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BASIC CONCEPTS OF STRATEGIC MANAGEMENT

 Phases of Strategic Management

 Phase I – Basic Financial Planning
 Phase II – Forecast based planning
 Phase III – Externally oriented (Strategic Planning)
 Phase IV – Strategic Management.
 Benefits of Strategic Management
 A clearer sense of Strategic vision for the firm
 A sharper focus on what is strategically important
 An improved understanding of a rapidly changing environment.
 Impact of Globalization
 Globalization, the integrated internationalization of markets and corporations, has
changed the way modern corporations do business.
 Impact of Innovation
 Innovation, as the term is used in business, is meant to describe new products,
services, methods, and organizational approaches that allow the business to achieve
extraordinary returns
 Impact of Sustainability
 Sustainability refers to the use of business practices to manage the triple bottom
which involves (1) the management of traditional profit/loss; (2) the management of
the company’s social responsibility; and (3) the management of its environmental
responsibility.
 Theories of Organisational Adaption
 Population Ecology
 Institution Theory
 Strategic choice perspective
 Organizational learning theory
 Basic Model of Strategic Management
 Environmental Scanning
 SWOT Analysis
 Strategy formulation
 Mission: Stating Purpose
 Objectives: Listing Expected results
 Strategy: Defining the competitive advantage
Corporate Strategy
Business Strategy
Functional Strategy
 Policies: Setting guidelines
 Strategy implementation
 Programs & Tactics: Defining actions
 Budgets: Costing programs
 Procedures: Detailing activities
 Evaluation & Control
 Feedback/Learning process
 Modes of Strategic Decision Making
 Entrepreneurial mode
 Adaptive Mode
 Planning mode
 Logical incrementalism
 Strategic decision making Process
 Evaluate current performance results
 Review Corporate Governance
 Scan and assess the external environment
 Scan and assess the internal corporate environment
 Analyse strategic factors
 Generate, evaluate & select the Best alternative strategies
 Implement selected strategies
 Evaluate implemented strategies

4 ENVIRONMENTAL SCANNING AND INDUSTRY ANALYSIS

 Identifying External Environment variables

 Natural Environment – Physical resources, Wildlife, Climate change etc..
 Effects of climate change on companies translates into risks, namely
Regulatory
Supply chain risk
Product & Technology risk
Litigation risk
Reputational
Physical
 Societal Environment
 STEEP Analysis – Scanning of Sociocultural, technological, Economic,
Ecological & Political-legal Environmental forces (PESTEL Analysis)
  Task Environment

 Porter’s Approach to Industry Analysis

 In carefully scanning its industry, a corporation must assess the importance to its
success of each of six forces: threat of new entrants, rivalry among existing firms,
threat of substitute products or services, bargaining power of buyers,
bargaining power of suppliers, and relative power of other stake holders. The
stronger each of these forces is, the more limited companies are in their ability to
raise prices and earn greater profits.
 Threat of New Entrants - An entry barrier is an obstruction that makes it
difficult for a new company to enter an existing industry. Some of the
possible barriers to entry are
Economies of Scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages, independent of size.
Government policy
 Rivalry amongst Existing firms – Several factors
Number of Competitors
Rate of Industry growth
Product or Service characteristics
Amount of fixed costs
 Capacity
Height of exit barriers
Diversity of Rivals
 threat of substitute products or services
 bargaining power of buyers
 bargaining power of suppliers
 relative power of other stake holders – governments, local communities,
creditors, trade associations, special interest groups, unions, shareholders and
complementors.
 Strategic Types
 There is a need to characterize the various competitors for predictive purposes. A
strategic type is a category of firms based on a common strategic orientation and a
combination of structure, culture, and processes consistent with that strategy. These
general types have the following characteristics
 Defenders
 Prospectors
 Analysers
 Reactors

5. ORGANISATIONAL ANALYSIS AND COMPETITIVE ADVANTAGE

 Core & Distinctive Competencies

 Competency is a cross-functional integration and coordination of capabilities.
 A core competency is a collection of competencies that crosses divisional boundaries,
is widespread within the corporation.
 When unique resources and/or core competencies are superior to those of the
competition, they are called distinctive competencies.
 VRIO framework of analysis, proposes four questions to evaluate a firm’s
competencies
 Valuable: Does it provide customer value and competitive advantage?
 Rareness: Does only one other competitor or preferably do no competitors
possess it at relatively the same level?
 Imitability: Do the competitors have the financial ability to imitate?
 Organization: Is the firm organized to exploit the resource?

 Business Models
 It is a company’s method for making money in the current business environment
which includes the key structural and operational characteristics of a firm—how it
earns revenue and makes a profit. Has five elements
 Who it serves
 What it provides
 How it makes money
 How it differentiates and sustains competitive advantage
 How it provides its product/service

 Corporate Value Chain Analysis- Three steps

 Examine each product line’s value chain in terms of the various activities involved in
producing that product or service.
 Examine the “linkages” within each product line’s value chain.
 Examine the potential synergies among the value chains of different product lines or
business units.

 Strategic Marketing issues

 Market Position & Segmentation
 Marketing Mix
  Product Life cycle
 Brand & Corporate reputation

 Strategic Financial issues

 Financial leverage
 Capital budgeting

 Strategic R & D issues

 R&D Intensity, Technological Competence, and Technology Transfer
 R&D Mix
 Impact of Technological Discontinuity on Strategy

 Strategic Operations Issues

 Experience Curve.
 Flexible Manufacturing for Mass Customization.

 Strategic HRM Issues

 Increasing use of teams
 Union Relations and Temporary/Part-Time Workers
 Quality of Work Life and Human Diversity

 Strategic IT Systems Issues

 Impact on Performance
 Supply Chain Management

6. STRATEGY FORMULATION: BUSINESS STRATEGY

 Mission Statement – Five common elements

 short so that every employee can remember the statement.
 simple design so that everyone in the company can understand what the senior
leadership team desires.
 It has to provide direction to the activities of company employees.
 The statement should enable employees knowing exactly what the company does and
what it does not do.
 statement should be measurable so that the company can visibly see progress.

 Porter’s competitive strategies

 Cost leadership is the ability of a company or a business unit to design, produce, and
market a comparable product or service more efficiently than its competitors.
 Differentiation is the ability of a company to provide unique and superior value to the
buyer. This may include areas such as product quality, special features, or after sale
services.
 Cost focus is a low-cost competitive strategy that focuses on a particular buyer group
or geographic market and attempts to serve only this niche, to the exclusion of
others.
 Differentiation focus, like cost focus, concentrates on a particular buyer group,
product line segment, or geographic market.

 Cooperative Strategies
 Collusion

 Strategic Alliances – Reasons

 To obtain or learn new capabilities
 To obtain access to specific markets
  To reduce financial risk
 To reduce political risk

 Strategic Alliances – Types

 Mutual Service Consortia.
 Joint Venture.
 Licensing Arrangements.
 Value-Chain Partnerships.

7. STRATEGY FORMULATION: CORPORATE STRATEGY

 Corporate Strategy – It is primarily about the choice of direction for a firm as a whole and the
management of its business or product portfolio and addresses three key issues facing the
corporation as a whole. It also includes decisions regarding the flow of financial and other
resources to and from a company’s product lines and business units.

 Directional Strategy - The firm’s overall orientation toward growth, stability, or

retrenchment
 Portfolio analysis - The industries or markets in which the firm competes through its
products and business unit.
 Parenting strategy - The manner in which management coordinates activities,
transfers resources, and cultivates capabilities among product lines and business
units.

 Directional Strategy – It is composed of three general orientations.

 Growth strategies expand the company’s activities
 Concentration on the current or innovative product line(s) in one industry
Vertical growth - It can be achieved by taking over a function
previously provided by a supplier or distributor. Vertical growth
results in vertical integration—the degree to which a firm operates
vertically in multiple locations on an industry’s value chain from
extracting raw materials to manufacturing to retailing.

Horizontal Growth - A firm can achieve horizontal growth by

expanding its operations into other geographic locations and/or by
increasing the range of products and services offered to current
markets. Horizontal growth results in horizontal integration—the
degree to which a firm operates in multiple geographic locations at
the same point on an industry’s value chain.

 Diversification Strategies
 Companies begin thinking about diversification when their growth has
plateaued and opportunities for growth in the original business have been
depleted.
Concentric (Related) Diversification - Growth through concentric
diversification into a related industry may be a very appropriate
 corporate strategy when a firm has a strong competitive position but
industry attractiveness is low.
Conglomerate (Unrelated) Diversification - When management
realizes that the current industry is unattractive and that the firm
lacks outstanding abilities or skills that it could easily transfer to
related products or services in other industries, the most likely
strategy is conglomerate diversification—diversifying into an industry
unrelated to its current one.
 Stability Strategies
 Pause/proceed-with-caution strategy - It is in effect a timeout—an
opportunity to rest before continuing a growth or retrenchment strategy. It is
a very deliberate attempt to make only incremental improvements until a
particular environmental situation changes.
 No-change strategy - It is a decision to do nothing new—a choice to
continue current operations and policies for the foreseeable future.
 Profit strategy - It is a decision to do nothing new in a worsening situation
but instead to act as though the company’s problems are only temporary. The
profit strategy is an attempt to artificially support profits when a company’s
sales are declining by reducing investment and short-term discretionary
expenditures.
 Retrenchment Strategies
 Turnaround Strategy – It emphasizes the improvement of operational
efficiency and is probably most appropriate when a corporation’s problems
are pervasive but not yet critical. Three phases
Contraction is the initial effort to quickly “stop the bleeding” with a
general, across the-board cutback in size and costs.
Second phase- Consolidation, implements a program to stabilize the
now leaner corporation. To streamline the company, plans are
developed to reduce unnecessary overhead and to make functional
activities cost-justified.
The last phase, re-birth, happens if the company is successful with its
efforts and starts growing profitably again.
 Captive company strategy involves giving up independence in exchange for
security. A company with a weak competitive position may not be able to
successfully implement a full-blown turnaround strategy for a variety of
reasons.
 Sell-Out/Divestment Strategy - If a corporation with a weak competitive
position in an industry is unable either to pull itself up by its bootstraps or to
find a customer or competitor to which it can become a captive company, it
may have no choice but to sell out.
 Bankruptcy/Liquidation Strategy - Bankruptcy involves giving up
management of the firm to the courts in return for some settlement of the
corporation’s obligations. In contrast to bankruptcy, which seeks to
perpetuate a corporation, liquidation is the termination of the firm.

 Portfolio Analysis
 In portfolio analysis, top management views its product lines and business units as a
series of investments from which it expects a profitable return. The product
lines/business units form a portfolio of investments that top management must
constantly juggle to ensure the best return on the corporation’s invested money.
 BCG (Boston Consulting Group) Growth-Share Matrix - Each of the corporation’s
product lines or business units is plotted on the matrix according to both the growth
rate of the industry in which it competes and its relative market share. The matrix
assumes that, other things being equal, a growing market is attractive.
 As a product moves through its perceived life cycle, it is generally categorized into
one of four types for the purpose of funding decisions:

 Question marks are new products with the potential for success, but needing
a lot of cash for development. If such a product is to gain enough market
share to become a market leader and thus a star, money must be taken from
more mature products and spent on the question mark.
 Stars are market leaders that are typically at or nearing the peak of their
perceived product life cycle and are able to generate enough cash to
maintain their high share of the market and usually contribute to the
company’s profits.
 Cash cows typically bring in far more money than is needed to maintain their
market share. In this maturing or even declining stage of their life cycle, these
products are “milked” for cash that will be invested in new question marks.
 Dogs have low market share and do not have the potential (usually because
they are in an unattractive industry without a significant market position) to
bring in much cash.
 BCG Growth-Share Matrix - limitations:
The use of highs and lows to form four categories is too simplistic.
The link between market share and profitability is questionable as
Low-share businesses can also be profitable.
Growth rate is only one aspect of industry attractiveness.
Product lines or business units are considered only in relation to one
competitor: the market leader. Small competitors with fast-growing
market shares are ignored.
Market share is only one aspect of overall competitive position.

 Portfolio Analysis – Advantages

 It encourages top management to evaluate each of the corporation’s businesses
individually and to set objectives and allocate resources for each.
 It stimulates the use of externally oriented data to supplement management’s
judgment.
 It raises the issue of cash-flow availability for use in expansion and growth.
 Its graphic depiction facilitates communication.

 Portfolio Analysis – Limitations

 Defining product/market segments is difficult.
 It suggests the use of standard strategies that can miss opportunities or be
impractical.
  It provides an illusion of scientific rigor, when in reality positions are based on
subjective judgments.
 Its value-laden terms such as cash cow and dog can lead to self-fulfilling prophecies.
 It is not always clear what makes an industry attractive or where a product is in its life
cycle.
 Naively following the prescriptions of a portfolio model may actually reduce
corporate profits if they are used inappropriately.

 Managing a Strategic Alliance Portfolio

 There are four tasks of multi-alliance management that are necessary for successful
alliance portfolio management.
 Developing and implementing a portfolio strategy for each business unit and a
corporate policy for managing all the alliances of the entire company.
 Monitoring the alliance portfolio in terms of implementing business unit
strategies and corporate strategy and policies.
 Coordinating the portfolio to obtain synergies and avoid conflicts among
alliances.
 Establishing an alliance management system to support other tasks of multi
alliance management.

 Corporate Parenting
 It views a corporation in terms of resources and capabilities that can be used to build
business unit value as well as generate synergies across business units.
Multi business companies create value by influencing—or parenting—the businesses
they own. The best parent companies create more value than any of their rivals would
if they owned the same businesses.
 Corporate parenting generates corporate strategy by focusing on the core
competencies of the parent corporation and on the value created from the
relationship between the parent and its businesses.
 In the form of corporate headquarters, the parent has a great deal of power in this
relationship. The primary job of corporate headquarters is, therefore, to obtain
synergy among the business units by providing needed resources to units,
transferring skills and capabilities among the units, and coordinating the activities of
shared unit functions to attain economies of scope.
 An appropriate corporate strategy involves three analytical steps
 Examine each business unit (or target firm in the case of acquisition) in terms
of its strategic factors.
 Examine each business unit (or target firm) in terms of areas in which
performance can be improved.
 Analyse how well the parent corporation fits with the business unit (or target
firm.
 A horizontal strategy is a corporate strategy that cuts across business unit boundaries
to build synergy between business units and to improve the competitive position of
one or more business units.
 In multipoint competition, large multi business corporations compete against other
large multi business firms in a number of markets. These multipoint competitors are
firms that compete with each other not only in one business unit, but also in a
number of business units.

8. STRATEGY FORMULATION: FUNCTIONAL STRATEGY & STRATEGIC CHOICE

 Functional Strategy -
 It is the approach a functional area takes to achieve corporate and business unit
objectives and strategies by maximizing resource productivity.
 Marketing Strategy - deals with pricing, selling, and distributing a product.
 Market Development Strategy
 Product Development Strategy
 Push & Pull Marketing Strategy
 Skim & Penetration Strategy

 Financial Strategy - examines the financial implications of corporate and business-level

strategic options and identifies the best financial course of action.

 R & D Strategy - deals with product and process innovation and improvement.
 Technological leader.
 Technological follower.
 Open innovation

 Operations Strategy - determines how and where a product or service is to be manufactured,

the level of vertical integration in the production process, the deployment of physical
resources, and relationships with suppliers.

 Purchasing Strategy - deals with obtaining the raw materials, parts, and supplies needed to
perform the operations function.
 Multiple sourcing.
 Sole Sourcing.
 Parallel Sourcing.

 HRM Strategy - addresses issues that range from whether a company or business unit should
hire a large number of low-skilled employees who receive low pay, perform repetitive jobs,
and will most likely quit after a short time or whether they should hire skilled employees who
receive relatively high pay and are cross-trained to participate in self-managing work teams.

 Information Technology Strategy - provide the business units with competitive advantage.

 Sourcing decision – Location of Functions

If a corporation does not have a distinctive competency in a particular functional area, that
functional area could be a candidate for outsourcing.
 Outsourcing - It is purchasing a product or service externally that had been previously
provided internally. Thus, it is the reverse of vertical integration.
 Offshoring – It is the outsourcing of an activity or a function to a wholly owned
company or an independent provider in another country. Offshoring is a simple reality
of business operations that has been supported by advances in information and
communication technologies, the development of stable, secure, and high-speed data
transmission systems, and logistical advances like containerized shipping.

The key to outsourcing is to purchase from outside only those activities that are not key to the
company’s distinctive competencies.

In determining functional strategy, the strategist must:

 Identify the company’s or business unit’s core competencies.

 Ensure that the competencies are continually being strengthened.
 Manage the competencies in such a way that best preserves the competitive
advantage they create.
 Strategic Choice – Constructing Corporate Scenarios
Corporate scenarios are pro forma (estimated future) balance sheets and income statements
that forecast the effect each alternative strategy and its various programs will likely have on
division and corporate return on investment.
Steps:-
 Use industry scenarios to develop a set of assumptions about the task environment
(in the specific country under consideration). This should be done for every
country/region in which the corporation has significant operations that will be
affected by each strategic alternative.
 Develop common-size financial statements for the company’s or business unit’s
previous years to serve as the basis for the trend analysis projections of pro forma
financial statements, using the Scenario Box.

 Construct detailed pro forma financial statements for each strategic alternative.

Regardless of the quantifiable pros and cons of each alternative, the actual decision will
probably be influenced by several subjective factors such as

 Management’s Attitude Toward Risk

 Pressures from Stakeholders
 Pressures from the Corporate Culture
 Needs and Desires of Key Managers
 Process of Strategic Choice
Strategic choice is the evaluation of alternative strategies and selection of the best alternative.
 Devil’s advocate
 Dialectical inquiry

The devil’s advocate and dialectical inquiry methods are equally superior to consensus in
decision making, especially when the firm’s environment is dynamic. Regardless of the process
used to generate strategic alternatives, each resulting alternative must be rigorously evaluated
in terms of its ability to meet four criteria

 Mutual exclusivity
 Success
 Completeness
 Internal consistency

10. STRATEGY IMPLEMENTATION – ORGANIZING AND STRUCTURE

 Strategy Implementation
It is the sum total of the activities and choices required for the execution of a strategic plan. It
is the process by which objectives, strategies, and policies are put into action through the
development of programs and tactics, budgets, and procedures.

 Developing Programs, Budgets & Procedures

Strategy implementation involves establishing programs and tactics to create a series of new
organizational activities, budgets to allocate funds to the new activities, and procedures to
handle the day-to-day details.

 Programs & Tactics

The purpose of a program or a tactic is to make a strategy action-oriented. In
practice, a program is a collection of tactics and a tactic is the individual action taken
by the organization as an element of the effort to accomplish a plan.
 Competitive tactics – Tactics available to implement Competitive strategies are
 Timing tactics – When to compete: A timing tactic deals with when a company
implements a strategy. The first company to manufacture and sell a new product or
service is called the first mover (or pioneer).
 Market Location Tactics: Where to Compete: A market location tactic deals with where
a company implements a strategy. A company or business unit can implement a
competitive strategy either offensively or defensively. An offensive tactic usually takes
place in an established competitor’s market location. Some tactics are
Frontal assault, Flanking manoeuvre, Bypass attack, Encirclement, Guerrilla
warfare.

A defensive tactic usually takes place in the firm’s own current market position as a
defence against possible attack by a rival. Defensive tactics aim to lower the
probability of attack, divert attacks to less threatening avenues, or lessen the intensity
of an attack. Instead of increasing competitive advantage per se, they make a
company’s or business unit’s competitive advantage more sustainable by causing a
challenger to conclude that an attack is unattractive. Some tactics are

Raise structural barriers, Increase expected retaliation, Lower the inducement for
attack.
 Budgets - Planning a budget is the last real check a corporation has on the feasibility of
its selected strategy.
 Procedures - Often called Standard Operating Procedures (SOPs), they typically detail the
various activities that must be carried out to complete a corporation’s programs and
tactical plans. Also known as organizational routines, procedures are the primary means
 by which organizations accomplish much of what they do. Procedures must be updated
to reflect any changes in technology as well as in strategy.

 Achieving Synergy
Synergy between and among functions and business units is said to exist for a divisional
corporation if the return on investment of each division is greater than what the return would
be if each division were an independent business. Six forms of synergy are
 Shared knowhow, coordinated strategies, Shared tangible resources, Economies of scale
or scope, Pooled negotiating power, new business creation.

 Structure follows strategy - Changes in corporate strategy leads to changes in organizational

structure. Organizations follow a pattern of development from one kind of structural
arrangement to another as they expand.

 Stages of Corporate development (See Table 10.1 below)

 Simple Structure
 Functional Structure
 Divisional structure
 Beyond SBU’s
 Blocks to changing stages
Blocks to development may be internal (such as lack of resources, lack of ability, or refusal
of top management to delegate decision making to others) or external (such as economic
conditions, labor shortages, or lack of market growth).
Individuals when they try to manage a larger firm with diverse needs, departments,
priorities, and constituencies face these issues – Loyalties to comrades, task oriented,
single mindedness, working in isolation.

 Organisational Life cycle

Organizational life cycle approach places the primary emphasis on the dominant issue facing
the corporation. The organizational life cycle describes how organizations grow, develop, and
eventually decline and is the equivalent of product life cycle in marketing. The stages are Birth
(Stage I), Growth (Stage II), Maturity (Stage III), Decline (Stage IV), and Death (Stage V). The
impact of these stages on corporate strategy and structure is summarized (TABLE 10–2).
 The Matrix Structure: This structure may be very appropriate when organizations conclude
that neither functional nor divisional forms, even when combined with horizontal linking
mechanisms such as SBUs, are right for their situations. In matrix structures, functional and
product forms are combined simultaneously at the same level of the organization.

Matrix structure was developed to combine the stability of the functional structure with the
flexibility of the product form. The matrix structure is very useful when the external
environment (especially its technological and market aspects) is very complex and
changeable. This type of structure is found when the following three conditions exist.
 Ideas need to be cross-fertilized across projects or products.
 Resources are scarce.
 Abilities to process information and to make decisions need to be improved.

Phases in development of Matrix structure

 Temporary cross-functional task forces: These are initially used when a new product line is
being introduced.
 Product/brand management: If the cross-functional task forces become more permanent,
the project manager becomes a product or brand manager. In this arrangement, function
is still the primary organizational structure, but product or brand managers act as the
integrators of semipermanent products or brands.
 Mature matrix: A true dual authority structure. Both the functional and product structures
are permanent. All employees are connected to both a vertical functional superior and a
horizontal product manager.

 Network Structure – Virtual Organisation

It is termed a “non-structure” because of its virtual elimination of in-house business functions.
Many activities are outsourced. A corporation organized in this manner is often called a virtual
organization because it is composed of a series of project groups or collaborations linked by
constantly changing non-hierarchical, cobweb-like electronic networks.
This structure provides an organization with increased flexibility, adaptability to cope with
rapid technological change and shifting patterns of international trade and competition. It
also allows a company to concentrate on its distinctive competencies, while gathering
efficiencies from other firms that are concentrating their efforts in their areas of expertise.
Disadvantages - network is really only a transitional structure because it is inherently unstable
and subject to tensions, availability of numerous potential partners can be a source of trouble.
Contracting out individual activities to separate suppliers/distributors may keep the firm from
discovering any internal synergies by combining these activities. If a particular firm
 overspecializes on only a few functions, it runs the risk of choosing the wrong functions and
thus becoming non-competitive.

 Cellular/Modular organization – A cellular/modular organization is composed of cells (self-

managing teams, autonomous business units, etc.) which can operate alone but which can
interact with other cells to produce a more potent and competent business mechanism. This
allows the cellular/modular organizational form to generate and share the knowledge and
expertise needed to produce continuous innovation. This form includes the dispersed
entrepreneurship of the divisional structure, customer responsiveness of the matrix, and self-
organizing knowledge and asset sharing of the network.

 Reengineering and Strategy implementation – It is the radical redesign of business processes

to achieve major gains in cost, service, or time, and an effective program to implement a
turnaround strategy. Principles of Reengineering:-

 Organize around outcomes, not tasks.

 Have those who use the output of the process, perform the process.
 Subsume information-processing work into the real work that produces the information.
 Treat geographically dispersed resources as though they were centralized.
 Link parallel activities instead of integrating their results.
 Put the decision point where the work is performed and build control into the process.
 Capture information once and at the source.

 Six Sigma – It an analytical method for achieving near-perfect results on a production line and
increasingly being applied to accounts receivable, sales, and R&D. Six Sigma reduces the
defects to only 3.4 defects per million, saving money by preventing waste. Five Steps
 Define a process where results are poorer than average.
 Measure the process to determine exact current performance.
 Analyse the information to pinpoint where things are going wrong.
 Improve the process and eliminate the error.
 Establish controls to prevent future defects from occurring.

 Designing Jobs to Implement Strategy - Organizing a company’s activities and people to

implement strategy involves more than simply redesigning a corporation’s overall structure; it
also involves redesigning the way jobs are done. The design of jobs and subsequent job
performance are considered as sources of competitive advantage.

 Centralization V/s Decentralization

11. STRATEGY IMPLEMENTATION – STAFFING & DIRECTING

 Staffing focuses on the selection and use of employees.

Companies are appointing special integration managers to shepherd companies through the
implementation process. Integrator’s job :-
 prepare a competitive profile of the combined company in terms of its strengths and
weaknesses.
 draft an ideal profile of what the combined company should look like.
 develop action plans to close the gap between the actuality and the ideal.
 establish training programs to unite the combined company and make it more
competitive.

Integrator’s skill sets

 a deep knowledge of the acquiring company

 a flexible management style.
 an ability to work in cross functional project teams.
  a willingness to work independently.
 sufficient emotional and cultural intelligence to work well with people from all
backgrounds.

 Staffing follows strategy

 Changing Hiring & Training requirements
Having formulated a new strategy, a corporation may find that it needs to either hire
different people or retrain current employees to implement the new strategy. One way to
implement a company’s business strategy, such as overall low cost, is through training
and development. Training is also important when implementing a retrenchment strategy.
 Matching the manager to the Strategy - The most appropriate type of manager needed to
effectively implement a new corporate or business strategy depends on the desired
strategic direction of that firm or business unit.
 A corporation following a concentration strategy emphasizing vertical or horizontal
growth would probably want an aggressive new chief executive with a great deal of
experience in that particular industry - A dynamic industry expert
 A diversification strategy, might call for someone with an analytical mind who is
highly knowledgeable in other industries and can manage diverse product lines. - An
analytical portfolio manager
 A corporation choosing to follow a stability strategy would want a person with a
conservative style, a production or engineering background, and experience with
controlling budgets, capital expenditures, inventories, and standardization procedures
– A cautious profit planner
 Weak companies in a relatively attractive industry tend to turn to a type of challenge-
oriented executive to change the company. – A turnaround specialist.
 If a company cannot be saved, a professional liquidator might be called on by a
bankruptcy court to close the firm and liquidate its assets.

 Executive Succession: Insiders vs. Outsiders

Executive succession is the process of replacing a key top manager
 Selection and development ensure that people with right mix of skills and experiences are
initially hired and also helps them grow on the job preparing them for future promotions.
 Succession Planning for Internal v/s External candidate
  Identifying Abilities and Potential
A company can identify and prepare its people for important positions in several ways.
Some of them are
 Performance appraisal system identifies good performers with promotion potential
 Assessment centers are used to evaluate a person’s suitability for an advanced
position. They use special interviews, management games, in-basket games,
leaderless group discussions and similar exercises to assess potential of employees
for specific positions.
 Job rotation – moving people from one job to another – ensures employees are
gaining a mix of experience to prepare them for future responsibilities.

 Problems in Retrenchment
Downsizing refers to the planned elimination of position or jobs, often used to implement
retrenchment strategy. Guidelines proposed for successful downsizing:
 Eliminate unnecessary work instead of making across-the-board cuts.
 Contract out work that, others can do cheaper.
 Plan for long-run efficiencies.
 Communicate the reasons for actions.
 Invest in the remaining employees.
 Develop value-added jobs to balance out job elimination.

 Leading emphasizes the use of programs to better align employee interests and attitudes with
a new strategy. Implementation also involves leading through coaching people to use their
abilities and skills most effectively and efficiently to achieve organizational objectives. Leading
may be accomplished more formally through action planning or through programs, such as
Management by Objectives and Total Quality Management.

 Managing Corporate Culture - It can strongly affect a company’s ability to shift its strategic
direction. Organizational culture has been described as the shared values, principles,
traditions, and way of doing things that influence the way organizational members act.
 An optimal corporate culture is one that best supports the strategy and strategy of the
company of which it is a part.
 Strategy should be in complete agreement with the culture & it is management’s job to
manage corporate culture.
 Steps to be followed
 Evaluate what a particular change in strategy would mean to the corporate culture.
 Assess whether a change is needed and decide whether an attempt to change the
culture is worth the likely costs.
 Assessing Strategy-Culture Compatibility
  Managing Cultural Change through Communication
Communication is key to the effective management of change. Rationale for strategic
changes should be communicated to workers not only in newsletters and speeches, but
also in training and development programs.
 Managing Diverse Cultures Following an Acquisition
When merging with or acquiring another company, top management must give some
consideration to a potential clash of corporate cultures. There are four general methods
of managing two different cultures.
 Integration – Equal merger of both cultures into a new corporate culture Renault’s
purchasing of interest in Nissan is an e.g of Integration
 Assimilation – Acquiring firm’s culture kept intact, but subservient to that of acquiring
firm’s corporate culture. Maytag (now a part of Whirlpool) acquisition of Admiral is an
e.g of Assimilation
 Separation – Conflicting cultures kept intact but kept separate in different units.
Boeing’s acquisition of McDonnell-Douglas is an e.g of Separation.
 Deculturation – Forced replacement of conflicting acquired firm’s culture with that of
the acquiring firm’s culture. AT&T’s acquisition of NCR in 1990 is an e.g of
Deculturation.

 Management By Objectives (MBO) is a technique that encourages participative decision

making through shared goal setting at all organizational levels and performance assessment
based on the achievement of stated objectives.
MBO links organizational objectives and the behaviour of individuals. The MBO process
involves:
 Establishing and communicating organizational objectives.
 Setting individual objectives (through superiorsubordinate interaction) that help
implement organizational ones.
 Developing an action plan of activities needed to achieve the objectives.
 Periodically (at least quarterly) reviewing performance: Goals Vs Results

 Total Quality Management

It is an operational philosophy committed to customer satisfaction and continuous
improvement.

TQM’s essential ingredients are

 An intense focus on customer satisfaction.

 Internal as well as external customers.
 Accurate measurement of every critical variable in a company’s operations.
 Continuous improvement of products and services.
 New work relationships based on trust and teamwork.

12. STRATEGY EVALUATION & CONTROL

 Appropriate Measures
A firm needs to develop measures that predict likely profitability. These are referred to as
steering controls because they measure variables that influence future profitability. Every
industry has its own set of key metrics that tend to predict profits.
 Inventory turnover ratio - a retailer’s cost of goods sold is divided by the average value of
its inventories. The higher the ratio, the better.
 Customer satisfaction - Companies that score high on the American Customer Satisfaction
Index (ACSI), a measure developed by the University of Michigan’s National Research
Center, have higher stock returns and better cash flows than those companies that score
low on the ACSI.
 Types of Controls
 Output controls specify what is to be accomplished by focusing on the end result of the
behaviours through the use of objectives and performance targets or milestones. Output
controls (such as sales quotas, specific cost-reduction or profit objectives, and surveys of
customer satisfaction) are most appropriate when specific output measures have been
agreed on but the cause–effect connection between activities and results is not clear.
 Behaviour controls specify how something is to be done through policies, rules, standard
operating procedures, and orders from a superior. Behaviour controls (such as following
company procedures, making sales calls to potential customers, and getting to work on
time) are most appropriate when performance results are hard to measure, but the cause–
effect connection between activities and results is relatively clear.
 Input controls emphasize resources, such as knowledge, skills, abilities, values, and
motives of employees. Input controls (such as number of years of education and
experience) are most appropriate when output is difficult to measure and there is no clear
cause–effect relationship between behaviour and performance (such as in college
teaching).

 Activity Based Costing (ABC)

It is an accounting method for allocating indirect and fixed costs to individual products or
product lines based on the value-added activities going into that product. This method is very
useful in constructing a value-chain analysis of a firm’s activities for making outsourcing
decisions.
ABC accounting allows accountants to charge costs more accurately because it allocates
overheads far more precisely.

 Enterprise Risk Management

It is a corporatewide, integrated process for managing the uncertainties that could negatively
or positively influence the achievement of the corporation’s objectives. ERM is being adopted
because of the increasing amount of environmental uncertainty that can affect an entire
corporation. Microsoft uses scenario analysis to identify key business risks.
The process of rating risks involves three steps:-
 Identify the risks using scenario analysis, brainstorming, or by performing risk self-
assessments.
 Rank the risks, using some scale of impact and likelihood.
 Measure the risks, using some agreed-upon standard.

 Primary measures of Corporate performance

Traditional Financial Measures

 Return on investment (ROI)- It is simply the result of dividing net income before taxes by
the total amount invested in the company (typically measured by total assets).
 Earnings per share (EPS)- It which involves dividing net earnings by the amount of
common stock. EPS does not consider the time value of money.
 Return on equity (ROE)- It involves dividing net income by total equity.
 Operating cash flow- It is the amount of money generated by a company before the cost
of financing and taxes, is a broad measure of a company’s funds.

Because of the belief that accounting-based numbers such as ROI, ROE, and EPS are not
reliable indicators of a corporation’s economic value, many corporations are using the below
mentioned measures as a better measure of corporate performance and strategic
management effectiveness.

 Shareholder value can be defined as the present value of the anticipated future stream of
cash flows from the business plus the value of the company if liquidated.
  Economic value added (EVA) – It measures the difference between the pre-strategy
and post-strategy values for the business. EVA is after-tax operating income minus
the total annual cost of capital.
Formula is EVA = After Tax operating income - (investment in assets * weighted
average cost of capital).
 Market value added (MVA) is the difference between the market value of a
corporation and the capital contributed by shareholders and lenders. MVA is the
present value of future EVA.

 Balanced Scorecard Approach: Using key performance measures

The balanced scorecard combines financial measures that tell the results of actions already
taken with operational measures on customer satisfaction, internal processes, and the
corporation’s innovation and improvement activities—the drivers of future financial
performance. Thus, steering controls are combined with output controls. Management
develops goals or objectives in each of four areas, namely
 Financial: How do we appear to shareholders?
 Customer: How do customers view us?
 Internal business perspective: What must we excel at?
 Innovation and learning: Can we continue to improve and create value?

Each goal in each area (for example, avoiding bankruptcy in the financial area) is then
assigned one or more measures, as well as a target and an initiative. These measures can then
be thought of as key performance measures.

 Evaluating Top Management and the Board of Directors

Members of the compensation committees of today’s boards of directors generally agree that
a CEO’s ability to establish strategic direction, build a management team, and provide
leadership are more critical in the long run than are a few quantitative measures. The board
should evaluate top management not only on the typical outputoriented quantitative
measures, but also on behavioral measures—factors relating to its strategic management
practices.
 Management Audit - Management audits are very useful to boards of directors in
evaluating management’s handling of various corporate activities.
 Strategic Audit – It is a type of management audit & provides a checklist of questions,
by area or issue, that enables a systematic analysis of various corporate functions and
activities to be made.

 Responsibility Centres – They are used to isolate a unit so it can be evaluated separately from
the rest of the corporation. Each responsibility centre has its own budget and is evaluated on
its use of budgeted resources. Five types of responsibility centres:-
 Standard cost centres: They are primarily used in manufacturing facilities. Standard (or
expected) costs are computed for each operation on the basis of historical data.
 Revenue centres: Here, production, usually in terms of unit or dollar sales, is measured
without consideration of resource costs (for example, salaries). The centre is thus judged
in terms of effectiveness rather than efficiency.
 Expense centres: Resources are measured in dollars, without consideration for service or
product costs. Thus, budgets will have been prepared for engineered expenses (costs that
can be calculated) and for discretionary expenses (costs that can be only estimated).
 Profit centres: Performance is measured in terms of the difference between revenues
(which measure production) and expenditures (which measure resources). A profit centre
is typically established whenever an organizational unit has control over both its resources
and its products or services.
 Investment centres: An investment centre’s performance is measured in terms of the
difference between its resources and its services or products.
 Using Benchmarking to Evaluate Performance
Benchmarking is “the continual process of measuring products, services, and practices against
the toughest competitors or those companies recognized as industry leaders. It is based on
the concept that it makes no sense to reinvent something that someone else is already using.
Process usually involves the following steps.
 Identify the area or process to be examined. It should be an activity that has the potential
to determine a business unit’s competitive advantage.
 Find behavioral and output measures of the area or process and obtain measurements.
 Select an accessible set of competitors and best-in-class companies against which to
benchmark.
 Calculate the differences among the company’s performance measurements and those of
the best-in-class and determine why the differences exist.
 Develop tactical programs for closing performance gaps.
 Implement the programs and then compare the resulting new measurements with those
of the best-in-class companies.

 Problems in Measuring Performance

 Short term Orientation- It is an orientation in which managers consider only current
tactical or operational issues and ignore long-term strategic ones.
 Goal displacement- It is the confusion of means with ends and occurs when activities
originally intended to help managers attain corporate objectives become ends in
themselves or are adapted to meet ends other than those for which they were intended.
 Behaviour substitution refers to the phenomenon of pursuing substitute activities
that do not lead to goal accomplishment instead of activities that do lead to goal
accomplishment because the wrong activities are being rewarded.
 Suboptimization refers to the phenomenon of a unit optimizing its goal
accomplishment to the detriment of the organization as a whole.

 Guidelines for proper control

 Control should involve only the minimum amount of information needed to give a reliable
picture of events. Monitor those 20% of the factors that determine 80% of the results.
 Controls should monitor only meaningful activities and results, regardless of
measurement difficulty.
 Controls should be timely so that corrective action can be taken before it is too late.
 Long-term and short-term controls should be used.
 Controls should aim at pinpointing exceptions.
 Emphasize the reward of meeting or exceeding standards rather than punishment for
failing to meet standards.

 Aligning Incentives
Management and the board of directors should develop an incentive program that rewards
desired performance. This reduces the likelihood of the agency problems. Incentive plans
should be linked in some way to corporate and divisional strategy.
 Weighted-factor method: This method is particularly appropriate for measuring and
rewarding the performance of top SBU managers and group level executives when
performance factors and their importance vary from one SBU to another.
 Long-term evaluation method: This method compensates managers for achieving
objectives set over a multiyear period.
 Strategic-funds method: This method encourages executives to look at developmental
expenses as being different from expenses required for current operations. The
accounting statement for a corporate unit enters strategic funds as a separate entry below
the current ROI. It is then possible to distinguish between expense dollars consumed in
the generation of current revenues and those invested in the future of a business.
 Therefore, a manager can be evaluated on both a short- and a long-term basis and has an
incentive to invest strategic funds in the future.

2. CORPORATE GOVERNANCE

 Responsibilities of the Board of Directors

 Effective board leadership including the processes, makeup, and output of the board.
 Strategy of the organization
 Risk vs. initiative and the overall risk profile of the organization
 Succession planning for the board and top management team
 Sustainability.

 Role of the Board in Strategic Management

 Monitor: By acting through its committees, a board can keep abreast of developments
inside and outside the corporation, bringing to management’s attention developments it
might have overlooked.
 Evaluate and influence: A board can examine management’s proposals, decisions, and
actions; agree or disagree with them; give advice and offer suggestions; and outline
alternatives.
 Initiate and determine: A board can delineate a corporation’s mission and specify strategic
options to its management.

 Composition of Board of Directors

 Affiliated directors, who, though not really employed by the corporation, handle the legal
or insurance work for the company or are important suppliers (and thus dependent on
the current management for a key part of their business).
 Retired executive directors, who used to work for the company, such as the past CEO who
is partly responsible for much of the corporation’s current strategy and who probably
groomed the current CEO as his or her replacement.
 Family directors, who are descendants of the founder and own significant blocks of stock
(with personal agendas based on a family relationship with the current CEO).

 Codetermination: Should Employees Serve on Boards?

CEOs often nominate chief executives (as well as board members) from other firms to
membership on their own boards in order to create an interlocking directorate. A direct
interlocking directorate occurs when two firms share a director or when an executive of
one firm sits on the board of a second firm. An indirect interlock occurs when two
corporations have directors who also serve on the board of a third firm, such as a bank.
 Interlocking directorates are useful for gaining both inside information about an uncertain
environment and objective expertise about potential strategies and tactics.

 Roles & Responsibilities of Top Management

 Executive Leadership and Strategic Vision
Executive leadership is the directing of activities toward the accomplishment of corporate
objectives. A strategic vision is a description of what the company is capable of becoming
& is often communicated in the company’s vision statement.
Transformational leaders—that is, leaders who provide change and movement in an
organization by providing a vision for that change, exhibit three key characteristics.
 The CEO articulates a strategic vision for the corporation.
 The CEO presents a role for others to identify with and to follow.
 The CEO communicates high-performance standards and also shows confidence in
the followers’ abilities to meet these standards.
 Managing the Strategic Planning Process
The board of directors expects top management to manage the overall strategic planning
process so that the plans of all the units and functional areas fit together into an overall
corporate plan. Top management’s job, therefore, includes the tasks of evaluating unit
plans and providing feedback.

3. SOCIAL RESPONSIBILITY & ETHICS in STRATEGIC MANAGEMENT

 Responsibilities of a Business Firm

The concept of social responsibility proposes that a private corporation has responsibilities to
society that extend beyond making a profit.
R two contrasting views of the responsibilities of business firms to society.
 Friedman’s Traditional View of Business Responsibility
Milton Friedman argued against the concept of social responsibility as a function of
business. A business person who acts “responsibly” by cutting the price of the firm’s
product to aid the poor, or by making expenditures to reduce pollution, or by hiring the
hard-core unemployed, according to Friedman, is spending the shareholder’s money for a
general social interest. He referred to the social responsibility of business as a
“fundamentally subversive doctrine” and stated that:
‘There is one and only one social responsibility of business—to use its resources and
engage in activities designed to increase its profits so long as it stays within the rules of
the game, which is to say, engages in open and free competition without deception or
fraud’
 Carroll’s Four Responsibilities of Business
He proposed that the managers of business organizations have four responsibilities:
 Economic responsibilities of a business organization’s management are to produce
goods and services of value to society so that the firm may repay its creditors and
increase the wealth of its shareholders.
 Legal responsibilities are defined by governments in laws that management is
expected to obey.
 Ethical responsibilities of an organization’s management are to follow the generally
held beliefs about behaviour in a society.
 Discretionary responsibilities are purely voluntary obligations that a corporation
assumes.
 Sustainability & Corporate Stake holders

In order for a business corporation to be sustainable—that is, to be successful over a long

period of time—it must satisfy all of its economic, legal, ethical, and discretionary
responsibilities. Sustainability thus involves many issues, concerns, and trade-offs.
A corporation’s task environment includes a large number of groups with interest in a
business organization’s activities. These groups are referred to as stakeholders because they
affect or are affected by the achievement of the firm’s objectives.

Stakeholder analysis is the identification and evaluation of corporate stakeholders. Three

steps:-
 Identify primary stakeholders, those who have a direct connection with the corporation
and who have sufficient bargaining power to directly affect corporate activities. Primary
stakeholders include customers, employees, suppliers, shareholders, and creditors.
 Identify the secondary stakeholders — those who have only an indirect stake in the
corporation but who are also affected by corporate activities. These usually include NGOs,
(such as Greenpeace), activists, local communities, trade associations, competitors, and
governments.
 Estimate the effect on each stakeholder group from any particular strategic decision.
Stakeholder input.
Once stakeholder impacts have been identified, managers should decide whether
stakeholder input should be invited into the discussion of the strategic
alternatives and before making a strategic decision, strategic managers should
consider how each alternative will affect various stakeholder groups.
 Ethical decision making & some reasons for ethical behaviour
 Cultural norms and values vary between countries and even between different geographic
regions and ethnic groups within a country.
 Differences in values between the business people and key stakeholders.
 Moral Relativism
 Some people justify their seemingly unethical positions by arguing that there is no
one absolute code of ethics and that morality is relative. Moral relativism claims that
morality is relative to some personal, social, or cultural standard and that there is no
method for deciding whether one decision is better than another. Four types to justify
questionable behaviour.
Naïve relativism: Based on the belief that all moral decisions are deeply personal
and that individuals have the right to run their own lives, adherents of moral
relativism argue that each person should be allowed to interpret situations and
act according to his or her own moral values.
Role relativism: Based on the belief that social roles carry with them certain
obligations to that role, adherents of role relativism argue that a manager in
charge of a work unit must put aside his or her personal beliefs and do instead
what the role requires—that is, act in the best interests of the unit.
Social group relativism: Based on a belief that morality is simply a matter of
following the norms of an individual’s peer group, social group relativism argues
that a decision is considered legitimate if it is common practice, regardless of
other considerations (“everyone’s doing it”).
Cultural relativism: Based on the belief that morality is relative to a particular
culture, society, or community, adherents of cultural relativism argue that people
should understand the practices of other societies, but not judge them.
  Kohlberg’s Levels of Moral Development – Three levels of Moral development.

 The preconventional level: This level is characterized by a concern for self. Small
children and others who have not progressed beyond this stage evaluate behaviours
on the basis of personal interest.
 The conventional level: This level is characterized by considerations of society’s laws
and norms. Actions are justified by an external code of conduct.
 The principled level: This level is characterized by a person’s adherence to an internal
moral code. An individual at this level looks beyond norms or laws to find universal
values or principles.

 Encouraging Ethical Behaviour – Code of ethics.

A code of ethics specifies how an organization expects its employees to behave while on the
job. A code of ethics
 clarifies company expectations of employee conduct in various situations.
 makes clear that the company expects its people to recognize the ethical dimensions in
decisions and actions.

 Views on Ethical Behaviour

Ethics is defined as the consensually accepted standards of behaviour for an occupation, a
trade, or a profession. Morality, in contrast, constitutes one’s rules of personal behaviour
based on religious or philosophical grounds. Law refers to formal codes that permit or forbid
certain behaviours and may or may not enforce ethics or morality.
Three basic approaches to Ethical behaviour.
 Utilitarian approach proposes that actions and plans should be judged by their
consequences. People should, therefore, behave in a way that will produce the greatest
benefit to society and produce the least harm or the lowest cost. Stakeholders who have
the most power (ability to affect the company), legitimacy (legal or moral claim on
company resources), and urgency (demand for immediate attention) are given priority
while others are ignored.
 Individual rights approach proposes that human beings have certain fundamental rights
that should be respected in all decisions. A particular decision or behaviour should be
avoided if it interferes with the rights of others.
 Justice approach proposes that decision makers be equitable, fair, and impartial in the
distribution of costs and benefits to individuals and groups. It follows the principles of
distributive justice (people who are similar on relevant dimensions such as job seniority
should be treated in the same way) and fairness (liberty should be equal for all persons) &
also includes the concepts of retributive justice (punishment should be proportional to
the offense) and compensatory justice (wrongs should be compensated in proportion to
the offense).