ASSIGNMENT ON

THE SUMMARY OF THE BOOK

“CORPORATE STRATEGY”
BY H I ANSOFF

SCHOOL OF MANAGEMENT STUDIES, PUNJABI UNIVERSITY,

PATIALA.

Submitted To: Submitted By:

P.S.GILL ARSHPREET KAUR
(PROFESSOR, ROLL NO. 3776
SMS, PUNJABI UNIVERSITY, MBA-4TH Sem (SEC-B)
PATIALA.)
Peter Drucker has said “the end products of management are decisions
and actions”

This book is concerned with the business strategy formulation in the social –economic
environment of the United States. . It is concerned with the management, the active
process of determining and guiding the course of a firm toward its objectives.
Management of a business firm is very large complex of activities which consists of
analysis, decisions, communications, leadership, motivation, measurement and control.
A major part of a manager’s time is occupied in a daily process of making numerous and
diverse decisions. On a single day he may be called upon to decide on a future course of
the firms business, to reconcile an organization conflict between two executives and to
r4esolve a host of day to day operating problems. Hence decision process is very
complex and to understand this, one can proceed along two complementary lines. The
first and by far the more ambitious one is to discover how people in general and
executives in particular make decisions either individually or in groups. The other
direction is to study the alternatives and their consequences to seek an understanding of
the nature and the structure of decisions – to identify the problem, to enumerate and
define the controllable and uncontrollable variables, to establish relationships among
them, to single out important decisions and to prescribe rules for arriving at them.

From decision point of view the overall problem of the business of the firm is to
configure and direct the resource conversion process in such a way as to optimize the
attainment of the objectives. Since this calls for a great many distinct and different
decisions, a study of the overall decision process can be facilitated by dividing the total
decision space into several distinct categories as given below:
I. Operating decisions are those Decisions that involve routine tasks, such as
planning production and sales, scheduling personnel and equipment, adjusting
production rates, and controlling the quality of production. These are those which
usually absorb the bulk of the firm’s energy and attention. These are the Decisions
 that involve routine tasks, such as planning production and sales, scheduling
personnel and equipment, adjusting production rates, and controlling the quality of
production. The objective is to maximize the efficiency of the firm’s recourse –
conversion process, or in the more conventional language to maximize profitability
of current operations. The major decision areas are resource allocation i.e.
budgeting among functional areas and product lines, scheduling of operations,
supervision of performance and applying control actions.
II. Strategic decisions are likely to affect the long-term direction of an organization.
. Strategic decisions are normally about trying to achieve some advantage for the
organization.
Strategic decisions are the decisions that are concerned with whole environment in
which the firm operates, the entire resources and the people who form the company
and the interface between the two.

Characteristics/Features of Strategic Decisions

 Strategic decisions have major resource propositions for an organization. These

decisions may be concerned with possessing new resources, organizing others or
reallocating others.

 Strategic decisions deal with harmonizing organizational resource capabilities

with the threats and opportunities.

 Strategic decisions deal with the range of organizational activities. It is all about
what they want the organization to be like and to be about.

 Strategic decisions involve a change of major kind since an organization operates

in ever-changing environment.

 Strategic decisions are complex in nature.

 Strategic decisions are at the top most level, are uncertain as they deal with the
future, and involve a lot of risk.
 Strategic decisions are different from administrative and operational decisions.
Administrative decisions are routine decisions which help or rather facilitate
strategic decisions or operational decisions. Operational decisions are technical
decisions which help execution of strategic decisions. To reduce cost is a
strategic decision which is achieved through operational decision of reducing the
number of employees and how we carry out these reductions will be
administrative decision
I. Administrative decisions are concerned with structuring the firms’
resources in a way which creates a maximum performance potential. One
part of the administrative problem is concerned with organization:
structuring of authority and responsibility relationships, work flows,
information flows, distribution channels and location of facilities.
The differences between Strategic, Administrative and Operational decisions can be
summarized as follows-

Strategic Decisions Administrative Decisions Operational Decisions

Strategic decisions are long- Administrative decisions Operational decisions are

term decisions. are taken daily. not frequently taken.

These are considered where These are short-term based These are medium-period
The future planning is Decisions. based decisions.
concerned.

Strategic decisions are taken These are taken according These are taken in
in Accordance with to strategic and accordance with strategic
organizational mission and operational Decisions. and administrative
vision. decision.

These are related to overall These are related to These are related to
Counter planning of all working of employees in production.
Organization. an Organization.

These deal with These are in welfare of These are related to

organizational Growth. employees working in an production and factory
organization. growth.
At first glance, strategic decisions resemble capital investment decisions, which deal in a
similar manner with resource allocation to fixed assets and machinery. Therefore a well
developed theory is available for capital investment decisions, which is known as
CAPITAL INVESTMENT THEORY (CIT): it says that capital investment analysis starts
with identification and enumeration of fixed asset and equipment proposals for the next
budget period. For each proposal, positive (revenues) and negatives (costs) cash flows are
computed over the life time of the project. For proper comparison, these flows must be
marginal to other flows within the firm.
With the projects enumerated and the flows determined, the worth of each project is
evaluated wit respect to both its net returns to the firm and the entailed risks. Three
common methods for evaluation are the payback period, the internal rate of discount and
the net present worth.
Solution to any decision problem can be viewed in four steps:
1 Perception of decision need or opportunity. This is intelligence phase
2 Formulation of alternatives courses of action.
3 Evaluation of the alternatives for their respective contributions.
4 Choice of one or more alternatives for implementation.

PORTFOLIO SELECTION THEORY is the alternative frame of reference to capital

investment theory. While CIT deals with selection of physical assets for the firm,
portfolio selections concerns selecting securities either for an individual investor or for an
investment firm. Unlike CIT, the decision rules for search and evaluation of products and
markets are not the same for all the firms. Since objectives are no longer a simple
yardstick, they will vary from one type of firm to another depending on the firm’s past
profitability, its prospects and its stage in the life cycle.
For example: an infant firm trying to gain a toehold will focus attention on current
profitability whereas a large firm entrenched in the market place will turn attention to
long term growth prospects. Since a firm has to search for opportunities, it will also tend
to adapt search rules to the particular opportunities which confront it. Thus a firm with
large fixed investments will narrow its search to opportunities to which this investment
can be applied, while a firm with highly liquid assets may range wide in search of new
product markets.

Internal Expansion Compone

appraisal of the strategy nts of
firm strategy

Formulatio Decision
n of on
objective, whether
choice of to
goals diversify

Appraisal of
outside Diversificat Component
opportunities ion strategy s of
strategy

Figure showing decision schematic in strategy formulation

Objective is a projected state of affairs that a person or a system plans or intends to

achieve—a personal or organizational desired end-point in some sort of assumed
development. Many people endeavor to reach goals within a finite time by setting
deadlines. Objectives are currently one of the most controversial issues of business ethics.
Objectives are decision rules which enable management to guide and measure the firm’s
performance toward its purpose. Objectives can be inferred from its relationship to the
environment, from its internal structure, from the functions it performs, and from its past
history. Objectives need to be made compatible with the existing information-processing
systems within the firm. In order to meet the requirement, one should develop a system
of objectives which is based on following premises:
1 The firm has both economic objectives aimed at optimizing the efficiency
of its total resource-conversion process and social or non economic
objectives which are the result of interaction among individual objectives
of the firms’ participants.
 2 In most firms the economic objectives exert the primary influence on the
firms’ behavior and form the main body of explicit goals used by
management for guidance and control of the firm.

3 The central process of the firm is to maximize long term return on

resources employed within the firm.

4 The social objectives exert a secondary modifying and constraining

influence on management behavior.

5 In addition to proper objectives two related types of influence are exerted

on management behavior: responsibilities and constraints.

We also define objectives as a measure of efficiency of the resource conversion process.

An objective contains three elements: the particular attribute that is chosen as a measure
of efficiency, the yardstick or scale by which the attribute is measured and the goal-the
particular value on the scale which the firm seeks to attain.

By synergy a firm seeks a product market posture with a combined performance that is
greater than the sum of its parts. In synergy, joint effects are measured between two
product markets; in strength and weakness evaluation, the firm’s competences are rated
relative to some desired performance level. There are different types of synergy i.e. sales
synergy, operating synergy, investment synergy, management synergy and all these can be
measured with the help of ROI formula. A firm with positive will have a competitive
advantage over a firm which lacks it.
The synergistic effect can be measured in either two ways: by estimating the cost
economics to the firm from a joint operation for a given level or revenue, or by
estimating the increase in net revenue for a given level of investment.
In principle, all synergistic effects can be mapped on one of three variables: increased
volume of dollar revenue o the firm from sales, decreased operating costs, & decreased
investments requirements. All three are viewed in the perspective of time; therefore, a
fourth synergistic effect is acceleration of the respective changes in three variables.
One of the early steps following the formulation of objectives should be analysis of
strengths & weaknesses i.e. ‘audit of the tangible and intangible resources for
diversification.’ The audit has two purposes. First, it can identify deficiencies in the
firm’s present skills and resources which can be corrected short of diversification.
Second, it can identify strengths from which the firm can lead in pursuing diversification
and/or deficiencies which it may wish to correct through diversification.
In order to accommodate synergy and strength & weaknesses within the same analytic
framework, we shall use the method of profile comparison. As the first step we shall
develop the framework for a capability profile which rates a particular pattern of skills
and facilities relative to some reference level. This is done by first constructing a grid
which matches functional areas in the firm against its skills and competences, and then by
providing a checklist for entries into the grid. This grid includes various functional areas
which encompass individual skills & resources as organized below:
1. Research & development
2. Operations
3. Marketing
4. General management & finance

The major use of competence profile is in assessment of balance in four different parts of
the strategic problem:
1. Internal appraisal
2. External appraisal
3. Synergy component of strategy
4. Evaluation of individual opportunities

The end product of strategic decisions is deceptively simple; a combination of products

and market is selected for firm. These combinations may include addition of new product
markets, divestment from some old ones, expansion of the present position & many more.
Capital investment starts with identification and enumeration of fixed assets and
equipment proposals for the next budget period. For each proposal negative cash flows
are computed over the life time of the project. Three common methods for evaluation of
project flows are the payback period, the internal rate of discount, and net present worth.
Simons model of decision making include following steps:
1. Perception of decision need or opportunity. Simon calls this the intelligence
phase.
2. Formulation of alternative courses if action.
3. Evaluation of the alternatives for their respective contributions.
4. Choice of one or more alternatives for implementation.

The seventh chapter of the book explores the conditions when the firm faces the decision
whether or not to diversify, reasons of the diversification, alternative directions for
diversification.
Strategic change is a realignment of the firm’s product-market environment. In
diversification, novel products are acquired and previously unexplored markets are
entered. Some of the reasons for the diversification are:
1. Its objectives can no longer be met within the product-market scope defined by
expansion.

2. When the retained cash exceeds the total expansion needs.

3. When diversification promises greater profitability

4. When available information is not reliable enough to permit a conclusive

comparison between expansion and diversification.

Diversification alternatives are:

1. Vertical: More sensitive to instabilities and offer less assurance of flexibility. It
increases the firm’s dependence on a particular segment of economic demand.
The synergy is strong in case of related technology while weak or even negative
when technology is unrelated.
 2. Horizontal: It consists of moves within the economic environment of the
diversifying firm. Marketing synergy is well achieved since the firm continues to
sell through established marketing channels.

Both of the above diversifications offer only a limited potential for objectives and make
a limited contribution to flexibility and stability.
3. Concentric: concentric diversification differs from the conglomerate in the degree
of synergy with the firm’s present position. It has a measure of common thread
with the firm either through marketing or technology or both.

4. Conglomerate: By definition, it has no strategy. But there is a slight difference

between a conglomerate strategy and no strategy is that while the former has no
synergy component, it will usually have a product-market scope, a competitive
advantage component, as well as a set of clearly stated objectives.

The conglomerate strategy is followed by some firms which are too highly specialized or
too obsolete to have synergy with other kinds of business, in firms where depth of
competence is too shallow to offer opportunities for synergy.

To answer how firms should construct step by step solutions of the strategy
problems; firm has two main options namely expansion or diversification. In
diversification firm would acquire novel products and unexplored markets are entered
whereas expansion offers transfer of product, service or competencies. If equal
opportunities are provided synergy would be higher in case of expansion.
Diversification for firms is a costly affair and firm could meet its objectives short
of being diversified it should go ahead. We have to conduct both internal and external
appraisal to check the feasibility of diversification. The decision to diversify raises
important question that whether the acquisition would be integrated with existing
structure or structure would be varied so as to avail advantage.
Internal Appraisal is the first and foremost step in appraising the diversification.
Main objectives of the firm have to be made explicit, tentative revision of objectives,
goals and priorities need to be done. Current forecast of future performance is to be made
to test firm’s performance on high priority objectives. If firm doesn’t have long range
planning previous performance could be extrapolated into future. Finally comparison
between objectives and forecast should be done to measure the gap. If there is any gap
objectives are revised and gaps adjusted upwards or downwards pertaining to negative or
positive gaps respectively.
External Appraisal is carried out to analyze market opportunities available to the
firm, outside its scope that would help in finalizing whether to diversify or not. We have
some problems in carrying out this analysis; firstly firm’s purpose is described by
multiple objectives competing with each other. Other being that there is no assurance that
all the forthcoming opportunities have been identified. Thirdly the problem is incurred in
averaging characteristics of industry data to calculate whether technological and
economic potential exists in industry. Fourthly, in most diversification new activity is
integrated into parent operation which adds to synergy criteria.
Therefore while selecting between expansion and diversification ranking should
be constructed and consolidated according to following yardsticks: Ranking should be
done according to economic criteria, second list should constructed according to entry
cost. These two lists are consolidated into three based on the objectives. In cases when
internal appraisal forecast declines the ides should be to liquidate firm and reinvest in
diversification, while expansion that shows slow growth or sales decline keep to main
business and devote most available resources to diversification. When both expansion
and diversification has limited opportunity, good idea is to maintain resources to
expansion.
Strategy structure leads to strategy formulation in which alternative portfolios are
constructed which are within the resources of the firm. Two key issues are taken care-off
i.e. how to trade of competing demands and flexibility of objectives and secondly how to
allow risks associated with strategic decisions.
In most of the cases industries which are preferable for proximate profitability
will be inferior to others on long term. To provide maximum flexibility and overall
product market posture it is necessary to consider all the alternatives. For this
organizations could use judgmental trial and error method. Sometimes large number of
entries is not advisable because different entries entail an accumulation of entry costs
which depresses profitability. Also distinct entries will cost more to operate because of
lack of synergy and dilution of management attention. For many type of entries there is
minimum critical mass below which the chances of success drop off quickly, while
critical mass is the minimum size of entry needed in order to be competitive. Entries
which are larger than critical mass are advantageous because of stronger competitive
position.
Analysis also takes into consideration the problem of risk. Problem arises in three
ways: Our ability to foresee future in detail is limited to only certain events that we
expect, but in most of the case probable may not happen. Second the projections itself are
based on expectations and estimates of probable events. Third, activities taken up by the
firm react through competition posed by other firms. Therefore three sources of risk and
uncertainty are: uncertainty in estimation, projecting environment and competitive
reactions.
Major decision in both cases is made on firm’s organizational strategy synergy-
structure followed by successive decisions on four parameters viz product- market scope,
growth vector, synergy and competitive advantage. Final result of strategy decision is
built on series of concept objectives, strategy, present position, capabilities, potential both
economic and competitive. Strategy is an operator which is designed to transform the
firm from present position to position framed by objectives subject to constraints,
potential and capabilities. Hence many firms who don’t make good strategies they fail .

There are many reasons why strategic plans fail, especially:

 Failure to understand the customer

o Why do they buy
o Is there a real need for the product
o inadequate or incorrect marketing research
 Inability to predict environmental reaction
o What will competitors do
 Fighting brands
 Price wars
o Will government intervene
 Over-estimation of resource competence
 o Can the staff, equipment, and processes handle the new strategy
o Failure to develop new employee and management skills
 Failure to coordinate
o Reporting and control relationships not adequate
o Organizational structure not flexible enough
 Failure to obtain senior management commitment
o Failure to get management involved right from the start
o Failure to obtain sufficient company resources to accomplish task
 Failure to obtain employee commitment
o New strategy not well explained to employees
o No incentives given to workers to embrace the new strategy
 Under-estimation of time requirements
o No critical path analysis done
 Failure to follow the plan
o No follow through after initial planning
o No tracking of progress against plan
o No consequences for above
 Failure to manage change
o Inadequate understanding of the internal resistance to change.