial Policies and Plans

Next to production and marketing policies and plans, financial policies and plans are most vital for strategy implementation of a company. Some may even argue, and rightly so, that all the three are equally important or vital. Implementation of every strategy has financial implications in terms of cost or investment. Financial policies and plans relate to three important factors: (a) Sourcing of funds (b) Allocation of funds or investment decisions (c) Management and control of funds
14.5.1 Sourcing of Funds

Policies and plans related to sourcing of funds deal with financing mix or capital mix decisions. Policies have to be formulated and decisions taken on major financing factors or issues: capital structure, capital issues, capital procurement pattern, working capital borrowings, reserves and surplus or retained earnings
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as sources for funding, relationship with lenders, banks, financial institutions, etc. These policies and decisions are vital because of two reasons: first, these determine how and how much financial resources will be made available for implementation of different strategies; and, second, each of the sources or choices has certain cost associated with it. Various sources of funds can be broadly divided into two categories: short term and long term. The other way to classify sources is as internal or external (Table 14.2).
Table 14.2 Sources of Funds: Internal, External, Short term, Long term Source Internal External Short term Nil Short-term loans Banks Financial institutions Public deposits Leased assets Trade credits Customers advances Long term Retained earings Share capital Equity shares Preference shares Debentures Fixed deposit Longterm loans
Given the various sources of funds, a major policy decision for a company is to secure the optimal financing mix, i.e., the right combination of internal and external, and short-term and long-term sources of funds. Such combination or mix is governed by a number of factors. The major factors are mentioned below. (a) Nature of business (b) Purpose of financing (c) Cost of financing (d) Financial leverage (e) Control or interference in management (f) Organizational ability Because of these various factors, different companies adopt different policies for financing mix commensurate with their business conditions. Ingersoll Rand, for example, adopted a policy of blending internal and external sources for financing its strategies for expansion and growth. Almost 70 per cent of the companys post-tax profit was reinvested to reduce its dependence on external sources (borrowed funds). This enabled the company to keep its interest costs
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low. Reliance Industries gives a different kind of example. It has successfully used its capabilities to source funds at lower cost. To achieve this, it has used a mix of external long-term sources fully convertible debentures, partly convertible debentures, and global depositing receipts (GDRs). The company has used these sources to finance its expansion plans without putting much pressure on equity. The companys debt-equity ratio is maintained around 1:1 which is very favourable for a rapidly growing company as against a general private sector norm of 2:1.
14.5.2 Allocation of Funds or Investment Decisions

All strategy implementations, except retrenchment strategy, involve allocation and deployment of funds or investment decisions. As sound corporate practice, uses or allocation of funds should be kept in view while formulating policies on sourcing of funds. Policies and plans related to allocation or utilization of funds essentially relate to asset mix decisions, i.e., regulating investments in fixed assets and holding of current assets. Fixed assets are long term in nature, have certain life and depreciate; current assets are short term in nature and are either held as cash or expected to be converted into cash during the accounting period. Fixed investment or investment in fixed assets and investments in current assets or working capital are meant for different business or corporate purpose; but, both forms of investment are used simultaneously and, in certain combinations, with a common objective of strategy or project implementation. For example, in manufacturing, a company requires both fixed capital and working capital to fulfil the same objectiveto produce or make a product as per strategy requirements. Working capital requirements depend on various factors, like production or sales, raw material/input procurement pattern, inventory norms, seasonal fluctuations in demand/sales, etc. For formulating its working capital policy, a company should take into account these and related factors. The fundamental guiding principle for working capital policy formulation and implementation is the endeavour to maintain working capital at a level which enables efficient business operation and, at the same time, minimize the cost of working capital. This requires three major steps or actions: (a) Inventory management (b) Credit/ debit policy (c) Cash balance
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9. All strategy implementations, except retrenchment strategy, involve allocation and deployment of funds or investment decisions. (True/False) 10. Fixed assets are long term in nature. (True/False)
14.6 HR Policies and Functions

Human resource function in an organization may not appear as significant as production, marketing and finance, but, its role is becoming increasingly important. Strategic importance of HR function/activity received widespread attention in the 1990s, and, its role is encompassing newer dimensions. The job of the HR manager is changing rapidly as companies are downsizing and reorganizing or restructuring and his/her strategic responsibilities are assuming greater significance. Also, HR policies and functions essentially deal with people who are at the core of all the functions and are considered the most precious resource of an organization. HR policies are, therefore, very sensitive in terms of application because these affect employees more directly than other functional area policies. HR policies and functions should concentrate on four major factors or areas: (a) Development of human resource (b) Retaining personnel (c) Incentive system (d) Job mobility/Succession planning Management of human resource (HRM) and development of human resource (HRD) are both important. HRM helps in retaining personnel by keeping them happy and motivated. HRD prepares personnel/managers for performing the present jobs better and for newer tasks and responsibilities which help in job mobility and succession planning. HRD, therefore, plays a more vital role. In practice, however, HRM and HRD play complementary roles. These two together govern HR policies and plans. Human resource development is a continuous process. HR development takes place through counselling, postings, promotions and training. Training is the most important. In most companies concerned with HR development, elaborate and systematic training programmes are planned depending on development requirement of managers at different levels. In planning and
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designing training programmes, two factors are important: first, assessment of training needs, and, second, partly following from the first one, training methods and intensity of training. Training needs are usually different for different managers. Therefore, many tailor-made programmes or modules are necessary. There are two major methods of training: on-the-job and off-the-job. To determine the methods or modes of training and frequency, and, because HRD is a continuous process, many companies have their own training cells and, also centres. Hindustan Unilever, Larsen & Toubro, RCF, Tata steel, SAIL and BHEL, are among them.
11. There are two major methods of training: _______ and __________. 12. Human resource development is a _______process.
14.7 MIS/IT Policies and Plans

MIS/IT is a new economy function which is increasingly playing a significant role in planning, strategy formulation and implementation. We had briefly discussed MIS in the previous unit under systems. It provides vital connectivity between the organization and the environment, and, also among various functional and operational areas within the organization. Earlier, MIS was considered a peripheral functionsetting up of information system was purely a matter of option or choice. But, today, it has become an essential requirement. It has been observed that the strategic management process is more efficient in companies which have an effective MIS. Many companies are adopting a new approach to MISa system which blends the technical knowledge of IT experts with thoughts and vision of senior/top management. An effective management information system should consist of five interrelated steps or stages to increase its utility and comprehensiveness: (a) Collection and retention of information (b) Processing and storage of information (c) Database management (d) Synthesis of information, retrieval and usage (e) Transmission and dissemination of information
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Companies are developing MIS policies and plans for its extensive application to increase productivity in different functional areas, efficiency in operation and to improve networking for better connectivity. Hindustan Unilever launched a pilot project to widen its area network by connecting its distributors and important retailers. The purpose was market research and intelligence to source information from the market about customers, competitors and various channel members. The company has also set up a sales force automation system with wireless connectivity through which salespersons in the field can collect useful retail data and send the same to the MIS centre for further analysis and policy formulation. Reliance Fire and General Insurance Company, a subsidiary of Reliance Industries, is using MIS/IT to improve efficiency in operationcomplete networking of area offices, service centres and insurance agents for instant service to the customers. Glaxo India, Corporation Bank and RPG Enterprises have used MIS/IT in different ways.
13. MIS provides vital connectivity between the organization and the environment, and, also among various functional and operational areas within the organization. (True/False) 14. MIS is a peripheral function in most companies today. (True/False)
14.8 Alternative Business Strategies and Functional

Policies and Plans We have analysed various dimensions and developments in major functional areas of production, marketing, finance, HR and MIS/IT in relation to corporate strategy. For effective implementation, different business strategies require different functional policies and plans. So, functional policies and plans should be flexible, adaptable and strategy-driven. Expansion or diversification strategies require one set of functional plans; stability strategies need different kind of functional plans; restructuring or downsizing or retrenchment require still different plans; combination strategies would generally require a blending of some of these functional plans. This is illustrated in Table 14.3.
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Table 14.3 Alternative Strategies and Functional Plans

Strategy
Expansion/ Diversification
Production
Expand/ install plant capacity to support new products Defer new investments in plant and equipment
Marketing
Extend and improve product; this is more critical than margin Push high margin products/ brands
Financial Plan
Increase debtequity ratio; Review dividend policy for cash flow needs/ generation Strengthen the balance sheet and maintain steady dividends
HR Plan
Hire additional production, R&D and sales workers/ managers Invest in training programmes to improve management skills
Back-up Action
Evaluate market share and review financial position after two years Continue for few years unless market trend shows high opportunity for growth. Sell plants and reduce personnel in one year; cut dividends
Stability/ Incremental growth
Restructuring/ Retrenchment
Identify plants to be closed on the basis of capacity utilization and obsolescence
Identify products for divestment those with low sales and/ or margin
Eliminate or reduce dividends and manage cash flows
Reduce and/or redeploy personnel on the basis of skills and experience
Source: Adapted from L R Jauch, R Gupta and W F Glueck, Business Policy and Strategic Management (New Delhi: Frank Bros. & Co., 2004), 387 (Exhibit 10.2).
For each of the major strategies and the functional plans mentioned in the table, a set of policies has to be laid down relating to a particular area of business. The policies will ensure that the plans are implemented as intended and that different functional plans work towards achievement of the same objectives. The example in Table 14.3 is an illustration of only one group of strategies, functional plans and required policy support. Plans and policies have to be developed by companies for all the key functional decisions pertaining to each particular business strategy. B. Operational Implementation We have distinguished between functions and operations earlier in the unit. Operations are more implementational; they give support to functional policies and plans. Distribution is a function; transportation involved in distribution is operation. Operational implementation, therefore, becomes as vital, if not more, as functional implementation. And, the scope of operational implementation is very wide because it is part of every function or functional implementation. Operational implementation, or its effectiveness, depends on four major interrelated factors. Some call them 4-Ps: processes, productivity, pace and people (Figure 14.4).
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Figure 14.4 4-ps: Processes, Productivity, Pace and People
15. Functional policies and plans should be________, adaptable and strategydriven. 16. Operational implementation, or its effectiveness, depends on four major interrelated factors, which are called the.
14.9 Processes or Methods

Processes are methods or courses of action in sequential steps for carrying out tasks for achieving certain organizational objectives. All the functional areas of production, marketing, finance, HR, and MIS/IT operate on the basis of established processes. Processes, however, evolve and change over time, and these affect operational implementation of corporate strategies. Many processes have been developed by strategy analysts, consultants and companies which have affected strategy implementation in different ways. Major processes which have influenced strategic management in a significant manner are: value chain analysis, supply chain management, enterprise resource planning (ERP), benchmarking, business process re-engineering (BPR) and outsourcing or BPO. We had discussed value chain analysis, at length, in Unit 6. Value chain analysis, as a process, links a set of value-creating activities in a company. These include both primary activities (inbound logistics, production, outbound logistics, marketing/sales and services) in an organization and, also, support activities (R&D, HR, MIS, general administration, etc.). Relative effectiveness of individual valuecreating activities, particularly the primary activities, has direct impact on operational implementation, and, therefore, on overall strategy implementation.
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Supply chain management (SCM) is one of the developments, which emerged from value chain analysis. SCM is a process in business logistics. It lends logistical support to the activity-based value chain. Supply chain, as a process, manages the entire movement of raw material/inputs and finished goods from procurement to the market. Each of the steps or stages in SCM is critical for the company on the one hand, and stakeholders like vendors, transporters, channel members and customers on the other. Process improvements in SCM benefit all the parties concerned and operational implementation of strategies also improves. Enterprise resource planning (ERP) provides vital connectivity within an organization. ERP systems, through appropriate software, seek to integrate the entire business operations of a company including manufacturing, marketing finance, HR, logistics, warehousing, etc., to harmonize operations and reduce cost. Many large organizations use the ERP process to increase operational efficiency. HPCL, among others, has installed an adapted ERP system to optimize communication or linkages among various functional departments/activities of the company.
17. The process called _______ links a set of value-creating activities in a company. 18. ______systems, through appropriate software, seek to integrate the entire business operations of a company including manufacturing, marketing finance, HR, logistics, warehousing, etc.
14.10 Productivity and Efficiency

Productivity and efficiency contribute to the operational effectiveness of various functions. Productivity measures or innovations to increase productivity have, however, primarily taken place in the field of manufacturing. Development of linear and non-linear programming techniques aimed at optimizing production is subject to certain resource allocations or constraints. Japanese companies had popularized quality and productivity technique during the 1980s. There was virtual explosion of such techniques during the 1990s. Many of these were either initiated by Japanese companies or prompted by their competitive superiority in manufacturing methods over the US and European companies. Six such major techniques/methods are: just-in-time manufacturing, cycle time reduction, mass
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customization, flexible manufacturing system, optimized production technology and total productive maintenance. Just-in-time (JIT) manufacturing is a productivity-cum-efficiency technique with two primary objectives: cost reduction and inventory minimization. In trying to achieve these two objectives, JIT, in effect, becomes a more comprehensive approach including simplification of product designs, streamlining process flows, meticulous time planning, etc. Cycle time reduction helps or complements JIT. Cycle time reduction, as the name indicates, seeks to minimize the time taken for each step or work in the assembly line or the manufacturing process. Mass customization of products is a development which has struck a middle course between the two traditional classifications of mass market and niche market. Mass customization is a landmark evolution in production and productivity combining the characteristics and benefits of a mass product and niche product. We had discussed mass customization in Unit 8. Flexible manufacturing process or system almost follows from the mass customization approach; or, rather, it is a necessity to ensure mass customization of products and, at the same time, keep costs under control. Optimized production technology is a computer-aided system for planning and integrating production, materials management and resource utilization to maximize output and control inventory. Total productive maintenance is an improvement over the traditional reactive maintenance system and focusses on a total system of managing productivity through organization-wide autonomous maintenance by everybody concerned rather than a single department.
19. _________manufacturing is a productivity-cum-efficiency technique with two primary objectives: cost reduction and inventory minimization. 20. ________ seeks to minimize the time taken for each step or work in the assembly line or the manufacturing process.
14.11 Pace or Speed of Action

Given the processes or methods and productivity, pace or speed of action or implementation becomes a vital factor in operational effectiveness. Pace or speed is essentially concerned with timing or time management of implementation. For example, in value chain analysis, speed can be a differentiating factor in performing different activities in the chain faster than the
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competitors to lead to competitive advantage. The same is true of timing or speed of action in other processes or methods like supply chain management, benchmarking, outsourcing, etc. Strategy analysts have suggested a number of techniques for better planning and management of time to increase efficacy of operations. Three such techniques are: time study, network analysis and activity charting and time-based management. Time study is one of the oldest methods of time management. In time study, the emphasis is on analysing and sequencing critical stages in production to identify bottlenecks and wastages, and eliminate or minimize them to build a more efficient and fast process. Network analysis and activity charts are an improvement over time study methods. Charting and networking of activities are done to construct a critical path to optimize time and resource allocation, and consequently, saving costs. Time-based management approach developed during the 1980s and 1990s highlights the role of time as a strategic weapon. For example, first movers in products/markets enjoy a definite competitive advantage over late-movers or parallel innovators or initiators in launching and implementation.
21. Time study is one of the latest methods of time management. (True/False) 22. _________and ________of activities are done to construct a critical path to optimize time and resource allocation, and consequently, saving costs.
14.12 People Factor

Finally, people in an organization become a major factor, or rather, the ultimate factor, for the success in operational implementation of strategy. Be it process or method, productivity or time management, people are a common factor. People signify three categories of human resource who matter most for strategy implementation: workers on the shop floor, operating staff and managers. Each of these categories of people makes a difference in operational effectiveness. Some of the important factors to be considered for optimizing peoples role in implementation are: strategic selection and recruitment, training and development and performance management. Strategic selection and recruitment is the first step in manpower planning and, should be properly aligned with strategies. As selection of right people for
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right positions leads to enhancement of productivity, recruitment of wrong people can significantly affect performance. After selection and posting, skill levels of people need to be continually developed and updated through appropriate training and development methods. Training and development have to be job based and operation based. The third important factor, which supplements selection and development, is performance management of the employees. Productivity comes through performance, and, therefore, many companies use performance appraisal and monitoring to improve employee efficiency in operation. The three factorsselection, development and performance management should be read in conjunction with the four important factors development of human resource, retaining personnel, incentive system and job mobility/succession planningmentioned before under HR policies and plans. In fact, the people factor in operations should be viewed as a role extension of human resource from HR policies and plans. We have analysed above many processes, methods, techniques and practices in different organizational areas for increasing operational effectiveness of strategy implementation. Managers/management often are not clear about which are the right methods and techniques, and, in their search for quick results, sometimes make indiscriminate choices or fall for the latest techniques without assessing their applicability or appropriateness to particular operational situations. Companies should guard against such pitfalls. Even carefully chosen processes and techniques may not always be sufficient to ensure successful strategy implementation. Porter feels that operational effectiveness is necessary, but is not a sufficient condition for success of strategy. By operational effectiveness, he means, performing similar activities better than rivals perform them. It refers to any number of practices that allows a company to better utilize its inputs.5 Activity 2 Suppose that you are the strategy head in an organization. How would you design the operational implementation plan for your company? Discuss in the form of a project.
23. People signify three categories of human resource who matter most for strategy implementation: workers on the shop floor, operating staff and managers. (True/False)
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24. Productivity comes through performance, and, therefore, many companies use performance appraisal and monitoring to improve employee efficiency in operation. (True/False)
14.13 Case Study

Microsoft: Marketing/Operating Strategy to Sustain Leadership* Market leaders usually adopt defensive strategies mostly counter offensiveto maintain their leadership positions, and challengers (No. 2) employ offensive strategiesfrontal or flank attacksto challenge or displace the leader. But, Microsoft, the market leader in computer software, primarily adopts an offensive or aggressive, or, in the minimum, pre-emptive strategies to sustain its leadership
Microsoft tried to dissuade IBM and Gateway from promoting or using Microsofts competitors products on their PCs. IBM and Gateway resisted the move. In retaliation, Microsoft forced them to pay higher prices for installing MS Windows operating system on their PCs than any other PC makers. Microsoft urged Intel not to export its newly developed NSP software because Microsoft felt that NSP becomes an intrusion into its operating system platform. Microsoft also pressurized PC makers not to install Intels NSP software on their PCs. Microsoft adopted an aggressive posture against Netscape also. Microsoft wanted to enter into a special alliance with Netscape. The alliance would allow Microsoft to incorporate Netscapes Navigator browsers functionality into Windows. When Netscape declined the proposal, Microsoft withheld
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information about its Windows 95 code till it released the new operating system and its own new version of Internet Explorer. During 1999, US district judge, Jackson, delivered a judgement (in US vs Microsoft) that Microsoft had repeatedly used high-handed tactics to pressurize customers, crush competitors and throttle competiton. Judge Jackson cited many examples to support his conclusion/judgement. But, Microsoft continues to use its marketing/operating muscle to sustain its dominance. During 2001, the company curtailed its support for Java in its release of the new Windows XP operating system because Java is favoured by Microsofts old rival Sun Microsystems. Microsoft is also pressurizing PC makers to follow/oblige it in different ways.
* Based on A A Thomson, A J Strickland, and J E Gamble, Crafting and Executing Strategy (New Delhi: Tata McGraw Hill, 2005), 211 (Illustration capsule 8.2).
14.14 Summary
Let us recapitulate the important concepts discussed in this unit: In any organization, actual implementation of strategy takes place through major functional areas of manufacturing, marketing, finance, HR and MIS/ IT. In each of these functional areas, operational implementation is equally important. Functional implementation and operational implementation are, in practice, complementary to each other. Marketing is the most vital function in an organization because it establishes the link between the company and the market or the customers. In marketing policies and plans, pricing is the most critical element. Pricing policies and methods are based on the fundamentals of cost, demand and competition. Implementation of every strategy has financial implications in terms of cost or investment. Financial policies and plans are, therefore, as important or vital as production and marketing policies. HR function in an organization may not appear as significant as production, marketing and finance, but, its role is becoming increasingly important. MIS/IT is a new economy function which is playing a very significant role in planning, strategy formulation and implementation. For effective implementation, different business strategies require different functional policies and plans.
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14.15 Glossary
Current assets: Assets that are short term in nature and are either held as cash or expected to be converted into cash during the accounting period Fixed assets: Assets that are long term in nature, have certain life and depreciate Functional strategy: Strategy that relates to a particular functional area and follows from business strategy of an organization Marketing mix: The way the four Ps or some of the Ps (depending on the product category) are combined or blended to optimize market offerings to increase sales and market share.

1. Discuss functional policies and plans in the area of production including the major issues involved. 2. Anaylse marketing policies and plans with respect to strategy implementation in terms of 4-Ps and marketing mix application. 3. What are the major factors which govern financial policies and plans of an organization? Analyze them. 4. Discuss the role of MIS/IT as a new economy function in planning, strategy formulation and implementation. 5. What are the major processes, methods or techniques which affect operational implementation of strategy? Discuss briefly. 6. Discuss the vital role of people factor in implementation. Analyse in terms of major HR initiatives required to optimize peoples role in strategy implementation.

1. quality circle 2. Armand Feigenbaum
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3. (a) Paper 4. (d) almost zero 5. False 6. True 7. (d) Production 8. (a) Point-of-purchase (POP) 9. True 10. False 11. On-the-job, off-the-job 12. continuous 13. True 14. False 15. flexible 16. 4Ps 17. value chain analysis 18. ERP 19. Just-in-time (JIT) 20. Cycle time reduction 21. False 22. Charting, networking 23. True 24. True

1. If a company decides to manufacture the product, it has to consider some major policy issues in relation to the production process. Refer to Section 14.3 for further details. 2. Marketing is the most vital function in an organization because it establishes the link between the company and the market or the customers. Refer to Section 14.4 for further details.
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3. Next to production and marketing policies and plans, financial policies and plans are most vital for strategy implementation of a company. Refer to Section 14.5 for further details. 4. MIS/IT is a new economy function which is increasingly playing a significant role in planning, strategy formulation and implementation. Refer to Section 14.7 for further details. 5. Processes are methods or courses of action in sequential steps for carrying out tasks for achieving certain organizational objectives. Refer to Section 14.9, 14.10, 14.11, 14.12 for further details. 6. People in an organization become a major factor, or rather, the ultimate factor, for the success in operational implementation of strategy. Refer to Section 14.7 for further details.
4.18 References
1. David, F R. 2003.Strategic Management: Concepts and Cases. 9th ed. Pearson Education. 2. Ghosh, P K. 2003. Strategic Planning and Management. 10th ed. New Delhi: Sultan Chand & Sons. 3. Jauch, L R, R Gupta, and W F Glueck. 2004. Business Policy and Strategic Management. 6th ed. New Delhi: Frank Bros. & Co. 4. Miller, A. 2002. Strategic Management. New York: McGraw Hill. 5. Nag, A. 2008. Strategic Marketing. 2nd ed. New Delhi: Macmillan India. 6. Pearce II, J A, and R B Robinson Jr. 2005. Strategic Management: Formulation, Implementation and Control. 9th ed. New Delhi: Tata McGrawHill. Endnotes
1 2 3
F R David, Strategic Management: Concepts and Cases, (Pearson Education, 2003),26 P K Ghosh, Strategic Planning and Management (2003), 416. P Drucker, Managing for Business Effectviness, Harvard Business Review (May-June, 1963), 59. This section is primarily based on A Nag, Marketing Successfully: A Professional Perspective (New Delhi: Macmillan India, 2001), Chapter 8. M Porter, What is strategy? Harvard Business Review (NovemberDecember, 1996), 62.
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Unit 15
Structure
Implementation: Behavioural and Values
15.1 Introduction 15.2 Caselet Objectives 15.3 Leadership: Strategic Role 15.4 Leadership Styles 15.5 Is Leadership Style Portable? 15.6 Leadership Role of Top/Senior Management 15.7 Organizational Culture 15.8 Corporate Ethics and Values 15.9 Corporate Politics and Power 15.10 Power, Politics, Strategy and Implementation 15.11 Case Study 15.12 Summary 15.13 Glossary 15.14 Terminal Questions 15.15 Answers 15.16 References
15.1 Introduction
The significance of behavioural factors in strategy implementation in an organization is clearly understandable. Organizations may plan, formulate and implement strategies, but, it is the individualsmanagers at different levels who actually take appropriate actions involved in implementation. So, individualrelated or individual-focussed factors or issues like leadership styles, personal ethics and values, corporate politics, etc., become very vital. In addition to these, cultural environment in an organizationwork styles, beliefs, shared values, etc., is also equally important. Leadership plays a vital role in addition to organizational culture and values. So, behavioural implementation of strategies focusses on:
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A. Role of leadership Strategic role Leadership styles Role of top management B. Organizational culture, values, politics Organizational culture Business ethics and values Corporate politics and power We shall analyse each of these factors below. In analysing these factors, we shall discuss changing roles and styles of leaders, cultural web, strategy culture relationship, cultural barriers to strategy implementation, strategy supporting culture, organizational ethics, personal values of managers, corporate politics, corporate power equations, etc.
15.2 Caselet
The quality and style of a companys leader is very important in determining its growth and sustainability. Wipro was a small insignificant vegetable oil company in 1947, which grew into a multinational conglomerate in the 21st century. Wipro Technologies, one of the largest software companies in India, is headed by Azim Premji (Premji), whose leadership is characterized by sound values, integrity and professional will. It is these qualities that have driven Premji to churn Wipro from a $2 million company to a $1.76 billion one, serving customers across the globe. Premjis sharp strategic vision and crisp communication skills led his team to strive for excellence. He has been known for his modesty, simplicity and non-extravagance.
Source: J. Shalom J and Ravi L (2009), Wipros Azim Premji: Level 5 Leadership Style? Available at http://www.ibscdc.org/Case_Studies/HRM/OB0021.htm
Objectives
After studying this unit, you should be able to: Analyse the role of leadership in strategy implementation Discuss whether leadership style is portable Analyse the role of organizational culture in implementation of strategy
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Focus on the role of business ethics and values in implementation Appreciate the role of corporate politics and power
15.3 Leadership: Strategic Role

We had highlighted the critical role of leadership in turnaround situations in Unit 9. We had also discussed the role of CEO in the strategic management process in Unit 2. Be it a crisis or turnaround situation, normal times or good times, the leader plays a pivotal role in the functioning and performance of every organization. For the manager, leadership is the focus of activity through which the goals and objectives of the organization are accomplished.1 Good or great leaders lead an organization to strategic success, and bad leaders can be instrumental for the downslide or closure of companies. A leader performs two strategic roles. First, he is the architect of a strategyinnovates, conceives, plans and formulates strategy ; second, he is the implementor of strategyinitiates action and induces/drives the employees into operations. Successful performance of these two roles presumes many characteristics or qualities of a leader. King (1990) has enunciated 10 such characteristics or factors (his original enunciation has nine factors) in relation to strategy formulation, strategic direction and implementation. Many strategy analysts agree with him that a leader should Be a visionary, willing to take risk and be adaptable to change; Develop new capabilities and qualities to perform effectively; Exemplify the goals, values and culture of the organization; Be clearly aware of the environmental factors affecting the business of the organization; Pay attention to and encourage strategic thinking and intellectual activities; Adopt a collective view of leadership in which leaders influence is dispersed across all levels of the organization; Lead by empowering employees and put an increasing emphasis on statesmanship; Adopt a strong perspective to build subordinates skills and confidence to make them change agents;
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Facilitate transformation of followers into leaders even at lower levels; and Delegate authority and put emphasis on innovation.2
1. A leader implements the strategy formulated by others. (True/False) 2. A leader should not delegate authority. (True/False)
15.4 Leadership Styles

Leadership style is a way or pattern of behaviour, which a leader adopts in managing the affairs of the organization directing and motivating managers and staff for achievement of organizational objectives. Such definition shows that leadership styles can be many and varied. A question, therefore, arises as to which is the most appropriate leadership style. A straightforward answer to this is always difficult because leadership styles depend on organizational conditions and business/strategic situations. In fact, most leadership styles are situational. Contingency theories on leadership support this view. Khandwala has studied leadership styles in a cross-section of organizations. Based on his study, Khandwala distinguishes between leadership styles based on five major characteristics or dimensions. These are presented in Table. 15.1.
Table 15.1 Leadership dimensions and styles Base/Dimension Risk taking Technocracy Organicity Participation Coercion Style/Characteristics Willingness to take high-risk, high-return decisions Use of planning techniques and decision making by technically qualified persons Flexibility and adaptability in organizational structuring Team management approach involving managers at different levels Authoritarian use of fear and domination by top management
Source: Adapted from P Khandwala, Some Top Management Styles: Their Context and Performance, Organization and Administrative Science (Winter, 1977), 2125. Sikkim Manipal University Page No. 408
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Leadership styles are influenced by environmental factors as shown in the table, but, styles must relate to organizational strategy. Leadership roles and styles are, in fact, designed to formulate and implement strategy. As we had mentioned in Unit 7, such strategies are formulated taking into account given environmental conditions. Styles would also depend on the type of strategy for effective implementation and success. Leadership styles which suit stability strategies may not be appropriate for growth or diversification strategies or corporate restructuring or turnaround strategies. Similarly, leadership styles which may be most suitable for managing internal change (crisis) would not be applicable for pursuing or implementing growth or diversification strategies. So, there are three interactive but, different factors: style, strategy and environment. Strategy-environment combination determines leadership styles.
15.4.1 Leadership Styles in Practice

If we analyse the leadership styles of the global and the Indian CEOs, we would find that each CEO has a distinctive style of his/her own. These styles are influenced by environmental conditions and they all relate to organizational strategies; but, there is a uniqueness to the style of each of these leaders which make him/her successful and, also exemplary. This is true of great global CEOs like Lee lacocca, Jack Welch, Bill Gates, Akio Morita, L N Mittal and Indian CEOs like Dhirubhai Ambani, Ratan Tata; Aditya Birla, Rahul Bajaj, Azim Premji, N R Narayana Murthy, B L Munjal and many others. The predominant styles of some of these CEOs are mentioned below. Jack Welch L N Mittal Dhirubhai Ambani Aditya Birla Ratan Tata Rahul Bajaj Azim Premji : Building on strength; entrepreneurial, participative. : Highly entrepreneurial, highly aggressive : Highly entrepreneurial and innovative : Participative, family approach : Democratic temperament, delegates authority : Friendly and philosophical, believes in level playing field : Focus on developing peoplecreating leaders
N R Narayana Murthy : Constantly aspires for more, blends professionalism with simplicity Some studies suggest that, in the Indian context, a purely authoritarian or a purely participative style may not be effective. Instead a nurturant-task style
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can be more relevant and appropriate. Nurturant-task style means a combination of tasks, responsibilities and concern for people/subordinates (nurturant), and, is directive as well as paternalistic in approach.3 Maheswari (1980) has studied the relationship between decision styles and organizational effectiveness in Indian corporates. He observes that most of the Indian organizations are neither authoritarian nor highly participative. The predominant style is consultation with limited participation, rather than joint decision making or company-wide participation. Organizational effectiveness is positively correlated with entrepreneurial style and negatively correlated with bureaucratic style of decision making.4
15.5 Is Leadership Style Portable?

Nohria and others (2006) have researched on a very interesting subject: Is leadership or leadership style portable? Or, to put it in another way: Will a leader, successful in one organization, be necessarily successful in another company? The authors studied job switching of 20 executives of GE (who left the company between 1989 and 2001) to become chairmen, CEO or CEO-designates of other companies. These companies include some of the big international names like 3M, Fiat and Home Depot. GE was chosen because the company is widely regarded in the US as one of the best talent generators. The authors conducted their analysis of CEO/leadership portability in terms of four different types of human capital: strategic human capital, industry human capital, relationship human capital and company-specific human capital. Strategic human capital refers to skills or capabilities required to control or manage different strategic situationscost control, competitive threat or fierce competition, new product development, etc. Strategic capability or strategic human capital may be the most portable. Industry human capital pertains to skills and capabilities which are successful in one particular industry, but need not be transferable to another industry. GE top executives who moved to industries which were quite different from GE businesses were found generally ineffective. Relationship human capital, which may also be called social capital, relates to skills, relationships and understanding an executive develops in course of working with his/her team or colleagues, and, a manager would be always more successful in a new job or company if he/she brings along with him/her some of his/her former colleagues or team members. Lee lacocca did this when he joined Chrysler. Company-specific human capital refers to skill, knowledge, culture, systems, procedures, informal processes, etc., which exist in a company and,
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are unique to particular organizations and, therefore, are least portable or transferable. Based on their study of the selected GE executives in terms of the four types of human capital, Nohria et al. have come to some interesting findings and conclusions about leadership portability or transferability. These are summarized below: (a) Certain skillsmostly company-specific oneswill not be relevant to the new job and will have to be unlearned, which takes time. (b) The more closely the new environment (the company and the business) matches the old environment, the higher the chances of success of the portable managers. (c) The new company should be prepared to make necessary changes to allow the newcomer to succeedchanges in systems, procedures business portfolios, hiring a new team, etc. (d) The efforts of CEOs/leaders to replicate their performances in new jobs may have only mixed success. (e) Even the best management talent (CEO/leader) may not be portable if it does not match the new environment.5
3. Leadership _________ is a way or pattern of behaviour, which a leader adopts in managing the affairs of the organization. 4. Skills or capabilities required to control or manage different strategic situations are referred to as _________. 5. Skills or capabilities required to control or manage different strategic situations are referred to as ________. 6. Skills, relationships and understanding an executive develops in course of working with his/her team or colleagues are referred to as _______.
15.6 Leadership Role of Top/Senior Management6

The primary responsibility for providing effective strategic leadership is vested at the top, that is, the CEO. The analysis so far has been directed towards this. It does not, however, mean that leadership rests only with the CEO. Other
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strategic leaders include members of the board of directors, the top management team and senior managers including general manager (GM), vice-president (VP), assistant vice-president (AVP), etc. We had discussed the role of managers at different levels in the strategic management process in Unit 2. The focus here is on leadership styles or qualities of the top/senior managers and the important issues related to this. The top/senior level managers are vested with the responsibility (under the guidance/supervision of CEO) for formulating and implementing strategies of the organization. The top/senior level managers take most of the strategic initiative in the company, and, participate in the process of formulation of strategic plans. Strategic decisions by top/senior level managers influence, to a large extent, how far corporate goals will be achieved. Top/senior managers also help to develop appropriate organizational structures and systems for successful implementation of strategies. In Unit 12, we had analysed how organizational structure and reward systems affect implementation of strategies. The top/senior managers perform their leadership roles individually or, more often, as a team.
15.6.1 Top Management Team

In most companies, the complexity of tasks, issues and challenges and the need for diversity of knowledge and skills require strategic leadership by a team of managers. Use of a team to make strategic decisions also helps to avoid potential problems when these decisions are made by the CEO alone: managerial hubris.7 Research has shown that when CEOs begin to believe that they are unlikely to make errors, they are more likely to make poor strategic decisions.8 Some felt that part of Carly Fiorinas (CEO, HP) problem was that she seemed to be the only spokesperson for HP, and her refusal to focus more on the operational details of the business might have been the reflection of her celebrity status. CEOs and top executives need to have self-confidence but they must not allow it to become arrogance and develop a false belief in their invincibility. To guard against CEO overconfidence and poor strategic decisions, companies often use the top management team to consider strategic opportunities and problems, and to make strategic decisions. The nature and quality of the strategic decisions made by a top management team influences, to a large extent, the companys ability to innovate and initiate effective strategic management and change. The top management team should be, and usually is, heterogeneous in composition. A heterogeneous team consists of top/senior managers from manufacturing, marketing, finance, etc., with varied experience and skills. The
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more heterogeneous a top management team is, the more varied knowledge and experience will be at its disposal for effective interaction and decision making. Different perspectives given by team members during meetings are likely to increase the quality of the teams decision, particularly when a consensus or synthesis emerges from diverse perspectives. Research has shown that greater heterogeneity among top management team members generates healthy debate which often leads to better strategic decisions, implementation and organizational performance.
15.6.2 Top Management Team, CEO and Board

Diversity among team members may, however, lead to differences of views and also conflicts. In general, the more heterogeneous and large the top management team is, the more difficult it may be for the team to effectively implement strategies. Comprehensive and long-term strategic plans can be constrained because of communication barriers or problems among top executives who have different backgrounds of education, experience and skills. A group of top executives with diverse backgrounds may complicate the process of decision making if it is not properly managed. In such situations, top management teams may fail to logically examine all the issues, opportunities and threats leading to a sub-optimal strategic decision. In such cases, the CEO must attempt to seek behavioural integration among the team members and ensure that the members function cohesively. The characteristics of top management teams should be related to innovation and strategic change. More heterogeneous top management teams are likely to be associated positively with innovation and strategic change because of diverse capability inputs. The heterogeneity may force the team or some of the members to think out of the box and thus be more creative in making decisions. Companies which need to change their strategies are more likely to succeed if they have top management teams with diverse backgrounds and expertise. When a new CEO is hired from outside the industry, the probability of strategic change is greater than if the new CEO is from inside the organization or inside the industry.9 Hiring a new CEO from outside the company or industry adds diversity to the team, but, the top management team must be managed effectively to use the diversity in a positive way. Board of directors may sometimes find it difficult to direct the strategic actions of powerful CEOs and top management teams. It often happens that a powerful CEO appoints to the board a number of sympathetic outside members and/or inside members who are also in the top management team and report to
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the CEO. In either case, the CEO exercises significant control over the boards actions. Thus, the amount of discretion a CEO has in making strategic decisions is related to the board of directors and how it oversees the CEOs actions and the top management team. For poor performance of HP during Carly Fiorinas leadership, the board of directors had to share part of the blame. Activity 1 The predominant styles of eight leaders have been mentioned in the text. Choose any of these leaders and make a detailed analysis of his functioning style.
7. The primary responsibility for providing effective strategic leadership is vested at the top, that is, the CEO. (True/False) 8. The leadership of a company rests only with the CEO. (True/False) 9. The more _______a top management team is, the more varied knowledge and experience will be at its disposal for effective interaction and decision making 10. Hiring a new CEO from outside the company or industry adds _______ to the team.
15.7 Organizational Culture

Among the behavioural factors, next only to leadership style, organizational culture plays the most important role in the strategy implementation process of a company. Some people say culture is an abstraction; but it is the culture which shapes or moulds the soft Ss in an organization. In McKinseys 7-S framework, culture represents the seventh Sshared values (or superordinate goals). Culture is not created by declaration; it is mostly unwritten or unstated assumptions, values, beliefs, etc. Different authors have attempted different definitions of organizational culture. One such definition, which is quite representative, is given below:
Organizational culture is the set of assumptions, beliefs, values and norms that are shared by an organizations members.10
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The most important characteristic of organizational culture is sharing or common beliefs, values, attitudes, feelings, etc. Sathe (1985) has enunciated four components of sharing in organizational culture: Shared things (e.g., the way people dress) Shared saying (e.g., lets get down to work) Shared action (e.g., a service-oriented approach) Shared feelings (e.g., hard work is rewarded here)11 J R D Tata, former chairman of Tata Group, has well illustrated corporate cultural dimensions while describing the house of Tata:
I would call it a group of individually managed companies united by two factors. First, a feeling that they are part of a large group which carries the name of Tatas, and, public recognition of honesty and realiability trustworthiness. The other reason is more metaphysical. There is an innate loyalty, a sharing of beliefs. We all feel a certain pride that we are somewhat different from others.12
15.7.1 Creating Strategy-supportive Culture

In analysing the relationship between culture and strategy, we had mentioned five alternatives or possibilities. Two of the alternatives involved either adapting strategy implementation to the existing culture or changing the strategy itself midway through implementation. But, before changing any strategy, a company must carefully assess the stakes involved in the strategy and the implication of its change on corporate objectives, growth and profitability. If the strategy has very high stake like a major takeover or acquisition or a joint venture or merger with long-term organizational growth or diversification, the change of strategy will not be easy or will be at a high cost of organizational sacrifice. Therefore, change of strategy should be the option or compulsion of last resort. In fact, the recommended course for most of the situations is: mould the mindset of the people, remove the resistance to change and prepare the organization for strategic transformation. Many methods or techniques are available for changing an organizations culture. These methods include effecting changes in organizational design and structure, job reallocations, role modelling, training, transfer, promotion, etc. One such method is triangulation. Duncan describes triangulation as an effective, multimethod technique for analysing and changing a companys culture. Triangulation combines obtrusive observations, self-administered questionnaires and personal interviews to analyse the existing organizational culture. The
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process of triangulation identifies the changes required to be made in a companys culture to make it contribute to strategy.13 In addition to using methods like triangulation, it is also possible to identify, through experience and/or research, factors which are useful in positive linking of culture and strategy. Schein has indicated many elements which can facilitate creation of a strategy-supportive culture: (a) Clear statements of organizational philosophy, mission, goals and objectives; (b) Organizational design, structure and hierarchy; (c) Organizational systems and procedures; (d) Designing of physical spaces, facades and buildings; (e) Criteria used for selection, recruitment, promotion, leveling off and retirement of people; (f) Motivation, compensation and reward systems; (g) Stories, legends and myths about key people and events; (h) Role modelling, teaching and coaching by leaders; (i) What leaders pay attention to, measure and control; (j) Leaders reactions to critical incidents and organizational crises.14
15.7.2 Building a Sound Organizational Culture

A sound organizational culture is always conducive to strategy formulation and implementation. Efforts should, therefore, be made by companies to build a strong or sound cultural paradigm. Strategists and consultants can develop an ambitious strategic plan; the organization may have the necessary resource base; and, the top management/ leadership may be keen on fast and efficient implementation. But, the managers and staff should be prepared to take on the challenge, i.e., the organization should be culturally geared up. Sumantra Ghoshal has observed that:
Worldwide, managers are recognizing that while process re-engineering, financial restructuring and strategic repositioning are important means to corporate renewal, the bedrock of competitiveness ultimately lies in the behaviour of people. To stimulate initiative, trust, commitment and cooperation within the organization and, in its external relationships, top level managers are increasingly recognizing that the shaping and embedding of organizational values are perhaps their most important challenges.15 Sikkim Manipal University Page No. 416
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Building sound organizational culture has been the concern of many companies. Researches have been conducted on this to evolve ways and methods to develop an organizational culture which is positive, proactive, and supports and strengthens strategy formulation and implementation. Collins and Porras (1994), based on their research, have suggested six guidelines for developing a sound organizational culture: (a) Preserve core ideologies and values while allowing change to take place; (b) Stimulate growth and development through challenging objectives, purposeful evolution and continuous self-improvement; (c) Encourage new ideas, thoughts, experimentation and accept mistakes as lessons for the future; (d) Allow diverse thinking and accept paradox while accepting or rejecting either or arguments; (e) Create alignment by translating core values into organizational goals, strategies and practices; and (f) Grow new and trained managers internally by promotion from within.16
11. The set of assumptions, beliefs, values and norms that are shared by an organizations members is called ________. 12. ________ is a method to change organizational culture that combines obtrusive observations, self-administered questionnaires and personal interviews to analyse the existing organizational culture. 13. A sound organizational culture is always conducive to strategy formulation and implementation. (True/False) 14. A change of strategy should be the first option for a company. (True/False)
15.8 Corporate Ethics and Values

Corporate culture governs, to a large extent, corporate ethics and values in an organization. In fact, many feel that ethics and values are embedded in the cultural paradigm itself. We had mentioned about code of corporate governance
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and corporate ethics in Unit 3. But, that was more with reference to corporate ethics and values in the context of strategy formulation and implementation. Organizational ethics may be generally understood to be of two kinds: (a) professional ethics or ethics in terms of observance of rules, procedures, systems, etc., and, (b) value ethics or ethics in terms of personal integrity of individual managers. In terms of personal values, three types of managers can be distinguished: the moral manager, the immoral manager and the amoral manager. The moral manager is fully committed to high standards of ethical behaviour both in his individual actions and in his perception of how the companys business should be conducted. The immoral manager is openly or clearly opposed to ethical behaviour in business, and willingly ignores ethical principles in his management and decision making. The amoral manager believes that business and ethics need not be mixed. He feels that it is not necessary to introduce ethical considerations into his business practices and decisions because business activity lies outside the purview of moral judgement. Corporate ethics has three aspects or dimensions: development of the manager as a moral person; influence of the organization as a moral environment; and, evolving procedures, regulations and actions to ensure a high level of ethical performance in general management and strategic operations and implementations.
15.8.1 Different Approaches to Business Ethics

In practice, different companies have different approaches to business ethics. It depends on their prioritization of ethical practices in conducting business. Some companies accord highest priority to the achievement of organizational objectives and business targets; ethical practices may have to be compromised. Some companies give almost equal priorities to both. Some companies give very high priorities to ethics and values; management and strategic functions are governed or dictated by this. According to Rossouw and Vuuren (2003), approaches adopted by various companies to deal with business ethics may take one of the four forms. These are shown below in terms of increasing order of ethical concern: (a) Unconcerned or ethical non-issue approach (b) Ethical damage control approach (c) Ethics compliance approach (d) Ethical culture approach
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Unconcerned or ethical non-issue approach: This approach is adopted by companies whose managers are either immoral or amoral. Such companies believe that organizational objectives and business targets are the foremost. Business must grow; profit should be generated and maximized. These companies plan and adopt strategies which may follow general legal and business principles, but may be ethically unsound. They are not really concerned with the ethical issues in the conventional sense. Many feel that Mittal Steels (L N Mittal) international acquisitions fall in this category. Ethical damage control approach: In companies in this category, managers are generally amoral, but, they fear adverse publicity or scandal. The objective in this approach is to protect the company from adverse publicity which may be made by unhappy stakeholders, external investigation agencies, threats of litigation, punitive government action, etc. To avoid such a contingent situation, there is a need for rejecting unethical behaviour and introducing corporate governance safeguards through window-dressing ethics. A company may generally ignore or condone questionable methods or actions which may help to achieve business targets or improve its market position so long as it does not publicly tarnish the image of the company. Ethics compliance approach: In this approach, companies are conscious that they should comply with ethical standards and requirements. The managers are either moral and view strong compliance to prescribed norms or methods as the best way to enforce ethical practices; or, are unintentionally amoral but are highly concerned about their ethical reputation. Companies which adopt a compliance approach adhere to certain practices to demonstrate their commitment to ethical conduct: make the code of ethics visible and a regular part of communication with employees, form ethics committees to give guidance on ethical matters, introduce ethics training programmes, lay down formal procedures for investigating alleged ethical violations, conduct ethics audit to measure and monitor compliance and institute ethics awards for employees for outstanding efforts for creating an ethical environment and improving ethical performance. Ethical culture approach: In companies with this approach, ethical business practices are rooted in the organizational culture itself. The top management/ CEO believes that high ethical principles embedded in the corporate culture should guide the managers and staff. The ethical principles contained in the companys code of ethics and/or corporate values are seen as integral to the companys identity and image. The prevalence and success of the ethical culture approach depends heavily on the personal integrity of the individual managers
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who create and nurture the culture. It is clearly understood in such companies that corporate strategy should be ethical in all respects and ethical behaviour should also be reflected in strategy implementation.17
15.8.2 Why Unethical Business Behaviour

In todays volatile business environment, it is an established fact that business ethics and values are under severe test. Companies are too busy chasing targets and managers are under enormous pressure to perform. If the targets or results are achieved, the end justifies the means, i.e., certain amount of dubious or unethical business behaviour may be permissible if this helps in the achievement of physical or financial targets. Sometimes, managers themselves may be of questionable personal integrity and may adopt unethical practices for personal motives or interests. If we analyse unethical business behaviour perceived in various companies, this can be attributed to one or more of three major reasons or factors: (a) Company culture encourages unethical behaviour (b) Pressure on company managers to meet or beat targets (c) Pursuit of personal gain and other selfish interests by managers
15.8.3 Company Culture Encourages Unethical Behaviour

There are companies where corporate values are based on unethical foundation. The general work culture is immoral or, at best, amoral. The employees have a company-approved licence to ignore or underplay conventional ethical norms or standards for pursuing operations and strategies which can significantly contribute to financial gains of the company. Prompted by such corporate environment, even the otherwise ethical or moral managers may commit ethical errors and also succumb to opportunities and pressures to resort to unethical practices. Almost a classical example of such companies is now infamous Enron. Enrons top management/leadership encouraged managers to be innovative and aggressive in finding out what could be done to increase current revenues and earnings of the company. The company hired the best and the brightest people in the industry/market. They were pushed to be creative, exploit opportunities in the environment and exhibit a sense of urgency in producing results. Managers were encouraged to be entrepreneurial and, go all out to contribute to corporate growth and profitability. Norms, procedures and ethics could be underplayed for this. Employees got the messagepushing the limits
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and achieving numbers is the key to survival. Managers had to devise clever ways to bolster revenue and earnings even if it meant violating existing policies and norms and doing things without the knowledge of superiors. In fact, for generating profitable new business, out-of-ethics practices were even appreciated and sometimes celebrated.
15.8.4 Pressure on Company Managers to Meet or Beat Targets

An organizations cultural foundation need not be amoral or unethical as in companies like Enron, but pressures to perform may force managers to look beyond ethics for the achievement of business targets. Targets can be of various kinds: quarterly or annual sales targets, profit targets, production or output targets, inventory management/liquidation targets, dealer networking targets, etc. Towards the end of the financial year, the pressure builds for meeting specified targets. Many times, annual compensation packages of managers are linked to organizational performance and their individual performances in terms of targets. This puts additional pressure and the fear of loss of financial gains/incentives prompts the managers to bend the rules, norms and values. Bristol-Myers Squibb (BMS), one of the worlds largest drug manufacturers, can be cited as an example. In BMS, the management engaged in different kinds of manoeuvres to achieve revenue/profit targets. Number games were said to be common earnings management practice at BMS and, according to one former executive, this sent a huge message across the organization that you make your numbers at all costs. Some such cases were: (a) Offering special discounts at the end of a quarter to distributors and local pharmacists to build stocks of certain prescription drugsa practice known as channel stuffing; (b) Giving last-minute price increase signals to prompt/force purchases and increasing operating margin; (c) Building excessive reserves in the name of restructuring and then reversing some of the financing or cost elements to bolster operating profit.18
15.8.5 Pursuit of Personal Gain and Other Selfish Interests

Immoral managers are characterized by their lack of personal integrity and disregard of ethical values. Their only objective is to maximize personal gain and wealth. In many such cases, the organization and the manager/managers may be working at cross-purposes. The organizational culture may be based
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on sound ethical principles and the top management/leadership may not encourage managers to adopt unethical practices. It is the individual managers who may be indulging in unethical or corrupt practices in disregard of organizational norms and values. Sometimes, the top management itself may be unscrupulous and highly corrupt and try to rip off the company financially. One such glaring case has been reported by the Securities and Exchange Commission (SEC) of the US. According to a complaint filed by the SEC, CEO of Tyco International, a well-known $36 billion manufacturing and services company, conspired with the companys chief financial officer (CFO) to ransack more than $170 million from the company. Tycos CEO and CFO were further charged with conspiracy to manipulate more than $ 430 million through sales of company shares. They did this by using questionable methods to hide their actions and indulging in deceptive accounting practices to distort the companys financial position during 19952002. On the charges filed by the SEC, the prosecutor told the judiciary: This case is about lying, cheating, and stealing. These people didnt win the jackpot they stole it.19
15.8.6 Business Ethics in Indian Companies

In terms of ethical practices, companies in India, as in many other countries, can be classified as good and bad. We have just given the examples of Infosys, Amul, ICICI, etc., which are highly ethical. There are also companies which do not conform to strong ethical norms. We also have regulations like the MRTP Act and FEMA (earlier FERA) for curbing unethical business practices. KPMG India conducted a survey of 280 top Indian companies for ascertaining the level of business ethics in India. Study analysis and findings are contained in Business Ethics Survey Report: India, 1999. Major findings of the study are summarized below: (a) Mission statement: About 85 per cent of the companies surveyed are reported to have a mission statement. But, most of these statements focus on customer service and customer satisfaction. Very few companies emphasize ethical and moral issues such as organizational values, integrity in business, harassment in the workplace, etc. (b) Company policy on ethics: Many companies have a documented policy on ethics. But, implementation or reinforcement of a formal ethical system is weak in most of these companies. Some companies
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have a grievance cell; some companies conduct periodic workshop on business ethics, but nothing much beyond that. (c) Ethical risk in the workplace: Many companies express concern about lack of ethics in the workplace. Some of the major ethical concerns expressed by companies are: leakage or misuse of confidential information (77 per cent); insider trading (48 per cent); receiving gifts or favours from suppliers (48 per cent); promoting personal interest (47 per cent). (d) External factors in corporate ethics: Most Indian companies feel that ethical problems in business arise because of external or environmental factors. Two major external factors are government policies/regulations and political interference. (e) Training in business ethics: Majority of the companies feel that training in business ethics should be given high priority. Education in ethics should be incorporated in the formal management development programmes of companies. (f) Strengthening ethical practices: Most Indian companies are of the opinion that, for strengthening ethical business practices, two factors are important: first, professionalizing company management; and, second, minimizing state or governmental control and interference.20 Activity 2 Conduct an analysis of business ethics among Indian companies, with particular reference to a company of your choice.
15. Organizational ethics may be generally understood to be of two kinds _______ and _______ ethics. 16. In the _______ approach, ethical business practices are rooted in the organizational culture itself. 17. _________ managers are characterized by their lack of personal integrity and disregard of ethical values. 18. In the ________ approach, companies are generally amoral, but, the objective is to protect the company from adverse publicity.
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15.9 Corporate Politics and Power

All corporate cultures include a political component (corporate politics), and, in this sense, all organizations are, to a large extent, political in nature. This permeates to strategy formulation and implementation also. In Unit 11, we have discussed the role of pressure groups and also about bargaining in final selection or choice of strategy. These are actually manifestations of organizational politics and power. Managers come from different social backgrounds with different views/opinions, professional or individual biases, etc. These managers continually try to position themselves in the organization so that they can establish their dominance or prevail over others with their opinions and decisions in all management matters including strategy. Some tend to call this political view of strategy development. Political view of strategy development relates to the proposition that strategies develop as the outcome of process of bargaining and negotiation among powerful internal or external interest groups (or stakeholders).21 Power and politics are different, but, they play interrelated roles in corporate functioning and strategic management. Politics stems from power. Managers and strategists use different types of power to influence operations, choice of strategy and its implementation. We can distinguish five types or sources of power. (a) Legitimate power: This is derived from positions managers hold in an organization. Managers can use their official positions to influence strategy and decision making. (b) Expert power: This emanates from a managers knowledge, competence and expertise acknowledged by others in the organization. (c) Referent power: This arises from personality and charisma of managers, and their ability to use these to create liking among subordinates and peers. (d) Reward power: This is derived from the ability of managers (partly because of legitimate power) to reward outcomes or results. (e) Coercive power: This is based on the ability of managers (derived from their positions) to penalize or punish non-performance or negative results.22
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As mentioned above, politics stems from power, and, it is concerned with the use of power in different forms in organizational matters. Corporate politics may be defined/described as the carrying out of activities not prescribed by policies for the purpose of influencing the distribution of advantage within the organization.23 In more clear terms, this means seizing, holding, extracting and executing of power. The nature of organizational structure itself creates conditions for corporate politics. The organizational structure (some call it a power structure) creates hierarchy, positions and relationships; and, this leads to ambitions, coalitions and conflicts among managers. This happens because material benefits, promotions, career growth, prestige, ego, etc., are involved. We can put it like this: The who gets what (politics) is endemic to every organization regardless of size, function or character of ownership. Furthermore, it is to be found in every level of the hierarchy; and, it intensifies as the stakes become more important and the area of decision possibilities greater.24
19. The ________ view of strategy development relates to the proposition that strategies develop as the outcome of process of bargaining and negotiation among powerful internal or external. 20. _______ power emanates from a managers knowledge, competence and expertise acknowledged by others in the organization.
15.10 Power, Politics, Strategy and Implementation

A common thinking is that power and politics have adverse or negative effects on company operations and strategies, because, power and politics mean influence, manipulation and domination. But these can be viewed or used in a positive way also, or, at least, as significant factors in strategy making and implementation. Mintzberg (1991) observes that corporate politics is neither inherently good nor bad. Although, more often corporate politics may lead to divisiveness which is not healthy for an organization, but, there are times when it can be strategically used to bring about changes. There are times when an organization is emerging from a stage of complacency or stability or incremental growth and entering into a phase of fundamental changes or discontinuous growth. Suggesting the need for creating political tension as well as harmony,
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Mintzberg contends that the organization must ... pull apart before it can pull together again.25 Quinn (1980) observes that most strategic decisions and strategic thrusts in large enterprises emerge as part of an evolving continuous political consensusbuilding with no precise beginning or end.26 All this tends to indicate that a manager cannot effectively formulate and implement strategy without being perceptive about company politics and being adept at political manoeuvring.27 What is important or essential is that managers and strategists should know when to exploit power and politics, and, when to shun them and promote harmony for achievement of organizational objectives. Based on an understanding of the power structure, and, the nature of corporate politics, the strategists should master support for acceptable proposals and garner similar support for discarding unacceptable or unviable ones. Some strategic analysts feel that power and politics have a more critical role to play in strategy implementation than in strategy formulation. There is a valid reason behind such thinking. Strategies are mostly formulated (planned and finalized) by the strategic planning group under the direction of the top management/CEO. Many functional and operational areas may not be associated with this. But, implementation invariably involves the major functional and operational areas. Let us take the example of diversification strategysay launching of a new product. Three functional areasmanufacturing, finance and marketingwill play critical roles in implementation of this strategy along with the respective operational areas. Successful implementation of this strategy necessitates balancing of interests of all the functional and operational areas involved and, therefore, requires conflict resolutions (handling inter-functional and interpersonal clash of interests), consensus building and managing understanding or coalitions. This can be achieved only through careful and, sometimes delicate, management of power and politics. The strategists and managers responsible for implementation should, therefore, take cognizance of the dominant factors in organizational politics and power. In other words, managers should make strategic use of power and politics in implementation. For this, 10 guidelines28 may be followed. The guidelines recommend that managers should: (a) Accept the inevitability of power and politics in organizational functioning. (b) View power and politics more as positive factors in strategic management.
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(c) Understand how an organizations power structure worksindividuals and groups whose opinions matter most and those who can be undermined. (d) Be sensitive and alert to political signals emanating from different parts of the organization. (e) Generally adopt a team approach subject to organizational power blocks. (f) Know when to tread softly and rely on coalition management and consenus building and, when to push through decisions and actions for results. (g) Gather support for acceptable ideas and proposals and let the unacceptable ones die a natural death. (h) Encourage and reward organizational commitment, and discourage and penalize negative attitude or actions. (i) Promote and practice principled politics with openness and honesty and counter unprincipled and corrupt politics.
21. According to Mintzberg (1991), corporate politics is inherently bad. (True/ False) 22. Managers should accept the inevitability of power and politics in organizational functioning. (True/ False)
15.11 Case Study

Hewlett-Packard: What is Right Leadership? Hewlett-Packard (HP) had two contrasting leaders (CEOs): Carly Fiorina and Mark Hurd with almost diametrically opposite styles. Fiorina was a visionary, and her style or strategy was to provide long-term direction to the company rather than focus on immediate or short-term results. She was charismatic and a well known leader. One of the biggest long-term strategic decisions taken by Fiorina was the acquisition of Compaq. Her decision was based on the directive of the board of directors to change the course of the company and increase its long-term competitiveness. The objective was to acquire market power
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through integration of the two companies and be able to compete with the likes of Dell Computer and IBM. This was a high profile acquisition and many such M&As were not successful in the past. Therefore, Fiorinas decision involved a high element of risk.
The developments after the acquisition exposed the risk factor. Even after three years of merger of Compaq with HP, the new HP could not compete with Dell or IBM. Some analysts think that Fiorina overlooked critical operating issues which had to be addressed, particularly to compete with the super-efficient Dell.* During 2004, HP fell far short of its sale and profit targets. Because of the companys poor performance, the stock price fell and investors and other stakeholders got worried. Many HP managers viewed Fiorinas style more as a promotional role than as strategic leadership. Many felt that Fiorina had a vision, but she was unable to secure necessary internal/organizational support to fulfil the vision.** After being in HP for almost six years as CEO, Fiorina was finally fired. HP hired Mark Hurd as the new CEO. Mark was viewed as quiet, unassuming and un-Carly. His approach was traditional. He was a nuts-and-bolts operation man with apparently no clear vision. Working on short-term targets to reduce costs without a long-term vision was not considered a good strategy of recapturing HPs lost glory. Hurds style has been summarized as executing, but without a long-term sense of direction.*** For HP, some have suggested a combination of (styles of) Fiorina and Hurd. This would blend a thinker with vision and a doer who excels in execution and operational efficiency. Both styles may be required for strategic leadership. But, it implies dual CEO. Is it possible in practice?
* B Elgin, The Inside story of Carlys ouster, Business Week, (February 10, 2005). ** .Ibid. *** P Burrows, and P Elgin, The Un-Carly Unveils His Plan, Business Week, June 16, 2005.
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15.12 Summary
Let us recapitulate the important concepts discussed in this unit: Organizations may plan, formulate and implement strategies, but, it is the individualsmanagers at different levelswho actually take appropriate actions involved in implementation. Individual-related or individual-focussed factors or issues like leadership styles, personal ethics and values, corporate politics, etc., are very important. In addition to these, organizational culturework styles, beliefs, shared values, etc.,is equally important or vital. In an organization, the leader performs two strategic roles. First, he/she is the architect of a strategyinnovates, conceives, plans and formulates strategy; second, he/she is the implementor of strategyinitiates action and induces/drives the employees into operation. Leadership style is way or pattern of behaviour which a leader adopts in managing the affairs of an organizationdirecting and motivating managers and staff for achievement of organizational objectives. Next only to leadership style, organizational culture plays the most important role in the strategy implementation process of a company. The most important characteristic of organizational culture is sharing or common beliefs, values, attitudes, feelings, etc. Different companies adopt different approaches to business ethics. It depends on their prioritization of ethical practices in conducting business.
15.13 Glossary
Business ethics: A form of professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and entire organizations. Leadership style: A way or pattern of behaviour which a leader adopts in managing the affairs of the organization. Organizational culture: The set of assumptions, beliefs, values and norms that are shared by an organizations members. Triangulation: A multimethod technique for analysing and changing a companys culture that combines obtrusive observations, self-administered questionnaires and personal interviews to analyse the existing organizational culture.
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1. Discuss the major leadership styles, including the leadershio styles in practice. 2. Explain how to create a strategy supportive culture. Discuss the various steps involved in this. 3. What are the different approaches to business ethics adopted by various companies? Discuss in details. 4. Why does unethical business behaviour exist in many companies? Explain the major reasons. 5. Discuss the state of business ethics in Indian companies. Analyse in terms of KPMG business ethics survey. 6. Discuss the roles of power and politics in strategy implementation. Focus on different thoughts on this.

1. False 2. False 3. style 4. strategic human capital 5. Strategic human capital 6. Relationship human capital 7. True 8. False 9. heterogeneous 10. diversity 11. Organizational culture 12. Triangulation 13. True 14. False
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15. professional, value 16. Ethical culture approach 17. Immoral 18. Ethical damage control 19. Political 20. Expert 21. False 22. True

1. Leadership styles are influenced by environmental factors. Refer to Section 15.4 for further details. 2. In the relationship between culture and strategy, two of the alternatives involved are either adapting strategy implementation to the existing culture or changing the strategy itself midway through implementation. Refer to Section 15.7.1 for further details. 3. Different companies have different approaches to business ethics. Refer to Section 15.8.1 for further details. 4. In todays volatile business environment, it is an established fact that business ethics and values are under severe test. Refer to Section 15.8.2 for further details. 5. In terms of ethical practices, companies in India, as in many other countries, can be classified as good and bad. Refer to Section 15.8.6 for further details. 6. All corporate cultures include a political component. Refer to Section 15.9 for further details.
15.16 References
1. Collins, J C, and J I Porras. 1994. Built to last: Successful Habits of Visionary Companies. New York: Harper Business. 2. Groysberg, B, A Mclean, and N Nohria. Are Leaders Portable? Harvard Business Review, May, 2006.
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3. Khandwala, P. 1977. Some Top Management Styles: Their Context and Performance. Organization and Administrative Science, Winter. 4. King, A S. 1990. Evolution of Leadership Theory. Vikalpa. April-June. 5. Rossouw, G J., and C J Vuuren. 2003. Modes of Managing Morality: A Descriptive Model of Strategies for Managing Ethics. Journal of Business Ethics, September. Endnotes
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A D Szilagyi Jr, and M J Wallace, Jr. Organisational Behaviour and Performance, 2nd ed., (Glenview, IL: Foreman and Company, 1980), 274. King, A S, Evolution of Leadership Theory, Vikalpa, 1990, 4354. Sinha, J B P, The Nurturant Task Leader: A Model of Effective Executive, ASCI Journal of Management (Vol. 8), 1979, 10919 B L Maheswari, Decision Styles and Organisational Effectiveness, Vikas Publishing House, 1980, ix-x. B Groysberg, A N Mclean, and N Nohria, Are Leaders Portable? , Harvard Business Review, (May, 2006). This section is largely based on M A Hitt, et al. (2007), 364-69. M A Hitt, et al. (2007), 365. M L A Hayward, et al., Believing ones own Press: The Causes and Consequences of CEO Celebrity, Strategic Management Journal, 25, 2004. Y Zhang, and N Rajagopalan, Explaining the New CEO Origin: Firm versus Industry Antecedents, Academy of Management Journal, 46, 2003. C O Reilly, Corporations, Culture and Commitment: Motivation and Social Control in Organization, California Management Review (Summer, 1989), 10. V Sathe, Culture and Related Corporate Realities (Homewood, III: Richard D Irwin, 1985), R M Lala, The Creation of Wealth (Mumbai: IBH Publishing, 1981), 198. For details, refer J Duncan, Organisational Culture: Getting a Fix on an Elusive Concept, Academy of Management Executive (August, 1989). E H Schein, The Role of the Founder in Creating Organisational Culture, Organisational Dynamics (Summer, 1983), 13-28. S Ghoshal, The Value of Values, Economic Times (Supplement) (March 5, 1999), 1. J C Collins and J I Porras. Built to Last: Successful Habits of Visionary Companies (New York: Harper Business, 1994). G J Rossouw, and L J Vuuren, Modes of Managing Morality: A Descriptive Model of Strategies for Managing Ethics, Journal of Business Ethics (September, 2003), 389 400. A A Thompson Jr, A J Strickland III, J E Gamble, and A K Jain, Crafting and Executing Strategy: The Quest for Competitive Advantage, 14th ed. (New Delhi: Tata McGraw-Hill, 2006), 287. Ibid. 286.
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Picking India Incs Conscience: The KPMG Business Ethics Survey, Financial Express, (October, 1999), 5. This is discussed in D Buchanan, and D Boddy, The Expertise of the Change Agent: Public Performance and Backstage Activity (London: Prentice Hall, 1992). J R P French, and B Raven, The Bases of Social Power, in Studies in Social Power, ed. D Cartwright (Ann Arbor, MI: University of Michigan Press, 1959), 15067. A Sharplin, Strategic Management (New York: McGraw-Hill, 1985), 141 J M Pfiffner, and F P Sherwood, Administrative Organization (New Delhi: Prentice Hall of India, 1964), 311. H Mintzberg, The Effective Organization: Forces and Forms, Sloan Management Review, 32 (Winter, 1991), 5467 J R Quinn, Strategies for Change: Logical Incrementalism (Homewood, Illinois: Richard D Irwin, 1980), 119. A Zaleznik, Power and Politics in Organisational Life, Harvard Business Review, (48)3, 4760. The guidelines are generally based on A Kazmi, Business Policy and Strategy Management (New Delhi: Tata McGraw-Hill, 2005), 363.
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Unit 16
Structure
Strategy Evaluation and Control
16.1 Introduction 16.2 Caselet Objectives 16.3 The Evaluation and Control Process 16.4 Evaluation and Control Criteria: Pre-implementation 16.5 Implementation Process Control 16.6 Evaluation and Control Criteria: Post-implementation 16.7 The Balanced Scorecard Approach 16.8 Organizational Controls 16.9 Six Sigma Approach to Evaluation and Improvement 16.10 Characteristics of an Effective Evaluation System 16.11 Case Study 16.12 Summary 16.13 Glossary 16.14 Terminal Questions 16.15 Answers 16.16 References
16.1 Introduction
For an organization, evaluation and control of strategy is the final stage, and, is one of the most vital stages in the strategic management process. Through the evaluation system, the management tries to demonstrate how well the chosen strategy is implemented and how successful or otherwise the strategy is. If implementation is not taking place as planned, or, if there are deficiencies in the strategy in terms of achievement of the objectives or targets which are getting exposed during implementation, appropriate control mechanisms have to be put in position for taking necessary corrective actions based on the feedback process. In analysing the strategy evaluation and control process, we will be discussing here all related factors and issues. We shall start with an understanding of the evaluation and control process. We will discuss preimplementation and post-implementation evaluation and control criteria. In terms
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of specific details, we will analyse participants in the evaluation process, critical success factors, strategic control factors, various quantitative performance criteria and qualitative criteria. Special focus will be given on analysis of the balanced scorecard approach as an evaluation criterion. We shall also discuss the Six Sigma approach to evaluation and improvement. Finally, we will mention certain important factors or characteristics of an effective evaluation system.
16.2 Caselet
Six Sigma has evolved into a highly rigorous tool for analysis and continuous improvement of corporate performance. Six Sigma at many organizations simply means a measure of quality that strives for near perfection. To achieve Six Sigma, a process must not produce more than 3.4 defects per million opportunities. Six Sigma processes are executed by Six Sigma Green Belts and Six Sigma Black Belts, and are overseen by Six Sigma Master Black Belts. According to the Six Sigma Academy, Black Belts save companies approximately $230,000 per project and can complete 4-6 projects per year. (Given that the average Black Belt salary is $80,000 in the United States, that is a fantastic return on investment.) General Electric, one of the most successful companies implementing Six Sigma, has estimated benefits on the order of $10 billion during the first five years of implementation. GE first began Six Sigma in 1995 after Motorola and Allied Signal blazed the Six Sigma trail. Since then, thousands of companies around the world have discovered the far reaching benefits of Six Sigma.
Source: http://www.isixsigma.com/new-to-six-sigma/getting-started/what-six-sigma/
Objectives
After studying this unit, you should be able to: Discuss the evaluation and control process in an organization Identify the evaluation and control criteria: pre-implementation and postimplementation Analyse the strategy implementation process control Use the concept and tool of balanced scorecard analysis Apply the Six Sigma approach to corporate evaluation and improvement
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16.3 The Evaluation and Control Process

The evaluation and control system is a step-by-step or sequential process. The process consists of five interrelated steps or stages. These are: A. Set performance targets, standards and tolerance limits for the strategy, implementation and achievements. B. Measure the actual performance position in relation to the targets at a particular point of time. C. Identify/diagnose deviations from the prescribed targets. D. Analyse/measure deviations from targets and given tolerance limits. E. Incorporate modifications, if and as necessary, to revise targets/objectives, strategy and the implementation process. Figure 16.1 illustrates the evaluation and control process.
Figure 16.1 Strategy Evaluation and Control Process Note: 1, 2, 3, 4 and 5 indicate possible corrective steps/actions Source: Adapted from L R Jauch, R Gupta, and W F Glueck, Business Policy and Strategic Management, 6th edn, (New Delhi: Frank Bros & Co, 2004), 438 (Exhitbit 11.3).
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As seen in the figure, the evaluation and control system actually operates through stages C, D and E. The evaluation process may reveal many things. Targets or standards may not be met because those are too high or low (too soft). All objectives and targets are based on certain assumptions. Sometimes, assumptions may be erroneoustoo rigid or too general. In some cases, the assumptions may have been based on pessimistic environmental scenario and the goals and objectives may be conservative or narrow in scope. The assumptions might have ignored the new or emerging environmental opportunities. Under the opposite set of assumptions or scenario, the objectives may be too ambitious or unrealistic. It is also possible that the objectives have been achieved because the strategy has not been properly implemented; that the selection of strategy has not been very appropriate. The strategists/ management have to ascertain which of these factors or cause-and-effect relationships are at work. The evaluation and control system generally operates during the process of implementation of a strategy as shown in Figure 16.1. But, these can be applied before and after implementation also. So, the evaluation and control process can be analysed during three stages: (a) Pre-implementation; (b) During implementation; and (c) Post-implementation.
1. The evaluation and control system is a ________ process, with five interrelated steps or stages. 2. The evaluation and control system generally operates during the process of _____of a strategy.
16.4 Evaluation and Control Criteria: Pre-implementation

The major participants in the evaluation and control process have to play both pre-implementation and post-implementation roles. Pre-emptive measures are always better than reactive or corrective actions. To minimize the problems of strategy implementation and, possible strategy formulation-implementation mismatch, it is advisable to use certain evaluation criteria before implementation.
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For pre-implementation assessment of strategies, three interrelated evaluation criteria are generally used (Figure 16.2). 1. Suitability 2. Acceptability 3. Feasibility
Figure 16.2 Evaluation Criteria: Premple-mentation
Suitability is the most important criterion for evaluating a strategy. As shown in the figure, acceptability and feasibility generally follow assessment of suitability. Based on these three criteria, a final decision is taken about choice or adoption of a particular strategy, keeping in mind the implementation factor. Suitability of a strategy involves assessment in terms of three stages: first, establishing the rationale or logic of each strategic option available; second, analysing relative merits of various options when alternative choices are available; and, third, evaluating the alternatives for final selection of strategy. Examining the suitability of a strategy in terms of the above factors may appear to be an elaborate process. But, in practice, the process may not be as elaborate as it appears. Most of the strategists/managers should be constantly monitoring product/brand life cycles, positioning and, also the value chain. While evaluating a particular strategy, the strategy team has to assess the financial results or profitability and the balancing factor in terms of product/brand portfolios to arrive at a final decision. Acceptability of a strategy is concerned with expected performance or outcome. Factors considered for deciding about the acceptability of a strategy are return on investment (on strategy formulation/implementation) risk involved and stakeholders expectations from or reaction to possible outcomes.
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Feasibility of a strategy involves three aspects. The first is the compatibility of the strategy with internal competences of the company resources, capabilities and skills; second, practicability of the strategy in terms of the environment market structure, competitors, government controls, etc.; and, third, amenability or easiness of implementationsteps or stages are not ambiguous or mutually conflicting.
16.4.1 Critical Success Factors (CSFs)

Identification of critical success factors helps in analysing suitability of a strategy. In fact any strategy, to be successful, must start with an identification of the critical success factors (CSFs) or key success factors (KSFs).1 We had defined CSF while analysing parenting fit in Unit 7. Critical success factors are those factors or aspects of strategy in which a company must excel to outperform competitors, and there are underlying core competences in specific activities of the company which are concomitant with CSFs. For example, if speed to market with new product launch is a CSF, the underlying core competences should be logistics of physical distribution and retail network. CSF analysis highlights the important relationship between resources (includes business assets and skills), competences and choice of strategy which is vital for assessing performance. A study (Vasconcellos and Hambrick, 1989) of six mature product industries shows that critical success factors differ from industry to industry a capital goods manufacturer will have CSFs different from an input supplying firm or a consumer goods company. And, those companies which have strengths matching the CSFs perform significantly better than other companies. Failure of companies like Procter & Gamble and Philip Morris to penetrate the soft drinks market because they lack the CSF of access to bottlers gives a good example of the significance of this concept or tool. An analysis2 of the wine market in the early 1990s identified seven CSFs: 1. Access to quality grape supply (50 per cent of the variable cost), particularly for those in the premium segment. 2. Access to technology both in the vineyard and in the winery so that costs can be controlled or minimized. 3. Achievement of adequate scale in production, perhaps with a set of brands. 4. Expertise in wine making. 5. Financial resources to compete in a capital-intensive business.
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6. Name or image recognitiona sense of tradition. 7. Strong relationship with distributors. It is not enough to identify present CSFs. It is also necessary to project them into the future, that is, identify emerging CSFs. This gives sustainability to success. Experience shows that many companies have faltered when CSFs changed, and resources and competences on which they were based became less relevant. For example, for industrial products, technology and innovation are most important during the introduction and growth phase, and systems capability, marketing and service back-up play more dominant roles as the market matures. In consumer goods, marketing and distribution skills are critical during the introduction and growth phases, and manufacturing and operations become more vital as the product moves into maturity. For services, the CSFs would be different.
3. Which of these is an evaluation criterion for pre-implementation assessment of strategies? (a) Suitability (b) Acceptability (c) Feasibility (d) All the above 4. Factors or aspects of strategy in which a company must excel to outperform competitors are known as _________.
16.5 Implementation Process Control

In most companies, evaluation and control are exercised during the strategy implementation process itself. Many call these strategic controls. All strategies are based on certain assumptions. These assumptions may change or lose their validity during the period between strategy formulation and its implementation, and, also, during the period or process of implementation. Strategic controls take into account required changes in assumptions, continuously monitor and review the strategic implementation process, and suggest or undertake changes in the strategy to match the new developments. Schreyogg and Steinman (1987) have mentioned four types of strategic control:
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(a) Premise control (b) Strategic surveillance (c) Implementation control (d) Special alert control3 These controls have a time perspective. See Figure 16.3.
Figure 16.3 Strategy, Implementation and Strategic Control Source: Adapted from G Schreyogg, and H Steinman, (1987). 86.
16.5.1 Premise Control

This is the first stage of control. As mentioned above, all plans and strategies are based on certain premises or assumptions. The objective of premise control is to identify key or critical assumptions, and, during the course of implementation, either maintain constancy of the assumptions or modify or drop some of them or reformulate the strategy, if changes of assumptions warrant this. Premise control is the responsibility of the strategic planning group. The premises or assumptions may relate to organizational factors and/or industry factors and/or environmental factors because these are the ones which govern or influence strategy building. Organizational factors can relate to resource availabilityfinancial as well as managerial. Assumptions about organizational factors can also pertain to different functional areas. For example, it may be about an expected breakthrough in R&D (may be through strategic alliance) which can directly affect any strategy on new product development or diversification. The assumption can also relate to timely installation of a new plant or equipment,
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i.e., introduction of a new technology. It may also involve marketing or distribution collaboration for market penetration strategy of an existing product. Assumptions are also made about several industry factorsessentially about industry structure, competitive position and growth. For example, if an industry is exhibiting a high growth rate like the IT industry, a companys plan and strategy may be based on continuance of such growth rate; or, if there is excess capacity in an industry, creation of any new capacity by a company would be governed by certain assumptions about the nature and magnitude of excess capacity. Lafarge of France had planned to set up a greenfield cement manufacturing project/plant in India. After assessing the overcapacity in the Indian cement industry, Lafarge changed their strategy to the acquisition route. Proposal of Michelin of France, the international tyre major, was approved by FIPB for setting up a radial tyre project in Pune in 2000. The company deferred project implementation because of a slump in the Indian automobile market. Important assumptions are required to be made about environmental factors because these are very critical for determination of strategy. Some of the vital environmental developments include sudden change in government policy, regulation and/or control, shift in business or market conditions, an unanticipated competitor action and capital market boom or depression. VSNL had planned to raise capital overseas through global depository receipts (GDRs). The company postponed its GDR issue thrice because of depressed stock market conditions which prevailed during the period between grant of permission and actual issue of GDR. Sometimes, it can be a political or social development. Tata Steel had formulated a strategic plan for establishment of a steel plant in Orissa. The company had also acquired land for the project. But, they finally abandoned the project because of sustained protest by the local inhabitants who were likely to be displaced if the project had come up.
16.5.2 Strategic Surveillance

This is a more generalized strategic control over the entire period spanning from finalization of strategy to completion of the implementation process. This is designed to monitor a broad range of events inside and outside the company that are likely to threaten the course of a firms strategy.4 Through strategic surveillance, a company can keep control over organizational factors, industry factors and also major environmental factors. Surveillance or monitoring is done with respect to any of these factors. For example, if there is an unexpected development in resource availability leading to reallocation of resources, strategy implementation may have to be slowed down or some change made in the
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process. Similarly, strategic surveillance may reveal that a new competitor is emerging in the industry, and, this may necessitate review of the strategy or its implementation. In terms of environmental factors, the government may announce a change in its FDI policy. Strategic surveillance will assess its impact on the strategy and, accordingly undertake control measures may be in the form of reformulation of the strategy either in whole or part, and, also its implementation.
16.5.3 Implementation Control

Implementation control is focussed on the actual process of implementation. The implementation process consists of programmes, projects, actions, etc., relating to different functional and operational areas. Some of these programmes/ projects/actions are undertaken simultaneously, and, some other incrementally, in steps or stages, over a period of time. Implementation control evaluates and monitors these steps/stages. If it is observed that these are not following the plans, and, the predetermined course, controls are designed for necessary course corrections. For effective implementation control, two methods have been suggested; first, monitoring strategic thrust and, second, milestone review. In the strategic thrust approach, critical actions, steps or stages are identified as thrusts which need to be constantly monitored to assess the impact of change in any of these on the implementation process. For launching a new product, the thrusts are concept development, product development (R&D) and test marketing. On the basis of implementation position (deficiency or relative success) in the three stages, the product may be modified or product launch may be deferred; and, in case of too many abnormalities, the product may even be abandoned. In the milestone review approach, all critical activities (stages) are identified as milestones. Each milestone has a cost factor and time factor associated with it, and it is assessed in terms of these two parameters. Either cost overrun or time overrun or both in any of the milestones will affect the critical path of implementation. The milestone approach is analogous to the PERT/CPM method for project evaluation. This approach renders more exactness to the control process, and, can also be said to be more objective compared to monitoring strategic thrust approach.
16.5.4 Strategic Alert Control

Strategic surveillance and implementation control may not be sufficient for all situations. For extraordinary developments or situations, special alert control
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may be necessary. Such control is triggered by developments more sudden and serious than mentioned above. In other words, this refers to contingency or crisis situationsan industrial disaster, sudden fall of government, natural catastrophes like floods, earthquakes, etc. Special alert control works through a contingency plan or strategy which partially or wholly replaces the original strategy and the plan of implementation. Contingency or crises management strategy follows certain steps such as signal detection, preparation/prevention, containment/damage limitation and recovery leading to organizational learning.5 Special alert controls cover such steps to prevent organizational collapse.
5. The objective of _______ control is to identify key or critical assumptions. 6. _______ control is designed to monitor a broad range of events inside and outside the company that are likely to threaten the course of a firms strategy. 7. The control that is focussed on the actual process of implementation is called __________.
16.6 Evaluation and Control Criteria: Post-implementation

Post-implementation evaluation shows actual performance of a company vis-vis targets set in the plan. This also becomes an assessment of the strategy to what extent it has succeeded or failed. Evaluation of performance is generally done through various quantitative criteria. But, in a comprehensive evaluation system, qualitative criteria are also used in addition to the quantitative criteria. The qualitative criteria usually complement or support the quantitative criteria. We shall first discuss various quantitative performance criteria, and, then, qualitative indicators.
16.6.1 Quantitative Evaluation Criteria

Quantitative evaluation criteria or indicators of performance are primarily financial, but, there are also some important non-financial criteria. These criteria can be used to measure results or performance in three ways: first, comparing current performance of the company with its past performance; second, comparing companys performance with industry averages, standards or benchmarks; and, third, comparing companys performance with that of competitors. Because, absolute numbers can sometimes be misleading, different evaluation
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performance criteria are expressed in relative terms or ratios. Ten major financial and non-financial criteria may be used: Financial 1. Return on investment (ROI) 2. Return on equity (ROE) 3. Earnings per share (EPS) 4. Price-earnings ratio 5. Profitability: profit/sales ratio 6. Profitability: relative profit growth Non-financial 7. Market share: absolute market share 8. Market share: relative market share 9. Sales ratio: actual to target sales 10. Sales ratio: relative sales growth We had discussed the financial ratios in Unit 6 (Table 6.1). The above ratios and also the non-financial evaluation criteria are briefly described below. Return on investment (ROI) is gross or net income on total investment of a company including both fixed investment and working capital. Return on equity (ROE) is gross or net income on equity capital. Earnings per share (EPS) is gross or net income divided by total number of equity shares. Price-earnings ratio is market price per share to earnings per share. Profit-to-sales ratio is gross or net profit to total sales (these are also called gross profit margin or net profit margins). Relative profit growth is the growth of profit of the company relative to that of the market leader or the nearest competitor. Absolute market share is a traditional measure or indicator of performance of a company. But, relative market share is a better indicator of competitive performance. Relative market share can mean two things. The first is the ratio of market share of the company to that of the market leader; if the company is the leader, the ratio of its share to its challenger or No. 2. The second is the ratio of companys market share to its nearest rival or rivals (when the company is ideally in No. 2, No. 3 or No. 4 position). Sales ratio can be either actual sales or turnover to target sales or relative sales growth, i.e., growth in sales of the company to that of the leader or nearest rival as explained in the case of market share.
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We can now try to understand the post-implementation evaluation system more clearly. We shall use a hypothetical example to illustrate this. Hypothetical data on targets and performance (with and without strategic intervention) have been used to measure the deviations or variances between the targets and actuals. These are shown in Table 16.1. For post-implementation evaluation of strategy of a particular company, the hypothetical data can be replaced by actual data.
Table 16.1 Post-implementation Performance Evaluation
Evaluation Objective/ Target Expected Expected Actual Shortfall/ Performance Performance Performance Variance (without stategic (with stategic intervention) intervention) 3% 15% 10 100% 10% 100% 20% 60% 80% 5% 25% 20 150% 15% 140% 30% 80% 100% 6% 20% 15 150% 12% 120% 30% 70% 110% +1% 5% 5 0% 3% 20% 0% 10% 10%
1. 2. 3. 4. 5. 6. 7. 8. 9.
Return on investment Return on equity Earnings per share (`)
5% 25% 20
Price/earnings ratio 150% Profit/sales ratio Relative profit growth Absolute market share Relative market share* Ratio of actual sales to target sales 15% 140% 30% 80% 100%
10. Relative sales growth**

*relative to the leader
150%
100%
150%
130%
20%
**relative to the nearest competitor/leader/industry average.
As shown in the table, there can be mixed results in terms of targets and achievements. The ideal situation would be if actual performance in terms of all major evaluation criteria matches with targets or budgeted estimates given certain
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tolerance limits. There can be some cases of over-achievement, i.e., actuals surpassing the targets. But, more common outcomes are under-achievements or shortfalls, and, these are matters of serious concern for the strategists/top management/CEO. By using the four strategic controls mentioned earlier, the deviations or shortfalls can be minimized, or, in some cases, eliminated. But, this would depend on how timely and effectively the controls are exercised. If the shortfalls are still significant, the strategic group or the top management has to ascertain the causes of shortfalls or underperformance. A series of searching questions may help in determining the causes. Some such pertinent questions are given below. (a) Is the cause of deviation an organizational or management problem? (b) Is the causal factor external or environmental? (c) Is the cause random or could it have been foreseen? (d) Is the deviation temporary or permanent? (e) How far are the plans and strategies still valid? (f) Does the organization have the capacity or preparedness to respond to the changes required?6 Answers to the above questions will help in identifying the focus areas where corrective action is required, and, also, the nature and magnitude of such action. These may mean revision of targets, plan and strategy; this may sometimes be tantamount to formulation of a new strategy. The lessons learnt will also provide directions for future planning. Issues in Measurement One of the major limitations of the quantitative evaluation criteria, and of the quantitative indicators, is the problem of measurement. Difficulties are faced in the choice of unit, gross or net concepts/values, reference period, etc. Information or database are keys to correct measurement whether it is capital or investment, return on equity, earnings per share, relative sales growth or profitability. Incomplete or inadequate database can always create problems of accuracy. Also different accounting methods may give different results about many quantitative indicators. There is also a bias in terms of annual targets or objectives rather than short-term or long-term targets or variables. Finally, the human factor or subjective element is always associated with choice of, and/or deriving, quantitative criteria or estimates.
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Companies sometimes deliberately manipulate either definitions, units, or timing points or periodicity to show results which will please the stakeholders or shareholders. Some companies, particularly in the public sector, resort to soft targeting, i.e., set targets which are very easily achievable whatever be the methods of measurement. This is done in the public sector to take care of the accountability criteria, and, in the private sector, to please or satisfy the shareholders. But, large professional companies try to maintain as much neutrality or objectivity as possible in terms of choice of base year, data base, timing and periodicity for correct strategic evaluation and long-term growth.
16.6.2 Qualitative Evaluation Criteria

Because of the inadequacy of quantitative criteria (and also its limitations as discussed above), qualitative criteria are also used for evaluation of corporate strategy. Certain factors, which are critical for strategy and organizational performance evaluation, are not subject to quantitative measurement. These are strategic clarity, flexibility, skills and capabilities, organizational attitude towards risk taking, management motivation/commitment, employee turnover rates, etc. Qualitative criteria are generally applied before implementation of strategy, but these can be used as useful controls during the process of implementation also. A number of criteria have been suggested by strategic analysts. Tilles has posed six questions which can be useful in evaluating strategies. These are: (a) Is the strategy internally consistent? (b) Is the strategy compatible with the environment? (c) Is the strategy appropriate considering available resources of the organization? (d) Does the strategy involve an acceptable degree of risk? (e) Does the strategy have an appropriate time frame? (f) Is the strategy workable or practicable? David has raised seven additional questions, answers to which can give significant qualitative directions to strategy: (a) How good is the companys balance of investments between highrisk and low-risk businesses/projects? (b) How good is the balance of investments between long-term and short-term businesses/projects?
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(c) How good is the balance of investments between slow-growing markets and fast-growing markets? (d) How good is the balance of investments among businesses/ SBUs/ divisions? (e) What are the relationships between the companys key internal and external strategic factors? (f) How are major competitors likely to respond to particular company strategies? (g) To what extent are the organizations strategies socially responsible?7 Glueck and Jauch have suggested three qualitative criteria for strategy evaluation: consistency, appropriateness and workability. Consistency is compatibility of the strategy with organizational objectives/targets, internal conditions and major environmental factors. Appropriateness of the strategy is assessed with reference to resources, organizational capabilities, risk taking and time frame. Workability is feasibility or practicability in terms of implementation.8 Activity 1 We have mentioned financial and non-financial evaluation criteria in the text (16.6.1). Choose a public limited company and using its balance sheet and profit and loss account, do a perfromance analysis in terms of the criteria.
8. Quantitative evaluation criteria or indicators of performance are always financial. (True/False) 9. Relative market share is a better indicator of competitive performance than absolute market share. (True/False) 10. The gross or net income on total investment of a company including both fixed investment and working capital is called __________.
16.7 The Balanced Scorecard Approach

The balanced scorecard approach combines both quantitative and qualitative criteria/measures of evaluation and incorporates expectations of different
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stakeholders in relating performance to strategy. This approach has been developed by Kaplan and Norton (1992, 1993 and 1996) and elaborated, updated and improved by others, and is recognized as a modern tool for strategic evaluation of companies. Based on an analysis of some of the shortcomings of earlier implementation and control methods, the balanced scorecard approach has been designed to provide clear guidelines about what companies should assess/measure to balance the financial aspect in implementation and control of strategic plans. The balanced scorecard approach works through four critical perspectives: financial, internal business process, customer and, learning and growth. These four perspectives are interlinked, and, they emanate from or are guided by vision and strategy of the organization. Each of these perspectives is expressed through its own objectives, targets, initiatives and measures. Together with vision and strategy, these represent an integrated or balanced scorecard of performance and growth (Figure 16.4).
Figure 16.4 Balanced Scorecard Approach to Strategy Evaluation

Source: R S Kaplan, and D P Norton, Using the Balanced Scorecard as Strategic Management System, Harvard Business Review, (January-February, 1996).
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As shown in Figure 16.4, the objectives/targets, initiatives and measures of the four perspectives are connected through a chainsort of cause and effect relationshipswhich lead to successful implementation of strategy. Achievement of one perspectives targets leads to improvements in the next perspective, and so on till the companys overall performance improves. A properly built scorecard is balanced between financial and non-financial measures; internal and external performance perspectives; and short-term and long-term success. The balanced scorecard approach can be regarded as a management system and, not merely a measurement system, which enables companies to formulate their strategies, allocate resources, implement strategies and provide meaningful feedback. The method generates feedback on both internal business processes and external (stakeholder) outcomes to be able to continuously evaluate and improve strategic performance and results. When fully developed, the balanced scorecard is expected to transform strategic planning from a purely top management function into the system centre in the organization guiding resources, processes and outcomes. Kaplan and Norton describe the effect of balanced scorecard on organizational functioning as follows:
The balanced scorecard retains traditional financial measures. But, financial measures tell the story of past events, an adequate story of industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology and innovation.9
During the last decade, a large number of forward-looking companies have adopted the balanced scorecard approach. Some of the initial experiences were not very good. But, those may be either because the approach and methodology were not understood clearly or not implemented fully. But, companies soon realized that an overwhelming dependence on conventional financial performance measures means using only lag indicator (consequences of past actions). As progressive companies, they should concentrate more on lead indicators, i.e., drivers of future financial performance innovations in business processes, learnings from the past and growth perspectives. Many US companies including Exxon Mobil, Sears, DuPont and Mobil Corporation have successfully used this approach in their own ways.
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Activity 2 Select a large public limited company and do a balanced scorecard analysis of the company using the balance sheet, annual report, balance sheet and profit and loss account.
11. The ______ approach combines both quantitative and qualitative criteria/ measures of evaluation and incorporates expectations of different stakeholders in relating performance to strategy. 12. A properly built scorecard is balanced between ________ and _____ measures.
16.8 Organizational Controls

We have discussed above different types of strategic controls used by organizations but, have not mentioned about the financial controls. We have however, analysed the balanced scorecard approach/framework which companies use to ensure that they have established both strategic and financial controls to assess their performance. These are two major components of organizational control before, during and after strategy implementation. Companies rely on strategic controls and financial controls as part of their structures to support implementation of their strategies. Strategic controls are largely subjective criteria applied to ensure that the company is adopting appropriate strategies for securing competitive advantage. Thus, strategic controls are concerned with examining the fit between what the company might do (to exploit opportunities in its external environment) and what it can do (as indicated by competitive advantages). Financial controls, in comparison, are largely objective criteria used to measure the companys performance against predetermined quantitative standardsaccounting-based or market-based criteria. The overall organizational control has to enforce complementarity between the two to make an integrated framework like the balanced scorecard. Financial control focusses on short-term financial outcomes. In contrast, strategic control focusses on the content of strategic actions, rather than their outcomes. Some strategic actions can be correct but may still result in poor
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financial outcomes because of external conditions such as a recession in the economy, unexpected domestic or foreign government actions or natural disasters. Therefore, an emphasis on financial control often produces more short-term and risk-averse managerial decisions because financial outcomes may be caused by events beyond managers direct control. Alternatively, strategic control encourages lower-level managers to take decisions that incorporate moderate and acceptable levels of risk because outcomes are shared between the business-level executives making strategic proposals and the corporatelevel executives evaluating them. Strategic controls demand rich communications between managers responsible for using them to judge the companys performance and those with primary responsibility for implementing its strategies (such as middle-and lower-level managers). These frequent exchanges can be both formal and informal in nature.10 Strategic controls are also used to evaluate the degree to which the firm focusses on the requirements to implement its strategies. For a business-level strategy, for example, the strategic controls are used to study primary and support activities (discussed under Value Chain Analysis in unit 5) to verify that those critical to successful implementation of the business-level strategy are being properly emphasized and executed. With related corporate-level strategies, strategic controls are used to verify the sharing of appropriate strategic factors such as knowledge, markets and technologies across businesses. Intel is focussed on improving strategic control of its operations. To accomplish this, Paul Otellini, Intels CEO, has shifted the chip makers organization and control systems to focus on different product platforms. He has reorganized Intel into five marketfocussed units: corporate computing, the digital home, mobile computing, health care and, channel products (PCs produced by smaller manufacturers). Each platform brings together engineers, software developers, and marketers to focus on creating and selling platform products for particular market-oriented customer groups. In doing this, he has used two men in a box meaning that there are two executives in charge of each of the largest groups, mobile computing and corporate computing. This approach has facilitated improved control; the overall structure has more key executives and affiliated functional teams overseeing the development of each market platform.11
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13. Strategic controls are largely subjective criteria applied to ensure that the company is adopting appropriate strategies for securing competitive advantage. (True/False) 14. Financial control focusses on long-term financial outcomes. (True/False)
16.9 Six Sigma Approach to Evaluation and Improvement

Six Sigma 12 is conventionally known for minimizing errors or defects in manufacturing or quality improvement. But, since its first introduction in Motorola in 1987, Six Sigma has evolved into a highly rigorous tool for analysis and continuous improvement of corporate performance. Improvement in performance is combined with profitability. This is brought about by defect reduction, yield improvement, increase in customer satisfaction and best-in-class performance standards. Today, Six Sigma approach in many organizations means benchmarking or best practices in quality, which seeks to achieve near perfection in every aspect of business including products, processes, functions, operations and transaction. Many companies including Honeywell (1994), GE (1995), Citibank (1997) Polaroid (1998) have adopted the Six Sigma approach as a major business initiative for success. In some companies, Six Sigma is referred to as the new TQM.
Figure 16.5 DMAIC Process of Six Sigma
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The Six Sigma approach, like any other effective performance improvement programme, does not ensure easy or automatic success. Companies need to work hard for this. Top management commitment is vital for its success; and employees must be fully trained in Six Sigma methodologies. Many methodologiesframeworks, models and statistical toolsexist for implementing the Six Sigma programme. One such method for improving a system through incremental, but steady corrections in the DMAIC process. DMAIC is a five-stage process: define, measure, analyse, improve, control. See Figure 16.5. The five stages of DMAIC process are elaborated below in terms of specific analysis, planning and action:13 1. Define Project definition Project charter preparation Ascertaining customer needs (voice of customer) Translating customer needs into specific functional and operational requirements 2. Measure Process mapping Data attributes/characteristics Measurement system analysis/choice Measurement process capability Calculating process sigma level Determining/displaying baseline performance 3. Analyse Data tabulation and display (Scatter diagram, Histogram, Pareto chart) Value addition analysis Cause and effect analysis Identification (verification of root causes) Locating opportunity (defects and financial) for improvement Project charter review/revision
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4. Improve Brainstorming sessions Quality tool deployment Failure modes and effects analysis (FMEA) Testing (piloting) the solution Implementation planning Culture change planning for the organization 5. Control Statistical process control Developing a process control plan Documenting the process Many Six Sigma programmes are based on an uncompromising orientation of all business processes towards the customer. The focus is on clear understanding of customer expectations so that appropriate methods can be developed to improve and realign business processes for maximizing customer satisfaction. Six Sigma implementation at Citibank is one such example.
15. The _________ approach is conventionally known for minimizing errors or defects in manufacturing or quality improvement. 16. In some companies, Six Sigma is referred to as the new __________.
16.10 Characteristics of an Effective Evaluation System

We have seen above that strategy evaluation and control is an elaborate, and, at times, complex, process. It can also be a sensitive process because of the human factor involved. Too much or too rigorous evaluation and control may be expensive and, sometimes counterproductive alsoauthority and flexibility may be challenged, minimized or even eliminated. Too little or no evaluation may create the opposite effectlack of responsibility and accountability. In some companies, strategy evaluation simply means performance appraisal of the organization. This is also not correct. The evaluation system should be balanced
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and follow some norms and standards. Strategic analysts have laid down certain basic requirements which evaluation should comply with to be effective. First, strategy evaluation process or measures should be meaningful. These should specifically relate to the objectives/targets and the plan. There should be clear focus and no ambiguity. Second, strategy evaluation and control process should be economical. This means that the process should not be made unnecessarily elaborate and incur too much cost on evaluation itself. Use of too much of information which may not be necessary increases cost which is avoidable. Third, the evaluation process should conform to a proper time dimension for control and information retrieval or dissemination. Time dimension of control should coincide with the time span of the activity or the implementation phase. Also, information on developments or feedback should be timely (not delayed or provided too early) to make evaluation and control more appropriate. Fourth, strategy evaluation system should give a true picture of what is actually happening. The objective of evaluation is not fault finding. Sometimes, performance may be overshadowed by external factors or the environment. For example, during a severe slump in economic/business activity, productivity and profitability may decline in spite of best efforts by the managers to implement strategy. This should be analysed in the correct perspective. Fifth, strategy evaluation process should not dominate or curb decisions; it should promote mutual understanding, trust and common cause. All functional and operational areas should cooperate with each other in evaluating and controlling strategies. Strategy evaluation process should be simple and not too complex or restrictive. Complex evaluation systems may confuse managers and result in lack of accomplishments.14 It is true that there may not be any ideal or the only strategy evaluation system. All organizations are unique in themselves in terms of vision/mission, objectives, size, management style, strengths, weaknesses, organizational culture, etc. All these together determine the exact nature of the evaluation system, as also the implementation process, which is most suitable for the organization. Waterman (1987) has made some useful observations about strategy evaluation system of successful organizations:
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17. The evaluation process should conform to a proper ________ for control and information retrieval or dissemination. 18. The strategy evaluation process should not ________ decisions.
16.11 Case Study

Samsung and LG: Contrasts in Control Samsung and LG are the leading electronics companies in Korea. During the 1980s, both the companies were facing environmental changes and reformulated their strategies in response to the new environment. They adopted similar strategic methods. Their performance during this period, however, differed significantly. Samsung clearly outperformed its rival. The difference in performance was primarily the result of different methods of control adopted by the two companies. In the late 1980s, Samsung further strengthened its already strong environmental scanning system. It did this by appointing monitors of information in every business activity/group by introducing management information system for collection and dissemination of information. The corporate office was strengthened by 200 high-performing managers, and this enabled the company to increase its supervisory role over the subsidiary units. The major instrument of control was the annual budget, with rebudgeting done every six months. In contrast, LG changed its strategy to give greater autonomy to the subsidiaries. It defined the headquarters role as coordinator and supporter rather than controller. Also, its strategic planning horizon became three years longer than that of Samsung.
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Samsung operates a highly formalized feeback control system. Reporting is comprehensive and also extremely regular with subsidiary units reporting 15 or 16 times during a month to corporate office. Evaluation is tough and the reward and punishment system is based on well-established norms or rules, and it can be harsh for many. For example, the bonus payments are on zero sum basiswhen some employees are paid extra, others are paid less. By contrast, LGs reporting system is less formalized and is based, to some extent, on the strong involvement of members of the founding families. This makes it difficult to implement the reward and punishment system in more professional or objective way. Samsung follows the groups recruitment system for new managers, except for some specialists such as R&D staff. So, Samsungs own recruitment policy focusses on qualification and skills, but the groups recruitment emphasizes the commitment, attitude and personality of applicants. This shift in recruitment policy focus weakens the socialization of new staff. Samsung has a well-developed education and training scheme with company career paths leading to generalists with some special knowledge. LG, on the other hand, recruits about half of its managers itself with the LG group recruiting the rest. Its rigorous education and training system is geared to provide different career paths for general managers, R&D staff and shopfloor managers. In Samsung, informal communication is not strong and sub-group formation is totally discouraged. By contrast, in LG, informal communication and sub-group formation are welcomed. To sum up, Samsung has been strengthening its strategic planning while reducing emphasis on its recruitment process as a control mechanism. It has focussed on two integrating mechanismscentralization and formalizationwhile reducing socialization among employees. In contrast, LG has strengthened central control of socialization, while decentralizing strategic planning and budgetary control.
16.12 Summary
Let us recapitulate the important concepts discussed in this unit: Evaluation and control of strategy is the final stage, and, is one of the most vital stages, in the strategic management process of an organization. Through the evaluation system, the management tries to demonstrate how well the chosen strategy is implemented, and how successful or otherwise the strategy is.
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Strategy evaluation and control criteria can be both pre-implementation and post-implementation. Pre-emptive measures are always better than reactive or corrective actions. Evaluation and control are not only pre-implementation or postimplementation; these are also exercised during the strategy implementation process itself. Many call these strategic controls. Post-implementation evaluation of strategy shows actual performance of a company vis-a-vis targetshow successful or otherwise a strategy is. Evaluation of performance is generally done through various quantitative criteriaprimarily financial and, also non-financial. The balanced scorecard approach to strategy evaluation combines both quantitative and qualitative criteria/measures and incorporates expectations of different stakeholders in relating performance to strategy. Six Sigma approach, conventionally known for minimizing errors or defects in manufacturing or quality improvement, has evolved into a highly rigorous tool for analysis and continuous improvement of corporate performance. Strategy evaluation and control is an elaborate, sometimes complex and, can also be a sensitive process. It should, therefore, be balanced andfollow some norms and standards.
16.13 Glossary
Six Sigma: A quality-control program developed in 1986 by Motorola. Initially, it emphasized cycle-time improvement and reducing manufacturing defects to a level of no more than 3.4 per million. Strategic control: process of monitoring as to whether to various strategies adopted by the organization are helping its internal environment to be matched with the external environment. Strategic surveillance: A process by which a company can keep control over organizational factors, industry factors and also major environmental factors.

1. Explain the strategy evaluation and control process in terms of different steps or stages involved.
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2. Analyse various quantitative criteria for performance evaluation of companies. Distinguish between the financial criteria and non-financial criteria. 3. What role does qualitative evaluation criteria play in the strategy evaluation process? Analyse. 4. Explain the balanced scorecard approach. Analyse the four perspectives in the balanced scorecard approach. 5. Analyse Six Sigma as a performance evaluation and improvement method. Discuss with reference to Citibanks Six Sigma application for improving customer satisfaction level. 6. What are the major characteristics of an effective strategy evaluation system? Analyse these characteristics.

1. step-by-step 2. implementation 3. All the above 4. (d) Critical success factors (CSFs) 5. premise 6. strategic 7. Implementation control 8. False 9. True 10. Return on investment 11. balanced scorecard 12. financial, non-financial 13. True 14. False 15. Six Sigma 16. TQM
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17. time dimension 18. dominate or curb
Answers Terminal Questions

1. The evaluation and control system is a step-by-step or sequential process. Refer to Section 16.3 for further details. 2. Quantitative evaluation criteria or indicators of performance are primarily financial, but, there are also some important non-financial criteria. Refer to Section 16.6.1 for further details. 3. Because of the inadequacy of quantitative criteria (and also its limitations as discussed above), qualitative criteria are also used for evaluation of corporate strategy. Refer to Section 16.6.2 for further details. 4. The balanced scorecard approach combines both quantitative and qualitative criteria/measures of evaluation. Refer to Section 16.7 for further details. 5. Six Sigma is conventionally known for minimizing errors or defects in manufacturing or quality improvement. Refer to Section 16.9 for further details. 6. Strategic analysts have laid down certain basic requirements which evaluation should comply with to be effective. Refer to Section 16.10 for further details.
16.16 References
1. Jauch, L R , R Gupta, W F Glueck. 2004. Business Policy and Strategic Management. 6th ed. New Delhi: Frank Bros & Co. 2. Kaplan, R, and D Norton. The Balanced Scorecard: Measures that Drive Performance. Harvard Business Review, JanuaryFebruary, 1992. 3. Kaplan, R, and D Norton. Using the Balanced Scorecard as a Strategic Management System. Harvard Business Review, JanuaryFebruary, 1996. 4. Schreyogg, G, and H Steinmann. 1987. Strategic Control: A New Perspective. Academy of Management Review, Vol. 12 (1).
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5. Tilles, S. How to Evaluate Corporate Strategy. Harvard Business Review. JulyAugust, 1963. Endnotes
1
Johnson and Scholes (1999) and others call these critical success factors (CSFs) and Aaker ( 1995) and others call these key success factors (KSFs). J Dougery, T Fabregas, and others, The California Wine Industry Report, (Unpuhlished Paper, 1991). G Schreyogg, and H Steinman. Strategic Control: A New Perspective, Academy of Management Review, Vol. 12(1), 1987, 91103. J A Pearce II, and R B Robinson, Strategic Management: Strategy Formulation and Implementation, 3rd ed., (Homewood, Illinois: Richard D Irwin, 1988), 409. I I Mitroff, 'Crisis Management: Cutting through the Confusion', Sloan Management Review, (Winter, 1988), 19. S Tilles, How to Evaluate Corporate Strategy, Harvard Business Review (JulyAugust, 1963). F R David, Strategic Management: Concepts and Cases, 9th ed., (Pearson Education, 2003), 308. W F Glueck and L R L R Jauch, Business Policy and Strategic Management, 4th edn., (New York: McGraw-Hill, 1984), 399402. R S Kaplan, and D P Norton, Using the Balanced Scorecard as Strategic Management System, Harvard Business Review, (January-February, 1996). M A Hitt et al. Management of Strategy: Concepts and Cases (South-Western Cengage Learning, 2007), 329, 382. Hitt et al. (2007), 329. For conceptual understanding of Six Sigma and other sigmas, refer any standard textbook on TQM or quality management. These have been abstracted and adapted from J A Pearce II and R B Robinson Jr (2005), 377-78 David, F R. 2003. Strategic Management: Concepts & Cases (2003), 312.
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Strategic Management and Business Policy

Understanding Corporate Strategy

Strategic Management and Business Policy

1.3 What is Strategy?

Strategic Management and Business Policy

1.3.1 Evolving Definitions of Strategy

Strategic Management and Business Policy

1.3.2 Business Strategy and Military Strategy

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Strategic Management and Business Policy

1.3.3 Levels of Strategy

Figure 1.1 Levels of Strategy

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Strategic Management and Business Policy

1.4 Strategic Window

Strategic Management and Business Policy

1.5 Corporate Strategy in Different Types of Organizations

Strategic Management and Business Policy

Sikkim Manipal University

Strategic Management and Business Policy

1.6 Lack of Strategic Management in Some Companies

Strategic Management and Business Policy

Strategic Management and Business Policy

1.7 Ten Principles of Strategy

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Strategic Management and Business Policy

Sikkim Manipal University

Strategic Management and Business Policy

1.8 Case Study

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Strategic Management and Business Policy

Sikkim Manipal University

Strategic Management and Business Policy

Sikkim Manipal University

Strategic Management and Business Policy

1.11 Terminal Questions

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Strategic Management and Business Policy

1.12 Answers Answers to Self-Assessment Questions

Answers to Terminal Questions

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Strategic Management and Business Policy

Sikkim Manipal University

Strategic Management and Business Policy

Strategic Management Process

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Strategic Management and Business Policy

2.3 Strategic Management Model

Sikkim Manipal University

Strategic Management and Business Policy

Strategy evaluation control

Understanding corporate strategy (Ch. 1)

Strategic management process (Ch.2)

Corporate strategy and corporate governance (Ch. 3)

Mission. goal, objectives (Ch. 4)

Internal competences resources (Ch. 5)

External environment (Ch. 6)

Structural implementation (Ch. 2)

Functional implementation (Ch. 13)