CHAPTER 12.
Integrating Strategies Motivating Agent- They can provide the
Principal/Agent Relationship
The relationship between the
different levels may be a supervisor–
subordinate one a relationship in
which authority is clearly defined,
but it is also a principal/agent
relationship. The latter relationship
captures better the essential nature of
the organization. The principal/agent
relationship is one which is common
to all hierarchical organizations, of
whatever kind, as well as to a host of
other relationships. Put in its
simplest form, the principal hires the
agent to carry out a defined job.
The rapid growth of founder enterprises
reflects the adoption of a successful strategy
closely associated
with one person, or at least a small team of
people closely linked to the founder, which
carries the enterprise through its early years.
Inflection Point- a point at which it needs to
rethink its business model and change its
strategy.
CEO and Top Management are the principal
of the organization
Supervision- The easiest method of
ensuring the harmonization of interests is
through continuous direct supervision of
staff, that is, of the agent by the principal,
supervision which ensures that the staff are
always performing their jobs in the expected
manner.
necessary incentives to reward good
behaviour, that is, that which promotes the
implementation of the strategy, and the
necessary sanctions to discourage poor
behaviour, that is, behaviour which obstructs
the achievement of the strategic intent.
Non-hierarchical structure-
spider’s web organizations, which
are really elaborate networks. They
may be the result of the simulation
within an organization of the
networks which often exist outside
an enterprise
starburst organizations which
continuously shed new second-
generation companies
federal or cluster organizations in
which the clusters continuously
form, disperse and reform with a
different membership
inverted organizations in which the
usual pyramid is inverted and the
number of contact points with
customers is maximized.
Organizational Design- the process of
aligning the structure of an organization
with its objectives, with the ultimate aim of
improving efficiency and effectiveness.
Understanding the business processes,
workflows, roles and responsibilities,
volumes of work, activity analysis and
resources.
Product Design Structure- describes the
process of imagining, creating, and iterating
products that solve users’ problems or
address specific needs in a given market.
Product Design Principle- desirable where
the emphasis in achieving competitive
advantage is on the supply side, that is,
either on a technology and its development
or the costs of various inputs.
Strategic Business Units- The key is to be
able to group them easily, often such
divisions, or the departments which group
the product. They bring together businesses
which are related in some strategically
important way, by sharing markets,
technology or key activities in the value
chain.
2 Form of Product Design:
1. Multidivisional form (M-form)-
relevant where the products are
related; there are self-contained
operations but overlapping
functional activities. The M-form
lends itself to a diversified company
in which there are synergies between
the different product groups.
2. Holding form (H-form)- The H-form
contains unrelated businesses which
can have complete autonomy. It is
the natural organizational design of a
pure conglomerate.
Benefits of product Design Principle
• This design concentrates expertise in the
relevant product areas, encouraging a
technical dynamism which rapidly moves
the enterprise down the experience curve
• It lends itself well to global organization,
that is, to the logistics of an organization
which sources from many facilities in
different parts of the world
• It allows an enterprise to take from the
lowest cost source or develop a flexible
system in which the risk of an excessive
dependence on one source is avoided
• Where there are economies of scale, this is
clearly the preferred organizational design,
as it allows their full exploitation
• It allows the development of a global
approach to marketing
Weakness of Product Design Principle
 Any design type has its own
specifific problems of reconciling
integration with differentiation. This
might be dealt with by having a
corporate services and a strategic
section attached to the offifice of the
CEO which acts as the focus for
integration
 The problems of this design structure
are usually concentrated in the areas
of coordination and communication
between the business units
 Getting the different product groups
to work together is diffificult.
Empire building within departments
is a universal phenomenon. It does
not matter whether the departments
are organized by product, region,
function or customer group, they will
still develop a loyalty to their
department and tend to promote the
interests of that department over
those of others. It is diffificult to
avoid this tendency
 Horizontal fracturing between units
at a similar level, whether they are
business or functional units, is
common
  Information is power and the release
of that information from one unit to
another is often not a main priority
but difficult to achieve
 Within each product division, there
may be the same functional
departments. Each group has its own
functional specialists who are likely
to duplicate much of the work done
elsewhere
Regional Organizational Structure
The regional organizational design
shifts the emphasis from the supply to the
demand side. It is better suited to a market
or customer orientation, particularly where
markets and customer wants to differ
significantly in character. In this design
structure the departments are demand-
oriented.
Benefits of Regional Organizational
Design
• It is appropriate for industries in which
cultural difference is important. At the
international level, products which have
signifificant intangible attributes lend
themselves to this design since the attrib
utes themselves are often culture-related
• It suits industries in which the system of
distribution differs
• It helps to meet the increasing emphasis
on product differentiation and the need
for customization
Weakness of Regional Organizational
Design
• This design loses the advantages of cost
reduction which accrue to the first design
principle
• It may even act to discourage technical
change
• It moves the enterprise away from a global
organizing principle
• It encourages an even more tenacious form
of empire building based on regional units.
Geographic distance and language barriers
tend to reinforce this
• Almost certainly the application of this
organizing principle adds another layer of
management to the organizational structure.
The centre may have to make up its mind
how much decentralization it will allow
• There may be duplication and a loss of
coordination between the regions. For these
reasons the Ford Motor Company dropped
its regional design structure
Functional Organizational Structure
The functional organizational design
is usually the first form of
specialized design structure to appear
in any organization, certainly where
there is only one business unit. The
design is appropriate where the
enterprise produces a narrow range
of similar products or services,
perhaps best of all, where there is
only a single product or service.
Benefits of Functional Organizational
Structure
• It gives enterprises a high degree of
centralization which tends to make them
potentially closely integrated
• It concentrates functional expertise in one
area and makes possible easy central control
of these functional areas and the quick
diagnosis of functional problems. When
there is a deterioration in performance, it is
difficult to identify the problem without a
significant delay. A functional organization
allows this to be done more quickly
• It also promotes in-depth promotional
expertise, an expertise which can become a
core competency
Weakness of Functional Organizational
Structure
• Empire building derived from functional
myopia and an overemphasis on function-
directed career paths
• Strategy-critical activities may be cross-
functional, so that the functions may get in
the way of making good strategy and
building core competencies
• In order to achieve cross-departmental
cooperation, much work may be thrown
onto the CEO, who may deliberately put in
place a department responsible for strategy
Customer Group Structure
The customer group design is
appropriate where there are
customers with different needs who
divide into discrete groups. This
structure is appropriate where the
needs of the different customer
groups differ significantly and/or
where different marketing or
distribution systems are required.
Benefits of Customer Group Structure
• It allows a significant degree of
customization by market segments
• It caters for significant differences in the
system of distribution
Weakness of Customer Group Structure
• There are serious duplication problems
• There are major problems of coordination
and communication
Matrix Design Structure
two of the other principles are
combined, so that the enterprise has a dual
structure.
Benefits of Matrix Design Structure
• This structure reflects the importance of
two organizing principles
• It is intended to promote integration, by
assisting coordination and communication
and countering the usual problems which
emerge in these areas
• From the perspective of strategy, it gives
deliberate attention to more than one
dimension of strategic priority
Weakness of Matrix Design Structure
• The structure is a complex and probably
confusing one
• It can lead to conflicting influences
slowing communication and creating delays.
The whole decision-making process may be
slowed unless one line of authority prevails
• Having two bosses, or two principals, may
be an opportunity for agents to make space
for the pursuit of their own interests or can
even be a source of confusion about what
their objectives really should be. There are
likely to be many trade-offs and
compromises
• There may be a significant deterrent to
entrepreneurial activity and the design may
be disempowering middle-level managers
Ideal type of Structure
1. Product Design Structure
2. Regional Organizational Structure
 3. Functional Organization Design
Structure
4. Customer Group Design
5. Matrix Design
Hybrid Organizations- with complex and
apparently irrational structures. Many have
different parts of the organization which
separately use as many as three or four
different design principles.
Restructuring- To modify complex
structures in a significant way is a costly
exercise. Restructurings are rare events
which need careful preparation. For that
reason, structure, having developed a life
and history of its own, sometimes
determines strategy.
Five C’s- The effective formulation and
implementation of strategy depends upon
satisfaction
• commands issued at the
appropriate time
• control, whether formal or
informal, direct or indirect
• coordination of the different parts
of the organization
• communication flows through
proper conduits
• conflict being contained and
creatively channeled. In some
countries, such as Japan and others
in the Confucian world, conflict
might be replaced by consensus,
with the emphasis on avoiding overt
conflict.
Informal Structures- are often as rich in their
variety of forms as formal structures.
However, they do not intend for long-time
use and some do survive beyond the short
term.
Galbraith Star- Objectives, processes,
structure, strategy, Incentives, and culture
Monitoring- is the systematic supervision
of subordinates and the regular appraisal of
their performance. It assumes that there is
some follow-up action which results from
such monitoring.
Sanctions- a threatened penalty for
disobeying a law or rule, official permission
or approval for an action.
Incentive System- in organizational
settings, a set of rewards and rules for their
disbursement that is designed to influence
future performance. 
Extrinsic Motivation- An extrinsic
incentive system is usually based on a
system of bonuses. If employees learn to
respond only to extrinsic motivation, that is,
to a material or pecuniary reward of some
kind, this may have the result of limiting the
contribution made to strategy making in its
broadest sense.
Intrinsic Motivation- the desire to
achieve for its own sake. It also known as
the, ‘Personal Motivation”
Organizational Culture- consists of a
complex set of common values and symbols,
shared by all members of the organization,
which can influence the way in which
members of the corporation or organization
behave.
1. Power Culture- the central power
source. The culture is homogeneous
 and strong, since only the like-
minded continue long in employment
positions in such an organization.
The organization is capable of being
flexible and quick-footed.
2. Role Culture- is beloved of
management textbooks and
sociologists. The defining feature is
functional specialization, reflected in
the existence of separate functional
units, coordinated by a top layer of
senior managers.
3. Task Culture- is the immediate
project and the tasks associated with
it. The undertaking of the task
requires expertise, and therefore the
knowledge that expertise brings. The
structure is likened to a net, with the
strands representing specializations
relevant to the task at hand and the
knots the center of power and
influence.
4. Person Culture- occurs when for
some reason the individual possesses
talents or skills which are critical to
success in the industry. The
individual is the dominant factor, so
that the organization consists of a
cluster of individual stars carefully
recruited or developed.
CHAPTER 13: WHEN TO COMPETE
AND WHEN TO COOPERATE
 Zero-Sum Game - a game in which if there
is a winner, there must be a loser
What Other Enterprises Know About
Themselves and Their Competitors;
 What is this knowledge likely to be?
 Is there an asymmetry in the knowledge
held by the enterprises?
 Does one know more than another?
Reading such unwritten strategies is difficult:
 The strategy may not exist as an explicit
statement and may be implicit
 The reading may be an incentive for
others to conceal their intentions.
Worse, there may be a deliberate
intention to mislead
 The behavior of different representatives
of an enterprise may be inconsistent.
The principal problem is to read the
differing strategic objectives of all the
main players
 There is always the problem of
strategists changing their mind or
adjusting specific objectives to changing
circumstances
 The time frame may differ significantly.
One player may be looking ten years
ahead, another may be concerned only
with the immediate future. This may
lead to one looking to emphasize short-
term profit and the other to building
significant market share.
 The strategic situation of any player is
made more complex by the existence of
what is called the commons and the
tendency of other players to free ride.
 shorthand for common property, that
is, a public good, and a resource or
simply a property which is accessible
to a number of potential users or
consumers, sometimes all potential
consumers, at a price which does not
cover the real cost of its use, in the
extreme case at no charge at all.
Some of the commons is directly relevant to
business:
 At the industry level, the supply of
trained workers or managers may be
part of the commons, that is, freely
available to all players within those
sectors without the need to incur the cost
of training. Anyone can recruit without
incurring such a cost
  The results of publicly available
research are another example, insofar
as the knowledge cannot be patented
and is freely available to all.
 Free riders - those who exploit in some way
the existence of the commons, engaging in
opportunistic behavior to take advantage of
the low or non-existent price
 Game Theory - used to aid understanding
of what is happening in various strategic
situations.
 emphasis on the benefits of competition
in most economics texts is based on the
operation of Adam Smith’s ‘invisible
hand’ of market forces, which is alleged
to produce a maximization of the
common good through the pursuit of
self-interest by all
 Prisoner’s Dilemma - does not appear to
have relevance to the business
or management world. However,
appearances are deceptive and it is worth
describing the dilemma at length before
applying it to four typical strategic
 Dominant Strategy - one in which, given
the rules and the structure of information,
there is a preferred strategy for each player.
Focuses attention on the assumptions made
concerning objectives and situation:
 What does it assume about the behavior
of other players?
 What are the players trying to
maximize?
 What is the game’s time perspective?
Five Distinct Elements to Any Game:
 the identity of the players
 the value added by the game
 the rules of the game
 the players’ tactics
 the scope of the game.
Game theory assumes simplified rules to the game.
The rules come from:
 practical requirements, such as the
mechanisms for the transmission of
information between players
 custom or convention, such as the norms of
ethical behavior or the normal behavior in a
market, including, for example, actions such
as refraining from price discrimination
 the law, which outlaws a wide, but varying,
range of practices
 any contractual constraints, such as giving
the right of last bid to the incumbent in an
existing arrangement which is being
renegotiated.
 Evolutionary Stable Strategies - which
evolve over time and are adopted by all
participants.
 Tit-For-Tat Strategy - a player does to
another player today what that player did to
it yesterday.
 The boundaries of a game determine its
scope.
Important Points Regarding the Nature of
Strategy Making:
 A strategic player can make a new game
as well as take the game on offer. The
player is a proactive strategist, not just a
reactive one.
 Games do not need to be zero-sum games.
It is better to create games which have
winning situations for all players. Part of
the objective of any game is to maximize
the value added. Other players may want
to compete and force competition on you.
Another game is to persuade them to
engage in cooperative behavior.
 In order to be successful, a player does not
need to have a unique strategy. There is
not one strategy good for all times and all
circumstances. Strategies can change. It is
possible to imitate the successful strategy
of other players.
 A player should attempt to see the whole
picture including all its games, not just
recognizing the players who can affect the
outcome of one particular game, but
linking this game with other games with
more significant outcomes.
  Allocentric strategies are more effective
than egocentric strategies, therefore the
respective games should be played the
same way. They have to consider the
consequences of the actions of other
players. The players must take account of
the strategies of these other players.
The Four Situations in the Universality of
Prisoner’s Dilemma:
1. Price strategy - relates to how price
levels are fixed in oligopolistic markets
 assumes that under oligopoly, price
competition can result in losses for
all players and that a price war is to
the detriment of all the players
2. Entry into a new market - There is an
existing monopoly but the possibility of
a new entrant
 One of the barriers to entry is the
possibility of retaliatory action by
the incumbent monopolist
 There is sequential instead of
simultaneous decision making,
which makes the second situation
more realistic.
3. Provision of Training (The
commitment of resources to training or
other activities closely linked to the core
activity of the enterprise) - may involve
a significant commitment on the part of
both the trainers and the trained
 can derive a benefit from their
increased employability which may
or may not justify any cost
individually incurred
4. Withdrawing a Deposit in a Financial
Crisis (The withdrawal of funds from a
threatened financial institution) -
enterprises which are in danger of
liquidation are faced with a number of
creditors all concerned with extracting
their money
 creditors are concerned:
 What should be the strategy of
each depositor?
 Should each seek to take out its
money as quickly as possible?
How to Cooperate
twofold problem for an enterprise
 recognizing when to cooperate
 identifying how to organize the situation
so that the best outcome is recognized
by all the key players and a cooperative
outcome achieved
The situation requires the use of three
appropriate cooperative mechanisms:
1. Spontaneous Self-Organization - involves
tacit cooperation by the players
 leaves the initiative to the spontaneous
response of individual players faced by
the challenges thrown up in the relevant
situations
 raises a number of questions:
 Is this realistic?
 Who takes the initiative in
promoting cooperation?
 Does a leader emerge
spontaneously?
 Credibility of any threat depends on:
 the reputation of the player issuing
the threat
 the writing of a specific contract,
expressing a commitment to go
ahead with the threatened action
 the deliberate burning of one’s
boats, closing off any alternative
paths
 chance – it is out of the control of
the issuer of the threat
  The reaction to any signal depends on
the objective of the player, which might
be more than just cooperation, including
a desire to:
 gain more information
 force withdrawal of the original
signal, or the intention expressed in
that signal
 offer an alternative course of action.
 two sides to what is called signal
effectiveness
 accurate interpretation of the signal
 appropriate reaction to the signal
 signal reaction comprises:
 Magnitude (size of response) -
there is a whole range from no
response to a dramatic response
which signals either total acceptance
or total rejection of the proposal
 Domain (areas of response) - is
there a behavioral response? What is
the nature of the behavior?
 Speed - response immediate or
deliberately delayed?
2. Industry-Organized Action – when
cooperation can be
organized within an industry, usually with
the leadership of one or several large
players, often working within an industry
association, sometimes with outside
prompting, where it is needed
 May be potentially illegal, in that they
are perceived to be anti-competitive, but
there are areas where this is not the case
3. Government-Imposed Cooperation –
when cooperation is enforced by an outside
body, usually by a government or some
agency endowed with a statutory authority
to force organizations to accept cooperative
behavior
 assumes the possibility of a benevolent
and informed regulator with a real
interest in implementing the best
outcome
 several possible consequences:
 A lack of incentive to reveal the true
situation of an individual player or
the proposed strategy of that player
to the authority imposing the
cooperative solution.
 Every incentive to seek ways of
cheating. Because there is a
tendency for the regulating agency
to be kept in the dark, there may be
an enhanced chance of secret
opportunism.
 Action to avoid the consequences of
regulation. This may involve corrupt
behavior or control of the regulators
in the interest of particular private
players.
Strategic Alliances
 Coopetition - enterprise is simultaneously
competing and cooperating with the same
enterprise
 Strategic Alliance - one of the most common
forms of cooperation
Various Motives for Cooperation:
 Reduction of vulnerability to strategic
risk. Many such situations can be
expressed as examples of the prisoner’s
dilemma.
 Avoidance of exploitation of a commons
and therefore the occurrence of free
riding.
 Leverage of existing competencies by
accessing and linking with the
competencies of other enterprises.
 Increase in the scale of commitment by
individual organizations.
Three Explicit Organizational Forms of a
Strategic Alliance:
1. Joint Venture - combines the assets of
two or more enterprises in a new
enterprise independent of the partners.
2. Equity Strategic Alliance - occurs
when partners acquire some proportion
of the equity of another enterprise
3. Non-Equity Strategic Alliances - occur
when a contract between partners
 indicates a commitment to cooperate in
some aspect of the partners’ activities
Business Level: Four Common Types of
Alliance: (Distinguished by a Different
Motivation)
1. Complementary alliances can be
horizontal alliances between potential
competitors or vertical alliances linking
enterprises which are located at different
points in the value chain.
2. Competition reducing alliances are
designed to reduce the intensity of
competition within an industry.
3. Competition response alliances are an
attempt to cope with increased
competition resulting from the entry into
an industry of a new player(s).
4. Uncertainty reducing alliances are put
together to reduce uncertainty or risk, of
whatever kind.
Corporate Level: Two Main Kinds of Alliance:
1. Diversifying Strategic Alliance - allows an
enterprise to begin a move into new product or
service areas and helps it to avoid the problems
of mergers or acquisitions which do not work; it
can reduce uncertainty or risk generally
2. Synergistic Alliance - rather like a
complementary strategic alliance at the business
level
Managing Strategic Alliances
Organizations are as likely to engage in cross-
border alliances as in domestic alliances. They
do this for a number of different reasons:
 Typically, multinational enterprises
(MNEs) perform better than domestic
ones
 In many industries and many countries,
the scope for domestic merger or
acquisition may have been exhausted
 Other modes of entry or participation in
the global scene may be impossible,
costly or difficult to achieve
 Such alliances may also help the
enterprise to adjust to a rapidly changing
environment.
CHAPTER 14: MANAGING RISK
The Universality of Risk Management
Effective risk management requires the taking of
an explicit attitude to risk and careful
consideration of the actual riskiness of
possible outcomes.
Four Major Elements in Determining Risk
Appetite:
1. Economic Health of the Enterprise -
partly its general profitability but notably
its immediate liquidity position
 Vulnerability may be a matter of:
 chronically low profits, as with the
airlines
 persistent loss making, as with many
dot-com companies
 low financial reserves and poor
borrowing ability.
2. Personality and Motivation of the
Strategists Themselves -perception of
performance outcomes is colored by the
position of the observer and reflects the
confidence with which expectations of the
future are held by that observer.
 Risk aversion - often reflects the past
history of the individual
3. Culture of the Enterprise - whether it
encourages or discourages risk taking
 invariably involves an attitude to risk
and risk taking
 partly the result of past behavior and
its outcomes what succeeded in the
past and what failed and partly the
result of the attitude and influence of
leaders, past and present.
4. ‘Political’ Interaction Between Key
Decision Makers - level of conflict within
the enterprise.
 Conflict can prevent decisive action
and encourage risk averse behavior
Two Ways of Measuring Risk
1. Variance in A Key Performance
Indicator - dwells on the general
tendency in some sectors of the economy
to variation.
2. Size of Possible Extreme Fluctuations
Occurring with A Defined Probability -
focuses on the shock of the occasional
extreme event
Two Strategic Decisions Which Are Necessary
Preliminaries to Managing Risk
1. extent of the risk assessment
2. who should implement it
 Risk Assessment - what level of resources
is it desirable to commit to such an exercise
 thorough assessment of the level and
nature of risk
 involves the identification of risk-
generating events and the estimation of
their incidence
 Risk Managers - whether to do it ‘in-house’
or use the services of specialists
 decision depends partly on the size of
the organization, its capacity to carry out
an effective risk assessment and the
relative costs of doing it in-house or
outsourcing the service
 Risk-Generating Events - these
fluctuations are the result of events
elsewhere in the world
Strategic Response to Risk
Three Main Generic Strategies Which Are Valid
Techniques of Risk Control.
1. Risk Avoidance
 Does it mean that you wish to invest in a
particular industry but avoid investing in
a particular country, investing
elsewhere?
 Or does it mean that you wish to invest
in a particular country, but avoid
investing in this industry rather than that
one?
 In other words, does it mean that you
reject one project in favor of another? In
so doing you make a choice based on
relative riskiness and relative return.
 Or does it mean simply that entry into a
particular industry or country is far too
risky, so that there is no entry at all?
2. Risk Management - Three Principal Ways
in which this can be done
a. Insurance - covers a specific type of
risk and it pays a premium to receive
this kind of cover
 Hedging - alternative commercial
management that requires putting
together, in the general market for
risk, offsetting risks, whether
directly or through a specialist
enterprise or specialized financial
instrument
b. Strategic Alliances and Risk Sharing -
shared with other related enterprises by
voluntary agreement
 focused on risk management and
involve a sharing of the risk
associated with particular projects
c. Government guarantee - involves
action by the government
 government might be ready to
compensate an enterprise for
excessive losses arising because of
extreme events
3. Risk Mitigation - strategic action is taken to
reduce the risk level to which the enterprise
is exposed
 building flexibility or diversification
into the enterprise’s strategy
 Risk Premium - simplest way of
conceptualizing and therefore understanding
the problem of risk
 All risk can be expressed as a risk
premium, which can be factored into
price levels, for example the interest rate
charged by financial institutions on a
loan.
Methods of Reducing Risk Which Are Open to
Any Enterprise
  Negotiating with government officials
or other major players to reduce
strategic risk
 Building a level of flexibility into a
project to allow for unexpected events
and possible setbacks
 Putting together a balanced portfolio of
assets or projects.
Direct Cost (of Removing Risk)
 gaining exact information about the risk
to which the enterprise is exposed
 negotiating an alliance or government
support
 insurance or hedging techniques
Indirect Cost (of Removing Risk)
 A loss in revenue may result from
sharing risk with a strategic ally
 Flexibility usually has a cost in lost
revenue
Most Common Problems of Concealment Arise
With:
 the employment of operating leases for
the assets used in key operations
 the securitization of benefit streams, that
is, bringing forward future revenue
streams
 the use of special-purpose entities to
take on obligations, that is, taking
liabilities off the balance sheet
 the creation of captives, that is, setting
up insurance companies to insure
against the risks carried by one company
only
Risk and Diversification
 Diversification - one risk mitigation device
which has been widely applied and
recommended
 deliberate holding of a wide range of
different assets, subject to different
levels of risk
 Portfolio Approach - basis of
recommendation of diversification
 borrowed from financial markets where
a number of conditions mean that risk
can be reduced to a negligible, if not
zero, level
 Condition:
 existence of something analogous to
perfect competition, in which there
are a large number of buyers and
sellers exchanging a wide range of
homogeneous products
 availability of good access to
information
 ease of adjustment of the portfolio
composition
 large data bank, built up from past
behavior, making it possible to
calculate the exact level of risk in
different asset markets
 independence of price movements
and risk from individual assets -
divide risk into two types:
a. Systematic - when the prices of
assets move together
b. Unsystematic - when prices do
not move together
Strategic Risk, Scenario Building and Strategy
Making
Five General Principles in an Overall Risk
Management Policy
1. The enterprise should concentrate on
providing an incentive to strategists and
operating managers to undertake any
value-adding activities which promise a
competitive advantage, particularly for
more than the short term.
2. The enterprise must not treat the main
control functions, relevant to the
implementation of a strategy, such as
accounting, quality control or even
strategy making itself, as profit centers,
in which the staffs is given an interest in
 maximizing profit, either by increasing
revenues or reducing costs.
3. The enterprise must appoint high-quality
external and internal audit committees,
independent of the CEO.
4. The enterprise must read the
environment carefully, notably for
possible threats, and understand all the
implications of that changing
environment and those possible threats
for the core business activities.
5. Evaluate all incoming information
critically, whatever its source.
 Country risk and competitive risk, which
together constitute strategic risk
Level of country risk is highly correlated with
the level of GDP per head in a country:
 The rich developed countries, which
have representative democracies in
which the legitimacy of government is
confirmed by regular elections, have a
low level of country risk, whatever
index or rating agency is consulted.
 Undeveloped economies, especially
those with governments subject to rapid
change or whose legitimacy is doubtful,
have high levels of country risk.
 Developing countries have an
intermediate level, which also tends to
be unstable.
Scenario building is the technique which
should be used. Most commentators, including
the country risk rating agencies, have a poor
record in predicting such sudden turns of
fortune. Where strategy making is based on
scenario building, it is sometimes called
scenario planning. Scenario building becomes
an integral part of the strategy-making process
itself. It is highly desirable to develop both in
combination.
CHAPTER 15. PARTICIPATING IN
THE GLOBAL ECONOMY
Different Modes of Entry into A New Market
 producing the product or service locally
and exporting it directly to the market
setting up a production facility in the
country in which the market is located
 organizing the setting up by a local
producer
Two Questions Which Must Be Asked on A
Periodic Basis
1 Should the company withdraw from the
commitment – a different issue from
making the initial commitment when
significant expenditures have become
sunk costs which cannot be retrieved?
2 Should the company move to a different
mode which represents a bigger
commitment, for example, from
exporting to direct investment?
Choice of A Mode of Entry Depends Largely
On:
 the nature of the competitive advantage
held by the enterprise
 the commitment of resources – the
greater the commitment of resources,
the greater the return and the greater the
risk level
 the return to be made – the lure is a
higher return
 the level of risk to which the company is
exposed – as is generally the case, the
higher the prospective return, the higher
the level of risk.
 Indirect Exporting - an enterprise may sell
its product as an input to another domestic
enterprise which then exports the assembled
product.
 Direct Exporting - company deliberately
sells to consumers outside the domestic
market
 may take the form of intra-enterprise
transfers across international frontiers,
one part of a multinational company
 shipping components to another part in
another country, an internal transaction.
 May be:
 Reactive - response to an
opportunity arising, perhaps drawn
to the attention of staff in the
company by others, sometimes
unexpectedly, sometimes in the
normal course of business
 Proactive - result of a deliberate
strategy on the part of the exporter
who actively seeks out new markets.
 Licensing - enterprise can sell the right,
either to use a particular process,
manufacture a particular product or exploit a
particular brand name, to a foreign
enterprise in a market into which the
enterprise wishes to sell
 Partner enterprise is then responsible for
producing and selling the product
 Franchising - special case of licensing,
involving a more complex and sophisticated
movement of assets, beyond the simple
transfer of intellectual property rights,
including the application of organizational
know-how.
 involves hiring the good name of the
franchiser
 may involve the transfer of
management expertise, even amounting
to an entrepreneurial input
 franchisee saves on marketing or
promotion costs by using the good name
of the franchiser.
 Foreign Direct Investment - enterprise
both produces and sells in the foreign
country.
 involves the largest commitment of
resources but also carries the highest
risk
 Three Main Ways of Engaging FDI
1. Joint Ventures - finding a partner
who will share risks and returns
2. Acquisitions and Mergers
3. Greenfield Projects - to start with
an empty site and build a facility
upon it
Participation Strategies and Competitive
Advantage
 Graduated Entry (Creeping
Incrementalism) - start with low risk, low-
cost entry modes, such as exporting or
licensing, and then, if the experience has
been rewarding, they move on to more
complex modes, such as investment, which
require a greater commitment of resources
Difficulties with Profit as the Sole Criterion:
Three Obvious Difficulties
1. It is necessary to consider carefully the
time frame.
2. Higher profit is often linked to higher
risk
3. There may be other non-profit
objectives, often strategic objectives,
which need to be taken into account
Country -Specific Assets and Enterprise-Specific
Assets
 Country-Specific Assets (Supply-Based
Explanation) - based on comparative
advantage and differing resource
endowments, principally the different
factors of production – land or resources,
labor and capital
 country exported those products which it
produced relatively more efficiently or
cheaply.
 Enterprise-Specific Assets (Demand-
Based Explanation) - based on the need to
meet the tastes of consumers with rising
discretionary income and the associated
product differentiation
 Created assets rather than natural assets
now help to determine the patterns of
foreign trade and investment
Internationalization
 Internationalization - a situation in which
transactions are taken out of the market and
placed within an enterprise
 Intellectual Property Rights - such as
patents, trademarks, copyrights, and even
organizational know-how of a more specific
kind, and the need of the enterprise to
protect these rights
Transaction Cost includes;
 Find suitable partners who will not
exploit the situation
 Write contracts which include all
possible contingencies
 Ensure enforcement, through periodic
resort to the courts, government bodies
or third parties who will not exploit the
situation
The Nature of a World (Global) Enterprise
 Multidomestic Strategy - strategic and
operating decisions are decentralized to the
strategic business unit in each country in
order to customize to the domestic markets
which are assumed to differ according to the
local cultures
 Global Strategy - standardized products are
offered to all potential customers, across
country markets
 marketing strategy is dictated by the
home headquarters.
 Transnational Strategy - seeks to achieve
both global efficiency and local
responsiveness, a difficult task, one
combining the benefits of product
differentiation with the benefits of low costs
 ‘think globally, act locally’
 World Enterprise (Global Enterprise) - an
enterprise which has completely transcended
all national boundaries.
Main Characteristics of a World (Global)
Enterprise
 It may have its headquarters in one
country, but this may not be the country
of origin but is chosen for reasons of
convenience or efficiency.
 It may have production or service
facilities all over the world but with no
particular concentration of facilities in
any one country, least of all the country
of origin.
 It is likely to have a presence in all the
major markets, notably the triad markets
and the fastest growing developing
economies.
 It will be engaged in generating FDI
flows and be in the process of building
significant FDI stocks across the world.
 It will generate most of its profits
outside the original home economy, the
proportion varying with the business
conditions in different areas of the
world.
 It is likely to use for internal
communication, and often for external
negotiation and contact, the universal
business language of English.
 It will have a cosmopolitan management
team recruited solely on the basis of
ability to do the job, and not on the basis
of country of origin.
 It is likely to have a distinctive corporate
culture, one developed to suit its global
nature and offset the natural home
country bias.
 It will hold a considerable portfolio of
intellectual property rights, which is the
basis of the significant benefits to be
derived from internalization and a
rationale
CHAPTER 16:Formulating Strategy
Formulating strategy considers the way in
which strategy formulation should and does
occur, including the nature and possible
sequencing of steps in the process.
Five phases in the evolution of strategy
making:
1. Meet the Budget (operational Control) -
Tight Financial Control
2. Forecast the Future (more effective
forward thinking)
-Strategic Allocation of Resources
3. Thinking Strategically (Heightened
Responsive to markets and
competition)
-Dynamic Allocation of Resources
4. Act Strategically ( Integration within
strategic framework of all resources to
create competitive advantage) –
Strategic Management of Resources
5. Plan Strategically (Formulation of
detailed Strategic Plan) -Strategic
Planning of resources
11 steps in Strategy Making
1. Studying, analyzing or, reading the
general environment, for any
opportunities or threats relevant to the
enterprise.
2. Reading the competitive or industrial
environment.
3. Forecasting, or more exactly, scenario
building, notably in the area relevant to
the enterprise.
4. Locating an attractive industry or
market segment (positioning), which
have favorable conditions, including
competitive conditions, offers
opportunities of an above normal
return.
5. Identifying the positive aspects of the
firm’s internal environment through
evaluating the organization’s resources
and making an audit of all these
resources.
6. Determining the enterprise’s
capabilities, given its resources and the
different ways in which they can be
integrated, and comparing these with
those of competitors, while considering
the enterprise’s potential strengths and
weaknesses
7. Considering core competencies as a
source of distinctive competitive
advantage, in the light of all the
possible strategies.
8. Formulating an appropriate strategy.
9. Acquiring any missing resources,
capabilities or competencies needed to
implement the strategy.
10. Implementing the strategy.
11. Monitoring the strategy
Two alternative models
 Positioning Model (also called as
Industrial Organization Model)
- the starting point is the external
environment of the enterprise.
Decisions about where to position
an enterprise are regarded as more
important than the capacity to
implement such a positioning.
- Steps in strategy making related
to Positioning Model (STEP 1-
10)
-This model is the world that the
economist typically assumes.
 assumed that markets are
competitive enough to impose one
highly specific but broad objective
on the enterprise, that which
accords with the interests of the
owners or shareholders which is
maximization of profit.
 All resources held by enterprises
within a particular industry are
assumed to be similar. The resource
positions of different enterprises
within the same industry do not
lead to different strategies.
  assumes that product markets are
heterogeneous, characterized by
different and changing conditions of
competition.
 Resource model (also known as
Resource -based model)
-start with the resource position of
the enterprise. Decisions about
internal organization are regarded
as more important. The resources
of the organization determine what
it can do and what its performance
is likely to be.
- Steps in strategy making related to
Resource model (STEP 4,5,6,7,8,10)
 profit maximization is impossible, given
the constraints on enterprises and that
they have different resource
endowments
 resources are by their nature dissimilar
or heterogeneous.
 The resources are relatively immobile.
They cannot be transferred without a
significant cost.
Strategic thinking – making room for
creativity
Types of creativity
 Responsive creativity
 Expected creativity
 Contributory creativity
 Proactive creativity
Creativity Drivers: External and Internal
Problem Type: Open and Close
How to release creativity
- Creativity cannot be planned; it is by its nature
unexpected. Assumes that the removal of
potential obstacles to creative activity frees the
innate desire to be creative. However, creativity
must be relevant to the strategic framework.
Alignment -The aim is to harmonize the
interests and actions of all staff and stakeholder
groups around the key goals of the
organization. A strong alignment is needed in
order to stimulate and channel appropriately
the creativity of staff so that they innovate in
ways which help achieve the strategic targets.
Self-initiated activities - means that they tend
to self-select for the job at hand, provided they
are not prevented by some obstacle, such as a
lack of time, excessive supervision or a poor
corporate culture. The goal is to avoid the
suppression of creativity. The role of the
organization is to release what is already there
and not in any way obstruct the natural desire
to be creative.
Unofficial Activity- Every unexpected creative
act begins with a period of unofficial activity,
sometimes an activity which takes place in a
matter of minutes, sometimes over a much
longer period, even years.
Serendipity- There are two aspects of
serendipity, the frequency of occurrence of a
fortunate accident and the ability on the part
of someone, who is in a position to do
something it.
Within company communication-The larger the
company, the more likely that the components
which make for creative action are already
present, but the less likely those they will come
together without help. It is critical for the staff
member to understand what the company does
and its expertise and capabilities.
New venture entrepreneurship-The key issue is
how a company can maintain the impetus of
creative entrepreneurship beyond the period
when an entrepreneurial leader usually
provides it from above. The impetus has to
come from below, in a process of autonomous
strategic development.
It is also told in terms of four processes. Two of
these – the so-called core processes – are
central to the new venture initiative as it is
initially conceived, developed and promoted:
✓ The cognitive process of defining what the
initiative means in technological and marketing
terms
✓ The sociopolitical process of imparting
impetus to the initiative, during which it is
championed by middle managers, especially
venture managers.
The other two – the overlaying processes –
comprise the way in which senior managers
become involved in incorporating the initiative
into a strategy:
✓ The administrative and institutional
mechanisms which set up or determine the
structural context in which the initiative can be
pursued
✓ The way in which the initiative leads to a
revision or redetermination of the strategic
context.
Intrapreneurship
➢ In the business management area, strategic
thinking involves a range of features which are
critical to good strategy making, particularly the
articulation of the vision and the strategic
objectives associated with it and their
continuing updating to accommodate
autonomous strategic developments:
 The preliminary existence of an explicit
strategic idea(s) or initiative which can
be the basis for a commercial operation
and a sound business model based on
competitive advantage
 The continuing emergence of similar
new ideas from within an existing
company
 The existence of many potential
strategists, each with his or her own
domain, those who think strategically,
have a distinct strategic orientation and
could be described as each having his or
her own vision
 The nature of strategic directions set for
an enterprise and how they are
articulated in.
 The reconciliation of the different
interests of stakeholder groups and the
different visions of the strategists
 The addressing, directly and properly,
of the uncertainties of the future as
they relate to the conduct of business,
particularly the potential interactions
between a changing external
environment and the internal resources
of the organization
 Identification of specific opportunities
and threats or risks outside the
enterprise.
 Identification of the kind of information
which is required for realization of the
strategic vision and the process by
which this information might be
acquired
 Use of the creative imagination to
devise innovative ways of dealing with
problems arising from the realization of
the strategic vision
 Determination of the capacity of the
enterprise to engage successfully in
strategic management and an
understanding of the limitations on the
effectiveness with which strategic
 management and strategic planning can
be used
 The recognition of the limitations of
strategic thinking, that business
performance depends upon
appropriate motivation and efficient
management as well as creative
strategic thinking.
Nature of Strategic Management
The emergent strategy
➢ It is impossible to deal with formulation and
implementation of strategy as different and
distinct stages in strategy making. Since there is
a massive overlap between the two, they
should occur simultaneously. This fusion is a
defining characteristic of an emergent strategy,
which is one which emerges as the result of the
implementation of a strategy already
formulated and its reformulation.
The procedure is to systematically analyze
these problems and redefine the process of
strategy formulation and implementation to
accommodate them.
 The need to encourage creativity
 The problem of imperfect information,
ignorance and uncertainty imperfect
information takes two forms.
 The indeterminateness inherent in
strategic risk
 The problem of solving the agency
dilemma
 The necessity of remaking in some way
the external and/or the internal
environment in order to maintain
competitive advantage
 The temporary nature of any
competitive advantage, or monopoly
profit, created by the enterprise.
E-learning strategy
 Strategy becomes part of a process of
discovery. Discovery is made necessary
by the elements indicated above – the
imperfection of the information
available, the indeterminateness of
outcome in the strategic situations
likely to occur and the universality of
the agency dilemma and the associated
opportunism. Since change is relentless,
any detailed strategic plan would
become obsolete even before it begins
to be implemented.
 Nor could any plan spell out in detail
possible strategic reactions to all the
contingencies which might occur.
Knowledge is highly specific to
particular sectors of the economy and
highly specific to particular times and
circumstances. It is impossible to deal in
advance with every eventuality.
Strategy is about the emergence of new
possibilities, some the result of the
release of creativity within the
enterprise.
Putting together an integrated strategy
 The arenas or peaks. This is where the
enterprise will position itself, where it
will be most active and where any
focus will be on the associated
activities. It considers:
 The enterprise’s range of business units,
with their products and services
 The market segments to which the
products and services are sold
 The geographic areas in which the
customers in those market segments
reside
 The core technologies employed to
produce the products and services
 The activities in the value chain on
which the enterprise concentrates.
✓ The competitive advantage differentiators –
choosing a generic strategy. The choice of a
generic strategy raises the following questions:
 How will the enterprise win over its
competitors?
 What is the nature of the competitive
advantage which is at the heart of its
strategy?
 Is it the cost or price level?
 Is it the image or branding of the
company and its products?
 Which product attributes or consumer
utilities are involved – style or
reliability, luxury or prestige, safety or
healthiness?
 Can utilities be delivered to the
consumer in combination?
 What value does the company offer to
consumers?
✓ The vehicles or modes of participation. How
exactly will the enterprise get to where it
desires to be? There are various methods
which have been discussed already:
 Organic or internal development
 A strategic alliance, such as a joint
venture
 Licensing
 Mergers or acquisitions linked
sometimes to demergers, a vehicle in
which GE excels all these methods have
been discussed in earlier.
✓ Staging or pacing
Staging involves:
 How the enterprise will get from its
starting point to the target point
 The speed of movement and the exact
sequence of moves which are best
suited to a successful completion. The
speed of expansion will be driven by a
range of different factors including:
 Resource availability
 The urgency of movement
 The credibility of the enterprise in
trying to do what it is doing
 The early successes achieved which
might make possible acceleration.
If there are key initiatives to be attempted, in
what order should they be undertaken?
✓ Economic logic and corporate social
performance the economic logic of any strategy
concerns outcomes as defined by performance
indicators. Corporate social performance
reflects the need to satisfy stakeholders other
than the owners.
Element of Strategic Management
Strategic management involves a combination
of the following:
 Undertaking a scenario-building
exercise which outlines possible futures
 Formulating core and contingent
strategies
 Articulating the vision of the enterprise
and disaggregating this as objectives
and targets in a clear and detailed way
 Communicating these detailed
objectives to managers
 Giving all the functional areas their
appropriate place in the realization of
enterprise objectives
 Integrating different functional areas of
management in the achievement of
enterprise objectives
 Linking specific functional plans with
the achievement of enterprise
objectives
 Considering how to get access to any
resources required which are not
already available within the enterprise
  Considering the role of the business or
corporate plan in strategic management
 Considering what is meant by a
strategic plan and how far the elements
of strategic management can be
embodied in such a plan.
Strategic Planning
➢ It has already been made clear that a
strategy is not the same as a plan. In has
frequently been shown how difficult it is to plan
thoroughly in the context of ignorance and
uncertainty, and rapid change in the
environments in which strategy making occurs.
The faster the rate of change, the more difficult
it is to make the final step to strategic planning.
strict or a loose definition of planning:
 A strict definition of planning would
insist on the existence of a
comprehensive detailed plan covering
all functional areas, for several years
into the future, usually at least three
 A loose definition of planning would
accept a business model, the annual
corporate plan or even the general
framework of a set of broad long-term
objectives as sufficient to show the
existence of planning
For the moment, the looser definition is
accepted in order to distinguish between four
different degrees, even types, of planning.
These are:
 Minimal planning – an annual business
or corporate plan within the
framework of broad long-term aims
and an apparently viable business
model
 Focused planning – the specification of
key targets, often in narrow functional
areas, with some detailed analysis of
how to achieve them, but little outside
the area(s) of focus
 Comprehensive planning without all
the detail – specific and coherent
aggregate targets but no detailed
disaggregation of what is needed in
order to achieve these targets
 A fully comprehensive plan which
spells out in detail, at all levels of the
organization both targets and the
resources needed to achieve those
targets.
Determinant of the nature of planning
There are four main determinants to the kind
of planning which will be used:
 The rate of change in the industry, on
the supply side, particularly the rate of
technical change, and on the demand
side, the rate of change in tastes or
consumer fashions, and the degree to
which it is possible to anticipate the
changes which are occurring.
 The point in the industry or product
cycle at which a particular product or
industry is located – infancy,
adolescence, adulthood or old age. Is
this sector part of the new or old
economy? Has the particular product or
service already been ‘commoditized’?
 The competitive conditions in the
industry. Is there easy entry and fierce
competition? Is there a natural
monopoly, or the usual oligopoly or
duopoly?
 The condition of the organization itself.
Is it in its infancy? Is it dynamic and
profitable, or stable and making a
satisfactory profit? Or is it in crisis for
some reason, facing a turnaround
situation?
Element of strategic Planning
Strategic planning therefore involves:
 The fixing of definite time horizons for
the achievement of strategic intent.
 The establishment of a strategic
planning department, or the
appointment of particular personnel,
professional strategists designated to
formulate, oversee the implementation
of and monitor and adjust plans
 The identification of appropriate
information streams which will allow
the preparation of a plan and the later
monitoring of planned target
achievement
 The establishment of conduits for the
communication of the plan to various
parts of the enterprise and the
generation of continuous feedback
from within the enterprise on plan
formulation and implementation
 The drawing up of detailed and
coherent plans in all the main
functional areas of management, for
example finance, operations,
marketing, human resource
management, research and
development, all consistent with the
broad objectives set and the resources
available
 Detailed allocations to the various units
of the resources needed to fulfil the
plans
 The preparation of mechanisms for the
adjustment of a plan to take account of
the changing external environment.
CHAPTER 17. Implementing Strategy
Key Areas:
Common weaknesses in strategy
implementation
Tokenism
 There is a danger of tokenism,
which can be defined as the wish
to have a strategy because any
respectable organization must
have a strategy, not because it has
any intention to implement it. The
strategy is put together quickly,
with inadequate preparation, a
minimum of effort and little
investment of resources. No self-
respecting manager would dream
of implementing such a strategy.
Bureaucratization
 Strategy making encourages a
tendency to excessive bureaucracy
– too many reports, too many
meetings, too many statistics, far
too much detail altogether. In this
approach, making strategy may
even become a substitute for
action, with an assumption that
more means better
Strategy as risk control
 In this view, strategy is about
heading off potential threats. It is
possible to interpret risk control as
the central activity in strategy
making, assuming that the ultimate
goal is the avoidance of all risk.
Strategy as short-term profit maximization
 Strategy can be used to encourage
an obsession with short-term
profit, or short-term opportunity at
the expense of long-term market
share or long-term growth. The
short-term opportunities are more
obvious and more easily exploited
than the medium and long-term
opportunities.
Strategy as reproduction of the past
  Strategy making can encourage a
concentration on the present
through the mirror of the past
rather than on the present through
the mirror of the future, which is
seen simply as an extrapolation of
the past. The focus is on the
existing strengths and weaknesses
of the enterprise and existing
rather than future markets.
Strategy as control of wide uncontrolled
ambition
➢ Strategy is concerned with breaking free
of all the constraints of the past and
completely remaking the environments of
the organization.
The dangers of such an approach are twofold:
 The creation of a straitjacket from
which it is difficult to escape
 A tendency to self-deception which
might be expressed in deliberate
distortion, and even rewriting, of
performance indicators. The strategists
cannot believe that they are failing.
The five Cs and strategy implementation
 Coordination
 Communication
 Command
 Control
 Conflict/Consensus
Degrees of conflict
 A condition of latent conflict
 A condition of perceived conflict
 A condition of felt conflict
 A condition of manifest conflict
 Conflict aftermath
Type of conflict situation
 The first example involves a
potential conflict between the
marketing and operations units.
 Involves a potential conflict
between both the operations or
logistics and marketing units and
the finance unit
The interactive or iterative nature of
strategy making
The process of iteration
 Strategy making involves a number
of different processes of iteration.
All organizations are hierarchical
and inevitably the targets or
objectives set at the topmost level
of the enterprise are more
aggregative than they are at the
bottom level. The larger the
organization, the greater the
degree of aggregation.
 The core iteration occurs within the
enterprise itself,
 General iteration between the
external and internal environment
 Iteration is that between the
different layers of strategy making
at national, community, industry or
enterprise levels
The problem of iteration
✓ Iteration takes time, exactly how much
depending on the number of different
layers in the organizational hierarchy and
on the nature of the conduits of
communication and command.
✓ Somewhere the iteration may become
blocked
Boundaries
➢ Crossing the boundaries
✓ Coordinating strategy with strategies outside
✓ Discovering assets, resources or
competencies outside which might desire
access.
✓ Forming strategic alliances and cooperating
with outside.
Staging
➢ - way strategy moves enterprise from its
current position to its target position
two particular aspects of staging which must be
considered:
✓ alternative routes - available for moving
between the two points.
✓ choice of the speed - movement occurs on
those routes.
Alternative Routers
➢ - movement towards simultaneous
achievement of a number of key targets.
Targets
-may be achieved at different dates.
-prioritized in two ways
1. importance
2. sequencing.
Alternative speed
✓ former - competitors leave them behind
✓ latter - enterprise is trying too much in the
time available and moving in lurches as
successive bottlenecks are created and released
Leadership and the role of the center: a
specialized strategy division
✓ articulator of enterprise’s mission, setting
the objectives in a clear way and ensuring of
moving in the right directions
✓ controller, direct or indirect, if necessary,
disciplining the various parts- keep performing
as anticipated and within limits of strategic
objectives.
✓ banker, using internal financial market to
allocate corporate funds, at lower cost than,
manage and providing better monitoring of
financial controls, within the parameters of the
strategy adopted.
✓ coordinator, particularly in diversified
company - need for joint asset utilization.
✓ protector of the intangible assets of the
company, the brands and the knowhow which
can so easily be dissipated.
Separate strategy Unit
✓ superimpose in a matrix, form a strategy
structure on line management of the company,
and whatever principle is used
✓ establish a separate functional division
alongside, and of equal status with, the other
functional units such as operations, finance or
marketing.
✓ be directly answerable to the CEO,
particularly where there are separate business
units organized on a product or other basis,
whose activities need to be harmonized
Advantage
✓ signals to all employees the importance of
activity.
✓ allows separation of strategy from other
functional interests.
✓ strategists with the time to consider the
broad view and look further ahead than most
functional units are able, given the immediate
demands of operations.
Disadvantages
✓ dangers in an extreme detachment of
thinkers from doers; it is only in doing that the
strategist discovers opportunities and threats
✓ encourages an excess of bureaucratization
which some already think is inherent in strategy
making – presentations which are too long,
reports which are made too frequently and at
excessive length, and meetings which demand
far too much time
✓ Strategic thinking may be discouraged by the
very existence of such a division.
Role of strategy Unit
✓ extended form of tokenism, a separate
division highlighting that you are doing the right
thing but without real significance.
✓ think-tank, gathering information. At the
same time, it may or may not have a role in
promoting strategic thinking throughout the
organization.
✓ executive arm of the leader or the central
strategy-making team.
Chapter 18. Monitoring Strategic Performance
Monitoring strategic performance – monitoring
of strategic outcomes
- strategy is genuinely successful?
-profit- performance indicator and a motivator
and interests of all stakeholder groups
Monitoring
-act of reviewing the appropriateness of a
strategy and overseeing way it is implemented.
- necessary to evaluate both effectiveness of
general strategy and the efficiency which
specific targets of a strategy are implemented.
Effectiveness - general appropriateness for the
organization of:
✓ areas chosen or peaks scaled
✓ competitive differentiators which are part of
the generic strategy
✓ vehicles for strategy achievement
✓ staging and pacing of any strategy.
Integration of monitoring into strategy making
stages in the formulation and implementation
of a strategy, this imperative must be borne in
mind.
The following are required as necessary parts of
monitoring:
✓ Key performance indicators - selected
✓ Control systems - put in place to promote
achievement of targets
✓ Performance must be continuously
appraised- as a whole
✓ strategy must be adjusted where necessary.
key aspect of success is the degree which new
ways of meeting the broader aims are thrown
up by the strategy process itself.
Strategy Canvass
- sees strategy as nothing more than strategic
thinking and uses very simple mechanism for
monitoring the strategic performance of the
enterprise.
All that is needed for a good strategic profile is:
✓ focus, either - particular attribute or a set of
attributes of the products or services provided,
which stand out as special
✓ source of differentiation in these attributes
✓ compelling tag line- summarizes and creates
a graphic image of both focus and
differentiation.
procedure allows the staff to check whether it
has achieved such a strong strategic profile.
There are four stages, all or some of which
could be part of this process:
✓ staffs (whatever level) - invited to portray
visually their view of the existing strategic
profile
✓ If does not produce either a distinctive focus
or a differentiation,
staff - shown that this is the case and asked to
explore with customers and complementors
how both might be achieved and what they
think the strategic profile should become.
✓ different profiles which emerge from the
staff are compared and a desirable profile
chosen from the alternatives.
✓ desirable profile is communicated to the
rest of the company.
Monitoring and learning
interpretation of strategy - has strong
implications for the nature of monitoring.
Monitoring - not a discrete activity (It is
continuous and never ceases)
-process whereby strategists review the
appropriateness of a strategy to changing and
incorporate any improvements
-process is performed on the run. Quick
judgements have to be made.
- generates learning, which in turn results in
greater efficiency and greater effectiveness in
strategy making.
Measuring
What is being monitored is highly complex.
Task much easier = what is monitored is
reduced to quantifiable indicators
much easier to compare = what is
measurable(whether with past performance or
performance of competitors. This is not always
possible)
The Balanced scorecard
-One method of monitoring complex project is
to
- systematic application of monitoring based
on assumption that the processes of
formulation, implementation and monitoring
of a strategy are both integrated and
continuous.
- comprehensive framework which translates
an organization’s vision and strategy into a
coherent set of strategic initiatives and
performance measures.
- described with accuracy as a complete
strategic management system.
-not intended to measure compliance with a
pre-established plan or put in controls over
current operational performance, rather to
‘articulate the strategy of the business, to
communicate the strategy of the business, and
to help align individual, organizational, and
cross-departmental initiatives to achieve a
common goal
There are usually four key areas in the
standard balanced scorecard. (May be
customize the method according to the needs)
In the standard models, these are the following
areas:
✓ Financial performance (reduced to a single
measure) - level of profit or growth over time.
✓ performance of the organization in
satisfying - customers.
✓ performance of critical processes in the
internal value chain- including innovation.
✓ Performance in learning- and therefore in
innovating.
✓ Performance viewed from the perspective
of stakeholder groups other than owners,
managers or customers, - suppliers, strategic
allies or the local community.
✓ performance of people and the
development of human capital.
There are four steps in the procedure for
establishing a balanced scorecard:
Develop goals and measures for critical
✓ financial performance
✓ customer performance
✓ internal process performance
✓ learning and growth performance variables
scoreboard for each of these areas can be put
together. It should include:
✓ critical success factors – that is, those
factors that are critical to strong performance in
the designated area
✓ measures –quantitative indicators - which
performance will be measured.
✓ targets –level of achievement envisaged in
the strategy and to be attained in the time
horizon
✓ initiatives –special actions -required to meet
the targets
balanced scorecard is best described as a
strategy measurement system. Its use has a
number of advantages:
✓ Precision in performance evaluation.
Managers know exactly what is expected of
them.
✓ An all-round view. Managers must take a
balanced view of the performance of the
enterprise.
✓ Generation of important strategic
information. Managers can make better
informed decisions on strategy making.
✓ A single integrated report, one which is
concise and to the point.
Benchmarking
- analyses concern with quality,, including total
quality management and quality circles.
Microlevel- focus on performance indicators.
vital aspect of strategy and the achievement of
competitive advantage - benchmark every
activity against best-practice international
standards
Key performance indicators (KPIs).
- detailed measures established for major
strategic objective and for core processes.
Identification of KPI- key to day-to-day control
and evaluation of a strategy
continuous process- requires the specification
of indicators and continuous monitoring.
- relate to outcomes and the drivers of those
outcomes, that is, the key inputs or processes
needed.
Two steps in this logical progression:
✓ What are the outcomes desired?
✓ What are the key drivers which influence
these outcomes?
it is the element which produces the most
immediate and potentially the most negative
feedback if measures indicate a poor
performance.
Financial indicator
There needs to be a comparative context:
✓ Past performance of the enterprise
✓ Performance of other enterprises in the
industry
✓ Target levels, defined in a way which takes
account of what might be considered, on
objective grounds, a good performance.
five kinds of financial indicator:
Profitability Ratio
- considers the overall profitability

number of dangers:
• too many KPIs, diffusing any focus
• measures are poorly constructed or poorly
chosen
• emphasis is on inputs rather than outputs
• No action is taken on the basis of the actual Liquidity Ratio
movement of the KPIs and their relationship to -considers the liquidity position
the targeted movements. - what position it is in to meet any immediate
demands on its cash income or cope with
The role of Financial Control extreme but temporary fluctuations in the
Financial performance and financial controls - level of that income.
important parts of a strategy, but an excessive -possible : profitable and yet be unable to meet
concern with financial indicators can have short-term obligations.
undesirable outcomes.
✓ single-minded obsession with short-term
profit and its growth at the cost of longer-term
profit - can lead to distortion of accounting
results or a selective choice of performance
indicators, but even to deliberate falsification of
both.
✓ excessive attention on one stakeholder
group, the owners- at the expense of all other
stakeholder groups- not only reflect a neglect of Activity Ratio
those groups but even encourage such a Target for the First: inventory turnover- infinity;
neglect. - ultimate goal of JIT: to require no inventory at
✓ financial performance is easily the most all.
measurable element in strategic performance-
lower the turnover rate = greater the cost of
holding inventory.
next two indicate: amount of work the capital
used by the firm; - measure of the efficiency
with assets
last two: amount of credit that is being
extended by an enterprise to its customers.
Returns to shareholders
- put a downward pressure on share prices.
shareholder – interested in dividends paid out
and the notional capital gain over time.
shareholders happy - increase in share price ->
capital gain
enterprise- easier and cheaper to raise capital.
Satisfying all the stakeholders
Market and economic value added
Increase in market value added or wealth
-partly reflects the performance in adding
value to the equity, includes a component
which reflects expected future earnings- ability
to add value in the future. market value
declines- a loss of value.
economic value added (EVA) - expected to net
out at zero, since even good companies
generate a negative EVA about every four years
because of a capital-intensive phase in the
capital and growth cycle.
Total value added and the stakeholders
shareholders - owners and providing finance
nature of what is owned is considered,
intangible assets such as intellectual property
and human capital rather than physical assets
such as buildings, plant and equipment.
Governance and strategy
Governance- attempt to give the board of
directors’ real independence
-to ensure the board is responsive to owners,
not senior managers.
two ways in which this can be achieved:
✓ independent chairperson, not the CEO, and
majority of independent members on the
board-voted on by the shareholders and
possessing the required skills needed to make
board supervision real.
✓ controls - objective in nature and
application, particularly financial controls.
Satisfying other stakeholders
- ignores: keeping happy other stakeholder
groups.
-done by being aware of and sensitive to
differing interests and involving all the
stakeholders in the process of strategy making
- ensure that information on strategy
formulation and implementation is conveyed
to the stakeholders at the appropriate time
Multiple bottom lines
not easy to weigh all these relationships in the
balance.  Aww!
corporate social responsibility – fashionable,
summarize the need to take account of all the
wider stakeholder groups and their interests.
Aim: to avoid obvious and dramatic disaster it is
to keep all the relationships positive. NAOLL
!
different stages of an organizational life cycle,
can adopt one of four strategies towards
different stakeholder groups:
✓ proactive strategy - anticipates
responsibility by taking action to meet the
requirement of stakeholder
✓ accommodating strategy - accepts
responsibility but less active in meeting the
requirement
✓ defensive strategy- admit responsibility by
simply meeting the minimum legal
requirements
✓ reactive strategy - denying responsibility,
either fighting against addressing a
stakeholder’s wishes or withdrawing and
ignoring the stakeholder

expectation of loss - first and last stages of the

life cycle, start-up and decline, and expectation
of profit- middle two stages, growth and
maturity.
This can lead to the adoption of:
✓ risk-taking strategy - first situation - inclines
strategy towards reactive end of the scale and
a failure to meet the interests
✓ risk-averse strategy - second - inclines
strategy towards proactive end and an attempt
to meet the interests
two criteria for distinguishing behavior:
✓ motivation for acting responsibly is
sometimes instrumental –return and
sometimes intrinsic –appropriate and
praiseworthy conduct.
✓ behavior is sometimes accepted as what,
given the norms of the time, should be done,
and sometimes it is innovatory.

Corporate Social responsibility
@ best in terms of performance, typical
strategy - work actively to promote the
interests or at worst to accommodate them
@ worst in terms of performance, - forced to
retreat, concentrating on groups providing
critical resources Corporate social responsibility
-not necessarily produce profits, but a kind of
behavior which enhances the long-term
position, including its reputation
two forms of behavior in the upper half -can be
shifted to lower half by government action or a
change of social norms.
A company can receive only social credit for
operating at the frontier where it is seen as a
pioneer.
✓ Compliance – laws and regulations, already
exist, socially responsible behavior.
✓ Choice – whether or not to realize - virtues
expressed in unwritten and unformalized norms
and customs
✓ Strategic – innovating in social behaviour,
limited
✓ Structural – innovating, not part of profit
delivery mechanism and unlikely imitated.

Promoting strategy to stakeholders

✓ win support, strategy -never-ending selling
of strategic thinking
-regular contact and involvement in the
strategy-making process- maximum
participation of all staff, promote involvement,
integrated with strategy making itself
-staff can be involved to some degree in
continuously reviewing the current profile of
the organization and looking at its future.

✓ making clear the standing of any strategy at

any given time.
Strategy – best achieve made transparent and
best sold on basis of results –delivers outcomes
-benefit enterprise and stakeholders
Outcomes must be built into the strategy-
communication conduits which clearly defined,
beyond simply distributing the annual report.

Choosing the nature of strategy

Finding appropriate strategy
Good strategy
- successful company
-making is to decide an appropriate role for
strategy
Theory and practice - combined to helps remain
viable as a business unit.
discovery process in finding what is appropriate,
change over time
Strategy making - core competency
There is much room for strategic thinking in
developing this core competency and
strategies.

Reversing the accepted sequence of step

Monitoring and implementation - allow
formulation to occur because they involve a
discovery process
In ‘doing’
- discover what you are capable of doing.
-reveals previously unknown possibilities.
Strategy - discovering what you can do as
realizing what you plan to do.

Strategy making as a continuous process

strategy - continuous in two main senses.
-result of learning in a context of rapid change
in the external environment, more than the
result of an unpredictable process
-promotes and channels such learning

Learning - selective process, incorporated into

strategy and become the basis for further
process of discovery. (not yet known cannot be
incorporated)
Structure, strategy and culture - treated which
encourages such a learning process.