MBCG743D Business Policy and Startegy

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CE
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PE
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Business Policy & Strategy
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Course Design
Advisory Council
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Chairman
Dr Parag Diwan
Members
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Dr Kamal Bansal Dr Anirban Sengupta Dr Ashish Bhardwaj
Dean Dean CIO
Dr S R Das Dr Sanjay Mittal Prof V K Nangia

VP – Academic Affairs Professor – IIT Kanpur IIT Roorkee
SLM Development Team

Wg Cdr P K Gupta
Dr Joji Rao
Dr Neeraj Anand
Dr K K Pandey
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Print Production
Mr Kapil Mehra Mr A N Sinha

Manager – Material Sr Manager – Printing
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Author
C Appa Rao
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or any other means,
without permission in writing from MPower Applied Learning Enterprise.
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Course Code: MBCG-743D
Course Name: Business Policy & Strategy
Version: July 2013
© MPower Applied Learning Enterprise

UNIT 20: Case Study
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Contents
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Block-I
Unit 1 Business Policy – An Overview...................................................................................... 3

Unit 2 Strategy and Strategic Management........................................................................... 17
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Unit 3 Basic Models of Strategic Management ...................................................................... 45
Unit 4 Strategic Intent – Vision, Mission and Objectives...................................................... 65
Unit 5 Case Study .................................................................................................................... 89
Block-II
Unit 6 Formulating Business Strategy ................................................................................... 93

Unit 7 Formulating Corporate Strategy ............................................................................... 111
Unit 8 SWOT and Value Chain Analysis.............................................................................. 125
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Unit 9 Portfolio Analysis and Strategic Alliance.................................................................. 143
Unit 10 Case Study .................................................................................................................. 167
Block-III
Unit 11 Strategic Management Process.................................................................................. 177

Unit 12 Strategic Choice and Implementation ....................................................................... 187
Unit 13 Strategies for Global Environment............................................................................ 197
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Unit 14 Strategies for Retrenchment...................................................................................... 221

Unit 15 Case Study .................................................................................................................. 245
Block-IV
Unit 16 Strategic Organisational Design................................................................................ 249

Unit 17 Modern Organisational Structure ............................................................................. 263
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Unit 18 Learning and Organisational Strategy ..................................................................... 283

Unit 19 Behavioural Strategic Implementation ..................................................................... 301
Unit 20 Case Study .................................................................................................................. 323
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Block-V
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Unit 21 Strategies at Functional and Operational Level....................................................... 327
Unit 22 Strategic Control and Evaluation .............................................................................. 345
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Unit 23 Corporate Goals and Strategic Gap ........................................................................... 363
Unit 24 Life Cycle Approach to Strategic Planning ............................................................... 379
Unit 25 Case Study .................................................................................................................. 391
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Glossary ........................................................................................................................................... .395
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UNIT 1: Business Policy – An Overview
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Notes
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BLOCK-I
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Detailed Contents Business Policy & Strategy
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Notes
UNIT 1: BUSINESS POLICY – AN OVERVIEW
___________________ UNIT 3: BASIC MODELS OF STRATEGIC
MANAGEMENT
z Introduction
___________________ z Introduction
z Concept of Policy
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___________________ z Henry Mintzberg Model of Strategic Management
z Concept of Strategy
___________________ z Ansoff Model of Strategic Management
z Policy vs Strategy
___________________ z Michael Porter Model of Strategic Management
z Business Policy
___________________ z BCG Matrix
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z Scope of Business Policy
z Porter’s Five Forces Model
___________________
UNIT 2: STRATEGY AND STRATEGIC
___________________
MANAGEMENT UNIT 4: STRATEGIC INTENT – VISION, MISSION
AND OBJECTIVES
z ___________________
Introduction
z Introduction
z Defining and Explaining Strategy
___________________
z Hierarchy of Strategic Intent
z Definition of Strategic Management
z Vision Statement
z Levels at Which Strategy Operates
z Mission Statement
z Need for Strategies and Strategic Management
z Value Statement
z Strategies and their Role in Strategic Management
z Business and the Nature of its Objectives
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z Dimensions of Strategic Management
z Organization’s Objectives
z Strategic Decision-making
z Industry Analysis UNIT 5: CASE STUDY

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Unit 1
3
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Notes
Activity
Take___________________
any organisation of your
Business Policy – An Overview choice and discuss its policy.
The ___________________
discussion should be
presented in form of a short
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___________________
report of 200 words maximum.
Objectives
___________________
After completion of this unit, the students will be aware of the following
topics: ___________________
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\ Concept of Policy ___________________
\ Concept of Strategy ___________________
\ Policy vs Strategy
___________________
\ Business Policy
___________________
\ Scope of Business Policy
___________________
Introduction
The world economy has witnessed an amazing succession of major
developments during the last few decades, particularly after the
second world war. The profile of business enterprises has
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undergone phenomenal changes. These changes are reflected in
terms of developments in technology such as electric lights, power
distribution, telephone, refrigeration, radio, television video,
computer etc., expanding scale of business operations, ever
increasing competition, mounting internationalization of business,
growing state interference, changing socio-economic and political
environment and the emergence of new human values. These
developments served to complicate business problems and even
passed a threat to the survival pf existing enterprises. To cope with
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these remarkable developments in the business environment and

to surmount the grave problems encountered by the chief
executives for the survival and growth of their enterprises, new
techniques and principles of management have been evolved from
time to time.
Concept of Policy
Policies have been defined as statements, either expressed or
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implied of those principles and rules that are set up by executive

leadership as guides and constraints for the organisation's thought
and action. They are a kind of standing answers to recurring
questions. Thus, it may be the policy of the enterprise to employ
4 any local people to charge fixed prices for its products, to sell only
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Notes against cash. Policies may relate to production, sales, personnel,
___________________ finance and so, on. Policies are general in nature emphasize a
fairly definite course of action and are changed infrequently.
___________________
"Policies are general statements or undertaking (members of the
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___________________
group) which makes the action of each member of the group in the
___________________
given set of circumstances more predictable to other members."
___________________
– J. L. Massie
___________________
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"Policies are general statements or undertakings which guide or
___________________
channel thinking in decision making of subordinates."
___________________
Policies are typically promulgated through official written
___________________ documents. Policy documents often come with the endorsement or
___________________ signature of the executive powers within an organization to
legitimize the policy and demonstrate that it is considered in force.
Such documents often have standard formats that are particular to
the organization issuing the policy. While such formats differ in
form, policy documents usually contain certain standard
components including:
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z A purpose statement, outlining why the organization is
issuing the policy, and what its desired effect or outcome of the
policy should be.
z An applicability and scope statement, describing who the
policy affects and which actions are impacted by the policy.
The applicability and scope may expressly exclude certain
people, organizations, or actions from the policy requirements.
Applicability and scope is used to focus the policy on only the
desired targets, and avoid unintended consequences where
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possible.
z An effective date which indicates when the policy comes into
force. Retroactive policies are rare, but can be found.
z A responsibilities section, indicating which parties and
organizations are responsible for carrying out individual policy
statements. Many policies may require the establishment of
some ongoing function or action. For example, a purchasing
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policy might specify that a purchasing office be created to

process purchase requests, and that this office would be
responsible for ongoing actions. Responsibilities often include
identification of any relevant oversight and/or governance 5
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structures. Notes
Activity
z Policy statements indicating the specific regulations, Discuss the strategy of any
___________________
requirements, or modifications to organizational behaviour top Indian MNC of your choice
___________________
in form of a presentation
that the policy is creating. Policy statements are extremely
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___________________
diverse depending on the organization and intent, and may
take almost any form. ___________________
Some policies may contain additional sections, including: ___________________
Background, indicating any reasons, history, and intent that
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z ___________________
led to the creation of the policy, which may be listed as ___________________
motivating factors. This information is often quite valuable
___________________
when policies must be evaluated or used in ambiguous
situations, just as the intent of a law can be useful to a court ___________________
when deciding a case that involves that law. ___________________
z Definitions, providing clear and unambiguous definitions for

terms and concepts found in the policy document.
Check your Progress

Fill in the blanks:
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1. …………………….are statements either expressed or
implied of those principles and rules that are set up by
executive leadership as guides and constraints for the
organisation's thought and action.
2. Policies are general statements or undertakings which
guide or channel thinking in decision making of
…………………..
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Concept of Strategy
A strategy is a gamemanship or administrative course of action
designed to achieve success in the fact of the difficulties. It is the
design or the over all plan which a company choose in order to
move or reach the objectives, it seeks to provide the optimum
match between the firm and its environment.
"Strategy is the complex plan for bringing the organization from a
given posture to a desired position in a future period of time."
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"Strategy refers to the determination of purpose and the long term

objectives of the enterprise and the adoption of course of action and
allocation of resources necessary to achieve these aims."
– Harold Koontz
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Nature and Characteristics of Strategy
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Notes
Activity The nature and characteristics of strategy are:
Conduct an interactive quiz on
___________________
difference between policy and z It is the right combination of different factors.
___________________
strategy.
z It relates the business organization to its environment.
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z It is an action to meet a particular challenge to solve
___________________
particular problems or to attain objectives.
___________________
z Strategy may need contradictory action. For example, today a
___________________
manager may adopt a particular course of action but tomorrow
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___________________ he may end the same due to changes in situations.
___________________ z Strategy is forwards looking.
___________________ z It is a means to an end and not an end in itself.
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z It is a means of coping with or managing the events and
changes in the external environment.
z It is formulated at the top management level.
z It is generally long range in nature but short range moves are
also specified in it.
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z It is flexible and dynamic.
z It involves assumption of certain calculated risks.
z It is action oriented and more specific than objective.
z It is generally meant to cope with a competitive setting in
which the bahaviour of competitors and other adversaries of
the enterprise affects its own functioning and performance.
Check your Progress

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True or False:
1. Strategy is a design or the over all plan which a
company chooses in order to move or reach the
objectives.
2. Strategy may not need contradictory action
Policy vs Strategy
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A policy is a guide to thinking and action for those responsible for

making decisions. On the other hand, a strategy deals with the
allocation and of development of physical and human resources so
as to achieve the desired goals in the face of environmental
pressures. A strategy may exit without a policy, strategy and policy 7
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may in some cases be co-extensive. A strategy deals primarily with Notes
environmental constraints and opportunities where as a policy is ___________________
concerned mainly with internal management. A policy is a
___________________
contingent decisions and it lays down the response to be made
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whenever the specified contingency arises. But a strategy is ___________________
designed to deal with situations about which all facts are not ___________________
known and, therefore, alternatives can not be evaluated in
___________________
advance. The implementation of policy can be delegated but the
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execution of strategy can not be delegated because it requires a
last minutes executive decisions. However, both policy and ___________________
strategy are designed to achieve organizational objectives. The ___________________
process of their formulation is similar. In strategic decisions the
___________________
identification and analysis of the factors bearing on the problem
are more difficult than in case of policy decisions. ___________________
Thus we can say that a major distinction between policy and

strategy is that former is a guide to the thinking and action of
those who make decisions, while strategy concerns the direction in
which human and physical resources will be deployed and applied
in order to maximise the chance of achieving a selected objective in
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the face of difficulties.
Policy is contingent decision, whereas strategy is a rule for making
decision. A contingent even is recognised because it is repetitive,
but the time of its specific occurrence cannot be specified. It is not
worth while to require a new decision on what should be done each
time when a contingency arises. It is better to prescribe, in
advance, the response to be made whenever a specified contingency
occurs.
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This is done through policy formulations. Specification of strategy

is forced under conditions of partial ignorance when alternatives
cannot be arranged and analysed in advance. The strategy decision
is taken under the conditions where all the facts are not known,
which may not be lasting because of the further knowledge of the
facts.
The distinction between policy and strategy is made in the context
of delegation or implementation. The implementation of policy can
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be delegated downward in the organisation, while the strategy

cannot, since it requires a last-minute executive decision. The term
“policy” should not be considered as synonymous to the term
8 “strategy”. The difference between policy and strategy can be
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Notes
Activity summarized as follows-
Create an assignment on
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z Policy is a blueprint of the organizational activities which are
advantages and
___________________
disadvantages of business repetitive/routine in nature. While strategy is concerned with
those organizational decisions which have not been dealt/faced
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policy
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before in same form.
___________________
z Policy formulation is responsibility of top level management.
___________________
While strategy formulation is basically done by middle level
___________________ management.
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z Policy deals with routine/daily activities essential for effective
___________________ and efficient running of an organization. While strategy deals
___________________ with strategic decisions.
___________________ z Policy is concerned with both thought and actions. While

strategy is concerned mostly with action.
z A policy is what is, or what is not done. While a strategy is the
methodology used to achieve a target as prescribed by a policy
Check Your Progress

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Fill in the blanks:
1. ………………………. deals with the allocation and of
development of physical and human resources so as to
achieve the desired goals in the face of environmental
pressures.
2. Policy is contingent decision, whereas strategy is a
………………….. for making decision.
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Business Policy
Business policy refers to decision about the future of an ongoing
enterprise. These are the decisions which only the top
management of an organization can take. Top management take
these decisions after thoroughly investigating market
opportunities taking into consideration resources available in
internal and external environment and by appraising the
destructive competence. These are vital & strategic decisions in as
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much as they determine the relationship between the enterprise

and its environment what it is suppose to be doing in the coming
years, and how it should position itself to take advantage of the
future market opportunities.
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"A management policy is a predetermined selected course
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established as a guide towards accepted goals and objectives. Notes
Policies establish the framework of guiding principles that ___________________

facilitate delegation to lower levels and permit individual ___________________
managers to select appropriate tactics or programmes."
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___________________
– Yoder and Dale
___________________
"A business policy is nothing more than a well developed statement
___________________
of directions and goals. Goals involve definitions of precisely what
the business is or should be and the particular kind of company it
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___________________
should be. Direction guides the action of the firm to accomplish ___________________
these goals."
___________________
– Edmond and Gray
___________________
"A policy is a statement or a commonly accepted understanding of
___________________
decision making criteria or formulate prepared or evolved to
achieve economy in operations by making decision, relatively
routine or frequently occurring problems and consequently
facilitating the delegation of such decision to lower managerial
levels."
– Miller and Earnest
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Characteristics of Business Policy
The characteristics of business policy are:
z When policies are clearly framed and exclaimed, the help the
executive to know how others will act and this will help them
to have better co-ordination in achieving the well planned
objectives.
z Policies will be effective and fruitful only when they are
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properly implemented by properly trained personnel, as per

time schedule.
z Business Policies are never static and are subject to alteration
or modification depending upon the business environment.
z Policies act as guidelines to business executives to resolve
recurring problems so as to attain predetermined objectives.
z Policies further cover the wide field of product mix and market
mix, guiding the enterprise as to how much and what type of
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product to be manufactured and its channels of distribution.

z Policies are not a set of rigid rules and regulations instead
they are living precepts guiding and enterprise to continue
with in the set pattern of behaviour.
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They are overall guides determining the direction of
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z
Notes
managerial action subject to policy restrictions.
___________________
z Consistency in the work performance by different members of
___________________
firm is maintained because of clear cut policies chalked out at
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___________________ executive level.
___________________ z Policies normally cover the study of the nature and process of
___________________ choice about the future of a business enterprise and are to be
handled by responsible executives.
___________________
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___________________ z Policies are general statement of principles for achieving
predetermined goals by guiding action by executives at
___________________
different levels.
___________________
z They are generally meant for subordinates and are framed to
___________________ suit a specific situation.
z They are of multipurpose nature embracing
Avoiding confusion.
Providing guidelines at all levels.
Enabling the enterprise to run smoothly without any
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hindrance.
Helping management to achieve maximum utilization of
human and material resources.
z Decision making, planning and co-ordination of any business
organization are exclusively governed and controlled by
"business policies".
z Policies dominate over all other factors of management since
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they act in the form of a formal agreement to be strictly

followed at all levels in the organization before taking any
decision.
z Policies help the management to delegate duties to
subordinates with full confidence that these duties will carried
out strictly as per the policy decisions.
Objectives of Business Policy

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Objectives of business policy are as follows:

z Development of skills: The attainment of knowledge should
lead to the development of skills so as to apply what is learnt.
Such application takes place by an analysis of case studies and
their interpretation and by an analysis of the business events 11
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taking place around us. Notes
z Determination of objectives, mission etc.: Information ___________________

about the environment helps in the determination of the ___________________
mission, objectives and strategies of a firm. The learner
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___________________
appreciates the manner in which strategy is formulated.
___________________
z Developing a creative attitude: An important attitude is to
___________________
go beyond and think when faced with a problematic situation.
Developing a creative and innovative attitude is the hallmark
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___________________
of a general manager who refuses to be bound by precedents & ___________________
stereotyped decisions.
___________________
z Environmental analysis and knowledge: Knowledge about
___________________
the environment-external and internal and how it effects the
___________________
functioning of an organisation is vital in understanding
business policy. Through the tools of analysis and diagnosis, a
learner can understand the environment in which a firm
operates.
z Generalisation approach: The problems in real life business
are unique and so far their solutions are an enlightening
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experience for the managers at all levels. The knowledge
component of such an experience stresses the generalisation of
approach to be adopted in problem-solving and decision
making. With a generalised approach it is possible to deal with
a wide variety of situations.
z Implementation of strategy: Implementation of strategy is a
complex issue and is invariably the most difficult part of
strategic management. Through the knowledge gained in
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business policy, the learner is able to visualize how the

implementation of strategies can take place.
Advantages of Business Policy

The advantages of business policy are:
z An understanding of business policy enables the executives to
avail of opportunity and other way round to equip the
executive for avoiding a risk with regard to career planning
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and development.
z Setting up of policies can speed up decision making since they
provide a framework with in which the decisions can be made.
Policies give a practical shape to the objectives by elaborating
12 & directing the way in which predetermined goals are to be
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Notes achieved.
___________________ z Policies help in securing co-ordination of efforts and activities
___________________ in the organisations. Though managers try to co-ordinate the
efforts of their subordinates they, by prescribing how a
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___________________
subordinate is expected to behave in a particular context,
___________________
secure better co-ordination in a subordinate's efforts and
___________________ actions.
___________________ z A clearly defined business policy may lead to an improvement
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___________________ in job performance. As a middle level manager a person is
helped to understand the linkages between different sub units
___________________
of an organisation and how a particular sub-unit fits into the
___________________ overall picture.
___________________ z Policies help both superior and subordinates to work for a
better performance. When the policies are formulated carefully
the managers are not required to devote time on same or
similar assignments. The subordinates have not to consult
their superiors frequently. So by this way everybody can stick
to one's task instead of wasting time here & there.
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z Business policy diverts the management towards more
meaningful position, as one can look business decision making
in its proper perspective. For example, in the context of
business policy, a short term gain for a department is
knowingly sacrificed in the interest of the long term benefit
that may accrue to the organisation as a whole.
Disadvantages of Business Policy

The disadvantages of business policy are:
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z No problem can be solved very quickly on the basis of policies,

because policies don't give enough room to managers to decide.
Policies force managers to remain in boundary.
z Policies are not very fruitful in these days of rapidly changing
of business environment. Even this is possible that the time at
which policies were set up was quite different as compared to
present scenario, because of changes in political, social,
economical and technological aspects. So in these types of
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situation policies don't provide much help.

z Policies do not cover each and every sort of problem. At times,
such type of situation arise which never predicted earlier. So
in these sorts of circumstances policies are meaningless.
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In these days of dynamism, there is no space for anything
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z
Notes
static. Policies once setup, they will go for a longer period. Activity
Managers have to take their decision by taking into Conduct a group discussion
___________________
on persuasive nature of
consideration policies. ___________________
business policy
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___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. ……………………. refers to decision about the future of
an ongoing enterprise.
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___________________
2. A ………………….. is a predetermined selected course ___________________
established as a guide towards accepted goals and ___________________

objectives.
___________________
___________________
Scope of Business Policy
No business organisation can either survive or grow without
definite objectives which can only the accomplished by applying
different policies from time to time, depending upon the working
organisational thinking, behaviour and action. Policies as such are
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formulated pertaining to different aspects of business
organisations and therefore they enjoy a very wide scope in day-to-
day life of any business unit. Persons concerned with any type of
activity either commercial or otherwise will have to think of clear
cut policies right from the formation stage to the winding up of the
proposed business project. It should however be noticed that
though the scope of business policy is wide in general but it varies
in degree depending upon the size and nature of business
undertaking.
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Classification of Business Policy

Policies are of several types according to the nature. These are:
z Organisational and functional policies: Policies for the
enterprise as a whole are known as organisational policies,
e.g., promotion policy. Such Policies are formulated by the top
management. On the other hand, policies relating to particular
function or department of business are called functional or
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operating policies, e.g., production policy, price policy, personal

policy, etc. Functional or departmental policies are formulated
by departmental managers.
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z Written and implied policies: Policies explicitly stated in
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Notes
writing are written policies. They form a part of the
___________________ organisation manual or records. Implied policies are not in
___________________ print but are understood from the functioning of the
management.
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___________________
z Originated, appealed and imposed policies: Originated
___________________
policies are those laid down by the top management to guide
___________________
lower level executives. They originate at the higher echelons of
___________________ management. Policies that are formulated on the appeal or
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___________________ request of subordinate managers are called appealed policies.
Subordinates request for the formulation of policies to meet
___________________
exceptional problems not covered by prevailing policies.
___________________ Originated and appealed policies are two types of internal
___________________ policies. Imposed policies or external policies are those trust
upon the enterprise by outside forces, such as government
trade unions, competitors trade associations, etc. Such policies
tend to restrict the freedom of management.
Check Your Progress

Fill in the blanks:
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1. Policies for the enterprise as a whole are known as
……………….. policies.
2. Policies explicitly stated in writing are …………………..
policies.
Summary
Policy and strategy represent two significant subsets of the total
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field of management about which there is less than common

agreement regarding definition or relationship. In some instances,
policy is viewed as a static framework within which the more
dynamic construct of strategy is shaped and tempered. In other
instances, strategy is said to give rise to policy in a logical form
from the mission to the main stream of the organization. In still
other instances, policy and strategy are conceived in a kind of
transitory juxtaposition in which one may affect the other directly,
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indirectly, or not at all. The purpose of this unit is to delineate the

discrete conceptual foundation of policy and strategy and then
show the interrelation of these two core concepts of management.
Lesson End Activity 15
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Notes
Using web search compare and contrast the business policy and
___________________
strategies of any two blue chip companies operating in Indian
Markets. ___________________
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___________________
Keywords ___________________
Business Policy: A policy is a statement or a commonly accepted ___________________

understanding of decision making criteria or formulate prepared or
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___________________
evolved to achieve economy in operations by making decision,
___________________
relatively routine or frequently occurring problems and
consequently facilitating the delegation of such decision to lower ___________________
managerial levels. ___________________
Policy: Policies are general statements or undertaking (members ___________________

of the group) which makes the action of each member of the group
in the given set of circumstances more predictable to other
members.
Strategy: Strategy is the complex plan for bringing the
organization from a given posture to a desired position in a future
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period of time.
Questions for Discussion

1. What is Business Policy? Explain the scope of policy.
2. Briefly explain the Nature and Characteristics of Business
Policy
3. Distinguish between Strategy and Policy.
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4. Classification of Business Policy. Briefly explain each.
Further Readings
Books
Rao, VSP & Hari, Krishna V (2003). “Strategic Management – Text
and Cases.” Excel Books.
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Richard, Lynch (2006). “Corporate Strategy.” Pearson Education

Ltd.
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Wheelen, Thomas L, David, Hunger J & Krish, Rangarajan (2006).
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Notes
“Concepts in Strategic Management and Business Policy.” Pearson
___________________
Education.
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Hugh, MacMillan & Mahen, Tampoe (2000). “Strategic
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___________________ Management”. Oxford University Press.
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Web Readings
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http://www.scribd.com/doc/64899080/Difference-Between-Policy-
___________________
and-Strategy
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http://en.wikipedia.org/wiki/Strategic_management
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http://www.tutor2u.net/business/presentations/strategy/default.ht
___________________ ml
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http://www.managementstudyguide.com/business-policy.htm
http://www.slideshare.net/ulhasw/business-policy-strategic-
management-notes201112
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UNIT 2: Strategy and Strategic Management
Unit 2
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Notes
Activity
Take___________________
any organisation of your
Strategy and Strategic choice and discuss its policy.
The ___________________
discussion should be
Management presented in form of a short
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___________________
report of 200 words maximum.
___________________
Objectives ___________________
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___________________
topics:
___________________
\ Defining and Explaining Strategy
\ Definition of Strategic Management ___________________
\ Levels At Which Strategy Operates ___________________

\ Need for Strategies and Strategic Management ___________________
\ Strategies And Their Role In Strategic Management
\ Dimensions of Strategic Management
\ Strategic Decision-making
\ Industry Analysis
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Introduction
Strategic Management is the process by which organizations
translate their vision into programs and actions to deliver
‘outcomes’. It is recognized today that changing the ‘outcomes’ in
the real world is a necessary requirement for survival of the
business organization – and it is essential that the ‘outcomes’
result in the desired changes. Controlling market forces and
shaping the competitive environment, was at one time considered
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to be outside the capability of business organizations.
Economic thought till the beginning of the twentieth century

was dominated by the concept of the ‘invisible hand’. This
concept meant that firms do not have the ability to impact the
external environment. The development of strategic
management as an area of study began when there was a
realization that it was possible for the organization to impact
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changes on the macro -economic environment. It is, therefore,

not surprising that the study of strategic management is a
relatively recent phenomenon.
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Defining and Explaining Strategy
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Notes
Activity
Before we try to define strategy, we need to understand the
Taking any organisation of
___________________
your choice, discuss in form of difference between two terms that are often used interchangeably
___________________
a presentation the difference – ‘strategy’ and ‘tactics’. Strategy and tactics are both concerned
with formulating and then carrying out courses of action intended
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between Strategy and Tactics.
___________________
___________________
to attain particular objectives. The language of strategic
manoeuvre is also largely the language of tactics. ‘Tactics’ follow
___________________
and facilitate strategy and are defined as techniques or a science of
___________________ dispensing and manoeuvring forces to accomplish a limited
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___________________ objective or an immediate end.
___________________ Strategy and tactics are distinct in terms of their dimensions.

___________________
Strategy, for the most part, is concerned with deploying resources
and tactics is concerned with employing them. Strategy deals with
___________________
wide spaces, long periods of time, and large movements of forces,
tactics deal with the opposite. Strategy is the prelude to action,
and tactics the action itself. Table 2.1 attempts to summarize the
difference between the two, as there often is confusion about the
distinction between strategy and tactics.
Despite distinctions in theory, strategy and tactics cannot always
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be separated in practice. Strategy gives tactics its mission and
resources and seeks to reap the results. Tactics, then become
important conditioning factors of strategy, and as the tactics
change, so does strategy. Strategy triggers a movement; a
movement begets an action; and the action results in new
movement. This interconnectedness between the movement and
the action often merges one into the other.
Table 2.1: Strategy versus Tactics

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Aspects Strategy Tactics

Scale of the Objective Grand Limited
Scope of the Action Broad and General Narrowly Focused
Guidance Provided General and Specific and Situational
Ongoing
Degree of Flexibility Adaptable, but not Fluid, quick to adjust
hastily changed and adapt in minor or
major ways
Timing in Relation to Action Before Action During Action
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Focus of Resource Utilization Deployment Employment
There is a unique relationship between strategy and tactics. Every

tactic can be a significant strategic opportunity. It is necessary to
understand the difference between strategy and tactics as this can
be a strategic edge to the organization. It gives us the ability to 19
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have the ultimate position of the organization and the particular Notes
Activity
strategy in mind while executing any tactic. This competency can Prepare an essay on how
___________________
enhance the organization’s effectiveness without any investment. strategic management is an
___________________
understanding the strategic
For example, assume the strategic position of the company is to
E
position of an organization
___________________
aspire: “To be the best known, most trusted and respected company
in the target market.” If that is our overall goal, than we have to ___________________
ask what our tactics do to achieve this important goal. If our ___________________
salesperson is simply trying to make a sale, then he is operating
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___________________
only tactically.
___________________
If he can think strategically, he must ask "what should I do to sell
___________________
the product and make the customer believe my company is the best
in the market.” If he can accomplish this objective in his sale, he is ___________________
improving the effectiveness of the organization at no cost to the ___________________

organization. If not, he is just chasing the sale of the day, and not
building anything sustainable for the organization. This is difficult
as most business executives, even from the biggest firms in the
world, are so tactical that they often find it difficult to differentiate
between strategy and tactics.
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Check Your Progress
Fill in the blanks:
1. …………………. are concerned with formulating and
then carrying out courses of action intended to attain
particular objectives.
2. ………………….are techniques or a science of dispensing
and manoeuvring forces to accomplish a limited
)C
objective or an immediate end.
Definition of Strategic Management

We have so far discussed the concepts of strategic thinking;
strategic decision-making and strategic approach which, it is
hoped, will serve as a background understand the nature of
strategic management. However, to get an understanding of what
goes on in strategic management, it is useful to begin with
(c
definitions of strategic management. In this unit, we introduce the

elements and the process of strategic management and the
importance, benefits and limitations of strategic management.
20
As already mentioned, the concepts in strategic management have
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Notes
been developed by a number of authors like Alfred Chandler,
___________________
Kenneth Andrews, Igor Ansoff, William Glueck, Henry Mintzberg,
___________________ Michael E. Porter, Peter Drucker and a host of others. There are
therefore several definitions of strategic management. Some of the
E
___________________
important definitions are:
___________________
“Strategic management is concerned with the determination of the
___________________
basic long-term goals and the objectives of an enterprise and the
___________________ adoption of courses of action and allocation of resources necessary
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___________________ for carrying out these goals”.
___________________ – Alfred Chandler, 1962
___________________ “Strategic management is a stream of decisions and actions which
___________________ lead to the development of an effective strategy or strategies to
help achieve corporate objectives”.
– Glueck and Jauch, 1984
“Strategic management is a process of formulating, implementing
and evaluating cross-functional decisions that enable an
organization to achieve its objective”.
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– Fed R David, 1997
“Strategic management is the set of decisions and actions resulting
in the formulation and implementation of plans designed to
achieve a company’s objectives.”
– Pearce and Robinson, 1988
“Strategic management includes understanding the strategic
position of an organization, making strategic choices for the future
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and turning strategy into action.”

– Johnson and Scholes, 2002
“Strategic management consists of the analysis, decisions, and
actions organization undertakes in order to create and sustain
competitive advantages.”
– Dess, Lumpkin & Taylor, 2005
We observe from the above definitions that different authors have
(c
defined strategic management in different ways. Note that the

definition of Chandler that we have quoted above is from the early
1960s, the period when strategic management was being
recognized as a separate discipline. This definition consists of three 21
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basic elements: Notes
z Determination of long-term goals ___________________
z Adoption of courses of action ___________________
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___________________
z Allocation of resources to achieve those goals
___________________
Though, this definition is simple, it does not consist of all the
elements and does not capture the essence of strategic ___________________
management.
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___________________
The definitions of Fred R. David, Pearce and Robinson, Johnson ___________________

and Scholes and Dell, Lumpkin and Taylor are some of the
___________________
definitions of recent origin. Taken together, these definitions
___________________
capture three main elements that go to the heart of strategic
management. The three on-going processes are strategic analysis, ___________________
strategic formulation and strategic implementation. These three
components parallel the processes of analysis, decisions and
actions. That is, strategic management is basically concerned with:
z Analysis of strategic goals (vision, mission and objectives)
along with the analysis of the external and internal
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environment of the organization.
z Decisions about two basic questions:
What businesses should we compete in?
How should we compete in those businesses to implement
strategies?
z Actions to implement strategies. This requires leaders to
allocate the necessary resources and to design the organization
)C
to bring the intended strategies to reality. This also involves

evaluation and control to ensure that the strategies are
effectively implemented.
The real strategic challenge to managers is to decide on strategies
that provide competitive advantage which can be sustained over
time. This is the essence of strategic management, and Dess,
Lumpkin and Taylor have rightly captured this element in their
definition.
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Nature of Strategic Management

Strategic management can be defined as the art and science of
formulating, implementing, and evaluating, cross-functional
22 decisions that enable an organization to achieve its objectives.
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Notes
Activity Strategic management is different in nature from other aspects of
Write an article on SBU and
___________________ management. An individual manager is most often required to deal
strategy formulation for any with problems of operational nature. He generally focuses on day-
SBU ___________________
operating in India.
to-day problems such as the efficient production of goods, the
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___________________
management of a sales force, the monitoring of financial
___________________ performance or the design of some new system that will improve
___________________ the level of customer service.
___________________ These are all very important tasks. But they are essentially
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concerned with effectively managing resources already deployed,
___________________
within the context of an existing strategy. In other words,
___________________
operational control is what managers are involved in most of their
___________________ time. It is vital to the effective implementation of strategy, but it is
___________________ not the same as strategic management.
Strategic management involves elements geared toward a firm's
long-term survival and achievement of management goals. The
components of the content of a strategy making process include a
desirable future, resource allocation, management of the firm-
environment and a competitive business ethics. However, some
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conflicts may result in defining the content of strategy such as
differences in interaction patterns among associates, inadequacy of
available resources and conflicts between the firm's objectives and
its environment.
Check Your Progress

Fill in the blanks:
1. ................... requires leaders to allocate the necessary
resources and to design the organization to bring the
)C
intended strategies to reality.

2. The real strategic challenge to managers is to decide on
strategies that provide ………………. which can be
sustained over time.
Levels at Which Strategy Operates

Strategies surface at different tiers in the organization hierarchy
(c
depending on the architecture of the organization. Business

strategy can be formulated and implemented at three different
levels:
z Corporate level
23
Business unit level
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z
Notes
z Functional or departmental level
___________________
The three levels are shown in Figure 2.1 below.
___________________
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___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
Figure 2.1: Structure of Strategies
Corporate Level or Grand Strategy

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Corporate strategy is the highest, in the sense that it is the
broadest, applying to all parts of the organization. The corporate
level strategies or Grand strategies are the general plan by which
the organization intends to achieve its purpose and long term
objectives. Grand strategies are concerned with the type of
business the organization is in, it overall competitive position and
how the resources of the organization have to be deployed. They set
the overall direction the organization will follow.
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At the corporate level, the firm faces several strategic questions:

What businesses should we compete in, given our strengths and
weakness? Which new product markets should we enter? Which
should we exit? This is the "domain choice" question. It delineates
the product-market domain of the firm and describes the firm’s
scope of operations.
Business Unit Level or Competitive Strategy

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Many companies are composed of a number of Strategic Business

Units (SBUs). An SBU is an operating unit that groups a distinct
set of products or services. These products or services are sold to a
uniform set of customers, facing a well-defined set of competitors.
24 It is this external (market) dimension of a business that identifies
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Notes an SBU. At the business unit level, the SBU should have a set of
___________________ strategies that allow it to align and coordinate it activities with
other operating units on strategic issues.
___________________
In addition, business unit level or competitive strategy is also
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___________________
about developing and sustaining a competitive advantage for the
___________________
products and services that are produced. Developing a competitive
___________________ strategy is developing a broad framework for the business –
___________________ How are we going to compete;
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z
___________________
z What are our objectives; and
___________________
z What policies will be needed to carry out our objectives?
___________________
The competitive strategy is a combination of ‘ends’ for which an
___________________ organization is striving and ‘means’ by which it is seeking to get
there. Competitive advantage is created when resources and
capabilities owned exclusively by the organization can generate
unique abilities or core competencies in the business. Therefore, in
determining functional Strategy the management has to identify
business unit’s core competencies and ensure that competencies
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are continually strengthened. It must manage competencies so
that competitive advantage is preserved. It must meet three tests:
z Customer value
z Competitor unique
z Extendibility
The advantage that results from identifying and using core
competencies can be sustained due to the lack of substitution and
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imitation capacities by the organization’s competitors. As the core

competencies are unique, the benefits derived from these
advantages are retained inside the organization: they are not
appropriated by others.
Functional Level Strategy

The approach a functional area takes to achieve corporate and
business unit objectives by maximizing resource productivity in its
different operating divisions and departments is the functional
(c
level strategy. The strategic issues at the functional level are

related to functional business processes and value chain.
Functional level strategies in R&D, operations, manufacturing,
marketing, finance, and human resources involve the development
and coordination of resources through which business unit level 25
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strategies can be executed effectively and efficiently. Notes
Activity
The functional strategy is dictated by the business unit's strategy. Carryout a group discussion to
___________________
state the importance of
For example, a business unit that tries to differentiate its products ___________________
strategies as a tool to cope
to gain competitive advantage will require functional strategies in
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with Change.
___________________
manufacturing that emphasize on quality, quality assurance
processes; a human resource functional strategy that emphasizes ___________________
the hiring and training of a highly skilled workforce; and a ___________________

marketing functional strategy that emphasizes distribution
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___________________
channel "pull" using advertising to increase consumer demand over
___________________
"push" using promotional allowances to retailers. If a business unit
were to follow a strategy of competing on cost, a different set of ___________________
functional strategies would be needed to support the business ___________________
strategy.
___________________
Therefore, at the highest level strategic intent and corporate goals
are developed. These strategies form the basis of the strategies at
the business unit level. Functional units are involved in
translating the higher level strategies into discrete action plans
that each department or division must accomplish for the
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strategies to succeed. At each stage, there is a reverse flow of
information on customer feedback, market, resources and
capabilities etc. on which the higher level strategies can be based
in the future.
Check Your Progress

Fill in the blanks:
1. ………………….. are the general plan by which the
organization intends to achieve its purpose and long-
)C
term objectives.
2. The strategic issues at the functional level are related to
………………..
Need for Strategies and Strategic Management

These have been discussed below:
(c
Need for Strategy

Those in favour of setting strategies argue that strategies are
needed to give companies direction. Without strategies,
incorporating objectives, companies would be adrift. If companies
26 do not decide where they want to go, any direction and any activity
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Notes is fine. People in companies would not know what they were
___________________ working towards and, therefore, would not be able to judge what
constitutes effective managerial behaviour. However, those not in
___________________
favour argue that direction-setting strategies can also block out
E
___________________
peripheral vision, keeping companies sharply, yet myopically,
___________________ focused on one course of action. Thus, strategies may limit the
___________________ company's ability to open to new opportunities and threats as these
unfold and to deviate from a set course as the company interacts
___________________
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with its environment and learns. Strategists hit back arguing that
___________________ early commitment to a course of action is highly beneficial. By
___________________ setting objectives and drawing up a strategy to accomplish these,
___________________
companies can invest resources, train people, build up production
capacity and take a dear position within their environment.
___________________
Strategies allow companies to mobilize themselves and to dare to
take actions that are difficult to reverse and have a long payback
period. We need to point out that commitment has a flip side,
inflexibility, especially when mechanisms to change course midway
are not in place.
The absence of strategies does give the company flexibility to easily
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change course. Strategic plan also has the benefit of coordinating
all strategic initiatives within a company into a single cohesive
pattern. A company-wide master strategy can ensure that
differences of opinion are ironed out and one consistent course of
action is followed throughout the entire company, avoiding
overlapping, conflicting and contradictory behaviour. But the flip
side is that developing a master strategy may lead to the
squashing of initiative, either purposely or inadvertently.
)C
Strategists also point out that strategies also facilitate optimal

resource allocation. Drawing up a strategy disciplines strategists
to explicitly consider all available information and consciously
evaluate all available options before committing to a course of
action. Documented strategies also permit corporate-level
strategists to compare the courses of action proposed by their
various business units and to allocate scarce resources to the most
promising initiatives. However, strategies sometimes place a
disproportionate emphasis on thinking over action. Enormous
(c
amount of time and effort are put into analyses, paperwork,

meetings and presentations, trying to arrive at the optimal
strategy. Often the result is that producing a strategy becomes an
end in itself. Action is seen merely as operationalising the strategy,
instead of as the primary input into further strategy formation. 27
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The absence of explicit strategies, therefore, gives strategists the Notes
opportunity to merge thinking and acting, and to form strategies ___________________
through learning. Last, but not least, strategies are a means for
___________________
programming all organizational activities in advance.
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___________________
Having detailed strategies allows companies to be run with the
dockwork precision, reliability and efficiency of a machine. ___________________
Activities that might otherwise be plagued by poor company, ___________________

inconsistencies, redundant routines, random behaviour, helter
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___________________
skelter fire-fighting and chaos, can be programmed and controlled
___________________
if strategies are drawn up. However, using strategies to pre-
program all activities within a company grossly overestimates the ___________________
extent to which a company can be run like a machine. For ___________________
adaptation, experimentation and learning to take place and for
___________________
new ideas to emerge from within the company, a certain measure
of chaos might actually be beneficial. The absence of detailed top-
down strategies encourages employees to be responsible,
entrepreneurial and combine thinking and action. In this way, new
strategic initiatives are not organized and controlled top-down, but
emerge spontaneously through bottom-up processes of self-
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company.
What clearly comes out of these conflicting views is that strategies
are required but should not be walled ironclad into the one fixed
seat and not be changed, for that is the major objection against the
requirement of strategies. They should be adaptable as the
circumstances warrant and under the light of new developments as
they keep on happening in the dynamic and hyper competitive
world of business today. Having established the need of strategies
)C
(whether explicitly written down or not) we now turn our attention

to the formal strategic management process.
Check Your Progress

State true or false:
1. Without strategies, incorporating objectives, companies
would be adrift.
2. A company-wide master strategy can ensure that
(c
differences of opinion are ironed out and one consistent

course of action is followed throughout the entire
company
28
Strategies and their Role in Strategic Management
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Notes
Activity
Discuss citing evidences from
The nature of Strategic Management is different form other
___________________
Indian corporate world on how aspects of management as it demands attention to the "big picture"
___________________
strategic management or and a rational assessment of the future options. Strategic
strategy formulation provides
Management demands a clear analysis of the situation facing the
E
___________________
a firm the ability to exploit
opportunities and respond to
___________________
organization which has to have:
external change by taking
___________________ z A strategic direction endorsed by the team and stakeholders
ongoing strategic decisions
___________________ z A clear business strategy and vision for the future
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___________________ z A mechanism for accountability
___________________ z A framework for governance at the various levels that provide
___________________ the course of action even when there are competing priorities
and different goals
___________________
z The ability to exploit opportunities and respond to external
change by taking ongoing strategic decisions
z A coherent framework for managing risk – whether it is
balancing the risks and rewards of a business direction, coping
with the uncertainties of project risk or ensuring business
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continuity.
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(c
Figure 2.2: Role of Strategies in Strategic Management

The complexity and iterative nature of the process has been shown 29
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in the Strategic Management model in Figure 2.2. The decisions Notes
taken have serious impacts in all or some of areas of the working of ___________________
the organization. The firm has to continuously interact with the
___________________
market, the business and technological environments and keep
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___________________
re-evaluating its options in terms of the prevalent or changing
conditions. ___________________
___________________
Environmental Scan at the Corporate Level
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___________________
This refers to assessing the external forces impacting the firm. The
environmental scan formalizes the process of understanding the ___________________
external forces that are impacting the firm. There are three ___________________
different types of analyses to support this process – economic ___________________
overview, primary industrial sectors, and basic external factors.
___________________
The Mission of the Firm

Choosing competitive domains and the way to compete. The
mission of a firm is a statement of the current and future expected
product scope, market scope, and geographic scope. It also
identifies the unique competencies the firm has developed to
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achieve a long-term sustainable advantage.
Business Segmentation
Selecting planning and organizational focuses. A business unit can
be defined as an operating unit or a planning focus that sells a
distinct set of products or services to an identified group of
customers with a well defined set of competitors. The business unit
is the level of analysis where most of the strategic planning effort
)C
is centred.
Horizontal Strategy
Pursuing synergistic linkages across business units. Horizontal
strategy is a coordinated goals and policies across distinct but
interrelated business units. Defining horizontal strategy requires
searching for and exploiting potential interrelationships among the
various business units of the firm.
Horizontal strategy is required at the group, sector or corporate
(c
levels of a diversified firm. Through horizontal strategy, a

diversified firm enhances the competitive advantage of its business
units.
30
Vertical Integration
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Notes
Defining the boundaries of the firm. Vertical integration involves
___________________ the following set of decisions:
___________________
z Defining the boundaries a firm should establish the firm’s
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___________________ generic activities on the value chain (the question of make
___________________ versus buy or integrate versus contract).
___________________ z Establishing the relationship of the firm with its

constituencies outside its boundaries, primarily its suppliers,
___________________
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distributors, and customers.
___________________
z Identifying the circumstances under which these boundaries
___________________
and relationships should be changed to enhance and protect
___________________ the firm’s competitive advantage.
___________________
Corporate Philosophy
Defining the relationship between the firm and its stakeholders.
Corporate philosophy is a rather permanent statement articulated
by the Chief Executive of the firm, addressing the following issues:
z The relationship between the firm and its primary
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stakeholders – employees, customers, shareholders, suppliers,
and the communities in which the firm operates.
z A broad statement of objectives of the firm’s expected
performance primarily expressed in terms of growth and
profitability.
Strategic Posture of the Firm

Identifying strategic thrusts and planning challenges and
establishing corporate performance objectives in corporate,
)C
business and functional key result areas.

Strategic posture is a pragmatic and concrete set of guidelines
which serves as immediate challenges for the development of
strategic proposal at the business and major functional levels of
the firm.
It is primarily expressed by:
z Corporate Strategic thrusts,
(c
z Corporate, business and functional planning challenges, and

z Corporate performance objectives.
Portfolio Management 31
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Notes
Assigning priorities for resource allocation and identifying Activity
opportunities for diversification and divestment. Prepare a short report on role
___________________
of top management in
___________________
strategic management
Organizational and Managerial Infrastructure
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___________________
Adjusting the organizational structures, managerial processes and
systems, in consonance with the culture of the firm, to facilitate ___________________
the implementation of strategy. ___________________
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___________________
Human Resource Management of Key Personnel
___________________
Selection, development, appraisal reward and promotion.
___________________
Check Your Progress ___________________
Fill in the blanks:
___________________
1. The nature of Strategic Management is different form
other aspects of management as it demands attention to
the ……………….
2. …………………..is an operating unit or a planning focus
that sells a distinct set of products or services to an
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identified group of customers with a well defined set of
competitors.
Dimensions of Strategic Management

The characteristics of strategic management are as follows:
z Top management involvement: Strategic management
relates to several areas of a firm’s operations. So, it requires
)C
top management’s involvement. Generally, only the top

management has the perspective needed to understand the
broad implications of its decisions and the power to authorize
the necessary resource allocations.
z Requirement of large amounts of resources: Strategic
management requires commitment of the firm to actions over
an extended period of time. So they require substantial
resources, such as, physical assets, money, manpower etc.
Example: Decisions to expand geographically would have
(c
significant financial implications in terms of the need to build

and support a new customer base.
32
Affect the firm’s long-term prosperity: Once a firm has
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z
Notes
Activity
committed itself to a particular strategy, its image and
Create a white
___________________ board
presentation on Good
competitive advantage are tied to that strategy; its prosperity
___________________
decision-making is crucial to is dependent upon such a strategy for a long time.
good management and
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___________________
successful strategic z Future-oriented: Strategic management encompasses
management
___________________ forecasts, what is anticipated by the managers. In such
decisions, emphasis is placed on the development of projections
___________________
that will enable the firm to select the most promising strategic
___________________ options. In the turbulent environment, a firm will succeed only
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___________________ if it takes a proactive stance towards change.
___________________ z Multi-functional or multi-business consequences:
___________________ Strategic management has complex implications for most
areas of the firm. They impact various strategic business units
___________________
especially in areas relating to customer-mix, competitive focus,
organizational structure etc. All these areas will be affected by
allocations or reallocations of responsibilities and resources
that result from these decisions.
z Non-self-generative decisions: While strategic management
may involve making decisions relatively infrequently, the
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organization must have the preparedness to make strategic
decisions at any point of time. That is why Ansoff calls them
“non-self-generative decisions.”
Check Your Progress

1. Strategic management relates to several areas of a
firm’s operations.
)C
2. Strategic management has complex implications for

most areas of the firm
Strategic Decision-making
In the present business environment of rapid changes, heightened
risk and uncertainty, developing effective strategies is crucial for
achieving the organization’s objectives. This is not an easy task as
(c
it requires good decision making skills. Good decision-making is

crucial to good management and successful strategic management.
The excellence of an organization can be judged by its success in
putting diverse components together. Excellent organizations
develop effective strategies that are sustainable and at the same 33
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time: Notes
z Permit it to deliver greater value, or ___________________
z Create a similar value at a lower cost, or ___________________
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___________________
z Deliver greater value at a lower cost, for the customer.
___________________
This brings us to the question, what is the strategic decision
making process that permits developing such strategies? ___________________
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___________________
Strategic Decision-making Process
___________________
For the past few decades, researchers have attempted to model the
___________________
strategic decision process. There is a large amount of consensus on
the major elements of the decision making process. There are three ___________________
major phases with sub-phases within each as described below: ___________________
z The Identification Phase
Decision Recognition: Opportunities, problems, and crises
are recognized and evoke decisional activity.
Diagnosis: Information relevant to opportunities,
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problems, and crises is collected and problems are more
clearly identified.
z The Development Phase
Search: Organizational decision makers go through a
number of activities to generate alternative solutions to
problems.
Design: Readymade solutions which have been identified
are modified to fit the particular problem or new solutions
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are designed.
z The Selection Phase
Screen: When the search identifies more alternatives than
can evaluate in detail, alternatives are scanned and the
most obviously infeasible are eliminated.
Evaluation-Choice: An alternative is chosen either
through a process of analysis and judgment or a process of
(c
bargaining among decision-makers.

Authorization: When the individual making the decision
does not have the authority to commit the organization to
a course of action, the decision must move up the
34 organizational hierarchy until it reaches a level at which
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Notes the necessary authority resides.
___________________
z At any of the stages of decision-making if new information is
___________________ available, decision-makers may return to earlier phases as
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___________________ necessary. There are five basic types of processes of decision
___________________ making;
___________________ Command mode: In this strategy is driven by the

___________________ organization's leader or by a small top management team,
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___________________ Symbolic mode: In this mode, strategy is driven by the
___________________ organization's mission and vision of the future,
___________________ Rational mode: Strategy is driven by formal structure and

___________________ planning systems,
Transactive mode: Strategy formulation is driven by

internal processes and mutual adjustment, and
Generative mode: Strategy is most strongly influenced by

the initiative of organizational actors.
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The process of decision-making starts at the vision for the
organization and then works backwards by focusing on how the
business will be able to reach this vision. In doing so, it improves
the ability of the organization to make its business vision a reality.
‘Vision’ is a long-term perspective of what is the final destination of

the organization. Vision is what keeps the organization moving
forward. Vision is the motivator in an organization. It needs to be
meaningful with a long term perspective so that it can motivate
)C
people even when the organization is facing discouraging odds.
These are times of change and paradigm shift, where management

no longer has the luxury of resting upon past successes or ways of
doing business. The future is unknown and the world is
continually changing, all business plans and strategies eventually
become obsolete and the assumptions on which they are based
must be re-examined and updated. Therefore, it is not surprising
(c
that a focused approach to strategic decision making has become a

critical requirement of the business process and is a necessary
requirement for the modern organization.
35
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Notes
___________________
___________________
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___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
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Figure 2.3: Strategic Decision-making Process
In strategic decision-making, we first seek a clear understanding of

the particular character of each element of a situation. Then we
make the fullest possible use of the basic types of processes used by
the organization for decision making to restructure the elements in
the most advantageous way. For example, if the processes are
based on a command mode; the organization's leader or the small
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top management team will sit together to restructure the

elements.
Phenomena and events in the real world do not always fit a linear
model. Hence the most reliable means to analyze a situation is to
break it up into its constituent parts and reassemble the
constituent parts in the desired pattern. Though the decision-
making process has been shown as a step by step methodology,
very often the decision is based on the ultimate nonlinear thinking
tool, the human brain. Strategic decision-making, therefore, often
(c
contrasts sharply with the conventional mechanical systems

approach based on linear thinking. However, it should reach its
conclusions with a real breakdown or analysis. Strategic decision-
making process is shown schematically in Figure 2.3.
36
Strategic decisions demand an integrated approach to the
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Notes
Activity management of the organization. Unlike functional problems,
Suppose you are a firm who is
___________________
there is no one area of expertise, or one perspective that can define
in the process of strategy
___________________
formulation and are required or resolve the decision making. The management has to cut across
functional and operational boundaries to make strategic decisions.
E
to ___________________
conduct an industry
analysis. Describe what all Very often, there is a conflict of interest, and perhaps priorities,
you___________________
would study in form of a
between management involved in different functional or
short essay for about 200
___________________
words. operational areas.
___________________ Strategic decisions may also involve major changes in organization
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___________________ as well as in relation with the task environment. These are
___________________
difficult decisions, both in terms of planning as well as in
implementation. Especially so, as most ‘going businesses’ develop
___________________
their own style of operating, which is not necessarily in line with
___________________ future strategy. Therefore, strategic decisions may require major
changes including a change in the operational style of the
organization.
Check Your Progress

CE
1. There is a large amount of consensus on the major
elements of the decision making process.
2. ‘Vision’ is a short-term perspective of what is the final
destination of the organization.
Industry Analysis
Each business operates among a group of firms that produce
)C
competing products or services known as an “industry”. An

industry is thus a group of firms producing similar products or
services. By similar products we mean products that customers
perceive to be substitutes for one another.
Example: Firms that produce and sell textiles such as Reliance
Textiles, Raymond, S. Kumars etc. belong to the textile industry.
Similarly, firms that produce PCs, such as Apple, Compaq, AT&T,
IBM, etc. belong to the microcomputer industry.
(c
Although there are usually some differences among competitors,

each industry has its own set of “rules of combat” governing such
issues as product quality, pricing and distribution. This is
especially true in industries that contain a large number of firms
offering standardized products and services. As such, it is 37
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important for strategic managers to understand the structure of Notes
the industry in which their firms operate before deciding how to ___________________
compete successfully. Industry analysis is therefore a critical step
___________________
in the strategic analysis of a firm.
E
___________________
In a perfect world, each firm would operate in one clearly defined
industry. However, many firms compete in multiple industries, ___________________
and strategic managers in similar firms often differ in their ___________________

conceptualization of the industry environment. In addition, the
UP
___________________
advent of Internet has completely changed the way business is
___________________
done. As a result, the process of industry definition and analysis
can be specially challenging when internet competition is ___________________
considered. ___________________
The basic purpose of industry analysis is to assess the strengths ___________________

and weaknesses of a firm relative to its competitors in the
industry. It tries to highlight the structural realities of particular
industry and the extent of competition within that industry.
Through industry analysis, an organisation can find whether the
chosen field is attractive or not and assess its own position within
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the industry.
Framework for Industry Analysis

Industry analysis covers two important components:
z Industry environment
z Competitive environment
The following are the aspects to be covered in the above analysis:
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Industry Analysis
z Industry features
z Industry boundaries
z Industry environment
z Industry structure
z Industry performance
(c
z Industry practices
z Industry attractiveness
z Industry prospects for future
38 Competitive Analysis
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Notes
Competitive analysis basically addresses two questions:
___________________
z Which firms are our competitors?
___________________
z What factors shape competition in industry?
E
___________________
___________________ Industry Analysis

___________________ Industry Features: Industries differ significantly. So, analyzing a
___________________
company’s industry begins with identifying the industry’s
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dominant economic features and forming a picture of the industry
___________________
landscape. An industry’s dominant economic features include such
___________________ factors as:
___________________ z Overall size
___________________ z Market growth rate
z Geographic boundaries of the market
z Number and sizes of competitors
z Pace of technological change
z Product innovations etc.
CE
Getting a hand on industry features promotes understanding of
the kinds of strategic moves that managers should employ. For
example, in industries characterized by one product advance after
another, a strategy of continuous product innovation becomes a
condition for survival.
Example: Video games, computers and pharmaceuticals.
Industry Boundaries: All the firms in the industry are not
similar to one another. Firms within the same industry could differ
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across various parameters such as:

z Breadth of market
z Product/service quality
z Geographic distribution
z Level of vertical integration
z Profit motives
(c
Industry Environment: Based on their environment, industries

are basically of two types:
z Fragmented Industries: A fragmented industry consists of a
large number of small or medium-sized companies, none of
which is in a position to determine industry price. Many 39
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fragmented industries are characterized by low entry barriers Notes
and commodity type products that are hard to differentiate. ___________________
z Consolidated Industries: A consolidated industry is ___________________
dominated by a small number of large companies (an oligopoly)
E
___________________
or in extreme cases, by just one company (a monopoly). These
companies are in a position to determine industry prices. In ___________________
consolidated industries, one company’s competitive actions or ___________________

moves directly affect the market share of its rivals, and thus
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___________________
their profitability. When one company cuts prices, the
___________________
competitors also cut prices. Rivalry increases as companies
attempt to undercut each other’s prices or offer customers ___________________
more value in their products, pushing industry profits down in ___________________
the process. The consequence is a dangerous competitive
___________________
spiral.
According to Michael Porter, industries can be categorized into:
z Emerging industries: Are those in the introductory and
growth phases of their life cycle.
Mature industries: Are those who reached the maturity
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z
stage of their life cycle.
z Declining industries: Are those in the transition stage from
maturity to decline.
z Global industries: Are those with manufacturing bases and
marketing operations in several countries.
Industry Structure: Defining an industry’s boundaries is
incomplete without an understanding of its structural attributes.
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Structural attributes are the enduring characteristics that give an

industry its distinctive character. Industry structure consists of
four elements:
z Concentration: It means the extent to which industry sales
are dominated by only a few firms. In a highly concentrated
industry (i.e. an industry whose sales are dominated by a
handful of firms), the intensity of competition declines over
time. High concentration serves as a barrier to entry into an
(c
industry, because it enables the firms to hold large market

shares to achieve significant economies of scale.
z Economies of scale: This is an important determinant of
competition in an industry. Firms that enjoy economies of
40 scale can charge lower prices than their competitors, because
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Notes of their savings in per unit cost of production. They also can
___________________ create barriers to entry by reducing their prices temporarily or
permanently to deter new firms from entering the industry.
___________________
z Product differentiation: Real perceived differentiation often
E
___________________
intensifies competition among existing firms.
___________________
z Barriers to entry: Barriers to entry are the obstacles that a
___________________
firm must overcome to enter an industry, and the competition
___________________ from new entrants depends mostly on entry barriers.
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___________________ Industry attractiveness: Industry attractiveness is dependent on
___________________
the following factors:
___________________
z Profit potential
z Growth prospects
___________________
z Competition
z Industry barriers etc.
As a general proposition, if an industry’s profit prospects are above
average, the industry can be considered attractive; if its profit
prospects are below average, it is considered unattractive. If the
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industry and competitive situation is assessed as attractive, firms
employ strategies to expand sales and invest in additional facilities
as needed to strengthen their long-term competitive position in
business. If the industry is judged as unattractive, firms may
choose to invest cautiously, look for ways to protect their
profitability. Strong companies may consider diversification into
more attractive businesses. Weak companies may consider
merging with a rival to bolster market share and profitability.
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Industry performance: This requires an examination of data

relating to:
z Production
z Sales
z Profitability
z Technological advancements etc.
Industry practices: Industry practices refer to what a majority of
players in the industry do with respect to products, pricing,
(c
promotion, distribution etc. This aspect involves issues relating to:

z Product policy
z Pricing policy
41
Promotion policy
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z
Notes
z Distribution policy
___________________
z R&D policy
___________________
Competitive tactics.
E
z
___________________
Industry’s future prospects: The future outlook of an industry ___________________
can be anticipated based on such factors as:
___________________
z Innovation in products and services
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___________________
z Trends in consumer preferences ___________________
z Emerging changes in regulatory mechanisms ___________________
z Product life cycle of the industry ___________________
z Rate of growth etc. ___________________
Check Your Progress

Fill in the blanks:
1. Each business operates among a group of firms that
produce competing products or services known as an
CE
………………… .
2. The basic purpose of industry analysis is to assess the
strengths and weaknesses of a firm relative to its
………………… in the industry.
Summary
Strategic or institutional management is the conduct of drafting,
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implementing and evaluating cross-functional decisions that will

enable an organization to achieve its long-term objectives.
It is a level of managerial activity under setting goals and over
tactics.
It is the process of 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,
(c
projects and programs.

Strategic management provides overall direction to the enterprise
and is closely related to the field of Organization Studies.
42
Although a sense of direction is important, it can also stifle
S
Notes
creativity, especially if it is rigidly enforced. In an uncertain and
___________________
ambiguous world, fluidity can be more important than a finely
___________________ tuned strategic compass.
E
___________________
___________________ Lesson End Activity

___________________ Strategic Management Systems exist in many different
___________________
organizations. Discuss in form of a report the role should Strategic
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Management play in (a) Government of India Department,
___________________
(b) A Public Sector Undertaking, and (c) A medium-sized Private
___________________ Sector Company. Also mention in your report the differences of
___________________ roles.
___________________
Keywords
Plan: A set of intended actions, through which one expects to
achieve a goal.
Strategic Choice: Choice of course of action given the
environment, mission and capabilities.
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Strategic Management: Stream of decisions and actions that
lead to development of effective strategy.
Strategy: A plan of action designed to achieve a particular goal.

1. Examine the significance of strategic management.
2. "Strategic management process is the way in which strategists
)C
determine objectives and strategic decisions". Discuss.

3. Bring out the distinguishing features of strategic
management.
4. Can the process of strategic management really be depicted in
a given model or it is a prompt and dynamic process? Give
reasons.
5. What is strategy? What are the differences between strategy
(c
and tactics?
6. ‘Strategy can be formulated and implemented at three
different levels in business organizations.’ What are these
levels and why are they treated as such?
Further Readings 43
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Notes
Books ___________________
Rao, VSP & Hari Krishna V (2003). “Strategic Management – Text ___________________
E
___________________
___________________
Ltd.
___________________
UP
___________________
Education. ___________________
Hugh, MacMillan & Mahen, Tampoe (2000). “Strategic ___________________
Management”. Oxford University Press. ___________________
___________________
Web Readings
http://smallbusiness.chron.com/five-stages-strategic-management-
process-18785.html
http://www.managementstudyguide.com/strategic-
management.htm
CE
http://www.slideshare.net/ganeshramb/strategy-management-
process
http://www.prenhall.com/behindthebook/0131746170/pdf/Dessler1_
Why_I_Wrote_This_Book.pdf
)C
(c
44
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Notes
___________________
___________________
E
___________________
___________________
___________________
___________________
UP
___________________
___________________
___________________
___________________
CE
)C
(c
UNIT 3: Basic Models of Strategic Management
Unit 3
45
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Notes
Activity
Make an assignment on
Basic Models of Strategic
___________________
Mintzberg’s model of strategic
___________________
management.
Management
E
___________________
___________________
Objectives ___________________
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___________________
topics:
___________________
\ Henry Mintzberg Model of Strategic Management
\ Ansoff Model of Strategic Management ___________________
\ Michael Porter Model of Strategic Management ___________________
___________________
Introduction
The term ‘strategy’ proliferates in discussions of business. Scholars
and consultants have provided myriad models and frameworks for
analysing strategic choice. Today there are a variety of firms and
organizations having different nature and environment of work but
CE
every one has same objective that is to raise the sale of the firm.
For doing so it needs to tailor its strategy of working in such a way
that it can get its target or objective in the specified time with
minimum possible wastage of resources. In this unit, we will
discuss a few such strategic models designed by various eminent
management professionals in their long course of experience and
expertise.
)C
Henry Mintzberg Model of Strategic Management

The word "strategy" has been used implicitly in different ways
even if it has traditionally been defined in only one. Explicit
recognition of multiple definitions can help people to manoeuvre
through this difficult field. Mintzberg provides five definitions of
strategy:
z Plan
Ploy
(c
z Pattern
z Position
z Perspective.
46
Plan
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Notes
Strategy is a plan – some sort of consciously intended course of
___________________ action, a guideline (or set of guidelines) to deal with a situation. By
___________________ this definition strategies have two essential characteristics: they
are made in advance of the actions to which they apply, and they
E
___________________
are developed consciously and purposefully.
___________________
___________________ Ploy
___________________ As plan, a strategy can be a ploy too; really just a specific
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manoeuvre intended to outwit an opponent or competitor.
___________________
___________________ Pattern
___________________ If strategies can be intended (whether as general plans or specific
___________________ ploys) they can be realised. In other words, defining strategy as
plan is not sufficient; we also need a definition that encompasses
the resulting behaviour: Strategy is a pattern – specifically, a
pattern in a stream of actions. Strategy is consistency in
behaviour, whether or not intended. The definitions of strategy as
plan and pattern can be quite independent of one another: plans
may go unrealised, while patterns may appear without
CE
preconception.
Plans are intended strategy, whereas patterns are realised
strategy; from this we can distinguish deliberate strategies, where
intentions that existed previously were realised and emergent
strategies where patterns developed in the absence of intentions,
or despite them.
Position
)C
Strategy is a position – specifically a means of locating an

organisation in an "environment". By this definition strategy
becomes the mediating force, or "match", between organisation and
environment, that is, between the internal and the external
context.
Perspective
Strategy is a perspective – its content consisting not just of a
chosen position, but of an ingrained way of perceiving the world.
(c
Strategy in this respect is to the organisation what personality is

to the individual. What is of key importance is that strategy is a
perspective shared by members of an organisation, through their
intentions and/or by their actions. In effect, when we talk of
strategy in this context, we are entering the realm of the collective 47
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mind – individuals united by common thinking and/or behaviour. Notes
___________________
Mintzberg Views on Strategic Planning
___________________
Mintzberg says “Strategic planning is not strategic thinking.
E
Strategic planning often spoils strategic thinking, causing ___________________
managers to confuse real vision with the manipulation of numbers. ___________________

This confusion lies at the heart of the issue: the most successful
___________________
strategies are visions, not plans.”
UP
___________________
Strategic planning, as it has been practiced, has really been
___________________
strategic programming, the articulation and elaboration of
strategies or visions that already exist. When companies ___________________
understand the difference between planning and strategic ___________________

thinking, they can get back to what the strategy-making process
___________________
should be: capturing what the manager learns from all sources and
then synthesising that learning into a vision of the direction that
the business should pursue.
Planners should make efforts around the strategy-making process
rather than inside it. They should supply the formal analyses or
CE
hard data that is needed in strategic thinking, broadening the
consideration of issues rather than trying to discover the one right
answer. They should act as catalysts who support strategy-making
by encouraging managers to think strategically.
Planning is about analysis, breaking down a goal or set of
intentions into steps, formalising those steps so that they can be
implemented almost automatically and articulating the anticipated
consequences or results of each step. Strategic thinking, on the
other hand, is about synthesis. It comprises – intuition and
)C
creativity. The result of strategic thinking is an integrated

perspective of the enterprise, a not-too-precisely articulated vision
of direction. Such strategies often cannot be developed on schedule
and immaculately conceived. They must be free to appear at any
time and at any place in the organisation, typically through messy
processes of informal learning that must necessarily be carried out
by people at various levels who are deeply involved with the
specific issues at hand. Formal planning has always been
(c
dependent on the preservation and rearrangement of established

categories. But real strategic change requires not merely
rearranging the established categories, but inventing new ones.
Strategy needs to function beyond the boxes, to encourage the
48 informal learning that produces new perspectives and new
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Notes
Activity combinations.
Write an essay on Ansoff’s
___________________
The grand fallacy of strategic planning is the belief that due to the
model of strategic
___________________
management. fact that analysis encompasses synthesis, strategic planning is
strategy making. This fallacy itself rests on three fallacious
E
___________________
assumptions: that prediction is possible; that strategists can be
___________________
detached from the subjects of their strategies; and that the
___________________ strategy-making process can be formalised. There are two types of
___________________ planner, the analytical thinker and the creative thinker. Many
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organisations need both types and it is top management’s job to
___________________
ensure it has them in appropriate proportions.
___________________
___________________ Check Your Progress

___________________ Fill in the blanks:
1. Strategy is a position specifically a means of locating an
organisation in an …………………… .
2. Strategy is a …………………… some sort of consciously
intended course of action, a guideline to deal with a
situation.
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Ansoff Model of Strategic Management
Until the publication of corporate strategy, companies had little
guidance on how to plan for, or make decisions about, the future.
Traditional methods of planning were based on an extended
budgeting system which used the annual budget, projecting it a
few years into the future. By its nature, this system paid little or
)C
no attention to strategic issues.
With the advent of greater competition, higher interest in

acquisitions, mergers and diversification, and greater turbulence
in the business environment, however, strategic issues could no
longer be ignored. Ansoff felt that, in developing strategy, it was
essential to systematically anticipate future environmental
challenges to an organisation, and draw up appropriate strategic
plans for responding to these challenges. In corporate strategy,
(c
Igor Ansoff explored these issues, and built up a systematic

approach to strategy formulation and strategic decision-making
through a framework of theories, techniques and models.
Strategy Decisions 49
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Notes
Ansoff identified four standard types of organisational decisions as
related to strategy, policy, programmes, and standard operating ___________________
procedures. The last three of these, he argued, are designed to ___________________
resolve recurring problems or issues and, once formulated, do not
E
___________________
require an original decision each time. This means that the
decision process can easily be delegated. Strategy decisions are ___________________
different, however, because they always apply to new situations ___________________

and so need to be made anew every time.
UP
___________________
Ansoff developed a new classification of decision-making, partially ___________________
based on Alfred Chandler's work, Strategy and Structure. This
___________________
distinguished decisions as either: strategic (focused on the areas of
products and markets); administrative (organisational and ___________________
resource allocating), or operating (budgeting and directly ___________________
managing). Ansoff's decision classification became known as
Strategy-Structure-Systems, or the 3S model.
Components of Strategy
Ansoff argued that within a company's activities there should be
an element of core capability, an idea later adopted and expanded
CE
by Hamel and Prahalad. To establish a link between past and
future corporate activities (the first time such an approach was
undertaken) Ansoff identified four key strategy components:
z Product-market scope: A clear idea of what business or
products a company was responsible for (predating the
exhortations of Peters and Waterman to "stick to the knitting")
z Growth vector: As explained in the section below on the
Ansoff matrix, this offers a way of exploring how growth may
)C
be attempted.
z Competitive advantage: Those advantages an organisation
possesses that will enable it to compete effectively. A concept
later championed by Michael Porter.
z Synergy: Ansoff explained synergy as "2 + 2 = 5", or how the
whole is greater than the mere sum of the parts, and it
requires an examination of how opportunities fit the core
capabilities of the organisation.
(c
Ansoff Matrix
Variously known as the "product-mission matrix" or the "2 × 2
growth vector component matrix", the Ansoff Matrix remains a
50 popular tool for organisations that wish to understand the risk
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Notes component of various growth strategies, including product versus
___________________ market development and diversification.
___________________ The matrix was first published in a 1957 article called 'Strategies
for diversification' and the example below illustrates what such a
E
___________________
matrix may look like the matrix shown in Figure 3.1.
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
Figure 3.1: Ansoff’s Matrix Model

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The Ansoff Growth matrix is a tool that helps businesses decide
their product and market growth strategy. Ansoff’s product/market
growth matrix suggests that a business’ attempts to grow depend
on whether it markets new or existing products in new or existing
markets.
The output from the Ansoff product/market matrix is a series of
suggested growth strategies that set the direction for the business
strategy. These are described below:
)C
Market penetration
Market penetration is the name given to a growth strategy where
the business focuses on selling existing products into existing
markets. Market penetration seeks to achieve four main objectives:
z Maintain or increase the market share of current products –
this can be achieved by a combination of competitive pricing
strategies, advertising, sales promotion and perhaps more
(c
resources dedicated to personal selling.

z Secure dominance of growth markets.
z Restructure a mature market by driving out competitors; this
would require a much more aggressive promotional campaign,
supported by a pricing strategy designed to make the market 51
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unattractive for competitors. Notes
z Increase usage by existing customers – for example by ___________________

introducing loyalty schemes. ___________________
E
A market penetration marketing strategy is very much about ___________________
“business as usual”. The business is focusing on markets and
___________________
products it knows well. It is likely to have good information on
___________________
competitors and on customer needs. It is unlikely, therefore, that
this strategy will require much investment in new market
UP
___________________
research. ___________________
Market Development ___________________
___________________
Market development is the name given to a growth strategy where
the business seeks to sell its existing products into new markets. ___________________
There are many possible ways of approaching this strategy,

including:
z New geographical markets, for example, exporting the product
to a new country.
CE
z New product dimensions or packaging, for example, new
distribution channels.
z Different pricing policies to attract different customers or
create new market segments.
Product Development
Product development is the name given to a growth strategy where
a business aims to introduce new products into existing markets.
)C
This strategy may require the development of new competencies

and requires the business to develop modified products which can
appeal to existing markets.
Diversification
Diversification is the name given to the growth strategy where a
business markets new products in new markets. This is an
inherently more risk strategy because the business is moving into
markets in which it has little or no experience. For a business to
(c
adopt a diversification strategy, therefore, it must have a clear idea

about what it expects to gain from the strategy and an honest
assessment of the risks.
52
Of the four strategies given in the matrix, market penetration
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Notes
Activity requires increasing existing product market share in existing
Prepare a presentation
___________________
markets; market expansion requires the identification of new
showing the Porter’s generic
___________________
strategies. customers for existing products; product expansion requires
developing new products for existing customers; and diversification
E
___________________
requires new products to be produced for new markets.
___________________
___________________ Check Your Progress

___________________ State true or false:
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___________________ 1. Ansoff identified two standard types of organisational
___________________ decisions.
___________________ 2. The matrix was first published in a 1967 article called

Strategies for diversification.
___________________
Michael Porter Model of Strategic Management

If the primary determinant of a firm's profitability is the
attractiveness of the industry in which it operates, an important
secondary determinant is its position within that industry. Even
CE
though an industry may have below-average profitability, a firm
that is optimally positioned can generate superior returns.
A firm positions itself by leveraging its strengths. Michael Porter
has argued that a firm's strengths ultimately fall into one of two
headings: cost advantage and differentiation. By applying these
strengths in either a broad or narrow scope, three generic
strategies result: cost leadership, differentiation and focus. These
strategies are applied at the business unit level. They are called
)C
generic strategies because they are not firm or industry dependent.

The Table 3.1 illustrates Porter's generic strategies:
Table 3.1: Porter's Generic Strategies
Advantage
Target Scope
Low Cost Product Uniqueness
Broad (Industry Wide) Cost Leadership strategy Differentiation Strategy
Narrow (Market Focus Strategy (low cost) Focus Strategy
Segment) (differentiation)
(c
Cost Leadership Strategy

This generic strategy calls for being the low cost producer in an
industry for a given level of quality. The firm sells its products
either at average industry prices to earn a profit higher than that 53
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of rivals, or below the average industry prices to gain market Notes
share. In the event of a price war, the firm can maintain some ___________________
profitability while the competition suffers losses. Even without a
___________________
price war, as the industry matures and prices decline, the firms
E
that can produce more cheaply will remain profitable for a longer ___________________
period of time. The cost leadership strategy usually targets a broad ___________________
market.
___________________
Some of the ways that firms acquire cost advantages are by
UP
___________________
improving process efficiencies, gaining unique access to a large
___________________
source of lower cost materials, making optimal outsourcing and
vertical integration decisions, or avoiding some costs altogether. If ___________________
competing firms are unable to lower their costs by a similar ___________________
amount, the firm may be able to sustain a competitive advantage
___________________
based on cost leadership.
Firms that succeed in cost leadership often have the following
internal strengths:
z Access to the capital required to make a significant investment
in production assets; this investment represents a barrier to
CE
entry that many firms may not overcome.
z Skill in designing products for efficient manufacturing, for
example, having a small component count to shorten the
assembly process.
z High level of expertise in manufacturing process engineering.
z Efficient distribution channels.
Each generic strategy has its risks, including the low-cost strategy.
)C
For example, other firms may be able to lower their costs as well.
As technology improves, the competition may be able to leapfrog
the production capabilities, thus eliminating the competitive
advantage. Additionally, several firms following a focus strategy
and targeting various narrow markets may be able to achieve an
even lower cost within their segments and as a group gain
significant market share.
Differentiation Strategy
(c
A differentiation strategy calls for the development of a product or

service that offers unique attributes that are valued by customers
and that customers perceive to be better than or different from the
products of the competition. The value added by the uniqueness of
54 the product may allow the firm to charge a premium price for it.
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Notes The firm hopes that the higher price will more than cover the extra
___________________ costs incurred in offering the unique product. Because of the
product's unique attributes, if suppliers increase their prices the
___________________
firm may be able to pass along the costs to its customers who
E
___________________
cannot find substitute products easily.
___________________
Firms that succeed in a differentiation strategy often have the
___________________ following internal strengths:
___________________ z Access to leading scientific research.
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___________________ z Highly skilled and creative product development team.
___________________ z Strong sales team with the ability to successfully communicate
___________________
the perceived strengths of the product.
z Corporate reputation for quality and innovation.
___________________
The risks associated with a differentiation strategy include
imitation by competitors and changes in customer tastes.
Additionally, various firms pursuing focus strategies may be able
to achieve even greater differentiation in their market segments.
Focus Strategy
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The focus strategy concentrates on a narrow segment and within
that segment attempts to achieve either a cost advantage or
differentiation. The premise is that the needs of the group can be
better serviced by focusing entirely on it. A firm using a focus
strategy often enjoys a high degree of customer loyalty, and this
entrenched loyalty discourages other firms from competing
directly.
Because of their narrow market focus, firms pursuing a focus
)C
strategy have lower volumes and therefore less bargaining power

with their suppliers. However, firms pursuing a differentiation-
focused strategy may be able to pass higher costs on to customers
since close substitute products do not exist.
Firms that succeed in a focus strategy are able to tailor a broad
range of product development strengths to a relatively narrow
market segment that they know very well. Some risks of focus
strategies include imitation and changes in the target segments.
(c
Furthermore, it may be fairly easy for a broad-market cost leader

to adapt its product in order to compete directly. Finally, other
focusers may be able to carve out sub-segments that they can serve
even better.
A Combination of Generic Strategies – Stuck in the Middle 55
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Notes
These generic strategies are not necessarily compatible with one
another. If a firm attempts to achieve an advantage on all fronts, ___________________
in this attempt it may achieve no advantage at all. For example, if ___________________
a firm differentiates itself by supplying very high quality products,
E
___________________
it risks undermining that quality if it seeks to become a cost
leader. Even if the quality did not suffer, the firm would risk ___________________
projecting a confusing image. For this reason, Michael Porter ___________________

argued that to be successful over the long-term, a firm must select
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___________________
only one of these three generic strategies. Otherwise, with more
___________________
than one single generic strategy the firm will be "stuck in the
middle" and will not achieve a competitive advantage. ___________________
Porter argued that firms that are able to succeed at multiple ___________________
strategies often do so by creating separate business units for each ___________________

strategy. By separating the strategies into different units having
different policies and even different cultures, a corporation is less
likely to become "stuck in the middle."
However, there exists a viewpoint that a single generic strategy is not
always best because within the same product customers often seek
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multi-dimensional satisfactions such as a combination of quality,
style, convenience and price. There have been cases in which high
quality producers faithfully followed a single strategy and then
suffered greatly when another firm entered the market with a lower-
quality product that better met the overall needs of the customers.
Generic Strategies and Industry Forces

These generic strategies each have attributes that can serve to
defend against competitive forces. The Table 3.2 compares some
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characteristics of the generic strategies in the context of the

Porter's five forces.
Table 3.2: Generic Strategies and Industry Forces
Generic Strategies
Industry
Force Cost
Differentiation Focus
Leadership
Entry Ability to cut Customer loyalty can Focusing develops
Barriers price in discourage potential core competencies
(c
retaliation entrants. that can act as an

deters potential entry barrier.
entrants.
Contd…
56 Buyer Ability to offer Large buyers have less Large buyers have
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Notes Power lower price to power to negotiate less power to
Activity powerful buyers. because of few close negotiate because of
___________________
Critically anayse Abcg Matrix alternatives. few alternatives.
of any one Retail company.
___________________ Supplier Better insulated Better able to pass on Suppliers have
Power from powerful supplier price increases power because of
E
___________________
suppliers. to customers. low volumes, but a
___________________ differentiation-
focused firm is
___________________
better able to pass
___________________ on supplier price
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increases.
___________________
Threat of Can use low Customer's become Specialized
___________________ Substitutes price to defend attached to products & core
___________________ against differentiating competency protect
substitutes. attributes, reducing against substitutes.
___________________ threat of substitutes.
Rivalry Better able to Brand loyalty to keep Rivals cannot meet

compete on customers from rivals. differentiation-
price. focused customer
needs.
Check Your Progress

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Fill in the blanks:
1. The …………………. leadership strategy usually targets
a broad market.
2. The …………………. strategy concentrates on a narrow
segment and within that segment attempts to achieve
either a cost advantage or differentiation.
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BCG Matrix
Boston Consulting Group (BCG) Matrix is a four celled matrix
(a 2 * 2 matrix) developed by BCG, USA. It is the most renowned
corporate portfolio analysis tool. It provides a graphic
representation for an organization to examine different businesses
in it’s portfolio on the basis of their related market share and
industry growth rates. It is a two dimensional analysis on
management of SBU’s (Strategic Business Units). In other words,
(c
it is a comparative analysis of business potential and the

evaluation of environment.
According to this matrix, business could be classified as high or low
according to their industry growth rate and relative market share.
57
Relative Market Share = SBU Sales this year leading
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Notes
competitors sales this year.
___________________
Market Growth Rate = Industry sales this year - Industry Sales
last year. ___________________
E
___________________
The analysis requires that both measures be calculated for each
SBU. The dimension of business strength, relative market share, ___________________
will measure comparative advantage indicated by market ___________________
dominance. The key theory underlying this is existence of an
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___________________
experience curve and that market share is achieved due to overall
cost leadership. ___________________
BCG matrix has four cells, with the horizontal axis representing ___________________
relative market share and the vertical axis denoting market ___________________
growth rate. The mid-point of relative market share is set at 1.0. if ___________________
all the SBU’s are in same industry, the average growth rate of the
industry is used. While, if all the SBU’s are located in different
industries, then the mid-point is set at the growth rate for the
economy.
Resources are allocated to the business units according to their
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situation on the grid. The four cells of this matrix have been called
as stars, cash cows, question marks and dogs. Each of these cells
represents a particular type of business.
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Source:http://www.quickmba.com/strategy/matrix/bcg/
(c
Figure 3.2: BCG Matrix
Stars- Stars represent business units having large market share

in a fast growing industry. They may generate cash but because of
fast growing market, stars require huge investments to maintain
58 their lead. Net cash flow is usually modest. SBU’s located in this
S
Notes cell are attractive as they are located in a robust industry and
___________________ these business units are highly competitive in the industry. If
___________________ successful, a star will become a cash cow when the industry
matures.
E
___________________
___________________ Cash Cows- Cash Cows represents business units having a large
market share in a mature, slow growing industry. Cash cows
___________________
require little investment and generate cash that can be utilized for
___________________
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investment in other business units. These SBU’s are the
___________________ corporation’s key source of cash, and are specifically the core
___________________ business. They are the base of an organization. These businesses
___________________
usually follow stability strategies. When cash cows loose their
appeal and move towards deterioration, then a retrenchment
___________________
policy may be pursued.
Question Marks- Question marks represent business units having

low relative market share and located in a high growth industry.
They require huge amount of cash to maintain or gain market
share. They require attention to determine if the venture can be
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viable. Question marks are generally new goods and services which
have a good commercial prospective. There is no specific strategy
which can be adopted. If the firm thinks it has dominant market
share, then it can adopt expansion strategy, else retrenchment
strategy can be adopted. Most businesses start as question marks
as the company tries to enter a high growth market in which there
is already a market-share. If ignored, then question marks may
become dogs, while if huge investment is made, then they have
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potential of becoming stars.
Dogs- Dogs represent businesses having weak market shares in

low-growth markets. They neither generate cash nor require huge
amount of cash. Due to low market share, these business units face
cost disadvantages. Generally retrenchment strategies are adopted
because these firms can gain market share only at the expense of
competitor’s/rival firms. These business firms have weak market
share because of high costs, poor quality, ineffective marketing,
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etc. Unless a dog has some other strategic aim, it should be

liquidated if there is fewer prospects for it to gain market share.
Number of dogs should be avoided and minimized in an
organization.
Limitations of BCG Matrix 59
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Notes
The BCG Matrix produces a framework for allocating resources Activity
among different business units and makes it possible to compare How Porter's Five Forces is
___________________
regarded as a powerful tool in
many business units at a glance. But BCG Matrix is not free from ___________________
business situation.
limitations, such as:
E
___________________
z BCG matrix classifies businesses as low and high, but
___________________
generally businesses can be medium also. Thus, the true
nature of business may not be reflected. ___________________
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___________________
z Market is not clearly defined in this model.
___________________
z High market share does not always leads to high profits. There
are high costs also involved with high market share. ___________________
z Growth rate and relative market share are not the only ___________________
indicators of profitability. This model ignores and overlooks ___________________

other indicators of profitability.
z At times, dogs may help other businesses in gaining
competitive advantage. They can earn even more than cash
cows sometimes.
This four-celled approach is considered as to be too simplistic.
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z
Check Your Progress

Fill in the blanks:
1. …………………… represents business units having a
large market share in a mature, slow growing industry.
2. …………………… represent businesses having weak
market shares in low-growth markets.
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Porter’s Five Forces Model

The Porter's Five Forces tool is a simple but powerful tool for
understanding where power lies in a business situation. This is
useful, because it helps you understand both the strength of your
current competitive position, and the strength of a position you're
considering moving into.
With a clear understanding of where power lies, you can take fair
(c
advantage of a situation of strength, improve a situation of

weakness, and avoid taking wrong steps. This makes it an
important part of your planning toolkit.
60
Conventionally, the tool is used to identify whether new products,
S
Notes
services or businesses have the potential to be profitable. However
___________________
it can be very illuminating when used to understand the balance of
___________________ power in other situations.
E
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
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Source:http://www.mindtools.com/pages/article/newTMC_08.htm
Figure 3.3: Porter's Five Forces
Five Forces Analysis assumes that there are five important forces
that determine competitive power in a business situation. These
are:
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z Supplier Power: Here you assess how easy it is for suppliers

to drive up prices. This is driven by the number of suppliers of
each key input, the uniqueness of their product or service,
their strength and control over you, the cost of switching from
one to another, and so on. The fewer the supplier choices you
have, and the more you need suppliers' help, the more
powerful your suppliers are.
Buyer Power: Here you ask yourself how easy it is for buyers
(c
z
to drive prices down. Again, this is driven by the number of
buyers, the importance of each individual buyer to your
business, the cost to them of switching from your products and
services to those of someone else, and so on. If you deal with
few, powerful buyers, then they are often able to dictate terms 61
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to you. Notes
z Competitive Rivalry: What is important here is the number ___________________

and capability of your competitors. If you have many ___________________
competitors, and they offer equally attractive products and
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___________________
services, then you'll most likely have little power in the
situation, because suppliers and buyers will go elsewhere if ___________________
they don't get a good deal from you. On the other hand, if no- ___________________
one else can do what you do, then you can often have
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___________________
tremendous strength.
___________________
z Threat of Substitution: This is affected by the ability of your
___________________
customers to find a different way of doing what you do – for
example, if you supply a unique software product that ___________________
automates an important process, people may substitute by ___________________

doing the process manually or by outsourcing it. If substitution
is easy and substitution is viable, then this weakens your
power.
z Threat of New Entry: Power is also affected by the ability of
people to enter your market. If it costs little in time or money
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to enter your market and compete effectively, if there are few
economies of scale in place, or if you have little protection for
your key technologies, then new competitors can quickly enter
your market and weaken your position. If you have strong and
durable barriers to entry, then you can preserve a favorable
position and take fair advantage of it.
Check Your Progress

)C
1. The Porter's Five Forces tool is a simple but powerful

tool for understanding where power lies in a business
situation.
2. Power is not affected by the ability of people to enter
your market.
Summary
(c
There is no one perfect strategic management model for each

organization. Each organization ends up developing its own nature
and model of strategic planning, often by selecting a model and
modifying it as they go along in developing their own planning
62 process. The models discussed in this unit provide a range of
S
Notes alternatives from which organizations might select an approach
___________________ and begin to develop their own strategic planning process. It
should be noted that an organization might choose to integrate the
___________________
models, e.g., using a scenario model to creatively identify strategic
E
___________________
issues and goals, and then an issues-based model to carefully
___________________ strategize to address the issues and reach the goals.
___________________
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___________________ Do you think the strategy decision model of Ansoff is relevant in
___________________ present day organisations? Give appropriate reasons in support of
your answer.
___________________
___________________
Keywords
Core Competencies: Cluster of extraordinary abilities or related
'excellences' that a firm acquires from its founders, after consistent
striving over the years, and which cannot be easily imitated.
Planning: Basic management function involving formulation of
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one or more detailed plans to achieve optimum balance of needs or
demands with the available resources.
Strategic Management: Systematic analysis of the factors
associated with customers and competitors (the external
environment) and the organization itself (the internal
environment) to provide the basis for rethinking the current
management practices. Its objective is to achieve better alignment
of corporate policies and strategic priorities.
Corporate Strategy: Corporate strategy is a proprietary set of
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actions that enables a company to be worth more than just the sum
of its parts.
Matrix: A matrix is a grid, with each location in the grid
containing some information.

1. What is the significance of five P’s in the strategic planning
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model of Mintzberg?
2. What is significance of generic strategy model of Porter?
3. What are the Ansoff key strategy components?
4. Discuss Ansoff’s Matrix Model.
63
5. “Firms that succeed in cost leadership.” Do you agree with this
S
Notes
statement? If yes, give reasons.
___________________
6. Describe Differentiation Strategy.
___________________
7. Throw some light on Generic Strategies and Industry Forces.
E
___________________
8. Write brief note on BCG Matrix.
___________________
Further Readings ___________________
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___________________
Books ___________________
Rao, VSP & Hari, Krishna V (2003). “Strategic Management – Text ___________________
___________________
___________________
Ltd.
Education.
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Management”. Oxford University Press.
Web Readings
http://www.mindtools.com/pages/article/newTMC_90.htm
http://www.businessdictionary.com/definition/Ansoff-matrix.html
http://www.quickmba.com/strategy/matrix/ansoff/
http://www.mindtools.com/pages/article/management-roles.htm
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http://en.wikipedia.org/wiki/Porter's_generic_strategies
http://www.quickmba.com/strategy/generic.shtml
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64
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Notes
___________________
___________________
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___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
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(c
UNIT 4: Strategic Intent – Vision, Mission and Objectives
Unit 4
65
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Notes
Strategic Intent – Vision, Mission

___________________
___________________
and Objectives
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___________________
___________________
Objectives ___________________
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___________________
topics:
___________________
\ Hierarchy of Strategic Intent
\ Vision Statement ___________________
\ Mission Statement ___________________

\ Value Statement ___________________
\ Business and the Nature of its Objectives
\ Organization’s Objectives
Introduction
When you begin the process of strategic planning, visioning comes
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first. A vision statement answers the question, “Who are we?
Where we're headed? How we want to go about it? Where are we
headed? What is our preferred future? What will success look
like?” The process is developed through visioning. The outcome of
visioning is to develop an effective basis for business strategy. The
organization tries to fit its strengths with the market demand, to
make the organization highly competitive with growth and profits
as the rewards.
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Successful organizations have a vision that is executable. Their

vision statement identifies activities the organization intends to
pursue, sets forth long-term direction and provides a big
perspective. The vision statement becomes a basis for performance,
reflects core values of the organization and is the way to
communicate to bring the workforce together and galvanize people
to act. It is this quality of vision that makes organizations excel.
Vision is the critical focal point and beginning to high performance.
(c
Even the most exciting vision will remain only a dream unless it is
followed up with striving, building, and improving, it requires a
statement of purpose and function. The mission statement is a
statement of purpose and function.
66
Hierarchy of Strategic Intent
S
Notes
Activity
Strategic Intent is the basis on which organizations provide
Suppose you are the CEO of
___________________
an organisation that has just products and services for consumers, profits for investors, jobs for
___________________
launched an I-pod to give employees, taxes for governments, and economic stability for
competition to Apple and
communities. Strategic intent also identifies the commitment of
E
___________________
Sony. What will be the key
considerations
___________________ while
the organization to contribute to the welfare of society by setting
developing your vision standards on being economically productive and socially
___________________
statement? responsible. The goals identified through the strategic intent of the
___________________ organization represent a synthesis of goals and demands placed on
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___________________ the organization by its stakeholders. These choices, collectively,
sets apart one organization from another.
___________________
___________________
Formulating the strategic intent – the organization's vision,
mission, and value statements, is one of the first tasks of Strategic
___________________
Management. The strategic intent should be articulated at the
outset of an organization's life, if possible and at the first
opportunity if the organization is already underway.
The vision, mission, and value statements have the greatest
impact on the identity and the future of the organization as they
reflect what the organization intends to be in the long run. They
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offer unique insights into way in which organizations work and
think, and the aspirations of the organization.
Vision, mission, and values have their distinct characteristics and
play distinct roles in the development of the organization. Short
definitions given below explain these distinct characteristics:
z Vision is what keeps the organization moving forward. Vision
provides the long term perspective of the organization so that
it can motivate people even when the organization is facing
)C
discouraging odds.
z Mission is the founders' intentions at the outset of the
organization - what they wanted to achieve.
z Values manifest in what the organization does as a group and
how it operates.
The vision of an organization consists of two major components,
the ideology and the envisioned future of the organization. The
(c
core ideology characterizes the enduring nature of an organization

and remains unchangeable over a long period of time. The
envisaged future provides a description of goals.
67
The idea that an organization might be guided by its vision,
S
Notes
mission, and values is a key part of strategic thinking. Peter
Drucker has, time and again, emphasized that a failure to give ___________________
adequate thought to business purpose and mission was perhaps ___________________
the most important factor in both managerial frustration and
E
___________________
business failure.
___________________
A vision and sense of mission can be a powerful force in shaping
___________________
and guiding an organization. It is the entrepreneur’s vision that
gives the organization a real strategic direction and focus.
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___________________
However, the most important function of building a vision is to ___________________
provide a dream to the organization to live for – a basic motivation.
___________________
The Vision Statement should be such that each person in the
___________________
organization should see his or her job as part of building a
___________________
cathedral. It is this type of vision that provides a sense of purpose
and common cause to people in the organization. Articulated as a
formal mission statement it can be used to bring together
desperate stakeholder groups within the organization. It also
communicates what the venture has to offer customers, suppliers,
and potential employees. A clear mission can also help in
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attracting investment. It catches the attention of potential
investors and suggests professionalism in management approach.
The mission statement has a different perspective from the vision
statement. The mission statement lists out a particular set of tasks
that the organization has to carry out in order to fulfil the vision of
the organization. It sets out priorities of how the purpose of the
organization can be fulfilled and identifies the particular need of
society the organization will satisfy.
)C
This particular need of society, for example, could be the need for
personal transportation. This need could be satisfied equally by a
manufacturer of motorcycles and scooters, as it would by a bicycle
manufacturer, or a manufacturer of automobiles. Though they all
meet the same need of society, they will necessarily have different
objectives.
However, if it is to be effective, the mission must be right for the
venture, developed with sympathy to the organization and be
(c
communicated effectively. A clear mission can aid the performance

of an entrepreneurial venture – if it is developed in an appropriate
way.
68
Just the vision and the mission are not sufficient to create a sense
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Notes
Activity of purpose in the organization. To create purpose, it is equally
Given the vision, as the new
___________________
important to embed the vision and mission of the organization with
Director, what ideas would
you___________________
want to implement to a set of shared values and beliefs – a description of types of
behaviours and actions required for the organization to be what it
E
achieve the vision?
___________________
wants to be. To quote Azim Premji, “Beliefs and values give a
___________________
common cause and a sense of purpose across the businesses
___________________ making Wipro in essence one company. They define the spirit of
___________________ Wipro…”
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___________________ Vision, values and mission are the three components of focus and
___________________
context of the organization. They form a hierarchy.
___________________
___________________
Vision
Mission & Values
Objectives
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Figure 4.1: Hierarchy of Vision, Mission and Objectives
The vision of the organization leads to its Mission and its values.
The Mission in turn leads to the Objectives of the firm which is
shown in Figure 4.1.
Check Your Progress

Fill in the blanks:
)C
1. Strategic ………………… also identifies the commitment

of the organization to contribute to the welfare of
society.
2. The ………………… of the organization leads to its
Mission and its values.
Vision Statement
The first task in the process of strategic management is to
(c
formulate the organisation’s vision and mission statements. These

statements define the organisational purpose of a firm. Together
with objectives, they form a “hierarchy of goals.”
69
When you begin the process of strategic planning, visioning comes
S
Notes
first. Martin Luther King, Jr. said, "I have a dream," and what
followed was a vision that changed a nation. That famous speech is ___________________
a dramatic example of the power that can be generated by a ___________________
compelling vision of the future. A vision is a guide to implementing
E
___________________
strategy. Visions are about feelings, beliefs, emotions, and pictures.
___________________
A vision statement answers the question, "What will success look
___________________
like?" The pursuit of this image of success is what motivates people
to work together. It is an important requirement for building a
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___________________
strong foundation. When all the employees are committed to the ___________________
firm’s visions and goals, optimum choices on business decisions are
___________________
more likely.
___________________
A clear vision helps in developing a mission statement, which in
___________________
turn facilitates setting of objectives of the firm after analyzing
external and internal environment. Though vision, mission and
objectives together reflect the “strategic intent” of the firm, they
have their distinctive characteristics and play important roles in
strategic management.
Vision can be defined as “a mental image of a possible and
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desirable future state of the organisation”. It is “a vividly
descriptive image of what a company wants to become in future”.
Vision represents top management’s aspirations about the
company’s direction and focus. Every organisation needs to develop
a vision of the future. A clearly articulated vision moulds
organisational identity, stimulates managers in a positive way and
prepares the company for the future.
“The critical point is that a vision articulates a view of a realistic,
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credible, attractive future for the organisation, a condition that is

better in some important ways than what now exists.”
Vision, therefore, not only serves as a backdrop for the
development of the purpose and strategy of a firm, but also
motivates the firm’s employees to achieve it.
According to Collins and Porras, a well-conceived vision consists of
two major components:
(c
z Core ideology
z Envisioned future
Core ideology is based on the enduring values of the organisation
(“what we stand for and why we exist”), which remain unaffected
70 by environmental changes. Envisioned future consists of a long-
S
Notes term goal (what we aspire to become, to achieve, to create”) which
___________________ demands significant change and progress.
___________________ When visioning the change, ask yourself, "What is our preferred
future?" Your vision must be encompassed by your beliefs:
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___________________
___________________ z Your beliefs must meet your organizational goals as well as

community goals.
___________________
z Your beliefs are a statement of your values.
___________________
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___________________ z Your beliefs are a public/visible declaration of your expected
outcomes.
___________________
z Your beliefs must be precise and practical.
___________________
z Your beliefs will guide the actions of all involved.
___________________
z Your beliefs reflect the knowledge, philosophy, and actions of
all.
z Your beliefs are a key component of strategic planning.
The process and outcomes of visioning is to develop an effective
basis for business strategy. The foresight of the organization is to
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fit the strengths of the organization with the market demands, to
make the organization highly competitive with growth and profits
as the rewards. The long-term benefits are substantial, because
visioning facilitates the following:
z Breaks you out of boundary thinking.
z Provides continuity and avoids the stutter effect of planning
fits and starts.
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z Identifies direction and purpose.

z Alerts stakeholders to needed change.
z Promotes interest and commitment.
z Promotes laser-like focus.
z Encourages openness to unique and creative solutions.
z Encourages and builds confidence.
Builds loyalty through involvement (ownership).
(c
z Results in efficiency and productivity.

Whatever, the eventual architecture of the organization, the vision
statement encompasses the organization in all its forms. The
vision statement identifies activities the organization intends to 71
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pursue, sets forth long term direction and provides a big Notes
perspective of: ___________________
z Who are we? ___________________
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z What we're trying to do? ___________________
z How we want to go about it? ___________________
z Where we're headed? ___________________
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___________________
Nature of Vision
___________________
Successful organizations have a vision that is executable – not a
___________________
pie-in-the-sky blanket statement but a realistic goal, according to
Sunil Alagh, former Managing Director and CEO of Britannia ___________________
Industries. "It’s all about how you define the market, or how you ___________________
redefine it for yourself? We can always raise the bar, but the vision
stays with the company.” A vision represents an animating dream
about the future of the firm. By its nature, it is hazy and vague.
That is why Collins describes it as a “Big Hairy Audacious Goal”
(BHAG). Yet it is a powerful motivator to action. It captures both
the minds and hearts of people. It articulates a view of a realistic,
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credible, attractive future for the organisation, which is better
than what now exists. Developing and implementing a vision is one
of the leader’s central roles. He should not only have a “strong
sense of vision”, but also a “plan” to implement it.
Example:
z Henry Ford’s vision of a “car in every garage” had power. It
captured the imagination of others and aided internal efforts
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to mobilize resources and make it a reality. A good vision

always needs to be a bit beyond a company’s reach, but
progress towards the vision is what unifies the efforts of
company personnel.
z One of the most famous examples of a vision is that of
Disneyland “To be the happiest place on earth”.
Characteristics of Vision Statements

As may be seen from the above definitions, many of the
(c
characteristics of vision given by these authors are common such

as being clear, desirable, challenging, feasible and easy to
communicate. Nutt and Backoff have identified four generic
72 features of visions that are likely to enhance organisational
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Notes performance:
___________________
z Possibility means the vision should entail innovative
___________________ possibilities for dramatic organisational improvements.
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___________________ z Desirability means the extent to which it draws upon shared
___________________ organisational norms and values about the way things should
be done.
___________________
z Actionability means the ability of people to see in the vision,
___________________
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actions that they can take that are relevant to them.
___________________
z Articulation means that the vision has imagery that is
___________________
powerful enough to communicate clearly a picture of where the
___________________ organisation is headed.
___________________
Importance of Vision
Having a strategic vision is linked to competitive advantage,
enhancing organisational performance, and achieving sustained
organisational growth. Clear vision enable firms to determine how
well organisational leaders are performing and to identify gaps
between the vision and current practices. Organisations preparing
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for transformational change regularly undertake “envisioning”
exercises to help guide them into the future. The visioning process
itself can enhance the self-esteem of the people who participate in
it because they can see the potential fruits of their labours.
Conversely, a “lack of vision” is associated with organisational
decline and failure. As Beaver argues “Unless companies have
clear vision about how they are going to be distinctly different and
unique in adding and satisfying their customers, they are likely to
)C
be the corporate failure statistics of tomorrow”. Lacking vision is

used to explain why companies fail to build their core competencies
despite having access to adequate resources to do so. Business
strategies that lack visionary content may fail to identify when
change is needed. Lack of an adequate process for translating
shared vision into collective action is associated with the failure to
produce transformational organisational change.
Thus vision statements serve as:
(c
z A basis for performance: A vision creates a mental picture of

an organisation’s path and direction in the minds of people in
the organisation and motivates them for high performance.
73
Reflects core values: A vision is generally built around core
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z
Notes
values of an organisation, and channelises the group’s energies Activity
towards such values and serves as a guide to action. Discuss about a time when
___________________
you lost track when you lost
z Way to communicate: A vision statement is an exercise in ___________________
vision/mission of your
E
communication. A well-communicated vision statement will team/department/organisation.
___________________
What negative repercussions
bring the employees together and galvanize them into action.
did it___________________
have?
z A desirable challenge: A vision provides a desirable ___________________
challenge for both senior and junior managers.
UP
___________________
Fill in the blanks: ___________________
1. ………………… represents top management’s ___________________

aspirations about the company’s direction and focus. ___________________
2. The process and outcomes of visioning is to develop an
effective basis for ………………… .
Mission Statement
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Vision is the critical focal point and beginning to high performance.
But obviously a vision alone won't make it happen. Even the most
exciting vision will remain only a dream unless it is followed up
with striving, building, and improving.
Why does the organization exist? What is its value addition?
What's its function? How does it want to be positioned in the
market and minds of customers? What business is it in? These are
all questions of purpose. They deal with the deeper motivations
and assumptions underlying the values and purpose that form the
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context and focus of the organization. Your mission statement is a

statement of purpose and function.
z Your mission statement draws on your belief statements.
z Your mission statement must be future oriented and portray
your organization as it will be, as if it already exists.
z Your mission statement must focus on one common purpose.
z Your mission statement must be specific to the organization,
(c
not generic.
The mission statements set the organization apart from others.
They give meaning to the reason for being, value-add, and define
74 the business of the organization. As with vision and values, the
S
Notes mission should have clear answers to questions about the future of
___________________ the organization.
___________________ A mission statement can be defined as follows:
E
___________________ A statement of the current and future expected product scope,
___________________ market scope, and geographical scope, as well as the unique
competencies of the business must develop to achieve its desired
___________________
competitive positioning.
___________________
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The worksheet shown in Table 4.1 looks at these issues and
___________________
analyses the direction that the organization should move towards.
___________________ It is a statement of the current and future expected product scope,
___________________ market scope, and geographic scope.
___________________ Table 4.1: The Mission Worksheet
Now Future
Product Scope
Market Scope
Geographical Scope
Unique Competencies
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The mission statement, should in addition, identify the unique
competencies the firm has developed to achieve a long term
sustainable advantage. It also should reflect on some of the major
characteristics which are given in the paragraphs that follow.
Aspirations
The mission statement should arouse a strong sense of
organizational identity and business purpose. What the firm aims
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to achieve with this strategy: its aspirations.

Aspirations can be defined in many ways. However, in the mission
statement it must be defined in a way which relates the firm to the
competitive situation in its market. Some of the typical aspirations
can include being the “leader” in a market or the “leading” firm.
However, care is required with such definitions. Though some of
these questions often seem deceptively simple, they are not so
simple. We need to answer them to prepare a mission statement.
(c
For example this is ambiguous, ‘leading’ can be understood to

mean being the largest firm in the market (volume sales, market
share?) Or, could it refer to some other criteria, such as being the
technical leader, or the firm offering highest quality? Be specific.
75
It is best to be definite but you must remember aspirations of a
S
Notes
firm cannot be absolute. They must be defined relative to
competitors. Though an aspiration is not like an objective, it should ___________________
be capable of being used to guide the objective setting, performance ___________________
evaluation and benchmarking systems of the company. It must
E
___________________
preferably identify why the firm finds the niche it is aspiring to fill
profitable and how it can defend it. ___________________
___________________
Business Horizon
UP
___________________
Many industries have faded away because of the lack of vision in
___________________
identifying their business horizon in the mission statement. A
railway company can be in the ‘business of running railways’ or ‘it ___________________
can be in the business of moving people and goods.’ Similarly, a ___________________

cosmetics company can be in the business of ‘making cosmetics’ or
___________________
in the business of ‘enhancing beauty.’ An oil company can ‘supply
oil products’ or it can be in the ‘energy business.’ For example,
Helen Curtis says that is in the ‘enriching beauty business’. Oil &
Natural Gas Commission (ONGC) presents its mission statement
as, “To stimulate, continue and accelerate efforts to develop and
maximize the contribution of the energy sector to the economy of
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the country.”
Many companies define their business too narrowly. That means
they often miss new market opportunities. Or they don't provide a
broader level of service support to their basic products or services.
So customers start looking elsewhere. At the other extreme, some
companies define their business too broadly. That often takes them
beyond their core competencies into businesses they don't
understand. The results are often very expensive and sometimes
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fatal learning experiences.

The perception of what business you are in will, to a large extent,
determine strategy. It will determine who you consider your
competition is, and this focus can very often be the basis for the
survival of the firm. Management philosophers believe that if the
carriage makers of yesterday had realized that they were in the
business of ‘providing personal transportation to people’ and not in
the ‘carriage making business’, many of them would have survived
(c
the introduction of the motorcar. Similarly, gas light

manufacturers would have survived the electric bulb. An
inadequate vision of the business horizon is often called,
‘organizational myopia.’
76
Range of Offerings
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Notes
A Mission statement identifies the range of products and services
___________________ that the firm will offer the market. The target market needs to be
___________________ defined very carefully. To do this successfully, both products and
market have to be analyzed so that supply structure and the
E
___________________
dimensions along which segmentation occurs are fully understood.
___________________
There are established techniques to carryout this type of market
___________________
analysis exercise.
___________________
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The product/service scope must be specified in terms of the
___________________
features which characterize it. If the target market is composed of
___________________ consumer groups then it may be specified in geographic, socio-
___________________ graphic or psychographic terms. In a business sector, it can be
___________________
identified in geographic, industry sector, product use or buying
decision process terms. The range should lie between two
extremes; it must be greater than the current scope of the firm but
be smaller than the “total” market in which the firm competes.
The range of offerings also has direct implications on the

diversification strategy of the organization. It provides directions
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on the strategic choice in diversification strategies. The
implications of making a definitive identification means that the
organization has put boundaries around to give guidance to the
strategic direction in which it will move. For example, if the areas
are to be related it puts limits on the options.
The diversification options may be related in number of different

ways; the new products and services may have similar
technologies, or may be serving similar markets, or may have
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similar competencies.
Signal to Management’s Intents

Specifically speaking of Mission statements, a well crafted mission
statement must be narrow enough to specify the real area of
interest; and it should serve as a signal on where the top
management intends to take the firm. Overly broad mission
statements provide no guidance in strategy-making. However,
(c
diversified companies will have a broader mission definition than

single business enterprises. In either case, the statement should
lead to the direction the organization plans to take.
Ranbaxy Laboratories Ltd. – Mission Statement 77
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Notes
Our mission is to become a research-based international
pharmaceutical company. ___________________
___________________
McDonald’s – Mission Statement
E
___________________
To offer the fast food customer food prepared in the same high
___________________
quality worldwide, tasty and reasonably priced, delivered in a
consistent low key décor and friendly manner. ___________________
UP
___________________
In the examples given above the mission statement of Ranbaxy’s
gives a clear signal of the management’s intent. As a matter of ___________________
fact, Ranbaxy rejected a lucrative offer to expand by setting up ___________________
business in the USSR. It was the management’s view that this
___________________
would deter it from its mission to become an international
pharmaceutical company. Similarly, McDonald’s mission ___________________
statement which is given above, gives a clear signal of its

managements intent. It indicates that it will look at domestic and
international markets, and it intends to remain in the reasonably
priced, high quality fast food industry.
Some examples of the mission statements are given below. These
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are the mission statements of Ford Foundation, and Otis
Elevators:
Ford Foundation - Mission Statement

Our dream is a world free of poverty.
To fight poverty with passion and professionalism for lasting
results.
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To help people help themselves and their environment by

providing resources, sharing knowledge, building capacity, and
forging partnerships in the public and private sectors.
To be an excellent institution able to attract, excite, and nurture
diverse and committed staff with exceptional skills who know how
to listen and learn.
Our Principles:
Client centered, working in partnership, accountable for quality
(c
results, dedicated to financial integrity and cost-effectiveness,

inspired and innovative.
78
Check Your Progress
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Notes
___________________
___________________
1. Vision is the critical focal point and beginning to high
performance.
E
___________________
2. The product/service scope must not be specified in terms
___________________
of the features which characterize it.
___________________
___________________ Value Statement
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___________________
The potential of a mission statement does not end with strategy. It
___________________ can also include the values that the organization aspires to hold.
___________________ Corporate values can be defined, in a classical sense, as beliefs that
help companies make choices among available means and ends and
___________________
the behaviours they inculcate.
Technically values reflect the weight which corporate decision
makers attach to alternative goals when making their decisions.
Alternative goals could be accounting profitability, stock returns,
customer value, market share, company growth, employee
satisfaction, supplier surplus or measures of corporate social
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performance (like image, or environmental impact). They could be
present or future values of these variables to capture a trade off
between the short and the long run.
At the end of it all, value statements give a common cause and a
common sense of purpose across the organization. Just like the
mission statement, it provides the direction to the strategy of the
organization. It provides an explicit depiction of values to guide the
organization in choosing among competing priorities, thereby
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setting the organization apart from others.

Organizational Values can set the direction of the business
organization by identifying the contribution the organization plans
to make to the key market, and the ‘distinctive competencies’ or
‘value’ the organization will provide in its focus on to serve the key
market. The statements should speak loudly and clearly for
themselves, elicit personal effort and dedication and generate
enthusiasm for the firm’s future – the strategy of the organization.
(c
All organizations have some values. There are three broad reasons
why the organization might wish to codify those values in the
mission statement:
z To impress values on internal stakeholders.
79
To express values to external stakeholders.
S
z
Notes
z A testament to managerial values.
___________________
Values are already part of the attitudes and culture of the ___________________
organization. But the value statement may incorporate some
E
___________________
principle or ethical standard on which the organization holds to be
___________________
important. Sometimes, the company may use a particular stance
on some ethically, or politically, contentious issue in order to ___________________
achieve differentiate itself from competitors and give itself a
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___________________
unique positioning in the minds of external stakeholders. However,
___________________
both the impression of values on internal stakeholders and the
___________________
expression of values to external stakeholders are, in the final
instance, directed towards enhancing the performance of the firm. ___________________
___________________
Corporate values should aim to predict what goal variables will be
influential in a given company and what emphasis the decision
makers will place on each goal. Company behaviour can be
modelled as a balance struck between these alternative
behaviours. This means that a firm should maximize the expected
value of a corporate value function which can be defined on the
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range of potential goal variables. In a practical sense, what
matters is whether and how much potential goal variables
influence the behaviour of the company.
The value statement, therefore, basically translates the vision and

mission of the organization in the manner or behaviour of the
officers of the firm. Some of the attributes that the firm can
identify are shown in Figure 4.2. This diagram is based on a field
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interview with employees of a telecom company.
The value statement of the Ford Foundation, provides guidelines to

the moral conduct of the organization in the achieving its mission
and objectives. The statements reflect that the Ford Foundation do
not believe in a ‘no holds barred’ strategy. The strategies that it
will adopt will be limited by the ethical values of the organization.
The value statements are given below, as an example:
(c
Ford Foundation – Our Values

Personal honesty, integrity, commitment; working together in
teams — with openness and trust; empowering others and
respecting differences; encouraging risk-taking and responsibility;
80 enjoying our work and our families. Behaviours that form part of
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Notes the firm’s values are shown in Figure 4.2:
___________________
Cost-effective
___________________ Excellent Perfo
Philosophy
E
___________________ Bureaucratic
Flexibility
___________________
Responsiveness
___________________ Training
R&D
___________________
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Long-term
Fulfilment
___________________
Risk-taking
Responsibility
___________________
Competition
___________________ Expertise
Stability
___________________ Adaptability
Trust
Control
Innovation
Profit
Quality
Improvement
Communication
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Teamwork
Results
Env. awareness
Customer Satisfaction
Alliances
Superior pond
Org. growth
Market focus
0 1 2 3 4 5 6
Figure 4.2: Behaviours that Form Part of the Firm’s Values

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As with vision and its mission, the organizational values provided

should be clear to provide answers to what strategic options are
acceptable to the organization. It should add to the sense of
organizational identity and business purpose and identify the
areas of value-addition of the organization in its business. The
Values of an organization are often built with associations. You
create a simple and consistent message of who you are, what you’re
looking for, and your uniqueness as differentiated from others.
(c
For example, what does Pillsbury mean? Pillsbury perhaps means

a lot because it is identified with high quality dough products. The
two of the biggest names that have emerged in the past decade are
Amazon and Starbucks. Does Starbucks mean coffee? Absolutely
not. But we get to know a company and that starts to create an 81
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image. It is linked in customers’ minds with attributes or benefits. Notes
Activity
Identity, is the answer to the question, “Who are we?” The Tatas List ___________________
five potentially vulnerable
areas for a business without a
have been advertising, “Tata, a century of trust”. This corporate ___________________
stated company mission.
identity reflects the personalities and values of the founders and
E
___________________
its management. It envelops the whole group of industries
operating in different areas of business and the economy. ___________________
___________________
Check Your Progress
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___________________
___________________
1. All organizations have no values.
___________________
2. Values are already part of the attitudes and culture of
___________________
the organization.
___________________
Business and the Nature of its Objectives

A business (also called firm or an enterprise) is a legally recognized
organizational entity. The classical economic theory of profit
maximization implies that a business has a single objective, that
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is, to make profit. In other words, the owners and operators of a
business have as one of their main objectives the receipt or
generation of a financial returns in exchange for work and
acceptance of risk. But organizations that exist only to produce
profit don't last long. And organizations that don't pay attention to
profits can not exist to fulfil their long-term purpose.
While pursuing the objective of earning profit, business units
cannot ignore the interests of its employees, customers, the
community, as well as the interests of society as a whole. Many
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values studies have shown that profits follow from fulfilling the
purpose or strategic intent of the organization. Profits are a reward
depending on the value of the service the firm gives to others.
Based on the argument above, the nature of business objectives
can vary significantly. The nature depends on the perspective the
firm takes, from an economic to a global perspective. Based on
their nature and content, objectives may be described to be any of
the following:
(c
z Economic Objectives
z Social Objectives
z Human Objectives
z Global Objectives
82
Economic Objectives
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Notes
Economic objectives refer to earning profit and other objectives
___________________ necessary to achieve the profit objective. Profits must be earned to
___________________ ensure the survival of business, its growth and expansion over
time. In order to achieve this primary objective, the firm also has
E
___________________
to include the following:
___________________
___________________ z Customers: A business unit cannot survive unless there are

customers to buy the products and services. Profits are earned
___________________
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when a firm provides quality goods and services at a
___________________
reasonable price. Survival depends on maintaining a satisfied
___________________ customer base.
___________________ z Innovations: Innovation means improvement in products,
___________________ process of production and distribution of goods. Business units,
through innovation, are able to reduce cost by adopting better
methods of production and also increase their sales by
attracting more customers because of improved products.
z Resources: Business activities require various resources like

men, materials, money and machines. For example, capital is
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required to buy machinery, raw materials, employ men and
have cash to meet day-to-day expenses. The availability of
these resources is usually limited and companies have to make
the best possible use of these resources.
Economic objectives, therefore, need to include all these aspects

which ensure the well being of the firm in the long run.
Social Objectives
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Social objectives are those objectives, which benefit society. Since

business operates in a society by utilizing its scarce resources, the
society expects something in return for its welfare. These
expectations are reflected in the social objectives of the business
which may include:
z Production and supply of quality goods and services,
z Adoption of fair trade practices,

(c
z Ensuring a minimal ecological footprint, and
z Contribution to the general welfare of society.

Human Objectives 83
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Notes
Human objectives refer to the objectives aimed at the economic Activity
well-being as well as fulfilment of expectations of employees and Discuss a time when you
___________________
established objectives for your
the community. Employees must be provided with fair ___________________
team. What process was
remuneration and incentives for performance. Their social and
E
used? Were others involved in
___________________
psychological satisfaction must be ensured. Employees as human setting the objectives?
beings want to grow. Their growth requires proper training as well ___________________
as development. Business can prosper if the people employed can ___________________

improve their skills and develop their abilities and competencies in
UP
___________________
course of time. Thus, it is important that business should arrange
___________________
training and development programs for its employees.
___________________
Global Objectives
___________________
Today, the entire world has become one big market. Goods
___________________
produced in one country are readily available in other countries.
Global objectives are those objectives that make it possible for a
business to survive in the globalised marketplace. To face from
global players, businesses have to reflect this phenomenon in their
objectives. These may range from making available globally
competitive goods and services to competing in global markets with
CE
there competitors. Very often, these objectives may reflect
important national objectives, e.g. create opportunities for gainful
employment of people; investment in national priority areas,
raising the general standard of living, export substitution, etc.
Most businesses must accomplish similar functions regardless of
size, legal structure or industry. These functions are often
organized into departments. The role of business objectives is to
ensure the viability of the organization moving right through the
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organization up to the level of the individual and department.
Check Your Progress

Fill in the blanks:
1. A business is a legally recognized ………………… entity.
2. …………………objectives refer to earning profit and
other objectives necessary to achieve the profit objective.
(c
Organization’s Objectives
The strategic intent provides an insight into way in which
organizations is supposed to work. The role that objectives play in
84 realizing this is important. The mission statement lists out a
S
Notes particular set of tasks that the organization has to carry out in
___________________ order to fulfil the vision of the organization. It sets out priorities of
how the purpose of the organization can be fulfilled and identifies
___________________
the particular need of society the organization will satisfy.
E
___________________
Objectives define the organization’s relationship with the
___________________
environment and help the organization to pursue its mission. They
___________________ also provide the standards by which the performance of the
___________________ organization can be judged. But most important, as strategies
UP
consist of a set of objectives, the objectives determine the strategies
___________________
of the organization.
___________________
Firms choose their objectives to reflect the demands of their many
___________________
stakeholders.
___________________
Strategic Corporate Strategic

Mission
Business 56 Us’ Business

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Process Critical Processes Process
Individual Departments KRAs & Individual

Objectives Individual Managers Performance
Performance
Rewards & Consequence

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Figure 4.3: Objectives at Different Levels
Objectives of an organization form a hierarchy on a similar basis

as that for strategic choice, discussed earlier. This is shown in
Figure 4.3. The hierarchy ranges from the broad aim to specific
individual objectives. The long-term intentions of the organization
provide a focus for setting the objectives. They are expressed
qualitatively in the form of a mission statement. The zenith of the
hierarchy is the mission of the organization. This produces the
Strategic Objectives or Corporate Goals.
(c
At the second level are the operations of the Strategic Business

Units (SBUs) in a diversified organization, or critical processes in a
single unit organization. For example, in a single unit organization
manufacturing commercial vehicles, these could be Marketing, 85
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Manufacturing, or Quality Control. In a diversified organization, Notes
this would imply each major commercially oriented activity of the ___________________
firm, or each of its units. These are the Business Process
___________________
Objectives.
E
___________________
At a lower level that reflects the operations of a department the
objective are more specific. These are generally the Key Result ___________________
Areas (KRAs). The objectives are translated further down the line ___________________
to the individual managers and down to the lowest level of the
UP
___________________
organization. It may be necessary to sub-divide objectives into
___________________
functional work-tasks so accountability can be assigned to a single
individual. ___________________
Much of management literature talks of long-run and short-run ___________________
objectives. Long-run objectives focus on long-term performance and ___________________

short-run objectives focus on short term performance. Generally
the span of a short-run objective is 1-2 years, while the span of a
long-run objective is 3-5 years. Some planners try to emphasis that
a difference exists between goals and objectives – in that case you
should clearly define the difference. But for the majority of the
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managers there is very little difference between the terms.
Corporate Goals or Strategic Objectives are normally long-term
objectives, but often incorporate short-run objectives. Short-run
objectives play a significant part in assessing and determining
whether the speed and level of performance being aimed for is
being achieved. They also provide a stepping stone towards
attaining the long-term performance.
Check Your Progress

)C

1. The strategic intent provides an insight into way in
which organizations is supposed to work.
2. Firms do not choose their objectives to reflect the
demands of their many stakeholders.
Summary
(c
Strategies surface at different tiers in the organization hierarchy

depending on the architecture of the organization. The first task of
Strategic Management is formulating the organization's vision,
mission, and value statements. Strategic intent is the choices the
86 firm makes and is reflected in the vision, mission and value
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Notes statements. These statements define the choices - what to do and
___________________ what not to do. They establish the basis for identifying acceptable
strategic alternatives. The idea that an organization might be
___________________
guided by its vision, mission, and values is a key part of strategic
E
___________________
thinking. Whatever, the eventual architecture of the organization,
___________________ the vision statement encompasses the organization in all its forms.
___________________ The vision of the organization leads to its Mission and its values.
The vision of an organization consists of two major components,
___________________
UP
the ideology and the envisioned future of the organization.
___________________ Corporate values can be defined, in a classical sense, as beliefs that
___________________ help companies make choices among available means and ends and
___________________
the behaviours they inculcate. Technically values reflect the
weight which corporate decision-makers attach to alternative goals
___________________
when making their decisions. It provides an explicit depiction of
values to guide the organization in choosing among competing
priorities, thereby setting the organization apart from others.
Objectives should be balanced. They should incorporate
requirements that will involve all members of the organization.
The SMART Formula is a useful method of examining objectives.
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Objectives should be specific, measurable, achievable, realistic and
timely.
Lesson End Activity

Distinguish between mission and goals of an enterprise. What do
you think to be the mission of Indian Airlines, Britannia, and the
Steel Authority of India Ltd? How are these determined?
This question requires students to demonstrate an understanding
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of MISSION and how its role in developing the strategies for the
organization.
Keywords
Business Process Objectives are specific, measurable Objectives
that are developed at all levels of the enterprise or company. The
Objectives represent managerial commitment to achieve specific
(c
and measurable performance targets in a measurable time frame.

Critical Success Factors are the critical factors that need to be
kept in view to ensure organizational success.
87
Economic Objectives refer to earning profit and other objectives
S
Notes
necessary to achieve the profit objective.
___________________
Global Objectives are those objectives that make it possible for a
business to survive in the globalised marketplace. ___________________
E
___________________
Human Objectives refer to the objectives aimed at the economic
well-being as well as fulfilment of expectations of employees and ___________________
the community. ___________________
Key Result Areas (KRAs) are areas where performance is
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___________________
essential for the ongoing success of the enterprise.
___________________
Mission is the founders' intentions at the outset of the
___________________
___________________
Social Objectives are those objectives, which benefit society.
___________________
Strategic Objectives are the goals of the whole enterprise and
reflect the firm's aims. This set of objectives is a commitment of the
organization to direct efforts and energy on what needs to be
accomplished. They also provide a benchmark for judging
organizational performance.
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Values manifest in what the organization does as a group and how
it operates. It is a guide to ways of choosing among competing
priorities and about how to work together.
Vision is a long-term perspective of what is the final destination of
the organization.

1. "Employees have a greater role to play in formulating
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strategy". Comment.
2. When is a good time to formulate strategy? Explain with
reasons according to your understanding.
3. What is strategic intent and how does it determine the
survival of the organization?
4. What are the major characteristics of Vision Statements?
5. Describe the essential characteristics of a mission statement.
(c
How are mission statements generally formulated?

6. What are the major elements in the hierarchy of objectives and
how are they interrelated to each other?
88
Further Readings
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Notes
___________________ Books
___________________ Rao, VSP & Hari, Krishna V (2003). “Strategic Management – Text
E
___________________
___________________ Richard, Lynch (2006). “Corporate Strategy.” Pearson Education

Ltd.
___________________
___________________
UP
___________________
Education.
___________________
___________________
Web Readings
http://hbr.org/2005/07/strategic-intent/ar/1
http://www.unsw.edu.au/about-us/strategic-intent
http://www.alagse.com/strategy/s9.php
http://gwmoon.knu.ac.kr/Lecture_Library_Upload/Strategic_Intent.
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pdf
http://wiki.answers.com/Q/What_is_a_strategic_intent_of_an_orga
nisation
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(c
UNIT 5: Case Studies
Unit 5
89
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Notes
Case Study
___________________
___________________
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___________________
Objectives
___________________
After analyzing this case, the student will have an appreciation of the
concept of topics studied in this Block. ___________________
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___________________
___________________
Case Study: Formulating a Strategy – Following Apple
Turnaround ___________________
The firm's most important resources and capabilities are those ___________________
which are durable, difficult to identify and understand, imperfect
___________________
transferable, not easily replicated, and in which the firm
possesses clear ownership. These are the company's 'most
important assets' and need to be protected; and they play a
pivotal role in the competitive strategy which the company
pursues. The essence of strategy formulation, then, is to design a
strategy that makes the most effective use of these core resources
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and capabilities. Consider, for example, the remarkable
turnaround of Apple, the computer company behind the
Macintosh computers, between 2000 to date. Fundamental was
Steve Job's recognition that the company's sole durable, non-
transferable, irreplicable asset was Apple image and the loyalty
that accompanied that image. In virtually every other area of
competitive performance – production cost, quality, product and
process technology, and global market scope – Apple was greatly
inferior to its other rivals, such as IBM.
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Apple's only opportunity for survival was to pursue a strategy

founded upon Apple's image advantage, while simultaneously
minimising Apple' disadvantages in other capabilities. Apple' new
marketing strategy involved extending the appeal of the Apple
image of individuality from its traditional customer group (tech
savvy, graphic designers) to more a general, young professional
types. Protection of the Apple name by means of tougher controls
over dealers was matched by wider exploitation of the Apple name
through entry in other industries such as the portable music
business. Apple's share of the computer market went from 15% in
(c
1985 to 4% in 2005 and lost around $700 million in only three

months in 1997. However, thanks to the iPod and to the Apple's
iTunes music stores, its shares grew 90% between 2001 up until
Contd…
90 today, i.e. from a mere $7/share. Apple is today the premier
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Notes provider of MP3 players.
___________________ Designing strategy around the most critically important resources
and capabilities may imply that the firm limits its strategic scope
___________________
to those activities where it possesses a clear competitive
E
___________________ advantage. The principal capabilities of Apple are in design and
___________________ new products development; it lacked both the manufacturing
capabilities to compete effectively in the world's computer market.
___________________
Apple's turnaround from year 2000 followed it decision to
___________________ specialise upon design and new product development. The ability
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of a firm's resources and capabilities to support a sustainable
___________________
competitive advantage is essential to the time frame of a firm's
___________________ strategic planning process. If a company's resources and
___________________ capabilities lack durability or are easily transferred or replicated,
then the company must either adopt a strategy of short-term
___________________
harvesting or it must invest in developing new sources of
competitive advantage. These considerations are critical for small
technological start-ups where the speed of technological change
may mean that innovations offer only temporary competitive
advantage.
The company must seek either to exploit its initial innovation

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before it is challenged by stronger, established rivals or other
start-ups, or it must establish the technological capability for a
continuing stream of innovations. The main issue for Apple is to
make sure that it takes advantage of this window of opportunity.
Because there are tougher competitors down the road and the
more money it makes, the more companies will enter the market
making harder for Apple to sustain this new found competitive
advantage. In industries where competitive advantages based
upon differentiation and innovation can be imitated (such as
financial services, retailing, fashion clothing, toys), firms have a
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brief window of opportunity during which to exploit their

advantage before imitators erode it away. Under such
circumstances firms must be concerned not with sustaining the
existing advantages, but with creating the flexibility and
responsiveness that permits them to create new advantages at a
faster rate than the old advantages are being eroded by
competition.
Question:
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Critically analyse the above case.

Source:http://www.bestcxo.com/strategicmanagement/formulating-a-strategy-following-appleturnaround/
UNIT 6: Formulating Business Strategy
91
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Notes
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___________________
___________________
BLOCK-II
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92
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Notes
UNIT 6: FORMULATING BUSINESS STRATEGY
___________________ UNIT 8: SWOT AND VALUE CHAIN ANALYSIS
z Introduction z Introduction
___________________
z Business Level Strategy z SWOT Analysis: An Introduction
E
___________________
z Concept of Competitive Advantage z Analysis of the Firm against Competition
___________________
z Key Success Factors z The SWOT Matrix
___________________
z Value Chain: An Introduction
UNIT 7: FORMULATING CORPORATE STRATEGY
___________________
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z Value Chain Analysis
z Introduction
___________________
z Corporate Strategy UNIT 9: PORTFOLIO ANALYSIS AND STRATEGIC
___________________ ALLIANCE
z Single Business Units (SBUs)
___________________ z Introduction
z Diversification
z Portfolio Analysis
___________________
z Strategic Alliances
z Value through Corporate Strategy
UNIT 10: CASE STUDY

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Unit 6
93
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Notes
Activity
Critically analyse the strategy
Formulating Business Strategy
___________________
at business level of any
___________________
organisation with which you
are aware of.
E
___________________
Objectives
___________________
topics: ___________________
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\ Business Level Strategy ___________________
\ Concept of Competitive Advantage ___________________
\ Key Success Factors
___________________
___________________
Introduction
___________________
In a tidy logical world, any process of choice could be rational.
Identifying and choosing options would be done purely analytically.
This is not necessarily true. Identifying and evaluating options and
then exercising it for strategy formation is a complex process.
Actually, it may be difficult to identify all possible options with
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equal clarity, or at the same time. The future may evolve
differently from any of the options. Unexpected events can create
new opportunities, destroy foreseen opportunities, or alter the
balance of advantage between opportunities. The results may
eventually depend as much on chance and opportunity as on the
deliberate choice. Good fortune and inspiration play a large role in
organization success and failure, too. No one yet knows enough
about effective strategic management to model it fully, making it
more art than science.
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Business Level Strategy

Business strategies are basically competitive strategies. The
objectives of these strategies are about how to compete successfully
in particular markets, and how can the business units acquire
competitive advantage. This is an area of principle concern to
managers. It provides the framework that guides competitive
positioning decisions. It examines the way in which an
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organization can compete more effectively to strengthen its market

position.
The purpose of the competitive strategy of a business is to build a
sustainable competitive advantage over the organization’s rivals.
94 This means the ability to anticipate correctly how businesses
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Notes respond strategically to competitive threats and opportunities.
___________________ Michael Porter in his book, ‘Competitive Strategy has provided the
framework for business strategies. This is the framework of
___________________
‘Generic Strategies’.
E
___________________
___________________ Generic Strategies

___________________ There are two basic types of competitive advantage a firm can
possess: low cost or differentiation. The two basic types of
___________________
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competitive advantage combined with the scope of activities for
___________________ which a firm seeks to achieve them, lead to three internally
___________________ consistent generic competitive strategies. These strategies are:
___________________ z Cost Leadership,
___________________ z Differentiation, and
z Focus Strategies.
These strategies can be used by the organization to outperform
competition and defend its position in the industry. The Generic
Competitive Strategies are shown in Figure 6.1. These strategies
need to be examined in conjunction with the ‘competitive
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capabilities’ of the organization and the external environment.
Effectively implementing any of the generic competitive strategies
usually requires total commitment and determined organizational
support. There needs to be compatibility between corporate level
strategy and the strategy at the operational level.
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Figure 6.1: Generic Competitive Strategies

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Cost Leadership Strategy

A firm pursuing a cost-leadership strategy attempts to gain a
competitive advantage primarily by reducing its economic costs
below its competitors. This policy once achieved provides high 95
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margins and a superior return on investments. Notes
The skills and resources required to be successful in this strategy ___________________

are sustained capital investment and access to capital; superior ___________________
process engineering skills; good supervision and motivation of its
E
___________________
labour force; product designed for ease in manufacturing;
low-cost distribution system. The organization attempts to exploit ___________________
economies of scale by aggressive construction of efficient economies ___________________

of scale through:
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___________________
z volume of production and specialized machines ___________________
z volume of production and cost of plant and equipment ___________________
z volume of production and employees specialization ___________________
z volume of production and overhead costs ___________________
This strategy requires tight cost control. This is often done by

using a full costing method or activity based costing with frequent
and detailed control reports. The structure of the organization
should be clear-cut and responsibilities clearly laid out.
Organizations often provide incentives based on meeting strict
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quantitative targets, etc.
In order to remain a cost leader, the firm attempts to avoid those
factors that can cause the economies of scale to be affected. It has
to work within the physical limits to efficient size; worker
motivation; and focus on markets and suppliers, sometimes, in
restricted geographical areas. Firms that are known to have
successfully used this strategy in a number of their businesses
include Black and Decker, Texas Instruments, and Du Pont.
)C
The low-cost producer strategy works best when buyers are large
and have significant bargaining power; price competition among
rival sellers is a dominant competitive force; the industry's product
is a standard item readily available from a variety of sellers; there
are not many ways to achieve product differentiation that have
value to the buyer; buyers incur low switching costs in changing
from one seller to another and are prone to shop for the best price.
A low-cost leader is in the strongest position to set the floor on
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market price and this strategy provides attractive defences against

competitive forces. Its cost position gives it a defence from
competitors because its lower costs mean that it can still earn
returns after its competitors have competed away their profits
96 through rivalry. It is protected from powerful buyers because
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Notes buyers can exert power only to lower prices, and this will be
___________________ possible only with next most efficient competitor. Lower cost
provides protection against suppliers because there is more
___________________
flexibility in the organization to cope with input cost increases.
E
___________________
Any new entrant will find it difficult to overcome entry barriers
___________________ because of scales of economy and as the activities taken to achieve
___________________ low costs are both rare and costly to imitate.
___________________ Finally, it places the organization in a favourable position when
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pitted against substitutes compared to competitors in the industry.
___________________
___________________
Cost leadership is valuable if:
___________________ z Buyers do not value differentiation very much
___________________ z Buyers are price-sensitive

z Competitors will not immediately match lower prices
z There are no changes in:
consumer tastes
technology
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exogenous prices/costs
There are a number of risks in using this strategy. These risks
relate to the fast changing business environment. The most
important risk to cost leadership is technological change that
nullifies past investment or learning of the organization.
Sometimes the inability of the management to see or anticipate the
changes required in the product or market change, is a risk. The
organization’s advantage can also be neutralized if there is low cost
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learning by industry newcomers or inflation in costs of supplies or

processes that provide the organization a competitive advantage.
Differentiation Strategy
In a differentiation strategy a firm seeks to be unique in its
industry along some dimensions that are widely valued by buyers.
It selects one or more attributes that many buyers in an industry
perceive as important, and uniquely positions it to meet those
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needs. Differentiation will cause buyers to prefer the company's

product/service over brands of rivals. An organization pursuing
such a strategy can expect higher revenues/margins and enhanced
economic performance.
97
The challenge is finding ways to differentiate that create value for
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Notes
buyers and that are not easily copied or matched by rivals.
Anything a company can do to create value for buyers represents a ___________________
potential basis for differentiation. Ways to differentiate products / ___________________
services include:
E
___________________
z Product features
___________________
z Linkage between functions ___________________
z Timing
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___________________
z Location / convenience ___________________
z Product mix ___________________
z Links with other firms ___________________
z Customization ___________________
z Product complexity / sophistication

z Marketing (image, etc)
z Service and support
Successful differentiation creates lines of defence against the five
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competitive forces. It provides insulation against competitive
rivalry because of brand loyalty of customers and hence lower
sensitivity to price. The customer loyalty also provides a
disincentive for new entrants who will have to overcome the
uniqueness of the product or service. Competitors are not likely to
follow a similar approach if Buyers value the differentiated
products and services. If they do, this will lead to a lose-lose
situation for them.
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The higher returns of the strategy, provides a higher margin to

deal with supplier power. Buyer power is mitigated as there are no
comparable alternatives. Finally a company that has differentiated
itself to achieve customer loyalty should be better placed to
compete with substitutes than its competitors. Some successful
examples of this strategy are Mercedes in Automobiles, Bose in
Audio Systems, and Caterpillar in construction equipment.
Competitive advantage through differentiation is sustainable if the
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activities taken to achieve differentiation are rare and costly to

imitate. The most appealing types of differentiation strategies are
those least subject to quick or inexpensive imitation.
Differentiation is most likely to produce an attractive, long-lasting
98 competitive edge when it is based on technical superiority, quality,
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Notes giving customers more support services, and on the core
___________________ competencies of the organization.
___________________ Differentiation requires the organization to have some of these
skills and resources:
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___________________
___________________ z Strong marketing abilities
___________________ z Good product engineering

___________________ z Creative flair
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___________________ z Corporate reputation for quality or technological leadership
___________________ z Strong cooperation from channels
___________________
z Strong coordination among functions
___________________
z Amenities to attract highly skilled labour, scientists, or
creative people
Differentiation strategy works best when there are many ways to
differentiate the product/service and these differences are
perceived by buyers to have value or when buyer needs and uses of
the item are diverse. The strategy is more effective when not many
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rivals are following a similar type of differentiation approach.
There are risks in this strategy when the cost of differentiation
becomes too great or when buyers become more sophisticated and
need for differentiation falls.
Focus and Niche Strategies

The generic strategy of focus rests on the choice of a narrow
competitive scope within an industry. The focuser selects a
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segment or group of segments in the industry, or buyer groups, or

a geographical market and tailors its strategy to serving them to
the exclusion of others. The attention of the organization is
concentrated on a narrow section of the total market with an
objective to do service buyers in the target niche market. The idea
is that they will do a better job than the rivals, who service the
entire market. Each functional policy of the organization is built
with this in mind.
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There are two aspects to this strategy, the cost focus and the
differentiation focus. In cost focus a firm seeks a cost advantage in
its target market. The objective is to achieve lower costs than
competitors in serving the market – this is a low cost producer
strategy focused on the target market only. This requires the 99
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organization to identify buyer segments with needs/preferences Notes
that are less costly to satisfy as compared to the rest of the market. ___________________
Differentiation focus offers niche buyers something different from
___________________
other competitors. The firm seeks product differentiation in its
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target market. ___________________
Both variants of the focus strategy rest on differences between a ___________________
focuser's target market and other markets in the industry. The ___________________
target markets must either have buyers with unusual needs or else
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___________________
the production and delivery system that best serves the target
___________________
market must differ from that of other industry segments.
___________________
Cost focus exploits differences in cost behaviour in some markets,
while differentiation focus exploits the special needs of buyers in ___________________
certain markets. A focuser may do both to earn a sustainable ___________________

competitive advantage though this is difficult. Examples of focus
strategies are Rolls Royce in luxury automobiles; Apple Computer
in Desktop Publishing.
Focus strategy is successful if the organization can choose a
market niche where buyers have distinctive preferences, special
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requirements, or unique needs and then developing a unique
ability to serve the needs of the target buyer segment. Even though
the focus strategy does not achieve low cost or differentiation from
the perspective of the market as a whole, it does achieve this in its
narrow target. However, the market segment has to be big enough
to be profitable and it has growth potential.
The organization has to identify a buyer group or segment of a
product line that demands unique product attributes.
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Alternatively, it has to identify a geographical region where it can

make such offerings.
Focusing organizations develop the skills and resources to serve
the market effectively. They defend themselves against challengers
via the customer goodwill they have built up and their superior
ability to serve buyers in the market. The competitive power of a
focus strategy is greatest when the industry has fast-growing
segments that are big enough to be profitable but small enough to
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be of secondary interest to large competitors and no other rivals

are concentrating on the segment. Their position is strengthened
as the buyers in the segment require specialized expertise or
customized product attributes.
100
A focuser's specialized ability to serve the target market niche
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Notes
builds a defence against competitive forces. Its focus means that
___________________
either the organization has a low cost position with its strategic
___________________ target, high differentiation or both. The logic that has been laid out
earlier for cost leadership and differentiation also is applicable
E
___________________
___________________ here.
___________________ Some of the situations and conditions where a focus strategy works
___________________
best are:
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___________________ z When it is costly or difficult for multi-segment rivals to serve
the specialized needs of the target market niche;
___________________
___________________ z When no other rivals are concentrating on the same target

segment;
___________________
z When a firm's resources do not permit it to go after a wider
portion of the market;
z When the industry has many different segments, creating

more focusing opportunities and allowing a focuser to pick out
an attractive segment suited to its strengths and capabilities.
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A focus strategist must beware of events that could impact the
target market. This can happen when broad-line, multi-segment
competitors may find effective ways to match the focused firm in
serving the narrow target market or the segment may become so
appealing that it is soon crowded with eager, aggressive rivals,
causing segment profits to be split.
Often the niche buyer's preferences and needs drift more and more
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towards the product attributes desired by the market as a whole,

this could be threatening. The focus strategy always implies some
limitation on the overall market share achievable. The strategy
involves a trade-off between profitability and sales volume.
Check Your Progress

Fill in the blanks:
1. ……………… strategies are basically competitive
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strategies.
2. In order to remain a ……………… leader, the firm
attempts to avoid those factors that can cause the
economies of scale to be affected.
Concept of Competitive Advantage 101
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Notes
Activity
Every business has a competitive strategy. However many
Take an organization with
___________________
strategies are implicit, having evolved over time, rather than which you are familiar, and
explicitly formulated from thinking and planning process. Implicit use___________________
relevant tools and
strategies lack focus, produce inconsistent decisions, and
E
frameworks to identify and
___________________
assess the potential sources
unknowingly become obsolete. Without a well-defined strategy,
of competitive advantage. To
___________________
organizations will be driven by current operational issues rather what extent will the
than by a planned future vision. Porter’s model provides a process ___________________
sustainability of this
to make your competitive strategy explicit so it can be examined competitive advantage
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___________________
depend upon the
for focus, consistency, and comprehensiveness. ___________________
organization’s strategic
Developing a competitive strategy is developing a broad framework capabilities or its position
___________________
within the industry?
for the business - how is it going to compete; what are its
___________________
objectives; and what policies will be needed to carry out its
objectives. The competitive strategy is a combination of ‘ends’ for ___________________
which an organization is striving and ‘means’ by which it is

seeking to get there. It gives the firm a competitive advantage.
Competitive advantage is a position a firm occupies against its
competitors, allowing it to earn revenues higher than costs,
including cost of capital. A firm possesses a sustainable
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competitive advantage when its value-creating processes and
position cannot be duplicated or imitated by other firms. As
mentioned earlier in the last section, competitive advantages are
cost advantage and differentiation advantage. They are collectively
known as positional advantages because they denote the firm's
position in its industry as a leader in either superior services or
cost.
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Figure 6.2: Competitive Advantage Framework

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Creating competitive advantage involves the consideration of four

key factors. These are shown in 6.2. These factors determine what
a company can successfully accomplish. The factors that are
internal to the organization are its strengths and weaknesses and
102 the values of its key personnel; the factors that are external to the
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Notes organization are the industry opportunities and threats and
___________________ societal expectations. These factors combine to provide the basis
and limits to the competitive strategy a company can successfully
___________________
adopt. The appropriateness of the competitive strategy can be can
E
___________________
be determined by testing the proposed objectives and policies for
___________________ consistency.
___________________ A business must adopt a strategy that enables it to secure the
___________________ resources needed to effectively remain at the cutting edge of
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operational and technological advances in the pursuit of creating
___________________
and retaining the customers the firm wants. This is the first
___________________
requirement. History is rife with firms that failed to see new
___________________ technologies coming. Christensen uses the example of the diesel
___________________ locomotive to illustrate how disruptive technologies “sneak up”
until it is too late for the previously dominant firms to respond.
When the diesel locomotive was introduced, it did not match the
performance of the steam locomotive. Baldwin, the leading
locomotive manufacturer, scoffed at this upstart and proclaimed,
“They will never replace the steam locomotive!” This was true for
some time, but little by little, diesel locomotives improved and
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before Baldwin knew it, by 1950 diesels had the lion’s share of the
market. By then it was too late for Baldwin to respond.
Second, ‘competitive advantage’ is also created when resources and
capabilities owned exclusively by the organization can generate
unique core competencies. This advantage is sustainable due to the
lack of substitution and imitation capacities by the organization’s
competitors. As the core competencies are unique, the benefits
derived from these advantages are retained inside the
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organization; they are not appropriated by others.

Finally, competitive advantage can come from a strong and
supportive value chain. The members of the chain look at the
benefits that accrue to the entire value chain. Such cooperation is
possible and often seen in such value chains, e.g. increasing
productivity, reducing stocks at different levels, or process
improvements etc., are undertaken by members of the value chain
and the advantages that accrue benefit all members of the value
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chain. In addition, it is able to provide greater value to the

customer.
These broad considerations in an effective competitive strategy, to
gain sustainable competitive advantage, can be extended into a
generalized approach to the formulation of strategy. In order to do 103
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the organization must be in a position to answer the following Notes
questions: ___________________
z What is the current strategy, implicit or explicit? ___________________
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z What assumptions have to hold for the current strategy to be ___________________
viable?
___________________
z What is happening in the industry, with our competitors, and ___________________
in general?
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___________________
z What are our growth, size, and profitability goals?
___________________
z What products and services will we offer?
___________________
z To what customers or users? ___________________
z How will the selling/buying decisions be made? ___________________
z How will we distribute our products and services?

z What technologies will we employ?
z What capabilities and capacities will we require?
z Which ones are core?
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z What will we make, what will we buy, and what will we
acquire through alliance?
z What are our options?
z On what basis will we compete?
Although the process may seem intuitively clear, answering these
questions involves a great deal of penetrating analysis. It is in
answering these questions that the organization its finds the
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competitive strategy most suited to it.

Sustainable competitive advantage is built upon corporate
capabilities and must constantly be reinvented. Distinctive
capabilities are the basis of competitive advantage. Organizations
have found many offensive and defensive actions to defend their
position in the industry and cope with competitive forces.
Check Your Progress

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1. Not every business has a competitive strategy.
2. Creating competitive advantage involves the
consideration of four key factors.
104
Key Success Factors
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Notes
Activity
A Key Success Factor (KSF) is a performance area of critical
How___________________
can you use Key
Success Factors to analyze importance in achieving consistently high productivity. There are
the ___________________
position of the firm in the at least two broad categories of key success factors that are
common to virtually all organizations: business processes and
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industry?
___________________
___________________
human processes. Both are crucial to building great companies. If
your company is especially good in those processes and just
___________________
mediocre at everything else, your company will be successful.
___________________
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Focus has to be on a few activities – on those most important
___________________ activities – on those two or three (no more) key success factors. For
___________________ example, in the computer software market, the key success factors
___________________
are establishing efficient channels of distribution and providing
after-sales support. Too much concern about writing "efficient
___________________
code" may be a technical nicety, but from a competitive point of
view, it's a waste of resources. Similarly, in the strategy consulting
business, the key success factors are communicating with
executive decision makers and helping managers think more
deeply about their enterprise than they ever have before. Time
spent on controlling expenses is not critical.
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Key Success Factors are defined by the market and by the customer,
not by the company. They revolve around skills, processes and
systems. There are many ways to identify the company’s KSFs. One
of the methods is through brainstorming. Ask your planning team to
provide two or three answers (but no more) to the question, “For our
organization to be successful, we must be especially good at the
following activities …”
Ask everyone in the room to first spend a few moments thinking
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about the question and writing their individual answers. Then

have each person read their own answers aloud. Next discuss any
differences of opinion, and finally arrive at a consensus. Record
your team's final answers. You've developed a short list of
"activities at which we've got to be especially good."
And when itemizing your internal strengths and internal
weaknesses, you’ll want to keep your lists short and well focused.
You’ll want to include only those strengths and weaknesses which
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relate to your key success factors. Thus your key success factors
will serve as a guide in determining which potential strengths, and
which potential weaknesses you actually include in your lists.
These are normally two or three activities which are the primary 105
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determinants of success. Notes
___________________
___________________
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___________________
___________________
___________________
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___________________
___________________
___________________
___________________
Figure 6.3: Key Success Factors
___________________
You can transfer your results to the matrix shown as Figure 6.3.
Sorting these results based on the probability of occurrence and
the probable impact on the company, you can prune the list to 3 or
4 KSFs. Items that fall in the first column of the chart are most
probably Key Success Factors (KSFs). The items that fall in the
first two rows are factors on which the company needs to focus on.
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Identifying KSFs is a good cornerstone of a firm’s strategy.
Winning competitive advantage often hinges on being distinctively
better than rivals at one or more of the KSFs.
To generate an industry matrix identify 4 to 5 factors that appear
to determine current and expected success in the industry. Once
the KSFs have been identified, these can be used to analyze the
position of the firm within the industry.
z Give yourself a score on each KSF and also give a score to
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competition on a scale of ten (ten is outstanding). Each rating

is a judgment regarding how well that company is currently
dealing with each key success factor.
z Assign a weight to each factor from 1 to 0. The higher the value,
the more important is the factor. The total of the weights for all
the factors must add up to 1.
z In the table shown below, multiply the weight in Column 2 for
each factor times its rating in Column 3 to obtain that factor's
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weighted score for our company. Similarly, Company A and

Company B can be rated.
z Finally, add the weighted scores for all the factors determine
the total weighted scores. This score indicates how well each
106 company is responding to current and expected key success
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Notes factors in the industry's environment. Compare your score
___________________ against competitors (highest score is probably doing the right
things better)
___________________
An industry matrix, shown as in Table 6.1, summarizes the key
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___________________
success factors within a particular industry.
___________________
Table 6.1: Industry Matrix
___________________
Key Weight Our Company Company Weighted
___________________
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Success Company B B Score
Factors Rating Rating Rating
___________________ Us A B
___________________
___________________
___________________
Total 1.00
The matrix is used to specify the position of the primary

competitors in the industry on each of the factors. The industry
matrix can be expanded to include all the major competitors within
an industry simply by adding two additional columns for each
additional competitor. Use score as benchmark in the future to
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improve your performance and success over time. What are our
differentiators and what sustainable competitive advantage can we
develop? What are our areas of weakness, and potential quick wins
to improve on our success?
Key success factors are indicators or milestones that measure your
business achievements and help determine how well you are
progressing towards your goals and objectives. The challenge is to
improve in these areas. The success of the initiatives, in both areas
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of business processes and human processes, and their

incorporation within the line organization, ultimately determines
the success of the firm. Key success factors are different from
strategic factors. Key success factors deal with an entire industry;
whereas, strategic factors deal with a particular company.
Check Your Progress

Fill in the blanks:
(c
1. A ……………….. is a performance area of critical

importance in achieving consistently high productivity.
2. Key success factors deal with an entire industry;
whereas, ………. factors deal with a particular company.
Summary 107
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Notes
Successful organizations create value in many different ways.
___________________
Competitive advantage stems from the provider’s ability to create
experiences that are regarded as valuable by the consumer. ___________________
Management has to increasingly look at its job as providing
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___________________
meaningful experiences, as value creation progressively bases
___________________
itself on intangibles, so that ‘value creation logic’ can be translated
into a coherent growth path. There are two basic types of ___________________
competitive advantage a firm can possess: low cost or
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___________________
differentiation. The two basic types of competitive advantage ___________________
combined with the scope of activities for which a firm seeks to
___________________
achieve them, lead to three internally consistent generic
competitive strategies. In a differentiation strategy a firm seeks to ___________________
be unique in its industry along some dimensions that are widely ___________________
valued by buyers. It selects one or more attributes that many
buyers in an industry perceive as important, and uniquely
positions it to meet those needs. Differentiation will cause buyers
to prefer the company's product/service over brands of rivals.
Differentiation is most likely to produce an attractive, long-lasting
competitive edge when it is based on technical superiority, quality,
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giving customers more support services, and on the core
competencies of the organization. Strategy of focus rests on the
choice of a narrow competitive scope within an industry. The
focuser selects a segment or group of segments in the industry, or
buyer groups, or a geographical market and tailors its strategy to
serving them to the exclusion of others. There are two aspects to
this strategy, the cost focus and the differentiation focus. In cost
focus a firm seeks a cost advantage in its target market. Creating
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competitive advantage involves the consideration of four key

factors. The factors that are internal to the organization are its
strengths and weaknesses and the values of its key personnel; the
factors that are external to the organization are the industry
opportunities and threats and societal expectations. These factors
combine to provide the basis and limits to the competitive strategy
a company can successfully adopt. A business must adopt a
strategy that enables it to secure the resources needed to
effectively remain at the cutting edge of technological advances in
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the pursuit of creating and retaining the customers the firm wants.
The three generic strategies are based on competing differently in
the marketplace. They construct different types of defences against
competitive forces to provide the firm a competitive advantage.
108 Cost leadership imposes severe burden on the organization to keep
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Notes up its position. It means the organization has to reinvest in
___________________ modern equipment so as to keep reaping all economies of scale. In
addition, it must keep honing its process engineering core
___________________
capability. Similarly, differentiation requires investments in a
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___________________
strong R&D on a continuous basis and the ability to attract the
___________________ right type of people into the company. A Key Success Factor (KSF)
___________________ is a performance area of critical importance in achieving
consistently high productivity.
___________________
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___________________
Lesson End Activity
___________________
What factors would you keep in mind while determining the value
___________________
chain for a low cost airline? In what areas would you keep the
___________________ Value Index less than 1?
This question requires students to demonstrate an understanding
of value chain and how its role in developing the strategies for
outsourcing and product differentiation.
Keywords
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Competitive strategy provides the framework that guides
competitive positioning decisions. It examines the way in which an
position and build a sustainable competitive advantage.
Competitive advantage is a company’s ability to outperform its
competitors, measured by having profitability greater than the
industry average.
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Cost focus exploits differences in cost behaviour in some markets.

In cost focus a firm seeks a cost advantage in its target market.
The objective is to achieve lower costs than competitors in serving
the market – this is a low cost producer strategy focused on the
target market only.
Cost-leadership Strategy: A firm pursuing a cost-leadership
strategy attempts to gain a competitive advantage primarily by
reducing its economic costs below its competitors.
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Differentiation strategy is when a firm seeks to be unique in its

industry along some dimensions that are widely valued by buyers.
perceive as important, and uniquely positions it to meet those 109
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needs. Notes
Focus: The generic strategy of focus rests on the choice of a narrow ___________________
competitive scope within an industry. The focuser selects a ___________________
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___________________
the exclusion of others. ___________________
___________________
Generic competitive strategies are those competitive strategies
that can be used by the organization to outperform competition
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___________________
and defend its position in the industry. ___________________
Inbound Logistics: These are inputs required and disseminated ___________________

by the organisation in order to produce the gods and services that
___________________
it offers.
___________________
Key Success Factor is a performance area of critical importance
in achieving consistently high productivity.
Margin is a profit that depends on the organization’s ability to
manage the linkages between all activities in the value chain.
CE
1. Discuss the significance of Cost Leadership Strategy.
2. Write brief note on Differentiation strategy.
3. Highlight some of the situations and conditions where a focus
strategy works best.
4. Explain KSFs with reference to Industry Matrix.
5. What are the three generic strategies with which operations
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strategy must be consonant?

6. How do these generic strategies differ and provide ‘competitive
advantage’?
Further Readings
Books
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Ltd.
110
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Notes
___________________
Education.
___________________
E
___________________
Web Readings
___________________
http://www.managementstudyguide.com/strategy-formulation-
___________________
process.htm
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___________________
http://nptel.iitm.ac.in/courses/IIT-
___________________ MADRAS/Management_Science_I/Pdfs/9_1.pdf
___________________ http://community.mis.temple.edu/mis5102sec401/files/2011/02/For
___________________ mulating-bus-strategies-from-a-business-perspective.pdf
http://ww1.ucmss.com/books/LFS/CSREA2006/EEE4485.pdf
http://www.enotes.com/strategy-formulation-reference/strategy-
formulation
http://www.agr.unizg.hr/cro/istrazivanja/projekti/ahead/doc/strateg
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ic_mgmt_2.pdf
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UNIT 7: Formulating Corporate Strategy
Unit 7
111
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Notes
Activity
Formulating Corporate Strategy
___________________
showing the Corporate
___________________
Strategy.
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___________________
Objectives
___________________
topics: ___________________
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\ Corporate Strategy ___________________
\ Single Business Units (SBUs) ___________________
\ Diversification
___________________
___________________
Introduction
___________________
In this unit, we deal with corporate strategy. The corporate level
strategies or grand strategies can be defined as the general plan
by which the organization intends to achieve its purpose and long
term objectives. Growth is the primary objective of most
organizations. If the firm stops growing, it will ultimately be
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replaced by others in the marketplace. Growth is often a
requirement for survival. Managements, also opt for growth
strategies in the belief that ‘bigger is better’. Profitable growth
generates cash, which allows an organization to fund further
growth without taking on excessive debt or diluting equity too
much. This provides the organization the advantages of retaining
its strategic freedom as well as enhancing its investment
potential.
)C
Corporate Strategy
Corporate strategy is dominated by the "domain choice" question.
It defines the product-market domain of the firm and describes the
firm’s scope of operations. At the corporate level, the firm faces
several strategic questions:
z What businesses should we compete in, given our strengths
and weakness?
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z Which new product markets should we enter?

z Which should we exit?
112
All these activities are related to the grand strategy of the
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Notes
organization. The specific tasks from that list that fall under the
___________________
domain of corporate strategy include:
___________________
z The mission of the firm;
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___________________
z Business segmentation i.e. selecting planning and
___________________ organizational focuses;
___________________
z Horizontal strategy i.e. pursuing synergistic linkages across
___________________ business units and searching for and exploiting potential
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___________________ interrelationships among the various business units of the
firm;
___________________
z Vertical integration i.e. defining the boundaries of the firm;
___________________
and
___________________
z The strategic posture of the firm i.e. identifying strategic
thrusts and planning challenges and establishing corporate
performance objectives in corporate, business and functional
key result areas.
Corporate Strategy binds the organization together. It sets the
guides and principles for the rest of the functions to follow. It is
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concerned with the type of business the organization is in, it
overall competitive position and how the resources of the
organization have to be deployed. They set the overall direction the
organization will follow. Figure 7.1 graphically represents the
structure of strategies in a firm.
)C
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Figure 7.1: Structure of Strategies

The strategic intent, or the mission of the firm, gives a broad 113
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direction to strategic choice. Depending on the nature and purpose Notes
of the organization, within this broad direction, there are a number ___________________
of specific options concerning the direction of developing the
___________________
organization’s strategies. However, these options are defined by
E
___________________
three major approaches. The appropriate approach depends upon
the state of the organization and the internal and external ___________________
environment of the firm. The organization can adopt any of the ___________________
approaches described below or it can combine the approaches
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___________________
in the options it exercises:
___________________
Growth Strategies: Long Term Strategies
___________________
Stabilization or Restructuring Strategies: Medium Term Strategies
___________________
Corporate Revival or Turnaround: Short Term Strategies
___________________
We will start by looking at growth strategies. Growth is the
primary objective of most organizations. If the firm stops growing,
it will ultimately be replaced by others in the marketplace. Growth
is often a requirement for survival.
Managements, also opt for growth strategies in the belief that
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‘bigger is better’. They keep attempting to increase the level of the
organization's operations. In the bargain, these strategies provide
career growth for them and employees of the organization. In a
nutshell, there is a perception in many management’s wherein
they:
z Equate growth with success,
z Potential of greater rewards, and
View a strategy of stability as long run failure.
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Profitable growth generates cash, which allows an organization to

fund further growth without taking on excessive debt or diluting
equity too much. This provides the organization the advantages of
retaining its strategic freedom as well as enhancing its investment
potential. Reliance Industries, Bajaj Auto are examples of this type
of growth.
The growth strategy can be based on external options as in the
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case of acquisitions and divestitures. Growth can also be through

direct expansion that is internally focused and does not involve
other firms: new product development; quality improvement;
114 increasing company size, revenues, operations, or workforce; and
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Notes from creating businesses within the organization.
___________________
Growth strategies are usually healthy, but can be misleading
___________________ indicators of the organizations general health and cash flow.
Unprofitable growth is not desirable. There are numerous
E
___________________
examples of this type of growth amongst Indian companies. Some
___________________
of the examples are Kulwant Rai Group of Companies, Southern
___________________ Petrochemical Industries Ltd., Nagarjuna Fertilizers. All these
___________________ companies have been traded at very high stock prices and today
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are not traded or the stock prices have fallen below the face value.
___________________
___________________
Very often, the organization has to pause before it goes ahead, if it
has issues exemplified in the Essar case above. This is when
___________________
stabilization strategies become necessary. In the case of Essar, the
___________________ company needed to stabilize to focus on factors such as
organizational weaknesses or lack of competitiveness. An
organization will opt for stabilization strategies when it needs to
have breathing space to reorganize its activities so that it can grow
more vigorously in the long term. These strategies are also called
‘restructuring’ strategies.
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Some of the factors that may lead an organization to decide to
restructure are changing technologies, the rise of competition,
management adjustments, deregulation, fluctuating exchange
rates, and changes in tax policy, etc.
If any of these factors becomes critical, it results in unprofitable
growth. Unprofitable growth allows debts to grow, increases
interest costs, and the overall cost of capital. Gradually, the
company loses its ability to pursue growth opportunities because of
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depressed stock prices and dwindling cash flows.

Hindustan Lever devised Project Millennium, a comprehensive
transformation strategy, to restructure itself and also to manage
the resultant changes. This envisaged a transition from being a
large, diversified conglomerate company to becoming a
configuration of empowered businesses, each business acting like a
virtual company built around a single category of products. These
strategies were medium-term and were meant to ensure long-term
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growth.
Corporate sickness is widespread in India and in many other
market economies and is on the increase because of “hyper-
competition” as a result of globalization. Sometimes, the firm has
reached a stage when sales and profits are down and market share 115
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is slipping. A strategy must be found in time to stop the decline if Notes
the organization is to continue to succeed. Strategies of renewal ___________________
will stop the organization's decline and put it back on a successful
___________________
path.
E
___________________
Such strategies are called Corporate Revival or Turnaround
strategies. Renewal strategies are a similar to restructuring ___________________
strategies. While restructuring can be applied to healthy ___________________

organizations, with a view to make the business more efficient and
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___________________
therefore more profitable, renewal or turnaround strategies
___________________
address great weaknesses or flaws in the business.
___________________
For example, with the removal of controls and restrictions, in 1991,
individual entrepreneurs had the freedoms to explore their ___________________
opportunities in a more meaningful way than was possible before. ___________________

While some groups like the Tata Group and Hindustan Lever etc.
gained from these changes, some who had become complacent in
their monopolistic positions did not.
Some of these companies, in the later group, had centralized their
operations so much that they became unmanageable with in the
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new environment. The situation was further complicated by poor
financial management and interfamily and intra-family disputes.
Instead of taking up the opportunity to restructure, they continued
in their old ways. The result was that many of them started losing
their pre-eminence and some started cracking up. Those who lost
their positions in top business groups included the Scindias, the
Sarabhais and the Bhiwandiwalas. Some declined like Bangurs
and the Walchand Hirachands.
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The three strategy configurations show three different ways to

create value for the customer and for the company. One of the
configurations will probably explain the logic better than the two
others for the company in mind. Competitive advantage can be
created through unique resources and /or combining the activities
in a unique way. The three configurations show three different
ways to establish competitive advantage focusing on the activities
and the unique drivers behind the activities.
(c
These configurations are also tools to establish a common

communication platform. If management is the only ones that
understand how value is created in the company they will have
problems in implementing their strategies. The middle
management and employees will simply not understand the logic
116 behind decisions. This reduces the probability of the success of the
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Notes
Activity strategy employed.
___________________
Starting with a single business firm, we will discuss diversification
Single Business Firms
___________________
(SBUs). strategies. Then we will discuss the portfolio method of analysis.
We will also look at mergers and acquisitions that have made
E
___________________
waves in the recent past. Another topic that has been in the
___________________
forefront of discussions on strategy is strategic alliances. We will
___________________ discuss this. Finally, we will look at the concept of value creation
___________________ through corporate strategy.
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___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. Managements, also opt for growth strategies in the
___________________ belief that ……………………. .
2. The ……………………. strategy can be based on external
options as in the case of acquisitions and divestitures.
Single Business Units (SBUs)

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The primary goal of any firm or organization is achieving higher
levels of performance, where performance is a comprehensive term
that includes profitability, efficiency and effectiveness. The core of
strategy is to set the direction. The corporate strategy sets the
overall strategic direction. Strategy creates opportunities. As
opportunities increase, the organization is driven into more and
more neighbouring areas of opportunity, and is further propelled in
this direction by greater and greater success. Strategies become a
means towards more sales revenues, more employees, or more
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market share and an important option to help improve odds

against greater uncertainty.
How that strategy is implemented and managed, depends to a
large degree on whether an organization is engaged in one or
several businesses. A single-business firm is technically not
diversified because it gets 95 percent or more of its total revenues
from one business. A dominant-business firm is different in that it
has moved beyond a complete focus on one business by obtaining
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revenues from other businesses. However, as the definition

indicates that it is still largely dependent upon one industry. The
simplest corporate strategic model of a firm that has a single
business or a dominant business can be represented by a 2 × 2
matrix shown as in Figure 7.2. The Product-Market matrix 117
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(sometimes called the Corporate Strategy matrix) defines the Notes
options that are open to the firm. The Product-Market matrix, also ___________________
known as Ansoff’s matrix, explores two key dimensions.
___________________
The first is ‘product’ around which the business is built. Most
E
___________________
offerings are limited in at least two ways: time, in that their
relevance diminishes and redesign or renewal is usually required, ___________________
and transferability, in that they tend to work best under certain ___________________
market conditions. Modifying the core offering to improve the
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___________________
value offering is a key strategic choice.
___________________
The second is market, generally applied as market options. This
___________________
dimension distinguishes between customer markets that are well
established and known to the firm versus all the rest that are not. ___________________
___________________
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Figure 7.2: Product-Market Matrix
According to Ansoff, each of the four quadrants defines the core

strategic options to different sets of internal and external
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conditions. Careful assessment leads to better understanding and

decision-making:
z Upper left - Product Development: Positive customer
relationship and the goodwill allows a company to make new
product offers more effectively and inexpensively to existing
customers than to new ones. The advantages of this have to be
weighed against the possible damage resulting from negative
spill over from the new to the existing product experience. Any
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new offering needs to enhance customer relationship and the

goodwill.
z Lower left - Market Penetration: This strategy says, change
nothing and sell more of the same to existing customers. When
118 a business does not consciously select a growth or
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Notes
Activity diversification strategy, it is doing this, capacity expansion.
Write an essay
___________________ on This is the preferred strategy when a company’s product is
Diversification. performing well and there is room to increase market share.
___________________
However, the risk involved is in overcapacity in the industry.
E
___________________
z Lower right - Market Development: A well-developed
___________________
product can be introduced into new markets to extend its
___________________ value. This is ideal when little modification is required and
___________________ room for growth in the original market is restricted. Many
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products offered by multinationals, as diverse as food,
___________________
pharmaceuticals, and automobiles, etc. fall in this category.
___________________
z Upper right - Diversification: Diversification represents a
___________________
near total strategic overhaul, simultaneously trading in both
___________________ Product and Market. It is the most challenging, costly, and
risky of the options. New skills and relationships need to be
developed. Companies need to chart a gradual migratory path
leading from the known to the unknown.
In a multi-business firm corporate strategy takes a broad overview
role that is more encompassing than crafting strategy for a single
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business. Major tasks include devising actions to improve long-
term performance of a corporation’s portfolio of businesses;
capturing strategic fit benefits existing within and between
business units; and evaluating profit prospects of each business
unit and steering corporate resources into the most attractive
strategic opportunities.
Check Your Progress

)C
1. The core of strategy is to set the direction.

2. The first is market around which the business is built.
Diversification
Diversification entails entry into new markets with new products.
There is an underlying struggle for supremacy between the
management capabilities of the organization and the discipline of
(c
market forces. Market forces try to divide organizations into

smaller entities so as to achieve the economist’s ideal of a perfect
market with a large number of small operators defenceless against
the forces of competition. In contrast, corporate managements try
to grow and diversify fighting market forces so as to achieve high 119
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profits and be able to control their own destinies. This conflict is Notes
the basis for the theory of diversification. ___________________
Diversification, as a strategy, has had a roller coaster relationship ___________________
with business. In the 1970’s, diversification was the essence of
E
___________________
strategy. Organizations tried to diversify in order to minimize risks
in their product portfolios and enhance their capability for ___________________
unlimited growth. Problems in many organizations that followed ___________________

this dogma, created a new concept of strategy – core competence.
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___________________
Organizations that adhered to this dogma missed the opportunities
___________________
that were opening up around the globe as markets and
technologies converged to create huge new businesses. Since the ___________________
late nineties, this has brought in a renewed interest in ___________________
diversification.
___________________
When does one diversify and to what extent? Perhaps the answers
lie both in the market and the organization. When the organization
has a high level of organizational capability, it can bring the
market into submission and thereby diversify and earn sustained
high profits. As the markets become stronger and more efficient,
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when competition is high, capital markets are efficient, and labour
markets are more flexible, organizations require higher levels of
management capability to protect their diversity. Diversification is
an exciting option for those who have the management capability.
Diversification may be related or unrelated to the existing
operations of the organization. Related diversification is called
concentric diversification and unrelated diversification is called
conglomerate diversification.
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Concentric Diversification
The acquisition or internal development of a business outside of,
but in some way related to a company’s existing scope of
operations. Related diversification again divides into backward,
forward, and horizontal integration:
z Backward integration is a move towards suppliers and raw
materials in the same overall business. An example of this
would be a brewer acquiring malting facilities or growing hops.
(c
z Forward integration is a move towards the market place or

customers in the same overall business. An example of this
would be a manufacturer acquiring retail outlets or a hop
grower beginning to brew his own beer.
120
Horizontal integration is a lateral move into a closely related
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z
Notes
business such as selling by-products.
___________________
Related diversification can happen in two ways: (a) Related-
___________________
constrained – when all the businesses in which a firm operates
E
___________________ share a significant number of inputs, production technologies,
___________________ distribution channels, similar customers, etc., and (b) Related-
linked – when the different businesses that a single firm pursues
___________________
are linked on only a couple of dimensions, or if different sets of
___________________ businesses are linked along very different dimensions.
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___________________
For example, BIC produces products such as disposable razors,
___________________ cigarette lighters, and pens. This is a related-constrained
___________________ diversification strategy because all the products share significant
commonalities in the areas of plastic injection moulding, retail
___________________
distribution, and brand name.
Larsen & Toubro Limited (L&T) is a good example of a related-
linked firm. L&T is India's largest engineering and construction
conglomerate. The company sells its strengths in basic and
detailed engineering, process technology, project management,
procurement, fabrication and erection, construction and
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commissioning, to offer single point responsibility in project
execution and management.
The rationale behind the conglomerate diversification decision is
that there is a minimum common denominator and some degree of
synergy with the original business, even if the diversification is
unrelated. Examples of synergy are the ability to share facilities—
a sales force, for instance—or reducing the risk profile of the
organization by creating a balance in the timing of cash flow, etc.
)C
More generally, diversified businesses grow faster and growth

tends to be greatest if the diversification is unrelated. However,
related diversifications tend to be more profitable.
Conglomerate Diversification
Conglomerate Diversification is where a firm diversifies into
unrelated areas. It is the acquisition or internal development of a
business outside of, and in no way related to a company’s existing
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scope of operations. Conglomerate diversification requires strong

analysis of fit between the unrelated industries. It is often an
excellent option for organizations whose assets are undervalued;
who are financially distressed; or organizations with bright growth
prospects but which are short on investment capital. Another 121
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reason for conglomerate diversification is when there is some sort Notes
of barrier to expansion in/or related areas of the existing business. ___________________
For example: Gujarat Flourocarbons Ltd, a manufacturer of
___________________
refrigerant gases, has gone into building and operating
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multiplexes. This was an enforced choice due to the Montreal ___________________
Protocol, of which India is a signatory, which restricted its growth ___________________

in its traditional businesses.
___________________
Many organizations either have no option but to diversify into
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___________________
unrelated areas or find it prudent to do so, anticipating
___________________
unfavourable regulatory changes in the near future.
___________________
For example, many tobacco companies, due to stringent laws being
___________________
enacted against their products, have diversified into unrelated
products. ITC Ltd. has entered the food industry and hotel ___________________
industry, etc.
Conglomerate diversification has a number of advantages.

Business risk is scattered over many industries and capital can be
invested in whatever seems to offer the best profit prospects.
Profitability is more stable because hard times in one industry may
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be partially offset by good times in another. If corporate managers
are good at spotting bargain-priced firms with big upside profit
potential, shareholder wealth can be enhanced.
On the negative side, diversification does nothing to enhance the

competitive strength of individual business units; each business
remains on its own; and corporate synergy can be achieved only if
the organization has the ability to build and manage the units
through an integrated network, that exhibits three key features:
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(a) strong entrepreneurial units; (b) rich, horizontal flow of

knowledge, best practices across units; and (c) a corporate
ambition, set of values and identity.
This approach to creating strong, diversified organizations with

integrated networks raises questions about the quality of
management. Some of the issues raised are given below:
z Top management competence
Can top management tell a good acquisition from a bad

(c

one?
Can they select good managers to run each business?
Do they know what to do if a business unit stumbles?

122
Are the firm's profits more stable?
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z
Notes
___________________
How much diversity can the firm manage successfully?
___________________ How broad should the organization’s portfolio be?

Do the "up & down" cycles cancel out?
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___________________
___________________ There are questions about the ability of organizations with

___________________
conglomerate diversification to mask poor performance of some
units with the good performance of other units. This has raised a
___________________
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number of questions on the desirability of extensive conglomerate
___________________ diversification. Financial analysts and institutional investors have
___________________ been found to prefer investing in narrow product category
companies rather than in organizations that are highly diversified.
___________________
The result is that the attractiveness of conglomerate diversification
___________________ is on the wane.
Check Your Progress

Fill in the blanks:
1. ………………… entails entry into new markets with new
products.
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2. In the …………………, diversification was the essence of
strategy.
Summary
The specific tasks that fall under the domain of corporate strategy
include: The mission of the firm; Business segmentation;
Horizontal strategy; Vertical integration; and the strategic posture
)C
of the firm. Within this broad direction, there are a number of

specific options concerning the direction of developing the
organization’s strategies. However, these options are defined by
three major approaches: Growth Strategies (Long Term
Strategies); Stabilization or Restructuring Strategies (Medium
Term Strategies) and Corporate Revival or Turnaround Strategies
(Short Term Strategies). Diversification, as a strategy, depends
upon both in the market and the organization. Organizations
require higher levels of management capability to protect their
(c
diversity. Diversification may be related or unrelated to the

existing operations of the organization. Related diversification is
called concentric diversification and unrelated diversification is
called conglomerate diversification.
Lesson End Activity 123
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Notes
What do the 3 possible corporate strategic directions growth,
___________________
stability, and renewal strategies mean to you? How would you
apply these concepts to tomorrow’s markets? ___________________
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___________________
Keywords ___________________
Corporate Strategy: Corporate Strategy is the direction an ___________________

organization takes with the objective of achieving business success
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___________________
in the long term.
___________________
Segmentation: Segmentation is the process of splitting the entire
___________________
market into smaller groups that share similar traits.
___________________
Vertical integration: The combination in one company of two or
___________________
more stages of production normally operated by separate
companies.
Strategic Choice: A strategic choice is one that aligns your
company with its competitive edge.
Strategic Intent: A readily grasped declaration of the course that
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the management of a business plans on taking the company in over
some future time frame.

1. What is corporate level strategy?
2. How does corporate level strategy differ from other types of
strategy?
3. “Corporate Strategy binds the organization together.” Do you
)C
agree with this statement? If yes, give reasons.

4. Highlight the importance of restructuring strategies.
5. Critically analyse Product-Market Matrix.
6. What is Concentric Diversification?
7. Discuss Conglomerate Diversification.
Further Readings
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Books
124
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Notes
Ltd.
___________________
___________________
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___________________ Education.
___________________ Hugh, MacMillan & Mahen, Tampoe (2000). “Strategic
___________________
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Web Readings
___________________
http://dspace.mit.edu/bitstream/handle/1721.1/2155/SWP-1845-
___________________ 21289360-CISR-149.pdf
___________________ http://www.createadvantage.com/glossary/strategy-formation
___________________
http://www.lmcuk.com/course/corporate-strategy-formulation
http://wps.prenhall.com/bp_wheelen_smbp_10/37/9650/2470557.cw/
index.html
http://wiki.answers.com/Q/What_is_strategy_formulation
http://www.mckinsey.com/client_service/strategy/expertise/corporat
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e_strategy
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UNIT 8: SWOT and Value Chain Analysis
Unit 8
125
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Notes
Activity
Conduct a SWOT analysis of
SWOT and Value Chain Analysis
___________________
Vodafone and Airtel.
___________________
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___________________
Objectives
___________________
topics: ___________________
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\ SWOT Analysis: An Introduction ___________________
\ The SWOT Matrix ___________________
\ Value Chain: An Introduction
___________________
\ Value Chain Analysis
___________________
___________________
Introduction
The SWOT analysis provides information that is helpful in
matching the firm's resources and capabilities to the competitive
environment in which it operates. Successful businesses build on
their strengths, correct their weaknesses and protect against
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internal vulnerabilities and external threats. Value chain analysis
describes the activities the organization performs and links them
to the organization’s competitive position. In looking at the
strategic capability of an organisation, it is not sufficient to look
inside the organisation. Much of the value creation occurs in the
supply and distribution chain. Therefore, it evaluates which value
each particular activity adds to the organizations products or
services.
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SWOT Analysis: An Introduction

In the early 1950s, two professors of business policy at Harvard,
George Albert Smith Jr. and C. Roland Christensen, taught
students to question whether a firm’s strategy matched its
competitive environment. In reading stories of companies, students
were instructed to ask: Do a company’s policies “fit together into a
program that effectively meets the requirements of the competitive
situation?” Students were told to address this problem by asking:
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“How is the whole industry doing? Is it growing and expanding? Or

is it static; or declining?” Then, having “sized up” the competitive
environment, the student was to ask: “On what basis must any one
126 company compete with the others in this particular industry? At
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Notes what kinds of things does it have to be especially competent, in
___________________ order to compete?”
___________________ By the 1960s, classroom discussions in the business policy course
focused on matching a company’s “strengths” and “weaknesses” –
E
___________________
its distinctive competence – with the “opportunities” and “threats”
___________________
(or risks) it faced in the marketplace. This framework, which came
___________________
to be referred to by the acronym SWOT, was a major step forward
___________________ in bringing explicitly competitive thinking to bear on questions of
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___________________ business policy.
___________________ Kenneth Andrews put these elements together in a way that
___________________ became particularly well known. In 1963, a business policy
conference was held at Harvard that helped diffuse the SWOT
___________________
concept in academia and in management practice.
The acronym “SWOT” represents “Strengths”, “Weaknesses”,

“Opportunities”, and “Threats”. The environmental factors internal
to the firm usually can be classified as strengths (S) or weaknesses
(W), and those external to the firm can be classified as
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opportunities (O) or threats (T). The process diagram for a SWOT
analysis is shown in Figure 8.1.
Environmental Scan
/ \
Internal Analysis External Analysis
/\ /\
Strengths Weaknesses Opportunities Threats
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Figure 8.1: SWOT Analysis Framework
The SWOT analysis provides information that is helpful in

matching the firm’s resources and capabilities to the competitive
environment in which it operates. As such, it is instrumental in
strategy formulation and selection. Successful businesses build on
their strengths, correct their weaknesses and protect against
internal vulnerabilities and external threats. They also keep an
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eye on their overall business environment and spot and exploit

new opportunities faster than competitors. The technique is simple
and effective. It requires an analytical frame of mind. Due to its
simplicity, all firms have the capacity to use this tool to advantage.
127
Check Your Progress
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Notes
Activity
Fill in the blanks:
Is it ___________________
not enough for a company
1. SWOT stands for ……………………………………………… to analyse its own strengths
and ___________________
weaknesses? Justify your
2. The SWOT analysis provides information that is helpful
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answer
___________________
in matching the firm’s …………………… and capabilities
___________________
to the ………………………………… in which it operates.
___________________
Analysis of the Firm against Competition
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___________________
The first step is to identify competition. Every business has ___________________
competitors. Competitors are those who could provide our ___________________

customers a product or service that fills the same need as the ___________________
business does. Even if the product or service is truly innovative, we
___________________
need to look at what else customers would purchase to accomplish
this task.
Begin by looking at primary competitors. These are the market

leaders, the companies who currently dominate the market. Next,
look for secondary competitors. These are the businesses who may
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not go head-to-head with the firm but who are targeting the same
general market. Finally, look at potential competitors. These are
companies who might be moving into the market and who the firm
needs to prepare to compete against.
The second step is to analyze strengths and weaknesses of

competitors. Determine their strengths and find out what their
vulnerabilities are. Why do customers buy from them? Is it price?
Value? Service? Convenience? Reputation? Focus as much on
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“perceived” strengths and weaknesses as on actual ones. This is

because customer perception may actually be more important than
reality. The strengths/weaknesses analysis is more easily done in
table form. Write down the names of each of the competitors. Then
set up columns listing every important category for the line of
business. It may be price, value, service, location, reputation,
expertise, convenience, personnel, or advertising/marketing. Rate
the competitors on each of the identified parameters, and put in
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comments as to why you have given them that rating.
The third step is to look at opportunities and threats. Strengths

and weaknesses are often factors that are under a company’s
control. But when we’re looking at our competition, we also need to
128 examine how well prepared we are to deal with factors outside our
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Notes
Activity control. Opportunities and threats fall into a wide range of
You___________________
are the CEO of a categories. It might be technological developments, regulatory or
footwear manufacturing
___________________ legal action, economic factors, or even a possible new competitor.
company. Your company
An effective way to do this is to create a table listing competitors
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manufactures
___________________and
shoes
sandals for both the sexes. and the outside factors that will impact the industry. We will then
The ___________________
designs of the shoes and
be able to tell how we can deal with opportunities and threats.
sandals have not changed
___________________
over the years. Your shoes The fourth is to determine the position of the firm. Once we figure
sold___________________
like hot cakes in early
out what the competitors’ strengths and weaknesses are, we need
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2000s but now the sales have
___________________
declined heavily. Analyse the to determine where to position the company with respect to
situation and
___________________
suggest competition. Rank the company in the same categories that you
appropriate solutions to get
the company back on track.
ranked competitors. This will give a clear picture of where the
___________________
business fits in the competitive environment. It will also help
___________________
determine what areas the firm needs to improve, and what
characteristics of business the firm should take advantage of to
gain more customers.
Check Your Progress

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1. The second step is to look at opportunities and threats.
2. The fourth is to determine the position of the firm.
The SWOT Matrix

The relationships in a SWOT analysis are generally represented by
a 2 × 2 matrix. The “Strengths” and “Opportunities” are both
positive considerations. “Weaknesses” and “Threats” are both
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negative considerations. The final results of an analysis could be

listed in the matrix given in Table 8.1. The matrix identifies the
Strengths, Weaknesses, Opportunities and Threats of a firm.
This information can be used by the company in many ways in

evolving its options for the future. In general, the company should
attempt:
z To build its strengths;

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z To reverse its weaknesses;
z To maximize its response to opportunities; and
z To overcome its threats.

Table 8.1: The SWOT Matrix 129
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Strengths (Internal) Weaknesses (Internal) Notes
Many product lines? Obsolete, narrow product lines?
___________________
Broad market coverage? Rising manufacturing costs?
___________________
Manufacturing competence? Decline in R&D innovations?
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Good marketing skills? Poor marketing plan? ___________________
Good materials management Poor material management systems?
systems? ___________________
R&D skills and leadership? Loss of customer goodwill? ___________________

Information system competencies? Inadequate human resources?
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___________________
Human resource competencies? Inadequate information systems?
Brand name reputation? Loss of brand name capital? ___________________
Portfolio management skills? Growth without direction? ___________________
Cost of differentiation advantage? Bad portfolio management?
___________________
New-venture management Loss of corporate direction?
expertise? ___________________
Appropriate management style? Infighting among divisions?
Appropriate organizational Loss of corporate control?
structure?
Appropriate control systems? Inappropriate organizational structure
and control systems?
Ability to manage strategic change? High conflict and politics?
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Well-developed corporate strategy? Poor financial management?
Good financial management? Others?
Others?
Opportunities (External) Threats(External)
Expand core business(es)? Attacks on core business(es)?
Exploit new market segments? Increases in domestic competition?
Widen product range? Increase in foreign competition?
Extend cost or differentiation Change in consumer tastes?
advantage?
Diversify into new growth Fall in barriers to entry?
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businesses?
Expand into foreign markets? Rise in new or substitute products?
Apply R&D skills in new areas? Increase in industry rivalry?
Enter new related businesses? New forms of industry competition?
Vertically integrate forward? Potential for takeover?
Vertically integrate backward? Existence of corporate raiders?
Enlarge corporate portfolio? Increase in regional competition?
Overcome barriers to entry? Changes in demographic factors?
Reduce rivalry among competitors? Changes in economic factors?
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Make profitable new acquisitions? Downturn in economy?

Apply brand name capital in new Rising labour costs?
areas?
Seek fast market growth? Slower market growth?
Others? Others?
130
A firm should develop a competitive advantage by identifying a fit
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Notes
between the firm's strengths and upcoming opportunities. In some
___________________
cases, the firm can overcome a weakness in order to prepare itself
___________________ to pursue a compelling opportunity. SWOT analysis is often used
to develop strategies. The strategy matrix is known as the TOWS
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___________________
matrix.
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
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Figure 8.2: TOWS Matrix
The TOWs matrix as shown in Figure 8.2 depicts the approach to

develop competitive advantage in the circumstances that exist. The
different quadrants can be interpreted as follows:
z S-O strategies pursue opportunities that are a good fit to the

company’s strengths.
z W-O strategies overcome weaknesses to pursue opportunities.

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z S-T strategies identify ways that the firm can use its strengths
to reduce its vulnerability to external threats.
z W-T strategies establish a defensive plan to prevent the firm's

weaknesses from making it highly susceptible to external
threats.
The SWOT analysis is a powerful tool, but involves a large

subjective component. Therefore, it is best when used as a guide
and not a prescription. Used in conjunction with other established
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strategic management tools, for example the PEST or PESTLE

analysis, the SWOT Analysis can provide information that is
helpful to the firm in strategy formulation and selection.
131
Check Your Progress
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Notes
Activity
Fill in the blanks:
Why do you think that value
___________________
1. The relationships in a SWOT analysis are generally chain analysis has become a
___________________
profound approach to guide
represented by a ……………….. matrix.
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internal analysis?
___________________
2. The strategy matrix is known as the ……………….
___________________
matrix.
___________________
Value Chain: An Introduction
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___________________
Porter his book "Competitive Advantage: Creating and Sustaining ___________________
superior Performance” used the concepts of separate activities and ___________________

value added and linked them for analysing the organisation’s
___________________
competitive advantage. In Porter’s analysis, he considered
‘strategic fit’, as the way various components of a strategy ___________________
interlink, and this could be facilitated by, “creating a value chain

that is as strong as its strongest link, and is a more potent, and
central, strategic concept.”
According to Porter, the processes and linkages between activities
can be better examined and understood through a Value Chain
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Analysis. The value chain analysis describes the activities the
organization performs and links them to the organization’s
competitive position. Therefore, it evaluates which value each
particular activity adds to the organizations products or services.
This idea of the value chain recognises that organisations are
much more than a random compilation of machinery, equipment,
people and money. If these assets are deployed into activities or
are arranged into systems effectively so as to maximize the
benefits to the organisation, it will become possible to produce
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something of value for which customers are willing to pay a price.

In other words, it is the ability to perform particular activities
efficiently and the ability to manage the linkages between these
activities which are the source of competitive advantage.
Primary Activities
Porter distinguishes between primary activities and support
activities. Primary activities are directly concerned with the
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creation or delivery of a product or service. They can be grouped

into five main areas:
z Inbound logistics: These are inputs required and
disseminated by the organisation in order to produce the gods
132 and services that it offers. These could be activities concerned
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Notes with receiving goods, stores functions, inventory control etc.
___________________
z Operations: These are the primary activities involved in
___________________ converting the inputs into outputs. For example in an
automotive company these could be foundry operations,
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___________________
forging operations, machining, assembly, painting etc.
___________________
___________________ z Outbound logistics: Once the output reaches its final form,
the activities that are involved in taking the service or product
___________________
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to the end user or bring the end user to the product of service.
___________________
For example in the case of tangible products it could mean
___________________ warehousing, transportation, material handling etc.
___________________
z Marketing and Sales: These are activities linked to bring the
___________________ product to the attention of the consumer and induce them to
consume the product or service. It also includes those activities
that would enable and facilitate purchase of the product or
service. This would include sales administration, marketing
services, advertising and promotion, etc.
z Service: These are activities designed to enhance or maintain

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a product or service’s value. Examples are installation of the
product, spare parts support, warranty administration,
maintenance etc.
z Each of these primary activities is linked to support activities

which help to improve their effectiveness or efficiency. There
are four main areas of support activities:
z Procurement: This refers to the activities involved in

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acquiring the various resource inputs needed to produce the

product or the service. This could be procurement of capital
goods, consumables, production parts, raw materials etc.
Procurement occurs in many parts of the organisation.
z Technology Development: All ‘value’ activities have a

technology, even if it is certain rules and procedures. The key
technology may be directly concerned with the product or
service e.g. Research & Development, Design, etc. or with the
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process, for example design of dies and fixtures, or methods to

improve productivity etc. or with a particular resource, e.g.
raw material improvements etc.
133
Human Resource Management: This is concerned with all
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z
Notes
activities involved in recruiting, training, developing and
rewarding people in the organisation. This is a particularly ___________________
important function as it is the basis for creating, rewarding ___________________

and enhancing those competencies that are related to the
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___________________
people in the organisation.
___________________
z Infrastructure: The systems for planning, finance, legal, ___________________
quality, information management etc. are included under this
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___________________
head. These activities are crucially important in the
___________________
organisation’s performance of its primary activities. Through
its infrastructure the organisation tries to effectively and ___________________
consistently identify external opportunities and threats, ___________________

identify resources and capabilities, and support core
___________________
competencies. Infrastructure also includes the structures and
routines of the organisation that sustain its culture.
In Figure 8.3, the primary activities as well as the support

activities are bordered with a ‘margin’. The term, ‘margin’ implies
that organizations realize a profit margin that depends on their
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ability to manage the linkages between all activities in the value
chain. In other words, the objective of the organization is to deliver
a product / service for which the customer is willing to pay more
than the sum of the costs of all activities in the value chain.
Infrastructure
Activities
Support
Human Resource Management

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Ma
rg i n
Technology Development
Procurement
Marketing and Sales
Outbond Logistics
Inbound Logistics
Operations
Ma
Services
rg i
n
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Primary Activities
Figure 8.3: The Value Chain

134
The linkages shown in the model are crucial for corporate success.
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Notes
The linkages are flows of information, goods and services, as well
___________________ as systems and processes for regulating activities. In the result,
___________________ the linkages are about seamless cooperation and information flow
between the value chain activities. Their importance is illustrated
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___________________
with a simple example:
___________________
___________________
In an organisation producing a tangible product, the Marketing &
Sales function is supposed to deliver the sales forecasts for the next
___________________
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period to all other departments in time and in reliable accuracy.
___________________
Based on this forecast, procurement will be able to order the
___________________ necessary material for the correct date. And if the materials and
___________________ inputs are properly provided by procurement and it forwards order
information to inbound logistics, only than operations will be able
___________________
to schedule production in a way that guarantees the delivery of
products in a timely and effective manner – as pre-determined by
marketing.
One of the key features of modern industrial system is that

organisations use specialist services, incorporate proprietary items
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into products, and develop ancillaries to support their product and
services. Very rarely does a single company perform all activities
from product design, production of components, and final assembly
to delivery to the final user by itself. Therefore, all the
organizations connected with delivering the product or services to
the final consumer are elements of a value system or supply chain.
There is usually specialization of role and a number of
organisations are involved in the creation of the final product.
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In looking at the strategic capability of an organisation, it is not

sufficient to look inside the organisation. We must look into the
interconnections. Much of the value creation will occur in the
supply and distribution chain. Any analysis of the strategic
capability has to be viewed fro a holistic view that includes the
entire value chain. For example, an analysis into the value chain
may show that some of these interconnections will be critical to the
competitive advantage of the organisation; some can perhaps have
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substitutes; others can be eliminated. Hence, value chain analysis

should cover the whole value system in which the organization
operates. This concept is illustrated in Figure 8.4.
135
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Supplier Channel Customer
Value Chains Value Chains Value Chains Notes
___________________
___________________
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___________________
Organizations ___________________
Value Chain
___________________
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___________________
___________________
___________________
Figure 8.4: The Value System ___________________
Within the whole value system, there is only a certain value of ___________________
profit margin available. This is the difference of the final price the
customer pays and the sum of all costs incurred with the
production and delivery of the product/service (e.g. raw material,
energy etc.). The structure of the value system will determine, to a
large extent, how this margin is distributed between the various
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elements of the value system, e.g. suppliers, producers,
distributors, customers, and others.
Each member of the value chain will use its standing in the value
chain, market position and negotiating power to get a higher
proportion of this margin. A successful value chain is developed
when each member of the value chain believes that it obtains value
from the relationship. The ability of an organization to influence
the performance of other organizations in the value chain is often a
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core capability and a source of competitive advantage. Many

organizations have special functions that are involved in ancillary
development, dealer and distributor training, etc.
A value chain is one of the most common sources of increasing the

technological competence of organisations. Knowledge is spread
between members in the value chain through the process of
diffusion. This results in adding competencies both to the provider
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and receiver of the knowledge. The traditional structure of the

Japanese industry is illustrative of this. Units attached to the
mother unit cooperated with each other to improve their efficiency,
teach each other and learn from each other new and better ways of
136 accomplishing their tasks, and help each other to reduce their
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Notes costs. In doing so, they are able to achieve a higher total margin to
___________________ the benefit of all of the members in the system.
___________________ A strong and supportive value chain works like the traditional
Japanese system, where members of the chain look at the benefits
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___________________
___________________ that accrue to the entire value chain. Such cooperation is possible
and often seen in such value chains, e.g. increasing productivity,
___________________
reducing stocks at different levels, or process improvements etc.,
___________________
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are undertaken by members of the value chain and the advantages
___________________ that accrue benefit all members of the value chain.
___________________
Value chain analysis is not a very difficult exercise conceptually.
___________________ However, depending on the nature of the product, the linkages, the
___________________ primary processes involved, etc. it is often an exercise that can be
quite complex and requires a large amount of information and data
processing capacity for the analysis. However, many of the
concepts of breaking up functions into activities and attributing
costs to them are now a standard cost accounting practice which
makes the process easier. Once the basic information has been
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collected and the linkages established, it becomes a routine
exercise. A typical value chain analysis can be performed in the
following steps:
z Analysis of own value chain – identify the primary and

support activities. Each of these activity categories needs to be
broken up into its basic components and costs are allocated to
every single activity component.
z Analysis of customers value chains – examine how does our

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product fit into the value chain of the customer
z Identify activities that differentiate the firm and the potential

cost advantages in comparison with competitors
z Identify potential value added for the customer – how can our
product add value to the customers value chain (e.g. lower
costs or higher performance) – where does the customer see
such potential?
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z The final step is to identify those activities that provide a

differential advantage compared to competitors. These are the
competencies or the core competencies of the organization.
137
Check Your Progress
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Notes
___________________
1. The value chain analysis describes the activities the
___________________
organization performs and links them to the
E
organization’s competitive position. ___________________
___________________
2. Secondary activities are directly concerned with the
creation or delivery of a product or service. ___________________
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___________________
Value Chain Analysis ___________________
The value chain is useful in defining the areas where it can benefit ___________________
from: (a) cost reduction, and /or (b) product differentiation. ___________________
Cost Reduction ___________________
Rahul Bajaj, in the face of competition and limited by the capacity

to grow due to Government restrictions, focused on standardizing
and refining the operational processes of Bajaj Auto. He was able
to bring Bajaj Auto to the position where it became the lowest cost
two-wheeler producer in the world. The idea was on giving
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customers ‘the best value for money’. Historically, about 60 percent
of the value of the Bajaj vehicle was outsourced. Outsourcing was
increased, and the value chain was rationalized. Costs were tightly
controlled on costs and developing a highly efficient value chain for
supply, production and distribution system. As a result the labour
time to manufacture a scooter came down from 1.9 man days to 1.3
man days. Bajaj Auto successfully regained it position as the
market leader in the two-wheeler industry based on cost
leadership.
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A strategy based on seeking cost leadership requires reduction in

the costs associated with the value chain activities, or reduction in
the total amount of resources used. The basic approach of value
chain analysis is to look at the value and cost of each activity and
determine whether it is delivering value for money. The priority
between various activities is determined by a Value Index:
Value Index (VI) = Value/Cost = Utility/Cost = Function/Cost
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If the Value index is less than 1, it is not worth the cost incurred; if
Value index is greater than 1, it provides value to the organization.
The organization has to identify those activities that add value and
those where the value added does not justify their cost. The value
138 is generally based upon a comparison with a similar activity within
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Notes the organization or on the basis of benchmarking the activity with
___________________ the best practices in the industry.
___________________ Cost reduction can be either by reducing individual value chain
activities or by reconfiguring the value chain. Reconfiguring the
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___________________
value chain involves structural changes such as new production
___________________
processes, new distribution channels, new sources of supply etc. In
___________________ general, Porter has identified 10 drivers for cost reduction:
___________________ Economies of Scale,
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z
___________________
z Learning,
___________________
z Capacity utilization,
___________________
z Linkages between activities,
___________________
z Interrelationships with suppliers and buyers,
z Degree of Vertical Integration,
z Timing of market entry,
z Generic Strategy,
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z Geographical location, and
z Institutional factors.
Value chain activities are often linked. For example, if a product is
redesigned to reduce cost, it is possible that the cost of servicing
the product may go up. Inversely, it may result in a concomitant
reduction in service costs due to an improvement in reliability. In
the first case the value benefit would be less than was anticipated.
On the other hand, in the second case, the value benefit would be
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greater and has a potential to become a source of competitive

advantage.
Product Differentiation
Jet Airways started with 4 aircraft in 1993. Since May 1993 the
airline has flown close to 33 million passengers. Its fleet of 31
Boeing B737s and 8 ATR aircraft operate daily over 245 flights to
41 destinations in India. Jet Airways differentiated itself from its
main rival, Indian Airlines, by its focus from the very beginning -
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to emerge as the "Businessman's Preferred Airline". It did this by

providing high standards of service and reliability of operations. It
earned a reputation for punctuality, quality of catering, in-flight
service and the attention paid to security. Today, Jet Airways 139
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accounts for a domestic market share of around 45 per cent. Notes
Differentiation stems from uniqueness. This uniqueness can be ___________________

achieved either by changing the value chain activities to provide ___________________
uniqueness to the product, or by reconfiguring the value chain.
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___________________
Porter has identified several drivers for uniqueness:
___________________
z Policies and decisions,
___________________
z Linkages between activities,
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___________________
z Timing,
___________________
z Location,
___________________
z Interrelationships, ___________________
z Learning, ___________________
z Integration,
z Scale, and
z Institutional factors.
Once identified, we have to decide how we can enhance these
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competencies that have a Value index greater than 1, to provide us
with greater differentiation and competitive advantage. For
example, a business which wishes to outperform its competitors
through differentiating itself, through higher quality, will have to
perform its value chain activities related to quality better than the
opposition. Changes in technology can also be a factor in
reconfiguring the value chain or changing the activities, to provide
competitive advantage.
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However, there will be activities that add value to the business

though they may not directly justify their costs. These are
activities that have to be accepted as apart of doing business and
cannot be eliminated. It should be recognized that Value Chain
Analysis has its origins in accounting practices. Its effectiveness is
based on the ability of the organization to identify costs and
associating it to each activity and attributing a value to each
activity.
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Since the value chain is composed of the set of activities performed

by the business unit, it provides a very effective way to analyze the
position of the business against its major competitors. The way in
which the value system of the organization is configured, the
linkages between value activities and the competence in separate
140 activities, provide the key to sustainable success. This type of
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Notes analysis has already been shown in the last section. The manner in
___________________ which the value chain will improve the competitive position has
also been shown in the use of the Life Cycle – Portfolio matrix.
___________________
Another way to use the value chain is to determine the degree to
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___________________
which the strategy provides synergy. This will show how much
___________________
extra benefit can be created by reconfiguring the value chain.
___________________
Table 8.2: The Value Chain and synergy
___________________
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Degree of Synergy with Weight Strategy Strategy Strategy
___________________ present Activities age 1 2 3
___________________
___________________
___________________
Table 8.2 is an analytical tool designed to show the relationship

between synergy and the value chain. The first column should
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identify all the activities in the organization that are impacted by
the strategic options. The second column represents the
importance of the activity in the scheme of the organization. The
total of the weight age in the second column should add up to 100.
The third column onwards represents the different strategies.
The objective is to identify the impact of each strategy on the

identified activity. The degree of synergy can be scored on a scale
of 1 to 5. The degree of synergy should be multiplied with the
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weight age factor of the activity and the total put in column for the
particular strategy. Then each column is added. The total of the
column represents the level of synergy of the strategy.
Synergy can arise through many different types of links or

interrelationships. For example, in marketing it could arise from
exploiting the brand name, sharing distribution channels,
advertising and promotion etc. Synergy is often used as a
justification in many areas of the company’s strategy that includes
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new products, new markets and diversification. Many decisions on

mergers and acquisitions are based on the synergy the
organization derives from such a strategy.
141
Check Your Progress
S
Notes
Fill in the blanks:
___________________
1. …………………… can arise through many different
___________________
types of links or interrelationships.
E
___________________
2. It should be recognized that Value Chain Analysis has
___________________
its origins in …………………… practices.
___________________
Summary
UP
___________________
The SWOT strategy matrix, better known as the TOWS matrix, ___________________
enables a different strategic perspective from which to examine ___________________

problems or situations based on corresponding identified ___________________
opportunities/threats, opportunities/weaknesses, etc. The basic
___________________
approach of value chain analysis is to look at the value and cost of
each activity and determine whether it is delivering value for
money. The priority between various activities is determined by a
Value Index. If the Value index is less than 1, it is not worth the
cost incurred; if Value index is greater than 1, it provides value to
the organization.
CE
Lesson End Activity
"SWOT analysis stands at the core of strategic management".
Elucidate.
Keywords
SWOT Analysis represents an analysis of the “Strengths”,
)C
“Weaknesses”, “Opportunities”, and “Threats” relating to the firm’s

environment.
TOWS matrix is a SWOT strategy matrix based on corresponding
identified opportunities/threats, opportunities/weaknesses, etc.
Value chain analysis describes the activities the organization
performs and links them to the organization’s competitive position.
Therefore, it evaluates which value each particular activity adds to
the organizations products or services.
(c
Value Index is a ratio that looks at value and cost of each activity
and determines whether it is delivering value for money.
142
S
Notes
1. Discuss how you would construct a SWOT matrix.
___________________
___________________
2. What is the relationship between the SWOT and TOWS
analysis?
E
___________________
3. What points would you keep in mind to enhance the quality of
___________________
the material while devising a SWOT Analysis?
___________________
4. Identify the factors that could either create opportunities or
___________________ threats for Indian software companies in the near future.
UP
___________________
5. Explain the value chain approach for diagnosing a firm’s key
___________________ strengths and weaknesses.
___________________
___________________ Further Readings
Books
CE
Ltd.
Education.
Web Readings
)C
http://wiki.telfer.uottawa.ca/ci-
wiki/index.php/SWOT_%26_Value_Chain_Analysis:_A_CI_Perspec
tive
http://smallbusiness.chron.com/identify-relationship-between-swot-
value-chain-31780.html
http://www.scribd.com/doc/37606619/Swot-Analysis-and-Value-
Chain
http://www.tutor2u.net/business/strategy/value_chain_analysis.ht
(c
m
http://www.ivoryresearch.com/sample36.php
http://studyonline.edu.vn/index.php/assignment/strategic-
management/1905-lecture-29-swot-analysis-and-value-chain
UNIT 9: Portfolio Analysis and Strategic Alliance
Unit 9
143
S
Notes
Activity
Through examples, prove that
Portfolio Analysis and Strategic
___________________
some of the underlying
___________________
assumptions of the BCG
Alliance matrix may not hold good for
E
___________________
some businesses.
___________________
Objectives ___________________
UP
___________________
topics:
___________________
\ Portfolio Analysis
\ Strategic Alliances ___________________
\ Value through Corporate Strategy ___________________
___________________
Introduction
A number of techniques have been developed for displaying a
diversified organization’s operations as a portfolio of businesses.
The techniques provide simple frameworks for reviewing the
performance of multiple Strategic Business Units (SBUs)
CE
collectively. A SBU is a business that can be planned separately
from others, has its own set of Competitors, and is managed as a
Profit Centre. Techniques of portfolio analysis have their greatest
applicability in developing strategy at the corporate level. It charts
and characterizes the different businesses in the organization’s
portfolio and helps in determining the implications for resource
allocation.
)C
Portfolio Analysis
Besides other portfolio methods are some of the important
instruments of the strategic planning. By using these methods
strategic business units of an enterprise can be analyzed and
strategies can be built to strengthen the strategic business units. It
is pointless to focus on only one single business unit, rather than it
is important to have several business units and build up a
combination out of them to get an achievement of objectives and of
(c
adequate results in different future environments. Portfolio-models

are instruments to co-ordinate the several strategic business units
of an enterprise. Enterprises use them, to analyze whether there is
an opportune or an optimal combination of several business units
144 in their own enterprise. If not, the enterprise has to adjust its
S
Notes strategy, create new business units or to enlarge respective to close
___________________ existing business units, to get an optimal combination. Another
coordinating task of the strategic planning is to get and to co-
___________________
ordinate substitutes to reach the target-portfolio. This instrument
E
___________________
exists to lookup the substitutes and basic conditions in a global
___________________ way. The planning period has a look at the future, but the models
___________________ are not quantitative models. They are for the use of qualitative
analyzes of the combinations of the business units and to have an
___________________
UP
effect on them.
___________________
A business portfolio is the collection of Strategic Business Units
___________________
(SBUs) that makes up a corporation. The optimal business
___________________ portfolio is one that fits perfectly to the company's strengths and
___________________ helps to exploit the most attractive industries or markets. A SBU
can either be an entire mid-size company or a division of a large
corporation. It normally formulates its own business level strategy
and often has separate objectives from the parent company.
The aim of a portfolio analysis is:
z Analyze its current business portfolio and decide which SBUs
CE
should receive more or less investment,
z Develop growth strategies for adding new products and
businesses to the portfolio, and
z Decide which businesses or products should no longer be
retained.
The basis for many of these matrix analyses grew out of work
carried out in the 1960s by the Boston Consulting Group (BCG).
BCG observed in many of their studies that producers tend to
)C
become increasingly efficient as they gain experience in making

their product and costs usually declined with cumulative
production. They came up with a hypothesis to explain how an
organization with the highest market share in the industry
generally will have the greatest accumulated volume of production
and therefore the lowest cost relative to other producers in the
market.
The breakthrough came while working for a major manufacturer of
(c
semiconductors. They were able to collect the evidence on which to

build the experience curve concept. The wide variety of
semiconductors, that were a part of the study, offered them a
chance to compare differing growth rates and price decline rates in
a similar environment. Price data supplied by the Electronic 145
S
Industries Association was compared with accumulated industry Notes
volume. ___________________
Two distinct patterns emerged: ___________________
E
z In one pattern, prices, in current dollars, remained constant ___________________
for long periods and then began a relatively steep and long
___________________
continued decline in constant dollars.
___________________
z In the other pattern, prices, in constant dollars, declined
UP
___________________
steadily at a constant rate of about 25 percent each time
accumulated experience doubled. ___________________
This pattern seemed to have applicability across the board. In a ___________________
study on the cost of television components BCG found striking ___________________

differences in the rate of cost improvement between monochrome ___________________
parts and colour parts. This was difficult to explain since the same
factory, the same labour; the same processes were involved at the
same time. This was explained by the experience curve;
monochrome parts had progressed down a cost curve to a larger
degree than the colour parts, as the accumulated experience in
monochrome parts was much greater than in colour parts.
CE
Systematic cost differences arise between competitors because some
develop more knowledge about production than others. This concept
has important implications: if a company can accelerate its
production experience by increasing its market share, it could gain a
cost advantage in its industry that would be difficult to match.
Substantial investment in pursuing market share today could pay
off even more substantially tomorrow.
)C
(c
Figure 9.1: The Experience Curve
This linear relationship between costs and cumulative production

became known as the Experience Curve. The Experience Curve
146 which is showm in Figure 9.1 has had profound implications for
S
Notes business thinking and practice. As a strategic concept, it is based
___________________ on strong relationships between market share and accumulated
production. It shows that it is possible to deliberately acquire and
___________________
manage competitive advantage.
E
___________________
According to the experience curve concept, costs of value added
___________________
decline approximately 20 to 30 percent in real terms each time
___________________ accumulated experience is doubled. If the growth rate is constant,
___________________ the cost decline continues indefinitely as long as the growth rate
UP
continues. If the growth stops, costs continue to decline, but the
___________________
rate of decline is cut in half each time the accumulated experience
___________________
doubles. Extensive substitution of cost elements and exchange of
___________________ labour for capital is characteristic of progress down a cost
___________________ experience curve.
Application of the experience curve to problem solving and policy
determination requires managerial inputs. There are many
technical questions that need to be addressed. Some of these have
been identified below:
z How do you define cost elements?
CE
z How do you define the measuring unit of experience?
z What is an appropriate unit of experience where the product
itself changes too?
z What is the relationship between experience effects on similar
but different products?
z How are technological changes integrated into experience
effects?
)C
z What effect does capital investment intensity have?

z Does the same effect appear in overhead and marketing
functions?
The cost declines identified by the experience curve do not occur
automatically. It is assumed that there is added investment in an
amount commensurate with the marginal cost of capital. Study of
the experience curve shows, if high return on investment
thresholds is used to limit capital investment, then costs do not
(c
decline as expected.
The experience curve and the learning curve are related. The
learning curve is a somewhat limited application, of the experience
curve. It is only applied to direct labour. The experience curve 147
S
deals with the entire realm of possibilities of job element Notes
management with volume changes. Its business effects are ___________________
summarized below:
___________________
z Market Share: Costs are inversely proportional to market
E
___________________
share. A high market share will produce low cost.
___________________
z Growth: Relative costs should improve if growth rate is faster
than that of competitors. ___________________
Debt Capacity: Relative debt capacity will increase with no
UP
z ___________________
loss of safety if market share increases. ___________________
z Shared Experience: Cost should decline proportionately ___________________
faster or slower when cost elements are shared between more
___________________
than one product.
___________________
z Cost Control: As cost declines are predictable, it should
therefore be the basis for cost control and management
evaluation.
z Product Design: Choice of design element alternatives can be
determined by whether initial experience is high or low
compared to future volume expected.
CE
z Make or Buy: The relative experience between your
experience and supplier experience differential if you make the
part should determine the choice of make or buy.
z Procurement Negotiation: The value to the supplier of large
scale procurement can be calculated. Also the rate of normal
cost change for the supplier can be calculated.
z Market Potential: By comparing market elasticity with cost
decline, the market potential can be approximated.
)C
z Product Line Breadth: The total economic effect of product

line extension can be evaluated by interaction of the
experience and volume of combined cost elements.
As can be seen, the experience curve has significant effects on
business decisions. However, the basic mechanism that produces
the experience curve effect is still to be adequately explained. The
effect itself is beyond question and is so universal that its absence
is almost a warning of mismanagement or misunderstanding.
(c
BCG Matrix
The Boston Consulting Group Matrix (BCG Matrix) is the best-
known portfolio planning framework. The BCG growth share
148 matrix is directly derived from the experience curve. The
S
Notes experience curve essentially provides a pattern of cash flow.
___________________
The experience curve is used as the means of measuring probable
___________________ competitive cost differentials. The average cost is by definition the
total expenditure divided by the total output. The unit cost is the
E
___________________
rate of change in that ratio. Projection of this relationship is
___________________
frequently both simpler and more accurate for cost forecasting.
___________________
The use of cash is proportional to the rate of growth of any product.
___________________ The generation of cash is a function of market share because of the
UP
___________________ experience curve effect. A difference in market share of 2 to 1
___________________
should produce about 20 percent or more differential in cost on
value added. The growth share matrix is a diagram of the normal
___________________
relationship of cash use and cash generation.
___________________
All of the products of a company can be shown on a single growth
share matrix as a product portfolio. Each product can be plotted on
its own growth and share coordinates. The size of the product can
be indicated by a circle in proportional scale. Great care must be
taken in product-market segmentation before drawing such charts.
It is quite possible for a company to be the largest in the industry
CE
and be a leader in no single segment.
)C
Figure 9.2: The BCG Matrix
The matrix reflects the contribution of the products offered by the

firm to its cash flow. Based on this analysis, products are classified
as ‘stars’, ‘cash cows’, ‘question marks’ and ‘dogs’ as shown in
Figure 9.2.
(c
z Stars (high growth, high market share): Stars are in the

upper left quadrant of the matrix.
They grow rapidly
They use large amounts of cash
149
Are leaders in the business so they should also generate
S

Notes
large amounts of cash
___________________
There is generally a balance on net cash flow.
___________________
Over time all growth slows. Therefore, stars eventually become
E
___________________
cash cows if they hold their market share. If they fail to hold
market share, they become dogs. ___________________
z Cash Cows (low growth, high market share): Cash cows ___________________
are in the lower left quadrant of the matrix.
UP
___________________
Such products are profitable and cash generation is high ___________________
Because of the low growth, investments needed should be ___________________

low ___________________
Keep profits high ___________________
They form the foundation of an organization.

Cash cows pay the dividends, pay the interest on debt and cover
the corporate overhead.
z Dogs (low growth, low market share): Dogs are in the
CE
lower right quadrant.
These products need to be avoided. You should try to
minimize the number of dogs in a company.
Beware of expensive ‘turn around plans’.
As soon as they stop delivering cash, they should be
phased out or otherwise liquidated.
They are essentially worthless and are generally cash traps.
)C
z Question Marks (high growth, low market share): They are in

the upper right quadrant.
These products have the worst cash characteristics of all,
because high demands and low returns due to low market
share.
If nothing is done to change the market share, question
marks will simply absorb great amounts of cash and later,
as the growth stops, turn into dogs.
(c
Either invest heavily or sell off; or invest nothing and

generate whatever cash it can. Either you should increase
market share or deliver cash.
150
Question marks are the real gambles. Their cash needs are great
S
Notes
because of their growth. Yet, their cash generation is very low
___________________
because their market share is low.
___________________
The strategic implications of this categorization appear obvious.
E
___________________ The cash cows become the financiers of the other developing
___________________ businesses of the organization. One funds the ‘stars’, decides what
to do with the ‘question marks’ and gets rid of the dogs.
___________________
However, the importance of this analysis is that it highlights the
___________________
UP
need for management to look into the products and analyze their
___________________
performance based on the fact that the life of products is finite. As
___________________ it has been put by a leading management thinker, “Perhaps the
___________________ most important task of management is to balance the needs of
existing lines against the needs of potential lines.”
___________________
The degree of applicability of the portfolio model depends on a
number of conditions; some of them are given below:
z It is essential that the market is defined properly to account
for the important interdependencies with other markets
z In many industries, the relative market share is not a good
CE
proxy for competitive position and relative costs
z Market growth is a good proxy for required cash investments.
Yet profits and cash flow depend on a number of other factors.
The growth – share matrix is by itself not very useful in
determining strategy for a particular business. However, it
provides analysis in determining the competitive position and this
can then be translated into strategy. For example, a business being
harvested could be vulnerable to attacks on its market share. The
)C
comparison of competitor’s portfolio over time could provide

information on shifts in competitor’s unit relative to other and
provide an insight into the strategic mandate of the competitor.
GE/McKinsey Matrix
GE’s Business screen is a more complex version of the BCG;
however, it is derived from the same principles as the BCG Matrix.
This model is an example of highly centralized planning
(c
specialists. This matrix is a model to perform a business portfolio

analysis on the Strategic Business Units of a corporation. Strategic
Business Units (SBUs) are portrayed as a circle plotted in the
Matrix. Here the sizes of the circles represent the Market Size; the
size of the pies represent the Market Share of the SBUs’, and 151
S
arrows represent the direction and the movement of the SBUs in Notes
the future. This is shown in Figure 9.3. ___________________
GE/McKinsey Matrix ___________________
E
Competitive Strength ___________________
___________________
Low Medium High
___________________
UP
___________________
High
Market Attractiveness
___________________
___________________
Medium
___________________
___________________
Low
Figure 9.3: GE/McKinsey Matrix
The GE/McKinsey Matrix is a later and more advanced form of the

CE
BCG Matrix in three aspects, which are discussed below:
In this model, market growth is replaced by market (Industry)
attractiveness as the dimension of industry attractiveness. Porter
identified market growth as just one of the parameters of market
attractiveness. Market Attractiveness includes a broader range of
factors other than just the market growth rate that can determine
the attractiveness of an industry/market. Depending on the
product characteristics, different parameters can be selected to
measure ‘market attractiveness’.
)C
Typical factors that affect ‘Market Attractiveness’ are called

‘drivers’ and can be:
z Market size
z Market growth rate
z Market profitability
z Pricing trends
(c
z Competitive intensity / rivalry

z Overall risk of returns in the industry
z Opportunity to differentiate products and services
152
Demand variability
S
z
Notes
___________________
z Segmentation
___________________ z Distribution structure

Market share in the BCG Matrix is replaced by competitive
E
___________________
strength. This is the dimension by which the competitive position
___________________
of each SBU is assessed. Competitive strength likewise includes a
___________________
broader range of factors other than just the market share that can
___________________ determine the competitive strength of a Strategic Business Unit.
UP
___________________ Typical drivers of Competitive Strength of a Strategic Business
Unit:
___________________
z Strength of assets and competencies
___________________
z Relative brand strength
___________________
z Market share
z Market share growth
z Customer loyalty
z Relative cost position (cost structure compared with
CE
competitors)
z Relative profit margins (compared to competitors)
z Distribution strength and production capacity
z Record of technological or other innovation
z Access to financial and other investment resources
Finally it works with a 3×3 grid, while the BCG Matrix has only
2×2. This also allows for more sophistication.
)C
Using the GE / McKinsey Matrix involves a six-step approach. The

different stages to implement the portfolio analysis include the
following:
z The drivers for each dimension are to be specified. The
organization must carefully determine those factors that are
important to its overall strategy
z You must assign relative importance by giving weights to the
drivers
(c
z Score the SBUs’ on each driver and multiply weights times

scores for each SBU to determine the value of each dimension
z Repeat the exercise for each dimension
153
View resulting graph and interpret it
S
z
Notes
Activity
z Perform a review/sensitivity analysis using adjusted weights
Analyse the main issues
___________________
and scores. which have to be taken care of
___________________
while formulating a multi
Though this matrix analysis is more sophisticated that many other
E
business strategy.
___________________
similar tools, there are some important limitations. It has most of
the advantages and limitations of the BCG matrix analysis. ___________________
However, it has some specific characteristics that need to be ___________________
understood:
UP
___________________
z The company position/ industry attractiveness screen is less
___________________
precisely quantifiable than the growth/ share matrix.
___________________
z This technique requires subjective criteria about where a
___________________
particular business unit should be plotted.
___________________
z The screening technique reflects the assumption that each
business unit is different and requires its own analysis of
competitive position and industry attractiveness. Therefore, it
is more vulnerable to manipulation.
Check Your Progress

CE
Fill in the blanks:
1. …………………. are in the upper left quadrant of the
matrix.
2. …………………. cows are in the lower left quadrant of
the matrix.
Strategic Alliances
)C
Lando Zeppei, managing partner of Booz, Allen and Hamilton,

defines strategic alliance as a cooperative arrangement between
two or more companies where:
z A common strategy is developed in unison and a win-win
attitude is adopted by all parties
z The relationship is reciprocal, with each partner prepared to
share specific strengths with each other, thus lending power to
the enterprise
(c
z A pooling of resource, investments, and risks occurs for mutual

(rather than individual) gain
154
Strategic alliances and partnerships have become popular recently.
S
Notes
Strategic alliance is an intention to cooperate at a strategic level,
___________________
to share information, and to work together in a way that goes
___________________ beyond a clear contractual arrangement. In a rapidly changing
world, strategic alliances are an effective way in which the
E
___________________
___________________ necessary speed of response and global spread can be achieved. In

a strategic alliance, two or more organizations share resources,
___________________
capabilities, or distinctive competencies to pursue some business
___________________
UP
purpose.
___________________
Strategic alliances often transcend the narrower focus and shorter
___________________
duration of joint ventures. These alliances may be aimed at world
___________________ market dominance within a product category. However, it must be
___________________ kept in mind that the companies in strategic partnerships are
normal competitors. Therefore, the types of projects that are
conducive to this instrument are normally limited. Strategic
partnerships are becoming relatively common with large
companies in electronics/computers, automobiles, oil and mining,
while they are still rare in small and medium companies.
CE
The incentive for such relationships is to gain competitive or
strategic advantage. This would include: gaining access to new
markets and new supply sources; access to the latest technology; or
improve the utilization of resources. In the developing counties and
the underdeveloped countries, organizations rely on strategic
alliances for technology and know-how acquisition, on a large
scale. Apart from these reasons, strategic alliances are also used to
accelerate product introduction and overcome legal and trade
)C
barriers. Sometimes, speed and timing are of essence in

implementing strategies, alliances may help the organization
attain these.
There are many examples of strategic alliances in India also. Some

of the alliances that have been successful are alliances such as
TVS-Suzuki and Mahindra-Ford, BPL-Sanyo, and Videocon-
Sansui. To realize its mission of becoming a research-base
international pharmaceutical company, Ranbaxy entered into a
(c
strategic alliance with Eli Lilly of the US. Taj Hotels and British
Airways are a good example of synergistic benefits arising out of a
strategic alliance; both have gained through complementarities of
airline and hotel services.
Typologies of Strategic Alliances 155
S
Notes
Several typologies of strategic alliances are available in business
literature. One such classification is by Yoshino and Rangan. This ___________________
is a two dimensional model with the two dimensions being, the ___________________
extent of organizational interaction and conflict potential between
E
___________________
alliance partners. The classification is shown in Figure 9.4.
___________________
Low High
Conflict ___________________
UP
___________________
High Non-competitive Competitive
___________________
Interaction
___________________
___________________
Pro-competitive Pre-competitive ___________________
Low
Figure 9.4: Typology of Strategic Alliances

CE
z Pro-competitive Alliances: These are generally alliances
within the industry exemplified by vertical value-chain
relationships between manufacturers and their suppliers and
distributors. Such relationships are advantageous to both
parties as they do not invest resources for the activities carried
out by the other. Supplier and buyer organizations entering
upon long-term contracts constitute pro-competitive alliances.
z Non-competitive Alliances: These are partnerships within
)C
the industry. Such alliances are entered upon by organizations

that operate in the same industry yet do not perceive each
others as rivals. This can be because their areas of activity do
not coincide and/or their products and services are sufficiently
dissimilar to prevent competition. Organizations that have
carved out distinct areas in the industry-geographically or
otherwise, adopt the non-competitive alliances. There has been
a growing trend in this direction in R&D Research.
A number of strategic alliances have been formed where a
(c
z
group of companies with a common need collectively contract
research development through an established institution or
through an independent facility. This allows the companies to
share the risk and cost. It also creates a situation where they
156 can learn from each other as well as from the experts
S
Notes conducting the research. For example, a number of automotive
___________________ manufacturers in Europe have entered into a strategic alliance
for engine development.
___________________
z Competitive Alliances: These are relationships that bring
E
___________________
rival organizations in a cooperative arrangement. These
___________________
alliances may be intra-or inter-industry. Many foreign
___________________ companies, operating independently in India, have sought this
___________________ route to enter into a cooperative arrangement with local rival
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companies for specific purposes. For example, Coca Cola
___________________
entered into an agreement with Parle Products, the
___________________
manufacturers of Thums Up, their main competitors in
___________________ western India.
___________________ z Pre-competitive Alliances: These partnerships bring two
organizations from different, often unrelated industries to
work on well-defined activities. This is often seen in activities
such as, mass awareness campaigns or environmental and
social issues. Sometimes inter industry and inter disciplinary
cooperation is necessary for development. For example, Intel
CE
has pre-competitive alliances with software, hardware and
other manufacturers.
Contractual Arrangements
Contractual arrangements come in many different forms. Long-
term contracts are agreements between two firms without actual
exchange of ownership. One form is Consortia. These are groups of
companies that form a joint entity for a specific purpose—such as
building the channel tunnel. When the project is finished, the
)C
consortium breaks up.

Franchising is another form of contractual arrangement and is
commonest in retailing. Some of the well known franchises in India
are McDonalds, Pizza Hut, DPS Schools, and NIIT etc. The
franchisee pays the franchiser a fee for services and royalties,
typically for use of the company name, business approaches, and
advertising. The franchisee risk is determined by the success of the
brand name and by the support and advice provided by the
(c
franchiser.
There are other types of contractual arrangements used for
technology acquisition. It is also possible to develop combinations
of these sources of technology for best results. Many companies
purchase technology by the route of purchasing only the drawing 157
S
and technical specifications of the process or product or both. In Notes
such cases, it is quite common to hire the services of experts from ___________________
the seller to operate the system till such time that the buyer is able
___________________
to absorb the technology. Recent developments include strategic
E
partnerships in Research & Development and personnel ___________________
secondment. ___________________
___________________
Collaborative Development
UP
___________________
The internal R&D work with an external agency to jointly develop
a technology. This enhances the ability of the firm to enter into ___________________
technology areas, where it might not be able to do so singly. ___________________

Collaborative development has the same advantages and ___________________
disadvantages as internal R&D. The basic difference is that the
___________________
results are jointly owned, and an effective mechanism to co-
ordinate the efforts of the teams are necessary. This approach
actually improves the company’s external acquisition capabilities.
This often uncovers technology options that might not be
considered by the firm from its internal R&D.
CE
Joint Ventures
In a joint venture, two or more organizations form a separate legal
undertaking, which is an independent organization for strategic
purposes. The partnership is usually focused on a specific market
objective. They may last from a few months to a few years, and
often involve a cross-border relationship. One organization may
purchase a percentage of the stock in the other partner, but not a
controlling share. Entering into a joint venture agreement with a
)C
technology provider is another form of external acquisition that

can be very effective. This form is extremely advantageous when it
is contracted between a company with technology and a company
with market access. It normally takes the form of a new company
with each of the partners owning shares in the company. For
example, General Motors came into India in a joint venture with
Hindustan Motors and set-up it manufacturing facilities at Halol,
in Gujarat.
(c
Licensing
Licensing is a third form of contractual arrangement. Licensing
existing technology is a popular and effective form of technology
acquisition. It enables the firm to move directly into the
158 implementation of the project. Its major advantage is the reduction
S
Notes in time to market the product, relative to forms of technology
___________________ acquisition that require development. If the payment is in the form
of royalty, the provider of the technology shares the risks of
___________________
financial performance.
E
___________________
It has the appearance of being low risk or almost risk free. This is
___________________
true if the company’s application is identical to the one for which
___________________ the technology was developed. However, there is implementation
___________________ risks involved, in such cases.
UP
___________________ When the application is not similar or the variables change
___________________
significantly, the risks can be serious. Some of the variables that
one should consider include scale of operations, climate, and legal
___________________
requirements to reduce import content, quality of local inputs, skill
___________________ level of acquiring organization, and level of codification of the
technology.
Though this is often the lowest cost option to the firm, the major
risk in the technology transfer mechanism is the inability of the
firm to develop the internal technical strength to absorb the
technology. Alternatively, the reluctance of the technology supplier
CE
to create this competence in the firm can result in higher risks and
often failure of the project.
The major limitation of licensing is that the licensee will seldom be
able to compete with the licensor. This is because of the inherent
impact on the price of the product or service. The price is
constituted of a number of components, manpower, materials,
money, capital investments, and taxes. It will be an unusual
circumstance if the sum total of these factors comes out to be the
)C
same in different economies and under business conditions.

This means that imported technology generally has limitations in
that it is the sub-optimal when implanted across international
borders where costs of resources and taxes, scales of operation and
productivity parameters undergo change. The greater the change,
the less suitable is the technology. This is a very important
consideration when considering how technology is to be managed.
How do we minimize the impact of these factors when selecting
(c
technological options? What do we need to do within the firm to

improve the competitiveness of such technologies?
This route has been used by a number of corporations to establish
their products or brands in India. Daimler Benz had a licensing
agreement with Telco, GE and Siemens had a number of licensing 159
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agreements with BHEL. There are may such examples. This can Notes
allow quick growth by avoiding the need to build manufacturing or ___________________
distribution capability. At the same time, the intellectual property
___________________
rights for the invention are retained. Licensing is probably most
E
frequent in high technology businesses particularly in foreign ___________________
countries or specialized markets where volumes of business may be ___________________

too low to justify a permanent presence. Such contracts normally
___________________
have a defined duration. Difficulties with this mode include
UP
___________________
conflicts of interest when the same agent acts for competing
principals, develops competitive products or is simply inert. ___________________
___________________
Contracted Out R&D
___________________
Companies choose to contract out R&D for a variety of reasons. It
___________________
is an ideal option for those who do not have the necessary facilities
and expertise to carry out the work and yet would like to maintain
control and own the results exclusively. It allows short-term access
to world-class personnel and facilities that would normally be
beyond the company’s means. With the selection of the right team
for the work required, it should be able to assemble a more capable
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team than it could assemble internally.
Contracting R&D reduces the company’s hands-on experience with
the technology. This can be quite risky if the application of the
technology is in areas with no in-house expertise. The risk of
breach of confidentiality may be high in some cases. The ownership
of the technology and what constitutes the technology needs to be
carefully defined in the documentation.
Consulting Engineering Firms are often a source of technology.
)C
Obtaining technology from consulting engineering firms is another

form of contracted out R&D. This is generally used in the case of
process design, and seldom for product design. It has the problems
associated with contracted out R&D as well as its advantages.
Personnel Secondment
Firms to fill gaps in their perceived technological requirements are
increasingly using Personnel secondment. A number of firms offer
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Operation and Maintenance contracts for running complex

industrial plants. This method is increasingly being used where
the promoters have high level of financial and organizational skills
but lack technical skills.
160
Another form of personnel secondment is called “body shopping”.
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Notes
This is quite common in the software industry. The firm buys the
___________________
services of trained personnel for limited period of time, based
___________________ either on specific project requirements or on a ‘time’ basis. In this
case, the seconded personnel are generally specialists, who the
E
___________________
firm may find uneconomical to recruit on a long-term basis.
___________________
An example is the early business model of Infosys Technologies. It
___________________
was set-up in 1981 as a body shopping operation. The customers
___________________ were mostly located in the United States. Infosys would send its
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___________________ officers to the customer site and plan, prepare, develop, implement
___________________
the software system and train organization members on-site. On
project completion the manpower resources were re-located to the
___________________
next project. The client was able to leverage low cost manpower to
___________________ create a quality product with extremely low risks as the functions
of the ‘seconded personnel’ were defined and the credentials
tailored to the requirements.
The costs are low, because in all these cases the transfer of
technology is facilitated either through an individual or group of
individuals or through an off-shore entity with the core competency
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to create value through price differentials. The contracting
organization is able to develop its technological objectives during
the period of secondment.
Managing Strategic Alliances

Managing strategic alliances is difficult. Yet, like most things
difficult to manage, the ultimate rewards well worth the effort. A
good strategic alliance should be consistent with the corporate
strategies of the partners; the operational responsibility of each
)C
partner has clarity; there is trust and commitment on both sides;

and there is a continuing and consistent commitment to shared
goals. Walters, Peters & Dess suggested four basic principles to
manage alliances successfully.
z Clearly define the strategy and assign responsibilities
z Phase in the relationship between the partners
z Blend the cultures of the partners
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z Provide for an exit strategy

Phasing in the relationship means giving adequate time and
opportunity to the partners to know each other well. Once two
firms have worked in a partnership successfully it is easier for 161
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them to work in subsequent projects. It is also important to blend Notes
Activity
cultures. There must be an understanding and appreciation of the Write an essay on Value
___________________
differences. It is the understanding between people that makes through Corporate Strategy.
___________________
any alliance work. In addition, an exit clause is essential to cover
E
the eventuality that the alliance does not work or the objectives ___________________
are not being achieved. Contracting and communication issues ___________________

need to be clearly understood for successful partnerships.
___________________
There are dangers in strategic alliances in that the objectives of
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___________________
the two parties may drift apart over time and the arrangement is
___________________
hard to terminate neatly because of the lack of organization
contracts. The Rover–Honda alliance is an example of an ___________________
arrangement that seemed to work well for a time but ended ___________________
messily when Rover was acquired by BMW. Strategic alliance is a
___________________
demanding strategy in terms of the leadership and human
relations skills of the managers involved.
Check Your Progress

CE
1. There has been a diminishing trend in this direction in
R&D Research.
2. Contractual arrangements come in only in one forms.
Value through Corporate Strategy

The key strategic issue for stakeholders is how best to seek out the
most effective ways to maximize the different forms of value
created through utilization of capital. Recent years have brought
)C
new ways of looking at the spectrum of value creation, expanding

business perception to effective action on a broad civil society
agenda.
The issue is: what is the value created by an organization through
corporate strategy? Is it limited to the business model of the firm
or does it have to be measured on dimensions over and above the
simple concept of profit and growth? Value is what gets created
when investors invest and organizations act to pursue their
(c
mission. Traditionally, we have thought of value as being either

economic (created by for-profit companies) or social (and created by
non-profit or nongovernmental organizations). All organizations,
162 whether for-profit or not, create value that consists of economic,
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Notes social and environmental value components.
___________________
This measure of value, which is being increasingly used, has
___________________ helped drive and shape the fields of corporate strategy and is
called the triple bottom line (TBL) concept. The TBL concept
E
___________________
focuses on value created - or destroyed - in relation to (a) the
___________________
economy, (b) society, and (c) the environment. Successful
___________________ corporations must evolve new ways of monitoring, measuring, and
___________________ managing their impacts (both positive and negative) in these three
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areas.
___________________
___________________
Acceptance of this concept has resulted in firms adding to their
agenda improvements in areas such as public relations or
___________________
stakeholder engagement, rather than just the company’s business
___________________ model. The TBL concept has been built into the strategies of many
companies. While some believe this to be a trade-off across the
various dimensions, the general perception is that TBL is a
positive sum game.
Many companies are using a model that combines the multiple
dimensions of value creation and tailors them to the specific needs
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and tastes for its stakeholders. An example is Toyota Motors.
Toyota in its new offering of Prius hybrid cars spotlights the
environmental credentials in Europe (presenting them as "green"
cars), but emphasizes technology, fuel efficiency, and torque (i.e.,
they are positioned as "muscle" cars) in the United States. The
growing complexity of the parameters of judging business success
means that successful enterprises need to know how to operate
across the full spectrum of value—and value perception.
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Efforts are on to develop standard methodologies for assessing

progress against the triple bottom line and the social return on
investment model or other concepts linked to multi-dimensional
value creation. Among recent experiments, one of the most
interesting is ITC Ltd. who has prepared circulated full-fledged set
of TBL accounts for the company. This is also being practiced by
Tata Steel Ltd.
Triple Bottom Line (TBL) is assessed using Input-Output Analysis
(c
(IOA). Input-output analysis is a top-down economic technique,

which uses sectoral monetary transactions data to account for the
complex interdependencies of industries in modern economies.
Table 9.1: Some Macro TBL Indicators 163
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Notes
___________________
___________________
E
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
Some macro TBL indicators have been shown in Table 9.1. Thus
economic indicators of surplus, exports and imports can be
reported as "dollars of surplus per dollar of final demand". Social
indicators such as employment, wages and government revenue
CE
can be described as "the minutes of employment generated per
dollar of final demand". Environmental indicators such as
greenhouse gas emissions, water requirement and land
disturbance can be described as "kilograms of carbon dioxide
equivalent emissions per dollar of final demand" or the like.
It is important to note that understanding value as a composite of
three components does not mean value is in any way "blurred" or
that each component loses its definition. Rather, firms and capital
)C
should seek to maximize the contribution of each component to

ensure that both performance and returns are greater than the
sum of their parts. That understanding is what is now driving
companies such as ITC Ltd. or Tata Steel.
Check Your Progress

Fill in the blanks:
1. The ……………….. concept focuses on value created or
(c
destroyed.
2. ………………. analysis is a top-down economic
technique.
164
Summary
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Notes
Portfolio analysis is an analytical tool which views a corporation as
___________________
a basket or portfolio of products or business units to be managed
___________________ for the best possible returns, and help a corporate to build a multi-
business strategy. Though the portfolio approaches have
E
___________________
___________________
limitations, but all these limitations can be overcome through
effective strategy development and meticulous planning. A SBU
___________________
can either be an entire mid-size company or a division of a large
___________________ corporation. The basis for many of these matrix analyses grew out
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___________________ of work carried out in the 1960s by the Boston Consulting Group
(BCG). The matrix reflects the contribution of the products offered
___________________
by the firm to its cash flow. Based on this analysis, products are
___________________
classified as ‘stars’, ‘cash cows’, ‘question marks’ and ‘dogs’. The
___________________ key strategic issue for stakeholders is how best to seek out the
most effective ways to maximize the different forms of value
created through utilization of capital.
Lesson End Activity

Though BCG matrix can be very helpful in forcing decisions in
CE
managing a portfolio of products, it cannot be employed as the sole
means of determining strategies for a portfolio of products. Do you
agree with this statement or not? Why?
Keywords
BCG Matrix: It reflects the contribution of the products offered by
the firm to its cash flow.
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Stars: These are products with high growth and high market
share.
Cash Cows: These are products with low growth but high market
share.
Dogs: They are products with low growth and low market share.
Question Marks: These are products with high growth but low
market share.
GE Matrix: This is a more complex version of the BCG matrix
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with cash flow as the basis for differentiation, the market growth
is replaced by market (Industry) attractiveness as the dimension of
industry attractiveness and market share is replaced by
competitive strength.
Questions for Discussion 165
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Notes
1. Why portfolio analysis is a good option for multi-product
___________________
organisations?
___________________
2. Compare and contrast the General Electric Grid and the BCG
E
Matrix? ___________________
3. Do you think BCG Matrix has limited application? Justify your ___________________
answer. ___________________
4. On the basis of GE Matrix, make an analysis of banking
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___________________
company of your choice. ___________________
5. Compare the BCG matrix with the GE model and relate the ___________________
two to the experience curve.
___________________
___________________
Further Readings
Books
CE
Ltd.
Education.
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Web Readings
http://www.utdallas.edu/~zlin/RP(2011).pdf
http://www.drlaureen.com/solutions/gold-brilliance-success-
portfolio/
http://studenttheses.cbs.dk/bitstream/handle/10417/3519/helena_el
isabeth_harton_reichwald%20.pdf?sequence=1
http://www.business.uconn.edu/ccei/files/IDEAawards/Ozcan%20O
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rigin.PDF
http://sun.csim.scu.edu.tw/~jjhuang/papers/DeNovofSA.pdf
166
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Notes
___________________
___________________
E
___________________
___________________
___________________
___________________
UP
___________________
___________________
___________________
___________________
CE
)C
(c
UNIT 10: Case Study
Unit 10
167
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Notes
Case Study
___________________
___________________
E
___________________
Objectives
___________________
UP
___________________
___________________
Case Study: Ryanair Case Study Analysis
___________________
Ryanair started in year 1985 with only 57 staff members and with
one 15 seater turboprop plane from the south of east of Ireland to ___________________
London-Gatwick which carried 5000 passengers on one route. In
___________________
1986, inspired from the story of David and Goliath the company
sought to go after the big guys for a slice of the action and ended
up smashing the British Airways high fare cartel on the Dublin-
London route. The staff increased from mere 57 to 120 staff
members and the plane carried for about 82,000 passengers on
two routes. In 1989, the company employed 350 staff and their
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average maximum passengers increased to 600,000. In 1990-1991,
the company has 700,000 passengers.
However, despite of the increase of passengers, the company is

not so good in managing cost that the company has lose its
money. A new management team is brought in to sort it out and
re-launch as a “low fares or no frills” airline, closely modelling the
Southwest Airlines model in the U.S. And in 1994, Ryanair
bought its first Boeing 737 aircraft which carried over 1.5 million
passengers. In 1995, Ryanair is the biggest passenger carrier on
)C
Dublin-London route, the largest Irish airline on every route

being operate and carried 2.25 million passengers in the year
2002.
In 1997, the EU air transport deregulation allowed the airline for
the first time to open up new routes to Continental Europe with
over 3 million passengers on 18 routes carried. Ryanair launched
services to Stockholm, Oslo, Paris and Brussels and took time out
to float Ryanair plc on Dublin and NASDAQ Stock exchanges.
The company was awarded as Airline of the Year in 1999 by the
Irish Air Transport Users Committee. In 2000, they announced
(c
the launch of 10 new European routes for the summer 2000 after
much deliberation and watching others burning money. The
company has also jump onto the internet with the launch of their
new online booking site and in just 3 months the site is taking
Contd…
168 over 50,000 bookings a week. By 2001 there are more than 1500
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Notes employees working for Ryanair and more than 10 million
passengers are carried to 56 cities in 13 European countries. The
___________________
company has opened Frankfurt-Hahn in 2002 as their second
___________________ continental European base and announce a long term partnership
with Boeing which will see the company acquiring up to 150 new
E
___________________
Boeing 737-800 series aircraft over an eight year period from
___________________
2002-2010.
___________________ The booking in their web accounts have increased to 94% which
___________________ has probably has something to do with opening another 26 routes.
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In year 2003, the company is characterised by rapid expansion
___________________
and the start the year by announcing that the company has
___________________ ordered an additional 100 new Boeing 737-800 series aircraft to
facilitate the rapid European growth plans. They acquired Buss
___________________
from KLM in April and re-launched 13 buss routes in May. In
___________________ February they opened their first base in Italy at Milan-Bergamo
and launched their Stockholm base in Sweden with six new
European routes. In all 60 new routes are added throughout 2003
to bring the company a total of 127 routes. By 2004, the company
is named as the most popular airline on the web by Google and
they launched their 10th and 11th bases in Rome Ciampino and
Barcelona Girona and continue to add more routes to their
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already extensive network. The company has also passed out
British Airways to become the UK’s favourite airline in United
Kingdom and throughout Europe.
Critical Success Factors
Although the company had encountered different problems,
specifically in line with its cost structures, the company had been
able to survive and grow in the marketplace. Ryanair implement
different marketing strategy to make the company survive in the
competition and to be able to gain competitive position in the
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airline market. It is said that the company was regarded recently

as the most punctual airline between Dublin and London. And
because of the strategy of the industry, Ryanair is now recognised
as the second largest airline in United Kingdom and Europe’s
largest low-fares airline having a network of over 57 routes in 11
countries and served by a fleet of 31 Boeing 737-200 and -800
aircraft with over 1,400 staffs and personnel.
In order to position itself in the marketplace the company
continuously concentrates on driving own its costs to offer the
(c
lowest fares possible and remain profitable. In addition, Ryanair

offer minimum standards of service and very low prices for point-
to-point, short haul flights. The goal of Ryanair is to meet the
needs of travelling at the lowest price. The Critical Success
Contd…
UNIT 10: Case Study
Factors (CSFs) are as follows in airline industry: the strategic 169
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focus of having the lowest prices, being reliable within the Notes
marketplace, comfort and service and frequency.
___________________
It is noted that low-cost companies concentrate on this first
___________________
critical success factor by trying to offer the lowest prices.
E
Although Ryanair has eliminated extras such as in-flight meals, ___________________
advanced seat assignment, free drinks and other services, it still
___________________
prioritises features which remain important to its target market.
Such features include frequent departures, advance reservations, ___________________
baggage handling and consistent on-time services.
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___________________
Cost Reduction Strategy ___________________
To achieve its goal of having a competitive position in the airline ___________________
market, Ryanair uses a cost reduction strategy. Such cost
___________________
reduction strategy relies on five main aspects like fleet
commonality, contracting out services, airport charges and route ___________________
policies, managed staff costs and productivity and managed
marketing costs. In terms of fleet commonality, the company used
only one kind of plane which limits the cost for staff training,
maintenance services and facility of obtaining spares, facility in
scheduling aircraft and crew assignment. With their purchase
of aircraft Boeing 737, Ryanair has been able to gain capacity and
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reduces the average age of fleet which means savings on
maintenance costs and avoiding the fit of European Union-
conform equipment on old feet.
The next factor under the cost reduction strategy of Ryanair is

contracting out services. In this manner, aircraft handling,
ticketing, handling and other functions are contracted out by
Ryanair to third parties. In addition, in order to limit their
expenses engine and heavy maintenance are also contracted out
whereas the staff of Ryanair carries out routine maintenance.
)C
Another factor for the cost reduction strategy of the company is in

terms of airport charges and route policies. Herein, Ryanair has
made judicious choice of dealing with secondary and regional
airports, where the traffic is not jammed and fees incomparably
lower. Since Ryanair, is a true windfall for such airports, the
airline company has a bargaining power which enables it
getting favourable access fees. In addition, Ryanair provides only
a point-to-point service, thus, it has no cost concerning connecting
passengers. Moreover, the company pays special focus to on-time
(c
departures because it means maximising aircraft utilisation.
Managing staff costs and productivity is another factor used for

reducing the cost for Ryanair. In this manner, the company pays
its staff on modest salary but has set up a performance related
Contd…
170 pay structure which urges employees to maximise the number of
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Notes sectors flown daily. This way, Ryanair both controls productivity
and keeps staff costs down. Lastly, managing marketing costs is
___________________
another factor that makes the company reduces it costs. Ryanair
___________________ advertises mainly on it website with its logo “Ryanair.com, the
Low-Fare Airline”. In addition, it is also advertised in national and
E
___________________
regional Irish and UK newspaper, on radio and on television.
___________________
Porter’s Generic Strategy
___________________
Aside from it cost-reduction strategy, Ryan has also been able to
___________________
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use Porter’s generic strategies to position itself in the
___________________ marketplace. Accordingly, a company positions itself by
leveraging its strengths. Today, more and more people and
___________________
organization are striving to be recognized in the business arena.
___________________ With this objective, these organizations had been able to
___________________ competently and effectively adapt to the situation in the market
place by using generic strategies that enhanced their
competitiveness. There are five different generic strategies that a
business can choose.
These include cost leadership, differentiation, focused cost

leadership and integrated cost leadership/differentiation. Each
generic strategy helps the company to establish and exploit a
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competitive advantage within a particular competitive scope
(2003). By applying these strengths, three generic strategies are
resulted: cost leadership, differentiation and focus (1997). The
strategies used by the company include cost leadership,
differentiation strategy and focused differentiation.
Cost leadership strategy is based upon a business organising and

managing its value-adding activities so as to be the lowest cost
producer of a product within an industry (2002). Cost advantage
may achieve in terms of how product or services is designed or in
)C
terms of its quality. Differentiation strategy is based upon

persuading customers that a product is superior to that offered by
competitors (2002). The value added by the uniqueness of the
product or services may allow the company to charge a premium
price for it. However, the danger associated with differentiation
may include imitation by competitors and changes in customer
tastes.
Focus-differentiation strategy is aimed at a segment of the

market fro a product rather than at the whole market or many
(c
markets (2002). The successful way using focus strategy is to

tailor a broad of product or service development strengths to a
relatively narrow market segment that they know very well. The
risk may include imitation and changes in the target segments. In
Contd…
UNIT 10: Case Study
the case of Ryanair, these three generic strategies had been 171
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utilised. First, the company offers the lowest cost of fare than its Notes
competitors in the airline. On the other hand, Ryanair has also
___________________
become a focuser because it concentrated on a narrow customer
segment which include Irish and UK business people or travellers ___________________
who could not afro to fly major airlines.
E
___________________
The main goal of the company is to provide a no frills service with
___________________
low fares designed to stimulate demand. At the time, it did not
aim to offer the lowest fare on the market. However, the company ___________________
expanded to continental Europe and had to focus on critical
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___________________
success factors to survive. Nowadays, it can be said that Ryanair
___________________
has shifted generic strategies to become more of a cost-leader not
only in terms of passenger volumes but being the lowest cost ___________________
operator in the airline industry.
___________________
Ryanair has restyled itself and shifted from a full service
___________________
conventional airline to the first European low fares, no frills
carrier. In 1985, it provided scheduled passenger airline services
between Ireland and the UK. By the end of 1990 and despite a
growth in passenger volume, the company had experienced some
trouble and had to dispose of five chief executives, recording
losses of IR 20 million. Ryanair had to fight to survive and the
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new management team, headed by Michael O’Leary, decides to
restyle the company on the model of successful American
Southwest Airlines.
Indeed, when one considers Porter's original framework,
Ryanair's generic strategy used to be unclear: it situated itself
somewhere between a cost leader and a focuser, although we can
consider it was closer to a focuser. The problem with such niche
strategies is that they involve a number of risks, the most obvious
being that the niche can get saturated and competitors invade the
segment. As long as Ryanair was the only European no frills
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airline, it did not have to distinctly define its strategic position. It

used to try and mix focus and cost leadership and was muzzy
about which one it wanted. But as soon as competitors started
blooming, it had to decide which strategy it would stick to. He
decided to ruthlessly pursue cost leadership. This strategy was a
success and by 1997, Ryanair was floated on the Dublin Stock
Exchange and on NASDAQ.
Expansion strategy is another factor that enables Ryanair to
position itself in the marketplace. The company has been known
(c
to be an airline which launches new routes since its operation

begins. In addition, under the expansion strategy, company
acquires Buzz in February 26, 2003. Such acquisition enables
Ryanair to gain immediate access to 11 new French regional
Contd…
172 airports and makes the company the largest airline operating at
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Notes London Stansted Airport. In addition, the company continues to
expand by opening two new Continental European bases with
___________________
low-fare flights from Milan Bergamo and Stockholm. In the year,
___________________ 2003, the company has been able to launch 73 new routes and
carry over 2 million passengers in one month (July). In addition,
E
___________________
the company website has been able to make the company position
___________________
itself in the global market.
___________________ Strategic Option
___________________ The case study has provided the problems and issues encountered
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___________________ by the Ryanair, in spite of its strategies. One of the problems is in
terms of handling customers or target market. In addition,
___________________
another problem is assuring quality service. In this manner, the
___________________ strategic option that can be used by the company for satisfying
both internal and external customers and marketing environment
___________________
is the use of total quality management. The industrial
competitions in airline industry worldwide are at brisk, making
companies in this field across the globe search for extensive
strategic management procedures that would keep them in on the
business world. The tasks of crafting, implementing, and
executing company strategies are the heart and soul of managing
business enterprise. A company’s strategy serves as the game
CE
plan management and is use to stake out a market position,
conduct its operations, attract and please customers, compete
successfully, and achieve organizational objectives. Thus, TQM
as a strategy is certainly appropriate for such situation.
Total Quality Management is a philosophy of management that is
driven by the constant attainment of customer satisfaction
through the continuous improvement of all organizational
processes (1998). It is a management philosophy that seeks to
integrate all organizational functions such as marketing, finance,
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design, engineering, production, customer service, and others to

focus on meeting customer needs and organizational objectives
(2000).
It is known that every organization’s primary purpose is to stay in
business, so that it can promote the stability of the community,
generate products and services that are useful to customers, and
provide setting for the satisfaction and growth of organization
members. From this perspective, it can be said that TQM
strategy for achieving its normative outcomes is rooted in four
(c
interlocked assumptions: quality, people, organizations, and the

role of the senior management (1995).
Total Quality Management is a planned procedure for satisfying
internal and external customers and suppliers by integrating the
Contd…
UNIT 10: Case Study
business environment, continuous improvement, and come 173
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through with advancement, growth, and safeguarding the cycles Notes
while changing organisational culture. Furthermore, TQM is an
___________________
array of management system throughout the organisation, geared
to ensure that the organisation to continuously attain or surpass ___________________
customer requirements. TQM places strong focus on process
E
___________________
measurement and controls as means of continuous improvement.
Moreover, Total Quality Management is infinitely variable and ___________________
adaptable. Although originally applied to manufacturing
___________________
operations, and over the years only used in that area, TQM is now
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being recognised as a standard management instrument, just as ___________________
applicable in service and public sector organisations like the ___________________
airlines industries (2004).
___________________
The Total Quality Management (TQM) philosophy of management
is customer-oriented. Hence, the airline operations must be ___________________
developed in order to steadily deal with the improvement of their ___________________
operation through the ongoing participation of all employees in
problem solving efforts across functional and hierarchical
boundaries. TQM incorporates the concepts of service quality,
process management, quality assertion, and quality perfection.
Consequently, the airline company must be able to control all
transformation processes with regards to their operations and
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services to better satisfy customer needs in the most economical
way.
In order to apply the TQM to Ryanair especially to be used in its

airline operations and services, the management of the airline
company must be able to accept the whole concept of the
improvement, which means that all the people of the airline
company must agree that there is a need for a total
transformation especially for the quality of operations and
services that the industry will be offered. Furthermore, the
management should be willing to participate to all the
)C
improvement, value each and every ones opinion in order to

achieve total quality management and provide a total quality
operations and services to satisfy their customers. Managers and
experts disagree about how to effectively implement Total Quality
Management to their organisations. Eventually, customer
satisfaction has always been regarded as the driving force behind
quality improvement; others suggest quality management is
achieved by internal productivity or cost improvement programs.
In other applications, Total Quality Management is regarded as a
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technique to introduce the context of participative type of

management (1998). Thus, the management should be more
straightforward to provide the potential role of applying the Total
Quality Management to their operations and services.
Contd…
174
In addition, since Total quality management is based on internal
S
Notes
or self-control, which is embedded in every element of the work
___________________ system (technology and people), the employees or the people
behind the operation and services being offered to the passengers
___________________
and customers of the airline must be able to determine the
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___________________ problems beforehand, to anticipate its occurrences.
___________________ Pushing problem solving and decision-making down in the
___________________ Ryanair especially to their operations and services may allow
people who do the work to both assess and take remedial action in
___________________
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order to deliver an operation or service that meets the needs of
___________________ their customer. In applying total quality management to airline
operations, they must be able to combine it with the core strategy
___________________
of the industries; this does not mean that such airline companies
___________________ must have total changes. It is important that in application of the
___________________ Total Quality Management to the Ryanair operations and services
they must also consider that an appropriate strategy should be
used in order to employ a total quality operations and services
that would satisfy all clients and customers.
Question:

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Source:http://ivythesis.typepad.com/term_paper_topics/2009/04/case-study-analysis-ryanair.html
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UNIT 11: Strategic Management Process
175
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Notes
___________________
___________________
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___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
BLOCK-III
CE
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176
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Notes
UNIT 11: STRATEGIC MANAGEMENT PROCESS
___________________ UNIT 13: STRATEGIES FOR GLOBAL
ENVIRONMENT
z Introduction
___________________ z Introduction
z Purposes of Strategic Management Process
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___________________ z Major Drivers of Globalization
z Steps involved in the Strategic Management Process
___________________ z Impact on National Conditions
z Strategic Management Process
___________________ z Strategies in Geographic Expansion
UNIT 12: STRATEGIC CHOICE AND z Competing Internationally
___________________
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IMPLEMENTATION
___________________ UNIT 14: STRATEGIES FOR RETRENCHMENT
z Introduction
z Constraints and Strategic Choice
___________________ z Introduction
z Strategy Implementation
___________________ z What is Retrenchment Strategy?
z Strategic Control and Assessment z Corporate Restructuring Strategy

___________________
z Category of Corporate Restructuring
z Methods of Corporate Restructuring
z Turnaround Strategies
UNIT 15: CASE STUDY

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Unit 11
177
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Notes
Activity
Strategic Management Process
___________________
showing the purposes of
___________________
strategic management
process of any firm whom you
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___________________
are aware of.
Objectives
___________________
topics: ___________________
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\ Purposes of Strategic Management Process ___________________
\ Steps involved in the Strategic Management Process ___________________
\ Strategic Management Process
___________________
___________________
Introduction
___________________
A strategy is developed within a firm. The final product will
necessarily be shaped by the background of that firm, the
processes it has in place for arriving at basic business decisions
and the interests and perspectives of its senior managers.
Typically, these factors come together in a formal strategy process
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through which strategy is defined and evaluated by the firm's
managers. The strategic management process is a continuous
process. "As performance results or outcomes are realized – at any
level of the organization – organizational members assess the
implications and adjust the strategies as needed." In addition, as
the company grows and changes, so will the various strategies.
Existing strategies will change and new strategies will be
developed. This is all part of the continuous process of improving
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the business in an effort to succeed and reach company goals.
Purposes of Strategic Management Process

Strategic management basically aims at formulating and
implementing effective strategies. Effective strategies, of course,
are those that help a superior ‘fit’ between the organisation and its
environment and the achievement of strategic goals (Andrews).
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Strategies necessarily change over time to suit environmental

changes but, to remain competitive, organisations develop
strategies that focus on core competence, develop synergy and
create value for customers.
178
Core Competence
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Notes
An organisation’s core competence is something it does
___________________ exceptionally well in comparison to its competitors. It reflects a
___________________ distinct competitive advantage (like superior research and
development, mastery of a technology, distribution channel,
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___________________
manufacturing efficiency or customer service) that provides the
___________________
firm (a) access to variety of products/markets (b) contributes
___________________
greatly to customer benefits in the end products and (c) is an
___________________ exclusive and inimitable preserve of the firm that is long-lasting
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___________________ and cannot be easily copied by competitors.
___________________
Synergy
___________________
When organisational parts interact to produce a joint effort that is
___________________
greater than the sum of the parts acting alone, synergy occurs.
Some call this the 1 + 1 = 3 effect. In strategic management,
managers are urged to achieve as much market, cost, technology
and management synergy as possible when arriving at strategic
decisions (such as mergers, acquisitions, new products, new
technology etc.). When one product or service strengthens the sales
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of one or more other products or services, market synergy occurs.
Wal-Mart’s new Supercentres and Super K marts that put a
discount store and a grocery store under one huge roof (Crossroads,
Mumbai; Spencer’s in Chennai) are a good example of market
synergy in action. Cost synergy can occur in almost every
dimension of organised effort. When two or more products can be
designed by the same engineers, produced in the same facilities,
distributed through the same channels, or sold by the same sales
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persons, overall costs will be lower than if each product received

separate treatment. In Europe, today, banks and insurance
companies are linking up in an effort to market a wide array of
financial products that each would have trouble selling on its own.
Technology synergy involves transferring technology from one
application to another, thus opening up new markets. In
management synergy also a similar kind of technology transfer is
needed. Management synergy would be achieved, for example, if a
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software product company with weak roots in training and

education line hires a new CEO with strong academic and training
credentials. Ideally the new CEO would transfer his technical
skills to good effect.
Value Creation 179
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Notes
Exploiting core competencies and achieving synergy help Activity
organisations create value for their customers. Value is the sum Make an assignment on steps
___________________
involved in the strategic
total of benefits received and costs paid by the customer in a given ___________________
management process.
situation. Ideally, the purpose of a strategy should be to create a
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___________________
lasting value that is greater than the cost of resources that are
used to create the same. ___________________
___________________
Check Your Progress
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___________________
Fill in the blanks:
___________________
1. An organisation’s core ………………… is something it
___________________
does exceptionally well in comparison to its competitors.
___________________
2. ………………… is the sum total of benefits received and
costs paid by the customer in a given situation. ___________________
Steps involved in the Strategic Management Process

Dynamic in nature, the strategic management process is the full
set of commitments, decisions and actions needed for a firm to
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achieve strategic competitiveness and earn above average returns.
Strategic competitiveness is achieved when a firm successfully
formulates and implements a value creating strategy. When a firm
implements such a strategy that other firms are unable to
duplicate or find too costly to imitate, this firm has a sustainable
competitive advantage. By achieving strategic competitiveness and
successfully exploiting its competitive advantage, the firm is able
to achieve above average returns which are returns in excess of
what an investor expects to earn from other investments with a
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similar amount of risk. ‘Risk’ here refers to an investor’s

uncertainty about the economic gains or losses that will result
from a particular investment.
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Figure 11.1: Strategic Management Process

180
Relevant strategic inputs from analyses of the internal and
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Notes
external environments are needed for effective strategy
___________________ formulation, implementation and evaluation. In turn, effective
___________________ strategic actions are essential to achieve desired outcomes in the
form of strategic competitiveness and above average returns (as
E
___________________
explained in the previous example). The various steps involved in
___________________ the strategic management process may be stated thus:
___________________
Vision, Mission and Objectives
___________________
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In the organisational context, vision is a picture of the
___________________
organisation: the core values for which an organisation stands and
___________________ a clear description of what the organisation wishes to become in
___________________ the years ahead. A mission statement, on the other hand, specifies
what an organisation is and why it exists. The strategic
___________________
management process begins with an evaluation of the
organisation’s current vision, mission, objectives and strategy. The
principal value of a mission statement lies in its specification of a
firm’s ultimate aims. It offers a sense of shared expectations
among all levels and generations of employees. It consolidates
values over time and across individuals and interest groups. It
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projects a glorified sense of worth and intent that can be identified
and assimilated by external groups too. It also exhibits a firm’s
commitment to responsible action in line with the firm’s internal
(survival, growth, profitability) as well as external (ethics,
corporate governance, social responsibility) objectives.
External Analysis
The firm’s external environment is challenging and complex.
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Because of the impact the external environment has on

performance, the firm must develop requisite skills to identify
opportunities and threats existing in that environment. The
external environment has three important parts
z General environment (elements in the broader society that
affect industries and their firms)
z Industry environment (factors that influence a firm, its
competitive actions and responses, and the industry’s profit
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potential) and
z Competitive environment (in which the firm examines each
major rival’s future objectives, current strategies, assumptions
and capabilities).
Internal Analysis 181
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Notes
In order to exploit environmental opportunities to its advantage, a Activity
firm must have internal resources and capabilities. A systematic Write an essay on strategic
___________________
management process.
internal appraisal helps a firm find ___________________
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z Where it stands in terms of its strengths and weaknesses ___________________
z Pick up opportunities that are in tune with its resource base ___________________
z Take steps to bridge any resource gaps and ___________________
Select appropriate areas that help consolidate its position in
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z ___________________
the industry. ___________________
A major task of strategists, while carrying out internal analysis, is ___________________

to match the conditions of the external environment with the firm’s
___________________
internal strengths and weaknesses. If a firm can perform an
___________________
activity better than its rivals, it then possesses a distinctive (or
core) competence that helps the firm to build its own source of
competitive advantage. In the final analysis, the choice of which
strategy to pursue should be based on using and exploiting the
firm’s competitive advantage.
After the external and internal analysis, the firm tries to formulate
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explicit strategic plans at three levels; corporate, business and
functional. These are then put into action using leadership,
structural designs, information systems and human resources to
good advantage.
Check Your Progress

1. Strategic competitiveness is achieved when a firm
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successfully formulates and implements a value creating

strategy.
2. A vision statement specifies what an organisation is and
why it exists.
Strategic Management Process

The strategic management process is made up of four elements:
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situation analysis, strategy formulation, strategy implementation

and strategy evaluation. These elements are steps that are
performed, in order, when developing a new strategic management
plan. Existing businesses that have already developed a strategic
182 management plan will revisit these steps as the need arises, in
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Notes order to make necessary changes and improvements.
___________________
Situation Analysis
___________________
Situation analysis is the first step in the strategic management
E
___________________
process. The situation analysis provides the information necessary
___________________ to create a company mission statement. Situation analysis involves
___________________ "scanning and evaluating the organizational context, the external
environment, and the organizational environment." This analysis
___________________
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can be performed using several techniques. Observation and
___________________ communication are two very effective methods.
___________________
To begin this process, organizations should observe the internal
___________________ company environment. This includes employee interaction with
___________________ other employees, employee interaction with management, manager
interaction with other managers, and management interaction
with shareholders. In addition, discussions, interviews, and
surveys can be used to analyze the internal environment.
Organizations also need to analyze the external environment. This
would include customers, suppliers, creditors, and competitors.
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Several questions can be asked which may help analyze the
external environment. What is the relationship between the
company and its customers? What is the relationship between the
company and its suppliers? Does the company have a good rapport
with its creditors? Is the company actively trying to increase the
value of the business for its shareholders? Who is the competition?
What advantages do competitors have over the company?
Strategy Formulation
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Strategy formulation involves designing and developing the

company strategies. Determining company strengths aids in the
formulation of strategies. Strategy formulation is generally broken
down into three organizational levels: operational, competitive and
corporate.
z Operational strategies are short-term and are associated
with the various operational departments of the company,
such as human resources, finance, marketing, and production.
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These strategies are department specific. For example, human

resource strategies would be concerned with the act of hiring
and training employees with the goal of increasing human
capital.
183
Competitive strategies are those associated with methods of
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z
Notes
competing in a certain business or industry. Knowledge of
competitors is required in order to formulate a competitive ___________________
strategy. The company must learn who its competitors are and ___________________
how they operate, as well as identify the strengths and
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___________________
weaknesses of the competition. With this information, the
company can develop a strategy to gain a competitive ___________________
advantage over these competitors. ___________________
Corporate strategies are long-term and are associated with
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z ___________________
"deciding the optimal mix of businesses and the overall ___________________
direction of the organization". Operating as a sole business or
___________________
operating as a business with several divisions are both part of
the corporate strategy. ___________________
___________________
Strategy Implementation
Strategy implementation involves putting the strategy into
practice. This includes developing steps, methods, and procedures
to execute the strategy. It also includes determining which
strategies should be implemented first. The strategies should be
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prioritized based on the seriousness of underlying issues. The
company should first focus on the worst problems, then move onto
the other problems once those have been addressed.
"The approaches to implementing the various strategies should be
considered as the strategies are formulated." The company should
consider how the strategies will be put into effect at the same time
that they are being created. For example, while developing the
human resources strategy involving employee training, things that
must be considered include how the training will be delivered,
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when the training will take place, and how the cost of training will
be covered.
Strategy Evaluation
Strategy evaluation involves "examining how the strategy has been
implemented as well as the outcomes of the strategy." This
includes determining whether deadlines have been met, whether
the implementation steps and processes are working correctly, and
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whether the expected results have been achieved. If it is

determined that deadlines are not being met, processes are not
working, or results are not in line with the actual goal, then the
strategy can and should be modified or reformulated.
184
Both management and employees are involved in strategy
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Notes
evaluation, because each is able to view the implemented strategy
___________________
from different perspectives. An employee may recognize a problem
___________________ in a specific implementation step that management would not be
able to identify.
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___________________
___________________ The strategy evaluation should include challenging metrics and

timetables that are achievable. If it is impossible to achieve the
___________________
metrics and timetables, then the expectations are unrealistic and
___________________ the strategy is certain to fail.
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___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. The strategic management process is made up of
___________________
……………… elements.
2. ……………… analysis is the first step in the strategic
management process.
Summary
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The term ‘Strategic Management Process’ refers to the steps by
which management converts a firm’s mission, objectives and goals
into a workable strategy. In a dynamic environment each firm
needs to tailor its strategic management process in ways that best
suit its own capabilities and situational requirements. Viewed
broadly, the strategic management process has two parts: an
information process and a decision process. The information
process involves collecting and analysing information about the
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external and internal environments. External factors are taken

into account to find major opportunities and threats that now or
will confront the organisation. To survive and grow, every
organisation, invariably, must find how the situational factors
have affected its past and current performance. This must be
followed by an internal analysis to determine the organisation’s
strategic direction. Strategists carry out internal analysis to have a
‘feel’ of where their organisation has been and where it now is,
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particularly with regard to internal strengths and weaknesses.

Information about the organisation’s strengths and weaknesses,
when combined with information about external opportunities and
threats, offers a stronger foundation for informed decisions about
strategic direction. The decision process covers four important 185
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steps: development of alternatives, choice, implementation and Notes
assessment. Based on the external and internal analysis, ___________________

strategists first identify possible strategic alternatives and pick up ___________________
those that help the organisation reach its mission and objectives.
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___________________
In the next step, the planners decide how and when to translate
___________________
strategic choices into action, followed by an evaluation of the
effectiveness and efficiency of the strategic direction the ___________________
organisation has followed.
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___________________
___________________
Lesson End Activity ___________________
Each firm needs to tailor its strategic management process in ways ___________________
that best suits its own specific context and situation. Do you agree? ___________________
Why? And why not?
Keywords
Strategic Management Process: A management process
designed to achieve the firm’s missions and objectives.
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Strategic Competitiveness: It is achieved when a firm
successfully formulates and implements a value creating strategy.
Value: Sum total of benefits received and costs paid by the
customer in a given situation.
Strategy Formulation: The process of determining appropriate
courses of action for achieving organisational objectives and
thereby accomplishing organisational purpose.
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1. Outline the major components of the strategic management
process.
2. Explain why engaging in strategic management is likely to be
beneficial for an organisation.
3. Write brief note on Synergy.
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4. What are the three important parts of external environment?

5. Compare and contrast external environment.
6. Discuss the categories of Strategy Formulation.
186
Further Readings
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Notes
___________________ Books
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___________________
___________________ Richard, Lynch (2006). “Corporate Strategy.” Pearson Education

Ltd.
___________________
___________________
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___________________
Education.
___________________
___________________
Web Readings
http://www.managementstudyguide.com/strategic-management-
process.htm
http://smallbusiness.chron.com/five-stages-strategic-management-
process-18785.html
CE
http://www.slideshare.net/ganeshramb/strategy-management-
process
http://www.prenhall.com/behindthebook/0131746170/pdf/Dessler1_
Why_I_Wrote_This_Book.pdf
http://jupapadoc.startlogic.com/compresearch/papers/JCR07-2.pdf
http://www.publicorgtheory.org/strategic-management.html
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UNIT 12: Strategic Choice and Implementation
Unit 12
187
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Notes
Activity
Strategic Choice and
___________________
showing the Strategic Choice
___________________
of any company.
Implementation
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___________________
___________________
Objectives ___________________
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___________________
topics:
___________________
\ Constraints and Strategic Choice
\ Strategy Implementation ___________________
\ Strategic Control and Assessment ___________________
___________________
Introduction
In general management strategic choice refers to the view that,
because of the power relationships in various organizational
contexts, people in roles with managerial accountability are not
simply restricted by obvious contextual factors such as technology
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available or environmental factors such as market demand, but
they exercise sometimes considerable discretion. Strategic choice is
a systemic theory of strategy. This theory is built on a notion of
interaction in which organizations adapt to their environment in a
self-regulating, negative-feedback manner so as to achieve their
goals. The dynamics, or pattern of movement over time, are those
of movement to states of stable equilibrium. Prediction is not seen
as problematic. The analysis is primarily at the macro level of the
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organization in which cause and effect are related to each other in

a linear manner. Micro-diversity receives little attention and
interaction is assumed to be uniform and harmonious. Strategic
implementation put simply is the process that puts plans and
strategies into action to reach goals. A strategic plan is a written
document that lays out the plans of the business to reach goals, but
will sit forgotten without strategic implementation. The
implementation makes the company’s plans happen.
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Constraints and Strategic Choice

Strategic choices involve the options for strategy in terms of both
the directions in which strategy might move and the methods by
188 which strategy might be pursued. For instance, an organisation
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Notes might have a range of strategic directions open to it: the
___________________ organisation could diversify into new products; it could enter new
___________________ international markets; or it could transform its existing products
and markets through radical innovation. These various directions
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___________________
could be pursued by different methods: the organisation could
___________________
acquire a business already active in the product or market area; it
___________________ could form alliances with relevant organisations that might help
___________________ its new strategy; or it could try to pursue its strategies on its own.
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___________________ There are strategic choices in terms of how the organisation seeks
___________________ to compete at the individual business level. Typically these choices
involve strategies based on cost (for example, economies of scale) or
___________________
differentiation (for example, superior quality). Crucial is deciding
___________________
how to win against competitors (for this reason, business strategy
is sometimes called ‘competitive strategy’). Viewed collectively, the
R&D strategy should encourage innovation; marketing should
stress brand loyalty and reliable distribution channels; production
should maintain long production runs, cost reduction and
routinisation; finance should focus on cash flows and positive
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returns and HR department should develop strategies for retaining
and developing a stable workforce. Of course, organisations do
come across constraints while formulating functional level
strategies in several forms; how to finance the proposals, what
kind of risk to be taken, how to combine strong production skills of
the company with its own weak marketing skills, how to keep
suppliers and channel partners happy, how to encounter
competitive retaliation etc. In any case while selecting appropriate
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strategies at corporate, business and functional level, the following

criteria should be kept in mind.
z They are responsive to the external environment.
z They offer a sustainable competitive advantage.
z They are consistent with other strategies in the organisation.
z They provide adequate flexibility for the business and the

organisation.
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z They conform to the organisation’s mission and long-term

objectives.
z They are organisationally feasible.

189
Check Your Progress
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Notes
Fill in the blanks:
___________________
1. ……………… involve the options for strategy in terms of
___________________
both the directions in which strategy might move and
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the methods by which strategy might be pursued. ___________________
___________________
2. There are strategic choices in terms of how the
organisation seeks to compete at the ………………… ___________________
business level.
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___________________
___________________
Strategy Implementation
___________________
Strategy implementation is the process of translation of strategies ___________________
and policies into action through the development of programmes,
___________________
budgets and procedures. It is typically conducted by the middle
and lower level management but is reviewed by the top
management. However, programmes and procedures are simply
more detailed plans for the eventual implementation of strategy.
Unless the corporation is appropriately organised, programmes are
adequately staffed and activities are properly directed, these
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operational plans fail to deliver the goods. To be effective, a
strategy must be implemented through the right organisation
structure and appropriate management practices. In addition,
management must also ensure that there is progress towards
objectives according to plan by instituting a rigorous process of
control over important activities.
Organising
In a classic study of large American Corporations (Du Pont,
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General Motors, Sears Roebuck, Standard Oil), Chandler

concluded that structure follows strategy. Changes in corporate
strategy have invariably led to changes in corporate structure.
Chandler found that most corporations begin with a centralised
organisation structure. As they add new product lines and create
independent distribution networks, the centralised structure is
discarded by the organisations in favour of a decentralised
structure which permits the creation of semi-autonomous product
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divisions. Burns and Stalker also found that mechanistic

structures (centralised decision making and bureaucratic rules)
seem to be appropriate to organisations operating in stable
environments. However, organic structures, in contrast
190 (decentralisation and flexible procedures), seem to be appropriate
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Notes to organisations operating in a constantly changing environment.
___________________ The research conducted later on also supports Chandler’s proposal
___________________ that an appropriate organisation structure is necessary to meet
changes in corporate strategy. The firm should, therefore, work to
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___________________
make its structure congruent with its strategy.
___________________
___________________ Staffing
___________________ Effective strategy implementation calls for utilisation of human
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resources fully. For implementing growth strategies, new people
___________________
should be recruited and given requisite training. Retrenchment
___________________
strategies call for a sound basis for firing people, i.e., seniority,
___________________ performance, absenteeism, etc. In order to translate the strategy
___________________ into action, the services of capable and committed people are
necessary. To this end, management should institute proper
performance appraisal systems which permit people to compare
their performance with others and find out where they are. These
systems also help the management to identify ‘star’ performers
easily and reward them adequately. Perspiration does not go far
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without a little bit of inspiration.
Directing
People should be motivated to implement a new strategy in desired
ways. It is not sufficient merely to have people who can do the job;
it is also necessary to have people who want to do the job the way
you need it done. In addition to traditional motivational
techniques, managers should also make use of modern techniques
in order to inspire people to peak performance.
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Motivational Techniques
The traditional motivational techniques are based on a reward-
punishment psychology and involve the use of performance
appraisals and performance-based incentive programmes. These
approaches, including MBO, indicate that specific results are best
achieved by clearly outlining realistic goals and then suitably
rewarding those managers who achieve them. They are overly
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reliant on money as the primary motivator, while overlooking

other factors that might be truly motivating to many managers.
According to Morse and Martin, motivating the organisation to
implement strategy requires:
Supportive Culture 191
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Notes
The successful implementation of strategy must take into account
the history of an organisation and dominant values or culture ___________________
which exists. The corporate culture is a system of shared beliefs ___________________
and values that the people within the corporation hold. Some of the
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___________________
critical dimensions of culture are:
___________________
z Clarity of direction: How well the company’s goal and plans
for achieving them are known, understood and found to be ___________________
motivating throughout the organization.
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___________________
z Decision making structure and processes: Whether the ___________________

culture is decision-oriented or decision-avoidant and whether ___________________
decisions are made on the basis of sound information or ‘seat of
___________________
the pants’ intuition.
___________________
z Management style: Whether too little or too much
participation in making decisions exists at each level of the
company.
z Integration of effort: Whether teamwork, sharing and
smooth meshing of activities – or the opposite – accurately
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describes the culture.
z Performance orientation: Whether managers feel
accountable for end results and whether rewards are related to
performance or not.
z Compensation: Whether it is equitably fairly administered
and motivational, or not.
z Human resource development: How much this characterises
the culture.
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z Organisational vitality: That drive to perform – that sense

of urgency and desire to be a winner – which some
organisations have and others do not.
z Risk taking: Whether it is encouraged or punished, and
z Competitive image: Whether company views itself as faster,
sharper and better than the competitor, or vice versa.
Every company should try to measure these dimensions of culture
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and determine what kind of culture and what kind of subcultures

will best support the company’s strategy. Senior executives should
determine the desired culture taking the short-term requirements
of the company.
192
Short-term Motivational Environment
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Notes
Whereas a company’s culture affects strategy implementation over
___________________ the long haul, the short-term motivational environment affects
___________________ strategy implementation today. The short-term environment
reflects the immediate mood of the company’s employees and
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___________________
contributes to the way they face immediate problems. Building
___________________
such an environment involves actions very similar to public
___________________ relations activities
___________________ Communication programmes
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z
___________________ z Morale-building conferences
___________________
z Visibility of charismatic leaders
___________________
z Use of awards, language, symbols, gestures etc.
___________________
Performance Management
The traditional motivators (MBO, performance appraisal, etc.)
should be logically and firmly linked to what is called an
integrated performance management process. To this end detailed
budgets and programmes should be drawn. Individuals should also
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know exactly what piece of the organisation structure they are
accountable for and what goals and objectives they must attain
this year to stay on plan. Performance management ensures that
rewards and sanctions result from measures of good or poor
performance. It links human resources planning with the firm’s
strategy formulation and performance appraisal processes so as to
guide the future efforts of the company.
Individual Motivators
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In addition to the traditional motivating techniques, the

organisation should also provide for individual motivators for
achieving results competently. Over-reliance on bonuses and
incentives may not fully motivate individual managers in today’s
world. Top management should, therefore, fully understand the
individual differences and devise an appropriate motivational
strategy. Though it is difficult to categorise individual motivators,
some of the important ones may be stated thus:
(c
z Mastery: The act of mastering a new skill or gain control over

a challenging problem is most motivating to many individuals.
z Approval: Lack of approval can hamper and constrict the
performance of talented and bright managers.
193
Risk and Adventure: High visibility positions having risk
S
z
Notes
and adventure are mostly preferred by managers possessing Activity
entrepreneurial talents. Make an assignment on
___________________
Strategy Implementation.
z Security: In order to perform effectively and efficiently, ___________________
E
managers need to feel that there is little at risk with respect to ___________________
their careers.
___________________
z Power and Influence: Organisational positions that enable ___________________
managers to gain power and control over human as well as
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___________________
non-human resources are highly motivating.
___________________
___________________
1. Strategy implementation is the process of translation of ___________________
strategies and policies into action.
2. Ineffective strategy implementation calls for utilisation
of human resources fully.
Strategic Control and Assessment

CE
Strategic control, the last step of the strategic management
process, is monitoring and evaluating the strategy management
process as a whole in order to make sure that it is operating
properly. The focus is clearly on activities involved in
environmental analysis, organisational direction, strategy
formulation, strategy implementation – ensuring that all steps of
the strategy management process are appropriate, compatible and
functioning properly. There are three basic steps to the strategic
)C
control process.
Measure Performance
Strategic audits are used to find what is actually happening in the
organisation. Both qualitative and quantitative tools are employed
for this purpose. According to S Tilles, the qualitative
measurement looks into five questions:
z Is the strategy internally consistent?
(c
z Is it consistent with its environment?

z Is it appropriate given organisational resources?
z Is it too risky?
z Is the time horizon of the strategy appropriate?
194
Quantitative tools like return on investment (the relationship
S
Notes
Activity between the amount of income generated and the amount of assets
Write an essay on Strategic
___________________
required to operate the organisation); z score (an analysis that
Control.
___________________ numerically weighs and sums five measures – working
capital\total assets; retained earnings\total assets; earning before
E
___________________
interest and taxes\total assets; market value of equity\book value
___________________
of total liabilities and sales\total assets – to find whether the
___________________ company in question is likely to go sick and become bankrupt) and
___________________ shareholders’ audit etc. are used to measure organizational
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performance.
___________________
___________________ Compare Performance to Goals and Standards

___________________ Here management builds a case for concluding whether the
___________________ performance is according to the predetermined standards in
respect of certain key areas. At General Electric, the following
eight types of standards are set for comparing performance at a
later stage; profitability, market position, productivity, product
leadership, personnel growth, employee attitude, social
responsibility and standards reflecting balance between short-
range and long-range goals.
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Corrective Action
If the actual performance is not in line with predetermined
standards set for the purpose, corrective action is necessary. In
such a case, every attempt is made to modify the enterprise’s
strategies and their implementation so that the organisations’
ability to accomplish its goals will be improved.
Check Your Progress

)C
Fill in the blanks:

1. Strategic …………………… are used to find what is
actually happening in the organisation.
2. If the ……………………… performance is not in line
with predetermined standards set for the purpose,
corrective action is necessary.
(c
Summary
There are strategic choices in terms of how the organisation seeks
to compete at the individual business level. Strategy
implementation is the process of translation of strategies and 195
S
policies into action through the development of programmes, Notes
budgets and procedures. Effective strategy implementation calls ___________________
for utilisation of human resources fully. People should be
___________________
motivated to implement a new strategy in desired ways. The
E
traditional motivational techniques are based on a reward- ___________________
punishment psychology and involve the use of performance ___________________

appraisals and performance-based incentive programmes. The
___________________
successful implementation of strategy must take into account the
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___________________
history of an organisation and dominant values or culture which
exists. Whereas a company’s culture affects strategy ___________________
implementation over the long haul, the short-term motivational ___________________
environment affects strategy implementation today. Strategic
___________________
control, the last step of the strategic management process, is
monitoring and evaluating the strategy management process as a ___________________
whole in order to make sure that it is operating properly.
Lesson End Activity

How will you compare performance to goals and standards?
CE
Explain it with the help of example.
Keywords
Strategy Implementation: Putting formulated strategy into
action.
Strategic Control: Monitoring and evaluating the strategic
management process as a whole, in order to make sure that it is
operating properly.
)C
Corporate Level Strategy: The strategy formulated by the top

management for the overall company.
Strategic Choices: It involves the options for strategy in terms of
both the directions in which strategy might move and the methods
by which strategy might be pursued.

(c
1. Discuss the criteria involved in the selection of strategies at

corporate, business and functional level.
2. Highlight the critical dimensions of culture.
196
3. Write brief note on Performance Management.
S
Notes
___________________
4. What are the individual motivators?
___________________ 5. Do you think that strategic audits are used to find what is
actually happening in the organisation?
E
___________________
___________________
Further Readings
___________________
___________________ Books
UP
___________________
___________________
Ltd.
___________________
Education.
CE
Web Readings
http://www.simply-strategic-planning.com/strategic-choice.html
http://www.createadvantage.com/glossary/strategic-choice
http://smallbusiness.chron.com/strategic-implementation-
5044.html
http://www.managementstudyguide.com/strategy-
implementation.htm
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http://mystrategicplan.com/resources/strategic-implementation/
(c
UNIT 13: Strategies for Global Environment
Unit 13
197
S
Notes
Activity
What are the different modes
Strategies for Global Environment
___________________
of entry that firms choose to
enter___________________
international markets?
Under what circumstances do
E
___________________
the exercise different options?
Objectives
___________________
topics: ___________________
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\ Major Drivers of Globalization ___________________
\ Impact On National Conditions ___________________
\ Strategies in Geographic Expansion
___________________
\ Competing Internationally
___________________
___________________
Introduction
The spread and power of globalization, or the shrinking of the
planet as it is today, has as its foundations in four major drivers.
These drivers provide an insight into the opportunities and
challenges that nations and corporations face in the future. The
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spread and power of globalization, or the shrinking of the planet as
it is today, has as its foundations in four major drivers
(a) Technology, (b) Finance, (c) Information, and (d) Decision-
making and information flows. Globalization thrives in a world
where the cost and ease of global transport and communications
are ever improving, the cost and ease of moving money are
negligible and where companies around the world use common
operating standards. These are the right conditions for businesses
)C
to replicate what they do at home in countries.
Major Drivers of Globalization

In the present-day world, the economies of different countries are
also connected through factors such as migration and the
diffusion of technology internationally. Technological innovation
and trade liberalization have contributed to globalization by
(c
supplying the infrastructure for international and intra-national

connections, making the world more interdependent and
interconnected. All these factors bind each country into one world
economy. A large chunk of modern business depends on distant
198 capital markets, distant consumer markets and distant systems
S
Notes of law enforcement.
___________________
z Technology is enabling more and more people to reach and
___________________ communicate with more and more people. We are able to reach
farther and farther into more and more countries, than it has
E
___________________
ever been possible before. Using faster and cheaper means, we
___________________
can access others even from our homes using computers,
___________________
modems, cellular phones, cable systems and Internet
___________________ connections.
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___________________ z Finance is witnessed by the change in how we invest. We
___________________ have gone from a world where a few bankers held the
sovereign debts of many of the countries to a world where
___________________
many individuals acting through various types of financial
___________________
instruments hold the sovereign debts of many countries. We
depend on these individuals for the growth of our economies.
Individuals can, at short notice, rain billions and billions of
dollars on the country's stock and bond markets, as well as
directly into plants and factories. They can also transform or
create havoc in the markets and affect the way nations run.
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They can determine whether to help governments to survive or
take steps leading to their collapse.
z Information has made it possible for us to see through, look
through or hear through almost every conceivable wall. The
result is that never before have so many people been able to
know of, and be informed about, the lives of so many others
scattered across the globe. The ideas of so many people in so
many countries, the products of so many people in so many
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countries, and produced by so many firms can circulate faster

than was ever possible before.
z Recognition of the enormous value of such relationships is
creating sweeping changes in international trade. The growth
of trade has been accelerated by the expansion of the new
areas of expertise and linkages that are being created –
corporate account management, strategic alliances,
relationship marketing and supplier partnerships. All these
features are manifestations of the growing influence of the
(c
democratization of information.
z Decision-making and information flows have been made
possible by the coming together of a number of innovations.
These innovations involve computerization, 199
S
telecommunications, miniaturization, compression technology Notes
and digitization. Over the years, advances in ___________________
telecommunications have steadily brought down the cost of
___________________
phone calls and data transfers, while increasing the speed,
E
distance and amounts of information that can be transmitted. ___________________
Digitization has made it possible to turn voices, sounds, ___________________

movies, television signals, music, colours, pictures, words,
___________________
documents, or any other form of data one can think of, into
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___________________
computer bits and transfer them by telephone lines, satellites
and fibre optic cables around the world. ___________________
Let us take up the success story of Wal-Mart which doesn't make ___________________
anything. It unique strength is drawn from the second ___________________
convergence. Its remarkable innovation is that it draws products
___________________
from all over the world and gets them into stores at incredibly low
prices. Wal-Mart can do so because of the new technologies
available and the new ways to use them. It has created a global
supply chain that has been designed down to the last atom of
efficiency. If you take an item off the shelf in a small town in
Alaska, another of that item will immediately be made in a remote
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town in China. Perfect knowledge, effective inventory control and
transparency exist throughout that supply chain.
Over half the world had accepted the idea of free-market
capitalism, including China and India. This is creating a
momentum for globalization that will not be easy to stop. This is
reflected in the way today’s global economy operates: firms
increasingly organize their activities on a global scale, forming
production chains, including services inputs, which cross many
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countries. Being part of the free market economy helps nations to

greatly increase global flows of trade and investment.
Take the personal computer on your desk. It may have been
designed in Taiwan and assembled in Mexico, with memory chips
from South Korea, a motherboard from China and a hard drive
from Thailand. This is an example of a collaboration of free-market
capitalism and the centrally planned economies.
Globalization thrives in a world where the cost and ease of global
(c
transport and communications are ever improving, the cost and

ease of moving money are negligible and where companies around
the world use common operating standards. These are the right
conditions for businesses to replicate what they do at home in
200 countries where labour is inexpensive, using their advantage of
S
Notes relatively cheap capital to leverage their operations.
___________________
These characteristics of globalization have resulted in dramatic
___________________ price reductions, made possible by globalizing production. For
example it has changed the market for mobile phones in India.
E
___________________
Just five years ago, there were almost no mobile phones in India.
___________________
Since then, prices have declined by roughly 70 per cent in real
___________________ terms, and 60 per cent of Indian households now have at least one
___________________ mobile phone. Mobile phones have been transformed from luxury
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items into nearly disposable goods that most of the population
___________________
considers a necessity.
___________________
These developments have created a paradigm change. On the
___________________
economic front, this change has fostered more growth and led to
___________________ higher average incomes. The factors responsible are higher
volumes of trade, more foreign investment, increasing
privatization and more efficient use of resources due to the
pressure of global competition.
The world's future – the big picture – is more likely to be
determined by the winners of this era, where individuals and
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corporations, rather than governments, act as agents of change.
Increasingly, innovative individuals at the helm of large
corporations tend to shape the new world.
Empowered by e-mail, the Internet, new computer software,
teleconferencing and production networks, more and more people
around the world are being drawn into competition and
cooperation on an equal footing. We now live in a globalized era in
which states matter far less and a level playing field for
)C
international trade serves as the principal engine of change. Tax

laws, labour legislation and environmental codes have to be
modified to encourage global investment. To enforce and encourage
the adoption of these rules, in 1994, a new, powerful international
body, the World Trade Organization (WTO), was established.
There was also an increase in the number of trade agreements
signed by WTOs member countries. WTOs most important
contribution has been to facilitate the transformation of
international trade from bilateral trade to multilateral trade.
(c
This has also resulted in a rapid and huge growth in the imports of
low-cost manufactured items from the developing and less
developed countries. Such a growth has benefited these countries
and has resulted in changes in trade patterns. For example,
exports from the Asia–Pacific region, which accounted for over 13 201
S
per cent of world trade in 1992, has almost doubled since 1980. Notes
Activity
There has also been an expansion in regional trade. The International business is no
___________________
membership of the European Union (EU) has increased. The longer limited to giant
___________________
multinational enterprises.
countries of the EU have adopted a common currency, the Euro.
E
Many small and medium sized
Moreover, economic cooperation treaties have created the North ___________________
businesses also go
American Free Trade Agreement (NAFTA), in the North American international. What should
___________________
continent, and, closer home, the Association of Southeast Asian they do to compete better?
___________________
Nations (ASEAN).
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___________________
These trade agreements have been so successful that many other
___________________
countries are also considering forming regional associations to
strengthen economic cooperation. India is also looking at the ___________________
possibility of creating such an economic bloc in South Asia with a ___________________
common currency. The model is based on that of the European Union.
___________________
Yet, it is true that globalization today is not truly global. We are
still a long way from achieving that objective. Nations still protect
their own interests notwithstanding the needs of the rest of the
world. People, mainly those belonging to the affluent strata of
society, still maintain their lavish lifestyles, notwithstanding the
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deprivation and destitution faced by a large section of humanity.
However, globalization is global in the sense that almost everybody
can feel the pressures and the constraints of this interconnected
world – directly or indirectly. All of us can also constructively
utilize the opportunities thrown up by globalization.
Check Your Progress

Fill in the blanks:
1. ……………………… is enabling more and more people to
)C
reach and communicate with more and more people.

2. …………… of the enormous value of such relationships
is creating sweeping changes in international trade.
Impact on National Conditions

Traditional theories of international trade propose that
comparative advantage of country lies in the natural endowments
(c
it is fortunate enough to inherit, like skilled labour, natural

resources, knowledge resources, capital resources, infrastructure,
etc., which are relevant for competition in particular industries.
They also include factors like quality of research on universities,
202 deregulation of labour markets, or liquidity of national stock
S
Notes markets. These national factors often provide initial advantages,
___________________ which are subsequently built upon. Each country has its own
particular set of factor conditions; hence, in each country will
___________________
develop those industries for which the particular set of factor
E
___________________
conditions is optimal. This explains the existence of so-called low-
___________________ cost-countries (low costs of labour), agricultural countries (large
___________________ countries with fertile soil), or the start-up culture in the United
States (well developed venture capital market).
___________________
UP
___________________ Michael Porter’s ‘Dynamic Diamond’ Theory
___________________ Based on a four-year study of ten countries, Michael Porter came
up with the “dynamic diamond” theory. This suggests that a
___________________
country’s global competitive advantage is not just related to factor
___________________ conditions, but other conditions as well. According to Porter
competitive advantage is related to four elements:
z Factor conditions;
z Domestic demand conditions;
z Related and support industries; and
Company strategy, structure, and rivalry.
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z
These elements are shown in Figure 13.1. Each element is

necessary for success in domestic and global markets, and the
presence of competition in domestic markets motivates individual
firms to identify productive marketing, manufacturing, and
logistics strategies.
Factor Conditions: Porter’s theory is called the ‘Dynamic
Diamond’ theory because the different elements required for
success are not necessarily nature-made or inherited. These
)C
elements may develop and change. Political initiatives,

technological progress or socio-cultural changes, for example, may
shape national factor conditions.
(c
Figure 13.1: Porter’s Dynamic (National) Diamond

This is exemplified by the case of Switzerland. Switzerland is a 203
S
land-locked nation with high-cost labour, strict environmental Notes
laws, and few natural resources - least of all cocoa. Yet it is a world ___________________
leader in chocolate, not to mention pharmaceuticals, banking, and
___________________
specialized machinery. The story of modern industrial history is
E
___________________
not exploiting abundance but creating it, not enjoying advantage
but coping with disadvantage. ___________________
Let us now look at some of the elements in Porter’s National ___________________
Diamond theory, other than factor conditions, which have already
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___________________
been explained above:
___________________
Domestic Demand Conditions: This reflects the domestic ___________________
demand for products and services produced in a country. Domestic
___________________
demand conditions impact the pace and direction of innovation and
product development. Domestic demand is determined by three ___________________
major characteristics:
z The mixture (the mix of customers needs and wants),
z The scope and growth rate of the products, and
z The mechanisms that transmit domestic preferences to foreign
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markets.
Porter states that a country can achieve national advantages in an
industry or market segment, if the domestic demand in that
country provides domestic suppliers a clearer picture of demand
trends and earlier than to foreign competitors. Normally, domestic
markets provide a greater insight to organization's in their ability
to recognize customers’ needs than foreign markets do.
Related and Supporting Industries: These are industries that
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can use and coordinate particular activities in the value chain

together like supplying industries, or that are concerned with
complementary products (e.g. hardware and software). The
existence or non-existence of internationally competitive supplying
industries and supporting industries has a high influence on initial
advantages in that industry. One internationally successful
industry may lead to advantages in other related or supporting
industries. Related and supporting industries will reinforce
innovation and internationalization in industries at later stages in
(c
the value system.

A typical example is the shoe and leather industry in Italy. The
Italian shoe industry is prodded by sophisticated consumer
204 demand that encourages entry by many firms, lots of them family
S
Notes owned, that compete jealously. The shoemakers bring out new
___________________ models continually and must keep improving efficiency to stay
competitive within Italy’s high-cost infrastructure. They develop
___________________
stringent raw-material and machinery requirements, giving rise to
E
___________________
an equally sophisticated supplier industry. Italy is not only
___________________ successful with shoes and leather, but with related products and
___________________ services such as leather working machinery, design, etc.
___________________ Company Strategy, Structure, and Rivalry: In different
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nations, factors like management structures, working morale, or
___________________
interactions between companies are shaped differently, with
___________________
culture playing an important role. Patterns of commitment among
___________________ workforce are of special importance. These patterns are heavily
___________________ influenced by structures of ownership and control. Family-business
based industries that are dominated by owner-managers will
behave differently than publicly quoted companies.
These will provide advantages and disadvantages for particular
industries. The conditions in a country determine how companies
are established, organized and managed. These determine the
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characteristics of domestic competition.
Porter argues that domestic rivalry and the search for competitive
advantage within a nation are important in translating into global
markets. They can help provide organizations with bases for
achieving competitive advantage on a more global scale.
Porter’s Diamond Applications

Chance and government, both can have an important effect on
global competitiveness. Major shifts in input costs or exchange
)C
rates, for example, create selective factor disadvantages that

catalyze periods of significant innovation.
Chance developments outside the control of companies, such as
wars or embargoes, can reshape industry structure in a country's
favour or against it. For example, the apparel industry developed
in Singapore after Western nations placed quotas on apparel
imports from Hong Kong and Japan.
(c
Governments can consider the policies that they should follow to

establish national advantages, which enable industries in their
country to develop a strong competitive position globally.
Governments can influence the comparative trade advantage of a
nation if it can ensure domestic firms to gain first mover 205
S
advantage vis-a-vis foreign firms. Notes
They can foster such advantages by ensuring high expectations of ___________________

product performance, safety or environmental standards, or ___________________
encouraging vertical co-operation between suppliers and buyers on
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___________________
a domestic level. Vigorous enforcement of antitrust laws
encourages competition and stimulates innovation. Innovation ___________________
reflects a nation's ability to upgrade its existing advantages to the ___________________

next level of technology and productivity. This is often the key to
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___________________
international (global) success.
___________________
Organizations can use the model to identify the extent to which
___________________
they can build on home-based advantages to create competitive
advantage in relation to others on a global front. A good example is ___________________
his view is Japan. Japan, which has had broad success in ___________________
sophisticated industries, began the postwar period in shambles.
How was this abundance and sophistication created? The harsh
domestic rivalry among Japanese companies - not government, not
cheap labour, not exports - has been the key to that nation's
success.
CE
The Dynamic Diamond Theory is a tool for analyzing the
organizations task environment. It highlights that strategic
choices should not only be a function of industry structure and a
firms resources, it should also be a function of the constraints of
the institutional framework. Goals are also vital. Porter also
believes that government can influence each of the four attributes
of his diamond. He recognizes that government’s role can be both
positive and negative. Countries and industries can achieve long-
term advantage if they are committed to it.
)C
Porter’s theory is an institutional analysis and such analyses

become increasingly important as firms enter new operating
environments and operate within new institutional frameworks.
Check Your Progress

1. Michael Porter came up with the dynamic diamond
(c
theory.
2. Porter states that a country can achieve national
disadvantages in an industry or market segment.
206
Strategies in Geographic Expansion
S
Notes
Activity
Give___________________
the name of firms which The level of trade liberalization and the growth of transnational
are using strategies in and multinational companies have given a big boost to
___________________
Geographic Expansion. internationalizing business. By tradition, multinational firms were
from the economically developed countries. Now many developing
E
___________________
___________________
nations have their own multinational corporations. Global markets
offer prospects of increased profits through higher sales volumes.
___________________
In addition, larger production runs to feed global markets promise
___________________ enhanced profits due to economies of scale.
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___________________ An organization may have to look beyond the borders for expansion
___________________ opportunities. Expansion through internationalization is certainly
___________________
not an easy option. There are exacting benchmarks of price,
quality, and timely delivery that are necessary to be achieved.
___________________
Ways to Go International
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Figure 13.2: Ways to Go International
There are several methods for going international. Each of them

)C
involve a trade-off between level of risk and the amount of foreign

control the organization's managers are willing to allow. Figure
13.2 shows the most common ways to expand internationally.
Organizations often try to minimize their exposure to the market
risks in a new market by starting their exposure to the market
with exporting. As the market grows, and they require servicing
their products, they progress to licensing, then to franchising. The
final stage is direct investment.
As the organization achieves success at each level, it moves to the
(c
next. If it experiences problems at any of these levels, it may cease

to progress further. If extreme problems occur or profitability does
not result within a reasonable time, the organization may
withdraw from the foreign market.
207
Export entry modes: The firm produces in the home country and
S
Notes
markets it in overseas markets. Direct exports do not involve home
country intermediaries and marketing is done either through ___________________
direct agent/distributor or through direct branch/subsidiary in the ___________________
overseas markets. Indirect exports involve intermediaries in the
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___________________
home country and who are responsible for exporting the firm’s
products. ___________________
___________________
Contractual entry modes: These are non-equity associations
between an international company and a company in the overseas
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___________________
markets. Licensing is an arrangement where the international ___________________
company transfers knowledge, know-how, technology, rights to
___________________
patents, etc. for a fixed period of time to an overseas entity in
return for some form of payment, usually a royalty payment. Other ___________________
forms of contractual arrangements are technical agreements, ___________________

service contracts, contract manufacturing, production sharing,
turnkey operations, and Build-Operate-Transfer (BOT)
arrangements etc.
Franchising: Franchising involves the right to use the business
format, usually a brand name, in an overseas market in return for
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the franchiser receiving some form of payment.
Investment entry modes: This involves ownership of production
units in the overseas market based on some form of equity
investment or direct foreign investment. Joint venture and
strategic alliances involve a cooperative partnership between two
or more firms with financial interests as the basis of cooperation.
One of the forms is “Worldwide sourcing.” This has become a
foundation of the new world economy. Instead of simply operating
)C
plants abroad, multinationals integrate those plants that

manufacture their components as subdivisions of a globally
organized production process. This is the new paradigm.
Independent ventures or wholly-owned subsidiaries are modes in
which the parent international company holds 100 per cent equity
and is in full control. Such facilities may be created either through
a new venture known as a Greenfield venture or acquired through
takeover strategies.
(c
International Strategies
International trade is heavily focused on the activities of
Multinational Corporations (MNCs). Dun and Stopford found that
208 500 MNCs account for 80 percent of the world’s foreign direct
S
Notes investment and 25 percent of the world’s capital. Of these 414 are
___________________ from European Commission, United States and Japan, also called
the triad.
___________________
China, India, Brazil, and, gradually, South Africa are becoming
E
___________________
new engines of global economic growth. They are positioned as
___________________
candidates to provide entrants into the field of international
___________________ business. In India’s case, four Indian companies - Indian Oil,
___________________ Bharat Petroleum, Hindustan Petroleum and Reliance Industries
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have already made it to the list of 500 top companies worldwide
___________________
compiled by prestigious 'Fortune' magazine.
___________________
In the old world of national economies, companies had relatively
___________________
little freedom in where and how to compete. Size was achieved
___________________ through diversification or integrated business systems. Within
each national market, the rules of the game were relatively stable.
Established businesses enjoyed massive advantages over new
entrants. This is true any longer, changes in the cost of
transactions, the ability to communicate, and the lowering of
barriers have changed the picture significantly.
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International business is no longer limited to giant multinational
enterprises. Many small and medium sized businesses also go
international. Many of these are from outside the triad. There are
inherent risks in the global market and competitive disadvantage
for the smaller less experienced business organizations located
outside the triad, but there are examples that show that while it is
a difficult and challenging task, it is not impossible for small
business organizations from developing countries to succeed in
tough global markets. For example, Ranbaxy, Tata Tea, Tata Steel,
)C
Sundram Fastners, Infosys, Wipro and Tata Consultancy Services,

etc. have demonstrated their ability to succeed in these markets,
though they may not yet be ‘global’, they have established a viable
and sustainable path for getting there. Acer grew from a small
electronics consulting firm in Taiwan to become the world’s
number two personal computer manufacturer.
Business organizations go international for two types of
opportunity:
(c
z The first derives from the specialization and scale effects that
can be exploited by an organization, e.g. service industries,
like software development, package delivery, personal
computers, or jet engines.
209
The second originates in the variations in factor cost
S
z
Notes
productivity and patterns of demand that exist in national
markets. Cross border participants exploit these country ___________________
differences in skill sets and productivity, and to arbitrage ___________________
labour price differentials, taxes, and so on.
E
___________________
From a strategic point of view this reflects in a number of strategic
___________________
initiatives. Some of them are given below:
___________________
z Protect themselves from the risk and uncertainty of domestic
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___________________
business cycles;
___________________
z Tap the growing market for goods and services;
___________________
z Protect world market shares in response to increased foreign
___________________
competition;
___________________
z Reduce costs;
z Overcome tariff walls by serving a foreign market from within;
and
z Take advantage of technological expertise by manufacturing
goods directly.
CE
Though organizations can "go international" by crossing domestic
borders, the changes in the world economy and the strategic
initiatives that become possible will encourage a significant
number of business organizations to use international expansion
as a favoured mode of growth.
High Low
Local Responsiveness
)C
High
Global Strategy Transnational
Strategy
Cost Pressure
International Multidomestic
Strategy Strategy
Low
(c
Figure 13.3: International Strategies
While going international, there are four major strategic choices

the company as to make. The company can go Global;
210 Transnational; Multi-domestic; or International. These choices
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Notes depend mainly on two factors, (a) Cost pressure, and (b) Local
___________________ responsiveness. These factors can be either low or high. Based on
this we can create a decision matrix that will provide guidance to
___________________
the appropriate strategic choice. This matrix is shown in
E
___________________
Figure 13.3.
___________________
Global: The organization offers standardized products and uses
___________________ integrated operations. Example: Coca Cola and Pepsi are
___________________ marketing Coke and Pepsi for all world markets— these drinks
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can be produced and sold in any nation. The basic formula is either
___________________
manufactured by them locally or imported and sold to bottler who
___________________
has to maintain the standards laid out internally for their
___________________ products. The white goods industry, FMCG industry and Fast
___________________ foods and Beverage industries have established global brands in a
large number countries and this seems to be a new global trend.
McDonalds in India has used this strategy in India with a twist. It
recognized the cultural bias in the taste of its consumers and has
special offerings in India suiting the palate of its audience though
it maintains and offers its standardized products and processes to
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its customers and franchisees. Its business that was once in the
doldrums is picking up again.
Transnational: The organization seeks the best of both the multi-
domestic and global strategies by globally integrating operations
while tailoring products and services to the local market. Flexible
manufacturing enables organizations to produce multiple versions
of products from the same assembly line, tailoring them to
different markets. This gives more choice in locating facilities to
take advantage of cheaper labour or to get the best of other factors
)C
of production.
Multi-domestic: Multi-domestic strategy is adopted when an
organization can achieve a high level of local responsiveness by
matching products and services to the national conditions
prevalent in the countries they operate in. The organization
attempts to extensively customize their products and services
according to the local conditions. This may lead to a high-cost
structure as research and development, production, and marketing
(c
have to be duplicated. However, the advantages that accrues;

especially when cultural, social, climatic and economic differences
exist; can be substantial. For years, U.S. auto manufacturers
maintained decentralized overseas units that produced cars
tailored to different countries and regions. General Motors 211
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produced the Opel in Germany and Opel in India. Though the two Notes
cars are branded similarly, the Indian Opel has been tailored to ___________________
Indian conditions. Ford Motors offers a range of products in India
___________________
that it does not produce elsewhere in the world.
E
___________________
The problem with this strategy often is that the local products may
not be regularly upgraded to match technological changes taking ___________________
place. If that happens, the organization could be at a disadvantage. ___________________

Phillips used this strategy in India to its disadvantage. It provided
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___________________
top of the rung technology to customers in the developed nations.
___________________
In India its manufacturing base was for low technology
components and the offerings were based on these components. As ___________________
the Indian economy opened up and was liberalized; Sony, Akai ___________________
along with a number of Korean companies like Samsung, LG etc.;
___________________
came into the country offering products that were concurrent to
world standards. Phillips India lost a large part of its market share
and had to totally revamp its strategy to rebuild the company.
International: Firms that have products or technologies which
are proprietary or protected against replication can create value by
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transferring products and services to foreign markets where these
products and services are not available. This is called an
international strategy.
The international organization maintains a tight control over its
overseas operations, offers standardized products and services in
different countries with little or no differentiation. Most
international companies, such as, Coca Cola, IBM, Kellogg, Proctor
and Gamble, Microsoft, and several others adopt this strategy for
the different countries they operate in. Indian organizations in
)C
software development have also adopted this strategy. They

combine this strategy with a cost leadership strategy taking
advantage of the large base of low-cost scientific and technological
manpower. Other industries where India could find a niche are the
service industry, knowledge-based industries, pharmaceuticals and
entertainment.
Some Indian companies who have either adopted international
strategies or become the beneficiaries of the expansion strategies of
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international companies. For example, the AV Birla group took the

route of international strategies quite early. They have set-up
manufacturing facilities in many countries, including Egypt,
Thailand, Indonesia, Malaysia, and Philippines. They also supply
212 to wide a spread of export markets, both from India and their
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Notes subsidiaries overseas.
___________________
Another example is Sun Pharmaceuticals, one of India’s top
___________________ pharmaceutical companies. The company has adopted the
acquisition route for its expansion strategies. It has acquired six
E
___________________
___________________ companies, one of which is in the US.
___________________ The disadvantages of international strategies lie in factors, such
___________________
as, the risks related to uncertainty in economic and political
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environments in host countries, difficulty managing cultural
___________________
diversity, cost of coordination, communication and distribution,
___________________
and barriers to expansion and growth.
___________________
International strategies provide opportunities for economies of
___________________ scale and learning. It offers a promise of above-average returns.
Globalization, trade liberalization, the regulatory framework,

emergence of regional trade blocs, emergence of the internet as a
communication platform, higher levels of cultural diffusion, and
the establishment of bilateral and multilateral institutions such as
the WTO to regulate and manage trade relations are some of the
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significant factors that indicate the likelihood of growth of
International business at an accelerated pace.
This is demonstrated by Indian companies like Infosys, Tata

Consulting Services, Wipro, Tata Tea, Tata Steel, Ranbaxy, Dr.
Reddy’s Labs, Sundram Fasteners, Reliance, Larson & Toubro and
many other business organizations have gained a foothold in the
international market. Indian industry already has the essential
)C
competencies and competitiveness to compete internationally in

pharmaceuticals, textiles, software services, biotechnology, steel,
and engineering. It is developing competencies and
competitiveness in other areas also.
Check Your Progress

Fill in the blanks:
1. The level of trade liberalization and the growth of
(c
transnational and multinational companies have given a

big boost to ………………… business.
2. ………………… through internationalization is certainly
not an easy option.
Competing Internationally 213
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Notes
Activity
India’s growth into an economic powerhouse is based on
Critically analyse why firms
___________________
recognizing the importance of strategy as means to the goal. compete globally.
According to management guru, C. K. Prahalad, to create 15 ___________________
million jobs and reach its objective of external economic
E
___________________
dominance, India needs a strategy that will help it to achieve the
___________________
following:
___________________
z Grow at around 15%.
UP
___________________
z Create modern manufacturing and global supply chain
___________________
management like those of General Motors or General Electric
using our sophistication in IT. ___________________
z Deal with scale. ___________________
___________________
z Balance between domestic and export dependence for growth,
and finally,
z Commit itself to low cost, high quality talent.
The challenge is daunting, but even so, the face of India is
changing. Businesses have been courageously facing the present
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environment of dynamic change. Many businesses are trying to
meet and match international practices. There are already world
class organizations in the country, in spite of the prejudice against
the predominance of family managed businesses.
In order to make an effective entry in the international market, a
number of factors need to be kept in mind. Indian companies have
to work hard at overcoming the prejudices that exist today where
goods from emerging markets are considered to be inferior. Some
)C
day, the label ‘made in India’, will be a symbol of high quality and
value. But for that to happen, business organizations need to
identify strategies that fit the processes under way, instead of
conflicting with them. They must shape opportunities by
concentrating on pieces of the business in which they have
world-class skills and proprietary intangible assets. They should
translate diversity into strength. They have to move up on the
value chain and reach a position where their products can compete
with products from the triad on an equal footing.
(c
Price/Performance Equation
Consumers in international markets expect global standards, but
they often are unwilling to pay global prices for products from
214 India. An Indian product or an Indian company is associated with
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Notes low cost and low price. This may be despite the fact that it is
___________________ providing comparable quality and value. Unless Indian business
organizations can overcome this liability, they will continue to
___________________
operate at the low end of the value curve.
E
___________________
___________________ Brand Management and Packaging

___________________ Downstream capabilities reflect strengths in brand marketing.
Most Indian companies lack this capability. Without the advantage
___________________
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of powerful, established brands, Indian multinationals are often
___________________ restricted to be part of the supply chain or are in commodities.
___________________ They need to move up the ladder to branded products, and
___________________
eventually to a strong brand image. Indian companies should not
underestimate the value of using a consistent approach to brand
___________________
management in the new markets so as to climb the value chain.
Packaging, not only is a requirement to meet the environmental
conditions, e.g. cold and heat, storage and transportation, etc., the
function of packaging also is different. It is also an important
marketing tool that needs to meet the perceptions and aesthetics of
the market. The distribution infrastructure in developed markets
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places special emphasis on packaging.
Ranbaxy and Dr. Reddy’s Labs, when they first entered the global
market were selling bulk drugs and intermediaries, placed at the
bottom of the pharmaceuticals value curve. Over the years they
have got into branded generics and now are in the branded product
markets. Initially, both the companies were not able to justify the
negative impact on their return on capital employed. This is not
the case now. Both these companies are aspiring to become
)C
‘research based’ companies to produce new drugs for the

international market, where margins of 100 percent or more are
possible.
Market Building
Another downstream competence is distribution. Entering western
markets with Indian products means introducing a new product or
service category. This requires the organization to build new
customer relationships and strong distribution channels. They may
(c
discover that it requires a large investment if they are to grow

their market sufficiently. In addition, it requires an enormous
amount of managerial vision, courage and grit. In the long run,
such investments pay off.
215
Infosys is developing downstream capabilities by creating a set of
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Notes
Proximity Development Centres (PDCs) in key cities around the
world. It has realized the importance of building networks of ___________________
business activities in local markets. Infosys PDCs will be staffed ___________________
predominantly by local people to provide the image of a local
E
___________________
company. It will look after the installation, sign-off, training etc.
required for software in addition to its primary objective to build ___________________
customer relationships. This is a slow process, but necessary to ___________________

succeed globally.
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___________________
Studds Accessories was in a hurry. It was a low cost producer ___________________
capable of manufacturing to international standards. Studds was
___________________
confident that it had the leverage to compete in international
markets, but it faced two main disadvantages: it did not have an ___________________
advertising budget to build an international brand, nor it did have ___________________

the distribution channels for its ambitions. Building distribution
channels required extensive investments, so, it entered into a joint
venture with, Nolan, an Italian firm and one of the world’s top ten
helmet manufacturers. Nolan had its own objectives for entering
into the joint venture, which were quite different from Studds. In a
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very short time, the joint venture failed and so did the dreams of
Studds.
Product Design
Upstream competencies include technology development and
product design. Providing consumers with a new product that
requires no re-education may be a much easier way to enter a new
market with a new product. Even when consumers in developed
markets appear to want the same products as are sold in emerging
)C
economies, some redesign is often necessary to reflect differences

in use, distribution, regulations and standards.
For example, Thermax has developed a high fluid velocity shell
type boiler. This reduces the size of a boiler by a third for the same
capacity. For the Indian market, the boiler has to be designed to
the Indian Boiler Regulation (IBR) Standards, but for global
markets the boiler has to meet British Standards or the US
Standards (ASME) – both these differ from IBR standards.
(c
However, moving upstream in technology development and new

designs is very challenging, more challenging than creating
downstream capabilities. It requires investing in R&D consistently
over a long period of time and looking at the end of the rainbow for
216 the payback. It requires the management to have a vision of the
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Notes world as their market and provide strong support.
___________________
Capital and Resources
___________________
Companies will require using more capital and human resources in
E
___________________
Western markets well ahead of demand. In spite of the efficient
___________________ distribution systems, good banking facilities, and excellent
___________________ logistics, the challenges that have to be overcome need long-term
investments. They Indian companies are not willing to commit
___________________
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fully. They make relatively junior managers, with little influence
___________________ in the corporate decision-making processes responsible for
___________________ international strategy. Pull out as soon as they see difficulties.
___________________
This is the wrong way.
___________________ Human resources can be best exploited if organizational structure

supports the new competitive capabilities that that are drivers for
success in the business. Business organizations moving up the
international value curve often find themselves constrained by
their traditional organizational structure. The organization has to
move on and this means generating an organizational structure
that allows each business to be managed on an integrated
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worldwide basis. There will be difficulties to integrate the new
structures into the business model. Business organization,
however, have little choice but to learn to meet these challenges.
Ranbaxy, when it decided to go international, chose a Geographical
structure. It divided its operations into four regions, of which India
was one. All four regional managers were treated as equals even
though the Indian operations were four times larger than the
business of all the regions put together. Each region had
)C
representation in key decision making committees. The result was

that international operations were integrated into the business
model, and the regional heads could continuously influence
resource allocation decisions. Infosys uses the SBU concept; Acer
created a matrix structure.
Building Leverages
The objective of globalization should be to identify and command
assets that can be leveraged for the particular market.
(c
Globalization does not erase the differences between countries or

render local knowledge, local talent, and local relationships
obsolete. There needs to be an understanding that regional tastes
vary, and language barriers can create difficulties, irrespective of
which market you want to serve. Privileged access to country- 217
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specific intangible assets is critical to success. However, it is vital Notes
to understand what differs and what remains the same from one ___________________
country to another.
___________________
Often business organizations do not have the means or the need to
E
___________________
build competencies internally, yet they lack the capability to move
up the value chain. Alliances and partnerships can provide the ___________________
means to leverage their resources and core competencies and at the ___________________
same time capturing the complementary capabilities of the
UP
___________________
partners. Indian companies have not been very successful in this
___________________
area in the past, as the Studds example demonstrates. Perhaps,
the cultural mindset and a lack of understanding of behavioural ___________________
differences due to different cultural and social values is the reason. ___________________
If it is, it needs to be overcome so that we have the capability to
___________________
work horizontally, in a partnership. The ability to form, sustain
and learn from alliances is a core competence that MNCs from
India will have to acquire and develop.
An ‘Economic Times’ headline of recent origin, tells a telling tale.
The headline reads, ‘A Foreign Dealing India Inc. Never Asked
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For’. Indian companies are currently involved in at least 100
international arbitration proceedings. Interestingly, the majority of
cases involve claims on Indian parties by foreign companies. Many
of these cases refer to dishonouring contractual obligations. We
need to examine whether this is another aspect of our mindset
where we show a lack of understanding of different cultural, legal
and societal values. An ability to understand and appreciate the
tenor of international relationships is perhaps, another core
competence that all Indian business organizations dealing
)C
internationally will have to acquire and develop.

Some Indian MNCs have tried to acquire expertise through the
acquisition route. Tata Tea’s acquisition of Tetley, Tata Steel’s
acquisition of National Steel, and perhaps Ranbaxy’s acquisition of
Ohm Labs, reflects this strategy. If the organization has the core
competence to integrate such acquisitions into the company and
leverage its competencies, this is the simplest route to obtaining
leverage.
(c
However, Indian business organizations should not be so seduced

by the opportunities they see in the international market that they
ignore or even destroy their foundation to build a new structure.
The existing assets should provide the resources to build higher
218 levels of business capabilities to succeed internationally. The
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Notes challenge is to protect historical assets and resources, even while
___________________ expanding overseas.
___________________
Check Your Progress
E
___________________
___________________
1. Consumers in international markets do not expect
___________________ global standards.
___________________
2. Upstream capabilities reflect strengths in brand
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___________________ marketing.
___________________
___________________ Summary
___________________ In a globalized era a level playing field for international trade
serves as the principal engine of change. To join the league of
globalized nations, countries must either adopt, or be seen as
moving towards the rules of the free market economy. To survive
in this new world and to attract investments from the
international community, countries have to abide by the neo-
liberal economic model. Some of the rules of the neo-liberal
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economic model are: (a) Make the private sector the primary
engine of their economic growth; (b) Maintain a low rate of
inflation and price stability; (c) Shrink the size of their state
bureaucracies and eliminating government corruption, subsidies
and kickbacks as much as possible; (d) Balance budget to the
extent possible; and (e) Eliminate or lower tariffs on imported
goods, remove restrictions on foreign investment, get rid of quotas
and domestic monopolies. However, globalization has to work
)C
within the framework of the nation state and each state makes
decisions based on its national economics. National governments
must still endorse international agreements. The power of national
governments may become more circumscribed in the future but the
nation state is far from dead, and sovereignty is still cherished. It
remains the sole arbiter in determining the nature, scope, pace and
sequencing of economic policy reform.
Lesson End Activity

(c
‘Merchants have no country,’ Thomas Jefferson (one of the early

US presidents) wrote way back 1814. ‘The mere spot they stand on
does not constitute so strong an attachment as that from which 219
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they draw their gains.’ Notes
Reinterpreting Jefferson’s words, the world is conglomerate of ___________________

merchants, each working to maximize its own gains. Discuss the ___________________
implications of this statement on nationalism.
E
___________________
___________________
Keywords
___________________
Dynamic Diamond Theory: Formulated by Michael Porter, this
UP
___________________
suggests that a country’s global competitive advantage is not just
related to factor conditions, but other conditions as well. ___________________
EFT: EFT stands for "Electronic Funds Transfer" and represents ___________________
the way the business can receive direct deposit of all payments ___________________
from other parties to the company bank account. ___________________
Global Organizations offer standardized products and use
integrated operations for their offerings in different parts of the
world.
Multi-domestic Organization decentralizes operational
decisions and activities to each country in which it is operating and
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tailors its products and services to each market.
Transnational Organization is a combination of both the multi-
domestic and global strategies whereby an organization globally
integrates operations while tailoring products and services to the
local market.
Worldwide sourcing is a system used by multinational
companies of integrating the supply chain by operating supplier’s
plants abroad and integrating those plants to manufacture
)C
components as subdivisions of a globally organized production

process.

1. What is globalization?
2. What are the opportunities and threats that globalization
throws up? Describe these with examples.
(c
3. What is the impact of globalization on national governments?

4. How do governments facilitate internationalization of trade?
220
5. Internationalization of trade is an opportunity for improving
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Notes
the competitiveness of local businesses’. Discuss this
___________________
statement critically.
___________________
Further Readings
E
___________________
___________________
Books
___________________
___________________
UP
___________________
___________________ Ltd.
___________________ Wheelen, Thomas L, David, Hunger J & Krish, Rangarajan (2006).
___________________ “Concepts in Strategic Management and Business Policy.” Pearson
Education.
Web Readings
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http://www.smetimes.in/smetimes/in-depth/2009/Jan/19/business-
strategies-for-going-global.html
http://nbstrategy.com/goingglobalstrategy
http://www.experian.co.uk/assets/business-strategies/white-
papers/wp-going-global-international-location-planning.pdf
http://www.global-strategy.net/categories/Buildingglobalstrategy
https://www.ashgate.com/pdf/SamplePages/Going_Global_Ch2.pdf
)C
(c
UNIT 14: Strategies for Retrenchment
Unit 14
221
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Notes
Activity
Strategies for Retrenchment
___________________
showing the Retrenchment
___________________
Strategy.
E
___________________
Objectives
___________________
topics: ___________________
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\ What is Retrenchment Strategy? ___________________
\ Corporate Restructuring Strategy ___________________
\ Category of Corporate Restructuring
___________________
\ Methods of Corporate Restructuring
___________________
\ Turnaround Strategies
___________________
Introduction
Retrenchment calls for a radical surgery to cut the ‘extra fat’ – say,
laying off employees, dropping items from a production line,
eliminating low-margin customer groups, avoiding elaborate
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promotional efforts etc. Apart from the above cost reductions,
retrenchment calls for drastic steps to improve cash flows through
sale of assets.
What is Retrenchment Strategy?

Retrenchment strategy is a corporate level, defensive strategy
followed by a firm when its performance is disappointing or when
)C
its survival is at stake for a variety of reasons. Economic

recessions, production inefficiencies, and innovative breakthroughs
by competitors are only three causes. Managers choose
retrenchment when they think that the firm is neither competitive
enough to succeed through a counter attack (on market forces
affecting its sales negatively) nor nimble enough (effecting fast
changes) to be a fast follower. However, retrenchment does not
mean death knell for every business under attack. Many healthy
(c
companies have faced life-threatening competitive situations in the

past, successfully addressed their weaknesses and restored
themselves.
222
Retrenchment strategy, as such, is adopted out of necessity, not by
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Notes
deliberate choice. In actual practice, retrenchment may take one of
___________________
the following forms:
___________________
z Outright sale to another company,
E
___________________
z Leveraged Buyout (LBO), and
___________________
z Spin-off.
___________________
A leveraged buy out occurs when a company’s shareholders are
___________________
UP
bought out (hence buyout) by the company’s management and
___________________ other private investors using borrowed funds (hence leveraged). In
___________________ the last case, the parent company creates a new company, then
distributes its shares to shareholders of the parent.
___________________
___________________ Reasons for Divestment

Following are the reasons for Disinvestment:
z Strong Focus: Spinning off unviable units may help a firm

focus on its core business more closely and regain the lost
ground quickly.
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z Unlock Critical Funds: The firm can sell those assets whose
values have plateaued or declined as a result of ignorance or
neglect.
z Invest in Emerging Technologies: Firms can use the cash

generated through spin offs in emerging or future technologies
that better leverage or revitalize their core competencies.
z A Maker of Policy: Sometimes the firm may spin off units in

fields where it has no dominance. If the firm wants to be in the
)C
top slot, it must naturally get out of all those ventures where it
is only a marginal player (like what K. M. Birla did in paper,
sugar and steel – all peripheral businesses in Birla’s kitty).
z From Red to Black: Assets bought at inflated prices might

drain out cash flows, especially if they are funded through debt
capital. Spinning off such assets would help a firm liquidate
debts, improve the cash flow position and recharge its
operations in areas where it has immense strength.
(c
z Unviable Projects: If the business becomes unviable due to

stiff competition or change in government policy it is better to
get out quickly.
223
Check Your Progress
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Notes
Activity
Fill in the blanks:
___________________
1. A ……………….. buy out occurs when a company’s corporate restructuring
___________________
strategy.
shareholders are bought out by the company’s
E
management and other private investors using ___________________
borrowed funds. ___________________
2. ……………….. unviable units may help a firm focus on ___________________

its core business more closely and regain the lost ground
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___________________
quickly.
___________________
___________________
Corporate Restructuring Strategy
___________________
Corporate restructuring is one of the most complex and
___________________
fundamental phenomena that management confronts. Each
company has two opposite strategies from which to choose: to
diversify or to refocus on its core business. While diversifying
represents the expansion of corporate activities, refocus
characterizes a concentration on its core business. From this
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perspective, corporate restructuring is reduction in diversification.
Corporate restructuring is an episodic exercise, not related to

investments in new plant and machinery which involve a
significant change in one or more of the following:
z Pattern of ownership and control
z Composition of liability
z Asset mix of the firm.

)C
It is a comprehensive process by which a company can consolidate

its business operations and strengthen its position for achieving
the desired objectives:
z Synergetic
z Competitive
z Successful
(c
It involves significant re-orientation, re-organization or

realignment of assets and liabilities of the organization through
conscious management action to improve future cash flow stream
and to make more profitable and efficient.
224
Meaning and Need for Corporate Restructuring
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Notes
Corporate restructuring is the process of redesigning one or more
___________________ aspects of a company. The process of reorganizing a company may
___________________ be implemented due to a number of different factors, such as
positioning the company to be more competitive, survive a
E
___________________
currently adverse economic climate, or poise the corporation to
___________________ move in an entirely new direction. Here are some examples of why
___________________ corporate restructuring may take place and what it can mean for
the company.
___________________
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Restructuring a corporate entity is often a necessity when the
___________________
company has grown to the point that the original structure can no
___________________ longer efficiently manage the output and general interests of the
___________________ company. For example, a corporate restructuring may call for
spinning off some departments into subsidiaries as a means of
___________________
creating a more effective management model as well as taking
advantage of tax breaks that would allow the corporation to divert
more revenue to the production process. In this scenario, the
restructuring is seen as a positive sign of growth of the company
and is often welcome by those who wish to see the corporation gain
a larger market share.
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Corporate restructuring may also take place as a result of the
acquisition of the company by new owners. The acquisition may be
in the form of a leveraged buyout, a hostile takeover, or a merger of
some type that keeps the company intact as a subsidiary of the
controlling corporation. When the restructuring is due to a hostile
takeover, corporate raiders often implement a dismantling of the
company, selling off properties and other assets in order to make a
profit from the buyout. What remains after this restructuring may
be a smaller entity that can continue to function, albeit not at the
)C
level possible before the takeover took place.

In general, the idea of corporate restructuring is to allow the
company to continue functioning in some manner. Even when
corporate raiders break up the company and leave behind a shell of
the original structure, there is still usually a hope, what remains
can function well enough for a new buyer to purchase the
diminished corporation and return it to profitability.
Purpose of Corporate Restructuring

(c
To enhance the shareholder value, the company should

continuously evaluate its:
z Portfolio of businesses.
225
Capital mix, Ownership & Asset arrangements to find
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z
Notes
opportunities to increase the shareholder’s value.
___________________
z To focus on asset utilization and profitable investment
___________________
opportunities.
E
___________________
z To reorganize or divest less profitable or loss making
businesses/products. ___________________
___________________
z The company can also enhance value through capital
restructuring, it can innovate securities that help to reduce
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___________________
cost of capital. ___________________
Characteristics of Corporate Restructuring ___________________
Following are the basic characteristics of corporate restructuring: ___________________
z To improve the company’s Balance sheet, (by selling ___________________
unprofitable division from its core business).
z To accomplish staff reduction (by selling/closing of unprofitable

portion)
z Changes in corporate management

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z Sale of underutilized assets, such as patents/brands.
z Outsourcing of operations such as payroll and technical

support to a more efficient third party.
z Moving of operations such as manufacturing to lower-cost

locations.
z Reorganization of functions such as sales, marketing, &

distribution
)C
z Renegotiation of labour contracts to reduce overhead
z Refinancing of corporate debt to reduce interest payments.
z A major public relations campaign to reposition the co., with

consumers.
Check Your Progress

(c
1. Corporate restructuring is one of the most simple and

fundamental phenomena that management confronts.
2. Corporate restructuring is an episodic exercise.
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Category of Corporate Restructuring
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Notes
Activity
Write an essay on various
Corporate restructuring entails a range of activities including
___________________
category of corporate financial restructuring and organization restructuring.
___________________
restructuring.
Financial Restructuring
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___________________
___________________ Financial restructuring is the reorganization of the financial assets

and liabilities of a corporation in order to create the most beneficial
___________________
financial environment for the company. The process of financial
___________________ restructuring is often associated with corporate restructuring, in that
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___________________ restructuring the general function and composition of the company is
likely to impact the financial health of the corporation. When
___________________
completed, this reordering of corporate assets and liabilities can help
___________________
the company to remain competitive, even in a depressed economy.
___________________
Just about every business goes through a phase of financial
restructuring at one time or another. In some cases, the process of
restructuring takes place as a means of allocating resources for a
new marketing campaign or the launch of a new product line.
When this happens, the restructure is often viewed as a sign that
the company is financially stable and has set goals for future
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growth and expansion.
Need for Financial Restructuring

The process of financial restructuring may be undertaken as a
means of eliminating waste from the operations of the company.
For example, the restructuring effort may find that two divisions
or departments of the company perform related functions and in
some cases duplicate efforts. Rather than continue to use financial
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resources to fund the operation of both departments, their efforts

are combined. This helps to reduce costs without impairing the
ability of the company to still achieve the same ends in a timely
manner.
In some cases, financial restructuring is a strategy that must take
place in order for the company to continue operations. This is
especially true when sales decline and the corporation no longer
generates a consistent net profit. A financial restructuring may
include a review of the costs associated with each sector of the
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business and identify ways to cut costs and increase the net profit.
The restructuring may also call for the reduction or suspension of
production facilities that are obsolete or currently produce goods
that are not selling well and are scheduled to be phased out.
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Financial restructuring also take place in response to a drop in
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Notes
sales, due to a sluggish economy or temporary concerns about the
economy in general. When this happens, the corporation may need ___________________
to reorder finances as a means of keeping the company operational ___________________
through this rough time. Costs may be cut by combining divisions
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___________________
or departments, reassigning responsibilities and eliminating
personnel, or scaling back production at various facilities owned by ___________________
the company. With this type of corporate restructuring, the focus is ___________________
on survival in a difficult market rather than on expanding the
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___________________
company to meet growing consumer demand.
___________________
All businesses must pay attention to matters of finance in order to
___________________
remain operational and to also hopefully grow over time. From this
perspective, financial restructuring can be seen as a tool that can ___________________
ensure the corporation is making the most efficient use of available ___________________
resources and thus generating the highest amount of net profit
possible within the current set economic environment.
Organizational Restructuring
In organizational restructuring, the focus is on management and
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internal corporate governance structures. Organizational
restructuring has become a very common practice amongst the
firms in order to match the growing competition of the market.
This makes the firms to change the organizational structure of the
company for the betterment of the business.
Need for Organization Restructuring

z New skills and capabilities are needed to meet current or
expected operational requirements.
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z Accountability for results are not clearly communicated and

measurable resulting in subjective and biased performance
appraisals.
z Parts of the organization are significantly over or under
staffed.
z Organizational communications are inconsistent, fragmented,
and inefficient.
(c
z Technology and/or innovation are creating changes in

workflow and production processes.
z Significant staffing increases or decreases are contemplated.
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Personnel retention and turnover is a significant problem.
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z
Notes
___________________
z Workforce productivity is stagnant or deteriorating.
___________________ z Morale is deteriorating.

The perspective of organizational restructuring may be different
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___________________
for the employees. When a company goes for the organizational
___________________
restructuring, it often leads to reducing the manpower and hence
___________________
meaning that people are losing their jobs. This may decrease the
___________________ morale of employee in a large manner. Hence many firms provide
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___________________ strategies on career transitioning and outplacement support to
their existing employees for an easy transition to their next job.
___________________
___________________ Leveraged Buyout, Hostile Takeover & Merger

___________________ Corporate restructuring may take place as a result of the
acquisition of the company by new owners. The acquisition may be
in the form of a leveraged buyout, a hostile takeover, or a merger of
some type that keeps the company intact as a subsidiary of the
controlling corporation.
Hostile Takeover
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A hostile takeover is a type of corporate takeover which is carried
out against the wishes of the board of the target company. This
unique type of acquisition does not occur nearly as frequently as
friendly takeovers, in which the two companies work together
because the takeover is perceived as beneficial. Hostile takeovers
can be traumatic for the target company, and they can also be
risky for the other side, as the acquiring company may not be able
to obtain certain relevant information about the target company.
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Companies are bought and sold on a daily basis. There are two
types of sale agreements. In the first, a merger, two companies
come together, blending their assets, staff, facilities, and so forth.
After a merger, the original companies cease to exist, and a new
company arises instead. In a takeover, a company is purchased by
another company. The purchasing company owns all of the target
company's assets including company patents, trademarks, and so
forth. The original company may be entirely swallowed up, or may
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operate semi-independently under the umbrella of the acquiring

company.
Typically, a company which wishes to acquire another company
approaches the target company's board with an offer. The board
members consider the offer, and then choose to accept or reject it. 229
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The offer will be accepted if the board believes that it will promote Notes
the long term welfare of the company, and it will be rejected if the
___________________
board dislike the terms or it feels that a takeover would not be
beneficial. When a company pursues takeover after rejection by a ___________________
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board, it is a hostile takeover. If a company bypasses the board ___________________
entirely, it is also termed a hostile takeover.
___________________
Publicly traded companies are at risk of hostile takeover because ___________________
opposing companies can purchase large amounts of their stock to
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___________________
gain a controlling share. In this instance, the company does not
have to respect the feelings of the board because it already ___________________
essentially owns and controls the firm. A hostile takeover may also ___________________
involve tactics like trying to sweeten the deal for individual board
___________________
members to get them to agree.
___________________
An acquiring firm takes a risk by attempting a hostile takeover.
Because the target firm is not cooperating, the acquiring firm may
unwittingly take on debts or serious problems, since it does not
have access to all of the information about the company. Many
firms also have trouble getting financing for hostile takeovers,
since some banks are reluctant to lend in these situations.
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Merger
A merger occurs when two companies combine to form a single
company. A merger is very similar to an acquisition or takeover,
except that in the case of a merger existing stockholders of both
companies involved retain a shared interest in the new
corporation. By contrast, in an acquisition one company purchases
a bulk of a second company's stock, creating an uneven balance of
ownership in the new combined company.
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The entire merger process is usually kept secret from the general
public, and often from the majority of the employees at the
involved companies. Since the majority of merger attempts do not
succeed, and most are kept secret, it is difficult to estimate how
many potential mergers occur in a given year. It is likely that the
number is very high, however, given the amount of successful
mergers and the desirability of mergers for many companies.
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A merger may be sought for a number of reasons, some of which

are beneficial to the shareholders, some of which are not. One use
of the merger, for example, is to combine a very profitable company
with a losing company in order to use the losses as a tax write-off
to offset the profits, while expanding the corporation as a whole.
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Increasing one's market share is another major use of the merger,
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Notes
particularly amongst large corporations. By merging with major
___________________
competitors, a company can come to dominate the market they
___________________ compete in, giving them a freer hand with regard to pricing and
buyer incentives. This form of merger may cause problems when
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___________________
two dominating companies merge, as it may trigger litigation
___________________
regarding monopoly laws.
___________________
Another type of popular merger brings together two companies
___________________ that make different, but complementary, products. This may also
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___________________ involve purchasing a company which controls an asset your
___________________
company utilizes somewhere in its supply chain. Major
manufacturers buying out a warehousing chain in order to save on
___________________
warehousing costs, as well as making a profit directly from the
___________________ purchased business, is a good example of this. PayPal's merger
with eBay is another good example, as it allowed eBay to avoid fees
they had been paying, while tying two complementary products
together.
A merger is usually handled by an investment banker, who aids in
transferring ownership of the company through the strategic
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issuance and sale of stock. Some have alleged that this relationship
causes some problems, as it provides an incentive for investment
banks to push existing clients towards a merger even in cases
where it may not be beneficial for the stockholders.
Mergers and acquisitions are means by which corporations
combine with each other. Mergers occur when two or more
corporations become one. To protect shareholders, state law
provides procedures for the merger. A vote of the board of directors
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and then a vote of the shareholders of both corporations is usually

required. Following a merger, the two corporations cease to exist
as separate entities. In the classic merger, the assets and liabilities
of one corporation are automatically transferred to the other.
Shareholders of the disappearing company become shareholders in
the surviving company or receive compensation for their shares.
Benefits of Mergers and Acquisitions
Merger refers to the process of combination of two companies,
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whereby a new company is formed. An acquisition refers to the

process whereby a company simply purchases another company. In
this case there is no new company being formed. Benefits of
mergers and acquisitions are quite a handful.
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Mergers and acquisitions generally succeed in generating cost
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Notes
efficiency through the implementation of economies of scale. It may
also lead to tax gains and can even lead to a revenue enhancement ___________________
through market share gain. The principal benefits from mergers ___________________
and acquisitions can be listed as increased value generation,
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___________________
increase in cost efficiency and increase in market share.
___________________
Mergers and acquisitions often lead to an increased value generation
___________________
for the company. It is expected that the shareholder value of a firm
after mergers or acquisitions would be greater than the sum of the
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___________________
shareholder values of the parent companies. An increase in cost ___________________
efficiency is affected through the procedure of mergers and
___________________
acquisitions. This is because mergers and acquisitions lead to
economies of scale. This in turn promotes cost efficiency. As the ___________________
parent firms amalgamate to form a bigger new firm the scale of ___________________
operations of the new firm increases. As output production rises there
are chances that the cost per unit of production will come down.
Demerger
Demergers are situations in which divisions or subsidiaries of
parent companies are split off into their own independent
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corporations. The process for a demerger can vary slightly,
depending on the reasons behind the implementation of the split.
Generally, the parent company maintains some degree of financial
interest in the newly formed corporation, although that interest
may not be enough to maintain control of the functionality of the
new corporate entity.
A demerger results in the transfer by a company of one or more of
its undertakings to another company. The company whose
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undertaking is transferred is called the demerged company and the

company (or the companies) to which the undertaking is
transferred is referred to as the resulting company.
Check Your Progress

Fill in the blanks:
1. ………………… restructuring is the reorganization of the
financial assets and liabilities of a corporation in order
(c
to create the most beneficial financial environment for

the company.
2. In …………… restructuring, the focus is on management
and internal corporate governance structures.
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Methods of Corporate Restructuring
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Notes
Activity
Highlight the various
Following are the methods of Corporate Restructuring:
___________________
techniques of corporate
___________________
restructuring used by the Joint Venture
firms.
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___________________ Joint ventures are new enterprises owned by two or more
___________________ participants. They are typically formed for special purposes for a
limited duration. It is a combination of subsets of assets
___________________
contributed by two (or more) business entities for a specific
___________________ business purpose and a limited duration. Each of the venture
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___________________ partners continues to exist as a separate firm, and the joint
venture represents a new business enterprise. It is a contract to
___________________
work together for a period of time each participant expects to gain
___________________
from the activity but also must make a contribution.
___________________
For example, GM-Toyota JV: GM hoped to gain new experience in
the management techniques of the Japanese in building high-
quality, low-cost compact & subcompact cars. Whereas, Toyota was
seeking to learn from the management traditions that had made
GE the no. 1 auto producer in the world and In addition to learn
how to operate an auto company in the environment under the
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conditions in the US, dealing with contractors, suppliers, and
workers. DCM group and Daewoo motors entered in to JV to form
DCM DAEWOO Ltd. to manufacture automobiles in India.
Reasons for Forming a Joint Venture

z Build on company's strengths
z Spreading costs and risks
z Improving access to financial resources
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z Economies of scale and advantages of size

z Access to new technologies and customers
z Access to innovative managerial practices
Rational for Joint Ventures

z To augment insufficient financial or technical ability to enter a
particular line or business.
(c
z To share technology and generic management skills in

organization, planning and control.
z To diversify risk
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To obtain distribution channels or raw materials supply
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z
Notes
z To achieve economies of scale
___________________
z To extend activities with smaller investment than if done
___________________
independently
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___________________
z To take advantage of favourable tax treatment or political
___________________
incentives (particularly in foreign ventures).
___________________
Spin-off
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___________________
Spin-offs are a way to get rid of underperforming or non-core
___________________
business divisions that can drag down profits.
___________________
Process of Spin-off ___________________
z The company decides to spin off a business division. ___________________
z The parent company files the necessary paperwork with the

Securities and Exchange Board of India (SERI).
z The spin-off becomes a company of its own and must also file
paperwork with the SEBI.
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z Shares in the new company are distributed to parent company
shareholders.
z The spin-off company goes public.
Notice that the spin-off shares are distributed to the parent
company shareholders. There are two reasons why this creates
value:
z Parent company shareholders rarely want anything to do with
the new spin-off. After all, it's an underperforming division
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that was cut off to improve the bottom line. As a result, many
new shareholders sell immediately after the new company goes
public.
z Large institutions are often forbidden to hold shares in spin-
offs due to the smaller market capitalization, increased risk, or
poor financials of the new company. Therefore, many large
institutions automatically sell their shares immediately after
the new company goes public.
(c
Simple supply and demand logic tells us that such large number of
shares on the market will naturally decrease the price, even if it is
not fundamentally justified. It is this temporary mispricing that
gives the enterprising investor an opportunity for profit. There is
234 no money transaction in spin-off. The transaction is treated as
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Notes stock dividend & tax free exchange.
___________________
Split-off & split-up
___________________
Split-off: It is a transaction in which some, but not all, parent
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___________________
company shareholders receive shares in a subsidiary, in return for
___________________ relinquishing their parent company’s share. In other words some
___________________ parent company shareholders receive the subsidiary’s shares in
return for which they must give up their parent company shares.
___________________
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Features: A portion of existing shareholders receives stock in a
___________________
subsidiary in exchange for parent company stock.
___________________
Split-up: It is a transaction in which a company spins off all of its
___________________
subsidiaries to its shareholders & ceases to exist.
___________________
z The entire firm is broken up in a series of spin-offs.
z The parent no longer exists and
z Only the new offspring survive.
In a split-up, a company is split up into two or more independent
companies. As a sequel, the parent company disappears as a
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corporate entity and in its place two or more separate companies
emerge.
Squeeze-out: The elimination of minority shareholders by
controlling shareholders.
Sell-off
Selling a part or all of the firm by any one of means: sale,
liquidation, spin-off & so on or General term for divestiture of
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part/all of a firm by any one of a no. of means: sale, liquidation,

spin-off and so on.
Partial Sell-off
z A partial sell-off/slump sale, involves the sale of a business
unit or plant of one firm to another.
z It is the mirror image of a purchase of a business unit or plant.
z From the seller’s perspective, it is a form of contraction; from
(c
the buyer’s point of view it is a form of expansion.

For example, When Coromandel Fertilizers Limited sold its cement
division to India Cement Limited, the size of Coromandel
Fertilizers contracted whereas the size of India Cements Limited 235
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expanded. Notes
___________________
Divestitures
___________________
Divesture is a transaction through which a firm sells a portion of
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its assets or a division to another company. It involves selling some ___________________
of the assets or division for cash or securities to a third party which ___________________
is an outsider.
___________________
Divestiture is a form of contraction for the selling company means
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___________________
of expansion for the purchasing company. It represents the sale of
___________________
a segment of a company (assets, a product line, a subsidiary) to a
third party for cash and or securities. ___________________
Mergers, assets purchase and takeovers lead to expansion in some ___________________
way or the other. They are based on the principle of synergy which ___________________
says 2 + 2 = 5; divestiture on the other hand is based on the
principle of “anergy” which says 5 – 3 = 3.
Among the various methods of divestiture, the most important
ones are partial sell-off; demerger (spin-off & split off) and equity
carve out. Some scholars define divestiture rather narrowly as
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partial sell off and some scholars define divestiture more broadly to
include partial sell offs, demergers and so on.
Motives for Divestitures
z Change of focus or corporate strategy
z Unit unprofitable can mistake
z Sale to pay off leveraged finance
z Antitrust
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z Need cash
z Defend against takeover
z Good price.
Equity carve out

A transaction in which a parent firm offers some of a subsidiaries
common stock to the general public, to bring in a cash infusion to
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the parent without loss of control. In other words equity carve outs
are those in which some of a subsidiaries shares are offered for a
sale to the general public, bringing an infusion of cash to the
parent firm without loss of control. Equity carve out is also a
236 means of reducing their exposure to a riskier line of business and
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Notes to boost shareholders value.
___________________
Features of Equity Carve Out
___________________
z It is the sale of a minority or majority voting control in a
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___________________
subsidiary by its parents to outsider investors. These are also
___________________ referred to as “split-off IPO’s”.
___________________ z A new legal entity is created.
___________________
The equity holders in the new entity need not be the same as
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z
___________________ the equity holders in the original seller.
___________________ z A new control group is immediately created.
___________________ Difference between Spin-off and Equity carve outs:
___________________
z In a spin off, distribution is made pro rata to shareholders of
the parent company as a dividend, a form of non cash payment
to shareholders. In equity carve out; stock of subsidiary is sold
to the public for cash which is received by parent company
z In a spin off, parent firm no longer has control over subsidiary
assets. In equity carve out, parent sells only a minority
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interest in subsidiary and retains control.
Leveraged Buyout
A buyout is a transaction in which a person, group of people, or
organization buys a company or a controlling share in the stock of
a company. Buyouts great and small occur all over the world on a
daily basis. Buyouts can also be negotiated with people or
companies on the outside. For example, a large candy company
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might buy out smaller candy companies with the goal of cornering
the market more effectively and purchasing new brands which it
can use to increase its customer base. Likewise, a company which
makes widgets might decide to buy a company which makes
thingamabobs in order to expand its operations, using an
establishing company as a base rather than trying to start from
scratch.
In a leveraged buyout, the company is purchased primarily with
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borrowed funds. In fact, as much of 90% of the purchase price can

be borrowed. This can be a risky decision, as the assets of the
company are usually used as collateral, and if the company fails to
perform, it can go bankrupt because the people involved in the
buyout will not be able to service their debt. Leveraged buyouts 237
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wax and wane in popularity depending on economic trends. Notes
The buyers in the buyout gain control of the company's assets, and ___________________
also have the right to use trademarks, service marks, and other ___________________
registered copyrights of the company. They can use the company's
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___________________
name and reputation, and may opt to retain several key employees
___________________
who can make the transition as smooth as possible. However,
___________________
people in senior management may find that they are not able to
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keep their jobs because the purchasing company does not want ___________________
redundant personnel, and it wants to get its personnel into key ___________________
positions to manage the company in accordance with their business ___________________
practices.
___________________
A leveraged buyout involves transfer of ownership consummated
___________________
mainly with debt. While some leveraged buyouts involve a
company in its entirety, most involve a business unit of a company.
Often the business unit is bought out by its management and such
a transaction is called management buyout (MBO). After the
buyout, the company (or the business unit) invariably becomes a
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private company.
Management buyout
In this case, management of the company buys the company, and
they may be joined by employees in the venture. This practice is
sometimes questioned because management can have unfair
advantages in negotiations, and could potentially manipulate the
value of the company in order to bring down the purchase price for
themselves. On the other hand, for employees and management,
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the possibility of being able to buy out their employers in the

future may serve as an incentive to make the company strong. It
occurs when a company's managers buy or acquire a large part of
the company. The goal of an MBO may be to strengthen the
managers' interest in the success of the company.
Purpose of MBO
From management point of view may be:
(c
z To save their jobs, either if the business has been scheduled for
closure or if an outside purchaser would bring in its own
management team.
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To maximize the financial benefits they receive from the
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z
Notes
success they bring to the company by taking the profits for
___________________
themselves.
___________________
z To ward off aggressive buyers.
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___________________
The goal of an MBO may be to strengthen the manager’s interest
___________________ in the success of the company. Key considerations in MBO are
___________________ fairness to shareholders price, the future business plan, and legal
and tax issues.
___________________
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___________________ Benefits of MBO
___________________ z It provides an excellent opportunity for management of

undervalued companies to realize the intrinsic value of the
___________________
company.
___________________
z Lower agency cost: cost associated with conflict of interest
between owners and managers.
z Source of tax savings: since interest payments are tax
deductible, pushing up gearing rations to fund a management
buyout can provide large tax covers.
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Master Limited Partnership
Master Limited Partnership’s are a type of limited partnership in
which the shares are publicly traded. The limited partnership
interests are divided into units which are traded as shares of
common stock. Shares of ownership are referred to as units. MLPs
generally operate in the natural resource (petroleum and natural
gas extraction and transportation), financial services, and real
estate industries.
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The advantage of a Master Limited Partnership is it combines the

tax benefits of a limited partnership (the partnership does not pay
taxes from the profit - the money is only taxed when unit holders
receive distributions) with the liquidity of a publicly traded
company.
There are two types of partners in this type of partnership:
z The limited partner is the person or group that provides the
capital to the MLP and receives periodic income distributions
(c
from the Master Limited Partnership's cash flow

z The general partner is the party responsible for managing the
Master Limited Partnership's affairs and receives
compensation that is linked to the performance of the venture.
Employees Stock Option Plan (ESOP) 239
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Notes
An Employee Stock Option is a type of defined contribution benefit
plan that buys and holds stock. ESOP is a qualified, defined ___________________
contribution, employee benefit plan designed to invest primarily in ___________________
the stock of the sponsoring employer. Employee Stock Options are
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___________________
“qualified” in the sense that the ESOP’s sponsoring company, the
selling shareholder and participants receive various tax benefits. ___________________
With an ESOP, employees never buy or hold the stock directly. ___________________
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___________________
Features
___________________
z Employee Stock Ownership Plan (ESOP) is an employee
benefit plan. ___________________
z The scheme provides employees the ownership of stocks in the ___________________
company. ___________________
z It is one of the profit sharing plans.

z Employers have the benefit to use the ESOP’s as a tool to fetch
loans from a financial institute.
z It also provides for tax benefits to the employers.
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Benefits for the Company
Increased cash flow, tax savings, and increased productivity from
highly motivated workers. The benefit for the employees: is the
ability to share in the company's success.
Check Your Progress

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1. Divestures are new enterprises owned by two or more

participants.
2. Buyouts great and small occur all over the world on a
daily basis.
Turnaround Strategies
A turnaround is designed to reverse a negative trend and bring the
organisation back to normal health and profitability. The basic
(c
purpose of a turnaround is to transform the corporation into a

leaner and more efficient firm. It usually involves getting rid of
unprofitable products, trimming the workforce, pruning
distribution outlets, and finding other useful ways of making the
240 organisation more efficient. If the turnaround is successful, the
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Notes organisation may then focus on growth strategy.
___________________
Conditions for Turnaround Strategies
___________________
Firms often lose their grip over markets due to various internal
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___________________
and external factors. If they have to survive and flourish in a
___________________ competitive environment, they have to identify the danger signals
___________________ quite early and undertake rectificational steps immediately. Such
negative trends are not difficult to trace.
___________________
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z Continuous cash flow problems
___________________
___________________ z Declining profits; lower profit margins.
___________________ z Dwindling market share.
___________________ z High employee turnover.

z Low morale of employees.
z Underutilization of capacity.
z Raw material supply problems.
z Rising input prices.
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z Strikes and lockouts.
z Increased competition, uncompetitive products or services.
z Recession
z Mismanagement etc.
Action Plans for Turnaround

The action plans for achieving a turnaround aim at yielding
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immediate results focusing attention on certain key areas like

quality improvement, cost reduction, new product development,
rejuvenated marketing effort etc. Such short-term action plans
usually tackle the following issues:
z Change the leader.
z Change the prices – depending on the elasticity of demand.
z Focus attention on specific customer and specific products.
(c
z Extend the product’s life through product improvements.

z Replace existing products with new ones.
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Focus on ‘power brands’ that are valued, visible and bring in
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z
Notes
most of the revenues of the firm; in short, rationalizing the
products line. ___________________
z Liquidating assets for generating cash. ___________________
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___________________
z Better internal coordination.
___________________
z Emphasis on selling, advertising etc.
___________________
Check Your Progress
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___________________
Fill in the blanks:
___________________
1. A ……………… is designed to reverse a negative trend ___________________
and bring the organisation back to normal health and
___________________
profitability.
___________________
2. Firms often lose their ……………… over markets due to
various internal and external factors.
Summary
Retrenchment strategy is a corporate level, defensive strategy
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followed by a firm when its performance is disappointing or when
its survival is at stake for a variety of reasons. Corporate
restructuring is one of the most complex and fundamental
phenomena that management confronts. Corporate restructuring
is the process of redesigning one or more aspects of a company.
Restructuring a corporate entity is often a necessity when the
company has grown to the point that the original structure can no
longer efficiently manage the output and general interests of the
company. Financial restructuring is the reorganization of the
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financial assets and liabilities of a corporation in order to create

the most beneficial financial environment for the company. In
organizational restructuring, the focus is on management and
internal corporate governance structures. Joint ventures are new
enterprises owned by two or more participants. Spin-offs are a way
to get rid of underperforming or non-core business divisions that
can drag down profits.
(c
Lesson End Activity

Discuss the conditions under which divestment and liquidation
strategies can be followed. Is it always painful to follow these
strategies? Why and why not?
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Keywords
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Notes
Spin-off: It means selling those units or parts of a business that
___________________
no longer contribute to or fit the firm’s core competence.
___________________
Stability Strategy: It involves maintaining the status quo or
E
___________________
growing in a methodical but slow manner.
___________________
Retrenchment Strategy: It is a defensive strategy adopted as a
___________________ reaction to operational problems such as internal mismanagement,
___________________ surprises caused by competitors, changing market conditions etc.—
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involving reduction of any existing product or service line to
___________________
improve its performance.
___________________
Turnover Strategy: A turnaround strategy is designed to reverse
___________________
a negative trend and bring the organisation back to normal health
___________________ and profitability.
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Joint Venture: Joint ventures are new enterprises owned by two
or more participants.
Demerger: Demergers are situations in which divisions or
subsidiaries of parent companies are split off into their own
independent corporations.
Merger: Merger refers to the process of combination of two
companies, whereby a new company is formed.
Acquisition: An acquisition refers to the process whereby a
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company simply purchases another company.

1. Define Retrenchment strategy.
2. Discuss the various reasons for Divestment.
3. When the need for corporate restructuring arises?
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4. Highlight the purpose of corporate restructuring.

5. Discuss the basic characteristics of corporate restructuring.
6. Write brief note on Organizational Restructuring.
243
7. What do you understand by Hostile Takeover?
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Notes
8. What are the benefits of Mergers and Acquisitions?
___________________
9. Explain the nature and objectives of a turnaround strategy?
___________________
10. What kind of steps should be undertaken to implement the
E
___________________
same?
___________________
UP
___________________
Books ___________________
Rao, VSP & Hari, Krishna V (2003). “Strategic Management – Text ___________________
___________________
___________________
Ltd.
Education.
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Web Readings
http://www.businessdictionary.com/definition/retrenchment-
strategy.html
http://www.publishyourarticles.net/knowledge-hub/business-
studies/what-are-the-different-types-of-retrenchment-strategies-of-
business.html
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http://www.scribd.com/doc/38591923/Retrenchment-Strategy
http://wiki.answers.com/Q/Retrenchment_corporate_strategy
http://www.blurtit.com/q358545.html
http://www.mba-mentor.com/what-is-retrenchment-strategy
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244
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Notes
___________________
___________________
E
___________________
___________________
___________________
___________________
UP
___________________
___________________
___________________
___________________
CE
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UNIT 10: Case Study
Unit 15
245
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Notes
Case Study
___________________
___________________
E
___________________
Objectives
___________________
UP
___________________
___________________
Case Study: ITC's Diversification Strategy Pays Off
___________________
ITC, often called the elephant that can dance, has once again
pleased its investors with better-than-expected results for the ___________________
quarter ended September 30, 2010. The company has managed to
___________________
log a double-digit growth in its net sales and, unlike other FMCG
companies, has been able to improve its operating margins on a
year-on-year as well as quarter-on-quarter basis. ITC currently
focuses on four-business groups - FMCG (cigarette and non-
cigarette), hotels, paper & packaging, and agribusiness.
Predominantly still a tobacco company, ITC is steadily gaining
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success in increasing its earnings from its non-cigarette
diversified businesses. Though cigarettes continue to contribute
more than 70% of total net revenues, the operating profit earned
from this business has sequentially dropped from 83% of the total
profit in the quarter ended June 2010 to 77.5% in the September
quarter this fiscal. The cigarette business contributed 62% of
revenues and 88% of the operating profits. In the latest
September quarter, the y-on-y growth in net sales stood at 16.3%
with all the businesses giving a handsome growth while the net
profit grew by 23.5%. Logging a growth of 22%, the non-cigarette
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FMCG business has been the fastest growing business revenue

wise. This was closely followed by the agribusiness that grew by
21.5%. Comparison of earnings across segments showed that
paper & packaging business had achieved the highest growth of
32% followed by the hotel business. Operating margins have also
improved across all its businesses. The hotel business, which had
been dented due to recessionary pressures, is now on its path of
steady recovery. The only loss making business in ITC's portfolio
continues to be the non-cigarette FMCG business. It includes
(c
packaged foods, garments, stationary products and personal care

products. The earnings still remain negative because of the high
costs involved in the business development, brand building and
gestation costs of other packaged foods and personal care
Contd…
246 products. However, the good news for investors is that this fast-
S
Notes growing segment has been steadily reporting declining losses
___________________
quarter after quarter. Though ITC continues to invest and grow
in its traditional business of cigarettes, it is well-equipped to beat
___________________ the intense competition in the non-cigarette consumer and agri
space due to its large distribution network and the vast
E
___________________
experience in handling cigarette brands. Investors shall continue
___________________
to benefit as the company's strategy of de-risking its portfolio is
___________________ executed successfully.
___________________ Question:
UP
___________________ Critically analyse the above case.
___________________ Source: The Economic Times, November, 2010
___________________
___________________
CE
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UNIT 16: Strategic Organisational Design
247
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Notes
___________________
___________________
E
___________________
___________________
___________________
UP
___________________
___________________
___________________
___________________
___________________
BLOCK-IV
CE
)C
(c
248
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Notes
UNIT 16: STRATEGIC ORGANISATIONAL DESIGN
___________________ UNIT 18: LEARNING AND ORGANISATIONAL
STRATEGY
z Introduction
___________________ z Introduction
z Organizational Structure: An Overview
E
___________________ z Characteristics of an Ideal Organization
z Organizational Design
___________________ z Organizational Learning
z Classical Structure Configurations
___________________ z Knowledge Management
UNIT 17: MODERN ORGANISATIONAL
___________________
UP
STRUCTURE UNIT 19: BEHAVIOURAL STRATEGIC
IMPLEMENTATION
___________________
z Introduction
z Introduction
z Matrix Structure
___________________
z Stakeholders and Strategy
z Strategy and Structure
___________________
z Strategic Leadership
z Type of Strategy
___________________
z Leadership Approaches
z Corporate Culture and Strategic Management
z Social Responsibility and Strategic Management
UNIT 20: CASE STUDY

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Unit 16
249
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Notes
Activity
Strategic Organisational Design
___________________
showing the organizational
___________________
structure of any organisation.
E
___________________
Objectives
___________________
topics: ___________________
UP
\ Organizational Structure: An Introduction ___________________
\ Organizational Design ___________________
\ Classical Structure Configurations
___________________
___________________
Introduction
___________________
Organizations are social entities that are goal directed, with
deliberately structured activity systems, and with a link to the
external environment. They create value for owners, customers,
and employees by their activities. They bring together resources to
accomplish specific goals, whether those goals are to put a man on
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the moon, sell lottery tickets, produce goods and services, or
provide value to its customers. They organize the activities of the
people to meet organizational objectives. The term organization
has been defined in several ways. Katz and Kahn define the
organization as a system incorporating a set of sub-systems. These
sub-systems are related group of activities which are performed to
meet the objectives of the organization.
Organizational Structure: An Overview

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Organizational structure refers to the institutional arrangements

and mechanisms for mobilizing human, physical, financial and
information resources at all levels of the system. Organizational
structure and design is, therefore, an important factor in
organization’s performance. It not only affects strategy, it affects
other factors too – environmental stability, workflow, technology,
size and life cycle, and corporate culture.
(c
Therefore, it is not surprising that there is an overriding important

given to the ‘structure’ in the implementation of strategy. With a
structural framework in place, people working within a firm know
how to interrelate their actions with the actions of others to
250 support and execute the organization’s strategy. Organizational
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Notes structure provides guidelines on:
___________________
z Division of work into activities;
___________________
z Linkage between different functions;
E
___________________
z Hierarchy;
___________________
z Authority structure;
___________________
z Authority relationships; and
___________________
UP
z Coordination with the environment.
___________________
In other words, the structure of an organization is the manner in
___________________
which various sub-units are arranged and inter-related. The
___________________
structure provides guidelines on hierarchy, authority structure,
___________________ relationships, linkage between different functions, and
coordination with environment. However, it is not necessary that
the organizational structure within the entire organization
remains the same; it may differ within the same organization
according to its particular requirements.
Organizational Chart
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The organizational chart is the visual representation of underlying
activities and processes being undertaken by the organization.
They have their origin in medieval times. Diagrams outlining
church hierarchy can be found as far back as medieval churches in
Spain. The key components pertaining to organizing the activities
of the people in the organization and their relationships with each
other are reflected in the organizational chart:
z Designation of formal reporting relationships including
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number of levels in the hierarchy and span of control of

managers and supervisors; and
z Grouping of individuals into departments and of departments
into the total organization.
The organization is represented by both the vertical and horizontal
aspects of the organization chart. Complexity is reflected in the
degree to which activities within the organization are
differentiated. Such differentiations may be horizontal, vertical or
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spatial. The chain of command, an unbroken line of authority, is

represented by vertical lines on an organization flow chart. A
simple organizational or company chart is shown as Figure 16.1.
251
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Notes
Activity
___________________
organizational design.
___________________
E
___________________
___________________
___________________
UP
___________________
___________________
___________________
___________________
___________________
Source:http://www.vertex42.com/ExcelTemplates/organizational-chart.html
Figure 16.1: A Company Chart
The principle underlying the organization chart is that vertical

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linkages primarily show control, while horizontal linkages indicate
coordination and collaboration. Vertical control is best associated
with goals of efficiency and stability, while horizontal coordination
is associated with learning, innovation, and flexibility.
Check Your Progress

Fill in the blanks:
1. Organizational structure and design is an important
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factor in organization’s …………………. .

2. The organizational …………………. is the visual
representation of underlying activities and processes
being undertaken by the organization.
Organizational Design
In designing an organization due consideration has to be given to
ensure clarity, understanding, de-centralization, stability and
(c
adaptability. The basic principles are:

z Specialization,
z Coordination,
252
Centralization, and
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z
Notes
___________________
z Formalization.
___________________ Specialization: Specialization is division of work into components

or units in which people specialize. It can be vertical (kinds of work
E
___________________
at different levels in the organization) or horizontal (division into
___________________ departments).
___________________
Coordination: Coordination is integration of activities of
___________________ specialized units towards the common objective. This involves
UP
___________________ placement of different units in the organization together or
separately and deciding on patterns of relationship and
___________________
communication.
___________________
Coordination is achieved through hierarchy of authority. This
___________________ involves important principles of organization. Unity of command is
being responsible to and receiving orders from only one superior.
The scalar principle ensures a chain of command in a straight line
from top to bottom. Since this is not always desirable or possible,
in modern organizational structures employees may relate with
each other on both on the vertical and horizontal levels.
CE
The responsibility and authority principle establishes the need for
authority along with responsibility for accomplishing tasks. Span
of control refers to the number of specialized units of persons
under one manager. Departmentalization is the process of
grouping different types of functions and activities of the
organization. Departmentalization may be functional, by product,
or by users, territory, process, equipment, etc.
Centralization: Another important principle of organizational
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structuring is whether decision making is delegated to lower levels

(de-centralized) or concentrated at the top (centralized). Design of
systems is required to ensure effective communication,
coordination, and integration across departments depending on the
decision making criteria. Organizations have different blends of
centralization and de-centralization as will be apparent as we
study the different types of organizational structures.
Formalization: Formalization refers to the extent to which rules
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and regulations permeate the organization. It defines the formal

relations in the organization. The line authority is used to classify
the superior-subordinate relationship through a hierarchy of
policies, rules and regulations. Line employees are directly 253
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responsible for achieving organizational goals. Notes
Departments are created to perform strategically important tasks. ___________________
Finding the right balance between vertical control and horizontal ___________________
E
coordination is an important design decision. Departmental ___________________
grouping can be a functional, divisional, multi-focused, or ___________________
horizontal grouping. Each type of structure is used in different
___________________
situations to meet different needs.
UP
___________________
Organizational structure has become important because of the
___________________
size, global spread, and complexity of the modern business firm.
___________________
Expanding markets, new competitors, a proliferation of products,
instant communications, and a fierce focus on asset values have ___________________
made the old industrial corporation obsolete in many instances. ___________________

Even in the case of a midsize company, management can’t oversee
every employee. Authority and accountability must be distributed,
systems of control and inspection implemented with incentives to
encourage desired behaviour.
There is no particular type of organizational structure that is best

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suited for all enterprises. The main issues in designing
organization structure are how to group tasks, functions, and
divisions; how to allocate authority and responsibility; and how to
use integrating mechanisms to improve coordination between
functions.
Goold and Campbell in their study, ‘Strategies and Styles,’ came to

the conclusion that the organizational architecture and
)C
organizational structure determine the role of the corporate centre

and the various parts of the organization. Therefore, the structure
and the model of strategic planning used by the organization form
the basis on which the organization exercises strategic control.
Above all, the design of the organization’s structure must infuse

with meaning, the corporation’s work, for thousands of its
employees. The most important resource of an organization is its
people. It is people who implement strategy. The relationship
(c
between people, who work with the organization either internally

or externally, is determined by the design of the organizational
structure.
254
Check Your Progress
S
Notes
Activity
Write an essay on classical
___________________
structure configurations.
___________________
1. Specialization is division of work into components or
units in which people specialize.
E
___________________
2. Centralisation is integration of activities of specialized
___________________
units towards the common objective.
___________________
___________________ Classical Structure Configurations
UP
___________________
There are a number of classical (traditional) organizational
___________________ structures that are generally seen in many business organizations.
___________________ Classical structures are the most common organizational designs
used by business and include:
___________________
z Simple Structures,
z Functional Structures,
z Divisional Structures, and
z Geographic Structures.
CE
A brief description of these classical organizational structures is
given in this section.
Simple Structure
This type of structure is generally seen in small businesses. A
single product or owner driven organization generally starts with a
simple structure or with no structure at all. There is little
separation of management responsibility and generally no clear
definition of functional divisions of labour. The owner or a
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representative of the owner undertakes most of the responsibilities

of management. The emphasis here is on direct control and
communication for increasing volumes.
It can operate effectively up to a certain size, beyond which it
becomes too cumbersome for an individual to control the
organization. The threshold size will depend on a number of factors
including the nature of the business, type of competencies required
to run the business, etc. For example, a lawyer in our apex courts
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may handle a very large turnover efficiently, whereas a

manufacturing organization with a similar turnover may require a
clear division of functional responsibilities.
Functional Designs 255
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Notes
The functional design is a natural evolution of the simple structure
as the organization grows and direct control becomes difficult or ___________________
inefficient. Functional designs are structured around a chief ___________________
executive officer and limited corporate staff. Activities are grouped
E
___________________
together by common functions with functional line managers in
important organizational areas such as production, accounting, ___________________
marketing, R&D, engineering, and human resources etc. Each ___________________

functional unit has a different set of duties and responsibilities.
UP
___________________
Jobs become differentiated around areas of specialty as shown in
___________________
Figure 16.2 below.
___________________
Functional structure consolidates human knowledge and skills with
respect to specific activities in order to provide depth of expertise. ___________________
This structure can be effective if there is low need for horizontal ___________________
coordination between functional departments. Functional design
provides functional clarity. Everybody understands his own task. As
each departmental manager is concerned with only one kind of
work, specialization is built into the organization structure. This can
be a competitive advantage for the organization.
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CEO
Departments Marketing Finance Materials Research and

Management Development
Functional
Managers
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Support Staff Support Staff Support Staff Support Staff
Figure 16.2: Organizational Chart – Functional Structure
Functional organization is a useful approach and one in which

corporate managers add value, if they are able to have an in-depth
detailed working knowledge of each ‘core business’. This type of
structure promotes skill development of employees. They are
exposed to a limited range of activities within their departments
allowing them to build on their skills. This promotes economies of
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scale in functional departments and makes it best suited for a cost

leadership strategy. It also suits small to medium sized
organizations producing a limited line of products, where the
dominant competitive issues are cost, efficiency and quality.
256
The disadvantage is that the functional-area managers tend to
S
Notes
develop a narrow dimension of the organization. The focus is on
___________________
local issues instead of the overall company strategic issues.
___________________ Vertical communication may be difficult, thereby, causing
E
___________________ duplication or rivalry between departments. As functional
___________________ organizations grow, boundaries are erected between departments.
___________________
Coordination and delegating responsibility among departments
becomes increasingly difficult, at the expense of performance. Also,
___________________
UP
functional specialization may lead to routine, narrow, and
___________________
repetitive jobs leading to poor productivity. This disadvantage can
___________________ be surmounted by focusing on job enrichment in the work
___________________ environment.
___________________ The traditional form of this organizational structure has a
weakness that it is slow to respond to environmental changes. In
order to overcome this limitation, a method used by management
is to design functional organizational structures with horizontal
linkages. This trend of redesigning the functional organization is
partly because of an increasingly uncertain environment and
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partly in order to improve response time. The functional
organizational structure with horizontal linkages reflects a shift
towards flatter and more horizontal structures. Horizontal
coordination can be improved with information systems, direct
contact between departments, full-time integrators or project
management task forces, or teams.
The major limitation of this type of organizational structure is the

emphasis on functional skills. This focus often limits the
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perspective on the organization’s activities and limits attention to

strategic issues. When it does so, it does not prepare people in the
organization for the future.
Divisional Structure
As the organization grows laterally, and the product offerings
increase, the functional organization becomes unwieldy as
functional units have to be assigned to different products and
(c
product groups, reporting to the function heads. Coordination

becomes difficult and decisions are often delayed. The divisional
structure was considered as a solution. As a company grows and
diversifies, it adopts a multidivisional structure. Although this 257
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structure costs more to operate than a functional or product Notes
structure, it economizes on the bureaucratic costs associated with ___________________

operating through a functional structure and gives a company the ___________________
capability to handle its value creation activities more effectively. In
E
___________________
this type of structure, departments are grouped together based on
___________________
organizational outputs, each such structure being called a
‘division’. ___________________
UP
___________________
The innovation of the divisional organizational structure is
attributed to Alfred Sloan, Jr. He was responsible for reorganizing ___________________
General Motors into separate divisions. Each division was a ___________________

distinct self-contained business with its own functional hierarchy. ___________________
The functional hierarchy instead of reporting to the functional
___________________
head reported to the divisional head making operations more
efficient. Sloan’s new structure delegated day-to-day operating
responsibilities to division managers. A small corporate office was
responsible for determining the organization’s long-term strategic
direction and for exercising overall financial control. Each division
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made its own business-level strategic decisions within the overall
corporate strategy. Sloan's structural innovation had three
important aspects:
z It enabled more accurate monitoring of the performance of

each business,
z It facilitated comparisons between divisions, and an improved

resource allocation process,
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z It motivated managers of poorly performing divisions to look

for ways to improve performance.
The divisional structure centres on the use of separate businesses,

cost or profit centres. It is particularly adaptable to the large and
complex modern organization. This structure is used by many
organizations competing at the global level. Composed of operating
divisions where each division represents a separate business or
profit centre and the top corporate officer assigns responsibility for
(c
day-to-day operations and business-unit strategy to division

managers. The organizational structure is shown in Figure 16.3.
258
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Notes
___________________
___________________
E
___________________
___________________
___________________
___________________
UP
___________________
___________________
___________________
___________________
Figure 16.3: Divisional Structure with Functional Departments
The resources of a division are deployed on the product and all

activities for a single project or purpose are brought under one
manager. This makes it is easy to fix accountability, and
procedures, and systems can be standardized, leading to better
integration across different specialties. The different units like
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marketing, sales, engineering, finance and personnel, are
dedicated to the interests of one or a few related products,
increasing emphasis on product, market development and growth.
The divisional structure strengths are that the design is suited to
fast change in an unstable environment, enhanced corporate
financial control, enhanced strategic control, growth and a stronger
pursuit of internal efficiency. It prepares managers for the
tomorrow to come, creating high quality managers possessing
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specialized skills. However, it makes high human demands of self

discipline, mutual toleration, and subordinating one’s self interest
to that of the organization.
However, the divisional structure has some disadvantages also.
Problems in implementing a multidivisional structure include
establishing the divisional-corporate authority relationship;
distortion of information; and short-term R&D focus. This
structure tends to create functional departments in each division
(c
leading to duplication of effort. The economies of scale in functional

departments are reduced. There is little incentive to promote
cooperation among divisions. The rivalry and territorial
protectionism by the individual divisions can make coordination by
headquarters extremely difficult. Inter divisional trading becomes 259
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complex and often misleading, especially where there is extensive Notes
transfers between the divisions. It can lead to reduced ___________________
transparency in the operations of the organization.
___________________
Conflicts are created as divisions and headquarters argue about
E
___________________
allocation of resources and support services. Managerial energy is
often wasted on adjudicating disputes between divisions with ___________________
reference to scarce inputs, etc. The focus often turns to the division ___________________
even in matters where the organization should have primacy.
UP
___________________
Geographical Structure ___________________
In a world where organizations are working towards becoming ___________________
transnational entities, the relevance of the organization with a ___________________

geographical structure is becoming increasingly important. This is
___________________
especially so because the markets, legal framework, culture and
state of the economy often determine the strategy required in the
particular geographical region.
The geographical structure is based on the concept of market
segmentation. The organization’s users or customers are grouped
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together by geographical area. As the operations in a particular
area grow, the geographical areas are often redefined.
Geographical structure is a form of the multi divisional
organizational structure. It has strengths and weaknesses that are
similar to the divisional structure.
)C
(c
Figure 16.4: Geographical Organizational Structure

260
The geographical structure provides the option of flexibility in
S
Notes
strategic direction without compromising its strategy in dissimilar
___________________ geographical areas. This is an additional advantage of this
___________________ organizational structure. Figure 16.4 illustrates the geographical
structure.
E
___________________
For example, Hanover Insurance, which is one of the world’s
___________________
leaders in their field, has become a trendsetter. It has localized
___________________
regionally, with each region operating as a free-standing unit with
___________________ its own internal board of directors. The people on the boards
UP
___________________ overlap, and this creates shared knowledge.
___________________ However, to make such a system work the skills and capabilities of
board members with respect to dealing with complex, highly
___________________
conflictual issues are important. These include both conceptual
___________________
and analytic skills and interpersonal skills, all of which are needed
to confront difficult problems where important decisions need to be
made, and yet where those decisions need to be understood and
arrived at by groups of people who may have conflicting interests.
Check Your Progress

CE
Fill in the blanks:
1. ………………… structure can operate effectively up to a
certain size, beyond which it becomes too cumbersome
for an individual to control the organization.
2. ………………… designs are structured around a chief
executive officer and limited corporate staff.
Summary
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The strategy implementation process is a bridge between the

classic economist’s view and the view of the resource school.
Critical areas related to the implementation of strategy are
organizational structure, the culture of the organization, and the
strategic change process. The structure of the organization
determines three key components pertaining to organizing the
activities of the people in the organization. The organization chart
is the visual representation of underlying activities and processes
(c
being undertaken by the organization. The principle underlying

the organization chart is that vertical linkages primarily show
control, while horizontal linkages indicate coordination and
collaboration. Business Organizations can have a classical or a
modern structure. Classical organizational structures include the 261
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Simple Structure, the Functional Structure, the Divisional Notes
Structure and the Geographical Structure. ___________________
___________________
Lesson End Activity
E
___________________
Take an organization with which you are familiar, and show how ___________________
its organizational structure helps in the implementation of its
___________________
strategy.
UP
___________________
Keywords ___________________
___________________
Divisional Structure centres on the use of separate businesses or
operating units with responsibility for day-to-day operations and ___________________
business-unit strategy is the responsibility of the division ___________________
managers. Each division has its own functional departments.
Functional Designs are organizational structures where
activities are grouped together differentiated around areas of
specialty. Each functional unit has line managers with identified
set of duties and responsibilities.
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Geographical Structure is based on the concept of market
together by geographical area. Each geographical area is treated
like a division.
Horizontal Structure tries to replicate the advantages of the
Simple Structure. The structure is flat and is centred on cross-
functional core processes rather than tasks, functions, or
geography. Self-directed teams are the basis of organizational
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design and process owners have responsibility for each core process
in its entirety.

1. What is organizational structure and why is it important?
2. What does the organizational structure reflect? Describe these
with examples.
(c
3. Describe different types of classical organizational structures

and their appropriateness in different circumstances.
4. Discuss the Functional Designs.
262
5. What are the three important aspects of Sloan's structural
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Notes
innovation?
___________________
6. What is Formalization?
___________________
E
___________________
Further Readings
___________________
___________________ Books
___________________
UP
___________________
___________________
Ltd.
___________________
___________________
Education.
Web Readings
CE
http://www.sdu.dk/om_sdu/institutter_centre/i_marketing/forsknin
g/forskningsenheder/strategisk_organisationsdesign
http://www.utoledo.edu/strategicplan/strategicorg/pdfs/StrategicOr
gDesign.pdf
http://www.mckinseyquarterly.com/Better_strategy_through_organ
izational_design_1991
http://smallbusiness.chron.com/relationship-between-
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organizational-strategy-organization-design-2691.html
http://ocw.mit.edu/courses/sloan-school-of-management/15-320-
strategic-organizational-design-spring-2011/index.htm
http://ceo.usc.edu/seminar/organization_design_workshop_2_1.htm
l
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UNIT 17: Modern Organisational Structure
Unit 17
263
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Notes
Activity
Make an assignment on any
Modern Organisational Structure
___________________
company’s matrix structure.
___________________
E
___________________
Objectives
___________________
topics: ___________________
UP
\ Matrix Structure ___________________
\ Strategy and Structure ___________________
\ Type of Strategy
___________________
___________________
Introduction
___________________
Modern organizational structures are based on providing a high
level of autonomy to the operating units. It is basically a hands-off
organizational strategy with control systems to monitor and
evaluate the performance of the business unit. This architecture is
found in the matrix structure, the horizontal structure and the
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virtual structures. Modern organizational structures have evolved
from several organizational theories, which have identified certain
principles as basic to any organization. Examples of the
architecture used in modern organizational design are: Matrix
structures, Horizontal structures and Virtual structures.
Matrix Structure
Webster’s Dictionary defines a matrix as "something within which
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something else originates or develops". A mathematical matrix is a

rectangular arrangement of elements into rows and columns. In an
organization, when the structure needs to be multi-focused a
structure designed as a matrix is often used e.g. when there is a
requirement for simultaneous emphasis on both product and
function or product and geography etc.
There could be different designs of the matrix. The balanced
matrix gives dual lines of authority to both the functional and
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product chains simultaneously. The matrix provides for lateral

chains of influence, therefore, managers report laterally as well as
vertically. The normal vertical hierarchy is “overplayed” by a form
of lateral influence.
264
Figure 17.1 shows the matrix structure where the horizontal and
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Notes
the vertical intersect into a grid. The grid is a network of
___________________
interfaces. A matrix interface determines “who works with whom?”
___________________ These interfaces can be between the project teams and the
functional elements of an organization. On the horizontal axis it
E
___________________
could be a process flow, product line, or activity set that is not a
___________________
project but which requires multidisciplinary cooperation if timely
___________________ success is to be achieved. At any given time, project managers
___________________ direct the activities of projects, while the functional heads allocate
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their resources to meet the requirements of these projects.
___________________
___________________ CEO
___________________ Vice President Vice President Vice President Vice President Vice President
Engineering Sales and Finance Research and Purchasing
Marketing Development
___________________
Product A
Manager
Product B Product Team

Manager
Product C
Manager
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Product D
Manager
Two-boss employee
Figure 17.1: The Matrix Organizational Structure
Two variations have evolved that shift emphasis either toward the
traditional vertical hierarchy or toward the horizontal teams. The
functional matrix gives functional bosses primary authority, while
project or product managers simply coordinate product activities.
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The product matrix gives the project or product managers primary

authority, while the functional managers simply offer advisory
expertise as needed for projects.
The success of the matrix organization requires the participants to
have a clear sense of the goals, objectives, and accountability
performance metrics. There must be both vertical and horizontal
alignment of goals, objectives, and metrics if the matrix is to
function properly. Other conditions necessary for the matrix
organization’s success are:
(c
z Economies of scale in the use of internal resources;

z Environmental pressure for two or more critical factors; and
z Complexity and uncertainty in the environment.
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Top leadership holds the balance of power in this organizational
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Notes
structure. In order to be effective, the leadership must promote
effective communication throughout the organization and also see ___________________
that the power of balance is maintained properly. The project ___________________
manager acts as an integrator to achieve the specific project
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___________________
objectives.
___________________
A matrix form permits efficient utilization of resources. Resources
___________________
can be freely allocated across different projects and specialists are
available to all products/projects on an equal basis. Further,
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___________________
knowledge and experience can be transferred from one project to ___________________
another. It encourages learning among project unit and functional
___________________
department members, and makes for better communication and
more flexibility. Quick decisions can be taken. Frequent interaction ___________________
among project unit and functional department members encourage ___________________

cross fertilization of ideas. The dual lines of authority reduce
tendencies of departmental managers to become ‘myopic’.
The matrix structure is best when environmental change is high
and when goals reflect a dual requirement for both product and
functional goals. Membership of the teams is based on special
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knowledge for the given aspects of the work. A matrix structure
helps employees to develop and grow. It enlarges their experience
and broadens their outlook. It exposes them to a wider arena full of
challenges. As a result, lower level of people can have a greater say
in important decisions. The opportunity to participate in important
decisions fosters higher levels of motivation and commitment.
Weaknesses of this type of organizational structure include the fact
that dual authority, particularly in the balanced matrix, can be
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frustrating and confusing to employees. This matrix structure

purposefully violates the principle of ‘unity of command’ which has
been considered an important management principle. The principle
states that one should receive orders from one and only one
individual in the chain of command.
There is a requirement to strike a balance between project and
functional authority. These two kinds of influence are negatively
correlated - the more successful the lateral collaboration, the lesser
(c
is the influence of the vertical hierarchy. Conversely, the better the

vertical relationships in the line hierarchy, the more likely are
lateral activities are to suffer.
266
It often fosters power struggles between product and functional
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Notes
managers, as both functional and product managers share the
___________________
same set of resources. Managers may try to safe guard control over
___________________ operations by building protective firewalls. There are three factors
that need to be controlled: role conflict, role ambiguity and role
E
___________________
overload. Misalignment, competition or conflict among managers'
___________________
goals, objectives, and metrics will create gridlock in the matrix —
___________________ across functions, across locations, or all of the above and more.
___________________ In spite of these limitations, as organizations take more
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___________________ multidisciplinary approaches and multiple assignments at once to
___________________
accomplishing work, the advantages overtake the disadvantages.
Therefore, the importance in the power of the matrix organization
___________________
and management style will keep increasing.
___________________
Horizontal Structure
The horizontal structure organizes employees around core
processes by bringing together people who work on a common
process so they can easily communicate and coordinate their
efforts. It tries to replicate the advantages of the most widely used
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structure, the simple structure of small organizations. Here the
owner-manager makes most of the decisions directly and monitors
all activities, while the staff serves as an extension of the
manager’s supervisory authority. The traditional vertical hierarchy
with departmental boundaries is eliminated. Divisions of the
organization work on a product basis. Large functional units are
divided into smaller units, each grouped in terms of product
manufactured and sold.
Figure 17.2 shows the dominant characteristics of the horizontal
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structure. The horizontal structure has generally found favour

with multi-product enterprises who want to expand and diversify
products using a differentiation strategy with the products having
distinct manufacturing and marketing features. It is particularly
suited to tremendously large, complex and multi-product
organizations. For example, Ford was concerned regarding
customer service. It decided that the horizontal model offered the
best chance to gain a faster, more efficient, and better integrated
(c
approach to customer service. Several horizontally-aligned groups

of multi-skilled teams, with their focus on core processes in areas
such as parts supply, logistics, and technical support were formed,
greatly improving customer service.
267
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Notes
___________________
___________________
E
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
Figure 17.2: The Horizontal Organizational Structure
Horizontal structure is characterized by a focus on results and

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performance than on means. The structure is organized, basically,
according to organizational outputs. The divisional head is
responsible for performance and holds complete strategic and
operating decision-making authority. The structure created around
cross-functional core processes rather than tasks, functions, or
in its entirety. Team members are given the skills and authority to
make decisions central to the team’s performance.
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As customers drive the horizontal corporation with effectiveness

measured by performance objectives, the horizontal structure
increases the emphasis on products, and thereby helps in orderly
and even development of products. The products which need to be
carefully nursed and skilfully developed, receive prompt and
improved attention. Other products, whose life is over, may be
discontinued. In response to changing conditions products can be
developed, added or dropped.
(c
The horizontal structure is more effective in building shareholder

value and strengthening its core competencies. It is more flexible
and responsive to changes in customer needs because of enhanced
coordination. As it is relatively flat, it allows organizations to
268 greatly expand their operations, though units can work together to
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Notes benefit for synergies.
___________________
This organizational structure encourages learning and innovation
___________________ and has the potential to positively influence the firm’s
diversification strategy by encouraging managers to pursue
E
___________________
additional marketplace opportunities. The culture is open, trustful
___________________
and collaborative, with a focus on continuous improvement. The
___________________ horizontal structure facilitates a wide span of control at the top
___________________ leading to a flat organization structure. It frees the top
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management from routine tasks so that they can focus on the long
___________________
term objectives of the organization.
___________________
The major weakness of the horizontal structure is that it can harm
___________________
rather than help organizational performance unless managers
___________________ determine which core processes are critical for bringing value to
customers.
Virtual Organization Structure

The ‘virtual organization’ is described as one which will appear
almost edgeless, with permeable and continuously changing
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interfaces between company, supplier, and customer; …….
operating divisions [will be] constantly reforming according to need
[and] job responsibilities will regularly shift, as will lines of
authority-even the very definition of employee will change, as some
customers and suppliers begin to spend more time in the company
than will some of the firm’s own workers. One of the Canada’s best
performing natural resources companies created a unique
organizational structure that combines the advantages of small
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business units with Virtual Structures - groupings of these

business units - that can address different strategic issues and
competitive environments. It created over 100 business units.
Based on the requirement, it subdivided the units on the basis of:
z Business Units serving a common customer group,
z Business Units located in a common geography,
z Business Units served by a common supplier group, and

(c
z Business Units in a similar phase of development.
Each of the 100-plus business units represents a small team with

accountability for strategy, resources and performance. According
to the authors, “This enables the CEO and his team to push 269
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accountability for value as close as possible to the ‘coal face’, where Notes
value is actually created or destroyed.” ___________________
Virtual structure is a dynamic grouping of business units that can ___________________

address different strategic issues and competitive environments. It
E
___________________
is a unique organizational structure and form of business
___________________
organization that is emerging. The benefit of these virtual business
___________________
units is their ability to tackle corporate strategic issues that the
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operational business units cannot address on their own without ___________________
creating new layers of bureaucracy that too often become ___________________

permanent. ___________________
Moreover, because they are “virtual”, these larger groupings of ___________________

business units can be “organized” in many different ways to meet ___________________
the company’s priorities, even as they evolve over time. This gives
the company enormous capacity to organize and reorganize in
response to an ever-moving agenda and competitive environment. In
some ways the Virtual Structure as shown in Figure 17.3 resembles
a horizontal structure, we have discussed earlier.
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Figure 17.3: The ‘Virtual’ Organizational Structure
In a conventional business organization the mission statements

and competitive strategy making, reflected in the business
objectives, flows naturally from the vision statement. This is not so
in the new organizational architecture. The single-minded
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emphasis on focus means that corporate culture, corporate

missions and corporate objectives, are determined at the unit level
and requires a hands-off policy from the corporate centre.
270
Table 17.1: Contrasts between Modern and Virtual Organizations
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Notes
Modern organization Virtual organization
___________________
1. Function in design structure 1. De-functionalized project-based
___________________ design held together by network
capabilities
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___________________
2. Hierarchy governing formal 2. Instantaneous, remote computer
___________________ communication flows and communication for primary
managerial imperative – the interaction; increase in face-to-
___________________
major form and basis of formal face informal interaction; decrease
___________________ communication. in imperative actions and increase
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governance through accountability
___________________
in terms of parameters rather
___________________ than instruction or rules.
3. The files 3. Flexible electronic immediacy

___________________
through IT.
___________________
4. Impersonal roles 4. Networking of people from
different organizations such that
their sense of formal
organizational roles blurs.
5. Specialized technical training for 5. Global, cross-organizational

specific careers computer-mediated projects.
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The organization design is based on the technological capacities of
digitalization amongst other things. Digitalization is just one part
of the tendencies towards ‘virtuality’. The enabling mechanism of
the ‘virtual organization’ allows time and space to be collapsed,
and the informational controls of conventional bureaucracies
superseded. This is reflected in Table 17.1.
These new organizational structures are based on being able to
pick points of leverage carefully. The relationship among the
business units is inconsistent and asymmetric. The asymmetrical
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structure of these organizations runs counter to traditional notions

of balance, equity, and fairness.
There are flexible relationships among its business units. R&D, for
example, could be managed centrally for two businesses, but not a
third. Or the corporate centre might play a role in managing
certain processes in one business unit but it may not do so in
another. The logic is that just like there the differences between a
mature business and a start-up there are differences between units
(c
and these need to be recognized. The organization has to avoid

imposing standardized rules and procedures that ignore the unique
requirements of each business unit. Therefore, it has many of the
advantages of small business units.
271
Though the advantages of this structure outweigh its
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Notes
disadvantages, managing this type of organization is challenging. Activity
The organizational architecture of this type of organization is Write an essay on strategy
___________________
and structure.
based on conflict. Conflict is encouraged to help incubate new ideas ___________________
and foster innovation, very often conflict within the organization is
E
___________________
essential – and inevitable. The conflict has to be managed so that it
does not become self destructive. Management also has to create a ___________________
relationship between the corporate centre and the unit, in a ___________________

manner, that the strategic choices are integrated to the vision of
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___________________
the larger organization.
___________________
Fill in the blanks: ___________________
1. A ………………….. matrix is a rectangular arrangement ___________________

of elements into rows and columns.
2. The normal vertical hierarchy is …………………….. by a
form of lateral influence.
Strategy and Structure

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Today's modern business practices demand leveraged operations,
technology, and knowledge throughout the enterprise, using a
multiplicity of corporate structures for competitive advantage. The
task of organization is particularly challenging because most large
companies are active not in one line of business but in several, and
even a company that makes a single product will probably wish to
excel in a number of dimensions.
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An organization with a focused approach normally employs a

multi–divisional structure. Many companies in India use this
model. For example, Tata Motors was organized into three major
manufacturing divisions at Jamshedpur: the Automotive Division,
the Excavator Division and the General Engineering Division.
Escorts Ltd. was organized into the Tractor Division, the
Motorcycle Division, the Agency Sales Division, the Automotive
Division, and the Farm Equipment Division etc.
When operations are related to a limited set of businesses,
(c
corporate management is likely to perform better in forming the

strategic direction of the different units. Highly diversified
organizations do well when the corporate management follows a
‘hands off’ relationship with the different units. The greater the
272 diversity among the businesses in multi business firms, the greater
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Notes is the necessary degree of decentralization and self containment.
___________________
The complex challenges have pioneered a range of novel hybrid
___________________ organizational designs. An industrial company might, for example,
have manufacturing units that are organized geographically by
E
___________________
product, as well as customer-oriented business units dealing with
___________________
sales and services that are organized by the industries they serve.
___________________ These hybrids require complex coordination, promoted by
___________________ advanced information technology and by corporate cultures that
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foster cooperation.
___________________
___________________
___________________
___________________
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Figure 17.4: Structure and Strategy

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Different strategies require different types of organizational

structures to deliver results. The structure of the organization
must support the organization’s competitive approach. For
example, if the organization uses a low-cost leadership strategy,
the organization has to be designed for efficiency whereas if the
organization uses the differentiation strategy, the design calls for a
learning structure with strong horizontal coordination. Therefore,
organizational structure and design are vital in context of the
strategic management of organizations.
(c
Even two organizations, competing in the same industry with a

similar set of products, technologies, and markets, may find that a
structure that works for one organization may need some
modification in another; the issue depends on several factors such 273
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as environment, strategy and goals, culture, technology and size. Notes
The schematic relationship between structure and how the ___________________

organization benefits from good organizational design is shown in ___________________
Figure 17.4. The structural components of an organization
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___________________
facilitate the smooth translation of organizational strategy and
policies into action. They distribute authority and accountability; ___________________
establish systems of control and inspection. Properly designed, the ___________________

organizational structure encourages desired behaviour. Above all,
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___________________
it infuses the corporation’s work with meaning, for the people
___________________
working in the organization. It also supports the organization’s
competitive approach. Therefore, a strategy – structure fit is one of ___________________
the necessary requirements for competitive advantage. ___________________
Good organizational design can lead to optimizing the bureaucratic ___________________

costs which results in a low cost advantage, providing increased
profits. In addition, enhancing the value creation skills of the
organization leads to differentiation advantages and the ability to
charge a premium price, thereby impacting the bottom line. In
order to maximize the benefits to the organization, it is necessary
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and important that the structure of the organization should align
itself and focus on furthering organizational objectives. There
should be benchmarks by which an organization can determine
whether or not it is benefiting from the way the organizational
structure is designed.
The main factors that need to be considered in the deciding on the
design of the organization are how to group tasks, functions, and
divisions; how to allocate authority and responsibility; should it be
a tall or flat organization; how to ensure a minimum chain of
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command; should there be centralization or decentralization? In

addition, the important requirements for organizational alignment
are that the design should incorporate integration and integrating
mechanisms; it should define degrees of direct contact, liaison roles
and the function and structure of specialized teams.
One or more of the following symptoms of structural deficiency
may appear as an indication of the structure being out of
alignment:
(c
z Decision-making is delayed or lacking in quality.

z The organization does not respond innovatively to a changing
environment.
274
Too much conflict from departments being at cross purposes is
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z
Notes
evident.
___________________
In case it becomes apparent from its symptoms that there is a lack
___________________
of alignment or such a danger is imminent, an analysis of the
E
___________________ structure is necessary. Analysis involves the examination of the
___________________ various factors that may influence the structure of the
organization. Some factors that have an influence on structure are
___________________
discussed below.
___________________
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___________________ Nature of Environment
___________________ The environment can be simple, complex or dynamic. In a simple
and static environment, organizations can gear themselves for
___________________
operational efficiency. They standardize operations and processes
___________________ of control. Examples are mining companies or some mass-
production companies. With increasing complexity there is a need
to devolve decision-making responsibilities to lower levels or
specialists. This means that organizations in complex
environments tend to be more devolved for operational purposes.
In dynamic conditions, it is necessary for the organization to
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increase its ability of sensing change and responding to it.
Adhocracy/ Missionary or divisional styles, with more emphasis on
cultural and self-controls will be required. Where the environment
is both complex and dynamic – for example, among organizations
operating at the frontiers of scientific development, there is a need
for speed and flexibility. Often, the level of complexity is such that
responsibility and authority must be devolved to specialists.
Therefore, self-control and the personal motivation have to be the
dominant control processes in the organization.
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External Environment on Structure

The external environment influences the effectiveness of the firm’s
day-to-day operations and its long-term growth. Factors such as
economic conditions, changes in market conditions, advances in
technology, legal and political conditions, all come within the
purview of environment. If the structure fits the type of
environment that it faces, the organization will be more successful.
(c
Often, different departments and divisions of the organization may

have to respond to different environments. The structure of these
sub-units should be designed taking this into consideration. For
example, many medium sized organizations in India prefer to set-
up small legally independent units rather than consolidate their 275
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operations due to the legal protection provided to workers and to Notes
Activity
avoid union formation. Prepare a presentation
___________________
showing the type of strategy.
E
State true or false: ___________________
___________________
1. An organization with a focused approach normally
employs a multi–divisional structure. ___________________
2. Similar strategies require different types of
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___________________
organizational structures to deliver results. ___________________
___________________
Type of Strategy ___________________
Matching organizational design to the types of strategy that the ___________________
organization is pursuing is a two way process. Organizational
configuration influences preferences for particular types of
strategy. Different product/market strategies may require different
forms of organizational design. For example, a low-price strategy
will need to find an organizational design that ensures a cost-
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efficient operation with an emphasis on cost control. On the other
hand, a differentiation strategy may need the organization to
possess a high degree of creativity to develop and sustain the
product or service qualities which provide competitive advantage.
Based on this view, the low-price strategy will require a

mechanistic system of control, with clear job responsibilities,
frequent and detailed reports on organizational efficiency and cost,
and a clear delineation of responsibility for budgets and
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expenditure. There will be a strong emphasis on administrative

controls. The organization following a differentiation strategy, on
the other hand, will need a great encouragement of informality and
creativity within a more devolved structure, but a good deal of
coordination between its various activities. The emphasis will be
more on groups working together on problems and opportunities
rather than on individual departments and specific job functions.
Cultural and self-control processes are of great importance with
(c
this type of strategy.
Strategic focus in diversified firms concerns the degree to which

the various businesses and products are structured around a
reasonably well-defined commonality. An organization that has
276 different units seeking different strategies may experience conflicts
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Notes in terms of organizational design and the need to have different
___________________ types of control systems. However, such conflicts are now a
___________________ common part of organizational life and a number of solutions to
this type of problem are available.
E
___________________
___________________ The important requirement is that management is aware of the

need to balance the organization in terms of its commonalities.
___________________
This commonality may not be advantageous in itself. However, a
___________________
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strategic focus helps management in deciding where to concentrate
___________________ its attention and resources. In addition, it influences the manner
___________________ in which the organization defines itself.
___________________
Technology
___________________
The nature of the tasks undertaken by the organization has an
important influence on the various aspects of organizational design
and control. For example, mass production systems require the
standardization of processes, centralization with greater direction
and control by senior managers. This may be implemented through
formal planning systems or by direct supervision. Organizations
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with less standardized operational processes are likely to have
more devolved and informal decision-making processes.
The more sophisticated and complex the technology of an
organization, the more elaborate the structure becomes. When the
work requires innovativeness and creativity, a good deal of
responsibility and power is likely to devolve to those specialists
concerned with the technology itself. Such an organization may
tend to operate as an adhocracy. In turn, this creates the need for
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effective exchange of information between the specialists and the

operating core of the business. This is often accomplished by
integrating and coordinating mechanisms such as committees,
joint working groups and project teams, etc. Alternately, there may
be an emphasis on social control through professional networks, or
a combination.
Size on Structure
There is considerable evidence that an organization’s size is a
(c
significant influence on structure. It has been seen that as the size

of the organization increases, the number of hierarchical levels
also goes up. This is shown in Figure 17.5.
277
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Notes
___________________
___________________
E
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
Figure 17.5: Number of Levels ___________________
The larger the size of the organization, the greater is the

specialization and horizontal differentiation. In order to facilitate
coordination, there is a corresponding increase in vertical
differentiation. The increase in complexity makes it more difficult
for top management to directly oversee what is going on
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throughout the organization. Direct control and communication,
therefore, is replaced by formalized rules and regulations. This
increases the distance between the top management and the
operating level and often results in the inability of the organization
to make rapid and informative decisions.
This type of problem creates the need to redesign the organization
such that decision making becomes more decentralized. The result
is that, a new organizational framework.
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Information-processing Perspective on Structure

Through most of the 20th century, the hierarchical, functional
structure predominated. But in recent years, organizations have
developed other structural designs, often aimed at increasing
horizontal communication. Vertical linkages are designed
primarily for control, in contrast to horizontal linkages that are
designed for coordination and collaboration; all organizations need
a mix. Figure 17.6 shows the relationship between the
(c
organizational structure and the capability of information

processing.
278 Functional Structure Divisional Matrix Structure Horizontal Structure
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Structure
Notes
___________________
Horizontal:
___________________ • Coordination
• Change
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___________________ • Learning
Vertical: • Innovation
___________________ • Control • Flexibility
• Efficiency
Vertical
___________________ • Stability
Dominant Structural Approach
• Reliability
___________________
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Information Processing Capacity
___________________
Figure 17.6: Effect of Structure on Information Processing
___________________
z Vertical Information Linkages: The lines of the
___________________ organization chart act both up and down the chain as the
___________________ communication channel. Vertical linkages emphasize on
efficiency and control. For repetitious problems and decisions,
rules or procedures are established so employees know how to
respond without communicating on each separate issue. For
example, the strategy for budgetary control is through an
increase in vertical information capacity in the form of periodic
reports, written information and computer-based
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communications distributed to managers.
z Horizontal Information Linkages: Horizontal linkages
emphasize on learning. Many organizations require a
considerable amount of information flow. Structure that is flat
is more responsive to flow of information. Organizations that
require large amounts of information flow are normally
designed with flatter organizational structure.
A classic structure will have the maximum number of vertical
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linkages and the minimum amount of information processing

capability. Such organizations are typified with values that
promote control, efficiency, stability and reliability. The least
number of vertical linkages are found in a horizontal structure and
it has the maximum information processing capability. These
organizations value coordination, change, learning, innovation and
flexibility. The other organizational structures fall in between
these two. The structure must fit information requirements of the
(c
organization so people have neither too little information nor too

much irrelevant information.
Where flatter organizational structures are not possible, cross-
functional information systems can be used. These enable
employees to routinely exchange information. Alternatively, a 279
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liaison role can be used. This involves identifying a person in one Notes
department who has the responsibility for communicating and ___________________
achieving coordination with another department.
___________________
Where the problem is more acute, task forces or temporary
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___________________
committees composed of representatives from each department
which links several departments are used to solve common ___________________
problems. The task force is disbanded after tasks are ___________________

accomplished.
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___________________
Box 17.1: Vertical and Horizontal Linkages ___________________
Vertical linkages - emphasis on Specialized tasks, hierarchy of authority, ___________________

efficiency and control rules and regulations, formal reporting
___________________
systems, few teams or task forces,
centralized decision-making ___________________
Horizontal linkages - emphasis Shared tasks, relaxed hierarchy and few

on learning rules, face-to-face communication, many
teams and task forces,
informal/decentralized decision-making
Box 17.1 summarizes the emphasis that different types of linkage

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mechanisms provide. Depending upon the nature of the business
and the core capabilities required for the functions of the
organization, the linkages need to be selected.
People on Structure
To be effective, the basic structure is governed by a set of rules and
regulations, reward-punishment systems, information networks,
control procedures etc. These apply to the people who are a part of
the organization. The result is the organization attracts and
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retains those whose attitudes, aspirations, experiences and roles as

organization members are related to and reflected in the structure
of the organization.
Depending on the nature of the work, it is necessary to design the
organization for excellence in performance. Organizations should
accommodate the psychological needs of employees adequately.
Choosing the right structure for the type of people the organization
requires, therefore, assumes importance. For example, an
(c
organization in the knowledge industry will require a structure

that is different from that of a manufacturing organization. An
international organization’s requirements of its people and
280 organizational structure may differ significantly from that of a
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Notes local organization.
___________________
Check Your Progress
___________________
Fill in the blanks:
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___________________
1. Organizational …………………… influences preferences
___________________
for particular types of strategy.
___________________
2. There is considerable evidence that an organization’s
___________________
…………………… is a significant influence on structure.
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___________________
___________________ Summary
___________________ The structural components of an organization facilitate the smooth
___________________ translation of organizational strategy and policies into action.
Properly designed, the organizational structure encourages desired
behaviour. It also supports the organization’s competitive
approach. In addition to organization design affecting strategy,
other factors – environmental stability, workflow technology, size
and life cycle, and corporate culture – must “fit” in the design of
the organization. There is considerable evidence that an
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organization’s size is a significant influence on structure.
Structural designs of organizations are often aimed at optimizing
the information processing capability. The structure must fit
information requirements of the organization so people have
neither too little information nor too much irrelevant information.
Lesson End Activity

)C
Compare and contrast Modern and Virtual Organizations
Keywords
Matrix Structure is an organizational structure based on a grid
of horizontal and vertical interfaces. A matrix interface determines
“who works with whom?” The matrix provides for lateral chains of
influence, therefore, managers report laterally as well as vertically.
Organization Chart is the visual representation of underlying
(c

Organizational Architecture is the model of strategic planning
used by the organization and determines the role of the corporate
centre and the various parts of the organization.
281
Organizational Structure is the model by which the components
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Notes
of the organization are related to facilitate the translation of
organizational strategy and policies to action. ___________________
Organizations are social entities that are goal directed, with ___________________
E
deliberately structured activity systems, and with a link to the ___________________
external environment.
___________________
Simple Organizational Structure is a type of structure with ___________________
little separation of management responsibility and generally no
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___________________
clear definition of functional divisions of labour.
___________________
Questions for Discussion ___________________
___________________
1. Do you think that matrix interface determines who works with
whom? ___________________
2. What are the conditions necessary for the matrix

organization’s success?
3. Describe Virtual Organization Structure.
4. Explain schematic relationship between structure and how the
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organization benefits from good organizational design.
5. Highlight external environment on structure.
6. Elucidate Vertical and Horizontal Linkages.
Further Readings
Books
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Ltd.
Education.
(c
Web Readings
http://smallbusiness.chron.com/modern-organization-structure-
2758.html
282
http://www.ehow.com/facts_6899004_modern-organizational-
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Notes
structure.html
___________________
http://www.slideshare.net/jayesh.8486/organizational-structure-
___________________
and-roles-presentation
E
___________________
http://www.fao.org/docrep/w7503e/w7503e04.htm
___________________
http://web.efzg.hr/dok/OIM/inacinovic/LECTURE%20-
___________________
%20MODERN%20ORGANIZATION%20STRUCTURES.pdf
___________________
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___________________
___________________
___________________
___________________
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)C
(c
UNIT 18: Learning and Organisational Strategy
Unit 18
283
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Notes
Activity
Make an assignment on the
Learning and Organisational
___________________
Characteristics of an Ideal
___________________
organization
Strategy
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___________________
___________________
Objectives ___________________
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___________________
topics:
___________________
\ Characteristics of an Ideal organization
\ Organizational Learning ___________________
\ Knowledge Management ___________________
___________________
Introduction
Peter Senge one of the earliest proponents of the Learning
Organization, says, "Learning disabilities are tragic in children,
but they are fatal in organizations. Because of them, few
corporations live even half as long as a person — most die before
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they reach the age of forty." The reason for the limited life of most
business organizations is because they have traditionally been
seen as hierarchies and bureaucracies set up to achieve order and
maintain control. They are structures built for stability rather
than change. This model of the organization is not suited to the
dynamic conditions and global forces for change of the twenty first
century. The world is simply too complex to figure it all out from
the top, and too rapidly changing to abide with the slow
)C
bureaucratic decision-making processes that come with top-down

decision making in complex organizations.
Characteristics of an Ideal Organization

The ideal organization needs to be seen not as a stable hierarchy,
but as an adaptive, continually changing ‘learning organization’.
Unlike popular belief that learning is an intellectual exercise,
learning has two dimensions, which are:
(c
z A Cognitive or Intellectual Dimension, and

z An Action Dimension.
284
Both these dimensions are intricately intertwined and assessed
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Notes
relative to the needs of the organization, whether the need is
___________________
cognitive or for action, or for both.
___________________
In traditional organizations, the job of people at the top has been to
E
___________________ "put the pieces together" and maintain a broad overview of what
___________________ needs to be done to ensure the success of the enterprise as a whole.
It was sufficient for one person to know what needs to be done and
___________________
simply give orders. Making explicit the reasoning behind the
___________________ orders was unimportant.
UP
___________________
What changes in a learning organization is that this responsibility
___________________ is spread more and more widely throughout the organization. The
___________________ concept of the learning organization includes a number of
dimensions, given below:
___________________
z Facilitates the learning of all its members and continuously
transforms itself,
z Facilitates participative and innovative development with and
between people and institutions commercially, technologically,
and socially,
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z Forms the strategy, structure, and culture of the enterprise
into a learning system,
z Encourages double loop learning in which learning informs
and impacts on strategic directions,
z Responds to changes in the internal and external environment
of the organization by detecting and correcting error, and
z Has as its primary aim rapid and continual regeneration of the
)C
total organization depending on rapid and continual learning.

The very idea of a "learning organization" is a vision. In essence, it
is the vision of an organization that is continually expanding its
capacity to learn and to create its future.
The fundamental building block for learning organizations is
partnership — the relationships formed by small numbers of
people who share commitment and responsibility toward building a
new type of organization.
(c
The partnership of a small number of people, who share a deep

sense of responsibility, who continually challenge one another’s
thinking, who continually remain open to further elaboration of the
vision, and who continually operate in a mode of genuine inquiry,
challenging and pushing one another to deeper understanding, 285
S
creates an incredibly powerful model for others to see what a Notes
learning organization is all about. ___________________
Simply put, the objective of the learning organization is to address ___________________
E
three issues, efficiency, effectiveness, and innovation. In order to ___________________
do so, the organization must have the capability to sense the ___________________
signals of change accurately, it must do so in good time so that it
___________________
can take the right actions, and it must process the signals to create
UP
___________________
capabilities to face the changes. This capability has also been
called, dynamic capabilities’. Dynamic capabilities in organizations ___________________
are based on a few simple concepts: ___________________
z Organizations don’t learn, people learn ___________________
___________________
z Most innovation is about small scale problem solving
z Ability to think creatively, is man’s standard equipment
z With every pair of hands, we get a brain free
z Repeated pattern of small improvements can result in savings

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These concepts become powerful tools to create dynamic
capabilities. When used properly, they also create the ability of the
organization to change its learning with changing environmental
conditions and to create value out of this new learning.
The concept of continuous improvement in core capabilities is the

basis of learning organizations. Core capabilities have to be
continuously redefined and realigned with changes in the business
environment. This ability can be built only when organizations are
)C
willing to unload the burden of past experience when it interferes

in receiving and processing new knowledge, the ability of the
organization to break defensive routines, the ability to overcome
tunnel vision, and unbound the bounded rationality that comes in
the way of generating organizational capabilities.
John Dewey (1859-1952), an influential thinker on education in the

twentieth century, said "All learning is a continual process of
(c
discovering insights, inventing new possibilities for action,

producing the actions, and observing the consequences leading to
insights."
286
Check Your Progress
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Notes
Activity
Fill in the blanks:
How___________________
does organizational
learning take place? Provide
___________________
1. The ideal organization needs to be seen not as a stable
examples to illustrate your
hierarchy, but as an adaptive, continually changing
E
answer.
___________________
………………. .
___________________
2. The very idea of a learning organization is a
___________________ ………………… .
___________________
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___________________ Organizational Learning
___________________ Every organization would like to build on its capabilities. In order
___________________ to do so, it has to keeping learning. There are at least two
fundamental dimensions of organizational knowledge:
___________________
z The Conceptual, and
z The Enactive.
The enactive knowledge is embedded in routines, policies and
procedures, longstanding organizational structures. In general,
"the way we do things around here", that embody past learnings
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into constraints and guidelines for present actions is "enactive". It
is "enactive" because it directly shapes people’s actions. The
conceptual form of memory questions the enactive knowledge and
captures the reasons why these procedures, structures, and
policies made sense in the first place.
Traditional organizations build on their enactive knowledge base
and often ignore their conceptual knowledge. The central task of
management in a learning organization is to continually build the
)C
knowledge base, both conceptual and the enactive. The aim should
be to encourage processes which unlock the knowledge of
individuals, and encourage the sharing of information and
knowledge, so that each individual becomes sensitive to changes
occurring around them and contributes to the identification of
opportunities and required changes and the organization builds on
its conceptual knowledge base.
The ‘conceptual’ organization is capable of taking a holistic view of
(c
its environment rather than being reliant on partial, filtered

information from its various functions. There is an absence of
power plays and blocking routines, so that a shared vision of the
future is created and reinforced by mutual support by
organizational members. The people making critical decisions 287
S
develop synergy between those decisions, surfacing assumptions Notes
and the reasoning behind decisions. Such an organization is ___________________
creative and continually changing, and it will be able to cope with
___________________
the ambiguity and contradictions it is likely to face.
E
___________________
___________________
___________________
UP
___________________
___________________
___________________
___________________
___________________
Figure 18.1: The Learning Cycle
The capabilities required to discover insights and invent new

possibilities for action are possible if the learning process can be
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captured and integrated into the organization. Organizations have
a choice as far as learning is concerned, they can ignore the signals
or they can undertake planned and systematic learning. This is
reflected by the learning cycle shown in Figure 18.1 which shows
the way organizations acquire and deploy knowledge with a high
chance of success.
Learning can be considered as a single loop system or a double loop
system. The simplest model of organizational learning is a single
loop learning process. This is also called ‘adaptive learning’. In
)C
single loop learning, the organization reviews the performance

against targets and takes corrective action. It does not result in the
sharing of experience. This calls for some level of learning for the
organization.
Double loop learning occurs when organizations challenge the
governing assumptions. Such methods of learning are
benchmarking, structured audits and learning networks. These are
often considered as double loop systems. This is because the
(c
experience is shared or documented.

The learning cycle is shown in Table 18.1. This table shows the
differences between single loop learning, which is reflected as post
project reviews in the table, and double loop learning which is
288 shown the remaining three rows. Though single loop learning
S
Notes means that they address a problem when it is detected, even in the
___________________ case of single loop learning there is requirement for evaluation and
review against the objectives and targets.
___________________
Table 18.1: Learning Mechanisms
E
___________________
___________________ Reflection Concept Experiment Experience
___________________ Post Project Theories and model Testing and Capture

Reviews prototyping experience
___________________
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Benchmarking New structures and R&D activities Sharing
___________________ process designs experience
___________________ Structured audits Formal planning Designed Documentation
___________________ reviews experiments
___________________
Learning Pilot projects Measurement Display
networks measurement
The learning ability of an organization is limited by a number of

factors. The most common limitation is the failure to define the
problem. Problem is defined with problem solving capabilities.
Organizations often lack either the time or the ability of
exploration. Exploration is another very important requirement for
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organizational learning.
)C
Figure 18.2: Problem Solving Cycle
Figure 18.2 shows the problem solving cycle. Problem solving

(c
attitude is a very critical requirement for learning organizations.

Some of the ways in which problem solving attitude can be
enhanced is by providing training. In addition developing a
problem solving attitude, the organization should develop the
exploration process, and measure and document it. In the absence 289
S
of these capabilities, there is a tendency in many organizations to Notes
repeat well tried solutions and have limited perspectives in ___________________
problem solving and exploration.
___________________
The different stages of organizational learning and their impact
E
___________________
with time are shown in Figure 18.3. It is shown in the figure that
in the ‘fire fighting mode’ there is an early impact and then the ___________________
impact remains constant with time. The impact grows with time ___________________
with the different modes of leaning and the maximum impact is
UP
___________________
when the organization is willing to innovate and experiment.
___________________
___________________
___________________
___________________
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Figure 18.3: Stages of Organizational Learning
The process has to be formalized and made acceptable; this is an

important part of organizational learning.
)C
Some of the ways in which organizational learning can be

enhanced is by the organization developing a learning process, and
measuring and documenting the learning. The process has to be
formalized and made acceptable; this is an important part of
organizational learning. There has to be an urge in the
organization to experiment, display itself and challenge itself. In
other words, it should go out looking for trouble, use different
perspectives and provide itself time to reflect.
(c
New concepts that add to the learning capability of the

organization are finding acceptance. The learning organization is a
concept that has being accepted in business organizations today,
290 especially in progressive organizations and knowledge based
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Notes
Activity industries.
Provide a narrative description
___________________
The learning organization is based on the principle that
of this problematic situation
that___________________
arises in knowledge organizations need to question the existing framework in which
decisions take place. Rather than regarding experience as
E
management and then identify
___________________
or solve the problem. something that is fixed, managers need to continually challenge
___________________
experiences from the world around them and from the different
___________________ experiences of those around them. This facilitates organizational
___________________ learning and allows them to develop into organizations that are
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pluralistic and learn to welcome conflicting ideas and views so that
___________________
debate and experimentation can be established as a norm and
___________________
organizational capabilities can be enhanced and built upon.
___________________
Check Your Progress
___________________
1. Every organization would like to build on its
capabilities.
2. Learning can not be considered as a single loop system
or a double loop system.
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Knowledge Management
Peter Drucker said, “Knowledge has become the key economic
resource and the dominant - and perhaps even the only - source of
competitive advantage.” Effective management of knowledge,
change, and innovation are central or “core competencies” that
must be mastered for organizations to succeed. In that sense,
managing knowledge has always existed in one form or another.
)C
Examples include on-the-job peer discussions, formal

apprenticeship, discussion forums, corporate libraries, professional
training and mentoring programs. However, with computers
becoming more widespread in the second half of the 20th century,
specific adaptations of technology such as knowledge bases, expert
systems, and knowledge repositories have further enhanced the
process.
It is profoundly important in getting people to think about new
(c
ways of managing organizations rather than creating new

organizational structures. Knowledge can be the basis for this
transformation. You have to start with new ideas and concepts
before you can change people’s actions and behaviour. With the
insight and inspiration that these ideas give, there’s a very great 291
S
challenge in figuring out how to operationalize them. This Notes
challenge is met through knowledge management. ___________________
Knowledge Management (KM) is emerging as one of the ___________________
management tools to gain competitive advantage. For example, a
E
___________________
bond trader who is the first to understand an opportunity to
arbitrage securities across two different markets can earn ___________________
extraordinary returns until other traders figure out the secret. A ___________________
company thoroughly familiar with how to compete in a particular
UP
___________________
geographic market—China, say—has huge advantages over
___________________
competitors lacking that familiarity.
___________________
Put simply, there is great value in sharing, across a whole
company, proprietary insights into customers, competitors, ___________________
products, production techniques, emerging research, and the like. ___________________

It is one of the most important set of practices and policies that an
organization can adopt, marking a significant step in an
enterprise’s evolution toward becoming a global, learning
organization that can survive in the knowledge based economy.
There is a broad range of thought on Knowledge Management with
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no unanimous definition. The approaches vary by author and
school. Knowledge Management may be viewed from each of the
following perspectives:
z Techno-centric: A focus on technology, ideally those that
enhance knowledge sharing/growth.
z Organizational: How does the organization need to be
designed to facilitate knowledge processes? Which
organizations work best with what processes?
)C
z Ecological: Seeing the interaction of people, identity,

knowledge and environmental factors as a complex adaptive
system.
Knowledge management processes are considered to be at the
intersection of technology, organizational structures, and cognitive-
based strategies. It is a concept based on dynamism, as it keeps
changing all the time. Knowledge is a mix of experience, values,
contextual information and expert insight that provides a
(c
framework for evaluating and incorporating new experiences and

information.
292
It originates and is applied in the minds of people who learn. In
S
Notes
organizations, it often becomes embedded not only in documents or
___________________
repositories but also in organizational routines, processes,
___________________ practices, and norms. For example, if case technology becomes the
tool, the organizational structure becomes the context, and the
E
___________________
knowledge becomes basis for advancement and organizational
___________________
culture the vehicle to carry it forward.
___________________
Implementations of "knowledge management", therefore, has many
___________________ aspects which range from technology-driven methods of accessing,
UP
___________________ controlling, and delivering information to the architecture of the
___________________
organization, and also to massive efforts to change corporate
culture. The type of knowledge that organizations are forced to
___________________
manage is, therefore, of central importance to organizations.
___________________
The function of knowledge management would be little more than
compliance if all knowledge were codified and formal (explicit). In
practice, of course, companies find it far more difficult than do
individuals to take advantage of all this knowledge. An individual's
knowledge is self-contained, always available. The reality is that
much of the information in organizations is held within the
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personal and collective experiences of the workforce; it is tacit
knowledge.
Tacit knowledge is unarticulated knowledge that is in a person’s
head that is often difficult to describe and transfer. It includes
lessons learned, know-how, judgment, rules of thumb, and
intuition, etc. It is the key characteristic of team-based learning
organizations. Explicit knowledge is generally easy to access and
manage, but tacit knowledge often defies capture given its highly
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personal and subjective, but critical, nature. The role of knowledge

management to ensure that individual learning becomes
organizational learning. There are four modes based on conversion
of explicit and tacit knowledge into organizational learning:
z Socialization,
z Externalization,
z Combination, and
(c
z Internationalization.
Socialization is a process of sharing mental models and technical
skills through shared experiences. Externalization is the process of
articulating tacit knowledge into explicit concepts of languages.
Combination and systemization of concepts through symbols such 293
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as language or figures is achieved through media. Finally, Notes
internalization is the conversion process from explicit into tacit ___________________
knowledge.
___________________
E
Tacit Tacit
___________________
___________________
Socialization Externalization
___________________
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Tacit ___________________
Explicit
___________________
___________________
___________________
___________________
Tacit
Explicit
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Internalization Combination
Explicit Explicit
Figure 18.4: Conversion to Organization Knowledge
In the ultimate analysis, knowledge management is jointly a goal

and a process. As a goal, knowledge management is focused on
sharing information for the benefit of the organization. As a
process, it is based on the ability of all members of the organization
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to add value to the basic business processes through the creation,

communication, codification, and coordination of both explicit and
tacit knowledge. In order to be successful in this effort, the specific
objectives of any knowledge management have to be:
z To create knowledge repositories to store knowledge and
information,
z To improve knowledge access or transfer,
(c
z To enhance the knowledge environment to facilitate creation,

transfer, and use of knowledge, and
z To manage knowledge as an asset and to recognize its value.
294
In today’s context, most work is information based, organizations
S
Notes
compete on the basis of knowledge and products and services are
___________________
increasingly complex, endowing them with a significant
___________________ information component. In addition, knowledge and information
have now become the medium in which business problems occur.
E
___________________
Organizations need means for knowledge acquisition, knowledge
___________________
creation, and finally knowledge application.
___________________
This view is creating an increasing recognition that information and
___________________ knowledge have to be treated as corporate assets, and that
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___________________ businesses need strategies to manage those assets as managing
___________________
knowledge represents the primary opportunity for achieving
substantial savings, significant improvements in human
___________________
performance, and competitive advantage. Some additional business
___________________ factors, because of which knowledge management is being
considered an important component of strategy, include the
following:
z Marketplaces are increasingly competitive and the rate of
innovation is rising.
Reductions in staffing create a need to replace informal
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z
knowledge with formal methods.
z Competitive pressures reduce the size of the work force that
holds valuable business knowledge.
z The amount of time available to experience and acquire
knowledge has diminished.
z Early retirements and increasing mobility of the work force
lead to loss of knowledge.
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z There is a need to manage increasing complexity as small

operating companies are trans-national sourcing operations.
z Changes in strategic direction may result in the loss of
knowledge in a specific area.
These changes make the need for life-long learning for a business
organization an inescapable reality. Companies have to be much
more flexible, more responsive, and make better decisions —
because even small mistakes can be fatal to them. It’s not essential
(c
for only large companies but also for small companies who need
formal approaches to knowledge management because they do not
have the market leverage, inertia, and resources that big
companies do.
Knowledge Organizations 295
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Notes
Effective knowledge management begins with drawing a
distinction between information and knowledge, because these ___________________
terms are often used interchangeably. If information is the raw ___________________
material—the input—used to make decisions, knowledge is what
E
___________________
provides the context for how people think.
___________________
The idea of applying market principles to knowledge-management
activities is relatively new. Therefore, there are few examples of ___________________
companies that have fully adopted the concept. Among those that
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___________________
have, however, the potential appears to be great. An example is J. ___________________
M. Huber, a large privately-owned US company.
___________________
J. M. Huber works in three diversified business sectors. In The
___________________
idea behind this move was to capture the lessons learned from
projects and events and use this knowledge to improve its future ___________________
performance. Members of project teams had to conduct post-project

meetings to answer three basic questions:
z What happened?
z Why did it happen?
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z What can we do about it?
At the end of the meeting, the team emerged with an action plan
and a list of lessons learned to improve future performance. These
findings were submitted to a common electronic-document library
accessible to all employees through a portal.
They found that lessons may be specific to a particular business
sector especially when they pertain to areas such as manufacturing
processes and procedures. However, other lessons - for instance,
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those pertaining to strategy, safety, or marketing – were generally

useful across all three business sectors.
This made them decide to encourage this process. As a result,
today the process has become part of Huber's culture. Its database
contains more than 8,000 reports. Managers can reach knowledge
seekers interested in the same subjects. In addition, this has also
become a means of advancement in the organization as it
simultaneously builds their reputation with colleagues in other
(c
divisions and with top management.

Once people in the organization realized the importance as well
advantages that could accrue to them, the self-interest of the
knowledge creators and knowledge seekers took over and
296 reinforced this within the culture of the organization. Huber's
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Notes management says that this exchange of knowledge has been
___________________ instrumental in improving company performance significantly.
___________________
Check Your Progress
E
___________________
Fill in the blanks:
___________________
1. ……………… can be the basis for this transformation.
___________________
2. ……………… knowledge is unarticulated knowledge that
___________________
is in a person’s head that is often difficult to describe
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___________________ and transfer.
___________________
___________________ Summary
___________________ The very idea of a "learning organization" is a vision. In essence,
the vision of a learning organization is one that is continually
expanding its capacity to create its future. This is the ideal for an
organization. It needs to be seen not as a stable hierarchy, but as
an adaptive, continually changing ‘learning organization’.
The fundamental building block for learning organizations is
CE
partnership — the relationships formed by small numbers of
people who share commitment and responsibility toward building a
new type of organization. Such organizations have the capability to
sense the signals of change accurately, it must do so in good time
so that it can take the right actions, and it must process the
signals to create capabilities to face the changes. This capability
has also been called, ‘dynamic capabilities’.
Dynamic capabilities can be built only when organizations are
)C
willing to unload the burden of past experience when it interferes

in receiving and processing new knowledge, the ability of the
organization to break defensive routines, the ability to overcome
tunnel vision, and unbound the bounded rationality that comes in
the way of generating organizational capabilities.
There are at least two fundamental dimensions of organizational
knowledge. These are conceptual and enactive knowledge. The
central task of management in a learning organization is to
continually build the knowledge base, both conceptual and the
(c
enactive. Knowledge Management (KM) is emerging as one of the

management tools to gain competitive advantage. Knowledge
management processes are considered to be at the intersection of
technology, organizational structures, and cognitive-based 297
S
strategies. Notes
___________________
E
“Effective knowledge management begins with drawing a ___________________
distinction between information and knowledge, because these ___________________
terms are often used interchangeably. In a large company, a
___________________
competitive advantage from knowledge management is gained
through employees as they make decisions and take actions.”
UP
___________________
Discuss how do you make a distinction between information and ___________________
knowledge. How is competitive advantage gained by a company ___________________

from knowledge management? How do employees in a company
___________________
with KM make decisions and take actions that are different?
___________________
Keywords
Aggregators: Combine demand within and across buying
enterprises to use the resulting market power to achieve lower
prices from suppliers.
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Business-to-business (B2B) is the exchange of services,
information and/or products between one business and another.
Business-to-consumer (B2C) is the exchange of services,
information and/or products from a business to a consumer.
Combination and systemization of concepts through symbols
such as language or figures is achieved through media.
Externalization is the process of articulating tacit knowledge into
)C
explicit concepts of languages.

Internalization is the conversion process from explicit into tacit
knowledge.
Knowledge Management is a process that may range from
technology-driven methods of accessing, controlling, and delivering
information to massive efforts to change corporate culture.
Learning Organization is an ideal organization that is adaptive
and continually changing with the changing environment.
(c
Liquidity Creators: Create liquid dynamic markets between

commodity products traded between buyers and sellers.
298
Project/Specification Managers: Aid in planning and managing
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Notes
complex projects or processes.
___________________
___________________
skills through shared experiences.
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___________________
Supply Consolidators: Identify relevant supply base and conduct
___________________ purchases.
___________________
Transaction Facilitators: Transact and execute purchases.
___________________
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___________________ Questions for Discussion
___________________ 1. “In essence, the vision of a learning organization is one that is
___________________ continually expanding its capacity to create its future.”
___________________
Discuss critically.
2. What are the dimensions of learning organization?
3. “Traditional organizations build on their enactive knowledge
base and often ignore their conceptual knowledge.” Do you
agree with this statement? If yes, give reasons.
4. Discuss The Learning Cycle.
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5. Explain the Learning Mechanisms.
6. Throw some light on the stages of organizational learning.
7. What do you understand by knowledge management?
8. Why is difficult to introduce KM in most organizations?
Further Readings
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Books
Ltd.
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Education.
Web Readings 299
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Notes
www.humtech.com/opm/grtl/ols/ols.cfm
___________________
www.cipd.co.uk › HR Resources › Factsheets
___________________
www.wbs.ac.uk/research/specialisms/special-interest/solar/
E
___________________
___________________
___________________
UP
___________________
___________________
___________________
___________________
___________________
CE
)C
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300
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Notes
___________________
___________________
E
___________________
___________________
___________________
___________________
UP
___________________
___________________
___________________
___________________
CE
)C
(c
UNIT 19: Behavioural Strategic Implementation
Unit 19
301
S
Notes
Activity
Assess the value of
Behavioural Strategic
___________________
stakeholders in an
___________________
organisation. Why is it
Implementation important to manage the
E
___________________
stakeholders well?
___________________
Objectives ___________________
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___________________
topics:
___________________
\ Stakeholders and Strategy
\ Strategic Leadership ___________________
\ Leadership Approaches ___________________

\ Corporate Culture and Strategic Management ___________________
\ Social Responsibility and Strategic Management
Introduction
Successful strategy formulation does not at all guarantee
successful strategy implementation. It is always more difficult to
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actually carry out something than to say you are going to do it.
Strategy implementation requires support, discipline, motivation
and hard work from all managers and employees. Managers should
pay careful attention to a number of key issues while executing the
strategies. Chief among them are how the organisation should be
structured to put its strategy into effect and how such variables as
leadership, power and organisational culture should be managed to
enable employees to work together while implementing the firm’s
)C
strategic plans. Organisations in stable, predictable environments

often become relatively tall, with many hierarchical levels and
narrow spans of control. On the other hand, companies in dynamic,
rapidly changing environments usually adopt flat structures with
few hierarchical levels and wide spans of control.
Stakeholders and Strategy

A firm’s stakeholders are the individuals, groups, or other
(c
organisations that are affected by and also affect the firm’s

decisions and actions. Depending on the specific firm, stakeholders
may include government, employees, shareholders, suppliers,
302 distributors, the media and even the community in which the firm
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Notes is located among many others.
___________________
z When it comes to corporate mission values stakeholders will
___________________ maximise the value for all stakeholders, as opposed to
shareholders who only maximise the value for themselves.
E
___________________
___________________ z Stakeholders also play a role in the decision making process in

a business. Although since employees and customers are
___________________
included in being stakeholders they too are considered when it
___________________ comes to decision making.
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___________________
z When it comes to accountability, it does not just come down to
___________________ being accountable to themselves. Accountability lies with the
___________________ customer, suppliers, government, community and employee
stakeholders.
___________________
Stakeholder Management
An organisation needs to have an effective stakeholder
management system in place, which provides a great support in
achieving its strategic objectives. It interprets and influences both
the external and internal environments and creates positive
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relationships with stakeholders through the appropriate
management of their expectations and agreed objectives.
Stakeholder Management is a process and control that must be
planned and guided by underlying principles.
Stakeholder Management, within business or projects, prepares a
strategy that utilises information or intelligence collected during
the following common processes:
z Stakeholder Identification: identify the parties, either
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internal or external to organisation, that are affected by the

business. For this purpose, a stakeholder map can be used.
z Stakeholder Analysis: Identify and acknowledge
stakeholder’s needs, concerns, wants, authority, common
relationships, interfaces, and put this information in line
within the Stakeholder Matrix.
z Stakeholder Matrix: Position the stakeholders on a matrix
based on their level of influence, impact or enhancement they
(c
may provide to the business or its projects.

z Stakeholder engagement: Engaging stakeholders does not
seek to develop the project/business requirements, solution or
problem creation, or establishing roles and responsibilities.
The process focuses on knowing and understanding each other, 303
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at the Executive level. It gives an opportunity to discuss and Notes
agree expectations of communication and, primarily, agree a
___________________
set of Values and Principles that all stakeholders will abide by.
___________________
z Communicating Information: expectations are established
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and agreed for the manner in which communications are ___________________
managed between stakeholders - who receives ___________________

communications, when, how and to what level of detail.
___________________
Protocols may be established including security and
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confidentiality classifications. ___________________
An organisation can follow these basic tips to manage their ___________________

stakeholders effectively: ___________________
z The organisation must prioritise business and stakeholders’ ___________________
needs. In order to feel like the organisation is still yours
___________________
without offending or losing big stakeholders that contribute
money to keep your company in business, the organisation
needs to think strategically and balance out business needs
and stakeholders’ needs. This means that they have to capture
business processes and link them to projects software and
capabilities. They will also need to modify their prioritisation
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as their understanding of the application and stakeholder
needs change. They also need to take into consideration the
customer needs as well by involving them in the project.
z The organisation should develop the growth activities around
stakeholder needs. By leveraging certain developments or user
centre designs, an organisation can accept the fact that
stakeholder needs will change over time. As you business
changes so will the needs of the stakeholders and they will
need to also meet their changing needs.
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z The organisation should understand the available assets. By

understanding what assets are available to the business, they
can also balance asset reuse with stakeholders needs. Some
examples of business assets would be legacy applications,
reusable components, etc.
Check Your Progress

Fill in the blanks:
(c
1. ……………. Management is a process and control that

must be planned and guided by underlying principles.
2. The organisation should understand the available
……………. .
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Strategic Leadership
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Notes
Leadership is the art and process of influencing people so that they
___________________
will strive willingly and enthusiastically towards achievement of
___________________ the organisation’s purpose. Specific styles of leadership are often
associated with specific approaches to the crafting and execution of
E
___________________
___________________
strategies. The organisation’s purpose and strategy do not just
drop out of a process of discussion, but are actively directed by an
___________________
individual with strategic vision, whom we call “strategic leader”.
___________________
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Strategic leadership establishes the firm’s direction by developing
___________________ and communicating a vision of the future and inspiring
___________________ organisation members to move in that direction. Unlike
___________________
managerial leadership which is generally concerned with the
short-term day-to-day activities, strategic leadership is concerned
___________________
with determining the firm’s strategy, direction, aligning the firm’s
strategy with its culture, modelling and communicating high
ethical standards, and initiating changes in the firm’s strategy
when necessary. The most successful leadership is not just to
define the vision and mission of an organisation in a cold, abstract
manner but to communicate trust, enthusiasm and commitment to
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strategy.
Example: Bill Gates of Microsoft, Akio Morita of Sony, Jack Welch
of General Electric, Gianni Agnelli of Fiat, Narayana Murthy of
Infosys, are all examples of strategic leaders who have guided and
shaped the direction of their companies.
It is rightly said:
“Visionary leadership inspires the impossible: fiction becomes
truth”.
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Strategic leadership thus enhances prospects for the organisation’s

long-term success, while at the same time maintaining its short-
term financial stability.
Role of a Strategic Leadership

Leaders play a central role in performing six critical and
interdependent activities in implementation of strategies:
(c
z Clarifying strategic intent: Leaders motivate employees to

embrace change by setting forth a clear vision of where the
business’s strategy needs to take the organisation.
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Setting the Direction: Leaders set the direction and scope of
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z
Notes
the organisation through formulating appropriate corporate
and business strategies. ___________________
z Building the organisation: Since leaders are attempting to ___________________
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embrace change, they are often required to rebuild their ___________________
organisation to align it with the ever – changing environment
___________________
and needs of the strategy. And such an effort often involves
___________________
overcoming resistance to change and addressing problems like
the following:
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___________________
Ensuring a common understanding about organisational ___________________
priorities ___________________
Clarifying responsibilities among managers and ___________________

organisational units ___________________
Empowering managers and pushing authority lower in the
organisation
Uncovering and remedying problems in coordination and
communication across the organisation
Gaining personal commitment from managers to a shared
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vision
Keeping closely connected with “what’s going on in the
organisation”.
z Shaping organisational culture: Leaders play a key role in
developing and sustaining a strategy supportive culture.
Leaders know well that the values and beliefs shared
throughout their organisation will shape how the work of the
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organisation is done. And when attempting to embrace

accelerated change, reshaping their organisation’s culture is
an activity that occupies considerable time for most leaders.
z Creating a learning organisation: Leaders must also play
a central role in creating a learning organisation. Learning
organisation is one that quickly adapts to change. The five
elements central to a learning organisation are:
Inspiring and motivating people with a mission or purpose
(c
Empowering people at all levels throughout the

organisation
Accumulating and sharing internal knowledge
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Gathering external information
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Notes
Activity
Critically analyse the role of
___________________
Challenging the status quo to stimulate creativity
strategic leader vis-à-vis
___________________ z Instilling ethical behaviour: Ethics may be defined as a
managerial leaders.
system of right and wrong. Business ethics is the application of
E
___________________
general ethical standards to commercial enterprises. A leader
___________________ plays a central role in instilling ethical behaviour in the
___________________ organisation.
___________________ The ethical orientation of a leader is generally considered to be a
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___________________ key factor in promoting ethical behaviour among employees.
Leaders who exhibit high ethical standards become role models for
___________________
others in the organisation and raise its overall level of ethical
___________________ behaviour. In essence, ethical behaviour must start with the leader
___________________ before the employees can be expected to perform accordingly.
Check Your Progress

Fill in the blanks:
1. ………………. is the art and process of influencing
people so that they will strive willingly and
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enthusiastically towards achievement of the
organisation’s purpose.
2. Leaders play a central role in performing ……………….
critical and interdependent activities in implementation
of strategies.
Leadership Approaches
Research has found that some leadership approaches are more
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effective than others for bringing about change in organisation.

Three types of leadership that can have a substantial impact are
transactional, transformational and charismatic leadership. These
types of leadership are briefly explained below:
Transactional Leadership
Transactional leaders clarify the role and task requirements of
subordinates, initiate structure, provide appropriate rewards, and
(c
try to be considerate to and meet the social needs of subordinates.

The transactional leader’s ability to satisfy subordinates may
improve productivity. Transactional leaders excel at management
functions. They are hardworking, tolerant, and fair minded. They
take pride in keeping things running smoothly and efficiently. 307
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Transactional leaders often stress the impersonal aspects of Notes
performance, such as plans, schedules and budgets. They have a ___________________
sense of commitment to the organisation and conform to
___________________
organisational norms and values. In short, transactional leaders
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use the authority of their office to exchange rewards such as pay ___________________
and status for employees and generally seek to enhance an ___________________

organisation’s performance steadily, but not dramatically. In other
___________________
words, transactional leadership is important to all organisations,
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___________________
but leading change requires a different approach, viz.
transformational leadership. ___________________
___________________
Transformational Leadership
___________________
Transformational leaders have a special ability to bring about
innovation and change. They encourage the followers to question ___________________
the status quo. They have the ability to lead change in the
organisation’s mission, strategy, structure and culture as well as
promote innovation in products and technologies.
Transformational leaders do not rely solely on tangible rules and
incentives to control specific transactions with followers. They
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focus on intangible qualities such as vision, shared values, and
ideas to build relationships and find common ground to enlist in
the change process.
Charismatic and Visionary Leadership

Charismatic leadership goes beyond transactional and
transformational leadership. Charisma is a “fire that ignites
followers’ energy and commitment, producing results above and
beyond the call of duty”. The charismatic leader has the ability to
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inspire and motivate people to do more than what they would

normally do, despite obstacles and personal sacrifice. Followers
transcend their own self-interests for the sake of the leader.
Charismatic leaders are often skilled in the art of visionary
leadership. A vision is an attractive, ideal future that is credible
yet not readily attainable. Visionary leaders see beyond current
realities and help followers believe in a brighter future. They speak
to the hearts of their followers, letting them be part of something
(c
bigger than themselves. Thus, visionary leaders have a strong

vision for the future and can motivate others to help realise it.
They have an emotional impact on subordinates because they
308 strongly believe in the vision and can communicate it to others in a
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Notes
Activity way that makes the vision real, personal and meaningful to others.
Identify some leaders from the
___________________
corporate world and comment When charismatic and visionary leaders respond to organisational
___________________
on their style of leadership. problems, they can have a powerful, positive influence on
organisational performance.
E
___________________
___________________ Check Your progress

___________________ State true or false:
___________________
1. Two types of leadership that can have a substantial
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___________________ impact.
___________________ 2. Charismatic leaders have a special ability to bring about
___________________ innovation and change.
___________________
Corporate Culture and Strategic Management
A company’s culture is manifested in the values and business
principles that management preaches and practices.
Example: Culture is manifested in:
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z Corporate stories
z Attitudes and behaviours of employees
z Core values
z Organisation’s politics
z Approaches to people management and problem solving
z Relationships with stakeholders; and
z Atmosphere that permeates its work environment
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An organisation’s culture is similar to an individual’s personality.

Just as an individual’s personality influences the behaviour of an
individual, the shared assumptions (beliefs and values) among a
firm’s members influence the opinions and actions within that
firm.
Quite often, the elements of company culture originate with a
founder or other early influential leader who articulates the
values, beliefs and principles to which the company should adhere.
(c
These elements then get incorporated into company policies, a

creed or value statement, strategies and operating practices. Over
time, these values and practices become shared by company
employees and managers. Culture is thus perpetuated as:
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New leaders act to reinforce them
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z
Notes
z New employees are encouraged to adopt and follow them
___________________
z Stories of people and events told and retold
___________________
Organisation members are honoured and rewarded for
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z
___________________
displaying cultural norms.
___________________
Influence of Culture on Behaviour ___________________
An organisation’s culture can exert a powerful influence on the
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___________________
behaviour of all employees. It can, therefore, strongly affect a
___________________
company’s ability to adopt new strategies. A problem for a strong
___________________
culture is that a change in mission, objectives, strategies or policies
is not likely to be successful if it is in opposition to the culture of ___________________
the company. Corporate culture has a strong tendency to resist ___________________
change because its very existence often rests on preserving stable
relationships and patterns of behaviour.
Example: The male-dominated Japanese centred corporate culture
of the giant Mitsubishi Corporation created problems for the
company when it implemented its growth strategy in North
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America. The alleged sexual harassment of its female employees by
male supervisors resulted in lawsuits and a boycott of the
company’s automobiles by women activists.
There is no one best corporate culture. An optimal culture is one
that best supports the mission and strategy of the company. This
means that, like structure and leadership, corporate culture should
support the strategy. Unless strategy is in complete agreement
with the culture, any significant change in strategy should be
)C
followed by a change in the organisation’s culture. Although

corporate cultures can be changed, it may often take long time and
requires much effort. A key job of management therefore involves
“managing corporate culture”. In doing so, management must
evaluate what a particular change in strategy means to the
corporate culture, assess if a change in culture is needed and
decide if an attempt to change culture is worth the likely costs.
Creating Strategy Supportive Culture

(c
Once a strategy is established, it is difficult to change. It is the

strategy-maker’s responsibility to select a strategy compatible with
the organisation’s prevailing corporate culture. If it is not possible,
once a strategy is chosen, it is the strategy implementer’s
310 responsibility to change the corporate culture that hinders effective
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Notes execution of a chosen strategy.
___________________
Changing a Problem Culture
___________________
Changing a company’s culture to align it with strategy is one of the
E
___________________
toughest management tasks. This is because the deeply held
___________________
values and habits are heavily anchored, and people cling
___________________ emotionally to the old and familiar. It takes concerted
___________________ management action over a period of time to root out certain
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unwanted behaviours and instil behaviours that are more strategy-
___________________
supportive. Changing culture requires competent leadership at the
___________________ top. Great power is needed to force major cultural change, to
___________________ overcome the spring back resistance of entrenched cultures, and
great power normally resides only at the top.
___________________
Changing a problem culture involves the following four steps:
Step 1: Identify facts of present culture that are strategy –
supportive and those that are not.
Step 2: Clearly define desired new behaviours and specify key
features of “new” culture.
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Step 3: Talk openly about problems of present culture, and how
new behaviours will improve performance.
Step 4: Follow with visible, aggressive actions to modify culture.
Managing Culture Change

As already explained in earlier sections, the culture that an
organisation wishes to develop is conveyed through rites, rituals,
myths, legends, actions etc. Only with bold leadership and
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concerted action on many fronts can a company succeed in tackling

a major cultural change. Top leadership should play a key role in
communicating the need for a cultural change and personally
launching actions to prod the culture into better alignment with
strategy.
Changing culture requires both (a) Symbolic actions and (b)
Substantive actions. They require serious commitment on the part
of the top management.
(c
The following measures are helpful in building a strategy

supportive culture:
z Emphasise key themes or dominant values: Leaders must
emphasise dominant values through internal company
communications. They must repeat at every opportunity the 311
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messages of why cultural change is good for the company. Notes
z Stories and legends: Leaders must tell stories, anecdotes ___________________

and legends in support of basic beliefs. Organisational ___________________
members must identify with them, and share those beliefs and
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___________________
values.
___________________
z Rewards: Visibly praising and generously rewarding people
who display new cultural norms will slowly change the culture. ___________________
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z Recruiting and hiring: New managers and employees are to ___________________
be recruited who have the desired cultural values. ___________________
z Revising policies and procedures in ways that will help the ___________________
new culture. ___________________
z Leading by example: If the organisation’s strategy involves ___________________
low-cost leadership, senior management must display in their
own actions and decisions, inexpensive decorations in the
executive suites, conservative expense accounts and
entertainment allowances, lean corporate allowances, few
executive perks, and so on.
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z Ceremonial events: In ceremonial functions, companies must
honour individuals and groups who exhibit cultural norms and
reward those who achieve strategic milestones.
z Group gatherings: Top management must participate in
employee training programmes etc. to stress strategic
priorities, values, ethical principles and cultural norms.
Every group gathering must be seen as an opportunity to repeat
and ingrain values, praise good deeds, reinforce cultural norms
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and promote changes that assist strategy implementation. Thus,

best companies and best executives expertly use symbols, role
models, and ceremonial occasions to achieve the strategy-culture
fit.
Managing Culture Clash

When merging or acquiring another company, top management
must give some consideration to a potential clash of corporate
cultures. Integrating cultures is a top challenge to a majority of
(c
companies. It is dangerous to assume that the firms can simply be

integrated into the same reporting structures. The greater the gap
between the cultures of the two firms, the faster executives in the
acquired firm quit their jobs, and valuable talent is lost.
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There are four general methods of managing two different
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Notes
cultures. They are: (1) Integration (2) Assimilation (3) Separation,
___________________
and (4) Deculturation.
___________________
z Integration involves merging the two cultures in such a way
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___________________ that separate cultures of both firms are preserved in the
___________________ resulting culture.
___________________ z Assimilation: Here, the acquired firm willingly surrenders its

culture and adopts the culture of the acquiring company.
___________________
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___________________ z Separation: Here there is a separation of the two companies’
cultures. They are structurally separated, without cultural
___________________
exchange.
___________________
z Deculturation: This involves imposition of the acquiring
___________________ firm’s culture forcefully on the acquired firm. This often
results in much confusion, conflict, resentment and stress.
Personal Values and Ethics

Values, personal values, and core values all refer to the same
thing. They are desirable qualities, standards, or principles. Values
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are a person’s driving force and influence their actions and
reactions.
Ethics is defined as “the discipline dealing with what is good and
bad, and right and wrong, or with moral duty and obligation.”
Ethics refers to the moral principles and values that govern the
behaviour of a person or group. Ethics helps us in deciding what is
good or bad, moral or immoral, fair or unfair in conduct and
decision-making. In other words, ethics serve as a “moral
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compass” to guide our actions.

There are many sources for an individual’s ethics. These include
family background, religious beliefs, community standards and
expectations etc.
Importance of Ethics
There has been a growing interest in corporate ethics over the past
several years. This is perhaps because of a spate of recent
(c
corporate scandals at such firms as Enron, Tyco, Texaco etc.

Without a strong ethical culture, the chances of ethical crises
occurring in companies cannot be ruled out. Due to this, companies
face enormous costs in terms of financial and reputational loss as
well as erosion of human capital and relationships with suppliers, 313
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customers, society at large and governmental agencies. Notes
An ethical organisation is driven by ethical values and integrity. ___________________
Such values shape the search for opportunities, the design of ___________________
systems and the decision-making processes of the organisation.
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___________________
They provide a common frame of reference that serves as a
___________________
unifying force across different functions and employee groups.
Organisational ethics define what a company is and what it stands ___________________
for.
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___________________
The potential benefits of an ethical organisation are many. A ___________________
strong ethical orientation can have a positive effect on employee ___________________

commitment and motivation to excel. This is particularly ___________________
important in today’s knowledge-intensive organisations, where
___________________
human capital is critical in creating value and competitive
advantage. An ethically sound organisation can also strengthen its
bonds among its suppliers, customers and governmental agencies.
The ethical orientation of a leader is generally considered to be a

key factor in promoting ethical behaviour among employees.
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Leaders who exhibit high ethical standards become role models for
others in the organisation and raise its overall ethical behaviour.
In essence, ethical behaviour must start with the leader, who plays
a central role in instilling ethical behaviour in the organisation.
Some may think that ethics is a question of personal scruples. But

ethics is as much an organisational issue as a personal issue.
Leaders who fail to provide leadership in establishing proper
systems and controls cannot create an ethical organisation.
)C
Unethical business practices reflect the values, attitudes and

behavioural patterns that define an organisation’s operating
culture. Thus ethics plays a critical role in organisations.
Approaches to Ethics
When an ethical dilemma arises, there are four approaches to
guide our action. These four approaches are:
z Utilitarian approach
(c
z Individualism approach
z Moral – rights approach
z Justice approach
314 Utilitarian Approach
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Notes
According to this approach, moral behaviour is one that produces
___________________
the greatest good for the greatest number.
___________________
Individualism Approach
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___________________
___________________ According to this approach, acts are moral when they promote the
individual’s best long-term interests, which ultimately lead to the
___________________
greater good.
___________________
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___________________
Moral – Rights Approach
___________________ According to this approach, the fundamental rights and liberties

should be respected in all decisions. Thus, an ethically correct
___________________
decision is one that best maintains the rights of those people
___________________ affected by it. Six moral rights should be considered during
decision-making:
z Right of free consent
z Right of privacy
z Right of freedom of conscience
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z Right of free speech
z Right to due process
z Right to life and safety
To make ethical decisions, managers need to avoid interfering with
the rights of others.
Justice Approach
)C
According to this approach, moral decisions must be based on

equity, fairness and impartiality. Four types of justices are of
concern to managers:
z Distributive justice requires that individuals should not be
treated differently on the basis of race, sex, religion or national
origin. Individuals who are similar should be treated similarly.
Thus, men and women should not receive different salaries if
they are performing the same job.
(c
z Procedural justice requires that rules be administered

fairly. Rules should be clearly stated and be consistently and
impartially administered.
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Compensatory justice requires that individuals should be
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z
Notes
compensated for the cost of their injuries by the party
responsible. Moreover, individuals should not be held ___________________
responsible for matters over which they have no control. ___________________
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z Natural duty principle: This principle reflects a duty to help ___________________
others who are in need or danger; duty not to cause
___________________
unnecessary suffering; and the duty to comply with the just
___________________
rules of an institution.
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___________________
Building an Ethical Organisation
___________________
A firm must have several key elements before it can become a
___________________
highly ethical organisation. These elements must be constantly
reinforced in order for the firm to be successful: ___________________
___________________
Role Models
For good or bad, leaders are role models in their organisation. The
values as well as the character of leaders become transparent to an
organisation’s employees through their behaviour. Leaders must
take responsibility for ethical lapses within the organisation,
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which enhances the loyalty and commitment of employees through
the organisation.
Code of Ethics
They are another important element of an ethical organisation.
Such mechanisms provide a statement and guidelines for norms
and beliefs as well as decision–making. They provide employees
with a clear understanding of the ethical standards of the
organisation. Many large companies have developed such codes
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code of conduct.
Reward and Evaluation Systems

An appropriate reward and evaluation system should consider both
the outcomes and the means adopted to achieve the organisational
goals and objectives. Inappropriate reward systems may cause
individuals to commit unethical acts.
(c
Policies and Procedures

Most of the unethical behaviours in organisations could be traced
to the absence of policies and procedures to guide behaviour. It is
important to carefully develop policies and procedures to guide
316 behaviour so that all employees are encouraged to behave in an
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Notes ethical manner. However, it is not enough merely to have policies
___________________ “on the books”. Rather, they must be effectively communicated,
___________________ enforced and monitored. The company should also follow sound
corporate governance practices.
E
___________________
___________________ Ethics Training

___________________
The purpose of ethic training is to encourage ethical behaviour.
___________________ Companies should provide appropriate training in ethical
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___________________ standards. It enables managers to align ethical behaviour with
___________________ organisational goals.
___________________
Ethics Audit
___________________
Companies should undertake periodic audits to ensure that proper
ethical standards are being followed by all deportments of the
organisation.
Chief Ethics Officer

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Some large corporations appoint a senior officer with the exclusive
responsibility of overseeing the ethical conduct of employees. He
functions like a watchdog on ethics.
Ethics Committee
An ethics committee establishes polices regarding ethical conduct
and resolves major ethical dilemmas faced by the employees of an
organisation. Ethics committee performs such functions as
)C
organisation of regular meetings to discuss ethical issues,

identifying possible violations of the code, enforcing the code,
rewarding ethical behaviour etc.
Ethics Hotline
This is a special telephone line that enables employees to bypass
the proper channel for reporting their ethical dilemmas and
problems. The line is usually handled by an executive also
(c
investigates the matter and helps resolve the problems of the

concerned employees.
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Check Your Progress
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Notes
Activity
Fill in the blanks:
Is ___________________
it necessary for an
1. A company’s …………………. is manifested in the values organisation to be ethical?
Give___________________
your viewpoint and
and business principles that management preaches and
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justify.
practices. ___________________
___________________
2. An organisation’s culture is similar to an individual’s
…………………. . ___________________
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___________________
Social Responsibility and Strategic Management ___________________
Corporate social responsibility (CSR) consists of “actions that ___________________

appear to further some social good, beyond the interests of the ___________________
firm” It includes such topics as environmental ‘green’ issues,
___________________
treatment of employees and suppliers, charitable work and other
matters related to the community. A brief idea of the areas
included in CSR is given in figure.
It is important to note that CSR requires firms to go beyond what
the law requires – just doing the minimum required by the law is
not sufficient. “Corporate social responsibility is concerned with
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the ways in which an organisation exceeds the minimum
obligations to the stakeholders”.
Corporate Social Responsibility is therefore a company’s duty to
operate its business by means that avoid harm to other
stakeholders and the environment, and also to consider overall
betterment of society in its decisions and actions. The essence of
socially responsible behaviour is that a company should strive to
balance its actions to benefit its shareholders without any adverse
)C
impact on other stakeholders like employees, suppliers, customers,

local communities and society at large, and, further, to proactively
mitigate any harmful effects on the environment its actions and
business may have.
Responsibilities of Business
A business organisation has four responsibilities:
z Economic responsibilities: are the most basic
responsibilities of a business firm. This involves the essential
(c
responsibility of business to provide goods and services to

society at a reasonable cost. In discharging that economic
responsibility, the company provides productive jobs to its
workforce, pays taxes to central, state and local governments.
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Legal responsibilities: reflect the firm’s obligation to comply
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z
Notes
with the laws that regulate business activities, especially in
___________________
the areas of consumer safety and pollution control.
___________________
z Ethical responsibilities: reflect the company’s notion of right
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___________________ or proper business behaviour. Ethical responsibilities go
___________________ beyond legal requirements. Firms are expected, though not
legally bound, to behave ethically.
___________________
z Discretionary responsibilities: are those that are
___________________
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voluntarily assumed by business organisations that adopt the
___________________
citizenship approach. They support ongoing charities, public-
___________________ service advertisement campaigns, donations, medical camps,
___________________ public welfare activities etc. A commitment to full corporate
responsibility requires strategic managers to attack social
___________________
problems with the same zeal in which they tackle business
problems.
Business managers should keep in mind that economic and legal
responsibilities are mandatory, ethical responsibilities are
expected, and discretionary responsibilities are desirable.
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The above four responsibilities are listed in order of priority. A
business firm must first make a profit to satisfy its economic
responsibilities. A firm must also follow the laws as a good
corporate citizen. Carrol, however, argues that business firms have
obligations beyond the economic and legal responsibilities; that
firms must also fulfil its social responsibilities. Social
responsibility includes both ethical and discretionary
responsibilities, but not economic and legal responsibilities.
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Need for CSR: The Strategy

After considering the arguments for and against CSR, it becomes
evident that it is in the enlightened self-interest of companies to be
good corporate citizens and devote some of their resources and
energies to employees, the communities in which they operate, and
society in general. There are five important reasons why
companies should undertake social responsibilities.
Self-interest of the Organisation

(c
Every organisation obtains critical inputs from the environment

and converts them into goods and services to be used by society at
large. In this process they help shareholders to get appropriate
returns on their investment. It is expected that organisations 319
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acknowledge and act upon the interests and demands of other Notes
stakeholders such as citizens and society in general that are ___________________
beyond its immediate constituencies – owners, customers,
___________________
suppliers and employees. That is, they must consider the needs of
E
the broader community at large, and act in a socially responsible ___________________
way. ___________________
___________________
It generates Internal Benefits
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___________________
CSR generates internal benefits like employee recruitment,
workforce retention and training. Companies with good CSR ___________________
reputation are better able to attract and retain employees ___________________

compared to companies with tarnished reputations. Some ___________________
employees just feel better about working for a company committed
___________________
to improving society. This can contribute to lower turnover and
better worker productivity. This also benefits the firm by way of
lower costs for staff recruitment and training. Provision of good
working conditions results in greater employee commitment.
It Reduces Risks
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CSR reduces the risk of damage to reputation and increases buyer
patronage. Consumer, environmental and human rights activist
groups are quick to criticise businesses that are not socially
responsive. Pressure groups can generate adverse publicity,
organise boycotts, and influence buyers to avoid an offender’s
products. Research has shown that adverse publicity is likely to
cause a decline in a company’s stock price.
In the Best Interest of Shareholders

)C
CSR is in the best interest of shareholders. Well-conceived social

responsibility strategies work to the advantage of shareholders in
several ways. Socially responsible behaviour can help avoid or
prevent legal and regulatory actions that could prove costly or
burdensome. A study of leading companies found that
environmental compliance and developing eco-friendly products
can enhance earnings per share, profitability, and the likelihood of
winning contracts.
(c
It gives Competitive Advantage

Being known as a socially responsible firm may provide a firm a
competitive advantage.
320
Example: Firms that are eco-friendly enhance their corporate
S
Notes
Activity image. In western countries, many consumers boycott products
Consider any one CSR
___________________
that are not “green”. Companies that take the lead in being
initiative taken up by any one
major ___________________
corporate house in environmentally friendly, such as by using recycled materials,
producing ‘green’ products, and helping social welfare programmes,
E
India. Do you think there was
___________________
any strategic objective behind enhance their corporate image.
the ___________________
initiative or was it purely
philanthropy? In sum, companies that take social responsibility seriously can
___________________
improve their business reputation and operational efficiency while
___________________ reducing their risk of exposure and encouraging loyalty and
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___________________ innovation. Overall, companies that take special pains to protect
___________________
the environment (beyond what is required by law), are active in
community affairs, and are generous supporters of charitable
___________________
causes are more likely to be seen as good companies to work for or
___________________ do business with. It will also benefit the shareholders.
Check Your Progress

1. Legal responsibilities: are the most basic responsibilities
of a business firm.
CE
2. Discretionary responsibilities are those that are
voluntarily assumed by business organisations that
adopt the citizenship approach.
Summary
A firm’s stakeholders are the individuals, groups, or other
organisations that are affected by and also affect the firm’s
)C
decisions and actions. An organisation needs to have an effective

stakeholder management system in place, which provides a great
support in achieving its strategic objectives. Strategic leadership
establishes the firm’s direction by developing and communicating a
vision of the future and inspiring organisation members to move in
that direction. A company’s culture is manifested in the values and
business principles that management preaches and practices. An
organisation’s culture can exert a powerful influence on the
behaviour of all employees. Ethics refers to the moral principles
(c
and values that govern the behaviour of a person or group. Ethics

helps us in deciding what is good or bad, moral or immoral, fair or
unfair in conduct and decision-making. Corporate social
responsibility (CSR) consists of “actions that appear to further
some social good, beyond the interests of the firm” It includes such 321
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topics as environmental ‘green’ issues, treatment of employees and Notes
suppliers, charitable work and other matters related to the ___________________
community. Corporate Social Responsibility is a company’s duty to
___________________
operate its business by means that avoid harm to other
E
stakeholders and the environment, and also to consider overall ___________________
betterment of society in its decisions and actions. ___________________
___________________
Lesson End Activity
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___________________
Suppose you are the manager of a firm that has just acquired ___________________
another firm. How will you ensure that there is good ‘fit’ between
___________________
the culture and strategy of the new firm?
___________________
Keywords ___________________
Culture: The beliefs and behaviours that determine how a

company’s employees and management interact and handle
outside business transactions.
Corporate Social Responsibility: A company’s sense of
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responsibility towards the community and environment (both
ecological and social) in which it operates.
Deculturation: The removing or abandoning of one’s own culture
and replaces it with another.
Leadership: Leadership has been described as a process of social
influence in which one person can enlist the aid and support of
others in the accomplishment of a common task.
Ethics: Motivation based on ideas of right and wrong.
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Stakeholders: A person, group, or organisation that has direct or

indirect stake in an organisation.
Strategic leadership: A manger’s potential to express a strategic
vision for the organisation, or a part of the organisation, and to
motivate and persuade others to acquire that vision.

(c
1. “Visionary leadership inspires the impossible: fiction becomes

truth”. Substantiate
322
2. Discuss the three approaches to leadership. Assess the
S
Notes
importance of each of them.
___________________
3. “An organisation’s culture is similar to an individual’s
___________________
personality.” Comment
E
___________________
4. “There is no best or worst culture”. Elucidate
___________________
5. What do you mean by problem culture? How will deal with
___________________
such a culture?
___________________
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6. CSR is not an obligation, then why most of the successful
___________________ companies engage in it?
___________________
___________________ Further Readings

___________________
Books
Ltd.
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Education.
Web Readings
http://220.227.161.86/20088ipcc_paper7B_vol2_cp6.pdf
)C
http://studyonline.edu.vn/index.php/assignment/strategic-
management/1910-lecture-34-behavioural-implementation
http://www.mbaknol.com/strategic-management/behavioural-
issues-in-strategy-implementation/
http://www.scribd.com/doc/23124109/10-Role-of-Leadership-in-
Strategic-Implementation-Behavioural
https://ujdigispace.uj.ac.za/handle/10210/3031
(c
UNIT 10: Case Study
Unit 20
323
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Notes
Case Study
___________________
___________________
E
___________________
Objectives
___________________
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___________________
___________________
Case Study: Beyond Core Competencies
___________________
The Eastman Kodak Company was an iconic industry leader. For
decades, it was synonymous with photography. But it got stuck in ___________________
its core competence of traditional film products and missed the
___________________
rise of digital photography and printing. To survive, it has
stopped selling film cameras, focusing on the digital ones that
dominate the market. But it arrived late. In 2005, IBM sold its PC
division to its former competitor, Lenovo.
In the preceding decade, IBM appeared to be headed into

extinction. From one SEC filing, it revealed that it lost nearly a
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billion dollars on the PC business over three-and-one-half years.
It sold this money-losing division systematically evolved itself to
become, once again, a respected technology competitor.
Organizations such as IBM and GE have adapted over the years
to remain competitive in the market. They have gone through
different cycles of disruptive innovations, leaving some
businesses, and creating new ones. Others like Kodak and Nokia
are re-strategising in order to remain relevant in a dynamic
global market.
)C
The latter just signed a partnership agreement with Microsoft to

develop new mobile solutions, after the new CEO acknowledged
that the phone maker has been left behind by its competitors.
Here, Nokia understood that its sole strengths are not enough to
win. C. K Prahalad and Gary Hamel's HBR classic Core
Competence of the Corporation made popular the notion that
knowing and mastering core business factors can be leveraged
across products and markets. Yet the ways companies make
products, especially electronics, have been disrupted and
(c
redesigned. As Nokia's boss noted, Nokia's core competence is in

phone designs, but the trend in China, where manufacturers buy
phone chipsets from vendors and make phones at unbelievable
Contd…
324 pace and price, controlling one-third of the global phone market,
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Notes introduces a new dimension of competition.
___________________ From my experience establishing a small semiconductor company
___________________ in Nigeria, I see consumer electronics design becoming a
commodity. Companies that are too obsessed with design
E
___________________ competence could suffer, especially in the developing markets.
___________________ Businesses such as Cisco, Dell, HP, and Motorola have seen their
R&D spending dropped as a percentage of sales; yet, most get
___________________
products to market faster. Why? There are other firms like
___________________ MediaTek and Flextronics that do to design what China's
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Shenzhen district does to manufacturing. They develop chipsets
___________________
and license to manufacturers who then produce and sell.
___________________ Companies like Best Buy and Wal-Mart rely on these design
___________________ houses for some of their branded tech products, enabling them to
sell at competitive prices, with no R&D cost. Looking outside for
___________________
new insights is everywhere: P&G expects 50% of new products
ideas to come from outside the company. With crowd sourcing
services, lower wages, and improving designers in most emerging
nations, multinational corporations must evaluate how to retool
products to make them relevant to new markets. While core
competence remains vital - differentiation offers a competitive
advantage - firms must examine their organizational
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ambidexterity. They must be ready to let go, just as Kodak is
doing on traditional cameras. They must be ready to go beyond
their core competence and its associated core products and
markets of today, which may be irrelevant tomorrow, to evolve
and prosper. And the ability to do that may become a new core
competence.
Question:

)C
Source: Adapted from Article by Ndubuisi Ekekwe, founder of the non-profit African Institution of
Technology
(c
UNIT 21: Strategies at Functional and Operational Levels
325
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Notes
___________________
___________________
E
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
___________________
BLOCK-V
CE
)C
(c
326
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Notes
UNIT 21: STRATEGIES AT FUNCTIONAL AND
___________________ UNIT 23: CORPORATE GOALS AND STRATEGIC
OPERATIONAL LEVEL GAP
z ___________________
Introduction z Introduction
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z Functional Strategies
___________________ z What are Corporate Goals?
z Operational Plans and Policies

___________________ z Strategic Gap: An Introduction
z Personnel (HR) Plans and Strategies

___________________ z Types of Strategic Gap
___________________
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UNIT 22: STRATEGIC CONTROL AND UNIT 24: LIFE CYCLE APPROACH TO STRATEGIC
EVALUATION PLANNING
___________________
z Introduction z Introduction
___________________
z Nature of Strategic Evaluation and Control z IA - BS Matrix
___________________
z Strategic Control z Arthur. D. Little’s Life Cycle Approach to Strategic
___________________ Planning
z Operational Control
z Business Portfolio Balancing
z Techniques of Strategic Control
z Strategic Funds Programming
z Role of Organisational Systems in Evaluation
UNIT 25: CASE STUDY
CE
)C
(c
Unit 21
327
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Notes
Activity
Consider two Indian firms from
Strategies at Functional and
___________________
the same industry and
___________________
compare their functional
Operational Levels strategies.
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___________________
___________________
Objectives ___________________
UP
___________________
topics:
___________________
\ Functional Strategies
\ Operational Plans and Policies ___________________
\ Personnel (HR) Plans and Strategies ___________________
___________________
Introduction
Once corporate level and business level strategies are developed,
management must turn its attention to formulating strategies for
each functional area of the business unit. For effective
implementation of strategies, functional strategies provide
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direction to functional managers regarding the plans and policies
to be adopted in each functional area.
Functional Strategies
Functional Strategy is the approach taken by a functional area to
achieve corporate and business unit objectives and strategies by
maximising resource productivity. It is concerned with developing
and nurturing a distinctive competence to provide a company or
)C
business unit with a competitive advantage. Just as a multi-

divisional corporation has several business units, each with its own
business strategy, each business unit has its own set of
departments, each with its own functional strategy.
Nature of Functional Strategies

Functional strategies are essential to implement business strategy.
In fact, the effectiveness of a corporate or business strategy
(c
execution depends critically on the manner in which strategies are

implemented at the functional level. The corporate strategy
provides the long-term direction and scope of a firm. The business
strategy outlines the competitive posture of its operations in an
328 industry. The functional strategy clarifies the business strategy,
S
Notes giving specific short-term guidance to operating managers in the
___________________ areas of operations, marketing, finance, HR, R&D etc., and
___________________ increases the likelihood of their success.
Orientation of the functional strategy, therefore, depends on the
E
___________________
___________________ business strategy.
___________________ Example: If a business unit follows a differentiation strategy
___________________
through high quality products, its production strategy emphasises
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expensive quality assurance processes over cheaper, high-volume
___________________
production; a human resource functional strategy that emphasises
___________________
hiring and training of a highly skilled, but costly, workforce; and a
___________________ marketing functional strategy that emphasises extensive
___________________ advertising to increase demand rather than using marketing
incentives to retailers. Similarly, if the business unit follows a low-
cost competitive strategy, a different set of functional strategies
emphasising cost-cutting measures would be needed to support the
business strategy.
Need for Functional Strategies

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Functional managers need guidance from the corporate and
business strategies in order to make decisions. In simple terms,
functional strategies tell the functional manager what to do in his
area to achieve business objectives.
Glueck and Jauch have suggested five reasons to show why

functional strategies are needed. Functional strategies are
developed to ensure that:
)C
z The strategic decisions are implemented by all the parts of an

organisation.
z There is a basis available for controlling activities in different

functional areas of a business.
z The time spent by functional managers on decision-making

may be reduced.
Similar situations occurring in different functional areas are

(c
z
handled by the functional managers in a consistent manner.
z Coordination across different functions takes place where

necessary.
Functional Plans and Policies 329
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Notes
The process of developing functional plans and policies is quite
similar to that of strategy formulation, with the difference that ___________________
functional heads are responsible for their formulation and
___________________
implementation. Environmental factors relevant to each functional
E
area will have an impact on the choice of strategies. Finally, the ___________________
actual process of choice involves a negotiation between functional ___________________

managers and business unit managers. Thus, functional strategies
___________________
are generally formulated in all key functional areas.
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___________________
For each of the functional strategies, a set of policies will have to
___________________
establish for appropriate areas of the business. The policies will
ensure that the strategies are carried out as intended and that the ___________________
different functional areas are working towards the same ends. ___________________
Companies have plans and policies that cover nearly every major
___________________
aspect of the firm. The firm should have strategies in every major
aspect of business, at least in key functional areas. We will
highlight some of the more important issues for each functional
area that need to be addressed in their respective functional
strategies.
The functional strategies should be comprehensive; but at the
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same time, they should not leave so much choice to operating
managers that they work sub-optimally or at cross purposes. At
the same time, the functional strategies should be flexible enough
to leave room to managers for responding quickly to situations and
make exceptions for good reasons. The functional strategies
required in key functional areas are outlined below:
Financial Strategy
In the financial management area, the major concern of the
)C
strategy relates to the acquisition and utilisation of funds. Major

issues involved are the sources from where the funds will come,
from equity or by borrowing. How much of the borrowing will be
short-term and how much long-term. In terms of usage of funds,
the policy decisions would relate to whether and to what extent
funds have to be deployed in fixed assets and current assets. The
long-term or capital investment decisions relate to buying or
leasing the fixed assets. A retrenchment strategy or paucity of
funds may compel the organisation to lease rather than buy. In
(c
case of an organisation where capital investment decisions are

decentralised, a “hurdle rate” may be fixed so as to avoid
investment in weaker projects by one division and non-investment
by another division.
330 Cash Flow
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Notes
Apart from capital budgeting, another consideration in financial
___________________
strategy which influences other functional areas is the cash flow. A
___________________ company may frame bonus and dividend policies based on
availability of cash. In case a company proposes expansion through
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___________________
internally generated funds, it may reduce bonus and dividend. This
___________________
is particularly so when it has formulated ambitious growth
___________________ strategies which require large cash. Similarly, if the firm has high
___________________ risk business, it should have a conservative debt/equity ratio to
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___________________
guard against heavy interest burden.
___________________ The funds position and optimisation orientation of top

management also determines the accounts receivable and payable
___________________
policies. Financial strategies and policies may even determine the
___________________ accounting policies as these affect the profitability, balance-sheet
and hence cash flow through taxes, dividend, bonus etc.
Marketing Strategy
Functional strategies in marketing area are required for
marketing – mix decisions, i.e. the four Ps of marketing, viz.
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Product design, Product distribution, Pricing and Promotion
aspects of marketing. In terms of specifics, the product decisions
relate to such issues as the variety of product (shape, size, model
etc.), quality requirements, introduction/withdrawal of products,
nature of customers etc. Specific policies are also required
regarding distribution channels i.e. through retailers or direct
selling? What would be the spread of distribution network?
Whether new dealers will be established or old ones developed?
The promotion strategies will relate to mode of promotion,
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coverage and nature (corporate, product or brand promotion).

Again, very clear and specific strategies will have to be made about
pricing, etc., full cost or standard cost based pricing. Offensive vs.
defensive postures also influence pricing policies.
HR Strategy
HR strategy deals with matters like HR planning, recruitment and
selection, training and development, compensation management,
(c
performance management, rewards and incentives etc. What

compensation/reward system will be able to attract people of the
desired type to join the organisation so as to meet the task
requirements demanded by the strategy? What strategies are
necessary to groom internal people for new positions? The problem 331
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becomes acute in the context of turnaround strategies. On the one Notes
hand, the most competent people leave and the firm finds it ___________________
difficult to attract suitable replacements. On the other hand, it
___________________
faces the problem of surplus staff. HR strategies for retrenchment,
E
though painful, are quite necessary but difficult to develop. ___________________
___________________
Production Strategy
___________________
The functions relating to production need strategies relating to
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___________________
quality assurance, machine utilisation, location of facilities, balancing
the line, scheduling of production, and materials management. The ___________________
strategy for entering into export market will dictate a different policy ___________________
regarding quality of products and maintenance. Location of facilities ___________________
may be determined by closeness to market or input supply points.
___________________
Decisions must be made to determine whether and how much to
make or buy, on the basis of cost differential, availability, criticality of
the item, capacity if expansion becomes necessary. In case of bought
out items, policies regarding number of suppliers and the criteria for
selecting them are necessary.
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R&D Strategy
In the area of research and development, functional strategies
regarding the nature of research are necessary. In case of
expansion through new product development, heavy emphasis has
to be laid on basic and applied research.
On the contrary, for expansion in the same line, research emphasis
has to be on product/process improvement to cut cost and to add
value. It may be noted that in case of basic research the firm
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should be prepared to commit resources and wait for outcome for

several years. It cannot have basic research unless it is prepared to
commit resources on long-term basis.
Check Your Progress

Fill in the blanks:
1. ………………… is concerned with developing and
nurturing a distinctive competence to provide a
company or business unit with a competitive advantage.
(c
2. Apart from capital budgeting, another consideration in

financial strategy which influences other functional
areas is the ………………… .
332
Operational Plans and Policies
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Notes
Activity
Operations management is the core function of any organisation.
Find___________________
out about the quality
management practices at This function converts inputs (raw materials, supplies, machines
___________________
McDonalds. and people) into value added outputs. Operations management
covers all manufacturing processes in an organisation and includes
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___________________
___________________
raw material sourcing, purchasing, production, distribution and
logistics. This function contributes to the organisation’s ability to
___________________
add value to the goods and services.
___________________
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___________________
Importance of Operational Strategy
The key to successful survival of an enterprise is how efficiently
___________________
the production activity is managed. The two major factors that
___________________
contribute to business failures are: obsolescence of the product line
___________________ and excessive production costs. These factors themselves have been
the outcome of ineffective production Planning.
Operations strategy plays a crucial role in shaping the ultimate
success of a firm. It enables an organisation to make optimal
decisions regarding product, production capacity, plant location,
choice of machinery and equipment, maintenance of existing
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facilities and host of other aspects of production. Constant review
of production plan aids in maintaining proper balance of capital
investment in plant, equipment and inventory; efficient operation
of the production system, product mix, Quality control; and
ensures effective material handling and Planning of facilities.
Within the broad framework of corporate and business strategies,
production strategy helps in maintaining full co-ordination with
marketing and engineering functions to formulate plans to improve
)C
products and services. It calls upon management to keep in

constant touch with finance and personnel to achieve the optimal
use of assets, cost control, recruitment of suitable personnel and
management of labour disputes and negotiations.
Components of Operational Plan and Policies

The different components of a production strategy should ideally
consist of the following:
(c
Product Mix
A firm should decide about the product mix (how many and what
kind of products to be produced) keeping in view Objectives such as
productivity, cost efficiency, Quality, reliability, flexibility etc.
Capacity Planning 333
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Notes
Capacity Planning is the process of forecasting demand and
deciding what resources will be required to meet that demand. ___________________
Meclain and Thomas suggested that capacity Planning involves ___________________
the following five sequential steps.
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___________________
z Predict future demand and competitive reactions: The
___________________
firm should forecast the demand for various products/services
as also estimate customer reaction to the products offered by ___________________
it. It should also take care of potential countermoves by
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___________________
competitors.
___________________
z Translate above estimates into capacity needs: Based on
___________________
forecasts, the firm must decide the quantity that can be
manufactured keeping input limitations, such as plant ___________________
equipment, manpower etc in mind. ___________________
z Create alternative capacity plans: Depending on what the

market might absorb and what the organisation can produce,
management should create alternative capacity plans for
various products/services that are offered to customers.
z Evaluate each alternative: The firm should identify the
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opportunities and Threats associated with each alternative,
and carefully evaluate in terms of additional costs involved,
payoffs etc.
z Select and implement a particular capacity plan: The
capacity plan that best serves organisational Objectives should
be selected and implemented.
One of the most vital decisions which have to be made regarding
production capacity is whether the company should build so much
)C
capacity to satisfy all demand during peak periods and keep the
production facilities idle during lean periods.
There are some organisations that prefer to build smaller capacity
to take care of normal requirements and meet peak demand by
way of imports or subcontracting. Some organisations employ
measures such as off-peak discounts, mail early campaign, etc. to
induce customers to avoid peak periods.
Technology and Facilities Planning

(c
Choosing Machines and Equipments

A strategic decision to be made by a production manager is what
type of equipments the organisation will require for production
334 purposes, how much it will cost, what will be its operating cost and
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Notes what services it will render to the organisation and for how long.
___________________
Choice of equipment for making a particular product essentially
___________________ depends on the basic manufacturing process. The decision-maker
must, therefore, familiarise himself with the production process to
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___________________
be adopted.
___________________
Another consideration in the choice of new equipment for a plant is
___________________
the type and degree of operating skill required and presently
___________________ available skills within the organisation. Other factors worth
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___________________ consideration are the ease with which the equipment can be
___________________
operated and the safety features of the equipment.
___________________ Equipment Investment

___________________
Acquisition of equipment involves capital expenditure which will
have long-term effects on the financial position of the company.
Hence, before taking a final decision regarding investment in a
machine, detailed analysis of such investment in terms of cost-
benefits must be made and its desirability and worth-whileness
should be evaluated with the help of internal rate of return or net
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present value method.
The decision to replace the existing machine is equally important
to the enterprise. In this regard the management has to decide
when the replacement should be made and the best replacement
policy that must be considered while making comparisons between
an existing unit of equipment and its possible replacement. In
order to make a sound economic comparison, all the factors must
be converted into cost considerations. The rate of return so
)C
obtained is compared with the cut-off rate to ascertain whether the

replacement is economically viable.
Thus, clear-cut policy guidelines regarding methodology or
computation of net investment outlay, incremental operating
expenditure and income, depreciation, obsolescence, salvage value
etc. will help management in taking decisions regarding
acquisition and/or replacement of machines.
Physical Facilities Decisions

(c
Facilities strategy covers plans for location analysis and selection,

design and specifications including layout of equipment, plant,
warehouses and related services. Facilities Planning deals with the
separate but interrelated costs of material, supplies, manpower,
services and facilities. Its Mission is to find ways to minimise the 335
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aggregate of such costs in making and distributing the products at Notes
the proper time. ___________________
Plant Location ___________________
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___________________
Plant location is essentially an investment decision having long-
term significance. Once a plant is acquired, it is a permanent asset ___________________
that cannot readily be sold. The management may also ___________________
contemplate relocation of the plant when business expansion and
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___________________
advanced technology require additional facilities to serve new
market areas, to produce new products, or simply to replace the ___________________
old, obsolete plants to increase the company’s production capacity. ___________________
The selection of an appropriate plant site calls for location study of ___________________
the region in which the factory is to be situated, the community in ___________________
which it should be placed and finally, the exact site in the city or
countryside.
Plant Building
Once the company has chosen the plant site, due consideration
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must be given to providing physical facilities. A company requiring
extensive space will always construct new buildings.
On planning a building for the manufacturing facilities, a number
of factors will have to be kept in mind such as nature of the
manufacturing process, plant layout and space requirements,
lighting, ventilating, air-conditioning, service facilities and future
expansion.
Plant Layout
)C
Plant layout involves the arrangement and location of production

machinery, work centres and auxiliary facilities and activities
(inspection, handling of material storage and shipping) for the
purpose of achieving efficiency in manufacturing products or
supplying consumer services. Plant layout should co-ordinate
material, men and machines and achieves the following Objectives:
z Facilitate the manufacturing process.
(c
z Minimise materials handling.

z Maintain flexibility of arrangement and operation.
z Maintain high turnover of work-in-process.
336
Hold down investment in equipment.
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z
Notes
___________________
z Make economical use of building space.
___________________ z Promote effective utilisation of manpower.

Promote employee convenience, safety and comfort in doing
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___________________ z
the work.
___________________
___________________
In designing plant layout a number of factors such as nature of
product, volume of production, Quality, equipment, type of
___________________
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manufacture, building plant site, personnel and materials
___________________ handling plan should be kept in view.
___________________
Maintenance of Equipment
___________________
Maintenance of equipment is an important component of planning
___________________
consideration. It is intimately linked with replacement policies.
Every manufacturing enterprise follows some maintenance routine
in order to avoid unexpected breakdowns and thus minimise costs
associated with machine down time, possible loss of potential sales,
idle direct and indirect labour delays, customer dissatisfaction
from possible delays in deliveries and the actual cost of repairing
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the machine.
A number of strategies can be adopted for maintenance of
machines and equipment. Two most important ones are carrying
excess capacity and preventive maintenance.
Excess Capacity
In carrying excess capacity method an organisation carries stand-
by capacity, which is used if trouble occurs. This excess capacity
)C
can be whole machines or it can be major parts or components

which ordinarily take time to obtain. Carrying excess capacity
involves cost which must be compared with costs arising out of a
slow-down or a shut-down of a whole series of dependent
operations. Therefore, the decision in this regard is cost trade-offs.
Preventive Maintenance
Preventive maintenance is based on the premise that good
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maintenance prevents breakdowns. Preventive maintenance

means preventing breakdowns by replacing worn-out machines or
their parts before their breakdown. It anticipates likely difficulties
and does the expected needed repairs at a convenient time before
the repairs are actually needed. Preventive maintenance depends
upon the past knowledge that certain wearing parts will need 337
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replacement after a normal interval of use. Notes
Activity
Critically analyse staffing and
___________________
Inventory Management training as strategies
___________________
decisions.
This is concerned with management of inventory consisting of raw
E
___________________
materials, work-in-process, goods in transit, finished goods etc.
Inventory management is a critical function because substantial ___________________
money can be locked up in inventory, which can be put to ___________________
productive use. There are various techniques that can be used for
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___________________
effective inventory management.
___________________
z Economic Order Quantity
___________________
z ABC analysis
___________________
z Just-in-Time (JIT) Inventory systems etc.
___________________
Quality Management
Quality is a major consideration in Production/Operations
strategy. By using techniques like Total quality management
(TQM), Six Sigma etc, organisations strive to produce ‘Zero defect
products’ Operations strategy should consist of appropriate Quality
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improvement programmes to achieve total Quality in products and
services of the organisation.
Check Your Progress

1. Operations management is not the core function of any
organisation.
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2. The firm should also take care of potential countermoves

by competitors.
Personnel (HR) Plans and Strategies

Personnel policies are guides to action. Brewster and Ricbell
defined HR policies as “a set of proposals and actions that act as a
reference point for managers in their dealings with employees”.
Management should pay attention to the following aspects of HR
(c
policies:
z HR policies must be related to the strategic objectives of the
firm.
338
They should be stated in definite, clear and understandable
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z
Notes
language.
___________________
z They should be sufficiently comprehensive and provide
___________________
yardsticks for future action.
E
___________________
z They should be stable enough to assure people that there will
___________________ not be drastic overnight changes.
___________________
z They should be built on the basis of facts and sound judgment.
___________________
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z They should be just, fair and equitable.
___________________
z They must be reasonable and capable of being accomplished.
___________________
z Periodic review of HR policies is essential to keep in tune with
___________________
changing circumstances.
___________________
HR Planning
HR planning is the first key component for developing a human
resource strategy. It involves translating corporate – wide strategic
objectives into a workable plan and serves as a blue-print for all
specific HR programmes and policies. It is the process of analysing
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and identifying the need for and availability of human resources so
that the organisation can meet its objectives. It helps determine
the manpower needs of firms and develop strategies for meting
those needs.
According to Jeffrey Mello, key objectives of HR planning are:
z Prevents overstaffing and understaffing.
z Ensures the organisation has the right number of employees
with the right skills in the right places and at the right time.
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z Ensures the organisation is responsive to changes in its

environment.
z Provides direction and coherence to all HR activities and
systems.
z Unites the perspectives of line and staff managers.
z Facilitates leadership continuity through succession planning.
Although HR planning follows from the strategic plan, the
(c
information collected in the HR planning process contributes to the

assessment of internal organisation’s environment done in
strategic planning.
Staffing 339
S
Notes
Staffing, the process of recruiting applicants and selecting
prospective employees, remains a key strategic area for human ___________________
resource strategy. Given that an organisation’s performance is a ___________________
direct result of the individuals it employs, the specific strategies
E
___________________
used and decisions made in the staffing process will directly impact
the success of the strategic plan. ___________________
___________________
Recruitment
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___________________
Recruitment means attracting people to apply for jobs in the
___________________
organisation. The strategic issues in recruitment are:
___________________
z Temporary versus permanent employees
___________________
z Internal versus external recruiting
___________________
z When and how extensively to recruit
z Methods of recruiting
Selection
Once a sufficient pool of applicants has been received, critical
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decisions need to be made regarding applicant screening, methods
of selection and placement. The selection methods should be
reliable and valid.
Placement
After selecting a candidate, he should be placed on a suitable job.
Placement is an important human resource activity. If neglected, it
may create employee adjustment problems. An employee placed in
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a wrong job may quit the organisation in frustration.
Training and Development

Training and development of employees is a key strategic issue for
organisations. It is the means by which organisations determine
the extent to which their human assets are viable investments.
Training involves employees acquiring knowledge and skills that
they will be able to use on the job.
There are two key factors to develop successful training
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programmes in organisations. The first is planning and

strategising the training. This involves four distinct steps:
z Needs assessment
z The establishment of objectives and measures
340
Delivery of the training
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z
Notes
___________________
z Evaluation
___________________ The second key factor is to ensure that desired results are achieved
or accomplished. Training needs are to be integrated with
E
___________________
performance management systems and compensation.
___________________
___________________ Performance Management
___________________
An organisation’s long-term success in meeting its strategic
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objectives rests on managing employee performance and ensuring
___________________
that performance measures are consistent with the strategic needs.
___________________ One purpose of performance management systems is to facilitate
___________________ employee development. A second purpose is to determine
appropriate rewards and compensation, which must be clearly
___________________
linked to achievement of strategic goals.
Compensation and Rewards

Organisations face a number of key strategic issues in setting their
compensation and reward policies and programmes. These include:
z Compensation relative to the market
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z Balance between fixed and variable compensation
z Appropriate mix of financial and non financial compensation
z Developing an overall cost-effective compensation programme
that results in high performance.
In addition to these strategic issues, the fast pace of change and
the need for organisations to respond in order to remain
competitive create challenges for all HR programmes, but
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particularly for compensation. Organisations should revaluate

their compensation programmes within the context of their
corporate strategy and specific HR strategy to ensure that they are
consistent with the necessary performance measures required by
the organisation. Overly rigid compensation systems inhibit the
flexibility needed by the company’s competitive strategies. HR
strategy must encourage creativity to meet strategic objectives.
Therefore, compensation systems must ensure that behaviours
that help achieve strategic objectives are appropriately rewarded.
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Industrial Relations
Industrial relations is a key strategic issue for organisations
because the nature of the relationship between employees can have
a significant impact on morale, motivation and productivity. 341
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Consequently, how organisations manage the day- to- day aspects Notes
of the employment relationship can be a key variable affecting ___________________
their ability to achieve strategic objectives.
___________________
Unionised employees present a number of key strategic challenges
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___________________
for management:
___________________
z The power base within the organisation is redistributed
___________________
z Management’s ability to manage workers at their discretion to
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___________________
achieve the organisation’s strategic objectives will be severely
curtailed. ___________________
z Outside leadership may pose additional challenges to the ___________________
management. ___________________
z Unionised work setting can greatly impact the organisation’s ___________________

cost structure. Since liberalisation of the Indian economy since
1990s, there is a perceptible change in the industrial relations
scenario of our country. Labour militancy, strikes and lockouts
have reduced drastically. However, in certain sectors of the
economy, especially the government and public sector, there is
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not much change in the clout of the unions.
Through appropriate collective bargaining and participative
management practices, industrial relations can be managed
effectively. HR strategy must incorporate long-term plans and
programmes to maintain industrial peace for effective
implementation of the business strategy.
Check Your Progress

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Fill in the blanks:

1. ……………….. policies are guides to action.
2. ……………….. means attracting people to apply for jobs
in the organisation.
Summary
Functional Strategy is concerned with developing and nurturing a
distinctive competence to provide a company or business unit with
(c
a competitive advantage. Functional strategies are essential to

implement business strategy. Functional policies will ensure that
the strategies are carried out as intended and that the different
functional areas are working towards the same ends. Companies
342 have plans and policies that cover nearly every major aspect of the
S
Notes firm. Operations strategy plays a crucial role in shaping the
___________________ ultimate success of a firm. It enables an organisation to make
optimal decisions regarding product, production capacity, plant
___________________
location, choice of machinery and equipment, maintenance of
E
___________________
existing facilities and host of other aspects of production.
___________________ Personnel policies are guides to action. Brewster and Ricbell
___________________ defined HR policies as “a set of proposals and actions that act as a
reference point for managers in their dealings with employees”.
___________________
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___________________
Lesson End Activity
___________________
Suppose you are the manager of a newly established garments
___________________
company. You have a business strategy ready for you that stresses
___________________ on competitive positioning and proper stakeholder management.
Draft out a proper functional strategy for your company, if the
objective is to establish a brand name in the long run.
Keywords
Capacity Planning: Process of forecasting demand and deciding
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what Resources will be required to meet that demand.
Cash Flow: The excess of cash revenues over cash outlays in a
given period of time (not including non-cash expenses)
Functional Strategy: Approach taken by a functional area to
achieve corporate and business unit objectives and strategies by
maximising resource productivity.
Human Resource Planning: The ongoing process of systematic
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planning to achieve optimum use of an organisation's most

valuable asset - its human resources.
Industrial Relations: Interaction between employers, employees,
and the government; and the institutions and associations through
which such interactions are mediated.
Inventory Management: Management of inventory consisting of
raw materials, work-in-process, goods in transit, finished goods,
etc.
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Operations Management: Design, execution, and control of a

firm's operations that convert its resources into desired goods and
services, and implement its business strategy.
Questions for Discussion 343
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Notes
1. Analyse the importance of functional strategies. Are they more
___________________
important than business strategy?
___________________
2. Discuss the functional strategies required in key functional
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areas of business. ___________________
3. “Operations management is the core function of any ___________________
organisation”. Justify ___________________
4. Why is choice of equipments to be used in business a major
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___________________
strategic decision? ___________________
5. “It is necessary to have personnel strategies in place in order ___________________

to make other strategies successful.” Comment
___________________
6. Evaluate the importance of effective marketing and R&D ___________________
strategies.
7. “The key to successful survival of an enterprise is how
efficiently the production activity is managed.” Discuss
8. How does obsolescence of the product line affect the
organisation?
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Further Readings
Books
Rao VSP and Hari Krishna V, Strategic Management – Text and
Cases, New Delhi, Excel Books, 2003.
Richard Lynch, Corporate Strategy, Essex, Pearson Education Ltd.,
2006.
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Wheelen Thomas L, David Hunger J, Krish Rangarajan, Concepts

in Strategic Management and Business Policy, New Delhi, Pearson
Education, 2006.
Hugh MacMillan and Mahen Tampoe, Strategic Management,
Oxford University Press, 2000.
Web Readings
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http://www.authorstream.com/Presentation/rahulshinde-305005-
functional-operational-data-education-ppt-powerpoint/
http://www.scribd.com/doc/42619223/Functional-and-Operational-
Implimentation
344
http://www.scribd.com/doc/44896755/Functional-Implementation
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Notes
___________________
http://www.ehow.com/info_12016537_operational-vs-functional-
level-strategy.html
___________________
http://www.focusedperformance.com/tactical.html
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___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
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UNIT 22: Strategic Control and Evaluation
Unit 22
345
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Notes
Activity
Consider two Indian firms from
Strategic Control and Evaluation
___________________
the same industry and
___________________
compare their functional
strategies.
E
___________________
Objectives
___________________
topics: ___________________
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\ Nature of Strategic Evaluation and Control ___________________
\ Strategic Control ___________________
\ Operational Control
___________________
\ Techniques of Strategic Control
___________________
\ Role of Organisational Systems in Evaluation
___________________
Introduction
Strategic evaluation and control is the final phase in the process of
strategic management. Its basic purpose is to ensure that the
strategy is achieving the goals and objectives set for the strategy.
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It compares performance with the desired results and provides the
feedback necessary for management to take corrective action.
According to Fred R. David, strategy evaluation includes three
basic activities (1) examining the underlying bases of a firm’s
strategy, (2) comparing expected results with actual results, and
(3) taking corrective action to ensure that performance conforms to
plans. Sometime, the best formulated strategies become obsolete as
a firm’s external and internal environments change. Managers
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should, therefore, identify important milestones and set strategic

thresholds to assist them in knowing the changes in the underlying
assumptions of a strategy and, if necessary alter the basic strategic
direction. The evaluation process thus works as an early warning
system for the organisation.
Strategic evaluation generally operates at two levels – strategic
and operational level. At the strategic level, managers try to
examine the consistency of strategy with environment. At the
operational level, the focus is on finding how a given strategy is
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effectively pursued by the organisation. For this purpose, different

control systems are used both at strategic and operational levels.
346
Nature of Strategic Evaluation and Control
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Notes
Activity
Strategic evaluation and control is defined as the process of
Suggest some corrective
___________________
actions that you would determining the effectiveness of a given strategy in achieving the
___________________
undertake if the performance organisational objectives and taking corrective actions wherever
required. According to Pearce and Robinson, strategic control is
E
is being affected adversely by
___________________
inadequate resource
___________________
allocation and ineffective
concerned with tracking a strategy as it is being implemented,
systems. detecting problems or changes in its underlying premises, and
___________________
making necessary adjustments. In contrast to post-action control,
___________________ strategic control seeks to guide action on behalf of the strategies as
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___________________ they are taking place and when the end result is still several years
off.
___________________
___________________
Strategic control in an organisation is similar to what the “steering
control” is in a ship. Steering keeps a ship, for instance, stable on
___________________
its course. Similarly, strategic control systems sense to what extent
the strategies are successful in attaining goals and objectives, and
this information is fed to the decision-makers for taking corrective
action in time. Strategic managers can steer the organisation by
instituting minor modifications or resort to more drastic changes
such as altering the strategic direction altogether. Strategic control
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systems thus offer a framework for tracking, evaluating or
reorienting the functioning of the firm’s strategy.
Types of General Control Systems

Basically, there are three types of general control systems:
z Output control (i.e. control on actual performance results)
z Behaviour control (i.e. control on activities that generate the
performance)
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z Input control (i.e. control on resources that are used in

performance)
Output Control
Output controls specify what is to be accomplished by focusing on
the end result. This control is done through setting objectives,
targets or milestones for each division, department, section and
executives, and measuring actual performance. These controls are
(c
appropriate when specific output measures haven’t been agreed on.

Often rewards and incentives are linked to performance goals.
347
Example: Sales quotas, specific cost reduction or profit targets,
S
Notes
milestones or deadlines for completion of projects are examples of
output controls. ___________________
___________________
Behaviour Control
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___________________
Behaviour controls specify how something is to be done. This
___________________
control is done through policies, rules, standard operating practices
and orders from superiors. These controls are the most appropriate ___________________
when performance results are hard to measure. Rules standardise
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___________________
the behaviour and make outcomes predictable. If employees follow
___________________
rules, then actions are performed and decisions handled the same
___________________
way time and again. The result is predictability and accuracy,
which is the aim of all control systems. The main mechanisms of ___________________
behaviour control are: ___________________
z Operating budgets
z Standard operating practices
z Rules and procedures
Example: One example of an increasingly popular behaviour
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control is the ISO 9000 Standards Series on quality management
and assurance developed by the International Standards
Association of Geneva, Switzerland. The ISO 9000 series is a way
of documenting a company’s quality operations, and strictly
complying with it. Many corporations worldwide view ISO 9000
certification as assurance that the firm sells quality products.
Input Control
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Input controls specify the amount of resources, such as knowledge,

skills, abilities, of employees to be used in performance. These
controls are most appropriate when output is difficult to measures.
Basic Characteristics of Effective Evaluation and Control

System
Effective strategy evaluation systems must meet several basic
requirements. They must be:
z Simple: Strategy evaluation must be simple, not too
(c
comprehensive and not too restrictive. Complex systems often

confuse people and accomplish little. The test of an effective
evaluation system is its simplicity not its complexity.
348
Economical: Strategy evaluation activities must be
S
z
Notes
economical. Too many controls can do more harm than good.
___________________
z Meaningful: Strategy evaluation activities should be
___________________
meaningful. They should specifically relate to a firm’s
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___________________ objectives. They should provide managers with useful
___________________ information about tasks over which they have control and
influence.
___________________
z Timely: Strategy evaluation activities should provide timely
___________________
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information. For example, when a firm has diversified into a
___________________
new business by acquiring another firm, evaluative
___________________ information may be needed at frequent intervals. Time
___________________ dimension of control must coincide with the time span of the
event being measured.
___________________
z Truthful: Strategy evaluation should be designed to provide a
true picture of what is happening. Information should
facilitate action and should be directed to those individuals
who need to take action based on it.
z Selective: The control systems should focus on selective
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criteria like key important factors which are critical to
performance. Insignificant deviations need not be focused.
z Flexible: They must be flexible to take care of changing
circumstances.
z Suitable: Control systems should be suitable to the needs of
the organisation. They must conform to the nature and needs
of the job and area to be controlled.
z Reasonable: Control standards must be reasonable. Frequent
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measurement and rapid reporting may frustrate control.

z Objective: A control system would be effective only if it is
unbiased and impersonal. It should not be subjective and
arbitrary. Otherwise, people may resent them.
z Acceptable: Controls will not work unless they are acceptable
to those who apply them.
z Foster Understanding and Trust: Control systems should
(c
not dominate decisions. Rather they should foster mutual

understanding, trust and common sense. No department
should fail to cooperate with another in evaluating and control
of strategies.
349
Fix Responsibility for Failure: An effective control system
S
z
Notes
must fix responsibility for failure. Detecting deviations would Activity
be meaningless unless one knows where they are occurring Identify some control practices
___________________
used in top companies in
and who is responsible for them. Control system should also ___________________
India.
pinpoint what corrective actions are needed.
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___________________
There is no ideal strategy evaluation and control system. The final
___________________
design depends on the unique characteristics of an organisation’s
___________________
size, management style, purpose, problems and strengths.
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___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. Output controls specify ………………….. is to be
___________________
accomplished by focusing on the end result.
___________________
2. Behaviour controls specify ………………….. something is
to be done.
Strategic Control
Strategic control is a type of “steering control”. We have to track
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the strategy as it is being implemented, detect any problems or
changes in the predictions made, and make necessary adjustments.
This is especially important because the implementation process
itself takes a long time before we can achieve the results. Strategic
controls are, therefore, necessary to steer the firm through these
events.
Types of Strategic Control

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There are four types of strategic controls:
Premise Control
Strategy is built around several assumptions or predictions, which
are called planning premises. Premise control checks
systematically and continuously whether the assumptions on
which the strategy is based are still valid. If a vital premise is no
longer valid, the strategy may have to be changed. The sooner
these invalid assumptions are detected and rejected, the better are
(c
the chances of changing the strategy. The premise control is

concerned with two types of factors:
z Environmental Factors: The performance of a firm is
affected by changes in environmental factors like the rate of
350 inflation, change in technology, government regulations,
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Notes demographic and social changes etc. Although the firm has
___________________ little or no control over environmental factors, these factors
have considerable influence over the success of the strategy
___________________
because strategies are generally based on key assumptions
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___________________
about them.
___________________
Example: A firm may assume massive increase in demand,
___________________ and embark on an expansion plan. If suddenly there is
___________________ recession and demand for the products of the firm fall down, it
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may have to change its strategic direction.
___________________
___________________
z Industry Factors: Industry factors also affect the
performance of a company. Competitors, suppliers, buyers,
___________________
substitutes, new entrants etc. are some of the industry factors
___________________ about which assumptions are made. If any of these
assumptions go wrong, strategy may have to be changed.
Strategic Surveillance
Strategic surveillance is a broad-based vigilance activity in all
daily operations both inside and outside the organisation. With
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such vigilance, the events that are likely to threaten the course of a
firm’s strategy can be tracked. Business journals, trade
conferences, conversations, observations etc. are some of the
information sources for strategic surveillance.
Special Alert Control

Sudden, unexpected events can drastically alter the course of the
firm’s strategy. Such events trigger an immediate and intense
reconsideration of the firm’s strategy.
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Implementation Control
Strategy implementation takes place as a series of steps,
programmes, investments and moves that occur over an extended
period of time. Resources are allocated, essential people are put in
place, special programmes are undertaken and functional areas
initiate strategy related activities. Implementation control is
aimed at assessing whether the plans, programmes and policies
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are actually guiding the organisation towards the predetermined

objectives or not. Implementation control assesses whether the
overall strategy should be changed in the light of the results of
specific units and individuals involved in implementation of the
strategy. Two important methods to achieve implementation 351
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control are: Notes
z Monitoring Strategic Thrusts: Strategic thrusts are small ___________________

critical projects that need to be done if the overall strategy is ___________________
to be accomplished. They are critical factors in the success of
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___________________
strategy. One approach is to agree early in the planning
process on which thrusts are critical factors in the success of ___________________
the strategy. Managers responsible for these -implementation ___________________

controls will single them out from other activities and observe
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___________________
them frequently. Another approach is to use stop/go
___________________
assessments that are- linked to a series of these thresholds
(time, costs, success etc.) associated with a particular thrust. ___________________
z Milestone Reviews: Milestones are critical events that should ___________________
be reached during strategy implementation. These milestones ___________________

may be fixed on the basis of.
Critical events
Major resource allocations
Time frames etc.
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Approaches to Strategic Control
According to Dess, Lumpkin and Taylor, there are two approaches
to strategic control.
Traditional Approach
Traditional approach to strategic control is sequential:
z Strategies are formulated and top management sets goals
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z Strategies are implemented

z Performance is measured against goals
z Corrective measures are taken, if there are deviations.
Control is based on a feedback loop from performance
measurement to strategy formulation. This process typically
involves lengthy time lags and often tied to a firm’s annual
planning cycle. This reactive measure is not sufficient to control a
(c
strategy. As already explained, this is because a strategy takes a

long period for implementation and to produce results. The
uncertain future requires continuous evaluation of the planning
352 premises and strategy implementation. There is a better
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Notes
Activity contemporary approach for strategic control.
Discuss the steps
___________________ in
implementing effective Contemporary Approach
___________________
operational control system.
Under this approach, adapting to and anticipating both internal
E
___________________
and external environment change is an integral part of strategic
___________________
control.
___________________
This approach addresses the assumptions and premises that
___________________ provide the foundation for the strategy. The key question
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___________________ addressed here is: do the organisation’s goals and strategies still fit
within the context of the current environment?
___________________
This involves two key actions:
___________________
___________________ z Managers must continuously scan and monitor the external

and internal environment
z Managers must continuously update and challenge the
assumptions underlying the strategy.
This may even need changes in the strategic direction of the firm.
While strategic control requires the contemporary approach,
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operational control is generally done through traditional approach.
Check Your Progress

1. There are two types of strategic controls.
2. Control is based on a feedback loop from performance
measurement to strategy formulation.
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Operational Control
Operational control provides post-action evaluation and control
over short periods. To be effective, operational control systems,
involve four steps common to all post-action controls:
Setting of Standards
The first step in the control process is setting of standards.
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Standards are the targets against which the actual performance

will be measured. They are broadly classified into quantitative
standards and qualitative standards.
Quantitative 353
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Notes
These are expressed in physical or monetary terms in respect of
production, marketing, finance etc. They may relate to: ___________________
___________________
z Time standards
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___________________
z Cost standards
___________________
z Productivity standards
___________________
z Revenue standards
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___________________
Qualitative ___________________
___________________
Qualitative criteria are also important in setting standards.
Human factors such as high absenteeism and turnover rates, poor ___________________
production quality or low employee satisfaction can be the ___________________

underlying causes of declining performance. So, qualitative
standards also need to be established to measure performance.
Measurement of Performance
The second step in operational control is the measurement of
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actual performance. Here, the actual performance is measured
against the standards fixed. Standards of performance act as the
benchmark against which the actual performance is to be
compared. It is important, however, to understand how the
measurement of performance actually takes place. Operationally
measuring is done through accounting, reporting and
communication systems. A variety of evaluation techniques are
used for this purpose, which are explained in the next section. The
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other important aspects of measurement relates to:
Difficulties in Measurement
There are several activities for which it is difficult to set standards
and measure performance.
Example: Performance of a worker in terms of units produced in a

day, week or month can easily be measured. On the other hand, it
(c
is not easy to measure the contribution of a manager or to assess

departmental performance. The solution lays in developing
verifiable objectives, stated in quantitative and qualitative terms,
against which performance can be measured.
354 Timing of Measurement
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Notes
Timing refers to the point of time at which measurement should
___________________
take place. Delay in measurement or measuring before time can
___________________ defeat the very purpose of measurement. So measurement should
take place at critical points in a task schedule, which could be at
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___________________
the end of a definable activity or the conclusion of a task.
___________________
Example: In a project implementation schedule, there could be
___________________
several critical points at which measurement would take place.
___________________
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___________________ Periodicity in Measurement
___________________ Another important issue in measurement is how often to measure.
___________________ Generally, financial statements like budgets, balance-sheets, and
profit and loss accounts are prepared every year. But there are
___________________
certain reports like production reports, sales reports etc. which are
done on a daily, weekly, monthly basis.
Identifying Deviations
The third step in the control process is identifying deviations.
The measurement of actual performance and its comparison with
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standards of performance determines the degree of deviation or
variation between actual performance and the standard. Broadly,
the following three situations may arise:
z The actual performance matches the standards
z The actual performance exceeds the standards
z The actual performance falls short of the standards
The first situation is ideal, but sometimes may not be realistic.
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Generally, a range of tolerance limits within which the results may

be accepted satisfactorily, are fixed and deviations from it are
considered as variance.
The second situation is an indication of superior performance. If
exceeding the standards is considered unusual, a check needs to be
made to test the validity of tests and the measurement system.
The third type of situation, which indicates shortfall in
performance, should be taken seriously and strategists need to
(c
pinpoint the areas where the performance is below standard and

go into the causes of deviation.
355
The analysis of variance is generally presented in a format called
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Notes
‘variance chart’ and submitted to the top management for their
evaluation. After noting the deviations, it is necessary to find the ___________________
causes of deviation, which can be ascertained through the following ___________________
questions: (Thomas)
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___________________
z Is the cause of deviation internal or external?
___________________
z Is the cause random or expected? ___________________
z Is the deviation temporary or permanent?
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___________________
Analysis of variance leads to a plan for corrective action. ___________________
___________________
Taking Corrective Action
___________________
The last and final step in the operational control process is taking
corrective action. Corrective action is initiated by the management ___________________
to rectify the shortfall in performance.
If the performance is consistently low, the strategists have to do an
in depth analysis and diagnosis to isolate the factors responsible
for such low performance and take appropriate corrective actions.
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There are three courses for corrective action:
z Checking performance
z Checking standards
z Reformulating strategies, plans and objectives.
Checking Performance
Performance can be affected adversely by a number of factors such
as inadequate resource allocation, ineffective structure or systems,
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faulty programmes, policies, motivational schemes, inefficient

leadership styles etc. Corrective actions may therefore include the
change in strategy, systems, structure, compensation practices,
training programmes, redesign of jobs, replacement of personnel,
re-establishment of standards, budgets etc.
Checking Standards
When there is nothing significantly wrong with performance, then
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the strategist has to check the standards. A manager should not

mind revising the standards when the standards set are
unreasonably low or high level. Higher standards breed
discontentment and frustration. Low standards make employee
356 unproductive. So, standards check may result in lowering of
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Notes standards if it is concluded that organisational capabilities do not
___________________ match the performance requirements. It may also lead to elevation
of standards if the conditions have improved to allow better
___________________
performance. For example, better equipment, improved systems,
E
___________________
upgraded skills etc. need modification in existing standards.
___________________
Reformulating Strategies, Plans and Objectives
___________________
___________________ A more radical and infrequent corrective action is to reformulate
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strategies, plans and objectives. Strategic control, rather than
___________________
operational control, generally leads to changes in strategic
___________________
direction, which will take the strategist back to the process of
___________________ strategy formulation and choice.
___________________
Techniques like total quality management (TQM) and ISO 9000
standards series are examples of very good control mechanisms.
TQM is a management philosophy that aims at total customer

satisfaction through continuous improvement of all organisational
processes. The main elements of TQM are:
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z Intense focus on the customer: The customer includes not
only outsiders but also internal customers.
z Concern for continuous improvement: TQM is committed

to improve quality continuously.
z Improvement in the quality of everything the

organisation does: TQM relates not only to the final product
but also how the organisation handles deliveries, responds to
complaints etc.
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z Accurate measurement: TQM uses statistical techniques to

measure every critical performance variable in the
organisation’s operations. These performance variables are
then compared against standards or benchmarks to identify
problems. The problems are traced to their roots, and causes
are eliminated.
z Empowerment of Employees: TQM involves all the

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employees in the improvement process. Teams are widely used

in TQM programmes as empowerment vehicles for finding and
solving problems.
357
Check Your Progress
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Notes
Activity
Fill in the blanks:
Find___________________
out more about various
1. The first step in the control process is setting of strategic control techniques.
___________________
…………………. .
E
___________________
2. …………………. action is initiated by the management to
rectify the shortfall in performance. ___________________
___________________
Techniques of Strategic Control
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___________________
Organisations use many techniques or mechanisms for strategic ___________________

control. Some of the important mechanisms are: ___________________
z Management Information Systems: Appropriate ___________________

information systems act as an effective control system.
___________________
Management will come to know the latest performance in key
areas and take appropriate corrective measures.
z Benchmarking: It is a comparative method where a firm
finds the best practices in an area and then attempts to bring
its own performance in that area in line with the best practice.
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Best practices are the benchmarks that should be adopted by a
firm as the standards to exercise operational control. Through
this method, performance can be evaluated continually till it
reaches the best practice level. In order to excel, a firm shall
have to exceed the benchmarks. In this manner, benchmarking
offers firms a tangible method to evaluate performance.
z Balanced scorecard: It is a method based on the
identification of four key performance measures i.e. customer
perspective, internal business perspective, innovation and
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learning perspective, and the financial perspective. This

method is a balanced approach to performance measurement
as a range of financial and non-financial parameters are taken
into account for evaluation.
Check Your Progress

1. Inappropriate information systems act as an effective
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control system.
2. Benchmarking offers firms a tangible method to
evaluate performance.
358
Role of Organisational Systems in Evaluation
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Notes
Activity
There are six types of organisational system involved in
In evaluating a strategy, it is
___________________
important to examine whether evaluation.
an ___________________
organisation has the
Information System
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abilities, competencies, skills
___________________
and talents needed to carry
out a___________________
given strategy. Why? Organisations evaluate by comparing actual performance with
standards. Purpose of information management system is to
___________________
enable managers to keep the track of performance through control
___________________ reports. Whether strategic surveillance or financial analysis, are
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___________________ based on information system to provide relevant & timely data to
managers to allow them to evaluate performance & strategy &
___________________
initiate corrective action
___________________
___________________ Control System

The control system is core of any evaluation process & is used for
setting standards, measuring performance, analysing variances, &
taking corrective action.
Appraisal System
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This is the system that actually evaluates performance. When
measuring the performance of managers, it is contribution to the
organisational objectives which is sought to be measured. The
evaluation process through appraisal system, measure the actual
performance and provides for the control system to work.
Motivation System
The primary role of the motivation system is to induce strategically
desirable behaviour so that managers are encouraged to work
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towards the achievement of organisational objectives. This system

plays an important role in ensuring that deviations of actual
performance with standards. Performance checks, which are a
feedback in the evaluation process, are done through the
motivation process.
Development System
The development system prepares the managers for performing
strategic & operational tasks. Among the several aims of
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development, the most important is to match a person with the job

to be performed. This in other words is matching actual
performance with standards. This matching can be done provided
it is known what a manager is required to do and what is deficient
in terms of knowledge, skills & attitude. Such a deficiency is 359
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located through the appraisal system. The role of development Notes
system in evaluation is to help the strategists to initiate & ___________________
implement corrective action.
___________________
E
Planning System ___________________
The evaluation process also provides feedback to planning systems ___________________

for the reformulation of strategies, plans & objectives. Thus
___________________
planning system closely interacts with the evaluation process on a
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___________________
continual basis.
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. Purpose of ………………….. system is to enable
___________________
managers to keep the track of performance through
control reports.
2. The evaluation process also provides feedback to
………………….. systems for the reformulation of
strategies, plans & objectives.
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Summary
Strategic evaluation generally operates at two levels – strategic
and operational level. At the strategic level, managers try to
examine the consistency of strategy with environment. At the
operational level, the focus is on finding how a given strategy is
effectively pursued by the organisation. Strategic control is a type
of “steering control”. We have to track the strategy as it is being
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implemented, detect any problems or changes in the predictions

made, and make necessary adjustments. Operational control
provides post-action evaluation and control over short periods.
They involve systematic evaluation of performance against
predetermined objectives. Organisations use many techniques or
mechanisms for strategic control. Some of the important
mechanisms are management Information systems, benchmarking,
balanced scorecard, key factor rating, responsibility centres,
network technique, Management by Objectives (MBO),
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Memorandum of Understanding. If the need for evaluation was

recognised from the outset, then a strategic evaluation will ideally
take place before the project begins delivering activities. The
purpose of evaluating causal connections between activities,
360 outputs and outcomes, is to explore whether or not the project’s
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Notes assumptions about the likely outcomes and effects of its activities
___________________ and outputs are well-founded. There are three fundamental
strategy evaluation activities, viz. reviewing external and internal
___________________
factors that are the bases for current strategies; measuring
E
___________________
performance and taking corrective actions.
___________________

___________________ If you were a strategist making evaluation, what would you do if
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___________________ you find something wrong though nothing is wrong with the
___________________
performance?
___________________
Keywords
___________________
Balanced Scorecard: Strategic performance management tool - a
semi-standard structured report supported by proven design
methods and automation tools.
Benchmarking: It is a comparative method where a firm finds
the best practices in an area and then attempts to bring its own
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performance in that area in line with the best practice.
Management by Objectives: Process of agreeing upon objectives
within an organisation so that management and employees agree
to the objectives and understand what they are in the organisation.
Operational Control: ensures that day-to-day actions are
consistent with established plans and objectives.
Responsibility Centre: A segment of a business or other
organisation, in which costs can be segregated, with the head of
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that segment being held accountable for expenses.

Strategic Evaluation and Control: Process of determining the
effectiveness of a given strategy in achieving the organisational
objectives and taking corrective actions wherever required.
Strategic surveillance: Broad-based vigilance activity in all daily
operations both inside and outside the organisation.
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1. Comment on the nature of strategic control and evaluation.
2. According to you, what should be the criteria for an effective
evaluation system?
3. How would you check whether a strategy can be implemented 361
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within the resources of an enterprise? Notes
4. “Strategic control is a type of steering control”. Discuss ___________________
5. Discuss the general approaches to strategic control. ___________________
E
6. Analyse the role of organisational systems in evaluation. ___________________
___________________
UP
___________________
Books
___________________
Cases, New Delhi, Excel Books, 2003. ___________________
Richard Lynch, Corporate Strategy, Essex, Pearson Education Ltd., ___________________
2006. ___________________

Education, 2006.
Oxford University Press, 2000.
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Web Readings
http://web.idv.nkmu.edu.tw/~hgyang/Module9.pdf
http://www.introduction-to management.24xls.com/en224
http://www.slideshare.net/RADHEY06/strategic-evaluation-and-
control
http://www.citeman.com/19491-strategy-evaluation-and-control-
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sec.html
http://xisspm.files.wordpress.com/2010/11/ch-7-strategy-
evaluation-and-control.pdf
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362
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Notes
___________________
___________________
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___________________
___________________
___________________
___________________
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___________________
___________________
___________________
___________________
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UNIT 23: Corporate Goals and Strategic Gap
Unit 23
363
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Notes
Activity
Prepare a report on Corporate
Corporate Goals and Strategic
___________________
Goals by finding a television
___________________
show or movie.
Gap
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___________________
___________________
Objectives ___________________
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___________________
topics:
___________________
\ What are Corporate Goals?
\ Strategic Gap: An Introduction ___________________
\ Types of Strategic Gap ___________________
___________________
Introduction
Strategic planning is a great start. But on paper it’s just an idea; it
needs to be put into action. The projects created as a result of the
strategic planning phase need to be managed closely.
Implementation planning assists individuals and organizations
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with creating plans, putting them into action, and getting results.
In order to activate strategies and projects effectively, it is
important to employ an implementation plan that maintains goals
and achieves desired end results.
What are Corporate Goals?

Companies require strategies to guide how to achieve objectives
and how to pursue the company’s mission. Strategy-making is all
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about how–how to reach performance targets, how to outcompete

rivals, how to achieve sustainable competitive advantage, how to
strengthen the enterprise’s long-term business position, how to
make management’s strategic vision for the company a reality. A
strategy is needed for the company as a whole, for each business
the company is in, and for each functional piece of each business —
Research & Development, purchasing, sales and marketing,
finance, human resources and so on.
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The strategy making spotlight however needs to be kept trained on

the important facets of management’s game plan for running the
enterprise – those actions that determine what market position the
company is trying to stake out and that underpin whether the
364 company will succeed. Strategy is inherently action oriented; it
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Notes
Activity concerns what to do, when to do it and who should be involved.
Write an essay on Strategic
___________________ Unless there is action, unless something happens, unless somebody
Gap. does something, strategy thinking and planning simply go to waste
___________________
and, in the end, amount to nothing.
E
___________________
For most of the organizations, profitability is the main goal.
___________________
Maximizing shareholder value, risk, and other goals like high
___________________ productivity, good organizational leadership, high morale, good
___________________ organizational reputation, high organizational efficiency, profit
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maximization, organizational stability, value to local community,
___________________
and service to public. Strategies as discussed are plans, big plans,
___________________
and important plans. They show the general direction in which the
___________________ organization would achieve its goals. Strategies emerge from goals.
___________________
Check Your Progress
Fill in the blanks:
1. ………………….. making is all about how–how to reach
performance targets.
2. A strategy is needed for the ………………….. as a whole.
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Strategic Gap: An Introduction
A strategy gap refers to the gap between the current performance
of an organisation and its desired performance as expressed in its
mission, objectives, goals and the strategy for achieving them.
Often unseen, the strategy gap is a threat to the future
performance—and even survival—of an organisation and is
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guaranteed to impact upon the efficiency and effectiveness of

senior executives and their management teams. The strategy gap
is considered to be real and exists within most organisations. An
article in the "Fortune magazine" stated that some 70% of CEOs'
failures were the result of poor execution rather than poor
strategies.
There are various schools of thought on what causes the gap
between vision and execution, and how the strategy gap might be
avoided. In 2005, Paul R. Niven, a thought leader in Performance
(c
Management Systems, pinpointed four sources for the gap between

strategy and execution, namely: lack of vision; people;
management; and, resources. He argued that few understand the
organisation's strategy and as most employees' pay is linked to
short-term financial results, maximising short-term gains becomes 365
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the foremost priority which leads to less rational decision making. Notes
Activity
Management is spending little attention to the linkage between Make an assignment on types
___________________
strategy and financial planning. Unless the strategic initiatives are of strategic gap.
___________________
properly funded and resourced, their failure is virtually assured.
E
___________________
Long-term goals and detailed, short-term budgets, with nothing to
link the two together. Does this organization sound familiar? ___________________
Whatever the answer, most business professionals understand that ___________________

achieving a long-term goal requires a series of logical, achievable,
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___________________
sequential steps. Organizations cannot rely on chance or luck. Yet
___________________
the steps that lead from where a business is today to where it
wants to be – its objectives – often are missing. If an organization ___________________
is not getting its goals, it simply means that it has strategic gap ___________________
and there might be some loop holes in framing or execution of the
___________________
strategic plans.
Check Your Progress

1. A strategy gap refers to the gap between the current
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performance of an organisation and its desired
performance.
2. Organizations can only rely on chance or luck.
Types of Strategic Gap

Following are the types of the Strategic Gap:
Management-Induced Gaps
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Management can cause a gap between strategy and execution

through both action and inaction. Four main ways management
causes this gap include failure to secure support for the plan,
failure to communicate the strategy, failure to adhere to the plan,
and failure to adapt to significant changes.
Failure to Secure Plan Support

The senior management team must develop a strategic plan with
(c
objectives, goals, strategies, and tactics that everyone supports. If

people do not accept and support the plan, they are unlikely to put
in the right amount of effort to make it succeed. Their allocation of
resources may be counterproductive to implementing strategic
366 initiatives, while their management time is diverted into seeking
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Notes out factors that will justify their position. This misplaced time and
___________________ effort will lead to a gap, which could prevent the execution of the
plan.
___________________
To achieve buy-in, management must create a corporate culture
E
___________________
and a set of values that support the vision and guide employees’
___________________
decisions and behaviour. Employees must have the opportunity to
___________________ provide feedback regarding their ability to implement strategy. Not
___________________ listening to their views, not addressing – and resolving – conflicts
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and major differences of opinion, and not building a learning
___________________
culture—one that tracks and learns from its own successes,
___________________
failures, and mistakes – will result in strategies that are
___________________ unrealistic and cannot be implemented. This situation leads to the
___________________ strategy gap.
Failure to Communicate the Strategy

Operational managers and their employees are typically the people
within an organization who implement strategy. They need to
know how the strategy impacts them. Yet according to research by
Kaplan and Norton, creators of the Balanced Scorecard, “less than
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5 percent of the typical workforce understands their organization’s
strategy.” Without a clear idea of what the strategy, vision, and
direction of the organization are, they are unlikely to act in ways
that will result in effective implementation of the corporate plan.
Communication of strategy is vital in all management processes.
When budgeting, employees need to see the tactical plans and
related targets that affect them so they can modify their behaviour
accordingly. During the year, they need to assess how well they are
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carrying out those tactics and the progress they are making toward
strategic goals. When forecasting, employees need to know when
their activities are unlikely to achieve their KPIs and, hence, their
strategic goals so they can act early to bring the tactical plan back
on target. Technology clearly has a role to play in facilitating this
communication. Failure to effectively communicate strategy and
how well or poorly it is being implemented will result in the
strategy gap.
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Failure to Adhere to the Plan

As the year progresses, many organizations make decisions
reactively rather than strategically. Often the cause is the
reporting of results based on a purely financial view of the 367
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organization, such as on the chart of accounts by cost centre, Notes
rather than by a strategic and tactical view. As a result, ___________________
operational managers focus on financial variances that do not
___________________
relate to the specific strategic initiatives outlined in the plan. To
E
put things back on track, the accounts become the target of any ___________________
decision rather than the agreed-on action plans, which may have ___________________
long been forgotten.
___________________
Test this for yourself. In your current reporting pack, how many of
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___________________
the reports tie actual and forecast results back to the strategies
___________________
outlined in the strategic plan? The reports may monitor the goals,
but how many of them actually monitor KPIs by tactic? Without ___________________
this link, organizations are likely to act and react in ways that are ___________________
divorced from the strategic plan, which results in the strategy gap.
___________________
Failure to Adapt to Significant Changes

The reality of today’s business environment is that it continually
changes. Strategic plans are built on a set of assumptions, such as
market growth, production capability, and competitor actions. If
these assumptions change, it is unlikely that the plan will still
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hold true. Following the attacks of September 11, 2001, for
example, most organizations found themselves in an economy that
was substantially different from the one that existed when they
planned earlier in the year. Continuing to follow a plan when the
basic assumptions on which it was founded have changed makes
no sense. Unless plans are modified to reflect changes to these
assumptions, the result will be the strategy gap.
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Process-Induced Gaps
The traditional processes an organization uses to implement and
monitor strategy are the second set of strategy gap causes. Once a
strategic plan has been researched and created, what happens
next? How is the plan translated into action? How are the
organization’s assets allocated to the various strategic initiatives?
How is progress monitored and the success or failure of tactics
measured? For most organizations, the key tool used to implement
strategy is the annual budget, while the processes of actual
(c
reporting and forecasting are used to monitor achievement. But

the way in which these processes are approached can lead to the
strategy gap.
368 Lack of Strategic Focus
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Notes
The objective of any process will determine what gets measured, by
___________________
whom, and how far in the future. It may seem obvious that the
___________________ budget should support the implementation of strategy. After all,
the purpose of this tool is to control how resources are allocated,
E
___________________
which in turn affects what an organization accomplishes. It also
___________________
may seem obvious that one of the roles of reporting would be to
___________________ monitor strategic progress. Unfortunately, there is very little
___________________ evidence to support that these processes actually achieve this.
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___________________
Instead of being focused on long-term business health, traditional
planning and budgeting are internally driven and focused on
___________________
current-year profits.
___________________
In a survey conducted by Comshare, Incorporated, participants
___________________ said that there is typically a gap between the strategic plan and
the budget created to support it. The budget tends to be financially
focused with emphasis on the chart of accounts by cost centre,
while the strategic plan tends to be behaviourally focused on
strategies and tactics. The result is that budget holders,
operational managers, and senior executives are often unaware of
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how strategic initiatives impact the operating plan or whether
resources have even been allocated. Without this linkage, the
budget becomes a pure numbers exercise, allowing the strategy
gap to emerge. As a result, the budgeting and planning processes
actually become barriers to strategy deployment.
The same is also true when it comes to reporting actual results and
forecasting future performance. For many organizations, reporting
of actuals takes the form of a simple income and expense
statement by department, based on the chart of accounts. The
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reason reporting takes this form is mainly because the general

ledger holds income and expense items, and these systems are
used to generate the reports. However, strategic plans, which are
typically action-based and measure activity, do not fit easily within
the rigid account and cost centre structure of a general ledger, and
so the focus is lost. As a result, there is no direction or logical
connection in the budgeting and reporting processes for budget
holders to adapt their behaviour to achieving strategic goals.
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Calendar Based
For most organizations, budgeting is an annual process that
follows the strategic plan, and it is a process that just takes too
long. Hackett Best Practices reports that a typical organization 369
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takes over four months to complete a budget cycle. Organizations Notes
with an annual budget must try to predict events that are 16 ___________________
months away, which is unrealistic and leads to the strategy gap.
___________________
According to Hackett, in today’s fast-paced business environment,
E
planning should be treated as a continuous exercise in operational ___________________
decision making, resource allocation, and performance ___________________

management.
___________________
Yet nearly half of organizations treat planning and budgeting as a
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___________________
strictly fiscal and annual exercise that leaves them unprepared to
___________________
deal with sudden change. Similarly, Hackett found that 74 percent
of organizations wait until the end of the month to issue reports. ___________________
Doing so delays the opportunity to deal with important emerging ___________________
trends, which could be vital to the effective implementation of
___________________
strategy. Interestingly, most organizations have the data; it is
their processes and tools that let them down. What is required is a
planning, budgeting, and reporting process that is triggered by
change, not by the date on a calendar.
Financially Focused
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An organization’s financial results are the outcome of its strategy
implementation or lack of strategy implementation. Although some
financial measures, such as investments and expenses, will be
used in implementing a tactical plan, many of the measures will be
non-financial. Indeed, the long-term viability of an organization
may well rest on the success of non-financial measures such as
product reliability, customer satisfaction, organizational learning,
and the efficiency of the internal processes. The adoption of
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methodologies like the Balanced Scorecard can ensure that

organizations achieve the correct balance of measures that will be
needed to achieve corporate objectives. The general ledger by itself
will not be able to supply all the data required. As already
mentioned, the chart of accounts is a transactional view of an
organization. The reliance on this view cannot support the
planning and monitoring of strategy and will lead to the strategy
gap.
(c
Internally Focused
Consider an organization that sets and achieves a revenue budget
that reflects a growth of 10 percent year on year. Is this
achievement a good result? Is it a good result if the general ledger
370 confirms that the goal was achieved while staying within the cost
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Notes budget? What if the goal was built on the assumption that the
___________________ market was due to grow at 5 percent, when, if fact, it grew at 15
percent? In this case market share was lost rather than gained.
___________________
In most organizations today, reports compare the performance of
E
___________________
the organization with the budget, not with competitors and the
___________________
market. Strategy is nearly always based on a combined internal
___________________ and external view that includes market and competitor
___________________ assumptions. To ensure that strategy is being implemented, actual
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reporting needs to compare performance by strategic initiative and
___________________
to check that any external assumptions made while planning still
___________________
hold true. Without this strategic external view, decisions will be
___________________ based on a view of performance that is too narrowly focused, and
___________________ the strategy gap will develop.
Lack of Realistic Forecasting

Although business conditions can change rapidly, many surprises
that affect organizational performance can be predicted using
available data and technologies. By predicting future performance
from plans based on the current and perceived business
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environment, contingencies drawn up in advance can be selected or
corrections to the existing plan can be made to avoid or exploit the
impact of any variances. The ability to recognize and exploit
changing business conditions is the driving force behind rolling
forecasts—which also deliver the benefit of reducing or eliminating
the annual budget process. According to Hackett Best Practices
research, however, only 23 percent of organizations make use of
this proven best practice.
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When forecasting, many organizations once again focus solely on

financial results, such as how much revenue will be generated and
what the associated costs will be. As with planning, effective
forecasting requires modifying and developing plans to achieve
strategic goals. In some circumstances, such as when assumptions
have changed, strategic goals may have to be reset. Forecasting
involves two steps:
z Predicting the likely future performance based on current
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knowledge.
z Evaluating or selecting alternative plans to change the
predicted outcome.
371
To predict future performance, the natural life cycle of an
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Notes
organization’s products and services should be taken into account.
This consideration must take place bottom up; that is, each ___________________
product and service must be analyzed individually. ___________________
E
Once a forecast has been generated, it can be used as the basis for ___________________
“what if” analysis, the process of evaluating alternative scenarios.
___________________
The aim is to evaluate what changes are required to the tactical
___________________
plan to achieve the strategic goals. As with budgeting, this
evaluation needs to be done by strategic initiative. The result will
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___________________
be the predicted income statement. Organizations that reduce the ___________________
forecasting process to a simple extrapolation into the future will
___________________
reap unrealistic and misleading predictions. They will be unable to
modify behaviour effectively to achieve strategic goals, which will ___________________
result in the strategy gap. ___________________
Other Factors
Two other factors that can contribute to the strategy gap are more
attributable to organizational behaviour than to the processes
themselves; nevertheless, they need to be taken into account when
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designing a solution. The first factor is a lack of accountability and
commitment to the budgeting process. Budgeting is often a game in
which budget holders inflate costs and suppress revenues because
they expect senior management to demand reduced costs and
increased revenues during a second budget pass. In addition, when
a budget is handed down to budget holders without giving them a
chance for input, budget holders feel free to miss their targets.
After all, it was not their budget. This game playing produces
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unrealistic budgets, an absence of accountability, and a lack of

commitment to the final plan. The result will be the strategy gap.
The second factor is wrongly focused incentive plans. Budget

holders and management often are paid on their ability to meet or
beat the budget. This fact will affect their decisions when it comes
to planning and reporting their performance and does little to help
with the implementation of strategy. In some cases it will actively
work against the implementation of strategy. Hackett found that
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when management motivation was linked to strategy rather than

to the annual plan, budgeting cycles were reduced and managers
were less afraid of taking risks.
372
Technology System-Induced Gaps
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Notes
The third area that causes the strategy gap involves the traditional
___________________ systems used to support the planning, budgeting, forecasting, and
___________________ reporting processes. Issues include fragmented systems and
misplaced 3, forecasting, and reporting are treated as separate,
E
___________________
disconnected processes and supported by different technology
___________________
solutions. In fact, these processes are all part of the much larger
___________________ process of strategy implementation. The following analogy
___________________ illustrates why this separation does not make sense. The journey
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that a business takes over time is like travelling down a road. The
___________________
road curves and changes direction, and its exact route often are
___________________ hidden from view. In the same way, business direction continually
___________________ varies because of changing customer requirements, competitors’
___________________
actions, or other occurrences in the business environment.
On this journey, the business objective rests on the horizon. This
objective, based on current circumstances and assumptions, is the
planned destination for the organization. It serves as a beacon,
guiding the organization’s actions and decisions. The journey is
divided into a number of shorter segments, each of which the
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organization will arrive at over time, allowing the organization to
gauge its progress. To reach the point on the horizon, the traveller
outlines a route. This plan identifies the main roads to be travelled
and the major cities the traveller will pass through en route to the
final destination. In the same way, strategic plans outline the
route an organization will travel to reach its objective. The journey
may take months or years to complete. The key roads are
analogous to the strategic plan’s tactics that must be performed to
achieve the objective. Cities are analogous to key performance
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indicators that will tell the organization if the tactics have been
completed and if it is on target for success.
Continuing, the traveller may plan in greater detail the portions of
the journey to be attempted in the near future. The plan may
include the names of townships, descriptions of landmarks, and
locations of road junctions. These are vital indicators. Without
them, the traveller may go in the wrong direction without realizing
it until much later. The budget is like that detailed plan outlining
(c
the organization’s immediate route. It is very much linked to the

strategic plan but contains far more detail. With the budget, the
business assigns money, people, and assets to the initiatives that
will keep the organization on course to reach its objective.
Monitoring progress relative to the detailed plan is a vital activity 373
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because it shows the organization whether it is on target. Past Notes
performance is of interest, but it actually does little to help the ___________________
business navigate the road ahead. On the journey, organizations
___________________
will come up against unexpected diversions, such as construction
E
(activities that are not yet implemented), accidents (activities that ___________________
are having an adverse impact on performance), and heavy traffic ___________________

(intense competition for the same customers). These diversions will
___________________
cause delays and can even lead to dead ends unless the
UP
___________________
organization can avoid them. Similarly, organizations may come
across new roads (new business opportunities) that were not on the ___________________
map when the journey started. They may discover that taking ___________________
advantage of these roads can enable them to reach their
___________________
destination sooner than anticipated.
___________________
Finally, like directional signs and mile markers, the forecast tells
an organization whether it is heading in the intended direction and
where it will end up unless it takes immediate action. The
enterprise must monitor position and make adjustments
constantly. Occasionally it may need to make a major detour –
sometimes even heading in what seems to be the wrong direction –
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to achieve its final objective. By taking note of the signs – the
projected forecasts – and using judgment based on experience,
business leaders can make intelligent adjustments to the plan.
These adjustments will not be just a once-a-year activity. They
may become necessary at any time to keep on track toward the
intended destination.
Strategic planning, budgeting, forecasting, and monitoring actual
are all part of the same process—moving an organization toward
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its objective. Together, they are essential components in the

implementation and execution of strategy. When performed in
isolation, however, they provide little value.
Quite often, managers are asked to budget using systems that do
not allow them to see the strategic plan or latest forecast. It is like
asking someone to drive down the road with only partial sight, no
map, and no idea of the final destination. To drive performance,
the company needs to see the whole travel plan: objective, strategic
(c
plan, forecast, actuals and budget. These elements are all part of
the same process. This journey, or performance management
process, is continuous. Markets and competitors do not remain
motionless to accommodate an organization’s annual planning
374 process. Travelling down this road smoothly and staying on course,
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Notes like driving a car, requires regular, small adjustments.
___________________
Unfortunately, the traditional systems that support planning,
___________________ budgeting, forecasting, and reporting are inflexible. Each
component is isolated from the others. In addition, often each piece
E
___________________
of the process is supported by a different technology than the
___________________
others, causing integration problems. For example, the strategic
___________________ plan may be presented as a text document; the budget may be
___________________ prepared in a spreadsheet; actual results may be reported in the
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general ledger; and analyses may be performed using an Online
___________________
Analytical Processing (OLAP) tool. These systems are completely
___________________
disjointed, manually intensive, and error-prone. As a result, they
___________________ help create the strategy gap. In addition, these systems tend to
___________________ suffer from other problems that also create gaps:
z Difficult to change: Most existing management systems do
not allow changes to be made easily. Altering structures,
accounts, and basic assumptions so that management can
quickly see the impact of change is complex and time
consuming. Sadly, most systems are nothing short of glorified
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adding machines – and they do not even do this very well.
z Reporting problems: Systems tend to report from one
perspective – usually accounts down the page, and time and
version across the page, with each page representing a cost
centre. Viewing data by product, turnover, geography, or any
other business perspective – such as strategy and tactic – is
extremely difficult. In addition, many systems require a great
deal of effort to disseminate actuals, the latest forecast, and
strategy information throughout the organization. These
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difficulties prevent the detailed analysis of budgets, forecasts,

and actual results in context and can result in the approval of
unrealistic plans.
z File management issue: Many organizations still rely on
spreadsheets for preparing budgets and reporting results.
While spreadsheets are great personal productivity tools, they
are a nightmare when used as a corporate planning and
reporting system. In addition to flexibility and reporting
(c
problems already discussed, spreadsheets and many other file-

based systems also incur version control and other problems
because multiple files have to be maintained, relinked, and
then redistributed. Apart from the time and error-prone
nature of this task, you can never be sure that users are now 375
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using the right version. Notes
___________________
Misplaced Dependence on Enterprise Resource Planning
___________________
A second system-induced gap can be caused by the reliance some
E
___________________
organizations have placed on their Enterprise Resource Planning
(ERP) systems to implement strategy. At first glance, such reliance ___________________
seems logical. Before ERP, the processes that made up the supply ___________________
chain – order entry, inventory management, billing, accounts
UP
___________________
receivable, and others – were separate functions supported by
multiple stand-alone systems, often running on multiple ___________________
technologies. Each part of the process could be owned by a different ___________________

department or operating unit. ___________________
The problems these systems generated are similar to those ___________________
encountered with today’s planning, budgeting and reporting
systems:
z Expensive in terms of both time (maintenance) and money
(hardware and software, personnel). Software had to be
maintained on individual desktops. Information Technology
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(IT) staff had to learn multiple technologies. If the system had
been created in-house by a person who then left the company,
the organization had a big problem.
z Data integrity and version control issues. Changes in one
system were not automatically reflected in other systems, data
often had to be re-keyed, and data were shared by transferring
files. Many departments multiplied by many files equalled
trouble. Organizations could never be certain that the
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information they were basing decisions on was accurate and

up to date.
z Organizations could not easily see what was happening across
the enterprise, making it difficult to implement corporate
strategy, measure its success, and make informed decisions.
Enterprise resource planning was hailed as the solution
because it integrated the supply chain processes and
supporting systems. The ERP systems increased the efficiency
and speed of these operations.
(c
Because ERP systems appear to hold most of the actual data in a

centralized database, organizations today are looking to these
systems to solve their planning, budgeting, and reporting
376 problems. Many organizations are also trying to leverage their
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Notes huge investments in ERP implementations to get a return. Given
___________________ that many ERP vendors are now offering “integrated” planning,
budgeting, and reporting applications on top of ERP, this initially
___________________
seems an attractive solution. The problem, however, is that ERP is
E
___________________
the wrong vehicle for implementing strategic plans just as a farm
___________________ tractor is the wrong vehicle for taking a family on vacation.
___________________ Gartner, the Stamford, Connecticut-based research firm, reports
that “although ERP systems have largely addressed the needs of
___________________
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transactional users, they have not been able to address the needs
___________________ of strategic and operational users.” The main reasons given are the
___________________ complexity of these systems for users and their closed
___________________
architectures, which make it difficult to integrate non-ERP data.
All enterprise resource planning systems are focused on
___________________
transactions, not on strategy. This very issue is the reason why
today’s traditional planning, budgeting, forecasting, and reporting
systems fail.
Implementing a strategic plan requires the dissemination of goals,
objectives, strategies, and tactics. Planners must be able to
evaluate the impact of economic drivers, forecast trends, and
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predict the impact of competitors. Senior management needs the
ability to analyze alternative operating structures, investments,
and divestments. Enterprise resource planning was not designed to
deliver these capabilities. It is focused on operational efficiency.
Implementing strategy is about management effectiveness. The
two are different and require different tools and processes.
Check Your Progress

)C
Fill in the blanks:

1. ……………………. can cause a gap between strategy and
execution through both action and inaction.
2. ……………………. of strategy is vital in all management
processes.
Summary
(c
Goals describe a future end-state – desired outcome that is

supportive of the mission and vision. Shapes the way ahead in
actionable terms. Best applied where there are clear choices about
the future. Puts strategic focus into the organization – specific
ownership of the goal should be assigned to someone within the
organization. May not work well where things are changing fast – 377
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goals tend to be long-term for environments that have limited Notes
choices about the future. ___________________
___________________
Lesson End Activity
E
___________________
How the Porter’s generic strategies are significant in overcoming ___________________
the strategic gap?
___________________
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Keywords ___________________
___________________
Goal: Goals set by an organization are specific, quantifiable
___________________
targets that it commits to attain in order to achieve its corporate
mission and objectives ___________________
___________________
Strategic Gap: Forecasting technique in which the difference
between the desired performance levels and the extrapolated
results of the current performance levels is measured and
examined. This measurement indicates what needs to be done and
what resources are required to achieve the goals of an
organization's strategy.
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Corporate Goal: A corporate goal is an observable and
measurable end result having one or more objectives to be achieved
within a more or less fixed timeframe.
Enterprise Resource Planning (ERP): ERP (enterprise resource

planning) is an industry term for the broad set of activities that
helps a business manage the important parts of its business.
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1. What are corporate goals?
2. How do strategic gaps hinder the achievement of corporate
goals?
3. What are the problems which are generated by ERP that are
similar to planning, budgeting and reporting systems?
4. Write brief note on Technology System-Induced Gaps.
(c
5. Compare and contrast Process-Induced Gaps and

Management-Induced Gaps.
378
Further Readings
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Notes
___________________ Books
___________________ Rao VSP and Hari Krishna V, Strategic Management – Text and
E
___________________
___________________ Richard Lynch, Corporate Strategy, Essex, Pearson Education Ltd.,

2006.
___________________
___________________
UP
___________________
Education, 2006.
___________________
___________________ Oxford University Press, 2000.
___________________
Web Readings
http://en.wikipedia.org/wiki/Strategy_gap
http://www.destinationmarketing.org/future_studies/content/chapt
ers-nbt/NBT12-GapAnalysis.pdf
http://www.thecommonwealth.org/files/189955/FileName/SGFRepo
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rtMainReport-FINAL.pdf
http://www.writinghelp-central.com/corporate-goals.html
http://www.nottawasaga.com/who/corporate_goals.html
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(c
UNIT 24: Life Cycle Approach to Strategic Planning
Unit 24
379
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Notes
Activity
Prepare a report on Corporate
Life Cycle Approach to Strategic
___________________
Goals by finding a television
___________________
show or movie.
Planning
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___________________
___________________
Objectives ___________________
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___________________
topics:
___________________
IA - BS Matrix
Arthur. D. Little’s Life Cycle Approach to Strategic Planning ___________________
Business Portfolio Balancing ___________________

Strategic Funds Programming ___________________
Introduction
Formal planning and evaluation processes can play an important
part in organizations which develop and select strategies through
these fragmented, incremental processes. They can be an
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important influence to insure that best practice is communicated
through the various parts of the organization, and communicating
the wider organizational context to their 'local' decision makers.
Planning can be about changing minds, not just making plans.
In some organizations, especially in family managed business
houses or the visionary type organizations the dominant process
for the selection of strategies is command. The decision is taken at
the highest level with involvement/ advice from the organization to
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varying degrees. The efforts of those involved in formal evaluation

are concerned to ensure that selections made through command
process are well informed. It is important that, if strategies are
selected in this way, they have some completeness and are
workable in practice. Without some detailed substance in terms of
specific strategic choices development directions and methods, the
vision and intentions are not a basis on which strategy selection
should proceed. The role of formal planning in these circumstances
is to devise useful means of raising the level of debate among the
(c
decision-makers during the selection process.

The pace of change, today, is unrelenting. It has created
challenges, ranging from direct threats like increased competition
380 to technological discontinuities. Organizations that have to
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Notes
Activity maintain or improve their position in the marketplace and create
Write an essay on IA - BS
___________________ competitive advantage for themselves will find that well thought
Matrix out strategies will play an increasingly important role in the
___________________
future. They will have to move towards a style of management that
E
___________________
closely resembles a planned approach.
___________________
___________________ IA - BS Matrix
___________________ The Planned Approach; Formal Evaluation: This is the ideal. The
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___________________ rationale of selection of future strategies is 'rational'. The
___________________
organization's objectives, quantified where possible, are used as
direct yardsticks by which options are assessed. For example:
___________________
whether or not the strategies are likely to meet targets for return
___________________ on capital or market share.
EXTERNAL ENVIRONMENT
MARKET OPPORTUNITIES
A : Opportunities & Threats
B : Economic Climate
C : Societal Environmental Concerns & Values

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WHAT OUGHT WE TO DO?
WHAT SHALL WE DO & WHY?
POTENTIAL SYNERGIES
STRATEGY
FIRM COMPETENCE
D : Marketing Capabilities
E : Other Corporate Resources
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Figure 24.1: Business Strategy Mix Matrix
They provide quantified 'answers' regarding the relative merits of

different courses of action and to come up with the 'right'
strategies.
Check Your Progress

Fill in the blanks:
1. The rationale of selection of future strategies is
(c
……………….. .
2. The organization's objectives, quantified where possible,
are used as direct ……………… by which options are
assessed.
Arthur. D. Little’s Life Cycle Approach to Strategic 381
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Planning Notes
Activity
___________________
Strategy selection is a complex process. Strategy will be driven by showing the Arthur. D. Little’s
___________________
the perception of the challenges and opportunities facing the life cycle approach to strategic
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planning
organization, and our strategic response to them. Choice of ___________________
strategies will depend on the relationship between the company ___________________
and its competitive environment; allocation of resources among
___________________
competing investment opportunities; and committing resources—
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often long-term—needed to realize these opportunities. ___________________
___________________
Notwithstanding the complexity of the process of strategic choice,
the organization cannot live in a vacuum; it has to choose its ___________________
strategies so that it can survive in the marketplace. Once strategy ___________________
formulation is undertaken by the organization, it needs to evaluate
___________________
the strategic options it can exercise. In assessing strategies, there
are three types of evaluation criteria that can be used.
Assessing Suitability
Assessing the suitability of strategic options is the starting point of
the selection process. On the basis of the results of the exercise, a
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more detailed analysis concerning the acceptability and feasibility
of these options can be undertaken.
It addresses the concern that under what circumstances of the
organization and its strategic intent, does the strategy bring the
results that it is looking for. There are a number of analytic
techniques that can be used to bring in clarity.
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Figure 24.2: Testing Suitability
As has been shown in Figure 24.2, the different techniques that

have been identified provide answers for different points of view.
Life Cycle Analysis examines the stage of development of the
382 products; Portfolio Analysis examines the ability of the strategy to
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Notes strengthen the balance of activities; the Business Profile examines
___________________ the financial performance; Positioning tells the organization
whether or not the position is viable; and Value Chain Analysis
___________________
provides information whether or not the strategy improves the
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___________________
value for money and exploits the core competencies of the
___________________ organization. An organization can use all or a combination of some
___________________ of these techniques described above. A short explanation on each of
these analytical tools is given in the paragraphs that follow.
___________________
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___________________ Life Cycle Analysis
___________________ One of the tools described in this unit is the Product Life Cycle
___________________
Model. The product life cycle model is a representation of life stage
of a product. Based on the life stage of the product the organization
___________________
can decide the type of strategy it would like to follow for the
product.
Table 24.1: Life Cycle - Portfolio Matrix, by Arthur D. Little

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)C
Table 24.1 describes the relationship between the stage of the

(c
product's life and its market position. This is called the Life Cycle -
Portfolio matrix. The market status is defined by its competitive
position. This has been broken up into five categories ranging from
dominant to weak. The product development stage has been
classified as embryonic, growth, mature and aging. The purpose of 383
S
the matrix is to establish the appropriateness of particular Notes
strategies in relation to the two dimensions. It shows the likely or ___________________
suitable strategies that can be used, depending upon the life cycle
___________________
position of the product.
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___________________
The position of the product within the life cycle is normally
determined by eight external factors; market growth rate; growth ___________________
potential; breadth of product lines; number of competitors; spread ___________________

of market share between these competitors; customer loyalty, entry
UP
___________________
barriers and technology.
___________________
The competitive position of the organization within its industry
___________________
can also be established by looking at the characteristics of each
category. Few organizations are in a dominant position in an ___________________
industry, unless they are state monopolies. For example, the State ___________________
Trading Corporation and the Mines & Minerals Trading
Corporation were set up by the Government of India in the early
sixties to give the Government better control over foreign
exchange. Even now, Oil & Natural Gas Corporation (ONGC) has
virtual monopoly in the exploration sector. Normally, dominant
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businesses are controlled by the State under the monopolies
prevention legislations. However, in specific products it is possible
for an organization to be in a dominant position.
Strong organizations are those that are in a position to follow
strategies without feeling threatened by competition. An
organization is in a favourable position where no single competitor
stands out, but where the company is better placed than most.
Tenable and weak competitive position indicates either the
organization is maintained by specialization or will find it difficult
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to survive independently in the long run.
Positioning
Positioning is a basic proposition promoted by Michael Porter in
determining the generic strategies for competitive advantage. So
assessing whether the existing and future positioning is viable can
be done by asking whether demand is likely to grow or decline. For
example, the quality of the resources and the uniqueness of the
(c
competencies are the basic features that determine the ability and
suitability of a positioning the product or service using a strategy
of differentiation. The extent to which the organization is capable
384 of supporting a particular positioning can be determined by using
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Notes the format given as Table 24.2.
___________________
Table 24.2: Assessing the Suitability of a Strategy
___________________
E
___________________
___________________
___________________
___________________
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___________________
___________________
___________________
The first step in the analysis on the suitability of the positioning
___________________
strategy of the organization is to list out the key resources and
competencies underpinning the strategy. In order to complete the
first step, you need to fill in column A in the table.
These are then scored against two important competencies of the
firm. These competencies, 'cost reduction' and 'value added' have a
significant impact on the outcome. In the table above, these are
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given in columns B1 and B2. We need to ask the question whether
each of the competencies identified in A strengthens cost reduction
or adds to the perceived value. A score is given on a scale of 1 to 5.
For example, the in-house R&D activities may be the source of
significant cost reductions and unique product features valued by
the customers. It would, then, score highly both in columns B1 as
well as B2.
Finally, the analysis requires re-examining each of the resources
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and competencies to establish whether it is sustainable and/ or

difficult to imitate. Unique resources and core competencies are
sources of competitive advantage. The criteria used to judge the
competitive advantage through the resources and competencies
include: whether it is valued by the consumers; whether it is rare;
is it complex to replicate; and whether it is embedded in the tacit
knowledge of the organization.
Generally speaking, few resources and competencies are difficult to
(c
imitate. Most often, competitive advantage may not come directly

from specific resources and competencies but on the ability of the
organization to mange linkages between the separate activities.
However, assessing the relationship between the generic product /
market strategy and the strategic capability of the organization is 385
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useful in preparing resource plans for the strategy and in Notes
Activity
identifying its critical success factors. Portfolio balancing provide a
___________________
framework for reviewing the
performance of multiple
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Strategic Business Units
State true or false: ___________________
(SBUs) collectively. Comment.
___________________
1. The product life cycle model is not a representation of
life stage of a product. ___________________
2. Positioning is a basic proposition promoted by Michael
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___________________
Porter. ___________________
___________________
Business Portfolio Balancing ___________________
A number of techniques have been developed for displaying a ___________________
diversified organization's operations as a portfolio of businesses.
The techniques provide simple frameworks for reviewing the
performance of multiple Strategic Business Units (SBUs')
collectively. A SBU is a business that can be planned separately
from others, has its own set of Competitors, and is managed as a
Profit Centre. Techniques of portfolio analysis have their greatest
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and characterizes the different businesses in the organization's
portfolio and helps in determining the implications for resource
allocation.
A business portfolio is the collection of Strategic Business Units
(SBU) that makes up a corporation. The optimal business portfolio
is one that fits perfectly to the company's strengths and helps to
exploit the most attractive industries or markets. A SBU can
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either be an entire mid-size company or a division of a large

corporation. It normally formulates its own business level strategy
and often has separate objectives from the parent company.
The aim of a portfolio analysis is:
z Analyze its current business portfolio and decide which SBUs
should receive more or less investment
z Develop growth strategies for adding new products and
(c
businesses to the portfolio

z Decide which businesses or products should no longer be
retained
386
The basis for many of these matrix analyses grew out of work
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Notes
Activity carried out in the 1960s by the Boston Consulting Group (BCG).
The___________________
Programming of Strategic
BCG observed in many of their studies that producers tend to
funds identifies feasible
___________________
options under different become increasingly efficient as they gain experience in making
their product and costs usually declined with cumulative
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physical assumptions.
___________________
Discuss. production. They came up with a hypothesis to explain how an
___________________
organization with the highest market share in the industry
___________________ generally will have the greatest accumulated volume of production
___________________ and therefore the lowest cost relative to other producers in the
UP
market.
___________________
___________________
Techniques of business portfolio balancing have their greatest
___________________
and characterizes the different businesses in the organization's
___________________ portfolio and helps in determining the implications for resource
allocation. The Boston Consulting Group Matrix (BCG Matrix) is
the best-known portfolio planning framework. The GE/ Mckinsey
Business screen is another well known portfolio framework, but it
is a more complex version of the BCG matrix. The aim of these
techniques is to develop growth strategies for adding new products
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and businesses to the portfolio, and decide which businesses or
products should no longer be retained.
Check Your Progress

Fill in the blanks:
1. A business portfolio is the collection of Strategic
…………….. that makes up a corporation.
2. The …………….. is the best-known portfolio planning
)C
framework.
Strategic Funds Programming

Funds are used to maintain (1) the same level of production or
services, (2) the organization’s “market share,” or (3) a specified,
ongoing rate of growth.
Strategic funds are invested in the new programs required to meet
the organization’s goals and objectives. They are used to purchase
(c
new assets, such as equipment, facilities, and inventory; to

increase working capital; and to support direct expenses for
research and development, marketing, advertising and promotion.
In the private sector, strategic funds are also used for mergers,
acquisitions and market development. A market penetration 387
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strategy, for example, may call for a more intensive investment of Notes
funds in the current business. A market expansion strategy ___________________
usually requires aggressive use of strategic funds for advertising
___________________
and promotion. A company must use strategic funds to produce
E
more diverse products or services and to develop new markets for ___________________
them. ___________________
The programming of strategic funds begins with the identification ___________________

of basic organizational units (program or budget units) and the
UP
___________________
formulation of goals and objectives for these units. The total
___________________
amount of strategic funds available to the organization can be
determined by subtracting baseline funds from total assets ___________________
(revenue or appropriation). Strategies must be formulated to carry ___________________
out the goals and objectives of each unit. Once estimates have been
___________________
made as to the funds required for each strategy, they can be
ranked according to their potential contribution to the achievement
of the identified goals and objectives. In undertaking this ranking,
the kinds of strategic funds available and the level of risk involved
must be taken into account.
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The available strategic funds should be allocated to each program
according to some set of priorities. Key decision points concerning
risk and return are encountered (1) when funds available from
internal sources have been fully consumed, and (2) when readily
available credit sources have been exhausted. At this point,
proposed strategies must be evaluated in terms of changes
required in the financial structure of the organization. The final
step is to establish a management control structure to monitor the
generation and application of funds to achieve the desired results.
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The programming of strategic funds simply identifies feasible

options under different fiscal assumptions. A further assessment or
risk and return on investment must be made before the final
option is chosen.
Check Your Progress

Fill in the blanks:
1. ………………… are invested in the new programs
(c
required to meet the organization’s goals and objectives.

2. A company must use strategic funds to produce more
diverse products or services and to develop new
………………… for them.
388
Summary
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Notes
Different techniques that have been identified provide answers for
___________________
different points of view. Life Cycle Analysis examines the stage of
___________________ development of the products; Portfolio Analysis examines the
ability of the strategy to strengthen the balance of activities; the
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___________________
___________________
Business Profile examines the financial performance; Positioning
tells the organization whether or not the position is viable; and
___________________
Value Chain Analysis provides information whether or not the
___________________ strategy improves the value for money and exploits the core
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___________________ competencies of the organization.
___________________ The position of the product within the life cycle is normally
___________________
determined by eight external factors; market growth rate; growth
potential; breadth of product lines; number of competitors; spread
___________________
of market share between these competitors; customer loyalty, entry
barriers and technology.
Positioning is a basic proposition in determining the generic
strategies for competitive advantage. Gap analysis is a useful
technique that can be used to identify the extent to which the
existing strategies will fail to meet the performance objectives in
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the future. Screening options basically are concerned with the
relative merits between different strategies.
The Life Cycle - Portfolio matrix depicts the relationship between
the stage of the product's life and its market position. The market
status is defined by its competitive position. This has been broken
up into five categories ranging from dominant to weak. The
product development stages have been classified as embryonic,
growth, matures and aging. The purpose of the matrix is to
)C
establish the appropriateness of particular strategies in relation to

the two dimensions.
Positioning - Resource Analysis is used to assess whether the
existing and future positioning are viable. The first step in the
analysis on the suitability of the positioning strategy of the
organization is to list out the key resources and competencies
underpinning the strategy. In order to complete the first step, you
need to fill in column A in the table. These are then scored against
(c
two important competencies of firm. These competencies, 'cost

reduction' and 'value added' have a significant impact on the
outcome. Finally, the analysis requires re-examining each of the
resources and competencies to establish whether it is sustainable 389
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and/ or difficult to imitate. Notes
___________________
E
Compile a study note on the use of A. D. Little’s Life Cycle ___________________
Approach to strategic planning in strategy evaluation and selection ___________________
of the product’s life cycle and its market position.
___________________
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Keywords ___________________
___________________
Portfolio: Portfolio is a financial term denoting a collection of
___________________
Investments held by an investment company, hedge fund, financial
institution or individual. ___________________
Planning: Planning is the process of thinking about and ___________________

organizing the required activities to achieve the desired goal.
Strategic Funds: Strategic Fund is an innovative alternative to
traditional business financing.
Life Cycle: Sum of all recurring and one-time (non-
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recurring) costs over the full life span or a specified period of
a good, service, structure, or system.
Strategic Planning: It is an organization's process of defining its
strategy, or direction, and making decisions on allocating its
resources to pursue this strategy.

1. Define the position of product within the life cycle.
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2. Describe the relationship between the stage of product’s life

and its market position.
3. Comment on Life Cycle-Portfolio matrix.
4. How is the programming of strategic funds useful in meeting
the goals and objectives of organisational units?
Further Readings
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Books
390
Richard Lynch, Corporate Strategy, Essex, Pearson Education Ltd.,
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Notes
2006.
___________________
___________________
E
___________________ Education, 2006.
___________________ Hugh MacMillan and Mahen Tampoe, Strategic Management,
___________________ Oxford University Press, 2000.
___________________
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Web Readings
___________________
http://dspace.mit.edu/bitstream/handle/1721.1/2061/SWP-1493-
___________________ 15478032.pdf
___________________ http://ideas.repec.org/p/mit/sloanp/2061.html
___________________
http://www.easts.info/on-line/proceedings_05/2294.pdf
http://www.himss.org/content/files/Code%2037_Successful%20Strat
egic%20Planning-Creating%20clarity%20JHIM.pdf
http://www.alterspark.com/project-management-approach
http://interfaces.journal.informs.org/content/14/1/19.abstract
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UNIT 25: Case Study
Unit 25
391
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Notes
Case Study
___________________
___________________
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___________________
Objectives
___________________
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___________________
___________________
Case Study: Strategic Control Techniques for Sony Ericsson
___________________
Strategic control shapes the decisions that are taken by corporate
rulers in relation to the determination of the basic long-term goals ___________________
and objectives of the enterprise, and the adoption of courses of
___________________
action and the allocation of resources necessary for carrying out
these goals. Strategic decisions set or alter the structure of the
basic parameters within which an enterprise acts (Scott 1997). To
control the implementation of the new strategy, communication
systems will be used between the members of the organization.
The communication systems will assist in monitoring the new
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strategy and its effects on the organization. The implementation
of the new strategy will be validated via its effect on the company
and the industry. To assist strategic control, control techniques
will be used. The following part lists the probable control
techniques for Sony Ericsson.
Balanced Scorecard
The balanced scorecard was introduced by Robert Kaplan and

David Norton to measure whether the activities of the company is
meeting its objectives. The balanced scorecard have become a
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fertile field of theories and scholastic research, as times past the

balanced scorecard was altered by various individuals depending
on the need of the environment. When Sony Ericsson implements
the balance scorecard it will translate the company's vision into
operating goals, the balance scorecard will communicate the
vision and then link it to individual and organizational
performance, the balance scorecard will also lead to a much
strategised business planning process, lastly the balanced
scorecard will help the company to know how to gain feedback
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and learn from such feedback. This in turn will help the company
adjust its strategy according to the feedback and what they have
learned from it. A disadvantage of the balanced scorecard is
studies not linking balanced scorecard to improved financial
Contd…
392 performance. This could mean that the balanced scorecard can
S
Notes create changes to the financial performance but it doesn't
___________________ necessarily mean that the financial performance will improve.
This also means that the balanced scorecard can only initiate the
___________________
movement in the financial performance and not create methods to
E
___________________ increase the financial performance of the firm.
___________________ Benchmarking
___________________ Benchmarking can help Sony Ericsson compare what it does
against what another organization does; it puts the basis of
___________________
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comparison on its cost, time spent or quality of service. A problem
___________________ with benchmarking is it forces restriction on what has been done.
___________________ Benchmarking does not help the organization to achieve
marketing share instead it is a catch-up managerial tool.
___________________
Sony Ericsson Budget
___________________
The company's budget in 2007 reached €5,380,000. This budget
was used for the cost of production and the other expenses made
by the firm. Each expense of the firm was duly noted and
recorded. The cost for the company includes the production
expenses, supplies expense, rent expense, salary expenses, tax
expenses and other miscellaneous expenses.
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Project Program Management
Project management will not work if managers are not

knowledgeable about the project they are guiding. Putting project
managers that knows about economics into projects that are
purely technical in nature would cause the failure of such
projects. There is a need for performance measurements during
project making. Performance measurements help in knowing
whether the people working in the project can finish such task at
the fastest time possible. There are different methods used to
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measure performance this includes GANTT, PERT and CPA.

Gantt charts can be understood by a wide audience because it
makes use of a common technique for representing the phases
and activities of a project. Gantt charts show little information
per unit area of display. It can be said that projects are
considerably complex than can be communicated effectively with
a Gantt chart. Program Evaluation and Review Technique
(PERT) is known as a method that helps in analyzing the involved
tasks in completing a given project. PERT focuses on the time
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needed to complete a task. Pert charts require the minimum time

needed to complete the total project. The limitation for PERT
chart involves human errors. Creators of PERT charts may omit
certain activities; PERT chart creators may also organize the
Contd…
UNIT 25: Case Study
activities in the wrong order. Critical Path Analysis (CPA) 393
S
calculates the longest path for planned activities until it reaches Notes
the end of the project. CPA takes a look at the earliest and latest
___________________
instances that a certain activity can start and finish without
making the project longer. There are instances wherein a ___________________
schedule made using CPA is not realized accurately, this results
E
___________________
to change in analysis and failure of the project.
___________________
Question:
___________________
UP
___________________
Source:http://ivythesis.typepad.com/term_paper_topics/2010/10/strategiccontrol-techniques-for-sony-
ericsson.html#ixzz1uqKSSP00 ___________________
___________________
___________________
___________________
CE
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394
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Notes
___________________
___________________
E
___________________
___________________
___________________
___________________
UP
___________________
___________________
___________________
___________________
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Glossary
Glossary
395
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Notes
___________________
Acquisition: An acquisition refers to the process whereby a ___________________

company simply purchases another company.
E
___________________
Aggregators: Combine demand within and across buying ___________________
enterprises to use the resulting market power to achieve lower
___________________
prices from suppliers.
UP
___________________
Balanced Scorecard: Strategic performance management tool - a
semi-standard structured report supported by proven design ___________________
methods and automation tools. ___________________
BCG Matrix: It reflects the contribution of the products offered by ___________________

the firm to its cash flow. ___________________
Benchmarking: It is a comparative method where a firm finds
the best practices in an area and then attempts to bring its own
performance in that area in line with the best practice.
Business Policy: A policy is a statement or a commonly accepted
understanding of decision making criteria or formulate prepared or
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evolved to achieve economy in operations by making decision,
relatively routine or frequently occurring problems and
consequently facilitating the delegation of such decision to lower
managerial levels.
Business Process Objectives are specific, measurable Objectives
that are developed at all levels of the enterprise or company. The
Objectives represent managerial commitment to achieve specific
and measurable performance targets in a measurable time frame.
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Business-to-business (B2B) is the exchange of services,

information and/or products between one business and another.
Business-to-consumer (B2C) is the exchange of services,
information and/or products from a business to a consumer.
Capacity Planning: Process of forecasting demand and deciding
what Resources will be required to meet that demand.
Cash Cows: These are products with low growth but high market
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share.
Cash Flow: The excess of cash revenues over cash outlays in a
given period of time (not including non-cash expenses)
396
Combination and Systemization of concepts through symbols
S
Notes
such as language or figures is achieved through media.
___________________
Competitive Advantage is a company’s ability to outperform its
___________________
competitors, measured by having profitability greater than the
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___________________ industry average.
___________________ Competitive strategy provides the framework that guides
___________________ competitive positioning decisions. It examines the way in which an
___________________
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position and build a sustainable competitive advantage.
___________________
Core Competencies: Cluster of extraordinary abilities or related
___________________
'excellences' that a firm acquires from its founders, after consistent
___________________ striving over the years, and which cannot be easily imitated.
___________________ Corporate Goal: A corporate goal is an observable and
measurable end result having one or more objectives to be achieved
within a more or less fixed timeframe.
Corporate Level Strategy: The strategy formulated by the top
management for the overall company.
Corporate Social Responsibility: A company’s sense of
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responsibility towards the community and environment (both
ecological and social) in which it operates.
Corporate Strategy: Corporate strategy is a proprietary set of
actions that enables a company to be worth more than just the sum
of its parts.
Cost Focus exploits differences in cost behaviour in some markets.
In cost focus a firm seeks a cost advantage in its target market.
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The objective is to achieve lower costs than competitors in serving

the market – this is a low cost producer strategy focused on the
target market only.
Cost-leadership Strategy: A firm pursuing a cost-leadership
strategy attempts to gain a competitive advantage primarily by
reducing its economic costs below its competitors.
Critical Success Factors are the critical factors that need to be
kept in view to ensure organizational success.
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Culture: The beliefs and behaviours that determine how a

company’s employees and management interact and handle
outside business transactions.
Glossary
397
Deculturation: The removing or abandoning of one’s own culture
S
Notes
and replaces it with another.
___________________
Demerger: Demergers are situations in which divisions or
subsidiaries of parent companies are split off into their own ___________________
E
independent corporations. ___________________
Differentiation Strategy is when a firm seeks to be unique in its ___________________

industry along some dimensions that are widely valued by buyers. ___________________
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___________________
perceive as important, and uniquely positions it to meet those
needs. ___________________
Divisional Structure centres on the use of separate businesses or ___________________
operating units with responsibility for day-to-day operations and ___________________

business-unit strategy is the responsibility of the division ___________________
managers. Each division has its own functional departments.
Dogs: They are products with low growth and low market share.
Dynamic Diamond Theory: Formulated by Michael Porter, this
suggests that a country’s global competitive advantage is not just
related to factor conditions, but other conditions as well.
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Economic Objectives refer to earning profit and other objectives
necessary to achieve the profit objective.
EFT: EFT stands for "Electronic Funds Transfer" and represents
the way the business can receive direct deposit of all payments
from other parties to the company bank account.
Enterprise Resource Planning (ERP): ERP (enterprise resource
planning) is an industry term for the broad set of activities that
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helps a business manage the important parts of its business.

Ethics: Motivation based on ideas of right and wrong.
Externalization is the process of articulating tacit knowledge into
explicit concepts of languages.
Focus: The generic strategy of focus rests on the choice of a narrow
competitive scope within an industry. The focuser selects a
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the exclusion of others.

Functional Designs are organizational structures where
activities are grouped together differentiated around areas of
398 specialty. Each functional unit has line managers with identified
S
Notes set of duties and responsibilities.
___________________
Functional Strategy: Approach taken by a functional area to
___________________ achieve corporate and business unit objectives and strategies by
maximising resource productivity.
E
___________________
___________________ GE Matrix: This is a more complex version of the BCG matrix

with cash flow as the basis for differentiation, the market growth
___________________
is replaced by market (Industry) attractiveness as the dimension of
___________________ industry attractiveness and market share is replaced by
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___________________ competitive strength.
___________________ Generic Competitive Strategies are those competitive strategies
___________________ that can be used by the organization to outperform competition
and defend its position in the industry.
___________________
Geographical Structure is based on the concept of market
together by geographical area. Each geographical area is treated
like a division.
Global Objectives are those objectives that make it possible for a
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business to survive in the globalised marketplace.
Global Organizations offer standardized products and use
integrated operations for their offerings in different parts of the
world.
Goal: Goals set by an organization are specific, quantifiable
targets that it commits to attain in order to achieve its corporate
mission and objectives
Horizontal Structure tries to replicate the advantages of the
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Simple Structure. The structure is flat and is centred on cross-

functional core processes rather than tasks, functions, or
in its entirety.
Human Objectives refer to the objectives aimed at the economic
well-being as well as fulfilment of expectations of employees and
the community.
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Human Resource Planning: The ongoing process of systematic

planning to achieve optimum use of an organisation's most
valuable asset - its human resources.
Glossary
399
Inbound Logistics: These are inputs required and disseminated
S
Notes
by the organisation in order to produce the gods and services that
it offers. ___________________
Industrial Relations: Interaction between employers, employees, ___________________
E
and the government; and the institutions and associations through ___________________
which such interactions are mediated.
___________________
Internalization is the conversion process from explicit into tacit ___________________
knowledge.
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___________________
Inventory Management: Management of inventory consisting of
___________________
raw materials, work-in-process, goods in transit, finished goods,
etc. ___________________
___________________
Joint Venture: Joint ventures are new enterprises owned by two
or more participants. ___________________
Key Result Areas (KRAs) are areas where performance is

essential for the ongoing success of the enterprise.
Key Success Factor is a performance area of critical importance
in achieving consistently high productivity.
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Knowledge Management is a process that may range from
technology-driven methods of accessing, controlling, and delivering
information to massive efforts to change corporate culture.
Leadership: Leadership has been described as a process of social
influence in which one person can enlist the aid and support of
others in the accomplishment of a common task.
Learning Organization is an ideal organization that is adaptive
and continually changing with the changing environment.
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Life Cycle: Sum of all recurring and one-time (non-

recurring) costs over the full life span or a specified period of
a good, service, structure, or system.
Liquidity Creators: Create liquid dynamic markets between
commodity products traded between buyers and sellers.
Management by Objectives: Process of agreeing upon objectives
within an organisation so that management and employees agree
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to the objectives and understand what they are in the organisation.

Margin is a profit that depends on the organization’s ability to
manage the linkages between all activities in the value chain.
400
Matrix Structure is an organizational structure based on a grid
S
Notes
of horizontal and vertical interfaces. A matrix interface determines
___________________
“who works with whom?” The matrix provides for lateral chains of
___________________ influence, therefore, managers report laterally as well as vertically.
E
___________________ Matrix: A matrix is a grid, with each location in the grid
___________________ containing some information.
___________________ Merger: Merger refers to the process of combination of two

companies, whereby a new company is formed.
___________________
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___________________ Mission is the founders' intentions at the outset of the
___________________
Multi-domestic Organization decentralizes operational
___________________
decisions and activities to each country in which it is operating and
___________________ tailors its products and services to each market.
Operational Control: ensures that day-to-day actions are
consistent with established plans and objectives.
Operations Management: Design, execution, and control of a
firm's operations that convert its resources into desired goods and
services, and implement its business strategy.
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Organization Chart is the visual representation of underlying
Organizational Architecture is the model of strategic planning
used by the organization and determines the role of the corporate
centre and the various parts of the organization.
Organizational Structure is the model by which the components
of the organization are related to facilitate the translation of
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organizational strategy and policies to action.

Organizations are social entities that are goal directed, with
deliberately structured activity systems, and with a link to the
external environment.
Plan: A set of intended actions, through which one expects to
achieve a goal.
Planning: Planning is the process of thinking about and
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organizing the required activities to achieve the desired goal.

Policy: Policies are general statements or undertaking (members
of the group) which makes the action of each member of the group
Glossary
in the given set of circumstances more predictable to other 401
S
members. Notes
Portfolio: Portfolio is a financial term denoting a collection of ___________________

Investments held by an investment company, hedge fund, financial ___________________
institution or individual.
E
___________________
Project/Specification Managers: Aid in planning and managing
___________________
complex projects or processes.
___________________
Question Marks: These are products with high growth but low
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___________________
market share.
___________________
Responsibility Centre: A segment of a business or other
organisation, in which costs can be segregated, with the head of ___________________
that segment being held accountable for expenses. ___________________
Retrenchment Strategy: It is a defensive strategy adopted as a ___________________

reaction to operational problems such as internal mismanagement,
surprises caused by competitors, changing market conditions etc.—
involving reduction of any existing product or service line to
improve its performance.
Segmentation: Segmentation is the process of splitting the entire
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market into smaller groups that share similar traits.
Simple Organizational Structure is a type of structure with
little separation of management responsibility and generally no
clear definition of functional divisions of labour.
Social Objectives are those objectives, which benefit society.
skills through shared experiences.
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Spin-off: It means selling those units or parts of a business that

no longer contribute to or fit the firm’s core competence.
Stability Strategy: It involves maintaining the status quo or
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growing in a methodical but slow manner.

Stakeholders: A person, group, or organisation that has direct or
indirect stake in an organisation.
402
Stars: These are products with high growth and high market
S
Notes
share.
___________________
Strategic Choice: A strategic choice is one that aligns your
___________________
company with its competitive edge. It involves the options for
E
___________________ strategy in terms of both the directions in which strategy might
___________________ move and the methods by which strategy might be pursued.
___________________ Strategic Competitiveness: It is achieved when a firm

successfully formulates and implements a value creating strategy.
___________________
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___________________ Strategic Control: Monitoring and evaluating the strategic
management process as a whole, in order to make sure that it is
___________________
operating properly.
___________________
Strategic Evaluation and Control: Process of determining the
___________________ effectiveness of a given strategy in achieving the organisational
objectives and taking corrective actions wherever required.
Strategic Funds: Strategic Fund is an innovative alternative to
traditional business financing.
Strategic Gap: Forecasting technique in which the difference
between the desired performance levels and the extrapolated
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results of the current performance levels is measured and
examined. This measurement indicates what needs to be done and
what resources are required to achieve the goals of an
organization's strategy.
Strategic Intent: A readily grasped declaration of the course that
the management of a business plans on taking the company in over
some future time frame.
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Strategic Leadership: A manger’s potential to express a strategic

vision for the organisation, or a part of the organisation, and to
motivate and persuade others to acquire that vision.
Strategic Management Process: A management process
designed to achieve the firm’s missions and objectives.
Strategic Management: Systematic analysis of the factors
associated with customers and competitors (the external
environment) and the organization itself (the internal
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environment) to provide the basis for rethinking the current

management practices. Its objective is to achieve better alignment
of corporate policies and strategic priorities.
Glossary
403
Strategic Objectives are the goals of the whole enterprise and
S
Notes
reflect the firm's aims. This set of objectives is a commitment of the
organization to direct efforts and energy on what needs to be ___________________
accomplished. They also provide a benchmark for judging ___________________
organizational performance.
E
___________________
Strategic Planning: It is an organization's process of defining its
___________________
strategy, or direction, and making decisions on allocating its
___________________
resources to pursue this strategy.
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___________________
Strategic Surveillance: Broad-based vigilance activity in all
daily operations both inside and outside the organisation. ___________________
Strategy Formulation: The process of determining appropriate ___________________
courses of action for achieving organisational objectives and ___________________

thereby accomplishing organisational purpose. ___________________
Strategy Implementation: Putting formulated strategy into
action.
Strategy: Strategy is the complex plan for bringing the
organization from a given posture to a desired position in a future
period of time.
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Supply Consolidators: Identify relevant supply base and conduct
purchases.
SWOT Analysis represents an analysis of the “Strengths”,
“Weaknesses”, “Opportunities”, and “Threats” relating to the firm’s
environment.
TOWS matrix is a SWOT strategy matrix based on corresponding
identified opportunities/threats, opportunities/weaknesses, etc.
)C
Transaction Facilitators: Transact and execute purchases.

Transnational Organization is a combination of both the multi-
domestic and global strategies whereby an organization globally
integrates operations while tailoring products and services to the
local market.
Turnover Strategy: A turnaround strategy is designed to reverse
a negative trend and bring the organisation back to normal health
and profitability.
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Value Chain Analysis describes the activities the organization

performs and links them to the organization’s competitive position.
Therefore, it evaluates which value each particular activity adds to
the organizations products or services.
404
Value Index is a ratio that looks at value and cost of each activity
S
Notes
and determines whether it is delivering value for money.
___________________
Value: Sum total of benefits received and costs paid by the
___________________
customer in a given situation.
E
___________________
Values: These manifest in what the organization does as a group
___________________ and how it operates. It is a guide to ways of choosing among
___________________ competing priorities and about how to work together.
___________________ Vertical integration: The combination in one company of two or
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___________________ more stages of production normally operated by separate
companies.
___________________
Vision is a long-term perspective of what is the final destination of
___________________
the organization.
___________________
Worldwide sourcing is a system used by multinational
companies of integrating the supply chain by operating supplier’s
plants abroad and integrating those plants to manufacture
components as subdivisions of a globally organized production
process.
CE
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MBCG743D Business Policy and Startegy

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(c

Dr S R Das Dr Sanjay Mittal Prof V K Nangia

SLM Development Team

Mr Kapil Mehra Mr A N Sinha

Course Code: MBCG-743D

Course Name: Business Policy & Strategy

Version: July 2013

© MPower Applied Learning Enterprise

Unit 1 Business Policy – An Overview...................................................................................... 3

Unit 6 Formulating Business Strategy ................................................................................... 93

Unit 11 Strategic Management Process.................................................................................. 177

Unit 14 Strategies for Retrenchment...................................................................................... 221

Unit 16 Strategic Organisational Design................................................................................ 249

Unit 18 Learning and Organisational Strategy ..................................................................... 283

Unit 22 Strategic Control and Evaluation .............................................................................. 345

Unit 24 Life Cycle Approach to Strategic Planning ............................................................... 379

Unit 25 Case Study .................................................................................................................. 391

z Industry Analysis UNIT 5: CASE STUDY

these remarkable developments in the business environment and

implied of those principles and rules that are set up by executive

policy might specify that a purchasing office be created to

identification of any relevant oversight and/or governance 5

Some policies may contain additional sections, including: ___________________

Background, indicating any reasons, history, and intent that

when deciding a case that involves that law. ___________________

z Definitions, providing clear and unambiguous definitions for

Check your Progress

"Strategy refers to the determination of purpose and the long term

Check your Progress

A policy is a guide to thinking and action for those responsible for

pressures. A strategy may exit without a policy, strategy and policy 7

Thus we can say that a major distinction between policy and

This is done through policy formulations. Specification of strategy

be delegated downward in the organisation, while the strategy

8 “strategy”. The difference between policy and strategy can be

___________________ z Policy is concerned with both thought and actions. While

Check Your Progress

much as they determine the relationship between the enterprise

Policies establish the framework of guiding principles that ___________________

properly implemented by properly trained personnel, as per

product to be manufactured and its channels of distribution.

they act in the form of a formal agreement to be strictly

Objectives of Business Policy

Objectives of business policy are as follows:

their interpretation and by an analysis of the business events 11

z Determination of objectives, mission etc.: Information ___________________

business policy, the learner is able to visualize how the

Advantages of Business Policy

12 & directing the way in which predetermined goals are to be

Disadvantages of Business Policy

z No problem can be solved very quickly on the basis of policies,

situation policies don't provide much help.

2. A ………………….. is a predetermined selected course ___________________

established as a guide towards accepted goals and ___________________

Classification of Business Policy

operating policies, e.g., production policy, price policy, personal

Check Your Progress

field of management about which there is less than common

indirectly, or not at all. The purpose of this unit is to delineate the

Lesson End Activity 15

Business Policy: A policy is a statement or a commonly accepted ___________________

managerial levels. ___________________

Policy: Policies are general statements or undertaking (members ___________________