The use of strategy is the key to success of any business.

- Ms. Areej Aftab

 Preface

With the ever changing environment of business, all barriers of national boundary have
been treaded over. In the present era, the world has emerged as a global village. The term
global has carved an edge over the term international. Though we use the terms
international and global interchangeably there exists a wide gap between the two. To
successfully enhance business opportunities and operations across borders, each
organization should have a strategic plan in place. The use of strategy is the key to
success of any business. The globalization of business has lead to formulation of various
models and theories which play a major role in international strategic management.

This booklet contains all the principles, theories and models of International Strategic
Management with a global perspective.

The First chapter explores the concept and nature of Strategy and Strategic Management.
The strategic management evolution and process is also discussed in detail. It also
encompasses the levels of Strategy and their relevance in the strategic management
process

The Second Chapter gives the strategic management a global edge and further shows the
nature, importance and benefits of international strategic management. The entry modes
are further discussed to develop a clear understanding for managing enterprises globally.

The Third Chapter lays emphasis on the role of environment in strategy. The
environment of conducting business is segregated into external and internal environment
of business and then correlated to show their interdependence. Value chain analysis is
discussed to analyse and understand the working of the organization.

The Fourth Chapter discusses the key terms used in International Strategic Management
like Mission, Vision, Goals, Policies and Objectives.

The Fifth Chapter looks into the reasons of globalization. The concept, phases and
problems of Global Strategic planning are discussed. Corporate Social Responsibility
which has become an irreplaceable part of doing business is presented to develop an
understanding regarding its concept, evolution and models used.

The Sixth Chapter lays down the models put forth by various researchers like- Porter‘s 5
Force Model, ETOP & SAP Profile, SWOT/TOWS Matrix, BCG, GE Nine Cell Matrix,
Hofer‘s Model and Strickland Grand Strategy Selection Model.

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The Seventh Chapter helps in developing an understanding towards Generic and Grand
Strategies of importance too International Strategic Management. The concept and types
of International Strategic Alliances is further discussed.

The Eight Chapter explores the last step in International Strategic Management of
Strategic Control and Evaluation. It also discusses the Balanced Scorecard Approach
used by firms to enhance their operations and profits.

In the end here‘s hoping that this booklet is worth treasuring by the students and
developing an understanding towards International Strategic Management.

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 Updated Syllabus

INTERNATIONAL STRATEGIC MANAGEMENT

Course Objective:

International Strategy is a term used to describe strategic activities of firm operating across borders. It is a
distinct area of management. ‗Global‘ is a new replacement for the term ‗International‘. Hence
‗International Strategy‘ and ‗ Global Strategy‘ are sometime used interchangeably. International Strategic
Management is relatively new and dynamic discipline and requires strong relationship with other areas of
management. A new strategic initiative can not be successfully implemented unless it is supported by all
the other functional areas of the organization like production, finance, HR. marketing, material
management and quality etc. International Strategic Management is thus deeply interwoven with other
aspects of business management. The aim of this course is to give learner an understanding of theory and
principles of strategic management with a wider perspective towards ‗Global Strategic Thinking‘. The
course presents a process of developing and implementing a strategic plan within an organization for
international business

Learning Objectives:
At the end of the course, the student will be able to:
Understand the concepts of strategy and strategic management
Learn its role in International Business Management
Conduct strategic analysis for making right strategic choices
Develop strategic alternatives
Make right choices of strategies and effectively implement them.

Course Contents:

Module I : Introduction & Basic Concepts

Introduction and Course Overview
Concept of Strategy and Strategic management
Nature of ‗ International Strategic Management‘
Evolution of Strategic Management
Strategic Management Process
Levels of Strategy

Module II : Role of environment on strategy

Value chain analysis

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 External environment
- Macro & Micro environment
- Opportunities & threats
- Global business environment
Internal Environment
- Strengths & weaknesses
- Present strategies, Capabilities & Core Competencies.

MODULE III : Vision, Mission, Business Definition, Goals and Objectives

of Global Companies

MODULE IV : Evolution of Global Corporation

Why do firms internationalize /Globalize
Phases of Global strategy
Global Strategic Planning/ Management
Problems in IS Planning
Corporate Social Responsibility

MODULE V : Global Strategic Analysis- Building strategic alternatives & choices

Porter‘s 5 Force Model
ETOP & SAP Profile
SWOT/TOWS Matrix
BCG, GE Nine Cell Matrix
Hofer‘s Model
Strickland Grand Strategy selection model

MODULE VI : Formulating International Strategies

Generic strategies
Grand strategies
Corporate/Business/Functional strategies
International strategic alliances

MODULE VII : Implementation, Evaluation and Control of International strategies

Operationalising and Institutionalizing strategy
Strategic leadership
Managing culture in a global organization
Strategic evaluation and control
Balance Score Card

Text & References:

Text:
Pearce John A & Robinson Richard B, Strategic Management: Formulation, Implementation and Control,
McGraw Hill, 2001
Johnson & Scholes, 2001, Exploring Strategic Change, Pearson Higher Education
Kamel Mellahi & J George Frynas, Global Strategic Management, Oxford University Press

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References:
Strategic Management: A Methodical Approach, by A.J. Rowe, E. Dickel, R.O. Mason and N.H. Snyder,
Addison Wesley, New York, 2003
T L Wheelen and J D Hunge 1996, Strategic Management, Addison-Wesley Publishing
B.De Wit and R. Meyer 1994, Strategy-Process, Content, Context, West Publishing.
Strategic Management Journal. Academy of Management Journal
F. Tau 1995, The responsivenss of information technology to business strategy formulation – An empirical
study, Journal of Information Technology

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 Index

Chapter Particulars Page no.

no.
Introduction to Strategic Management 7
1
International Strategic Management 36
2
Role of environment on strategy 59
3
Key Terms In Strategic Management 80
4
Evolution Of Global Corporation 93
5
Global Strategic Analysis- Building 111
6 Strategic Alternatives & Choices

Formulating International Strategies 140

7
Implementation, Evaluation And Control 161
8 Of International Strategies

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 Chapter-1

INTRODUCTION TO

STRATEGIC MANAGEMENT

Contents:

1.1 What is Strategy?

1.2 Elements of Strategy

1.3 Concept of Strategic Management

1.4 Strategic Management Process

1.5Strategy Formulation

1.6 Strategy Implementation

1.7 Levels of Strategy

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What is Strategy?

The term ‗strategy‘ proliferates in discussions of business. Scholars and consultants have
provided myriad models and frameworks for analysing strategic choice. For us, the key
issue that should unite all discussion of strategy is a clear sense of an organization‘s
objectives and a sense of how it will achieve these objectives. It is also important that the
organization has a clear sense of its distinctiveness. For the leading strategy guru,
Michael Porter (1996), strategy is about achieving competitive advantage through being
different – delivering a unique value added to the customer, having a clear and enactable
view of how to position yourself uniquely in your industry, for example, in the ways in
which Southwest Airlines positions itself in the airline industry and IKEA in furniture
retailing, in the way that Marks & Spencer used to. To enact a successful strategy
requires that there is fit among a company‘s activities, that they complement each other,
and that they deliver value to the firm and its customers. The three companies we have
just mentioned illustrate that industries are fluid and that success is not guaranteed. Two
of the firms came to prominence by taking on industry incumbents and developing new
value propositions. The third was extremely successful and lost this position. While there
is much debate on substance, there is agreement that strategy is concerned with the match
between a company‘s capabilities and its external environment. Analysts disagree on how
this may be done. John Kay (2000) argues that strategy is no longer about planning or
‗visioning‘ – because we are deluded if we think we can predict or, worse, control the
future – it is about using careful analysis to understand and influence a company‘s
position in the market place. Another leading strategy guru, Gary Hamel (2000), argues
that the best strategy is geared towards radical change and creating a new vision of the
future in which you are a leader rather than a follower of trends set by others. According
to Hamel, winning strategy = foresight + vision.

Two Approaches to Strategy

Historically, views of strategy fall into two camps. There are those who equate strategy
with planning. According to this perspective, information is gathered, sifted and
analysed, forecasts are made, senior managers reflect upon the work of the planning
department and decide what is the best course for the organization. This is a top-down
approach to strategy. Others have a less structured view of strategy as being more about
the process of management. According to this second perspective, the key strategic issue
is to put in place a system of management that will facilitate the capability of the
organization to respond to an environment that is essentially unknowable, unpredictable
and, therefore, not amenable to a planning approach. We will consider both these views
in this text. Our own view is that good strategic management actually encompasses
elements of each perspective. There is no one best way of strategy. The planning

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approach can work in a stable, predictable environment. Its critics argue that such
environments are becoming increasingly scarce, events make the plan redundant,
creativity is buried beneath the weight and protocols of planning and communication
rules. Furthermore, those not involved in devising the plan are never committed to its
implementation. The second approach emphasizes speed of reaction and flexibility to
enable the organization to function best in an environment that is fast-changing and
essentially unpredictable. The essence of strategy, according to this view, is adaptability
and incrementalism. This approach has been criticized for failing to give an adequate
sense of where the organization is going and what its mission is. Critics speak
disparagingly of the ‗mushroom‘ approach to management. (Place in a dark room, shovel
manure/money on the seeds, close the door, wait for it to grow!)

Elements of Strategy

Definitions of strategy have their roots in military strategy, which defines itself in terms
of drafting the plan of war, shaping individual campaigns and, within these, deciding on
individual engagements (battles/skirmishes) with the enemy. Strategy in this military
sense is the art of war, or, more precisely, the art of the general – the key decision maker.
The analogy with business is that business too is on a war footing as competition
becomes more and more fierce and survival more problematic. Companies and armies
have much in common. They both, for example, pursue strategies of deterrence, offence,
defence and alliance. One can think of a well developed business strategy in terms of
probing opponents‘ weaknesses; withdrawing to consider how to act, given the
knowledge of the opposition generated by such probing; forcing opponents to stretch
their resources; concentrating one‘s own resources to attack an opponent‘s exposed
position; overwhelming selected markets or market segments; establishing a leadership
position of dominance in certain markets; then regrouping one‘s resources, deciding
where to make the next thrust; then expanding from the base thus created to dominate a
broader area.

Strategic thinking has been much influenced by military thinking about ‗the strategy
hierarchy‘ of goals, policies and programmes. Strategy itself sets the agenda for future
action, strategic goals state what is to be achieved and when (but not how), policies set
the guidelines and limits for permissible action in pursuit of the strategic goals, and
programmes specify the step-by-step sequence of actions necessary to achieve major
objectives and the timetable against which progress can be measured. A well defined
strategy integrates an organization‘s major plans, objectives, policies and programmes
and commitments into a cohesive whole. It marshals and allocates limited resources in
the best way, which is defined by an analysis of a firm‘s unique strengths and weaknesses

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and of opportunities and threats in the environment. It considers how to deal with the
potential actions of intelligent opponents.

Management is defined both in terms of its function as those activities that serve to
ensure that the basic objectives of the enterprise, as set by the strategy, are achieved, and
as a group of senior employees responsible for performing this function. Our working
definition of strategic management is as follows: all that is necessary to position the firm
a way that will assure its long-term survival in a competitive environment. A strategy is
an organization‘s way of saying how it creates unique value and thus attracts the custom
that is its lifeblood. To understand the strategy of a particular firm we have to understand,
unless we are in a start-up situation, what factors have made the firm what it is today.
This involves answering questions such as: How did the organization reach its present
state? Why is it producing its particular range of products and services? What kind of
products or services does it intend to produce in the future – the same or different, and, if
different, how different? If it is thinking of altering its current range, what are the
reasons? Strategy usually reflects the thinking of a small group of senior individuals, or
even one strong leader, the strategic apex of a company. Why are the people who make
up the strategic apex in this position? How do they think? Are there other (more) fertile
sources of strategic thinking elsewhere in the organization that could be usefully tapped?
If necessary how can one go about learning from the ‗collective wit‘ of the organization,
the creative voice that so often remains silent? How are decisions made in the
organization? What is its management style – top-down or bottom-up, autocratic or
democratic? Why is the organization structured in a particular way? What is the link
between strategy and structure?

Assignment: Choose an organization and study the type of strategy it follows.

Concept of Strategic Management

Strategic management is a comprehensive area that covers almost all the functional areas
of the organization. It is an umbrella concept of management that comprises all such
functional areas as marketing, finance & account, human resource, and production &
operation into a top level management discipline. Therefore, strategic management has an
importance in the organizational success and failure than any specific functional areas.
Strategic management is different than the routine and operation management. Strategic
management deals with organizational level and top level issues whereas functional or
operational level management deals with the specific areas of the business. Strategic
management has relatively long term focus in comparison to the operational

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management. Top-level managers such as Chairman, Managing Director, and corporate
level planners involve more in strategic management process whereas functional
managers and other employees involve more in operational management areas. Strategic
management area is broader than any specific functional management area. Strategic
management relates to setting vision, mission, objectives, and strategies that can be the
guideline to design functional strategies in other functional areas. Therefore, it is top-
level management that paves the way for other functional or operational management in
an organization. Strategic management is very important area. It determines whether an
organization excels, survives, or dies. Strategic management is very important because it
guides all the functional areas of the business. It is generally believed that businesses,
which develop formal strategic management systems, have a higher probability of
success than those, which do not. Strategic management helps firms anticipate future
problems and opportunities. It provides clear vision, mission, objectives, and strategies
that lead organization into the secured future. "Strategic management is defined as the art
and science of formulating, implementing, and evaluating cross-functional decisions that
enable the organization to achieve its objectives." Generally, strategic management is not
only related to a single specialization but covers cross-functional or overall organization.

Strategic management is a stream of decisions and actions. It is a process by which top-

level management decides and does for the success of the organization. It helps to
determine the best possible strategy so that organization could win the game in
competitive business environment. Thus, strategic management is a way where a
strategist finds where organization is and where it wants to reach. The gap between
desired and possible is known as performance gap. In this context, strategic management
process not only identifies the performance gap but also attempts to reduce the gap.
Sometimes, the performance gap can be positive, too. In such case a strategist uplifts his
or her goal and minimizes the gap. Strategist tries to repair the system and strategy to
reach at the targeted goal to fulfill the performance gap in case of negative gap.

Origin of Strategic Management

The increasing importance of strategic management may be a result of several trends.

Increasing competition in most industries has made it difficult for some companies to
compete. Modern and cheaper transportation and communication have led to increasing
global trade and awareness. Technological development has led to accelerated changes in
the global economy. Regardless of the reasons, the past two decades have seen a surge in
interest in strategic management. Many perspectives on strategic management and the
strategic management process have emerged. We will focus predominantly on three of
these perspectives: (1) the traditional perspective, (2) the resource - based view of the
firm, and (3) the stakeholder approach, which are outlined in Table the table below:

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Traditional Perspective:

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As the field of strategic management began to emerge in the latter part of the 20th
century, scholars borrowed heavily from the field of economics. For some time,
economists had been actively studying topics associated with the competitiveness of
industries. These topics included industry concentration, diversification, product
differentiation, and market power. However, much of the economics research at that time
focused on industries as a whole, and some of it even assumed that individual firm
differences did not matter. Other fields also influenced early strategic management
thought, including marketing, finance, psychology, and management.

Academic progress was slow in the beginning, and the large consulting firms began to
develop their own models and theories to meet their clients‘ needs. Scholars readily
adopted many of these models into their own articles and books.

Eventually, a consensus began to build regarding what is included in the strategic

management process. The traditional process for developing strategy consists of
analyzing the internal and external environments of the company to arrive at
organizational strengths, weaknesses, opportunities, and threats (SWOT). The results
from this ―situation analysis,‖ as this process is sometimes called, are the basis for
developing missions, goals, and strategies. In general, a company should select strategies
that (1) take advantage of organizational strengths and environmental opportunities or (2)
neutralize or overcome organizational weaknesses and environmental threats. After
strategies are formulated, plans for implementing them are established and carried out.
Figure 1.1 presents the natural flow of these activities. The model contained in Figure 1.1
provides a framework for understanding the various activities described in this book.
However, the traditional approach to strategy development also brought with it some
ideas that strategic management scholars have had to reevaluate. The first of these ideas
was that the environment is the primary determinant of the best strategy. This is called
environmental determinism. According to the deterministic view, good management is
associated with determining which strategy will best fit environmental, technical, and
human forces at a particular point in time, and then working to carry it out. The most
successful organization best adapts to existing forces. Some evidence suggests that the
ability to align the skills and other resources of the organization with the needs and
demands of the environment can be a source of competitive advantage. However, after a
critical review of environmental determinism, a well - known researcher once argued:

There is a more fundamental conclusion to be drawn from the foregoing analysis: the
strategy of a firm cannot be predicted, nor is it predestined; the strategic decisions made
by managers cannot be assumed to be the product of deterministic forces in their
environments. On the contrary, the very nature of the concept of strategy assumes a

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human agent who is able to take actions that attempt to distinguish one’s firm from the
competitors.

Basically, a large firm may decide not to compete in a given environment. Or, as an
alternative, the firm may attempt to influence the environment to make it less hostile and
more conducive to organizational success. This process is called enactment, which means
that a firm can influence its environment.

THE PRINCIPLE OF ENACTMENT

The principle of enactment assumes that organizations do not have to submit to existing
forces in the environment; they can, in part, create their environments through strategic
alliances with stakeholders, investments in leading technologies, advertising, political
lobbying, and a variety of other activities. Of course, smaller organizations are somewhat

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limited in their ability to influence some components of their environments on their own.
For example, a small restaurant firm may have a difficult time influencing national
government agencies and administrators. However, smaller organizations often band
together into trade groups, such as the National Restaurant Association, to influence
government policy on pressing issues like minimum wage, immigration policy, and
health - care costs. Also, they may form alliances with other entities. The Global Hotel
Alliance is one example, in which Omni Hotels, Kempinski Hotels & Resorts, Pan
Pacific Hotels and Resorts, Rydges Hotels & Resorts, Marco Polo Group, Dusit Hotels &
Resorts and Landis Hotels & Resorts have joined forces to compete against the mega
chains. In addition, even a small firm may be able to exert a powerful influence on its
local operating environment. The key to enactment is understanding that a firm does not
necessarily have to adapt completely to the forces that exist in its operating environment.
It can at least partly influence certain aspects of the environment in which it competes.

The Organization as a Bundle of Resources: The Resource - Based View

In recent years, another perspective on strategy development has gained wide acceptance.
The resource - based view of the firm has its roots in the work of the earliest strategic
management theorists. It grew out of the question, ―Why do some firms persistently
outperform other firms?‖An early answer to that question was that some firms are able to
develop distinctive competencies in particular areas. One of the first competencies
identified was general management capability. This led to the proposition that firms with
high - quality general managers will outperform their rivals. Much research has examined
this issue. Clearly, effective leadership is important to organizational performance, but it
is difficult to specify what makes an effective leader. Also, although leaders are an
important source of competence for an organization, they are not the only important
resource that makes a difference.

Economic thought also influenced development of the resource - based view. Nearly two
centuries ago, an economist named David Ricardo investigated the advantages of
possessing superior resources, especially land. One of Ricardo‘s central propositions was
that the farmer with the most - fertile land had a sustained performance advantage over
other farmers. More recently, another economist, Edith Penrose, expanded on Ricardo ‘ s
view by noting that various skills and abilities possessed by firms could lead to superior
performance. She viewed firms as an administrative framework that coordinated the
activities of numerous groups and individuals, and also as a bundle of productive
resources. She studied the effects of various skills and abilities possessed by
organizations, concluding that a wide range of skills and resources could influence
competitive performance. A common thread of reasoning in the distinctive competency
literature and the arguments of Ricardo and Penrose is that organizational success can be

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explained in terms of the resources and capabilities possessed by an organization. Many
modern scholars have contributed to this perspective of the firm. According to this view,
an organization is a bundle of resources, which fall into the general categories of:

1. Financial resource, including all of the monetary resources from which a firm can
draw

2. Physical resources, such as land, buildings, equipment, locations, and access to

raw materials

3. Human resources, which pertains to the skills, background, and training of

managers and employees, as well as the way they are organized

4. Organizational knowledge and learning

5. General organizational resources, including the firm’s reputation, brand names,

patents, contracts, and relationships with external stakeholders

The organization as a bundle of resources is depicted in Figure 1.2. Envisioning the firm
as a bundle of resources has broad implications. For example, the most important role of
a manager becomes that of acquiring, developing, managing, and discarding resources.
Also, much of the research on the resource - based perspective has demonstrated that
firms can gain competitive advantage through possessing ―superior resources.‖ Superior
resources are those that have value in the market, are possessed by only a small number
of firms, and are not easy to substitute. If a particular resource is also costly or impossible
to imitate, then the competitive advantage may be sustainable. A sustainable competitive
advantage may lead to higher - than – average organizational performance over a long
period. Marriott is an example of a corporation that has successfully capitalized on its
resources to gain a competitive advantage over other hotels.

Many strategy scholars believe that acquisition and development of superior

organizational resources is the most important reason that some companies are more
successful than others.

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Most of the resources that a firm can acquire or develop are directly linked to its
stakeholders. For example, financial resources are closely linked to establishing good
working relationships with financial intermediaries. Also, the development of human
resources is associated with effective management of organizational stakeholders.
Finally, organizational resources reflect the organization‘s understanding of the
expectations of society and the linkages it has established with stakeholders.

THE EMERGENCE OF THE STAKEHOLDER APPROACH

In the mid - 1980s, a stakeholder approach to strategic management began to emerge. It

was developed as a direct response to the concerns of managers who were being buffeted
by increasing levels of complexity and change in the external environment. The existing
strategy models were not particularly helpful to managers who were trying to create new
opportunities during a period of such radical change. The word stakeholder was a

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deliberate play on the word stockholder. Much of the strategy literature at the time was
founded, either explicitly or implicitly, on the idea that stockholders were the only
important constituency of the modern for - profit corporation. Stakeholder theory
contradicted this idea by expanding a company‘s responsibility to groups or individuals
who significantly affect or are significantly affected by the company‘s activities;
including stockholders. Figure 1.3 contains a typical stakeholder map. A firm has internal
stakeholders, such as employees, who are considered a part of the internal organization.
In addition, the firm has frequent interactions with stakeholders in what is called the
operating (or task) environment. The firm and stakeholders in its operating environment
are influenced by other factors, such as society, technology, the economy, and the legal
environment. These other factors form the broad environment. The three perspectives that
will be incorporated are the traditional, the resource - based, and the stakeholder views of
strategic management and the firm.

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THE STRATEGIC MANAGEMENT PROCESS

Three perspectives on strategic management have been discussed so far: the traditional
model, the resource - based view, and the stakeholder approach. In this book, these three
approaches are combined (Table ). The basic strategic management process is most
closely related to the traditional model. However, each of the stages of this process is
heavily influenced by each of the three approaches.

The key activities in the strategic management process are shown in Figure 1.4 and begin
by providing:

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1. A situation analysis of the broad and operating environments of the organization,
including internal resources and both internal and external stakeholders

2. The establishment of strategic direction, reflected in mission statements and

organizational visions

3. A formulation of specific strategies

4. Strategy implementation, which includes designing an organizational structure,

controlling organizational processes, managing relationships with stakeholders, and
managing resources to develop competitive advantage.

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While these activities may occur in the order specified, especially if a firm is engaging in
a formal strategic planning program, they may also be carried out in some other order or
even simultaneously. For example, it is not uncommon for a strategic direction to serve as
a foundation for the situation analysis.

The feedback loops at the bottom of Figure 1.4 indicate that organizations often cycle
back to earlier activities during the strategic management process, as new information is
gathered and assumptions change. For instance, a company may attempt to develop
strategies consistent with its strategic direction and, after a trial period, discover that the
direction was not reasonable. Also, an organization may discover rather quickly (or over
a longer period of time) that a proposed strategy cannot be implemented feasibly. As a
result, the firm may have to cycle back to the formulation stage to fine - tune its strategic

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approach. In other words, organizations may learn from their own past actions and from
environmental forces, and they may modify their behavior in response. However, not all
organizations engage in all of the processes depicted in Figure 1.4 : entrepreneurial start -
up firms rarely do. They often begin with an entrepreneur who has an idea for a product
or service that he or she believes will lead to market success. Venture capital is raised
through a variety of public or private sources, and a new business is born. The
entrepreneur may establish an informal sense of direction and a few goals, but the rest of
the formal strategy process may be overlooked. If the organization is successful, it will
typically expand in both sales and personnel until it reaches a critical point at which the
entrepreneur feels a loss of control. At this point, the entrepreneur may attempt to
formalize various aspects of strategic planning, by either hiring outside consultants,
creating planning positions within the firm, or involving other managers in planning
activities. This same process is typical of nonprofit start - ups as well, except that the
nature of the cause (i.e., humanitarian or educational) may place tighter constraints on the
way the firm is financed and organized.

Consequently, the model in Figure 1.4 is not intended to be a rigid representation of the
strategic management process in all organizations as they currently operate. Nevertheless,
the progression of activities — from analysis to planning to action and control —
provides a logical way to study strategic management. Furthermore, the activities relate
equally well to for - profit, nonprofit, manufacturing, and service entities, although there
are some of the differences in the way these organizations approach strategic
management.

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Now that the strategic management process has been introduced, each of its components
—situation analysis, strategic direction, strategy formulation, and strategy
implementation — will be described in more detail.

Situation Analysis

Many of the stakeholders and forces that have the potential to be most important to
companies are presented in Figure 1.3. All of the stakeholders inside and outside of the
firm, as well as the major external forces, should be analyzed at both the domestic and
international levels. The external environment includes groups, individuals, and forces
outside of the traditional boundaries of the organization that are significantly influenced
by or have a major impact on the organization. External stakeholders, part of a
company‘s operating environment, include competitors, customers, suppliers, financial
intermediaries, local communities, unions, activist groups, and local and national
government agencies and administrators. The broad environment forms the context in
which the company and its operating environment exist, and includes sociocultural,
economic, technological, political, and legal influences, both domestically and abroad.
One organization, acting independently, may have very little influence on the forces in
the broad environment; however, the forces in this environment can have a tremendous
impact on the organization. The internal organization includes all of the stakeholders,
resources, knowledge, and processes that exist within the boundaries of the firm.

SWOT ANALYSIS

Analyzing the environment and the company can assist the company in all of the other
tasks of strategic management. For example, a firm‘s managers should formulate
strategic direction and specific strategies based on organizational strengths and
weaknesses and in the context of the opportunities and threats found in its environment.
A SWOT analysis is a tool strategists use to evaluate Strengths, Weaknesses,
Opportunities, and Threats. Strengths are company resources and capabilities that can
lead to a competitive advantage. Weaknesses are resources and capabilities that a
company does not possess, to the extent that their absence places the firm at a
competitive disadvantage. Opportunities are conditions in the broad and operating
environments that allow a firm to take advantage of organizational strengths, overcome
organizational weaknesses, and/or neutralize environmental threats. Threats are
conditions in the broad and operating environments that may impede organizational
competitiveness or the achievement of stakeholder satisfaction.

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Strategic Direction

Strategic direction pertains to the longer - term goals and objectives of the organization.
At a more fundamental level, strategic direction defines the purposes for which a
company exists and operates. This direction is often contained in mission and vision
statements. An organization‘s mission is its current purpose and scope of operation, while
its vision is a forward – looking statement of what it wants to be in the future. Unlike
shorter - term goals and strategies, mission and vision statements are an enduring part of
planning processes within the company. They are often written in terms of what the
organization will do for its key stakeholders. For example, the philosophy, vision,
mission, and guiding principles of Shangri - La Hotels and Resorts are:

Our Philosophy : Shangri - La hospitality from caring people

Our Vision: The first choice for customers, employees, shareholders, and business
partners

Our Mission: Delighting customers each and every time

Our Guiding Principles (Core Values):

We will ensure leadership drives for results.

We will make customer loyalty a key driver of our business.

We will enable decision making at customer contact point.

We will be committed to the financial success of our own unit and of our company.

We will create an environment where our colleagues may achieve their personal and
career goals.

We will demonstrate honesty, care, and integrity in all our relationships.

We will ensure our policies and processes are customer and employee friendly.

We will be environmentally conscientious and provide safety and security for our
customers and our colleagues.

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A well - established strategic direction provides guidance to the stakeholders inside the
organization who are largely responsible for carrying it out. A well - defined direction
also provides external stakeholders with a greater understanding of the company and its
activities. The next logical step in the strategic management process is strategy
formulation.

Strategy Formulation

Strategy formulation, the process of planning strategies, is often divided into three levels:
corporate, business, and functional. One of the most important roles of corporate - level
strategy is to define a company‘s domain of activity through selection of business areas
in which the company will compete. Business - level strategy formulation pertains to
domain direction and navigation, or how businesses should compete in the areas they
have selected. Sometimes business - level strategies are also referred to as competitive
strategies. Functional - level strategies contain the details of how functional resource
areas, such as marketing, operations, and finance, should be used to implement business -
level strategies and achieve competitive advantage. Basically, functional - level strategies
are for acquiring, developing, and managing organizational resources. These
characterizations are oversimplified, but it is sometimes useful to think of corporate -
level strategies as ―where to compete,‖ business - level strategies as ― how to compete in
those areas, ‖ and functional - level strategies as ― the functional details of how resources
will be managed so that business - level strategies will be accomplished. ‖ Another way
to distinguish among the three levels — perhaps a more accurate one — is to determine
the level at which decisions are made (see Figure 1.5), as follows:

• Corporate - level decisions are typically made at the highest levels of the organization
by the CEO and/or board of directors, although these individuals may receive input from
managers at other levels. If an organization is involved in only one area of business, then
business - level decisions tend to be made by these same people.

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• Business - level decisions in organizations that have diversified into multiple areas,
which are represented by different operating divisions or lines of business, are made
by division heads or business - unit managers.

• Functional - level decisions are made by functional managers, who represent

organizational areas such as operations, finance, personnel, accounting, research
and development, or information systems.

Figure 1.5 shows the levels at which particular strategy decisions are made within a
multibusiness firm. To illustrate these three levels of decision making, the Tata Group,
one of India ‘ s largest conglomerates, has more than 96 companies in seven business
sectors. One company in the portfolio is the Taj Hotels Resorts and Palaces, which
consists of 59 hotels at locations across India and internationally. In this very complex
company, corporate - level decisions are made for all 96 businesses, but business strategy
decisions are made at the firm level. Hence, business - level decisions that concern the
Taj Hotels company are made by senior management of the hotel chain, while functional
leaders, such as those who lead human resources, purchasing, and development, guide
functional - level decisions.

Levels of Strategy:

Strategy can be formulated on three different levels:

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 corporate level
business unit level
functional or departmental level.

While strategy may be about competing and surviving as a firm, one can argue that
products, not corporations compete, and products are developed by business units. The
role of the corporation then is to manage its business units and products so that each is
competitive and so that each contributes to corporate purposes.

Consider Textron, Inc., a successful conglomerate corporation that pursues profits

through a range of businesses in unrelated industries. Textron has four core business
segments:

Aircraft - 32% of revenues

Automotive - 25% of revenues
Industrial - 39% of revenues
Finance - 4% of revenues.

While the corporation must manage its portfolio of businesses to grow and survive, the
success of a diversified firm depends upon its ability to manage each of its product lines.
While there is no single competitor to Textron, we can talk about the competitors and
strategy of each of its business units. In the finance business segment, for example, the
chief rivals are major banks providing commercial financing. Many managers consider
the business level to be the proper focus for strategic planning.

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Corporate Level Strategy

Corporate level strategy fundamentally is concerned with the selection of businesses in

which the company should compete and with the development and coordination of that
portfolio of businesses.

Corporate level strategy is concerned with:

Reach - defining the issues that are corporate responsibilities; these might include
identifying the overall goals of the corporation, the types of businesses in which
the corporation should be involved, and the way in which businesses will be
integrated and managed.
Competitive Contact - defining where in the corporation competition is to be
localized. Take the case of insurance: In the mid-1990's, Aetna as a corporation
was clearly identified with its commercial and property casualty insurance
products. The conglomerate Textron was not. For Textron, competition in the
insurance markets took place specifically at the business unit level, through its
subsidiary, Paul Revere. (Textron divested itself of The Paul Revere Corporation
in 1997.)
Managing Activities and Business Interrelationships - Corporate strategy seeks
to develop synergies by sharing and coordinating staff and other resources across
business units, investing financial resources across business units, and using
business units to complement other corporate business activities. Igor Ansoff
introduced the concept of synergy to corporate strategy.

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 Management Practices - Corporations decide how business units are to be
governed: through direct corporate intervention (centralization) or through more
or less autonomous government (decentralization) that relies on persuasion and
rewards.

Corporations are responsible for creating value through their businesses. They do so by
managing their portfolio of businesses, ensuring that the businesses are successful over
the long-term, developing business units, and sometimes ensuring that each business is
compatible with others in the portfolio.

Business Unit Level Strategy

A strategic business unit may be a division, product line, or other profit center that can be
planned independently from the other business units of the firm.

At the business unit level, the strategic issues are less about the coordination of operating
units and more about developing and sustaining a competitive advantage for the goods
and services that are produced. At the business level, the strategy formulation phase deals
with:

positioning the business against rivals

anticipating changes in demand and technologies and adjusting the strategy to
accommodate them
influencing the nature of competition through strategic actions such as vertical
integration and through political actions such as lobbying.

Michael Porter identified three generic strategies (cost leadership, differentiation, and
focus) that can be implemented at the business unit level to create a competitive
advantage and defend against the adverse effects of the five forces.

Functional Level Strategy

The functional level of the organization is the level of the operating divisions and
departments. The strategic issues at the functional level are related to business processes
and the value chain. Functional level strategies in marketing, finance, operations, human
resources, and R&D involve the development and coordination of resources through
which business unit level strategies can be executed efficiently and effectively.

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Functional units of an organization are involved in higher level strategies by providing
input into the business unit level and corporate level strategy, such as providing
information on resources and capabilities on which the higher level strategies can be
based. Once the higher-level strategy is developed, the functional units translate it into
discrete action-plans that each department or division must accomplish for the strategy to
succeed.

Strategy Implementation

Strategy formulation results in a plan of action for the company and its various levels,
whereas strategy implementation represents a pattern of decisions and actions that are
intended to carry out the plan. Strategy implementation involves managing stakeholder
relationships and organizational resources in a manner that moves the business toward the
successful execution of its strategies, consistent with its strategic direction.
Implementation activities also involve creating an organizational design and
organizational control systems to keep the company on the right course. Organizational
control refers to the processes that lead to adjustments in strategic direction, strategies, or
the implementation plan, when necessary. Thus, managers may collect information that
leads them to believe that the organizational mission is no longer appropriate or that its
strategies are not leading to the desired outcomes. A strategic - control system may
conversely tell managers that the mission and strategies are appropriate, but that they
have not been well executed. In such cases, adjustments should be made to the
implementation process.

In summary, the four basic processes associated with strategic management are:

1. Situation analysis

2. Establishment of strategic direction

3. Strategy formulation

4. Strategy implementation

Morrison Restaurants is among many hospitality firms that fully use these processes. The
company, with more than $ 1 billion in revenues, developed and implemented ― an
integrated strategic plan for each of its divisions and concepts. ‖ Based on a strategic

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analysis, the company developed its strategies on the basis of its strengths, weaknesses,
opportunities, and threats (SWOT). Its plan and goals, which are widely used and
understood by managers and team members, support its mission of ―feeding America for
under $ 10.‖

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 END CHAPTER QUIZ

Q.1. Strategy is

(a)A sense of organizations objectives and how it achieves them

(b)An art of motivating employees

(c)To increase profits

(d) None of the above

Q.2 Strategic Management includes

(a)Managing strategies

(b)All functional areas of an organisation

(c)Is similar too operations management

(d) All of the above

Q.3According to Traditional Perspective of Strategic Management

(a) Firm is a collection of resources and skills

(b) Firm is an economic entity

(c)Firm is a network of relationships among the firm and its stakeholders

(d) Firm is an informal collection of people

Q.4 The Resource Based View of Strategic Management focuses on

(a) Analysis of the economic power, political influence, rights, and demands
of various stakeholders

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(b) Situation analysis of internal and external environments leading to
formulation of mission and strategies

(c) Analysis of organizational resources, skills, and abilities Acquisition of

superior resources, skills, and abilities

(d)None of the above

Q.5 The Strategic Management Process does not include:

(a) Strategy Formulation

(b) Strategy Evaluation & Implementation

(c) Strategy Control

(d)Strategic Intent

Q.6 Strategy implementation represents

(a) The purposes for which a company exists and operates

(b) A tool strategists use to evaluate Strengths, Weaknesses, Opportunities,

and Threats

(c)Formation of a strategy

(d) A pattern of decisions and actions that are intended to carry out the plan

Q.7 Corporate Level Decisions are

(a) Made at the highest level

(b) Made by functional managers

(c) Represented by different operating divisions or lines of business

(d) All of the above

Q.8 Business Unit Level Strategy deals with

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(a) Influencing the nature of competition through strategic actions such as
vertical integration and through political actions such as lobbying

(b) Development and coordination of resources through which business unit

level strategies can be executed efficiently and effectively

(c) Managing Activities and Business Interrelationships

(d) Defining the issues that are corporate responsibilities

Q.9 Functional Level Strategies

(a) Positions the business against rivals

(b) Managing Activities and Business Interrelationships

(c) Are related to business processes and the value chain

(d) Defining the issues that are corporate responsibilities

Q.10 The basic processes associated with strategic management are:

(a) Situation analysis

(b) Establishment of strategic direction

(c) Strategy formulation& implementation

(d) All of the above

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 Chapter-2

INTERNATIONAL STRATEGIC MANAGEMENT

Contents:

2.1 International Strategic Management

2.2 Difference between International and Global Strategic Management

2.3 Competitive Advantage

2.4 Global Cost Structure

2.5 Types of International Strategies

2.6 Foreign Entry Modes

International Strategic Management

The term ‗global strategy‘ has been in use only since the late 1970s, and began to assume
widespread use in the 1990s. Prior to the 1990s, ‗international strategy‘ was the term
most often used, and it is still in use now, to describe the strategic activities of firms
operating across borders. In fact, for many, ‗global‘ is just a new replacement for the term
‗international‘ and hence ‗international strategy‘ and ‗global strategy‘ are sometimes used
interchangeably. We will now understand the real difference between Global Strategy
and International Strategy.

International strategy

When firms first establish subsidiaries outside their home market, they move from a
domestic strategy phase to an international strategy phase. Firms that manufacture and
market products or services in several countries are called ‗multinational firms‘. During
this phase, each subsidiary is likely to have its own strategy, and will analyse, develop,
and implement that strategy by tailoring it to its particular local market. At this phase,
adaptation of products to fit local market peculiarities becomes the main concern for
multinational firms. Internationally scattered subsidiaries act independently and operate
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as if they were local companies, with minimum coordination from the parent company.
This approach leads to a wide variety of business strategies, and a high level of
adaptation to the local business environment.

Global strategy

As multinationals mature and move through the first three stages, they become aware of
the opportunities to be gained from integrating and creating a single strategy on a global
scale. A global strategy involves a carefully crafted single strategy for the entire network
of subsidiaries and partners, encompassing many countries simultaneously and leveraging
synergies across many countries. The term ‗simultaneous‘ is used here to indicate that
most of the activities of the different subsidiaries are coordinated from headquarters in
order to maximize global efficiency, which allows multinational firms to achieve the
economies of scale and scope that are critical for global competitiveness. Moving from a
domestic or international strategy to a global strategy is not an easy process, and creates
various strategic challenges. The challenge here is to develop one single strategy that can
be applied throughout the world while at the same time maintaining the flexibility to
adapt that strategy to the local business environment when necessary.

International strategy and global strategy: what is the difference?

What differences are there between the global strategy and international strategy? There
are three key differences.

The first relates to the degree of involvement and coordination from the centre.
Coordination of strategic activities is the extent to which a firm‘s strategic activities in
different country locations are planned and executed interdependently on a global scale to
exploit the synergies that exist across different countries. International strategy does not
require strong coordination from the centre. Global strategy, on the other hand, requires
significant coordination between the activities of the centre and those of subsidiaries.

The second difference relates to the degree of product standardization and responsiveness
to local business environment. Product standardization is the degree to which a product,
service, or process is standardized across countries. An international strategy assumes
that the subsidiary should respond to local business needs unless there is a good reason
for not doing so. In contrast, the global strategy assumes that the centre should

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standardize its operations and products in all the different countries, unless there is a
compelling reason for not doing so.

The third difference has to do with strategy integration and competitive moves.
‗Integration‘ and ‗competitive move‘ refer to the extent to which a firm‘s competitive
moves in major markets are interdependent. For example, a multinational firm subsidizes
operations or subsidiaries in countries where the market is growing with resources gained
from other subsidiaries where the market is declining, or responds to competitive moves
by rivals in one market by counter-attacking in others. The international strategy gives
subsidiaries the independence to plan and execute competitive moves independently—
that is, competitive moves are based solely on the analysis of local rivals. In contrast, the
global strategy plans and executes competitive battles on a global scale. Firms adopting a
global strategy, however, compete as a collection of globally integrated single firms.
International strategy treats competition in each country on a ‗stand-alone basis‘, while a
global strategy takes ‗an integrated approach‘ across different countries.

Defining global strategic management

Having examined the broad field of global strategic management, we are now able to
define it more accurately. Because global strategic management is a subset of strategic
management, any definition of global strategic management has to be built on basic
definitions of strategic management, with an added explanation of the global dimensions.

So what are these global dimensions? We use the three differences between international
strategy and global strategy to define global strategic management. Global strategy
dimensions can be categorized into three main dimensions: the configuration and
coordination, standardization, and integration dimensions.

These dimensions are explained below:

The first major dimension of global strategy is coordination and configuration of the
multinational firm‘s activities across countries. According to this view, global strategy is
the process of exploiting the synergies that exist across different countries, as well as the
comparative advantages offered by different countries. Comparative advantages offered
by different countries include resources that are inherited—such as a country‘s location,
climate, size, or stock of natural deposits—and resources that are the subject of sustained
investment over a considerable period of time—such as a country‘s education system and
specific skills, its technological and organizational capabilities, its communication and

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marketing infrastructures and its levels of labour productivity. According to the
configuration and coordination perspective, multinational firms must configure their
operations to exploit the benefits offered by different country locations, and coordinate
their activities across countries to capture synergies derived from economies of scale and
scope.

The standardization dimension defines global strategic management as the process of

offering products across countries. According to this view, multinational firms pursuing a
standardization strategy have a global strategy, while multinational firms pursuing an
adaptation strategy should be referred to as implementing an international strategy. It is
important to note that for strategy to be global absolute standardization across countries is
not necessary. Rather, it suffices if core elements of the product or service are applied
consistently across countries with minor adaptations to local peculiarities. For example,
IKEA offers its standard products worldwide but makes necessary adjustments to satisfy
local customers and meet different legal standards.

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The third perspective is the integrations view. According to this view, global strategy is
concerned with the integration of competitive moves across country markets. Here, a firm
makes competitive moves not because they are best for the particular country or region
involved but because they are best for the firm as a whole. The ability of a firm to
coordinate activities globally across markets depends on its ability to cross-subsidize,
explicitly or implicitly, across markets. In a global competitive strategy, competitive
moves are made in a systematic way across countries, and that a competitor could be
‗attacked in one country in order to drain its resources for another country, or a
competitive attack in one country is countered in another country‘.

Sources of Competitive Advantage from a Global Strategy

A well-designed global strategy can help a firm to gain a competitive advantage. This
advantage can arise from the following sources:

Efficiency
o Economies of scale from access to more customers and markets
o Exploit another country's resources - labor, raw materials
o Extend the product life cycle - older products can be sold in lesser
developed countries
o Operational flexibility - shift production as costs, exchange rates, etc.
change over time

Strategic
o First mover advantage and only provider of a product to a market
o Cross subsidization between countries
o Transfer price

Risk
o Diversify macroeconomic risks (business cycles not perfectly correlated
among countries)
o Diversify operational risks (labor problems, earthquakes, wars)

Learning
o Broaden learning opportunities due to diversity of operating environments

Reputation
o Crossover customers between markets - reputation and brand
identification

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Sumantra Ghoshal of INSEAD proposed a framework comprising three categories of
strategic objectives and three sources of advantage that can be used to achieve them.
Assembling these into a matrix results in the following framework:

Strategic Sources of Competitive Advantage

Objectives National Differences Scale Economies Scope Economies
Sharing
Efficiency in Exploit factor cost
Scale in each activity investments and
Operations differences
costs
Balancing scale with
Market or policy- Portfolio
Flexibility strategic &
induced changes diversification
operational risks
Societal differences in Experience - cost
Innovation Shared learning
management and reduction and
and Learning across activities
organization innovation

The Nature of Competitive Advantage in Global Industries

A global industry can be defined as:

An industry in which firms must compete in all world markets of that product in
order to survive.
An industry in which a firm's competitive advantage depends on economies of
scale and economies of scope gained across markets.

Some industries are more suited for globalization than are others. The following drivers
determine an industry's globalization potential.

1. Cost Drivers
o Location of strategic resources
o Differences in country costs
o Potential for economies of scale (production, R&D, etc.) Flat experience
curves in an industry inhibits globalization. One reason that the facsimile
industry had more global potential than the furniture industry is that for
fax machines, the production costs drop 30%-40% with each doubling of
volume; the curve is much flatter for the furniture industry and many

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 service industries. Industries for which the larger expenses are in R&D,
such as the aircraft industry, exhibit more economies of scale than those
industries for which the larger expenses are rent and labor, such as the dry
cleaning industry. Industries in which costs drop by at least 20% for each
doubling of volume tend to be good candidates for globalization.
o Transportation costs (value/bulk or value/weight ratio) => Diamonds and
semiconductors are more global than ice.

2. Customer Drivers
o Common customer needs favor globalization. For example, the facsimile
industry's customers have more homogeneous needs than those of the
furniture industry, whose needs are defined by local tastes, culture, etc.
o Global customers: if a firm's customers are other global businesses,
globalization may be required to reach these customers in all their
markets. Furthermore, global customers often require globally
standardized products.
o Global channels require a globally coordinated marketing program. Strong
established local distribution channels inhibits globalization.
o Transferable marketing: whether marketing elements such as brand names
and advertising require little local adaptation. World brands with non-
dictionary names may be developed in order to benefit from a single
global advertising campaign.

3. Competitive Drivers
o Global competitors: The existence of many global competitors indicates
that an industry is ripe for globalization. Global competitors will have a
cost advantage over local competitors.
o When competitors begin leveraging their global positions through cross-
subsidization, an industry is ripe for globalization.

4. Government Drivers
o Trade policies
o Technical standards
o Regulations

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The furniture industry is an example of an industry that did not lend itself to globalization
before the 1960's. Because furniture has a high bulk compared to its value, and because
furniture is easily damaged in shipping, transport costs traditionally were high.
Government trade barriers also were unfavorable. The Swedish furniture company IKEA
pioneered a move towards globalization in the furniture industry. IKEA's furniture was
unassembled and therefore could be shipped more economically. IKEA also lowered
costs by involving the customer in the value chain; the customer carried the furniture
home and assembled it himself. IKEA also had a frugal culture that gave it cost
advantages. IKEA successfully expanded in Europe since customers in different countries
were willing to purchase similar designs. However, after successfully expanding to
several countries, IKEA ran into difficulties in the U.S. market for several reasons:

Different tastes in furniture and a requirement for more customized furniture.

Difficult to transfer IKEA's frugal culture to the U.S.
The Swedish Krona increased in value, increasing the cost of furniture made in
Sweden and sold in the U.S.
Stock-outs due to the one to two month shipping time from Europe
More competition in the U.S. than in Europe

Country Comparative Advantages

Competitive advantage is a firm's ability to transform inputs into goods and services at a
maximum profit on a sustained basis, better than competitors. Comparative advantage
resides in the factor endowments and created endowments of particular regions. Factor
endowments include land, natural resources, labor, and the size of the local population.

In the 1920's, Swedish economists Eli Hecksher and Bertil Ohlin developed the factor-
proportions theory, according to which a country enjoys a comparative advantage in
those goods that make intensive use of factors that the country has in relative abundance.

Michael E. Porter argued that a nation can create its own endowments to gain a
comparative advantage. Created endowments include skilled labor, the technology and
knowledge base, government support, and culture. Porter's Diamond of National
Advantage is a framework that illustrates the determinants of national advantage. This
diamond represents the national playing field that countries establish for their industries.

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Types of International Strategy: Multi-domestic vs. Global

Multi-domestic Strategy

Product customized for each market

Decentralized control - local decision making
Effective when large differences exist between countries
Advantages: product differentiation, local responsiveness, minimized political
risk, minimized exchange rate risk

Global Strategy

Product is the same in all countries.

Centralized control - little decision-making authority on the local level
Effective when differences between countries are small
Advantages: cost, coordinated activities, faster product development

A fully multi-local value chain will have every function from R&D to distribution and
service performed entirely at the local level in each country. At the other extreme, a fully
global value chain will source each activity in a different country.

Philips is a good example of a company that followed a multidomestic strategy. This

strategy resulted in:

Innovation from local R&D

Entrepreneurial spirit
Products tailored to individual countries
High quality due to backward integration

The multi-domestic strategy also presented Philips with many challenges:

High costs due to tailored products and duplication across countries

The innovation from the local R&D groups resulted in products that were R&D
driven instead of market driven.
Decentralized control meant that national buy-in was required before introducing
a product - time to market was slow.

Matsushita is a good example of a company that followed a global strategy. This strategy
resulted in:

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 Strong global distribution network
Company-wide mission statement that was followed closely
Financial control
More applied R&D
Ability to get to market quickly and force standards since individual country buy-
in was not necessary.

The global strategy presented Matsushita with the following challenges:

Problem of strong yen

Too much dependency on one product - the VCR
Loss of non-Asian employees because of glass ceilings

A third strategy, which was appropriate to Whirlpool is one of mass customization,

discussed below.

Global Cost Structure Analysis

In 1986, Whirlpool Corporation was considering expanding into Europe by acquiring

Philips' Major Domestic Appliance Division. From the framework of customers, costs,
competitors, and government, there were several pros and cons to this proposed strategy.

Pros

Internal components of the appliances could be the same, offering economies of

scale.
The cost to customize the outer structure of the appliances was relatively low.
The appliance industry was mature with low growth. The acquisition would offer
an avenue to continue growing.

Cons

Fragmented distribution network in Europe.

Different consumer needs and preferences. For example, in Europe refrigerators
tend to be smaller than in the U.S., have only one outside door, and have standard
sizes so they can be built into the kitchen cabinet. In Japan, refrigerators tend to
have several doors in order to keep different compartments at different
temperatures and to isolate odors. Also, because houses are smaller in Japan,
consumers desire quieter appliances.
Whirlpool already was the dominant player in a fragmented industry.

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Since Philip's had a relatively small market share in the European appliance market, one
must analyze the cost structure to determine if the acquisition would offer Whirlpool a
competitive advantage. With the acquisition, Whirlpool would be able to cut costs on raw
materials, depreciation and maintenance, R&D, and general and administrative costs.
These costs represented 53% of Whirlpool's cost structure. Compared to most other
industries, this percentage of costs that could benefit from economies of scale is quite
large. It would be reasonable to expect a 10% reduction in these costs, an amount that
would decrease overall cost by 5.3%, doubling profits. Such potential justifies the risk of
increasing the complexity of the organization.

Because of the different preferences of consumers in different markets, a purely global

strategy with standard products was not appropriate. Whirlpool would have to adapt its
products to local markets, but maintain some global integration in order to realize cost
benefits. This strategy is known as "mass customization."

Whirlpool acquired Philips' Major Domestic Appliance Division, 47% in 1989 and the
remainder in 1991. Initially, margins doubled as predicted. However, local competitors
responded by better tailoring their products and cutting costs; Whirlpool's profits then
began to decline. Whirlpool applied the same strategy to Asia, but GE was outperforming
Whirlpool there by tailoring its products as part of its multi-domestic strategy.

Globalizing Service Businesses

Service industries tend to have a flat experience curve and lower economies of scale.
However, some economy of scale may be gained through knowledge sharing, which
enables the cost of developing the knowledge over a larger base. Also, in some industries
such as professional services, capacity utilization can better be managed as the scope of
operations increases. On the customer side, because a service firm's customers may
themselves be operating internationally, global expansion may be a necessity. Knowledge
gained in foreign markets can used to better service customers. Finally, being global also
enhances a firm's reputation, which is critical in service businesses.

High quality service products often depend on the service firm's culture, and maintaining
a consistent culture when expanding globally is a challenge.

A good example of a service firm that experienced global expansion challenges is the
management consulting firm Bain & Company, Inc. In consulting, a firm's most
important strategic asset is its reputation, so a consistent firm culture is very important.

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Bain faced the following challenges, which depend on the firm's strategy and which
affect the ability to maintain a consistent culture:

Coordinating across offices and sharing knowledge

Whether to hire locals or international staff
How to compensate

Foreign Entry Modes:

The decision of how to enter a foreign market can have a significant impact on the
results. Expansion into foreign markets can be achieved via the following four
mechanisms:

Exporting
Licensing
Joint Venture
Direct Investment

Exporting

Exporting is the marketing and direct sale of domestically-produced goods in another

country. Exporting is a traditional and well-established method of reaching foreign
markets. Since exporting does not require that the goods be produced in the target
country, no investment in foreign production facilities is required. Most of the costs
associated with exporting take the form of marketing expenses.

Exporting commonly requires coordination among four players:

Exporter
Importer
Transport provider
Government

Licensing

Licensing essentially permits a company in the target country to use the property of the
licensor. Such property usually is intangible, such as trademarks, patents, and production

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techniques. The licensee pays a fee in exchange for the rights to use the intangible
property and possibly for technical assistance.

Because little investment on the part of the licensor is required, licensing has the potential
to provide a very large ROI. However, because the licensee produces and markets the
product, potential returns from manufacturing and marketing activities may be lost.

Joint Venture

There are five common objectives in a joint venture: market entry, risk/reward sharing,
technology sharing and joint product development, and conforming to government
regulations. Other benefits include political connections and distribution channel access
that may depend on relationships.

Such alliances often are favorable when:

the partners' strategic goals converge while their competitive goals diverge;
the partners' size, market power, and resources are small compared to the industry
leaders; and
partners' are able to learn from one another while limiting access to their own
proprietary skills.

The key issues to consider in a joint venture are ownership, control, length of agreement,
pricing, technology transfer, local firm capabilities and resources, and government
intentions.

Potential problems include:

conflict over asymmetric new investments

mistrust over proprietary knowledge
performance ambiguity - how to split the pie
lack of parent firm support
cultural clashes
if, how, and when to terminate the relationship

Joint ventures have conflicting pressures to cooperate and compete:

Strategic imperative: the partners want to maximize the advantage gained for the
joint venture, but they also want to maximize their own competitive position.
The joint venture attempts to develop shared resources, but each firm wants to
develop and protect its own proprietary resources.

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 The joint venture is controlled through negotiations and coordination processes,
while each firm would like to have hierarchical control.

Foreign Direct Investment

Foreign direct investment (FDI) is the direct ownership of facilities in the target country.
It involves the transfer of resources including capital, technology, and personnel. Direct
foreign investment may be made through the acquisition of an existing entity or the
establishment of a new enterprise.

Direct ownership provides a high degree of control in the operations and the ability to
better know the consumers and competitive environment. However, it requires a high
level of resources and a high degree of commitment.

The Case of EuroDisney

Different modes of entry may be more appropriate under different circumstances, and the
mode of entry is an important factor in the success of the project. Walt Disney Co. faced
the challenge of building a theme park in Europe. Disney's mode of entry in Japan had
been licensing. However, the firm chose direct investment in its European theme park,
owning 49% with the remaining 51% held publicly.

Besides the mode of entry, another important element in Disney's decision was exactly
where in Europe to locate. There are many factors in the site selection decision, and a
company carefully must define and evaluate the criteria for choosing a location. The
problems with the EuroDisney project illustrate that even if a company has been
successful in the past, as Disney had been with its California, Florida, and Tokyo theme
parks, future success is not guaranteed, especially when moving into a different country
and culture. The appropriate adjustments for national differences always should be made.

Comparision of Market Entry Options

The following table provides a summary of the possible modes of foreign market entry:

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Comparison of Foreign Market Entry Modes

Conditions Favoring this

Mode Advantages Disadvantages
Mode
Limited sales potential in
target country; little
product adaptation Trade barriers &
required Minimizes risk and tariffs add to costs.
investment.
Distribution channels Transport costs
close to plants Speed of entry
Exporting
Limits access to local
High target country Maximizes scale; information
production costs uses existing
facilities. Company viewed as
Liberal import policies an outsider

High political risk

Import and investment
barriers Lack of control over
Minimizes risk and use of assets.
Legal protection possible investment.
in target environment. Licensee may
Speed of entry become competitor.
Licensing Low sales potential in
target country. Able to circumvent Knowledge
trade barriers spillovers
Large cultural distance
High ROI License period is
Licensee lacks ability to limited
become a competitor.
Import barriers
Overcomes Difficult to manage
Large cultural distance ownership
restrictions and Dilution of control
Assets cannot be fairly cultural distance
Joint
priced Greater risk than
Ventures
Combines resources exporting a &
High sales potential of 2 companies. licensing

Some political risk Potential for Knowledge

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 Government restrictions learning spillovers
on foreign ownership
Viewed as insider Partner may become
Local company can a competitor.
provide skills, resources, Less investment
distribution network, required
brand name, etc.
Greater knowledge
Import barriers Higher risk than
of local market
other modes
Small cultural distance
Can better apply
Requires more
specialized skills
Direct Assets cannot be fairly resources and
Investment priced commitment
Minimizes
knowledge spillover
High sales potential May be difficult to
manage the local
Can be viewed as an
Low political risk resources.
insider

Issues in Emerging Economies

In emerging economies, capital markets are relatively inefficient. There is a lack of

information, the cost of capital is high, and venture capital is virtually nonexistent.
Because of the scarcity of high-quality educational institutions, the labor markets lack
well trained people and companies often must fill the void. Because of lacking
communications infrastructure, building a brand name is difficult but good brands are
highly valued because of lower product quality of the alternatives. Relationships with
government officials often are necessary to succeed, and contracts may not be well
enforced by the legal system.

When a large government monopoly (e.g. a state-owned oil company) is privatized, there
often is political pressure in the country against allowing the firm to be acquired by a
foreign entity. Whereas a very large U.S. oil company may prefer acquisitions, because
of the anti-foreign sentiment joint ventures often are more appropriate for outside
companies interested in newly privatized emerging economy firms.

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Knowledge Management in Global Firms

There is much value in transferring knowledge and best practices between parts of a
global firm. However, many barriers prevent knowledge from being transferred:

Barriers attributable to the knowledge source

o lack of motivation
o lack of credibility
Barriers attributable to the knowledge itself - ambiguity and complexity
Barriers attributable to the knowledge recipient
o lack of motivation (not invented here syndrome)
o lack of absorptive capacity - need prerequisite knowledge to advance to
next level
Barriers attributable to the recipient's existing process - process rigidity
Barriers attributable to the recipient's external environment and constraints

Furthermore, even when the transfer is successful, there often is a temporary drop in
performance before the improvements are seen. During this period, there is danger of
losing faith in the new way of doing things.

To facilitate knowledge transfer a firm can:

Implement processes to systematically identify valuable knowledge and best

practices.
Create incentives to motivate both the knowledge source and recipient.
Develop absorptive capacity in the recipient - cumulative knowledge
Develop strong technical and social networks between parts of the firm that can
share knowledge.

Country Management

Country managers must have the following knowledge:

Knowledge of strategic management

Firm-specific knowledge
Country-specific knowledge
Knowledge of the global environment

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Country organizations can assume the role of implementor, contributor, strategic leader,
or black hole, depending on the combination of importance of the local market and local
resources.

Strategic Importance Level of Local Resources & Capabilities

of Local Market Low High
Low Implementor Contributor
High Black Hole Strategic Leader

The least favorable of these roles is the black hole, which is a subsidiary in a strategically
important market that has few capabilities. A firm can find itself in this situation because
of company traditions, ignorance of local conditions, unfavorable entry conditions,
misreading the market, excessive reliance on expatriates, and poor external relations. To
get out of a black hole a firm can form alliances, focus its investments, implement a local
R&D organization, or when all else fails, exit the country.

Country managers assume different roles (The New Country Managers, John A. Quelch,
Professor of Business Administration, Harvard Business School).

International Structure: Country manager is a trader who implements policy.

Multinational Structure: Country manager plays the role of a functional manager
with profit and loss responsibilities.
Transnational Structure: Country manager acts as a cabinet member (team player)
since management control systems are standardized and decision-making power is
shifted to the region manager. The country manager develops the lead market in
his country and transfers the knowledge gained to other similar markets.
Global Structure: Country manager acts as an ambassador and administrator. In a
global firm there usually are business directors who oversee marketing and sales.
The role of the country manager becomes one of a statesman. This person usually
is a local with good government contacts.

Case:

IKEA

Established in the 1940s in a small village in Sweden by Ingvar Kamprad, IKEA has
become one of the world‘s leading retailers of home furnishings. In 2002 it was ranked

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44th out of the top 100 brands by Interbrand, topping other known brands such as Pepsi.
In 2002, it had more than 160 stores in 30 countries.

IKEA‘s strategy is based on selling high-quality, Swedish designed, self-assembly

furniture products at low price. The IKEA business idea is: ‗We shall offer a wide range
of well-designed, functional home furnishing products at prices so low that as many
people as possible will be able to afford them.‘ IKEA targets price-conscious young
couples and families who are willing and able to transport and assemble furniture kits. By
the early 1960s the Swedish market was saturated and IKEA decided to expand its
business formula outside Sweden. IKEA‘s CEO, Anders Dehlvin, noted: ‗Sweden is a
very small country. It‘s pretty logical: in a country like this, if you have a very strong and
successful business, you‘re bound to go international at some point. The reason is
simple—you cannot grow any more.‘ IKEA opened its first store outside Sweden in 1963
in Norway. In 1969 it opened its second international store, in Denmark. It moved outside
the Scandinavian countries when it opened its store in Switzerland in 1973, and then
entered a new country every couple of years. Under IKEA‘s global strategy, suppliers are
usually located in low-cost nations, with close proximity to raw materials and reliable
access to distribution channels. IKEA has over 2,500 suppliers scattered in over sixty
countries. IKEA works closely with its suppliers by helping them to reduce costs, and
sharing technical advice and managerial knowhow with them. In return IKEA has
exclusive contracts with its suppliers. These suppliers produce highly standardized
products intended for the global market.

IKEA‘s internationalization strategy in Scandinavian countries and the rest of Europe has
not paid significant attention to local tastes and preferences in the different European
countries. Only necessary changes were allowed, to keep costs under control. IKEA‘s
business formula is based on low cost and affordability. Adaptation to each country‘s
local requirement would lead to higher cost of production and subsequently put pressure
on the company to increase its prices. IKEA applied its initial vision—to sell a basic
product range that is ‗typically Swedish‘ wherever it ventures. To emphasize its Swedish
roots, it often uses a Swedish theme in its advertising campaign, and has a Swedish blue
and gold colour scheme for its stores. The firm reaps huge economies of scale from the
size of each store, and the big production runs made possible by selling the same products
all over the world. IKEA‘s low responsiveness to local needs strategy seems to work. In
1997 its international sales represented around 89 per cent of its total sales. IKEA sales in
Germany (42.5 per cent) were much higher than its sales in Sweden (11 per cent).

IKEA‘s strategy of not paying attention to local market peculiarities has worked well in
Europe. The company has been able to sell its standardized products across Europe, and
as a result was able to build considerable economies of scale into its operations and
maintain a price advantage over its competitors. The first challenge came when IKEA
entered the US market in 1985. Although between 1985 and 1996 IKEA opened twenty-

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six stores in North America, these stores were not as successful as their counterparts in
Europe. IKEA faced several problems in the US market. The root of most of these
problems was the company‘s lack of attention to local needs and wants. US customers
preferred large furniture kits and household items. For example, Swedish beds were five
inches narrower than those US customers were used to, IKEA‘s kitchen cupboards were
too narrow for the large dinner plates typically used in the US, IKEA‘s glasses were too
small for US customers who typically add ice to their drink and hence require large
glasses—it is said that US customers bought flower vases thinking they were drinking
glasses—and bedroom chests of drawers were too shallow for US consumers, who tend
to store sweaters in them. In addition, IKEA Swedish-sized curtains did not fit American
windows, a mistake about which a senior IKEA manager joked, ‗Americans just wouldn‘t
lower their ceilings to fit our curtains.‘ As a result of initial poor performance in the US
market, IKEA‘s management realized that a standardized product strategy should be
flexible enough to respond to local markets. The company has recently adopted a more
balanced strategic focus (giving weight to global and domestic concerns). The current
approach puts greater emphasis on global market coordination to limit duplication of
activities and capture synergies or economies of scale and scope. In the early 1990s
IKEA redesigned its strategy and adapted its products to the US market. While overall its
subsidiaries are still no more than extensions of the corporate head office in Sweden,
following instructions provided from the centre, subsidiaries in the US are given more
autonomy, to respond effectively to the local business environment. A greater
customization in the US is made possible by the large size of the US market, which
enables IKEA‘s subsidiaries in the US to produce kits designed specifically for the US
market in large quantities and hence keep cost under control. During the 1990–94 period,
IKEA‘s sales in the US increased threefold to $480 million, and rose to $900 million in
1997. By 2002 the US market accounted for 19 per cent of IKEA‘s revenue.

Sources: IKEA‘s website: www.ikea.com; ‗Furnishing the world‘, Economist (19 Nov.
1994), 79–80; H. Carnegy, ‗Struggle to save the soul of IKEA‘, Financial Times, (27
Mar. 1995), 12; J. Flynn and L. Bongiorno, ‗IKEA‘s new game plan‘, Business Week (6
Oct. 1997), 99–102; ‗Ikea has designs to furnish the world‘, European (19 Nov. 1994),
32; Barbara Solomon, ‗A Swedish company corners the business: worldwide‘,
Management Review (Apr. 1991); Katarina Kling and Ingela Gofeman, ‗Ikea CEO
Anders Dahlving on international growth and Ikea‘s unique corporate culture and brand
identity‘, Academy of Management Executive (Feb. 2003).

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 END CHAPTER QUIZ

Q.1 In International Strategy

(a)Strategy will be domestically formed

(b) Each subsidiary will have a different strategy

(c) All subsidiaries have similar strategy

(d) None of the above

Q.2 In Global Strategy

(a) Is similar to International Strategy

(b)All subsidiaries have similar strategy

(c) Each Subsidiary has a different strategy

(d) All of the above

Q.3Global Strategy is different from International Strategy as

(a)There is lack of coordination between centre and subsidiaries

(b) Subsidiaries are independent to plan and execute competitive moves

(c)There is standardization of products across all subsidiaries

(d)All of the above

Q.4 Competitive Advantage from a Global Strategy depends on

(a)Efficiency

(b)Risk

(c)Learning

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(d)All of the above

Q.5 Cost Drivers depend on

(a)Location of strategic resources

(b)Global Customers

(c)Global Competitors

(d)Regulations

Q.6 Customer Drivers depend on

(a)Transportation Costs

(b)Global Customers

(c)Trade Policies

(d) Global Competitors

Q.7 An advantage of exporting is

(a)Control over other partners assets

(b) Able to circumvent trade barriers

(c) High ROI

(d)Uses existing facilities

Q.8 An important characteristic of Joint Ventures are

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(a) Minimizes risk and investment.

(b) Able to circumvent trade barriers

(c) Overcomes ownership restrictions and cultural distance

(d)All of the above

Q.9 Licensing has a disadvantage of

(a) Minimizes risk and investment

(b) Trade barriers & tariffs add to costs

(c) Maximizes scale; uses existing facilities

(d) Licensee may become competitor

Q.10 Direct Investment is advantageous as

(a) May be difficult to manage the local resources

(b) Maximizes knowledge spillover

(c) Minimizes knowledge spillover

(d)All of the above

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 CHAPTER-3
ROLE OF ENVIRONMENT ON STRATEGY

3.1 Value chain analysis

3.2 Global business environment
3.3 External environment
- Macro & Micro environment
- Opportunities & threats
3.4 Internal Environment
- Strengths & weaknesses
3.5 McKinsey 7S Framework

Value Chain Analysis

To better understand the activities through which a firm develops a competitive

advantage and creates shareholder value, it is useful to separate the business system into a
series of value-generating activities referred to as the value chain. In his 1985 book
Competitive Advantage, Michael Porter introduced a generic value chain model that
comprises a sequence of activities found to be common to a wide range of firms. Porter
identified primary and support activities as shown in the following diagram:

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The goal of these activities is to offer the customer a level of value that exceeds the cost
of the activities, thereby resulting in a profit margin.
The primary value chain activities are:
Inbound Logistics: the receiving and warehousing of raw materials, and their
distribution to manufacturing as they are required.
Operations: the processes of transforming inputs into finished products and
services.
Outbound Logistics: the warehousing and distribution of finished goods.
Marketing & Sales: the identification of customer needs and the generation of
sales.
Service: the support of customers after the products and services are sold to them.
These primary activities are supported by:
The infrastructure of the firm: organizational structure, control systems, company
culture, etc.
Human resource management: employee recruiting, hiring, training, development,
and compensation.
Technology development: technologies to support value-creating activities.

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 Procurement: purchasing inputs such as materials, supplies, and equipment.
The firm's margin or profit then depends on its effectiveness in performing these
activities efficiently, so that the amount that the customer is willing to pay for the
products exceeds the cost of the activities in the value chain. It is in these activities that a
firm has the opportunity to generate superior value. A competitive advantage may be
achieved by reconfiguring the value chain to provide lower cost or better differentiation.
The value chain model is a useful analysis tool for defining a firm's core competencies
and the activities in which it can pursue a competitive advantage as follows:

Cost advantage: by better understanding costs and squeezing them out of the
value-adding activities.
Differentiation: by focusing on those activities associated with core
competencies and capabilities in order to perform them better than do
competitors.

Cost Advantage and the Value Chain

A firm may create a cost advantage either by reducing the cost of individual value chain
activities or by reconfiguring the value chain.
Once the value chain is defined, a cost analysis can be performed by assigning costs to
the value chain activities. The costs obtained from the accounting report may need to be
modified in order to allocate them properly to the value creating activities.
Porter identified 10 cost drivers related to value chain activities:
Economies of scale
Learning
Capacity utilization
Linkages among activities
Interrelationships among business units
Degree of vertical integration
Timing of market entry
Firm's policy of cost or differentiation
Geographic location
Institutional factors (regulation, union activity, taxes, etc.)
A firm develops a cost advantage by controlling these drivers better than do the
competitors.
A cost advantage also can be pursued by reconfiguring the value chain. Reconfiguration
means structural changes such a new production process, new distribution channels, or a
different sales approach. For example, FedEx structurally redefined express freight
service by acquiring its own planes and implementing a hub and spoke system.

Differentiation and the Value Chain

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A differentiation advantage can arise from any part of the value chain. For example,
procurement of inputs that are unique and not widely available to competitors can create
differentiation, as can distribution channels that offer high service levels.
Differentiation stems from uniqueness. A differentiation advantage may be achieved
either by changing individual value chain activities to increase uniqueness in the final
product or by reconfiguring the value chain.
Porter identified several drivers of uniqueness:
Policies and decisions
Linkages among activities
Timing
Location
Interrelationships
Learning
Integration
Scale (e.g. better service as a result of large scale)
Institutional factors
Many of these also serve as cost drivers. Differentiation often results in greater costs,
resulting in tradeoffs between cost and differentiation.
There are several ways in which a firm can reconfigure its value chain in order to create
uniqueness. It can forward integrate in order to perform functions that once were
performed by its customers. It can backward integrate in order to have more control over
its inputs. It may implement new process technologies or utilize new distribution
channels. Ultimately, the firm may need to be creative in order to develop a novel value
chain configuration that increases product differentiation.

Technology and the Value Chain

Because technology is employed to some degree in every value creating activity, changes
in technology can impact competitive advantage by incrementally changing the activities
themselves or by making possible new configurations of the value chain.
Various technologies are used in both primary value activities and support activities:
Inbound Logistics Technologies
o Transportation
o Material handling
o Material storage
o Communications
o Testing
o Information systems
Operations Technologies
o Process
o Materials

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 o Machine tools
o Material handling
o Packaging
o Maintenance
o Testing
o Building design & operation
o Information systems
Outbound Logistics Technologies
o Transportation
o Material handling
o Packaging
o Communications
o Information systems
Marketing & Sales Technologies
o Media
o Audio/video
o Communications
o Information systems
Service Technologies
o Testing
o Communications
o Information systems
Note that many of these technologies are used across the value chain. For example,
information systems are seen in every activity. Similar technologies are used in support
activities. In addition, technologies related to training, computer-aided design, and
software development frequently are employed in support activities.
To the extent that these technologies affect cost drivers or uniqueness, they can lead to a
competitive advantage.

Linkages Between Value Chain Activities

Value chain activities are not isolated from one another. Rather, one value chain activity
often affects the cost or performance of other ones. Linkages may exist between primary
activities and also between primary and support activities.
Consider the case in which the design of a product is changed in order to reduce
manufacturing costs. Suppose that inadvertantly the new product design results in
increased service costs; the cost reduction could be less than anticipated and even worse,
there could be a net cost increase.
Sometimes however, the firm may be able to reduce cost in one activity and consequently
enjoy a cost reduction in another, such as when a design change simultaneously reduces
manufacturing costs and improves reliability so that the service costs also are reduced.

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Through such improvements the firm has the potential to develop a competitive
advantage.

Analyzing Business Unit Interrelationships

Interrelationships among business units form the basis for a horizontal strategy. Such
business unit interrelationships can be identified by a value chain analysis.
Tangible interrelationships offer direct opportunities to create a synergy among business
units. For example, if multiple business units require a particular raw material, the
procurement of that material can be shared among the business units. This sharing of the
procurement activity can result in cost reduction. Such interrelationships may exist
simultaneously in multiple value chain activities.
Unfortunately, attempts to achieve synergy from the interrelationships among different
business units often fall short of expectations due to unanticipated drawbacks. The cost of
coordination, the cost of reduced flexibility, and organizational practicalities should be
analyzed when devising a strategy to reap the benefits of the synergies.

Outsourcing Value Chain Activities

A firm may specialize in one or more value chain activities and outsource the rest. The
extent to which a firm performs upstream and downstream activities is described by its
degree of vertical integration.
A thorough value chain analysis can illuminate the business system to facilitate
outsourcing decisions. To decide which activities to outsource, managers must
understand the firm's strengths and weaknesses in each activity, both in terms of cost and
ability to differentiate. Managers may consider the following when selecting activities to
outsource:
Whether the activity can be performed cheaper or better by suppliers.
Whether the activity is one of the firm's core competencies from which stems a
cost advantage or product differentiation.
The risk of performing the activity in-house. If the activity relies on fast-changing
technology or the product is sold in a rapidly-changing market, it may be
advantageous to outsource the activity in order to maintain flexibility and avoid
the risk of investing in specialized assets.
Whether the outsourcing of an activity can result in business process
improvements such as reduced lead time, higher flexibility, reduced inventory,
etc.

The Value Chain System

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A firm's value chain is part of a larger system that includes the value chains of upstream
suppliers and downstream channels and customers. Porter calls this series of value chains
the value system, shown conceptually below:

SUPPLIER FIRM CHANNEL BUYER

VALUE VALUE VALUE VALUE
CHAIN CHAIN CHAIN CHAIN

Linkages exist not only in a firm's value chain, but also between value chains. While a
firm exhibiting a high degree of vertical integration is poised to better coordinate
upstream and downstream activities, a firm having a lesser degree of vertical integration
nonetheless can forge agreements with suppliers and channel partners to achieve better
coordination. For example, an auto manufacturer may have its suppliers set up facilities
in close proximity in order to minimize transport costs and reduce parts inventories.
Clearly, a firm's success in developing and sustaining a competitive advantage depends
not only on its own value chain, but on its ability to manage the value system of which it
is a part.

Global Business Environment:

All businesses and organisations operate in a changing world and are subject to forces
which are more powerful than they are, and which are beyond their control. No business
can survive without continued interaction with the external environment, just as a ship at
sea is subject to powerful natural forces of which it needs to be aware and deal with,
organisations are influenced by forces in their external business environment as well as
the internal forces. Any business strategy needs to take account of all these forces so that
opportunities and threats can be identified and the organisation can navigate its way to
success by matching its internal strengths to external opportunities. Let us now have a
look at the External Business Environment and then on the Internal Business
Environment.

External Business Environment

An organization operates within the larger framework of the external environment that
shapes opportunities and poses threats to the organization. The external environment is a
set of complex, rapidly changing and significant interacting institutions and forces that
affect the organization's ability to serve its customers. External forces are not controlled
by an organization, but they may be influenced or affected by that organization. It is
necessary for organizations to understand the environmental conditions because they
interact with strategy decisions. The external environment has a major impact on the

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determination of marketing decisions. Successful organizations scan their external
environment so that they can respond profitably to unmet needs and trends in the targeted
markets.

External Macro environment

The external macro environment consists of all the outside institutions and forces that
have an actual or potential interest or impact on the organization's ability to achieve its
objectives: competitive, economic, technological, political, legal, demographic, cultural,
and ecosystem. Though noncontrollable, these forces require a response in order to keep
positive actions with the targeted markets. An organization with an environmental
management perspective takes aggressive actions to affect the forces in its marketing
environment rather than simply watching and reacting to it.
1. Economic Environment
The economic environment consists of factors that affect consumer purchasing power and
spending patterns. Economic factors include business cycles, inflation, unemployment,
interest rates, and income. Changes in major economic variables have a significant
impact on the marketplace. For example, income affects consumer spending which
affects sales for organizations. According to Engel's Laws, as income rises, the
percentage of income spent on food decreases, while the percentage spent on housing
remains constant.
2. Technological Environment
The technological environment refers to new technologies, which create new product and
market opportunities. Technological developments are the most manageable
uncontrollable force faced by marketers. Organizations need to be aware of new
technologies in order to turn these advances into opportunities and a competitive edge.
Technology has a tremendous effect on life-styles, consumption patterns, and the
economy. Advances in technology can start new industries, radically alter or destroy
existing industries, and stimulate entirely separate markets. The rapid rate at which
technology changes has forced organizations to quickly adapt in terms of how they
develop, price, distribute, and promote their products.
3. Political and Legal Environment
Organizations must operate within a framework of governmental regulation and
legislation. Government relationships with organizations encompass subsidies, tariffs,
import quotas, and deregulation of industries.
The political environment includes governmental and special interest groups that
influence and limit various organizations and individuals in a given society.
Organizations hire lobbyists to influence legislation and run advocacy ads that state their
point of view on public issues. Special interest groups have grown in number and power
over the last three decades, putting more constraints on marketers. The public expects
organizations to be ethical and responsible. An example of response by marketers to

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special interests is green marketing, the use of recyclable or biodegradable packing
materials as part of marketing strategy.
The major purposes of business legislation include protection of companies from unfair
competition, protection of consumers from unfair business practices and protection of the
interests of society from unbridled business behavior. The legal environment becomes
more complicated as organizations expand globally and face governmental structures
quite different from those within the United States.
4. Demographic Environment
Demographics tell marketers who current and potential customers are; where they are;
and how many are likely to buy what the marketer is selling. Demography is the study of
human populations in terms of size, density, location, age, sex, race, occupation, and
other statistics. Changes in the demographic environment can result in significant
opportunities and threats presenting themselves to the organization. Major trends for
marketers in the demographic environment include worldwide explosive population
growth; a changing age, ethnic and educational mix; new types of households; and
geographical shifts in population.
5. Social / Cultural Environment
Social/cultural forces are the most difficult uncontrollable variables to predict. It is
important for marketers to understand and appreciate the cultural values of the
environment in which they operate. The cultural environment is made up of forces that
affect society's basic values, perceptions, preferences, and behaviors. U.S. values and
beliefs include equality, achievement, youthfulness, efficiency, practicality, self-
actualization, freedom, humanitarianism, mastery over the environment, patriotism,
individualism, religious and moral orientation, progress, materialism, social interaction,
conformity, courage, and acceptance of responsibility. Changes in social/cultural
environment affect customer behavior, which affects sales of products. Trends in the
cultural environment include individuals changing their views of themselves, others, and
the world around them and movement toward self-fulfillment, immediate gratification,
and secularism.
6. Ecosystem Environment
The ecosystem refers to natural systems and its resources that are needed as inputs by
marketers or that are affected by marketing activities. Green marketing or environmental
concern about the physical environment has intensified in recent years. To avoid
shortages in raw materials, organizations can use renewable resources (such as forests)
and alternatives (such as solar and wind energy) for nonrenewable resources (such as oil
and coal). Organizations can limit their energy usage by increasing efficiency. Goodwill
can be built by voluntarily engaging in pollution prevention activities and natural
resource.

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External Microenvironment

The external microenvironment consists of forces that are part of an organization's

marketing process but are external to the organization. These micro environmental forces
include the organization's market, its producer-suppliers, and its marketing
intermediaries. While these are external, the organization is capable of exerting more
influence over these than forces in the macro environment.
1. The Market
Organizations closely monitor their customer markets in order to adjust to changing tastes
and preferences. A market is people or organizations with wants to satisfy, money to
spend, and the willingness to spend it. Each target market has distinct needs, which need
to be monitored. It is imperative for an organization to know their customers, how to
reach them and when customers' needs change in order to adjust its marketing efforts
accordingly. The market is the focal point for all marketing decisions in an organization.
2. Suppliers
Suppliers are organizations and individuals that provide the resources needed to produce
goods and services. They are critical to an organization's marketing success and an
important link in its value delivery system.
3. Marketing Intermediaries
Like suppliers, marketing intermediaries are an important part of the system used to
deliver value to customers. Marketing intermediaries are independent organizations that
aid in the flow of products from the marketing organization to its markets. The
intermediaries between an organization and its markets constitute a channel of
distribution. These include middlemen (wholesalers and retailers who buy and resell
merchandise). Physical distribution firms help the organization to stock and move
products from their points of origin to their destinations. Warehouses store and protect
the goods before they move to the next destination. Marketing service agencies help the
organization target and promote its products and include marketing research firms,
advertising agencies, and media firms. Financial intermediaries help finance transactions
and insure against risks and include banks, credit unions, and insurance companies.

Internal Business Environment:

Internally, an organization can be viewed as a resource conversion machine that takes
inputs (labor, money, materials and equipment) from the external environment (i.e., the
world outside the boundaries of the organization), converts them into useful products,
goods, and services, and makes them available to customers as outputs. The organization
must continuously monitor and adapt to the environment if it is to survive and prosper.
Disturbances in the environment may spell profound threats or new opportunities. The
successful organization will identify, appraise, and respond to the various opportunities
and threats in its environment.

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The main components of Internal Business Environment are:

Key business drivers (e.g. Market indicators, competitive advances, product

attractiveness, etc.);
The organization's strengths, weaknesses, opportunities and threats;
Internal stakeholders;
Organization structure and culture;
Assets in terms of resources (such as people, systems, processes, capital etc);
Intellectual assets like patents/ process knowledge
Goals and objectives and the strategies already in place to achieve them.

Importance of understanding the environment:

The manager‘s job cannot be accomplished in a vacuum within the organization. There
are a number of factors both internal as well as external which jointly affect managerial
decision-making. It is therefore very important for the manager to understand and
evaluate the impact of the business environment due to the following reasons :

a)Businesses may be doomed to be non starters due to restrictive business environment

which may take the form of rigid government laws ( no polluting industry can ever be
located in around 50 Km radius of the Taj Mahal) , state of competition ( Car
manufacturing capacity presently in the country is far in excess of demand) etc.

b)The present and future viability of an enterprise is impacted by the environment For eg:
no TV manufacturer can be expected to survive by making only B&W television sets
when consumer preference has clearly shifted to colour television sets.

c)The cost of capital and the cost of borrowing - two key financial drivers of any
enterprise are impacted by the external environment . For eg the ability of a business to
fund its expansion plan by raising money from the stock markets depends on the
prevalent public mood towards investment in stock markets.

d)The availability of all key inputs like skilled labour , trained managers , raw materials ,
electricity , transportation , fuel etc are a factor of the business environment.

e)Increasing public awareness of the negative aspects of certain industries like hand
woven carpets ( use of child labour ) , pesticides (damage to environment in the form of
chemical residues in groundwater), plastic bags (choking of sewer lines) have resulted in

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the slow decline of some industries.

f) Finally , the environment offers the opportunities for growth and profits . For eg when
the insurance and aviation industry was thrown open to the private sector , the new
entrant could easily build on the expectations of the public.

SWOT Analysis

Strengths, Weaknesses, Opportunities and Threats (SWOT)

SWOT analysis is a tool for auditing an organization and its environment. It is the first
stage of planning and helps marketers to focus on key issues. SWOT stands for strengths,
weaknesses, opportunities, and threats. Strengths and weaknesses are internal factors.
Opportunities and threats are external factors.

In SWOT, strengths and weaknesses are internal factors. For example:A strength
could be:
Your specialist marketing expertise.
A new, innovative product or service.
Location of your business.
Quality processes and procedures.
Any other aspect of your business that adds value to your product or service.
A weakness could be:
Lack of marketing expertise.
Undifferentiated products or services (i.e. in relation to your competitors).

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 Location of your business.
Poor quality goods or services.
Damaged reputation.
In SWOT, opportunities and threats are external factors. For example: An
opportunity could be:
A developing market such as the Internet.
Mergers, joint ventures or strategic alliances.
Moving into new market segments that offer improved profits.
A new international market.
A market vacated by an ineffective competitor.
A threat could be:
A new competitor in your home market.
Price wars with competitors.
A competitor has a new, innovative product or service.
Competitors have superior access to channels of distribution.
Taxation is introduced on your product or service.

Below are a few examples of SWOT Analysis to make the understanding of the topic
easier:

Example 1 - Wal-Mart SWOT Analysis. Strengths - Wal-Mart is a powerful retail brand.

It has a reputation for value for money, convenience and a wide range of products all in
one store. Weaknesses - Wal-Mart is the World's largest grocery retailer and control of its
empire, despite its IT advantages, could leave it weak in some areas due to the huge span
of control. Opportunities - To take over, merge with, or form strategic alliances with
other global retailers, focusing on specific markets such as Europe or the Greater China
Region. Threats - Being number one means that you are the target of competition, locally
and globally.

Example 2 - Starbucks SWOT Analysis. Strengths - Starbucks Corporation is a very

profitable organization, earning in excess of $600 million in 2004.Weaknesses -
Starbucks has a reputation for new product development and creativity. Opportunities -
New products and services that can be retailed in their cafes, such as Fair Trade products.
Threats - Starbucks are exposed to rises in the cost of coffee and dairy products.

Example 3 - Nike SWOT Analysis. Strengths - Nike is a very competitive organization.

Phil Knight (Founder and CEO) is often quoted as saying that 'Business is war without
bullets. 'Weaknesses - The organization does have a diversified range of sports products.
Opportunities - Product development offers Nike many opportunities. Threats - Nike is
exposed to the international nature of trade.

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Example 4 - Indian Premier League (IPL) SWOT Analysis. Where will you find the
Mumbai Indians, the Royal Challengers, the Deccan Chargers, the Channai Super Kings,
the Delhi Daredevils, the Kings XI Punjab, the Kolkata Knight Riders and the Rajesthan
Royals? In the Indian Premier League (IPL) - the most exciting sports franchise that
the World has seen in recent years, with seemingly endless marketing opportunities (and
strengths, weaknesses and threats of course!).

Example 5 - Bharti Airtel SWOT Analysis. Weaknesses - An often cited original

weakness is that when the business was started by Sunil Bharti Mittal over 15 years ago,
the business has little knowledge and experience of how a cellular telephone system
actually worked. So the start-up business had to outsource to industry experts in the field.

McKinsey 7S Framework

McKinsey's 7S Model was created by the consulting company McKinsey and Company
in the early 1980s. Since then it has been widely used by practitioners and academics
alike in analysing hundreds of organisations. We will have an extensive look on each of
the seven components of the model and the links between them. It also includes practical
guidance and advice for the budding managers to analyse organisations using this model.

The McKinsey 7S model was named after a consulting company, McKinsey and
Company, which has conducted applied research in business and industry. All of the
authors worked as consultants at McKinsey and Company; in the 1980s, they used the
model to analyse over 70 large organizations. The McKinsey 7S Framework was created
as a recognisable and easily remembered model in business. The seven variables, which
the authors term "levers", all begin with the letter "S":
These seven variables include structure, strategy, systems, skills, style, staff and shared
values. Structure is defined as the skeleton of the organisation or the organisational chart.
The authors describe strategy as the plan or course of action in allocating resources to
achieve identified goals over time. The systems are the routine processes and procedures
followed within the organisation. Staff are described in terms of personnel categories
within the organisation (e.g. engineers), whereas the skills variable refers to the
capabilities of the staff within the organisation as a whole. The way in which key
managers behave in achieving organisational goals is considered to be the style variable;
this variable is thought to encompass the cultural style of the organisation. The shared
values variable, originally termed superordinate goals, refers to the significant meanings
or guiding concepts that organisational members share.

The shape of the model was also designed to illustrate the interdependency of the
variables. This is illustrated by the model also being termed as the "Managerial
Molecule". While the authors thought that other variables existed within complex
organisations, the variables represented in the model were considered to be of crucial

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importance to managers and practitioners.
The analysis of several organizations using the model revealed that American companies
tend to focus on those variables which they feel they can change (e.g. structure, strategy
and systems) while neglecting the other variables. These other variables (e.g. skills, style,
staff and shared values) are considered to be "soft" variables. Japanese and a few
excellent American companies are reportedly successful at linking their structure,
strategy and systems with the soft variables. The authors have concluded that a company
cannot merely change one or two variables to change the whole organisation.

For long-term benefit, they feel that the variables should be changed to become more
congruent as a system. The external environment is not mentioned in the McKinsey 7S
Framework, although the authors do acknowledge that other variables exist and that they
depict only the most crucial variables in the model. While alluded to in their discussion of
the model, the notion of performance or effectiveness is not made explicit in the model.

Description of 7 Ss

Strategy: Strategy is the plan of action an organisation prepares in response to, or

anticipation of, changes in its external environment. Strategy is differentiated by tactics
or operational actions by its nature of being premeditated, well thought through and often
practically rehearsed. It deals with essentially three questions 1) where the organisation
is at this moment in time, 2) where the organisation wants to be in a particular length of
time and 3) how to get there. Thus, strategy is designed to transform the firm from the
present position to the new position described by objectives, subject to constraints of the
capabilities or the potential.

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Structure: Business needs to be organised in a specific form of shape that is generally
referred to as organisational structure. Organisations are structured in a variety of ways,
dependent on their objectives and culture. The structure of the company often dictates the
way it operates and performs (Waterman et al., 1980). Traditionally, the businesses have
been structured in a hierarchical way with several divisions and departments, each
responsible for a specific task such as human resources management, production or
marketing. Many layers of management controlled the operations, with each answerable
to the upper layer of management. Although this is still the most widely used
organisational structure, the recent trend is increasingly towards a flat structure where the
work is done in teams of specialists rather than fixed departments. The idea is to make
the organisation more flexible and devolve the power by empowering the employees and
eliminate the middle management layers.

Systems: Every organisation has some systems or internal processes to support and
implement the strategy and run day-to-day affairs. For example, a company may follow a
particular process for recruitment. These processes are normally strictly followed and are
designed to achieve maximum effectiveness. Traditionally the organisations have been
following a bureaucratic-style process model where most decisions are taken at the higher
management level and there are various and sometimes unnecessary requirements for a
specific decision (e.g. procurement of daily use goods) to be taken. Increasingly, the
organisations are simplifying and modernising their process by innovation and use of new
technology to make the decision-making process quicker. Special emphasis is on the
customers with the intention to make the processes that involve customers as user
friendly as possible.

Style/Culture: All organisations have their own distinct culture and management style. It
includes the dominant values, beliefs and norms which develop over time and become
relatively enduring features of the organisational life. It also entails the way managers
interact with the employees and the way they spend their time. The businesses have
traditionally been influenced by the military style of management and culture where strict
adherence to the upper management and procedures was expected from the lower-rank
employees. However, there have been extensive efforts in the past couple of decades to
change to culture to a more open, innovative and friendly environment with fewer
hierarchies and smaller chain of command. Culture remains an important consideration in
the implementation of any strategy in the organization.

Staff: Organisations are made up of humans and it's the people who make the real
difference to the success of the organisation in the increasingly knowledge-based society.
The importance of human resources has thus got the central position in the strategy of the
organisation, away from the traditional model of capital and land. All leading
organisations such as IBM, Microsoft, Cisco, etc put extraordinary emphasis on hiring
the best staff, providing them with rigorous training and mentoring support, and pushing
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their staff to limits in achieving professional excellence, and this forms the basis of these
organisations' strategy and competitive advantage over their competitors. It is also
important for the organisation to instill confidence among the employees about their
future in the organisation and future career growth as an incentive for hard work.

Shared Values/Superordinate Goals: All members of the organisation share some

common fundamental ideas or guiding concepts around which the business is built. This
may be to make money or to achieve excellence in a particular field. These values and
common goals keep the employees working towards a common destination as a coherent
team and are important to keep the team spirit alive. The organisations with weak values
and common goals often find their employees following their own personal goals that
may be different or even in conflict with those of the organisation or their fellow
colleagues.

Using the 7S Model to Analyse an Organisation

A detailed case study or comprehensive material on the organisation under study is
required to analyse it using the 7S model. This is because the model covers almost all
aspects of the business and all major parts of the organisation. It is therefore highly
important to gather as much information about the organisation as possible from all
available sources such as organisational reports, news and press releases although
primary research, e.g. using interviews along with literature review is more suited. The
researcher also needs to consider a variety of facts about the 7S model. Some of these are
detailed in the paragraphs to follow.
The seven components described above are normally categorised as soft and hard
components. The hard components are the strategy, structure and systems which are
normally feasible and easy to identify in an organisation as they are normally well
documented and seen in the form of tangible objects or reports such as strategy
statements, corporate plans, organisational charts and other documents. The remaining
four Ss, however, are more difficult to comprehend. The capabilities, values and elements
of corporate culture, for example, are continuously developing and are altered by the
people at work in the organisation. It is therefore only possible to understand these
aspects by studying the organisation very closely, normally through observations and/or
through conducting interviews. Some linkages, however, can be made between the hard
and soft components. For example, it is seen that a rigid, hierarchical organisational
structure normally leads to a bureaucratic organisational culture where the power is
centralised at the higher management level.
It is also noted that the softer components of the model are difficult to change and are the
most challenging elements of any change-management strategy. Changing the culture and
overcoming the staff resistance to changes, especially the one that alters the power
structure in the organisation and the inherent values of the organisation, is generally
difficult to manage. However, if these factors are altered, they can have a great impact on
the structure, strategies and the systems of the organisation. Over the last few years, there
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has been a trend to have a more open, flexible and dynamic culture in the organisation
where the employees are valued and innovation encouraged. This is, however, not easy to
achieve where the traditional culture is been dominant for decades and therefore many
organisations are in a state of flux in managing this change. What compounds their
problems is their focus on only the hard components and neglecting the softer issues
identified in the model which is without doubt a recipe for failure. Similarly, when
analysing an organisation using the 7S model, it is important for the researcher to give
more time and effort to understanding the real dynamics of the organisation's soft aspects
as these underlying values in reality drive the organisations by affecting the decision-
making at all levels. It is too easy to fall into the trap of only concentrating on the hard
factors as they are readily available from organisations' reports etc. However, to achieve
higher marks, students must analyse in depth the cultural dimension of the structure,
processes and decision made in an organisation.
For even advanced analysis, the student should not just write about these components
individually but also highlight how they interact and affect each other. Or in other words,
how one component is affected by changes in the other. Especially the "cause and effect"
analyses of soft and hard components often yield a very interesting analysis and provides
readers with an in-depth understanding of what caused the change.

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 END CHAPTER QUIZ

Q.1 The primary activities in a value chain are

(a)Inbound Logistics

(b)Outbound Logistics

(c)Marketing & Sales

(d) All of the above

Q.2 The primary activities in a value chain are supported by

(a)Infrastructure

(b)Technology

(c)Human Resource

(d)All of the above

Q.3 Value Chain Analysis helps a firm in

(a) Differentiation

(b)Increasing Cost

(c)Reducing Profit

(d)None of the above

Q.4 Value chain activities maybe outsourced

(a)When the activity is performed better by suppliers

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(b)The risk of performing an activity in house is nil

(c)When the activity is performed better in house

(d)The lead is low when produced in house

Q.5 The macro environment of business consists of

(a)Suppliers

(b)Customers

(c)Stakeholders

(d)Economic environment

Q.6 The micro environment consists of

(a)Market

(b)Technological environment

(c)Social environment

(d)Political environment

Q.7 SWOT stands for

(a)Strength, Weakness, opportunity, threat

(b) Weakness, Strength, opportunity, threat

(c) Opportunity, Strength, Weakness, threat

(d) Threat, Strength, Weakness, opportunity

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Q.8Location of a business is a

(a)Weakness

(b)Threat

(c)Opportunity

(d)Strength

Q.9 A new international market is a

(a)Threat

(b)Weakness

(c)Opportunity

(d)Strength

Q.10McKinsey’s 7 S Model consists of

(a)Staff

(b)Strategy

(c)Style

(d)All of the above

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 Chapter-4
KEY TERMS IN STRATEGIC MANAGEMENT

4.1 Purpose

4.2 Mission

4.3 Goals

4.4 Objectives

4.5 Strategic Intent

4.6 Stretch, Leverage and fit

4.7 Policy

Whether developing a new business or reformulating direction for an ongoing corporate,

the basic goals, characteristics, and philosophies that will shape a firm‘s corporate
posture must be determined. This corporate mission will guide future executive action.
Thus, the corporate mission is defined as the fundamental, unique purpose that sets a
business apart from other firms of its type and identifies the scope of its operations in
product and market terms. The mission is a broadly framed but enduring statement of
corporate intent. It embodies the business philosophy of strategic decision-makers;
implies the image the corporate seeks to project; reflects the firm‘s self-concept; indicates
the principal product or service areas and primary customer needs the company will
attempt to satisfy. In short, the mission describes the product, market and technological
areas of emphasis for the business. And it does so in a way that reflects the values and
priorities of strategic decision-makers.

Purpose

The organization's purpose outlines why the organization exists; it includes a

description of its current and future business. The purpose of an organization is its
primary role in society, a broadly defined aim (such as manufacturing electronic
equipment) that it may share with many other organizations of its type.

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The Need for an Explicit Mission

Defining the corporate mission is time consuming, tedious, and not required by any
external body. The mission contains few specific directives, only broadly outlined or
implied objectives and strategies. Characteristically, it is a statement of attitude, outlook,
and orientation rather than of details and measurable targets.

What then is a corporate mission designed to accomplish? King and Cleland provide
seven good answers:

1. To ensure unanimity of purpose within the organisation.

2. To provide a basis for motivating the use of the organization‘s resources.

3. To develop a basis, or standard, for allocating organizational resources.

4. To establish a general tone or organizational climate, for example, to suggest a

businesslike operation.

5. To serve as a focal point for those who can identify with the organisation‘s purpose
and direction, and to deter those who cannot from participating further in the
organization‘s activities.

6. To facilitate the translation of objectives and goals into a work structure involving the
assignment to tasks to responsible elements within the organization.

7. To specify organisational purpose and the translation of these purposes into goals in
such a way that cost, time and performance parameters can be assessed and
controlled.

Formulating a Corporate Mission

The process of defining the mission for a specific business can perhaps be best
understood by thinking about a firm at its inception. The typical business organisation
begins with the beliefs, desires, and aspirations of a single entrepreneur. The sense of
mission for such an owner-manager is usually based on several fundamental elements:

1. Belief that the product or service can provide benefits at least equal to its price.

2. Belief that the product or service can satisfy a customer need currently not met
adequately for specific market segments.

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3. Belief that the technology to be used in production will provide a product or service
that is cost and quality competitive.

4. Belief that with hard work and the support of others the business can do better than
just survive, it can grow and be profitable.

5. Belief that the management philosophy of the business will result in a favourable
public image and will provide financial and psychological rewards for those willing
to invest their labour and money in helping the firm to succeed.

6. Belief that the entrepreneur‘s self-concept of the business can be communicated to

and adopted by employees and stockholders.

As the business grows or is forced by competitive pressures to alter its product / market /
technology, redefining the company mission may be necessary. If so, the revised mission
statement will reflect the same set of elements as the original. It will state the basic type
of product or service to be offered, the primary markets or customer groups to be served,
the technology to be used in production or delivery; the fundamental concern for survival
through growth and profitability; the managerial philosophy of the firm; the public image
sought; and the self-concept those affiliated with it should have of the firm. These
components will be discussed in this chapter.

Basic Product or Service; Primary Market; Principal Technology

Three components of a mission statement are indispensable: specification of the basic

product or service, primary market, and principal technology for production or delivery.
The three components are discussed under one heading because only in combination do
they describe the business activity of the company.

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Company Goals: Survival, Growth, Profitability

Three economic goals guide the strategic direction of almost every viable business
organisation. Whether or not they are explicitly stated, a company mission statement
reflects the firm‘s intention to secure its survival through sustained growth and
profitability.

Unless a firm is able to survive, it will be incapable of satisfying any of its stakeholders‘
aims. Unfortunately, like growth and profitability, survival is such an assumed goal that it
is often neglected as a principal criterion in strategic decision making. When this
happens, the firm often focuses on short-term aims at the expense of the long run.
Concerns for expediency, a quick fix, or a bargain displace the need for assessing long-
term impact. Too often the result is near-term economic failure owing to lack of resource
synergy and sound business practice.

Objective: to achieve profit to finance our company growth and to provide the resource
we need to achieve our other corporate objectives.

In our economic system, the profit we generate from our operations is the ultimate source
of the funds we need to prosper and grow. It is the one absolutely essential measure of
our corporate performance over the long term. Only if we continue to meet our profit
objective can we achieve our other corporate objectives.

A firm‘s growth is inextricably tied to its survival and profitability. In this context, the
meaning of growth must be broadly defined. While growth in market share has been
shown by the product impact market studies (PIMS) to be correlated with firm
profitability, other important forms of growth do exist. For example, growth in the
number of markets served, in the variety of products offered, and in the technologies used
to provide goods or services frequently leads to improvements in the company‘s
competitive ability. Growth means change, and proactive change is a necessity in a
dynamic business environment. Hewlett-Packard‘s mission statement provides and
excellent example of corporate regard for growth:

Objective: To let our growth be limited only by our profits and our ability to develop and
produce technical products that satisfy real customer needs.

We do not believe that large size is important for its own sake; however, for at
least two basic reasons continuous growth is essential for us to achieve our other
objectives.

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 In the first place, we serve a rapidly growing and expanding segment of our
technological society. To remain static would be to lose ground. We cannot maintain a
position of strength and leadership in our field without growth.

In the second place, growth is important in order to attract and hold high-caliber
people. These individuals will align their future only with a company that offers them
considerable opportunity for personal progress. Opportunities are greater and more
challenging in a growing company.

The issue of growth raises a concern about the definition of a company mission. How can
a business specify product, market, and technology sufficiently to provide direction
without delimiting unanticipated strategic options? How can a company define its
mission so opportunistic diversification can be considered while at the same time
maintaining parameters that guide growth decisions? Perhaps such questions are best
addressed when a firm outlines its mission conditions under which it might depart from
ongoing operations.

GOALS AND OBJECTIVES

Goals denote what an organisation hopes to accomplish in a future period of time. They
represent a future state or an outcome of the effort put in now. A broad category of
financial and non-financial issues are addressed by the goals that a firm sets for itself.

Objectives are the ends that state specifically how the goals shall be achieved. They are
concrete and specific in contrast to goals which are generalised. In this manner,
objectives make the goals operational. While goals may be qualitative, objectives tend to
be mainly quantitative in specification. In this way they are measurable and comparable.

In strategic management literature there has been a confusion with regard to the usage of
these terms: goals and objectives. The meaning assigned to these terms is sometimes in
contrast to what we have adopted here. Also, often they are used inter-changeable. (In
fact, the first edition of this book used these terms in a sense opposite to what we are
using now. We stand corrected. There is overwhelming evidence available now, as
inferred from recent strategic management literature, that goals connote the broader sense
of the term objectives.) Still we would prefer to use only the term objective to denote
both. After all, it must be remembered that objectives are the manifestations of goals,
whether quantified and specifically stated or not. Besides, it is more convenient to use
one term rather than both every time one refers to a future state or the outcome of an
effort.

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Any organisation shall always have a potential set of goals. It has to exercise a choice
from among these goals. This choice must be further elaborated and expressed in terms of
operational and measurable objective.

Note that an organisation has to translate its purpose into long-term goals and short-term
objectives for realising its mission and vision. This high- lights the role that goals and
objectives play in strategic management.

Role of Objectives in Strategic Management

Objectives play an important role in strategic management. We could identify the

various facets of such a role as shown below.

 Objectives define the organisation’s relationship with its environment. By stating its
objectives, an organisation commits itself to what it has to achieve for its employees,
customers and society at large.

 Objectives help an organisation to pursue its vision and mission. By defining the
long-term position that an organisation wishes to attain and the short-term targets to
be achieved, objectives help an organisation in pursing its vision and mission.

 Objectives provide the basis for strategic decision-making. By directing the attention
of strategists to those areas where strategic decisions need to be taken, objectives lead
to desirable standards of behaviour and, in this manner, help to coordinate strategic
decision-making.

 Objectives provide the standards for performance appraisal. By stating the targets to
be achieved in a given time period, and the measures to be adopted to achieve them,
objectives lay down the standards against which organisational as well as individual
performance could be judged. In the absence of objectives, an organisation would
have no clear and definite basis for evaluating its performance.

Managers who set objectives for themselves and their organisations are most likely to
achieve them than those who do not specify their performance targets. The importance of
the role that objectives play in strategic management could be aptly summed up in the
truism: if one does not know where one has to go, any path will take one there.

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Characteristics of objectives

Objectives , as measures of organisational behaviour and performance, should possess

certain desirable characteristics in order to be effective. Given below are seven such
characteristics.

1. Objectives should be understandable. Because objectives play an important role in

strategic management and are put to use in a variety of ways, they should be
understandable to those who have to achieve them. A chief executive who says that
‗something ought to be done to set thing right‘ is not likely to be understood by his
managers. Subsequently, no action will be taken, or even a wrong action might be
taken.

2. Objectives should be concrete and specific. To say ‗our company plans to achieve a
12 per cent increase its sales‘ is certainly better than stating that ‗our company seeks
to increase its sales‘. The first statement implies a concrete and specific objective and
is more likely to lead and motivate the managers.

3. Objectives should be related to a time frame. If the first statement given above is
restated as ‗our company plans to increase its sales by 12 percent by the end of two
years‘, it enhances the specificity of the objectives. If objectives are related to a time
frame, then managers know the duration within which they have to be achieved.

4. Objectives should be measurable and controllable. Many organisations perceive

themselves as companies, which are attractive to work for. If measures like the
number and quality of job applications received, average emoluments offered, or staff
turnover per year could be devised, it would be possible to measure and control the
achievement of this objective with respect to comparable companies in a particular
industry, and in general.

5. Objectives should be challenging. Objectives that are too high or too low are both
demotivating and, therefore, should be set at challenging but not unrealistic levels. To
set a high sales targets in a declining market does not lead to success. Conversely a
low sales target in a burgeoning market is easily achievable and, therefore, leads to a
sub-optimal performance.

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6. Different objectives should correlate with each other. Organisations set many
objectives in different areas. If objectives are set in one area disregarding the other areas
such an action is likely to lead to problems. A classic dilemma in organisations, and a
source of interdepartmental conflicts, is setting sales and production objectives.
Marketing departments typically insist on a wider variety of products to cater to a variety
of market segments while production departments generally prefer to have greater
product uniformity in order to have economies of scale. Obviously, trade-offs are
required to be made so that different objectives correlate with each other, are mutually
supportive, and different objectives correlate with each other, are mutually supportive,
and result in synergistic advantages. This is specially true for organisations which are
organised on a profit-centre basis.

7. Objectives should be set within constraints. There are many constraints –

internal as well as external - which have to be considered in objective- setting. For
example, resource availability is an internal constraint, which affects objective- setting.
Different objectives compete for scarce resources and trade-offs are necessary for
optimum resource utilisation. Organisations face many external constraints like legal
requirements, consumer activism and environmental protection. All these limit the
organisation‘s ability to set and achieve objectives.

In sum, objectives-setting is a complex process.

Strategic Intent

Strategic intent envisions a desired leadership position and establishes the criterion the
organization will chart its progress – it is simply something more than just unfetted
ambition. It captures the essence of winning and is stable over time. It sets a target that
requires personal effort and commitment and also a bit of luck – it is not a soft target.
Most companies look at change and innovation in isolation – i.e. try and keep a few
people isolated and let them free – but real innovation comes from everywhere – top
management role is to add value.

Strategic intent is clear about the ends, but flexible about the means – it leaves room for
improvisation and creativity and the top management gives the direction. The difference
is – resource as a constraint versus resources as a constraint versus resources as leverage.
In both, it is implicit that there must be balance in the scope so as to reduce risk. In the
first you do it through building a balanced portfolio of cash generating and cash
consuming business, in the other you ensure a well-balanced and sufficiently broad
portfolio of advantages.

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Strategic intent implies a sizeable stretch for an organization. Current capabilities and
resources will not suffice. This will force inventiveness to make the most of existing
resources. It will create a sense of urgency and force a competitor focus at all levels
through widespread use of competitive intelligence. The companies will invest and train
employees with the skills they need to work effectively. The management will keep on
invoking challenges, but also not overwhelm the employees with unreasonable pressures
and demands. They give the organization time to digest one challenge before launching
another challenge. There are clear milestones, which are communicated without any
ambiguity and also review mechanisms to monitor the milestones.

Strategic intent is what the organization strives for. Komatsu wanted to ― Encircle
Caterpillar‖ in the earthmoving business. Cannon wanted to ―Beat Xerox‖. These are
some of the strategic intents. It is an obsession with an organization – an obsession with
having ambitions that may even be out of proportion to their existing resources and
capabilities. This obsession is to win at all levels of the organization which sustaining
that obsession in the quest for global leadership.

Stretch, Leverage and fit

To achieve strategic intent – you need to stretch. As of today there is a misfit between
resources and aspirations. So instead of looking at resources, you will look at
resourcefulness. To achieve you will stretch and make innovative use of your resources.

This leads to leveraging your resources. Leverage refers to concentrating your resources
to your strategic intent, accumulating learning, experiences and competencies, in a
manner that a scarce resource base can be stretched to meet the aspirations that an
organizational resources to its environment.

The strategic fit is the traditional way of looking at strategy. Using techniques such as
SWOT analysis, which are used to assess organizational capabilities and environmental
opportunities. Strategy is taken as a compromise between what the environment has got
to offer in terms of opportunities and the counteroffer that the organization makes in the
form of its capabilities.

Policy

In years past it was common practice to title courses and books in the strategic
management areas as "Business policy," if one wished to take up broader range of
organizations. In one sense, what has happened is that word strategy has replaced policy.
But there is another sense in which the term policy is used that differentiates it from
strategy, and from tactics as well. In this view, policies are the means by which objectives

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will be achieved. "Policies are guide to action. They include how resources are to be
allocated and how tasks assigned to the organization might be accomplished –
William F. Glueck, and Lawrence R. Jauch "
Policies include guidelines, procedures, rules, programs, and budgets established to
support efforts to achieve stated objectives. Therefore, policies become important
management tools for implementing them.

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 END CHAPTER QUIZ

Q.1 Purpose refers to

(a) Implied objectives

(b) What an organisation hopes to accomplish in the near future

(c) Description of its current and future business

(d) The basis for strategic decision-making

Q.2 Objective refers to

(a) The basis for strategic decision-making

(b) Description of its current and future business

(c) What an organisation hopes to accomplish in the near future

(d) Implied objectives

Q.3Mission refers to

(a) Description of its current and future business

(b) The basis for strategic decision-making

(c) Implied objectives

(d) What an organisation hopes to accomplish in the near future

Q.4 Goals refers to

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(a) Implied objectives

(b) What an organisation hopes to accomplish in the near future

(c) Description of its current and future business

(d) The basis for strategic decision-making

Q.5 A characteristic of a good objective is

(a)Should be specific

(b)Should not be time related

(c)Should not be measurable

(d)Should not be controllable

Q.6 Strategic Intent

(a) Sets targets

(b)Envisions leadership

(c)Lays down criteria for progress

(d)All of the above

Q.7 Objectives should not be

(a)Challenging

(b)Correlated

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(c)Set within constraints

(d)None of the above

Q.8 Mission should

(a)Provide basis for motivation

(b)Serve as focal point for understanding firms objectives

(c)Specify organizational purpose

(d)All of the above

Q.9 To achieve Strategic Intent, one needs

(a) To stretch resources

(b)To leverage resources

(c)Fit resources

(d)All of the above

Q.10Policies include

(a)Guidelines

(b)Procedures

(c)Rules

(d)All of the above

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 CHAPTER-5
EVOLUTION OF GLOBAL CORPORATION

5.1 Why do firms internationalize /Globalize

5.2 Global Strategy
5.3 Phases of Global strategy
5.4 Global Strategic Planning
5.5 Benefits
5.6 Limitations
5.7 Corporate Social Responsibility

Global strategy as defined in business terms is an organization's strategic guide to

globalization. A sound global strategy should address these questions: what must be
(versus what is) the extent of market presence in the world's major markets? How to build
the necessary global presence? What must be (versus what is) the optimal locations
around the world for the various value chain activities? How to run global presence into
global competitive advantage?
Academic research on global strategy came of age during the 1980s, including work by
Michael Porter and Christopher Bartlett & Sumantra Ghoshal. Among the forces
perceived to bring about the globalization of competition were convergence in economic
systems and technological change, especially in information technology, that facilitated
and required the coordination of a multinational firm's strategy on a worldwide scale.
A global strategy may be appropriate in industries where firms are faced with strong
pressures for cost reduction but with weak pressures for local responsiveness. Therefore,
it allows these firms to sell a standardized product worldwide. However, fixed costs
(capital equipment) are substantial. Nevertheless, these firms are able to take advantage
of scale economies and experience curve effects, because it is able to mass-produce a
standard product which can be exported (providing that demand is greater than the costs
involved).
Global strategies require firms to tightly coordinate their product and pricing strategies
across international markets and locations, and therefore firms that pursue a global
strategy are typically highly centralized.

Reasons for Going International

There are two primary reasons for going international, and a third less common reason.

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1. to expand sales by accessing new markets,
2. to reduce costs, and/or
3. to reduce risk.
The following points should be kept in mind while establishing a firm globally:

- When going international to access new markets, a critical issue is the degree to which
you adapt the product for the foreign market. The choice on how you adapt the product
should be driven by the cost versus willingness-to-pay trade-off.
- When going international to save costs, you normally want to pick a place that has a
cost advantage. However, a firm should not necessarily carry out each activity precisely
where it can be done cheapest. This is because each activity within the firm interacts with
other activities, and there is a cost to interacting at a distance. For example, the R&D
group interacts with the marketing group to know what the market‘s needs are, and the
marketing group wants to know what is coming down the pipeline from R&D. Interaction
is less effective and less efficient if these groups are physically in different places.
- When a firm goes international to cut risks (e.g. exchange risk, political risk), all of the
above issues still apply.

Developing a Global Strategy:

To develop a global strategy the following aspects should be kept in mind:

1- Develop a core business strategy
2- Internationalise the strategy
3- Globalise the strategy
Let us develop a better understanding by having a look at the figure below:

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Framework of Global Strategy Forces

Global Strategic Planning

Global strategic planning is a process adopted by multi national organizations in order to

formulate an effective global strategy. GSP is a process of evaluating the internal and
external environment by multinational organizations, through which they set their long-
term and short-term goals and then they implement a specific plan of action in order to
achieve those objectives.

GSP is different from normal domestic strategic planning, because, in this case,
organizations consider internal as well as external environments. In fact, the external
environment is more crucial to consider when you are operating at a global level because
at a domestic level competition is very directional and optimized, but at international
level the competition is crucially important to be considered; otherwise survival is not at
all possible at global level.

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Benefits in Global Strategic Planning

The benefits of strategic planning are manifold since it:

Asks and answers questions of key importance to the organization

Provides a framework for decision making throughout the organization

Reveals and clarifies future opportunities and threats

Sets specific objectives for achievement

Provides a basis for measuring performance

Serves as a channel of communication

Develops a team which is focussed on the organization's future

Provides managerial training

The above benefits can be encapsulated in a single statement:

Strategic planning aligns the total organization – people, processes, and resources –
with a clear, compelling, and desired future state.

Limitations in Global Strategic Planning

While the benefits are manifold, unfortunately so so its limitations:

The future is uncertain and might differ substantially from expectations on which
parts of the plan may be built.
There will be internal resistance to formal planning due to multiple factors:
• Information flows, decision making, and power relationships will be perturbed.
• Conflicts within organization are exposed.
• Current operating problems tend to drive out long-term planning efforts.
• There are risks and fears of failure.
• New demands will be placed on managers and staff.
• Most people wish to avoid uncertainty.
Planning is difficult, messy, hard work.
Planning is expensive - in time and money.
The completed plan limits choices and activities for the organization in the future.

Strategic Planning Model

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Below is an outline of a basic strategic planning model, suggest the composition of
the planning team, and comment on the process.

The strategic planning model we have found useful for most companies has three phases:
1. Strategic thinking concentrates on establishing the planning bedrock of values,
vision, and mission and on setting the grand strategy. This phase encompasses
40-50% of the planning effort. Resolving these "big" issues at the start gives a
solid basis for smooth planning and for dealing with strategic issues as they arise
during implementation.
2. Strategic planning assesses the company's current ability to reach its desired
future in light of its competitive landscape, identifies the critical issues it faces,
sets strategic objectives to address these issues, and outlines strategic action
plans to realize these objectives.
3. Tactical planning focusses on the specifics of implementation and explicitly
connects people and budgets with the strategic action plans . This phase is
virtually synonymous with the annual planning and budgeting cycle.

Meaning of the Strategic Plan

The plan focuses on the future. It provides a common direction for everyone, is an
effective recruiting tool, can be shared with clients and prospects for marketing and with
suppliers for effectiveness, and gives you the ability to track progress.
A strategic plan is a living document, not something to be thrown on a shelf.

Strategic Planning Team

The ideal size of a strategic planning team is 6-12 members plus an outside facilitator.
Each team member should be chosen to represent different segments of the company, not
just direct reports to the CEO. All members should have the respect of their peers.
Senior, middle, and front line management should be represented. Members do not wear
their "departmental hats;" they wear the "company hat" during the planning deliberations.
One member, probably a younger one on the "fast track," should be charged with
handling the internal logistical details for the planning process.
An outside facilitator should be used to bring experience in the planning process, to give
perspective on the future, and to allow all team members to work as equals.
The CEO has a prominent role in the planning team, sets the context, endorses the result,
but remains enough in the background that the ideas of others may emerge. This is not an
easy task for most CEO's and is another compelling reason for using a skilled outside
facilitator.

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About the Strategic Planning Process

Openness. The strategic planning process should be an open one within the company.
While it is usually not practical to have everyone who wishes to attend the planning
meetings, the ongoing results should be available to all employees, for example, via the
company's intranet, through broadcast e-mail, or simply a loose-leaf binder at the
receptionist's desk. Critiques and suggestions should be welcomed from all.
Iterative. While there is an underlying logic and flow to the strategic planning process,
the plain fact is that planning is a highly iterative process. Almost at every step, the team
must revisit earlier steps to ensure consistency and revise accordingly.
Time commitment. For a typical company, 3-6 months is required to develop a strategic
plan, with 6-10 all-day meetings and a couple two-day retreats. Team members must also
work on the plan between meetings, so the CEO must ensure they are given the "space"
to permit their concentrated efforts and to encourage their personal commitment to both
the process and the end

Big thoughts. If there is ever a time to decouple everyone from the everyday concerns of
running the business and to think truly big thoughts, this is the time to do it. The CEO
and outside facilitator both have an obligation to see this is done by all.

Corporate Social Responsibility:

Corporate Social Responsibility (CSR) is generally understood to be the way a company

balances the economic, environmental and social aspects of its operation, addressing the
expectations of its stakeholders.

Since the 1990s, the CSR movement gained prominence in the political-economic debate
and in the strategies of leading business organisations. CSR stressed corporate self-
regulation associated with ethical issues, human rights, health and safety, environmental
protection and social and environmental reporting and voluntary initiatives involving
support for community projects and philanthropy.

The underlying principles of the CSR movement are represented by the Global Compact
principles for responsible corporate citizenship. The Global Compact initiated by the UN
Secretary -General in 1999, is a network involving ―governments, who defined the
principles on which the initiative is based; hundreds of companies from all regions of the
world, whose actions it seeks to influence; labour, in whose hands the concrete process of
global production takes place; civil society organisations representing the wider
community of stakeholders and the United Nations‖.

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A major force in the CSR movement is CSR Europe established in January 1996 by a
group of 57 European companies with the mission to help companies integrate CSR into
the way they do business. CSR Europe reaches out to 1400 companies through 18
National Partner Organisations.
Different theories concerning the purpose of corporations define the relations and
responsibilities a company has with participants in its economic activities and with
regulator. The CR theoretical background can be subdivided into early theoretical views,
CR models, the societal dimension of strategic management and an overview of the
different perspectives.

Early theoretical views

As early as 1916, J. M. Clark emphasised the importance of transparency in business

dealings, writing in the Journal of Political Economy :"if men are responsible for the
known results of their actions, business responsibilities must include the known results of
business dealings, whether these have been recognised by law or not".
In the early 1930s, Professor Theodore Kreps introduced the subject of Business and
Social Welfare to Stanford and used the term ―social audit‖ for the first time in relation to
companies reporting on their social responsibilities.
Peter Drucker argued in 1942 that companies have a social dimension as well as an
economic purpose in his second book ―The Future of Industrial Man‖ which addressed
primarily responsibility and preservation of freedom.

Corporate social responsibilities were defined in 1953 by Bowen as "the obligations of

businessmen to pursue those policies, to make those decisions, or to follow those lines of
action which are desirable in terms of the objectives and values of our society." At the
time, corporate social obligation was linked to the power that business holds in society.
This point was stressed by K Davis who in 1960 described business social responsibilities
as "the businessman's decisions and actions taken for reasons at least partially beyond the
firm's direct economic or technical interest… which need to be commensurate with the
company‘s social power."
The earliest reference addressing specifically social auditing was around the early 1960s
in a book by G Goyder called "The Responsible Company". Goyder referred to various
activities in the mid and late 1950s and suggested that social audit could provide a
management tool and could offer stakeholders a platform for challenging and influencing
companies.

Opposition to the notion that companies have social responsibilities has been prevalent on
the grounds that it will divert attention form the primary economic objectives. In 1962
Milton Friedman stated that ―Few trends could so thoroughly undermine the very

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foundations of our free society as the acceptance by corporate officials of a social
responsibility other than to make as much money for their stockholders as possible‖.

A balanced view of CSR is expressed by D Voge in ―The Market for Virtue: The
Potential and Limits of Corporate Social Responsibility‖ suggesting that CSR is not a
precondition for business success but a dimension of corporate strategy: "Just as firms
that spend more on marketing are not necessarily more profitable than those that spend
less, there is no reason to expect more responsible firms to outperform less responsible
ones. In other words, the risks associated with CSR are not different from those
associated with any other business strategy; sometimes investments in CSR make
business sense and sometimes they do not." Voge also highlights that ―Surveys of the
world's top brands rarely cite CSR as an issue associated with a given brand. And
companies that make most-admired lists do so by virtue of other factors--financial
performance, customer satisfaction, innovation, and so on.‖

Early social responsibility models

Early theoretical work specifically addressing corporate social responsibilities is

represented by Sethi (1975) who developed a three tier model for classifying corporate
behaviour which he labeled "corporate social performance". The three states of corporate
behaviour are based on:
a) social obligation ( response to legal and market constraints);
b) social responsibility (addressing societal norms, values and expectations of
performance);
c) social responsiveness (anticipatory and preventive adaptation to social needs).

Sethi's second tier requires that a company moves beyond compliance and recognises and
addresses societal expectations. The third tier requires that a company develops the
competence to engage effectively with stakeholders and take proactive measures on their
issues and concerns. Sethi also emphasised the cultural and temporal dependencies of
corporate responsibilities and the importance of stable management systems and standard
classifications to facilitate measurement of progress and comparative analysis.

Building on Sethi‘s model Carroll (1979) proposed a model that contains the following
four categories of corporate responsibility in decreasing order of importance:
a) Economic -be profitable;
b) Legal - obey the law;
c) Ethical- do what is right and fair and avoid harm;
d) Discretional / philanthropic- be a good corporate citizen.

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The four classes of responsibility are seen to reflect the evolution of business and society
interaction in the United States. According to Carroll ―the history of business suggests an
early emphasis on the economic and then legal aspects and a later concern for the ethical
and discretionary aspects‖. Economic obligations are therefore seen to be tempered by
ethical responsibilities or social expectations and norms. Discretionary responsibilities go
beyond ethical responsibilities and include philanthropic measures such as corporate
sponsored programs for disadvantaged workers.

In 1991, Carroll presented his CSR model as a pyramid and suggested that, although the
components are not mutually exclusive, it ―helps the manager to see that the different
types of obligations are in constant tension with one another‖.

The model has been validated by a number of studies.

Aupperle, Hatfield & Carroll (1985; 1983) performed the first empirical test of the four
tier CSR model by surveying 241 Forbes 500 listed CEOs using 171 statements about
CSR. The statistical analysis confirmed that there are four empirically interrelated but
conceptually independent components of CSR and provided tentative support to the
relative weightings assigned by Carroll to each of the four components.

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Pinkston & Carroll (1994) performed a similar survey among top managers in 591 U.S.
subsidiaries of multinational chemical companies with headquarters in England, France,
Germany, Japan, Sweden, Switzerland and the U.S. Aggregate findings once again
confirmed Carroll‘s four tier weighted model but interestingly showed Germany and
Sweden to be exceptions, where legal responsibilities were ranked the highest priority
followed by economic, ethical, and philanthropic aspects respectively.
Comparison with the Aupperle, Hatfield & Carroll‘s (1985) findings also showed that in
the intervening ten years the gap in the relative importance between economic and legal
responsibilities had decreased, while the importance of ethical responsibilities appeared
to be increasing and that of philanthropic responsibilities to be decreasing (Pinkston &
Carroll, 1996).

The societal dimension of strategic management

Around the time Carroll published his CSR model in 1979, the societal dimension of
strategic management was explored by Igor Ansoff in ―The Changing Shape of the
Strategic Problem‖. He proposed that an ―enterprise strategy‖, describing the interaction
of a firm with its environment, should be added to the corporate, business and functional
levels of strategic management.
According to Ansoff, enterprise strategy was needed in order to enhance a company‘s
societal legitimacy and to address new variables in strategic management such as ―new
consumer attitudes, new dimensions of social control and above all, a questioning of the
firm’s role in society‖. These ideas are today at the heart of stakeholder approaches to
strategic management.

The stakeholder theory, emphasising a broad set of social responsibilities for business
was established by R Freeman in 1984 through the ground breaking work published in his
book ―Strategic management: A stakeholder approach‖ which effectively established the
field of Business & Society. Freeman defined stakeholders as ―any group or individual
who is affected by or can affect the achievement of an organisation‘s objectives‖.

According to Freeman, the use of the term stakeholder grew out of the pioneering ideas at
Stanford Research Institute (now SRI International) in the 1960‘s which were further
developed through the work of Igor Ansoff and others. The basic SRI concept was that
―managers needed to understand the concerns of shareholders, employees, customers,
suppliers, lenders and society, in order to develop objectives that stakeholders would
support. This support was necessary for long term success. Therefore, management
should actively explore its relationships with all stakeholders in order to develop business
strategies.‖

Stakeholder management approaches can be very different in practice, spanning from

instrumental approaches which use stakeholder relationships strictly as an instrument to
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maximise profit to intrinsic approaches where fundamental principles guide how a
company does business particularly with respect to how stakeholders are treated.

Overview of theoretical perspectives

A summary of the theoretical streams described above is presented in the following

diagram.

The two main streams represent the CSR perspective emphasising ethical issues and
social audit and the stakeholder approach representing the social dimension of strategic
management. It should be noted that sustainability did not feature in corporate
responsibilities issues but is related to environmental economics established to address
environment a scarce resource and to ensure that the costs and the benefits of
environmental measures are well balanced.

Corporate responsibility drivers

The main driving forces for corporate responsibility are investor and consumer demands
and governmental and public pressures as shown in the following diagram.

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Governments are tightening corporate governance and sectoral compulsory standards
making self-regulation an appealing option for most businesses.

The loss of public confidence in the corporate word drives the markets down and
therefore has a significant impact on the value and growth potential for many companies.
As a consequence, public expectations on corporate integrity and ethical operations are
particularly important drivers for corporate responsibility.

Consumers are increasingly exercising their green buying power exerting pressure on
companies to address their environment impact and to invest in ‗environmentally friendly
products‘. The Code of Practice for Transnational Corporations initiated by the UN in
the early 1970‘s, in collaboration with many organisations including Consumer
International, defined what consumers expect from businesses in terms of ethics, product
standards, competition, marketing and disclosure of information.

Finally the growth of a strong Socially Responsible Investment movement gives distinct
advantages to companies performing well on sustainability criteria and therefore provides
a key driving force for improved corporate responsibility practices.

The increasing interest in social responsibilities can be associated with various factors,
from stabilising markets to avoiding increased regulation, to taking advantage of ‗green‘
consumer preferences and to doing the ‗right thing‘ to strengthen the corporate
reputation.
However, possibly the primary driving force is the recognition by an increasing number

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of people that it is time for a fundamental change in the role of businesses in a world that
has to develop in a sustainable manner. This strengthens the motivation for companies to
join the relatively few companies that have adopted corporate responsibility and
sustainability as a business philosophy.

The 4CR multi-dimensional corporate responsibility perspective

The 4CR multi-dimensional corporate responsibility perspective is aimed at establishing

a coherent approach to addressing the various concepts of corporate responsibility and
their integration with strategic management.

The 4CR taxonomy described in the following table highlights four corporate
responsibility areas:
· Corporate Competitiveness (CC)
· Corporate Governance (CG)
· CSR
· Corporate Sustainability (CS)

At the centre of the 4CR Corporate Responsibilities Map is stakeholder management

which provides the common link between corporate competitiveness and corporate

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responsibility and sustainability. The key issues in each of the Four Corporate
Responsibilities are as follows:

· Corporate Competitiveness addressed by strategic management is a subject rarely

discussed in the context of corporate responsibility. However, unless all strands of
corporate responsibility are brought together under a common management framework,
CSR and sustainability will remain peripheral activities and their impact is likely to
remain well below required levels to achieve the Millennium and related goals.

· Corporate Governance sets the legal framework to protect a company‘s shareholders

and stakeholders; the relative emphasis being dependent on national approaches.

· CSR is aimed at extending the legal requirements promoting ethics, philanthropy and
social reporting to satisfy stakeholder concerns.

· Corporate sustainability focuses on long term economic and social stakeholder

expectations both by optimising their sustainability performance and by participating in
networks with governments, NGOs and other stakeholders that can provide the capacity
for the world‘s sustainable development.

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 END CHAPTER QUIZ:

Q.1 Global Strategies require firms to

(a) Co-ordinate pricing strategies across subsidiaries

(b) To reduce profits

(c)To increase costs

(d)None of the above

Q.2 The reason for going international is

(a)To increase cost

(b)To increase risk

(c)To expand sales

(d)All of the above

Q.3 To develop a global strategy, the following steps should be followed

(a) Develop the strategy, Internationalise the strategy, Globalise the strategy

(b) Internationalise the strategy, Develop the strategy, Globalise the strategy

(c)Internationalise the strategy, Globalise the strategy, Develop the strategy

(d) Develop the strategy, Globalise the strategy, Internationalise the strategy

Q.4 Global Strategic Planning

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(a) is a process adopted by multi national organizations in order to
formulate an effective global strategy

(b) is a process of evaluating the internal and external environment by

multinational organizations

(c) is a process through which organisations set their long-term and short-
term goals and then they implement a specific plan of action in order to
achieve those objectives

(d)All of the above

Q.5 The benefits of Strategic Planning are

(a)Does not provide managerial training

(b) Provides a framework for decision making throughout the organization

(c)Does not serve as a channel of communication

(d)All of the above

Q.6 The main characteristics of Strategic Planning Process are

(a)Openness

(b)Big Thoughts

(c)Time Commitment

(d)Al of the above

Q.7 CSR refers to

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(a) The way a company balances the social aspects of its operation

(b) The way a company balances the economic, environmental and social
aspects of its operation, addressing the expectations of its stakeholders

(c) The way a company balances the economic aspects of its operation

(d) The way a company balances the environmental aspects of its operation

Q.8 The Corporate Responsibility Driving forces are

(a)Consumer demands

(b)Government pressure

(c)Investor demands

(d)All of the above

Q.9 The 4CR multi-dimensional corporate responsibility perspective is

aimed at

(a) establishing a coherent approach to addressing the various concepts of

corporate governance and their integration with strategic management

(b) establishing a coherent approach to addressing the various concepts of

corporate competitiveness and their integration with strategic management

(c) establishing a coherent approach to addressing the various concepts of

corporate responsibility and their integration with strategic management

(d)All of the above

Q.10 At the centre of the 4CR Corporate Responsibilities Map is

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(a) strategic management

(b) stakeholder management

(c) social management

(d)None of the above

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 Chapter-6

GLOBAL STRATEGIC ANALYSIS-

BUILDING STRATEGIC ALTERNATIVES &
CHOICES

6.1 Porter’s 5 Force Model

6.2 ETOP & SAP Profile

6.3 SWOT/TOWS Matrix

6.4 BCG Matrix

6.5 GE Nine Cell Matrix

6.6 Hofer’s Model

6.7 Strickland Grand Strategy selection model

Porter’s Five Force Model

The model of the Five Competitive Forces was developed by Michael E. Porter in his
book, Competitive Strategy: Techniques for Analyzing Industries and Competitors, in
1980. Since that time it has become an important tool for analyzing an organizations
industry structure in strategic processes.
Porters model is based on the insight that a corporate strategy should meet the
opportunities and threats in the organizations external environment. Especially,
competitive strategy should base on and understanding of industry structures and the way
they change.
Porter has identified five competitive forces that shape every industry and every market.
These forces determine the intensity of competition and hence the profitability and
attractiveness of an industry. The objective of corporate strategy should be to modify
these competitive forces in a way that improves the position of the organization. Porter‘s
model supports analysis of the driving forces in an industry. Based on the information
derived from the Five Forces Analysis, management can decide how to influence or to
exploit particular characteristics of their industry.

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The Five Competitive Forces

The Five Competitive Forces are typically described as follows:

Let us study each force in detail now:

Bargaining Power of Suppliers

The term 'suppliers' comprises all sources for inputs that are needed in order to provide
goods or services. Supplier bargaining power is likely to be high when:
· The market is dominated by a few large suppliers rather than a fragmented source
of supply,
· There are no substitutes for the particular input,
· The suppliers customers are fragmented, so their bargaining power is low,
· The switching costs from one supplier to another are high,
· There is the possibility of the supplier integrating forwards in order to obtain
higher prices and margins. This threat is especially high when
1. The buying industry has a higher profitability than the supplying industry,
2. Forward integration provides economies of scale for the supplier,
3. The buying industry hinders the supplying industry in their development (e.g.
reluctance to accept new releases of products),
4. The buying industry has low barriers to entry.
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In such situations, the buying industry often faces a high pressure on margins from their
suppliers. The relationship to powerful suppliers can potentially reduce strategic options
for the organization.

Bargaining Power of Customers

Similarly, the bargaining power of customers determines how much customers can
impose pressure on margins and volumes. Customers bargaining power is likely to be
high when:

· They buy large volumes, there is a concentration of buyers,

· The supplying industry comprises a large number of small operators
· The supplying industry operates with high fixed costs,
· The product is undifferentiated and can be replaces by substitutes,
· Switching to an alternative product is relatively simple and is not related to high
costs,
· Customers have low margins and are price sensitive,
· Customers could produce the product themselves,
· The product is not of strategic importance for the customer,
· The customer knows about the production costs of the product
· There is the possibility for the customer integrating backwards.

Threat of New Entrants

The competition in an industry will be the higher, the easier it is for other companies to
enter this industry. In such a situation, new entrants could change major determinants of
the market environment (e.g. market shares, prices, customer loyalty) at any time. There
is always a latent pressure for reaction and adjustment for existing players in this
industry. The threat of new entries will depend on the extent to which there are barriers to
entry.

These are typically:

· Economies of scale (minimum size requirements for profitable operations),

· High initial investments and fixed costs,
· Cost advantages of existing players due to experience curve effects of operation
with fully depreciated assets,
· Brand loyalty of customers
· Protected intellectual property like patents, licenses etc,
· Scarcity of important resources, e.g. qualified expert staff
· Access to raw materials is controlled by existing players,

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 · Distribution channels are controlled by existing players,
· Existing players have close customer relations, e.g. from long-term service
contracts,
· High switching costs for customers
· Legislation and government action

Threat of Substitutes

A threat from substitutes exists if there are alternative products with lower prices of better
performance parameters for the same purpose. They could potentially attract a significant
proportion of market volume and hence reduce the potential sales volume for existing
players. This category also relates to complementary products.
Similarly to the threat of new entrants, the treat of substitutes is determined by factors
like
· Brand loyalty of customers,
· Close customer relationships,
· Switching costs for customers,
· The relative price for performance of
· substitutes,
· Current trends

Competitive Rivalry between Existing Players

This force describes the intensity of competition between existing players (companies) in
an industry. High competitive pressure results in pressure on prices, margins, and hence,
on profitability for every
single company in the industry. Competition between existing players is likely to be high
when:

· There are many players of about the same size,

· Players have similar strategies
· There is not much differentiation between players and their products, hence, there
is much price competition
· Low market growth rates (growth of a particular company is possible only at the
expense of a competitor),
· Barriers for exit are high (e.g. expensive and highly specialized equipment).

Use of the Information form Five Forces Analysis

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Five Forces Analysis can provide valuable information for three aspects of corporate
planning:

Statistical Analysis:

The Five Forces Analysis allows determining the attractiveness of an industry. It provides
insights on profitability. Thus, it supports decisions about entry to or exit from and
industry or a market segment. Moreover, the model can be used to compare the impact of
competitive forces on the own organization with their impact on competitors.
Competitors may have different options to react to changes in competitive forces from
their different resources and competences. This may influence the structure of the whole
industry.

Dynamical Analysis:

In combination with a PEST-Analysis, which reveals drivers for change in an industry,

Five Forces Analysis can reveal insights about the potential future attractiveness of the
industry.
Expected political, economical, sociodemographical and technological changes can
influence the five competitive forces and thus have impact on industry structures. Useful
tools to determine potential changes of competitive forces are scenarios.

Analysis of Options:

With the knowledge about intensity and power of competitive forces, organizations can
develop options to influence them in a way that improves their own competitive position.
The result could be a new strategic direction, e.g. a new positioning, differentiation for
competitive products of strategic partnerships.
Thus, Porters model of Five Competitive Forces allows a systematic and structured
analysis of market structure and competitive situation. The model can be applied to
particular companies, market segments, industries or regions. Therefore, it is necessary to
determine the scope of the market to be analyzed in a first step. Following, all relevant
forces for this market are identified and analyzed. Hence, it is not necessary to analyze all
elements of all competitive forces with the same depth.
The Five Forces Model is based on microeconomics. It takes into account supply and
demand, complementary products and substitutes, the relationship between volume of
production and cost of production, and market structures like monopoly, oligopoly or
perfect competition.

Influencing the Power of Five Forces

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After the analysis of current and potential future state of the five competitive forces,
managers can search for options to influence these forces in their organization‘s interest.
Although industry-specific business models will limit options, the own strategy can
change the impact of competitive forces on the organization. The objective is to reduce
the power of competitive forces.

The following figure provides some examples. They are of general nature. Hence, they
have to be adjusted to each organization‘s specific situation. The options of an
organization are determined not only by the external market environment, but also by its
own internal resources, competences and objectives.

Critique

Porter‘s model of Five Competitive Forces has been subject of much critique. Its main
weakness results from the historical context in which it was developed. In the early

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eighties, cyclical growth characterized the global economy. Thus, primary corporate
objectives consisted of profitability and survival. A major prerequisite for achieving these
objectives has been optimization of strategy in relation to the external environment. At
that time, development in most industries has been fairly stable and predictable,
compared with today‘s dynamics.
In general, the meaningfulness of this model is reduced by the following factors:
· In the economic sense, the model assumes a classic perfect market. The more an
industry is regulated, the less meaningful insights the model can deliver.
· The model is best applicable for analysis of simple market structures. A
comprehensive description and analysis of all five forces gets very difficult in
complex industries with multiple interrelations, product groups, byproducts and
segments. A too narrow focus on particular segments of such industries, however,
bears the risk of missing important elements.
· The model assumes relatively static market structures. This is hardly the case in
today‘s dynamic markets. Technological breakthroughs and dynamic market
entrants from start-ups or other industries may completely change business
models, entry barriers and relationships along the supply chain within short times.
The Five Forces model may have some use for later analysis of the new situation;
but it will hardly provide much meaningful advice for preventive actions.
· The model is based on the idea of competition. It assumes that companies try to
achieve competitive advantages over other players in the markets as well as over
suppliers or customers. With this focus, it does not really take into consideration
strategies like strategic alliances, electronic linking of information systems of all
companies along a value chain, virtual enterprise-networks or others.
· Overall, Porters Five Forces Model has some major limitations in today‘s market
environment. It is not able to take into account new business models and the
dynamics of markets. The value of Porters model is more that it enables managers
to think about the current situation of their industry in a structured, easy-to-
understand way – as a starting point for further analysis.

Business Environment Analysis

Environmental analysis is a systematic process that starts from identification of

environmental factors, assessing their nature and impact, auditing them to find their
impact to the business, and making various profiles for positioning. A common process
of environmental analysis or scanning is discussed in the following section.

Environmental Analysis Process

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A business manager should be able to analyze the environment to grasp opportunities or
face the threats. Organizations need to build strength and repair their weakness available
in the business environment. Therefore, this process consists not only a single steps but a
process of various steps.
Environmental analysis comprises scanning, monitoring, analyzing, and forecasting the
business situation. Scanning is to get the relevant information from the information
overload. It is to focus on the most relevant information. Monitoring is to check the
nature of the environmental factors. Analyzing requires data collection and use of
different required tools and techniques.
Forecasting is to find the future possibilities based on the past results and present
scenario.
Environmental analysis process is not static but a dynamic process. It may differ
depending on the situation. However, a general process with few common steps can be
identified as the process of environmental analysis these are a) Monitoring or identifying
environmental factors, b) Scanning and selecting the relevant factors and grouping them,
c) Defining variables for analysis, d) Using different methods, tools, and techniques for
analysis, e) Analyzing environmental factors and forecasting, f) Designing profiles, and
g) Strategic positioning and writing a report. Brief discussion is made on each of the step
of this environmental analysis process.

Identifying environmental factors

First of all a strategist should identify all the relevant factors that might affect his or her
business. In this process, one should first know what the internal areas of the business
are. This includes all the systems, internal structure, strategies followed, and culture of
the organization. All these areas can be covered into the five functional areas in classical
approach. Similarly, a business daily interacts with the close environmental components
outside the business such as customer, competitor, and supplier. It might cover all other
stakeholders such as trade union, media, and pressure group. Furthermore, general such
business environment factors as political-legal, economic, sociocultural, and
technological factors are to be identified.

Scanning and selecting relevant and key factors

Out of all the business environmental factors, a strategist should focus only on the
relevant factors for further analysis. All the factors are not equally important and
affecting to the business. In this context, a strategist has to scan the environmental trend
to select only the most affecting environmental factors from the information overload.
This step paves the way of environment analysis and forecasting.

Defining Variables for Analysis

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Selected environmental factors are to be further specified into the variables. A concept
can be interpreted into different variables. For example, political situation can be
measured using few variables such as instability, reliability, and long-term effect.
Economic environment might cover many variables such as Per Capita, GDP, and
Economic policies that can be further classified into many other variables. Variables are
the basis of measurement in environmental analysis process. Variables can be compared,
grouped, correlated, and predicted to find the clearer picture of the broader concept. It is,
therefore, necessary to define the variables first in any kind of analysis including the
environmental analysis.

Using Different Methods, Techniques, and Tools

Different types of methods, tools, and techniques are used for analysis. Some of the
major methods of analysis can be Scenario Building, Benchmarking, and Network
methods. Scenario presents overall picture of its total system with affecting factors.
Benchmarking is to find the best standard in an industry and to compare the one‘s
strengths and weakness with the standard. Network method is to assess organizational
systems and its outside environment to find the strength and weakness, opportunity and
threats of an organization.

Some of the techniques of primary information collection can be Delphi, Brainstorming,

Survey, and Historical enquiry. Delphi technique collects independent information from
the experts without mixing them. Brainstorming is information collection technique being
open minded without criticizing others. Survey is to design questions and to ask them to
the participants whereas the historical enquiry is a kind of case analysis of past period.

Analysis tools can be statistical such general descriptive tools as mean, median, mode,
frequency. Tools can be inferential as ANOVA, correlation, regression, factor, cluster,
and multiple regression analysis. There are many tools of analyzing functional areas.
Finance and accounting use mostly profitability, leverage, fund flow and other similar
accounting and financial tools for analysis. Human resources use employee turnover,
training, satisfaction and many others as the basis of evaluating strength and weakness.
Production area is assessed using quality control, productivity, breakdown, and many
others. Similarly, marketing effectiveness is judged from the sales volume and market
coverage. Research and development is perceived successful if it can really develop the
strength in an organization.

Forecasting Environmental Factors

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Collecting relevant information from the selected areas and to identify the variables in
such areas are the basics of analysis. Analyzing the past information to predict the future
is the main objective of this step. As discussed earlier, use of different methods,
techniques, and tools comes under the analysis process. It is, therefore, a comprehensive
process that analyzes collected information using different tools and techniques.

Designing Profiles

After analyzing the environmental factors they are recorded into the profiles. Such
profiles record each component or variables into left side and their positive, negative, or
neutral indicators including their statement in the right side. Internal areas are recorded in
Strategic Advantages Profile (SAP) and external areas are recorded in Environmental
Threat and Opportunity Profile (ETOP). Strength, Weakness, Opportunity, and Threat
(SWOT) profile can be designed combining both of these two profiles into one.

There are varieties of reporting formats or profiles used for external and internal business
environment analysis. Environmental Threat and Opportunity Profile (ETOP) is
commonly used to report the external environmental situation whereas Strategic
Advantages Profile (SAP) to report the internal environmental situation
1. Both of these profiles can be merged into Strength-Weakness-Opportunity-Threat
(SWOT) profile.
2. External Factor Evaluation (EFE) Matrix is used to present weighted score of external
environmental factors. Similarly, he used Internal Factor Evaluation (IFE) Matrix to
make the reporting of internal environmental audit.
Whellen & Hunger used External Factors Analysis Summary (EFAS) and Internal
Factors Analysis Summary (IFAS). Environmental threats and opportunities profile
(ETOP) is a commonly used profile related to external business environment. Strategic
advantages profile
(SAP) is related to internal business environment. Nowadays, strength & weakness and
opportunities & threats (SWOT) profile has become very popular.

Preparing ETOP

Environmental threat and opportunity profile is referred as ETOP profile. It identifies the
relevant environmental factors. Such factors might be general environmental factors and
task environment factors. Thereafter, it is necessary to identify their nature. Some factors
are positive to the organization whereas others are negative. Therefore, it is necessary to
find out their impact to the organization. Positive, neutral, and negative sign in ETOP
denotes the relevant impact of environmental factors.

Preparing SAP

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Strategic advantage profile is known as SAP. It shows strength and weakness of an
organization. Preparation of SAP is very similar process to the ETOP. There are
generally five functional areas in most of the organizations. These areas are Production or
Operation, Finance or Accounting, Marketing or Distribution, Human Resource &
Corporate Planning, and Research & Development. These functional areas are listed to
identify their relative strength and weakness in SAP. Very similar to the ETOP, positive,
neutral, and negative signs are denoted and brief description is written in SAP profile.
Each functional area is very broad having many components inside. All these above
described profiles provide a clear picture to understand the strategic position of an
organization.

Strategic Position and Report Writing

After analysis of business environment a strategist knows the actual situation and can
make some future forecasting based on the environmental analysis. After preparing the
profiles strategists prepare formal report that describes the business environment. The
report might present issues and best strengths of business environment in a systematic
process. One can draw future strategies based on the strategic analysis followed.

In conclusion, a strategist or a manager first identifies the relevant environmental factors

then analyzes using different tools and techniques to find out the actual situation. This
overall process is sometimes known as SWOT analysis, environmental scanning,
environmental analysis, or monitoring-forecasting. This process is very important for a
manager to make his or her organization success by choosing the best available
alternative strategy.

SWOT/TOWS Analysis

A scan of the internal and external environment is an important part of the strategic
planning process. Environmental factors internal to the firm usually can be classified as
strengths (S) or weaknesses (W), and those external to the firm can be classified as
opportunities (O) or threats (T). Such an analysis of the strategic environment is referred
to as a SWOT analysis.

The SWOT analysis provides information that is helpful in matching the firm's resources
and capabilities to the competitive environment in which it operates. As such, it is
instrumental in strategy formulation and selection. The following diagram shows how a
SWOT analysis fits into an environmental scan:

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Strengths
A firm's strengths are its resources and capabilities that can be used as a basis for
developing a competitive advantage. Examples of such strengths include:
• patents
• strong brand names
• good reputation among customers
• cost advantages from proprietary know-how
• exclusive access to high grade natural resources
• favorable access to distribution networks

Weaknesses
The absence of certain strengths may be viewed as a weakness. For example, each of the
following may be considered weaknesses:
• lack of patent protection
• a weak brand name
• poor reputation among customers
• high cost structure
• lack of access to the best natural resources
• lack of access to key distribution channels

In some cases, a weakness may be the flip side of a strength. Take the case in which a
firm has a large amount of manufacturing capacity. While this capacity may be
considered a strength that competitors do not share, it also may be a considered a

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weakness if the large investment in manufacturing capacity prevents the firm from
reacting quickly to changes in the strategic environment.

Opportunities
The external environmental analysis may reveal certain new opportunities for profit and
growth. Some examples of such opportunities include:
• an unfulfilled customer need
• arrival of new technologies
• loosening of regulations
• removal of international trade barriers

Threats
Changes in the external environmental also may present threats to the firm. Some
examples of such threats include:
• shifts in consumer tastes away from the firm's products
• emergence of substitute products
• new regulations
• increased trade barriers

The SWOT Matrix

A firm should not necessarily pursue the more lucrative opportunities. Rather, it may
have a better chance at developing a competitive advantage by identifying a fit between
the firm's strengths and upcoming opportunities. In some cases, the firm can overcome a
weakness in order to prepare itself to pursue a compelling opportunity.
To develop strategies that take into account the SWOT profile, a matrix of these factors
can be constructed. The SWOT matrix is shown below:

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TOWS Analysis

TOWS Analysis is a variant of the classic business tool, SWOT Analysis. TOWS and
SWOT are acronyms for different arrangements of the words Strengths, Weaknesses,
Opportunities and Threats.
SWOT or TOWS analysis helps you get a better understanding of the strategic choices
that a firm faces. It helps to ask, and answer, the following questions: How do you:
Make the most of your strengths?
Circumvent your weaknesses?
Capitalize on your opportunities? and
Manage your threats?
A next step of analysis, usually associated with the externally-focused TOWS Matrix,
helps to think about the options that you could pursue. To do this you match external
opportunities and threats with your internal strengths and weaknesses, as illustrated in the
matrix below:

TOWS Strategic Alternatives Matrix

External External Threats
Opportunities (T)
(O) 1.
1. 2.
2. 3.
3. 4.
4.
Internal Strengths SO ST
(S) "Maxi-Maxi" Strategy "Maxi-Mini" Strategy
1.
2. Strategies that use Strategies that use
3. strengths to maximize strengths to
4. opportunities. minimize threats.
Internal WO WT
Weaknesses (W) "Mini-Maxi" Strategy "Mini-Mini" Strategy
1. Strategies that
2. minimize weaknesses Strategies that
3. by taking advantage minimize weaknesses
4. of opportunities. and avoid threats.

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This helps to identify strategic alternatives that address the following additional
questions:

• S-O strategies pursue opportunities that are a good fit to the company's strengths.
• W-O strategies overcome weaknesses to pursue opportunities.
• S-T strategies identify ways that the firm can use its strengths to reduce its
vulnerability to external threats.
• W-T strategies establish a defensive plan to prevent the firm's weaknesses from
making it highly susceptible to external threats.

BCG MATRIX

This technique is particularly useful for multi-divisional or multiproduct companies. The

divisions or products compromise the organisations ―business portfolio‖. The
composition of the portfolio can be critical to the growth and success of the company.
The BCG matrix considers two variables, namely
Market growth rate
Relative market share

The market growth rate is shown on the vertical (y) axis and is expressed as a %. The
range is set somewhat arbitrarily. The overhead shows a range of 0 to 20% with division
between low and high growth at 10% (the original work by B Headley ―Strategy and the
business portfolio‖, Long Range Planning, Feb 1977 used these criteria). Inflation and/or
Gross National Product have some impact on the range and thus the vertical axis can be
modified to represent an index where the dividing line between low and high growth is at
1.0. Industries expanding faster than inflation or GNP would show above the line and
those growing at less than inflation or GNP would be classed as low growth and show
below the line. The horizontal (x) axis shows relative market share. The share is
calculated by reference to the largest competitor in the market. Again the range and
division between high and low shares is arbitrary. The original work used a scale of 0.1,
i.e. market leadership occurs when the relative market share exceeds 1.0. The BCG
growth/share matrix is divided into four cells or quadrants, each of which represent a
particular type of business. Divisions or products are represented by circles. The size of
the circle reflects the relative significance of the division/product to group sales. A
development of the matrix is to reflect the relative profit contribution of each division and
this is shown as a pie segment within the circle.

The Boston Consulting Group’s Growth Share Matrix

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Page 125 of 185
Success and Disaster Sequences in the Product
Portfolio

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QUESTION MARKS

These are products or businesses, that compete in high growth markets but where the
market share is relatively low. A new product launched into a high growth market and
with an existing market leader would normally be considered as a question mark.
Because of the high growth environment, they can be a ―cash sink‖.
Strategic options for question marks include:
Market penetration
Market development
Product development

STARS
Successful question marks become stars. i.e. market leaders in high growth industries.
However, investment is normally still required to maintain growth and to defend the
leadership position.
Stars are frequently only marginally profitable but as they reach a more mature status in
their life cycle and growth slows, returns become more attractive. The stars provide the
basis for long term growth and profitability.

Strategic options for stars include:

Integration – forward, backward and horizontal
Market penetration
Market development
Product development
Joint ventures

CASH COWS
These are characterised by high relative market share in low growth industries. As the
market matures the need for investment reduces. Cash Cows are the most profitable
products in the portfolio. The situation is frequently boosted by economies of scale that
may be present with market leaders. Cash Cows may be used to fund the businesses in
the other three quadrants.
It is desirable to maintain the strong position as long as possible and strategic options
include:
Product development
Concentric diversification
If the position weakens as a result of loss of market share or market contraction then
options would include Retrenchment (or even divestment)

DOGS

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These describe businesses that have low market shares in slow growth markets. They
may well have been Cash Cows. Often they enjoy misguided loyalty from management
although some Dogs can be revitalised. Profitability is, at best, marginal. Strategic
options would include..
Retrenchment
Liquidation
Divestment
Successful products may well move from question mark though star to Cash Cow and
finally to Dog. Less successful products that never gain market position will move
straight from question mark to Dog.
The BCG is simple and useful technique for strategic analysis. It is convenient for multi-
product or multi-divisional companies. It focuses on cash flow and is useful for
investment and marketing decisions.
One should not however, ignore the limitations of the technique.
Definition (qualitative and quantitative) of the market is sometimes difficult. It assumes
that market share and profitability are directly related.
The use of high and low to form four categories is too simplistic. Growth rate is only one
aspect of industry attractiveness and high growth markets are not always the most
profitable. It considers the product or business in relation to the largest player only. It
ignores the impact of small competitors whose market share is rising fast. Market share is
only one aspect of overall competitive position. It ignores interdependence and synergy.
Companies will frequently search for a balanced portfolio, since:

Too many stars may lead to a cash crisis

Too many Cash Cows puts future profitability at risk
And too many question marks may affect current profitability.

Exercise:
Using the data provided construct a BCG and answer the following questions,
Has the company a balanced portfolio?
From the BCG what do you see as strengths and why?
Propose generic strategies for each division or product.

Consider a multi-divisional / product organization. Using the following data construct a

BCG matrix:

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 Is the company balanced?
Identify strengths and weaknesses of company
Propose strategies for each division/product

GE Nine Cell Matrix

The General Electric Company, with the aid of the Boston Consulting Group and
McKinsey and Company, pioneered the nine cell strategic business screen illustrated
here. The circle on the matrix represents your enterprise. Both axes are divided into three
segments, yielding nine cells. The nine cells are grouped into three zones:

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The Green Zone consists of the three cells in the upper left corner. If your enterprise
falls in this zone you are in a favorable position with relatively attractive growth
opportunities. This indicates a "green light" to invest in this product/service.
The Yellow Zone consists of the three diagonal cells from the lower left to the upper
right. A position in the yellow zone is viewed as having medium attractiveness.
Management must therefore exercise caution when making additional investments in this
product/service. The suggested strategy is to seek to maintain share rather than growing
or reducing share.
The Red Zone consists of the three cells in the lower right corner. A position in the red
zone is not attractive. The suggested strategy is that management should begin to make
plans to exit the industry.

Hofer’s Model

The principal purpose of analysis for strategic planning is to identify the major
opportunities and threats a business unit faces in the future and to identify the skills
around which it can develop a strategy to exploit the opportunities and negotiate around
the threats.
Hofer and Schendel felt that the major weakness with the General Electric business
screen was that it didn‘t effectively depict the positions of new businesses that are just
starting to grow in new industries.

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They suggested in 1975 that changes in basic competitive positions are easier to
accomplish at certain stages in the evolution of an industry than others. The Boston
Consulting Group also alluded to this with their assumption that market growth was
related to life cycle and was used as the one axis on their matrix.
The competitive position / market evolution matrix was developed in the late 1970‘s by
Charles W. Hofer and Dan Schendel.

Strategic Emphasis

The matrix was developed as a result of the findings and research done during the
previous ten years that suggested that the magnitude and type of opportunities and threats
that face a business vary according to the stage of evolution of that industry as well as its
competitive position within that industry. The model concentrates on positioning existing
SBU‘s on the product-market evolution matrix thereby establishing an ideal future
portfolio.
Hofer-Schendel suggested that a strategy analysis is made up of four steps
1. The assessment of the current strategic position of the business
2. The identification of the major strategic opportunities and threats that the business
will face given its current strategic position
3. Identification of the principle resources and skills on which the business can build a
competitive strategy
4. Identification of major issues and gaps deriving from the current position and the
threats and opportunities identified in the future.
The matrix was developed to solve the first step in this approach.

The Approach

Hofer-Schendel ascertain that four steps have to be undertaken to determine a basic

strategic position and this in turn determines the investment strategy of the business.
The four steps are:
1. The short term financial condition and health of the company must be determined to
assess whether it is a feasible entity or likely to go bankrupt
2. The relative competitive position of the business must be ascertained because even if
the business is not about to become bankrupt, liquidation of the business may be one of
the strategic choices.
3. It is then necessary to determine the position of evolution of the market that the
business competes in. This will help decide whether the preferred strategy is share
increasing, growth or profit.
4. A plot is then made of the business‘s basic strategic position.
Assessing the Short-Term Financial Condition of the Business

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Many tools are available for an analysis of this nature – this analysis must determine
whether the company is in a possible bankruptcy situation and can serve as strong
indicators of whether there is a need to adopt either turnaround or liquidation strategies.
Different trends should be examined including:
Liquidity trends
Profitability trends
Turnover trends
Ratio analyses should be calculated
Short and long term cash flows should be examined
Corporate and business financial models can also be of assistance

Relative Competitive Position

The purpose of doing this is to develop a better measure of the long-term growth
potential and profit potential of the organisations businesses. This method is more
comprehensive than a simple assessment of the market share as used in the BCG matrix.
Research shows that market share is an indicator of profit potential but other factors also
influence this measurement such as relative product quality, adequacy of distribution,
facilities location, as well as proprietary and key account advantages.

Horizontal Axis

Another reason for using relative competitive position and not market share is that the
success factors of the organisation‘s businesses vary from business to business and the
organisation must have a clear idea which of these factors has a dominant position in
which of the businesses, to be able to put forward a strategic plan that will be successful.
The relative competitive position is made up of two sets of variables, the technological
and economic characteristics of the industry involved.

Examples of success factors – Hofer-Schendel (1978)

Market share Capacity and productivity

SBU growth rate Experience curve effects

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 Breadth of product line Raw materials cost

Sales distribution effectiveness Value added

Proprietary and key account advantages Relative product quality

Price competitiveness R&D advantages/position

Advertising and promotional effectiveness Cash throw off

Calibre of personnel General image

Facilities location and newness

Market Evolution

Different opportunities and threats face a business as the product/market segments in

which it competes, evolve over time. Many different authors have described the different
market /product stages in the life cycle. The stages of the life cycle vary from author to
author. In the original competitive position / market evolution matrix developed by
Charles W. Hofer and Dan Schendel, they described seven stages of the life cycle, each
with certain characteristics by which the position of the market can be identified.
Market Evolution

Major changes in basic competitive position occur in the stages of development, shakeout
and decline because in these stages the basic nature of competition changes. It is more
difficult to make changes to competitive position in the other stages of growth,
maturation and saturation as the bases for competition are usually well established.

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Market shifts during these stages of the market evolution do happen however and can be
caused by:
1. a major blunder by the industry leader
2. a major investment program by a well positioned follower
3. through the acquisition and effective integration of another firm within the industry
4. through a sustained effort to produce small, consistent incremental advantages over a
long period of time.

Vertical Axis

The y-axis of the model is an assessment of the firm/product/service‘s stage of market

evolution. Note that on this matrix axis that Shakeout is positioned below Development
and before Growth whereas in the traditional evolution, Growth occurs before Shakeout.

Plot Configuration

Identify Key Success Factors

The firm must assess its relative competitive position by identifying the key success
factors. These can be derived using the list of economic and technological factors listed
in the previous section.
It must be remembered that the purpose of the exercise is to identify the key
factors/forces affecting the firm‘s competitive position and not to become bogged down
in numbers. The most important part of the process is to identify the most important key
success factors in the industry and the firm‘s relative position with respect to them.
Most industries have a limited number of success factors that have a substantial impact
on competitive position and it is far better to get a good weighting distribution of five
major factors than to try to get a list of a lot of factors and the try to give them all a
weighting.

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Importance Weighting
Each factor is given an importance weighting. This rating should reflect the factor‘s
relative impacts on overall profitability, market share, and other measures of competitive
position of the various firms in the industry involved.

This weighting exercise is difficult to do,

as managers within a firm always tend to overestimate or underestimate their relative
strengths and weaknesses. It is a good idea to involve a representative from each of the
functional areas in a group workshop to assign the weightings to the critical success
factors.

The total weightings of the sub-factors must add up to 100 (for simplicity sake) and then
normalised to add up to 1.00. (Divide each factor weighting by 100)

Model Use and Applicability

From the positioning on the matrix it can be seen that there are various generic strategies,
corresponding to the positions determined by the x and the y-axis. The suitability of the
strategies is therefore related to the stage of the product/market evolution of the industry
in which the firm competes and its competitive position in the industry
The six strategies devised by Hofer and Schendel are:
1. Share increasing strategies
2. Growth strategies
3. Profit strategies
4. Market concentration and asset reduction strategies
5. Turnaround strategies
6. Liquidation and divestiture strategies

Share Increasing Strategies

The purpose of this type of strategy is self-explanatory and is to increase share

significantly and permanently. They are usually designed to alter the competitive position
of the business involved. When businesses embark on this type of strategy they usually
aim to increase their market share by more than 50% of what it currently is and often as
high as 100 to 150 percent of current market share. This type of strategy involves large
investments to achieve the goals and so businesses attempting to increase market share to
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this extent must be able to attract capital in addition to that generated by the business
itself. Changes often include horizontal mergers with other companies and if this is not an
option then the business will need some major advantages over existing competitors to
achieve large changes in share.
If the product/market is in the development stage, competition in many industries
revolves around product design, product positioning and product quality. If it is in the
shakeout phase competition revolves around product features, market segmentation,
pricing and distribution and service effectiveness. These guidelines apply to all
industries.
Although market share changes usually occur in the development or shakeout stages, it
has to be noted that major changes in market share can occur in other stages of the
product/market evolution:
If the leader stumbles or
A sudden breakthrough in product form technology occurs or
The business is willing to make major investments to develop advantages over
time or
The business is willing to make sustained efforts to develop advantages over time

Growth Strategies

These occur in the Growth stage of market evolution and are designed to preserve the
firm‘s existing competitive position in a very rapidly expanding market. Major market
growth usually occurs during the early stages of product/market evolution and a growth
strategy has two important features:
The acquisition of resources needed to grow with the market so the business can
maintain its current position
The development of new types of competitive weapons that the business will need
to continue competing effectively as the growth slows and shake-out begins.

Often a company will concentrate on the first feature, which will leave it unprepared to
maintain growth in the competitive environment when shake-out begins and there are
different types of competition.
The reason that most companies do not concentrate on developing strategic skills is that
the growth in the initial phase requires the firm to concentrate their efforts on obtaining
new resources. Firms create debt and require equity financing as few can generate the
cash flow internally to finance requirements. As a result, very little management time and
resources are given for considering and developing the different types of organisational
skills needed to survive the shake-out period. A firm will usually build on exiting
strengths and rarely see their weaknesses or new conditions.

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Skills can be obtained by training existing personnel to broaden their skills base,
acquiring a business horizontally to complement existing resources or by hiring personnel
who have previously experienced firms in the shake-out phase i.e. headhunt personnel.

Profit Strategies

A profit strategy is a shift to maximising the return on the business‘s existing resources
and skills.
After growth and shake-out and when competition begins to stabilize, businesses should
shift their focus from growth to profitability. In the previous phases businesses
concentrated on market development and asset acquisition and now they must shift their
focus to market segmentation and asset utilisation.
The business must identify areas in which cost-cutting or revenue increasing might seem
feasible. Options include – price increases, unit volume increases, sales mix changes,
product pruning, cost reductions, asset reductions, acquisitions.
Value-added charts should be analysed for the business in question and the entire raw
materials to finished product chain. These charts can indicate areas that have the biggest
potential for cost saving based on value added and experience curve considerations.

Market Concentration and Asset Reduction Strategies

This type of strategy realigns both the scope and level of asset deployments of the
business to improve short-run profits and long-run prospects. This strategy is appropriate
when
When the business involved has a weak competitive position during the maturity
or saturation stages of product/market evolution
At the onset of the decline stage of product/market evolution.

Best Use

Hofer-Schendel suggests the use of this matrix when most of the businesses consist of
individual or small groups of related product/market segments.
This matrix is used when a firm wants to know what the investment potential of the
businesses is likely to be – the product /market evolution gives a good indication of this.
This model may be usefully applied to balancing the corporate portfolio and assigning
strategies to each SBU using the generic strategies.
It can also be used to establish the desired corporate portfolio profile, to formulate
specific business strategies for each SBU and close any gap existing between corporate
and SBU level.
This model can also be used for competitor analysis at both the corporate and SBU level.

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Model weaknesses

Porter (amongst others) has criticised this type of technique for 4 reasons:
1. The length of the stages in the cycle can vary enormously from industry to industry
and it is often not very clear what stage the industry is in.
2. Industry growth does not always go through the typical s-shape described by Hofer
and Schendel. Some industries go straight from growth to decline and some industries
revitalise themselves during a decline. Other industries do not have a slow introductory
growth stage but enter directly into a sharp growth phase.
3. Firms can alter the life-cycle shape themselves through product innovation, creative
marketing and repositioning. If a company takes the life cycle as a given, it can become a
self fulfilling prophesy.
4. Competition at each stage of the life cycle is different in different industries.
Porter argues that except for industry growth, there is little or no rationale for the reason
competitive changes associated with the life cycle will occur. Nothing in the life cycle
concept allows us to predict when it will hold and when it will not.
This in turn raises the concern of the appropriateness of the generic strategies at each
position of the matrix.

Strickland Grand Strategy selection model:

Thompson and Strickland developed several models of strategic management.

According to Thompson and Strickland strategic management is an ongoing process:
"nothing is final and all prior actions and decisions are subject to future
modification."
This process consists of five major five ever-present tasks:
1. Developing a concept of the business and forming a vision of where the organization
needs to be headed.
2. Converting the mission into specific performance objectives.
3. Crafting a strategy to achieve the targeted performance.
4. Implementing and executing the chosen strategy efficiently and effectively.
5. Evaluating performance, reviewing the situation, and initiating corrective adjustments
in mission, objectives, strategy, or implementation in light of actual experience, changing
conditions, new ideas, and new opportunities.
Thompson and Strickland suggest that the firm's mission and objectives combine to
define "What is our business and what will it be?" and "what to do now" to achieve
organization's goals. How the objectives will be achieved refers to the strategy of firm.

The matrix considers two parameters, namely

Competitive position

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Market growth

Competitive position could be measured by an IFE. The matrix can be used for both
organisations or SBU‘s. The matrix shows ―appropriate‖ strategies for the organisation or
business unit in order of attractiveness.

QUADRANT 1 (SO)
Strong strategic position. Strong competitive position in a high growth market. It would
seem logical for such organisations to concentrate on their current markets and products,
e.g. Market development, market penetration, product development. There may be
reasons why an organisation or business unit would wish to change, e.g. Utilise excess
resources (physical, financial, human) by integration, Limited product portfolio may
suggest concentric Diversification for future security.

QUADRANT 2 (WO)
Opportunities exist for growth in Quadrant 2 but the organizations in this quadrant are
ineffective. The first option must surely be an intensive strategy bur other options include
horizontal integration. If the organisation is unable to find the competitive advantage to
exploit the market growth divestment or even liquidation are options.

QUADRANT 3 (WT)
Organisations in this quadrant have a weak competitive position and compete in slow
growth industries. The options are obviously divestment or liquidation but retrenchment
or even diversification could be considered if exit costs were unacceptable.

QUADRANT 4 (ST)
Organisations with competitive strength but operate in low growth industries. Preferred
option is to move into a more attractive industry by concentric, horizontal or
conglomerate diversification.
The Grand Strategy matrix

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In general, this model highlights the relationships between the organization's mission, its
long- and short-range objectives, and its strategy.

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 END CHAPTER QUIZ

Q.1 The five force model was developed by

(a)Hofer

(b)GE

(c)Michael Porter

(d)Strickland

Q.2 The Grand strategy model was developed by

(a) Michael Porter

(b) GE

(c)Boston Consulting Group

(d) Strickland

Q.3 The BCG Matrix was developed by

(a)Hofer

(b) Michael Porter

(c) GE

(d) Boston Consulting Group

Q.4 The Nine cell matrix was developed by

(a)GE

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(b) Michael Porter

(c)Hofer

(d)Strickland

Q.5 ETOP refers to

(a) Economic threat and opportunity profile

(b)Environmental threat and opportunity profile

(c)Electronic threat and opportunity profile

(d)All of the above

Q.6 SAP refers to

(a) Strategic absolute profile

(b) Social advantage profile

(c) Social absolute profile

(d) Strategic advantage profile

Q.7 TOWS analysis is a variant of

(a)SAP

(b)SWOT

(c)ETOP

(d)BCG

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Q.8Stars refer to

(a)High market share, Low Market growth rate

(b) Low market share, High Market growth rate

(c) Low market share, Low Market growth rate

(d) High market share, High Market growth rate

Q.9 Hofer’s Model suggests that a strategy analysis is made up of

(a) Identification of the principle resources and skills on which the business
can build a competitive strategy

(b) The identification of the major strategic opportunities and threats that
the business will face given its current strategic position

(c) Identification of major issues and gaps deriving from the current position
and the threats and opportunities identified in the future.

(d)All of the above

Q.10 Strickland’s Grand Strategy Model consists of

(a) 2 axes

(b) 4 quadrants

(c)3 axes

(d) None of the above

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 CHAPTER-7
FORMULATING INTERNATIONAL STRATEGIES

7.1 Generic strategies

7.2 Grand strategies
7.3 International strategic alliances

Generic strategies

If the primary determinant of a firm's profitability is the attractiveness of the industry in

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

Porter's Generic Strategies

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Cost Leadership Strategy

This generic strategy calls for being the low cost producer in an industry for a given level
of quality. The firm sells its products either at average industry prices to earn a profit
higher than that of rivals, or below the average industry prices to gain market share. In
the event of a price war, the firm can maintain some profitability while the competition
suffers losses. Even without a price war, as the industry matures and prices decline, the
firms that can produce more cheaply will remain profitable for a longer period of time.
The cost leadership strategy usually targets a broad market. Some of the ways that firms
acquire cost advantages are by improving process efficiencies, gaining unique access to a
large source of lower cost materials, making optimal outsourcing and vertical integration
decisions, or avoiding some costs altogether. If competing firms are unable to lower their
costs by a similar amount, the firm may be able to sustain a competitive advantage based
on cost leadership.
Firms that succeed in cost leadership often have the following internal strengths:
• Access to the capital required to make a significant investment in production assets; this
investment represents a barrier to entry that many firms may not overcome.
• Skill in designing products for efficient manufacturing, for example, having a small
component count to shorten the assembly process.
• High level of expertise in manufacturing process engineering.
• Efficient distribution channels.

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Each generic strategy has its risks, including the low-cost strategy. For example, other
firms may be able to lower their costs as well. As technology improves, the competition
may be able to leapfrog the production capabilities, thus eliminating the competitive
advantage. Additionally, several firms following a focus strategy and targeting various
narrow markets may be able to achieve an even lower cost within their segments and as a
group gain significant market share.

Differentiation Strategy

A differentiation strategy calls for the development of a product or service that offers
unique attributes that are valued by customers and that customers perceive to be better
than or different from the products of the competition. The value added by the uniqueness
of the product may allow the firm to charge a premium price for it. The firm hopes that
the higher price will more than cover the extra costs incurred in offering the unique
product. Because of the product's unique attributes, if suppliers increase their prices the
firm may be able to pass along the costs to its customers who cannot find substitute
products easily.
Firms that succeed in a differentiation strategy often have the following internal
strengths:
• Access to leading scientific research.
• Highly skilled and creative product development team.
• Strong sales team with the ability to successfully communicate the perceived strengths
of the product.
• Corporate reputation for quality and innovation.
The risks associated with a differentiation strategy include imitation by competitors and
changes in customer tastes. Additionally, various firms pursuing focus strategies may be
able to achieve even greater differentiation in their market segments.

Focus Strategy

The focus strategy concentrates on a narrow segment and within that segment attempts to
achieve either a cost advantage or differentiation. The premise is that the needs of the
group can be better serviced by focusing entirely on it. A firm using a focus strategy
often enjoys a high degree of customer loyalty, and this entrenched loyalty discourages
other firms from competing directly. Because of their narrow market focus, firms
pursuing a focus strategy have lower volumes and therefore less bargaining power with
their suppliers. However, firms pursuing a differentiation-focused strategy may be able to
pass higher costs on to customers since close substitute products do not exist.
Firms that succeed in a focus strategy are able to tailor a broad range of product
development strengths to a relatively narrow market segment that they know very well.
Some risks of focus strategies include imitation and changes in the target segments.

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Furthermore, it may be fairly easy for a broad-market cost leader to adapt its product in
order to compete directly. Finally, other focusers may be able to carve out sub-segments
that they can serve even better.

A Combination of Generic Strategies - Stuck in the Middle?

These generic strategies are not necessarily compatible with one another. If a firm
attempts to achieve an advantage on all fronts, in this attempt it may achieve no
advantage at all. For example, if a firm differentiates itself by supplying very high quality
products, it risks undermining that quality if it seeks to become a cost leader. Even if the
quality did not suffer, the firm would risk projecting a confusing image. For this reason,
Michael Porter argued that to be successful over the long-term, a firm must select only
one of these three generic strategies. Otherwise, with more than one single generic
strategy the firm will be "stuck in the middle" and will not achieve a competitive
advantage. Porter argued that firms that are able to succeed at multiple strategies often do
so by creating separate business units for each strategy. By separating the strategies into
different units having different policies and even different cultures, a corporation is less
likely to become "stuck in the middle."

However, there exists a viewpoint that a single generic strategy is not always best
because within the same product customers often seek multidimensional satisfactions
such as a combination of quality, style, convenience, and price. There have been cases in
which high quality producers faithfully followed a single strategy and then suffered
greatly when another firm entered the market with a lower-quality product that better met
the overall needs of the customers.

Generic Strategies and Industry Forces

These generic strategies each have attributes that can serve to defend against competitive
forces. The following table compares some characteristics of the generic strategies in the
context of the Porter's five forces.

Generic Strategies and Industry Forces

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Grand Strategy:

Identification of various alternatives strategies is an important aspect of strategic

management as it provides the alternatives which can be considered and selected for
implementation in order to arrive at certain result. At this stage, the managers are able to
complete their environmental analysis and appraisal of their strengths and they are in a
position to identify what alternatives strategies are available for them in the light of their
organizational mission.

In this there are four main strategies:

1) Stability Strategy
2) Growth/Expansion Strategy
3) Retrenchment Strategy
4) Combination Strategy

1) Stability Strategy:

Basic approach in the stability strategy is ‗maintain present course: steady as it goes.‘
In an effective stability strategy, companies will concentrate their resource where the
company presently has or can rapidly develop a meaning full competitive advantage in
the narrowest possible product market scope consistent with the firm‘s resource and
market requirements. Many companies in different industries have been forced to adopt
stability strategy because of over capacity in the industries concerned.

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For Example:
Steel Authority of India has adopted stability strategy because of over capacity in steel
sector. Instead it has concentrated on increasing operational efficiency of its various
plants rather than going for expansion. Others industries are ‗heavy commercial vehicle‘,
‗coal industry‘.

2) Growth/Expansion:

Growth strategy is much talked in the present Indian environments, if we look at the
corporate performance in the recent years. We find out that various organizations have
grown both in terms of sales and profit as well as assets. Some organizations have grown
so fast.

For Example:
Nirma ltd., Reliance Industry Ltd., infact, in the life of any organization, growth strategy
is necessary at some point of time. James has identified those five stages emergence,
growth maturity and decline.
TISCO establish in 1907 is still the leader in steel sector. It suggests that the strategies
fooled by organizations will determine the application of various stages.
―A strategy is one that an enterprise pursue when it increase its level of objectives
upwards in significant increment, much higher than an exploration of its past
achievement level. The most frequent increase indicating a growth strategy is to raise the
market share and or sales objectives upwards significantly.‖

3) Retrenchment Strategy:

A Retrenchment grand strategy is followed when an organization aims at a contraction of

its activities through substantial reduction or the elimination of the scope of one or more
its businesses, in terms of their respective customer groups, customer functions or
alternatives technologies either singly or jointly on order to improve its overall
performance.
Retrenchment involves a total or partial withdrawal from either a customer group or
customer functions, or the use of an alternatives technology in one or more of firms
businesses, as can be seen from the situation as given below:

Types of Retrenchment Strategies:

Turnaround Strategy
Divestment Strategy
Liquidation Strategy

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For Example:
A pharmaceutical firm pulls out from retail selling to concentrate on institutional selling
in order to reduce the size of its sales force and increase marketing efficiency.
A corporate hospital decides to focus only on specialty treatment and realize higher
revenues by reducing its commitment to general cases which are typically less profitable
to deal with.

4) Combination Strategy:

Combination Strategies are a mixture of stability, expansion or retrenchment strategies

applied either simultaneously (at the same time in different businesses) or sequentially (at
different times in the same business).
It would be difficult to find any organization that has survived and grown by adopting a
single ‗pure‘ strategy. The complexity of doing business demands that different strategies
be adopted to suit the situational demands made upon the organization.

For Example:
The Tube Investments of India (TI), a Murugappa group company, has created strategic
alliances in its three major businesses: tubes, cycles, and strips. In cycles, it has entered
into regional outsourcing arrangements with the UP-based Avon (which we could term as
co-competition, as Avon is TI‘s competitor in the cycle industry) and Hamilton Cycles in
the western region. In steel strips, TI has entered into a manufacturing contract with Steel
Tubes of India, Steel Authority of India and the Jindals.

International strategic alliances

Strategic Alliance:

A Strategic Alliance is a formal relationship between two or more parties to pursue a set
of agreed upon goals or to meet a critical business need while remaining independent
organizations.
Partners may provide the strategic alliance with resources such as products, distribution
channels, manufacturing capability, project funding, capital equipment, knowledge,
expertise, or intellectual property. The alliance is a cooperation or collaboration which
aims for a synergy where each partner hopes that the benefits from the alliance will be
greater than those from individual efforts. The alliance often involves technology transfer
(access to knowledge and expertise), economic specialization, shared expenses and
shared risk.

Stages of Alliance Formation

A typical strategic alliance formation process involves these steps:

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 Strategy Development: Strategy development involves studying the alliance‘s
feasibility, objectives and rationale, focusing on the major issues and challenges
and development of resource strategies for production, technology, and people. It
requires aligning alliance objectives with the overall corporate strategy.
Partner Assessment: Partner assessment involves analyzing a potential partner‘s
strengths and weaknesses, creating strategies for accommodating all partners‘
management styles, preparing appropriate partner selection criteria, understanding
a partner‘s motives for joining the alliance and addressing resource capability
gaps that may exist for a partner.
Contract Negotiation: Contract negotiations involves determining whether all
parties have realistic objectives, forming high calibre negotiating teams, defining
each partner‘s contributions and rewards as well as protect any proprietary
information, addressing termination clauses, penalties for poor performance, and
highlighting the degree to which arbitration procedures are clearly stated and
understood.
Alliance Operation: Alliance operations involves addressing senior
management‘s commitment, finding the calibre of resources devoted to the
alliance, linking of budgets and resources with strategic priorities, measuring and
rewarding alliance performance, and assessing the performance and results of the
alliance.
Alliance Termination: Alliance termination involves winding down the alliance,
for instance when its objectives have been met or cannot be met, or when a
partner adjusts priorities or re-allocates resources elsewhere.

The advantages of strategic alliance includes:

1. Allowing each partner to concentrate on activities that best match their
capabilities.
2. Learning from partners & developing competences that may be more widely
exploited elsewhere
3. Adequacy a suitability of the resources & competencies of an organization for it
to survive.

Joint Ventures:
A joint venture (JV, sometimes 'J-V') is a legal entity formed between two or more
parties to undertake an economic activity together. It is a term more restricted to the US
and the 'new' countries on the world map such as India and China.
The JV parties agree to create, for a finite time, a new entity and new assets by
contributing equity. They then share in the revenues, expenses, and assets and "control"
of the enterprise.
The term is not used in the U.K. where 'company law' originates. In European law, the
term 'joint-venture' is an elusive legal concept, better defined under the rules of company
law. In France, the term 'joint venture' is variously translated as 'association d'entreprises',
'entreprise conjointe', 'co-entreprise' and 'entreprise commune'. But generally, societe
anonyme covers' foreign collaborations. In Germany,'joint venture' is better represented
as a 'combination of companies' (Konzern).
The venture can be for one specific project only - when the JV is referred more correctly
as a consortium- or a continuing business relationship. The consortium JV (also known as
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a cooperative agreement) is formed where one party seeks technological expertise or
technical service arrangements, franchise and brand use agreements, management
contracts, rental agreements, for ‗‘one-time‘‘ contracts. The JV is dissolved when that
goal is reached.

A JV on a continuing basis is the normal business undertaking. It is similar to a business

partnership with two differences: the first, a partnership generally involves an ongoing,
long-term business relationship, whereas an equity-based JV comprises a single business
activity. Second, all the partners have to agree to dissolve the partnership whereas a finite
time has to lapse before it comes to an end (or is closed by the Court due to a dispute).
The term JV refers to the purpose of the entity and not to a type of entity. Therefore, a
joint venture may be a corporation, a limited liability enterprise, a partnership or other
legal structure, depending on a number of considerations such as tax and tort liability.
JVs are normally formed both inside one's own country and between firms belonging to
different countries. Within one, JVs usually combine different strengths in a field or are
formed because of legal restrictions within a country; for example an insurance company
cannot market its policies through a banking company. Some JVs are also formed
because the law of a country allows dispute settlement, should it occur, in a third country.
They are also formed to minimize business,tax and political risks. The JV is an
alternative to the parent-subsidiary business partnership in emerging countries,
discouraged, on account of (a) ignoring national objectives (b) slow-growth (c) parental
control of funds and (d) disallowing competition.
JVs can be in the manufacture of goods, services, travel space, banking, insurance, web-
hosting business, etc.
Today, the term 'JV' applies to more occasions than the choice of JV partners; for
example, an individual normally cannot legally carry out business without finding a
national partner to form a JV as in many Arab countries where it is mentioned that there
are over 500 JVs in Saudi Arabia with Indians alone. Also, the JV may be an easier first-
step to franchising, as McDonald's and other fast foods, found out in China in the early
difficult stage of development.
Other reasons for forming a JV are:
reducing 'entry' risks by using the local partner's assets
inadequate knowledge of local institutional or legal environment
access to local borrowing powers
perception that the goodwill of the local partner is carried forward
in strategic sectors, the county's laws may not permit foreign nationals to operate
alone
access to local resources through participation of national partner
influence of local partners on government officials or 'compulsory' requisite (see
China coverage below)
access by one partner to foreign technology or expertise, often a key
consideration of local parties (or through government incentives for the
mechanism)
again, through government incentives, job and skill growth through foreign
investment, and
incoming foreign exchange and investment.

Strategic Reasons of One Partner

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There may be strategic interests of one partner's alone:
adding 'clout' (the influence of the other partner) to the enterprise
build on company's strengths
economies of (international) scale and advantages of size ('industrial hubs')
'globalize' without size economies of scale (e.g.Indian and Israeli pharmaceutical
industries)
influencing structural evolution of the industry
pre-empting competition
defensive response to blurring industry boundaries
speed to market
market diversification
pathways into R&D
outsourcing
JVs are formed by the parties‘ entering into an agreement that specifies their mutual
responsibilities and goals in an 'adventure. The JV partners can usually form the capital
of the company through injections of cash alone or cash together with assets such as
'technology' or land and buildings. Subsequent to its formation the JV can raise debt for
additional capital. A written contract is crucial for legal provisions. All JVs also involve
certain rights and duties. Each partner to the JV has a fiduciary responsibility, even to act
on someone‘s behalf, subordinating one's personal interests to those of the other person
or that of the ‗sleeping partner‘. Upon its incorporation (see later) it becomes a company
in most places, or a corporation (in the US).

Limitations of a JV
Some of the limitations of a joint venture may be:
differing philosophies governing expectations and objectives of the JV partners
an imbalance in the level of investment and expertise brought to the JV by the two
parent organizations
inadequate identification, support, and compensation of senior leadership and
management teams or
conflicting corporate cultures and operational styles of the JV partners
A JV can terminate at a time specified in the contract, upon the death of an active
member (unusual) or if a court so decides in a dispute taken to it.
Joint ventures have existed for many years in the US, from their usage in the railroad
industry (one party controls the sources of oil and the other party the rights of ferrying it)
and even to manufacturing and services. In the financial services industry JVs were
widely employed for marketing products or services that one of the parties, which acting
alone, would have been legally prohibited from doing so.

Mergers & Acquisitions:

The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of
corporate strategy, corporate finance and management dealing with the buying, selling
and combining of different companies that can aid, finance, or help a growing company
in a given industry grow rapidly without having to create another business entity.

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An acquisition, also known as a takeover or a buyout, is the buying of one company
(the ‗target‘) by another. Merger is when two companies combine together to form a new
company alltogether. An acquisition may be private or public, depending on whether the
acquiree or merging company is or isn't listed in public markets. An acquisition may be
friendly or hostile. Whether a purchase is perceived as a friendly or hostile depends on
how it is communicated to and received by the target company's board of directors,
employees and shareholders. It is quite normal though for M&A deal communications to
take place in a so called 'confidentiality bubble' whereby information flows are restricted
due to confidentiality agreements (Harwood, 2005). In the case of a friendly transaction,
the companies cooperate in negotiations; in the case of a hostile deal, the takeover target
is unwilling to be bought or the target's board has no prior knowledge of the offer. Hostile
acquisitions can, and often do, turn friendly at the end, as the acquiror secures the
endorsement of the transaction from the board of the acquiree company. This usually
requires an improvement in the terms of the offer. Acquisition usually refers to a
purchase of a smaller firm by a larger one.

Sometimes, however, a smaller firm will acquire management control of a larger or

longer established company and keep its name for the combined entity. This is known as
a reverse takeover. Another type of acquisition is reverse merger, a deal that enables a
private company to get publicly listed in a short time period. A reverse merger occurs
when a private company that has strong prospects and is eager to raise financing buys a
publicly listed shell company, usually one with no business and limited assets. Achieving
acquisition success has proven to be very difficult, while various studies have shown that
50% of acquisitions were unsuccessful. The acquisition process is very complex, with
many dimensions influencing its outcome. There is also a variety of structures used in
securing control over the assets of a company, which have different tax and regulatory
implications:

The buyer buys the shares, and therefore control, of the target company being
purchased. Ownership control of the company in turn conveys effective control
over the assets of the company, but since the company is acquired intact as a
going concern, this form of transaction carries with it all of the liabilities accrued
by that business over its past and all of the risks that company faces in its
commercial environment.
The buyer buys the assets of the target company. The cash the target receives
from the sell-off is paid back to its shareholders by dividend or through
liquidation. This type of transaction leaves the target company as an empty shell,
if the buyer buys out the entire assets. A buyer often structures the transaction as
an asset purchase to "cherry-pick" the assets that it wants and leave out the assets
and liabilities that it does not. This can be particularly important where
foreseeable liabilities may include future, unquantified damage awards such as
those that could arise from litigation over defective products, employee benefits
or terminations, or environmental damage. A disadvantage of this structure is the
tax that many jurisdictions, particularly outside the United States, impose on
transfers of the individual assets, whereas stock transactions can frequently be
structured as like-kind exchanges or other arrangements that are tax-free or tax-
neutral, both to the buyer and to the seller's shareholders.
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The terms "demerger", "spin-off" and "spin-out" are sometimes used to indicate a
situation where one company splits into two, generating a second company separately
listed on a stock exchange.

Distinction between mergers and acquisitions

Although often used synonymously, the terms merger and acquisition mean slightly
different things.

When one company takes over another and clearly establishes itself as the new owner,
the purchase is called an acquisition. From a legal point of view, the target company
ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be
traded.

In the pure sense of the term, a merger happens when two firms agree to go forward as a
single new company rather than remain separately owned and operated. This kind of
action is more precisely referred to as a "merger of equals". The firms are often of about
the same size. Both companies' stocks are surrendered and new company stock is issued
in its place. For example, in the 1999 merger of Glaxo Wellcome and SmithKline
Beecham, both firms ceased to exist when they merged, and a new company,
GlaxoSmithKline, was created.

In practice, however, actual mergers of equals don't happen very often. Usually, one
company will buy another and, as part of the deal's terms, simply allow the acquired firm
to proclaim that the action is a merger of equals, even if it is technically an acquisition.
Being bought out often carries negative connotations, therefore, by describing the deal
euphemistically as a merger, deal makers and top managers try to make the takeover
more palatable. An example of this would be the takeover of Chrysler by Daimler-Benz
in 1999 which was widely referred to in the time.

A purchase deal will also be called a merger when both CEOs agree that joining together
is in the best interest of both of their companies. But when the deal is unfriendly - that is,
when the target company does not want to be purchased - it is always regarded as an
acquisition.

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 END CHAPTER QUIZ
Q.1 Cost Leadership Strategy is

(a)Ability to cut prices

(b)Customer Loyalty

(c)Developing core competencies

(d)All of the above

Q.2 The Grand strategy includes

(a) Cost Leadership

(b) Differentiation

(c)Retrenchment strategy

(d) Focus strategy

Q.3 Stability Strategy

(a) Concentrate their resource where the company presently has or can
rapidly develop a meaning full competitive advantage

(b) a mixture of all the strategies

(c) involves a total or partial withdrawal from either a customer group or

customer functions

(d) None of the above

Q.4 Growth Startegy

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(a) Concentrate their resource where the company presently has or can
rapidly develop a meaning full competitive advantage

(b) a mixture of all the strategies

(c) involves a total or partial withdrawal from either a customer group or

customer functions

(d)Focuses on increase in sales, profits and assets

Q.5 Retrenchment strategy

(a) Concentrate their resource where the company presently has or can
rapidly develop a meaning full competitive advantage

(b) a mixture of all the strategies

(c) involves a total or partial withdrawal from either a customer group or

customer functions

(d)Focuses on increase in sales, profits and assets

Q.6 Strategic Alliance

(a) Shares risks

(b) is a mutual relationship

(c) provides resources

(d) All of the above

Q.7 Joint Venture is

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(a)for a finite time

(b)for an infinite time

(c)does not involve other firms

(d)none of the above

Q.8 Reason for forming a Joint Venture is

(a) reducing 'entry' risks by using the local partner's assets

(b) inadequate knowledge of local institutional or legal environment

(c) access to local borrowing powers

(d) All of the above

Q.9 Limitations of a JV

(a) differing philosophies governing expectations and objectives of the JV

partners

(b) an imbalance in the level of investment and expertise brought to the JV

by the two parent organizations

(c) inadequate identification, support, and compensation of senior

leadership and management teams

(d)All of the above

Q.10 Merger is

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(a) a take over

(b) an acquisition

(c)joining of 2 or more firms

(d) None of the above

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 CHAPTER-8

IMPLEMENTATION, EVALUATION AND

CONTROL OF INTERNATIONAL STRATEGIES
8.1 Operationalising and Institutionalizing strategy
8.2 Structure
8.3 Strategic leadership
8.4 Managing culture in a global organization
8.5 Strategic evaluation and control
8.6 Balance Score Card

There exists a prominent need to Institutionalise and operationalise strategy. This ensures
in proper functioning of the organization and in effective implementation of strategy by
the firm. For opeartionalising strategy three elements are essential. These are:

Structure

Leadership

Culture

Let us examine each of these in detail;

Structure:
The structure of an organisation affects what it can do well. For example, an informal
organisation with open communication and few controls is often very good at innovation
and research. On the other hand, an organisation with clear departmental boundaries,
strict controls and detailed procedures for operations is often extremely effective at
producing cost-effective products of high quality and reliability. An organisation has to
examine its structure to decide what kinds of operations it will be good at; or decide on a
strategy and adapt the structure to suit the competitive strengths it needs to be successful.

One can define an organisational structure as a system of tasks, reporting relationships

and communication linkages. The purpose of the organisational structure is to direct
resources according to plans and schedules, facilitate information flow and provide an
intrinsic level of control. The arrangement of functions within an organisation is
important. There is also usually an evolution of structure over the history of an
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organisation. Henry Mintzberg in his brilliant book, Structure in Fives, (1983: 153 ff)
describes five basic organisational structures:
1. the simple structure with direct supervision
2. the 'machine bureaucracy' with standardisation of work processes
3. the professional bureaucracy with standardisation of skills
4. the divisionalised form with standardisation of outputs
5. adhocracy, with mutual adjustment of staff to one another.

Many organisations evolve progressively through structures 1 to 4 (and sometimes on to

structure 5) as the organisation grows and becomes more complex.

Traditional organisation structures allow the grouping of people and jobs together into
work units on the basis of the classical principle of division of labour. These work units
are linked together in a coordinated manner within the larger organisation. This is the
process of departmentalisation which has traditionally resulted in functional, divisional
and matrix structures.

Organisational structures based on function allocate resources to activities which can be

grouped on the basis of function, such as accounting or engineering. Organisational
structures based on divisions allocate resources on the basis of broader dimensions such
as location or outputs. Organisations evolving from single to multi-country operations
often expand by establishing new divisions in the new location, which are usually mini-
versions of the parent company.

An alternative approach which is becoming increasingly popular is to adopt a hybrid of

functional and divisional structures to enable the organisation to focus resources under
two operating paradigms, instead of one. The name matrix structure refers to the
diagrammatic representation of such an organisation as a chart with functions along one
axis and divisions along the other. A significant side
effect of such a structure is that employees often find that they end up with two bosses -
one as a result of the functional structure of the organisation and one as a result of the
divisional structure of the organisation!

Robbins, Waters-Marsh et al. (1994) suggest that traditional organisational structures can
also be defined in terms of complexity, centralisation and formalisation. These elements
can be defined as follows:

Complexity involves how differentiated or broken down into parts activities are
within an organisation. They can be differentiated horizontally, vertically or
spatially.

o Horizontal differentiation refers to the number of different specialisations

and subcultures within an organisation.

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 o Vertical differentiation refers to the depth of hierarchy within an
organisation, the layers of supervisors and managers that exist between top
management and workers.

o Spatial differentiation refers to how physically or geographically spread

out people are within an organisation.

Centralisation refers to the degree to which decision making is concentrated at

one point in the organisation

Formalisation refers to what Stoner et al. (1985) call standardisation. This means
the degree to which jobs have been routinised and prescribed.

One such innovation is network structures which operate with a central core, that is
linked through networks of relationships with outside contractors and suppliers of
essential services. In recent times, the Internet has contributed substantially to
establishing network structures, which are sometimes referred to as virtual organisations.
A structure that might be considered a variation on a network structure is what Mintzberg
(1983) called an adhocracy—the term being a combination of ad hoc to indicate reactive
behaviour and bureaucracy to indicate structure. Adhocracies come into being when
people agree to work together for the duration of a specific project. Organisations are
increasingly reducing the levels of hierarchy in their structures to increase efficiencies
and reduce labour costs. This means that senior managers move closer to the core
processes of the organisation. This also increases the span of control of individuals within
the organisation as they become individually responsible for more activity.

Strategic leadership
Strategic leaders are generally responsible for large organizations and may influence
several thousand to hundreds of thousands of people. They establish organizational
structure, allocate resources, and communicate strategic vision.
Strategic leaders work in an uncertain environment on highly complex problems that
affect and are affected by events and organizations outside their own.
Strategic leaders apply many of the same leadership skills and actions they mastered as
direct and organizational leaders; however, strategic leadership requires others that are
more complex and indirectly applied.
Strategic leaders, like direct and organizational leaders, process information quickly,
assess alternatives based on incomplete data, make decisions, and generate support.
However, strategic leaders‘ decisions affect more people, commit more resources, and
have wider-ranging consequences in both space and time than do decisions of
organizational and direct leaders.
Strategic leaders often do not see their ideas come to fruition during their "watch" and
their initiatives may take years to plan, prepare, and execute. In-process reviews (IPRs)
might not even begin until after the leader has left the job. This has important

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implications for long-range planning. On the other hand, some strategic decisions may
become a front-page headline of the next morning‘s newspaper.
Perhaps of paramount importance—because they exert influence primarily through
subordinates—strategic leaders must develop strong skills in picking and developing
good second-tier leaders.

Strategic Leadership provides the vision and direction for the growth and success of an
organization. To successfully deal with change, all executives need the skills and tools
for both strategy formulation and implementation. Managing change and ambiguity
requires strategic leaders who not only provide a sense of direction, but who can also
build ownership and alignment within their workgroups to implement change.

Managing culture in a global organizations

With ever increasing competition and desire to transcend national boundaries in the quest
of gaining profits and fame a need has arisen to develop an understanding and
acceptability towards different cultures and behaviors. Each firm focuses on modifying
the product or service it offers in accordance with the needs of its customers. Satisfying
customers to the maximum has overtaken the aim of maximizing profits to a large extent.
Most firms today believe in carrying out business which is based on customer satisfaction
as well as profit maximizing. The price determination of the products is being done in
such a manner so as to earn profits as well as deliver the quality desired by customers.
The underlying factor to foray into other nations depends on developing a clear
understanding of the culture of that country. Firms which understand the cultures in
which they do business will be better equipped to meet the needs of local consumers and
to successfully manage their global operations.

MANAGERIAL GUIDELINES FOR CROSS CULTURAL SUCCESS:

Cross-cultural proficiency helps managers connect with their foreign counterparts.

Seasoned managers attest to the importance of a deep knowledge of culture and language
in international business. Managers can achieve effective cross-cultural interaction by
keeping an open mind, being inquisitive, and not rushing to conclusions about others‘
behaviors. Experienced managers acquire relevant facts, skills, and knowledge to avoid
offensive or unacceptable behavior when interacting with foreign cultures. They undergo
cultural training that emphasizes observational skills and human relations techniques.
Skills are more important than pure information because skills can be transferred across
countries, while information tends to be country specific. Various resources are available
to managers for developing skills, including videotape courses, cross-cultural consultants,
and programs offered by governments, universities, and training institutes. Planning that
combines informal mentoring from experienced managers and formal training through
seminars and simulations abroad and at home go far in helping managers meet cross-
cultural challenges. Although every culture is unique, certain basic guidelines are
appropriate for consistent cross-cultural success. Let‘s review three guidelines managers
can follow in preparing for successful cross-cultural encounters.

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Guideline 1: Acquire factual and interpretive knowledge about the other culture,
and try to speak their language-
Successful managers acquire a base of knowledge about the values, attitudes, and
lifestyles of the cultures with which they interact. Managers study the political and
economic background of target countries—their history, current national affairs, and
perceptions about other cultures. Such knowledge facilitates understanding about the
partner‘s mindset, organization, and objectives. Decisions and events become
substantially easier to interpret. Sincere interest in the target culture helps establish trust
and respect, laying the foundation for open and productive relationships. Even modest
attempts to speak the local language are welcome. Higher levels of language proficiency
pave the way for acquiring competitive advantages. In the long run, managers who can
converse in multiple languages are more likely to negotiate successfully and have
positive business interactions than managers who speak only one language.
Guideline 2: Avoid cultural bias-
Perhaps the leading cause of culture-related problems is the ethnocentric assumptions
managers may unconsciously hold. Problems arise when managers assume that foreigners
think and behave just like the folks back home. Ethnocentric assumptions lead to poor
business strategies in both planning and execution. They distort communications with
foreigners. Managers new to international business often find the behavior of a foreigner
hard to explain. They may perceive the other‘s behavior as odd and perhaps improper.
For example, it is easy to be offended when our foreign counterpart does not appreciate
our food, history, sports, or entertainment, or is otherwise inconsiderate. This situation
may interfere with the manager‘s ability to interact effectively with the foreigner, even
leading to communication breakdown. In this way, cultural bias can be a significant
barrier to successful interpersonal communication. A person‘s own culture conditions
how he or she reacts to different values, behavior, or systems. Most people unconsciously
assume that people in other cultures experience the world as they do. They view their
own culture as the norm—everything else may seem strange. This is known as the self-
reference criterion—the tendency to view other cultures through the lens of one‘s own
culture. Understanding the self-reference criterion is a critical first step to avoiding
cultural bias and ethnocentric reactions.
Critical incident analysis (CIA) refers to an analytical method for analyzing awkward
situations in cross-cultural interactions by developing empathy for other points of view. It
is an approach to avoiding the trap of self-reference criterion in cross-cultural encounters.
Critical incident analysis encourages a more objective reaction to cultural differences by
helping managers develop empathy for other points of view.
Guideline 3: Develop cross-cultural skills-
Working effectively with counterparts from other cultures requires an investment in your
professional development. Each culture has its own ways of carrying out business
transactions, negotiations, and dispute resolution. As an example, you will be exposed to
high levels of ambiguity; concepts and relationships that can be understood in a variety of
ways. One must make an effort to gain cross-cultural proficiency to be successful in
international business. Cross-cultural proficiency is characterized by four key personality
traits:
• Tolerance for ambiguity—the ability to tolerate uncertainty and apparent lack of
clarity in the thinking and actions of others.
• Perceptiveness—the ability to closely observe and appreciate subtle information in the
speech and behavior of others.

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• Valuing personal relationships—the ability to recognize the importance of
interpersonal relationships, which are often much more important than achieving one-
time goals or winning arguments.
• Flexibility and adaptability—the ability to be creative in devising innovative
solutions, to be open-minded about outcomes, and to show grace under pressure.
Managers with this view believe they can understand and accommodate similarities and
differences among cultures. One way for managers to determine the skills they need to
approach cultural issues is to measure their cultural intelligence. Cultural intelligence
(CQ) is a person‘s capability to function effectively in situations characterized by cultural
diversity. It focuses on specific capabilities that are important for high-quality personal
relationships and effectiveness in culturally diverse settings and work groups.

Strategic evaluation and control:

The final stage in strategic management is strategy evaluation and control. All strategies
are subject to future modification because internal and external factors are constantly
changing. In the strategy evaluation and control process managers determine whether the
chosen strategy is achieving the organization's objectives. The fundamental strategy
evaluation and control activities are: reviewing internal and external factors that are the
bases for current strategies, measuring performance, and taking corrective actions.

As soon as we mention evaluation and control some ideas will spring into your mind.
Stop for a moment to think of the controls in your work environment. Below are some
ideas of control for a master.
Our discussions will focus on the process of control and strategic control, but the
example should get you thinking about the types of things that represent managerial
control.
As we mentioned in the overview, evaluation and control play a central role in strategic
management. Their role is to critically assess how well things are going at every phase of
the strategic management process and to take whatever action is necessary to improve
performance.
The terms ‗evaluation‘ and ‗control‘, although almost always appearing in tandem, are
not necessarily the same thing. The figure below shows the relationship between
evaluation and control, and the role they play in the strategic management process.

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We can see that as strategic managers, we must be able to exercise proper control over
the strategic management process; that is, we must know how well our strategic plans are
formulated and implemented, and where necessary, what corrective action can be taken to
improve performance. Finding out what is going on is what evaluation is all about. It
means collecting information about how well the strategic plan is progressing. Once we
have the evaluation results, then we must decide on the appropriate action. If, according
to our evaluation, everything is going well, then we have no problem; all we need to do is
to continue doing what we are doing (or try to do better!). However, if our evaluation
shows that some things are not going well, then we have to take care of these trouble
spots and eliminate them. Are our goals, objectives and/or implementation plans so
ambitious that they cannot be achieved? Then perhaps we should be more realistic and
bring them down to earth. Are our people not well enough prepared to follow the
implementation process? Then we may have to prepare job aids or give training.
Evaluation is really just a part of the overall control process, but it is a very important
part. Without it, managers may end up making the wrong decisions. Because of this close
relationship between evaluation and control, it is common to talk of them as though they
were one and the same thing.

Benefits of strategic evaluation and control

What are the main benefits of strategic evaluation and control? There are three:
• They provide direction. They enable management to make sure that the organisation is
heading in the right direction and that corrective action is taken where needed.

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• They provide guidance to everybody. Everyone within the organisation, both managers
and workers alike, learn what is happening, how their performance compares with what is
expected, and what needs to be done to keep up the good work or improve performance.
• They inspire confidence. Information about good performance inspires confidence in
everybody. Those within the organisation are likely to be more motivated to maintain and
achieve better performance in order to keep up their track record. Those outside –
customers, government authorities, shareholders – are likely to be impressed with the
good performance.

How the process works

The way the evaluation and control process works is quite straightforward: set objectives,
evaluate actual performance against the objectives, and, based on the evaluation, take
whatever action is necessary (see figure below).

Step 1: Setting objectives-

Essentially, this involves looking at strategic targets. These could be your strategic goals
and objectives, or operational plans and programs that have been set up to meet the goals
and objectives while ensuring that they have measurable outcomes. The difficulty in
setting objectives lies not so much in specifying the outcomes themselves as in (a)
identifying those areas where performance objectives should be set and (b) evaluating
whether the level of performance set is appropriate.

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To set objectives properly, the first thing to do is to establish which areas require
performance objectives. Start with the big picture, then narrow down to the most
essential:
What specific things must be done to ensure the success of the strategic plan?
Of these, which are the most important?
Those that are identified as most important then become the areas where objectives
should be set.
Another equally important consideration when setting objectives is determining whether
they are realistic and attainable. To guard against this, a concept called benchmarking can
be a useful tool. Benchmarking simply means finding out how well your main
competitors are doing and comparing your performance against theirs. In this way, you
can set targets that equal, or are better than, what the competition is offering.
When setting performance objectives, also bear in mind these other useful pointers:
Objectives should focus on three main areas of performance:
– how people perform
– how equipment functions
– how money is used
To make sure that objectives fully describe the type of performance required, try
viewing performance along five dimensions:
– quantity: volume of work completed (number of tasks completed, number
of units sold, volume of money spent etc)
– quality: how well a task was done (number of satisfied customers, number
of rejects/repeats or things that had to be redone etc)
– cooperation: working well with others, providing support where needed
(interdepartmental sharing of resources and personnel, trading information
etc)
– dependability: doing a task according to expectations (completed work on
time and when needed, reduced number of sick days, etc.)
– creativity: finding new or better ways of doing things (coming up with
new ideas on how to increase revenue, reduce cost or complete a task, etc)
Good performance objectives should always be SMART. That is, they should be:
Specific: a specific area of improvement is targeted for
Measurable: some indicator of when it is complete
Assignable: someone is responsible for its achievement
Realistic: the level of performance expected, given the resources
Time-related: when the task should be completed by

Step 2 &3: Evaluating objective and taking action-

The second and third steps in the evaluation and control process, evaluating objectives
and taking action, tend not to be as problematic as the first. Once the appropriate

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objectives are set, the next step is to carry out the evaluation. This involves (a)
determining the types and sources of information required to compare actual performance
against the standard, (b) collecting the information, and (c) based on the information
collected, doing a comparative analysis. Once done, the final step is to determine what
action is necessary. Is everything fine? Then keep up the good work and continue
monitoring. Have any problem areas cropped up? Then some corrective action must be
taken to ensure things remain (or go back) on track.
Production, sales, expense and manufacturing figures and turnaround times are
commonly collected. These are often presented in daily, weekly, monthly and twice-
yearly totals.
In most activities some variation can be expected between set objectives and actual
performance. Therefore it is critical to determine the acceptable degree of deviation from
the standard.

Having determined that there has been a deviation from objectives one has two options.
Correct the actual performance (of equipment or human resources).
If the source of the deviation is inadequate performance you have a number of options.
For example, you may change your section‘s strategy or how you structure your section;
you may alter your compensation or remuneration practices; you may introduce training
programs or new technologies; or you may redesign jobs.
Revise the criteria of performance or the objectives set.
You may determine that one or more of the original objectives were unrealistic or
inappropriate. In this case it is the objectives, and not the performance, that need to be
altered.

Strategic Control:

Strategic control is concerned with tracking the strategy as it is being implemented,

detecting any problems areas or potential problem areas, and making any necessary
adjustments.

Newman and Logan use the term "steering control" to highlight some important
characteristics of strategic control Ordinarily, a significant time span occurs between
initial implementation of a strategy and achievement of its intended results. During that
time, numerous projects are undertaken, investments are made, and actions are
undertaken to implement the new strategy.

Also the environmental situation and the firm's internal situation are developing and
evolving. Strategic controls are necessary to steer the firm through these events. They
must provide some means of correcting the directions on the basis of intermediate
performance and new information.

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The Importance Of Strategic Control
Henry Mintzberg,one of the foremost theorists in the area of strategic management, tells
us that no matter how well the organization plans its strategy, a different strategy may
emerge.

Starting with the intended or planned strategies, he related the five types of strategies in
the following manner:

1. Intended strategies that get realized; these may be called deliberate strategies.
2. Intended strategies that do get realized; these may be called unrealized strategies.
3. Realized strategies that were never intended; these may be called emergent
strategies.

Recognizing the number of different ways that intended and realized strategies may differ
underscores the importance of evaluation and control systems so that the firm can
monitor its performance and take corrective action if the actual performance differs from
the intended strategies and planned results.

Management Control

Where management control is imposed, it functions within the framework established by

the strategy. Normally these objectives (standards) are established for major subsystems
within the organization, such as SBUs, projects, products, functions, and responsibility
centers.

Typical management control measures include ROI, residual income, cost, product
quality, and so on. These control measures are essentially summations of operational
control measures. Corrective action may involve very minor or very major changes in the
strategy.

Operating Control
Operational control systems are designed to ensure that day-to-day actions are consistent
with established plans and objectives. It focuses on events in a recent period. Operational
control systems are derived from the requirements of the management control system.

Corrective action is taken where performance does not meet standards. This action may
involve training, motivation, leadership, discipline, or termination.

Differences Between Strategic And Operational Control

The differences between strategic and operational control are highlighted by reference to
a general definition of management control: "Management control is the set of
measurement, analysis, and action decisions required for the timely management of
the continuing operation of a process".

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Measurement:

Strategic control requires data from more sources. The typical operational
control problem uses data from very few sources.
Strategic control requires more data from external sources. Strategic
decisions are normally taken with regard to the external environment as opposed
to internal operating factors.
Strategic control are oriented to the future. This is in contrast to operational
control decisions in which control data give rise to immediate decisions that have
immediate impacts.
Strategic control is more concerned with measuring the accuracy of the
decision premise. Operating decisions tend to be concerned with the quantitative
value of certain outcomes.
Strategic control standards are based on external factors. Measurement
standards for operating problems can be established fairly by past performance on
similar products or by similar operations currently being performed.
Strategic control relies on variable reporting interval. The typical operating
measurement is concerned with operations over some period of time: pieces per
week, profit per quarter, and the like.

Analysis:
Strategic control models are less precise. This is in contrast to operational
control models, which are generally very precise in the narrow domain they apply.
Strategic control models are less formal. The models that govern the
considerations in a strategic control problem are much more intuitive, therefore,
less formal.
The principal variables in a strategic control model are structural. In strategic
control, the whole structure of the problem, as represented by the model, is likely
to vary, not just the values of the parameters.
The key need in analysis for strategic control is model flexibility. This is in
contrast to operating control, for which efficient quantitative computation is
usually most desirable.
The key activity in management control analysis is alternative generation.
This is different from the operational control problem, in which in many cases all
control alternatives have been specified in advance. The key analysis step in
operations is to discover exactly what happened.
The key skill required for management control analysis is creativity. In
operational control, by contrast, the formal review of outcomes to discover causes
means that they skill required is the ability to do technical, even statistical,
analysis of the data received.

Action:
The relationship between action and outcome is weaker in strategic control.
This is not surprising, as the most desirable area for control in strategic problems -
the environment -is the least subject to direct action.

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 The key action variables in strategic control are organizational. In the
operational control problem, technical factors such as labor levels, production
levels, choice of materials, and the like are the predominant control levels.
Alternative actions in strategic control are less easy to choose in advance. In
strategic control problem, it is possible to choose all possible action responses to
received data in advance. In an operational control problem, the few responses
possible can usually all be worked out before any operating data received.
The worst failing in strategic control is omitting a worthwhile action. In
operating control, the most typical sins are those of omissions (e.g., complaints
about too many people employed, too many defects, and too much inventory). In
the strategic control problem, sins of omission are much more serious (e.g., not
moving into a business opportunity when it presents itself, not undertaking a
particular social program, not applying resources to meet that challenges in the
best fashion).
The time for strategic control is longer. The period in which control has an
impact is longer for strategic problems that for operating problems.
The timing of strategic control is events oriented. By contrast, operating
decisions tend to be made on a periodic basis, and they are usually measured
accordingly.
Strategic control has little repetition. Not even the structure is the same as past
problems of a like kind, much less the technical details. Operating problems, by
way of contrast, tend to repeat their structure.

Implications For Information Systems

Strategic control requires a greater variety of data types. Operating control
problems typically have a smaller variety of data.
The total volume of data required for strategic control is smaller. On the other
hand, perhaps thousands of pieces of data of each type are required for some of
operating problems (e.g., the payroll processing of even a small organization).
Strategic control data are more aggregated. Operating data are used at the most
detailed at transaction level.
Strategic control data are less accurate. Operating data generally need to be as
accurate as possible.
The most important strategic control information is structural. Unlike the
operational control are, the values of the technical variables are only of secondary
importance.
The receipt of data for strategic control is more sporadic. Data for strategic
problems are received sporadically as events take place.
Strategic control data are less processable by computer. The strategic control
that arise in the environment rather than within the organization are generally not
so easily available. For the most part, such data need not be computerized. It does
imply that any computerization of strategic control tools must consider the
important step of capturing necessary in machine-readable form.
The key decision in information for strategic control is what data to save. The
principal problem in operating control information systems design is the
technological problem of efficiently capturing and retrieving data.

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Implications For Controlling Formal Plans
Contingency plans are less possible in strategic control. The whole idea of
contingency plans is much more difficult in the strategic arena. It is more difficult
to generate all possible actions ahead of time in a strategic problem, because the
alternatives are too numerous and too complex.
Triggering contingency planning is more important in strategic control.
Because of this difficulty in making contingency plans, triggering an examination
of alternatives when things do not go according to plan becomes much more
important.
Preprogrammed variance analysis is less possible in strategic control. For an
operational control model might be possible that the computer performs all
possible variance analyses (in the accounting sense). For strategic control it is
both difficult technically and impossible practically.
A variance inquiry system is more necessary in strategic control. It seems
important to have an inquiry system linked to the formal planning model with
which combinations of deviations from plans can be explored by the human
operator.
A variance inquiry language is more necessary in strategic control. Some sort
of language in which the human can do variance inquiries is highly desirable in
the area of strategic control.
An augmented formal planning system in more necessary in strategic
control. A formal planning system should be augmented with the variance inquiry
language described. This would permit the same system that was used to generate
the plan to be used in controlling that plan, leading to both ease of additional
analysis as well, as to consistency with the plan being controlling.

Balance Score Card

The balanced scorecard is a strategic planning and management system that is used
extensively in business and industry, government, and nonprofit organizations worldwide
to align business activities to the vision and strategy of the organization, improve internal
and external communications, and monitor organization performance against strategic
goals. It was originated by Drs. Robert Kaplan (Harvard Business School) and David
Norton as a performance measurement framework that added strategic non-financial
performance measures to traditional financial metrics to give managers and executives a
more 'balanced' view of organizational performance. While the phrase balanced
scorecard was coined in the early 1990s, the roots of the this type of approach are deep,
and include the pioneering work of General Electric on performance measurement
reporting in the 1950‘s and the work of French process engineers (who created the
Tableau de Bord – literally, a "dashboard" of performance measures) in the early part of
the 20th century.

The balanced scorecard has evolved from its early use as a simple performance
measurement framework to a full strategic planning and management system. The ―new‖
balanced scorecard transforms an organization‘s strategic plan from an attractive but
passive document into the "marching orders" for the organization on a daily basis. It

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provides a framework that not only provides performance measurements, but helps
planners identify what should be done and measured. It enables executives to truly
execute their strategies.
This new approach to strategic management was first detailed in a series of articles and
books by Drs. Kaplan and Norton. Recognizing some of the weaknesses and vagueness
of previous management approaches, the balanced scorecard approach provides a clear
prescription as to what companies should measure in order to 'balance' the financial
perspective. The balanced scorecard is a management system (not only a measurement
system) that enables organizations to clarify their vision and strategy and translate them
into action. It provides feedback around both the internal business processes and external
outcomes in order to continuously improve strategic performance and results. When fully
deployed, the balanced scorecard transforms strategic planning from an academic
exercise into the nerve center of an enterprise.

Kaplan and Norton describe the innovation of the balanced scorecard as follows:
"The balanced scorecard retains traditional financial measures. But financial measures
tell the story of past events, an adequate story for industrial age companies for which
investments in long-term capabilities and customer relationships were not critical for
success. These financial measures are inadequate, however, for guiding and evaluating
the journey that information age companies must make to create future value through
investment in customers, suppliers, employees, processes, technology, and innovation."

Adapted from Robert S. Kaplan and David P. Norton, ―Using the Balanced Scorecard as
a Strategic Management System,‖ Harvard Business Review (January-February 1996):
76.

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Perspectives
The balanced scorecard suggests that we view the organization from four perspectives,
and to develop metrics, collect data and analyze it relative to each of these perspectives:

Financial Measures Are Insufficient

While financial accounting is suited to the tracking of physical assets such as
manufacturing equipment and inventory, it is less capable of providing useful reports in
environments with a large intangible asset base. As intangible assets constitute an ever-
increasing proportion of a company's market value, there is an increase in the need for
measures that better report such assets as loyal customers, proprietary processes, and
highly-skilled staff.
Consider the case of a company that is not profitable but that has a very large customer
base. Such a firm could be an attractive takeover target simply because the acquiring firm
wants access to those customers. It is not uncommon for a company to take over a
competitor with the plan to discontinue the competing product line and convert the
customer base to its own products and services. The balance sheets of such takeover
targets do not reflect the value of the customers who nonetheless are worth something to
the acquiring firm. Clearly, additional measures are needed for such intangibles.

Scorecard Measures are Limited in Number

The Balanced Scorecard is more than a collection of measures used to identify problems.
It is a system that integrates a firm's strategy with a purposely limited number of key
metrics. Simply adding new metrics to the financial ones could result in hundreds of
measures and would create information overload.
To avoid this problem, the Balanced Scorecard focuses on four major areas of
performance and a limited number of metrics within those areas. The objectives within
the four perspectives are carefully selected and are firm specific. To avoid information
overload, the total number of measures should be limited to somewhere between 15 and
20, or three to four measures for each of the four perspectives. These measures are
selected as the ones deemed to be critical in achieving breakthrough competitive
performance; they essentially define what is meant by "performance".

A Chain of Cause-and-Effect Relationships

Before the Balanced Scorecard, some companies already used a collection of both
financial and non-financial measures of critical performance indicators. However, a well-
designed Balanced Scorecard is different from such a system in that the four BSC
perspectives form a chain of cause-and-effect relationships. For example, learning and
growth lead to better business processes that result in higher customer loyalty and thus a
higher return on capital employed (ROCE).
Effectively, the cause-and-effect relationships illustrate the hypothesis behind the
organization's strategy. The measures reflect a chain of performance drivers that
determine the effectiveness of the strategy implementation.

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Objectives, Measures, Targets and Initiatives

Within each of the Balanced Scorecard financial, customer, internal process, and learning
perspectives, the firm must define the following:
Strategic objectives - what the strategy is to achieve in that perspective.
Measures - how progress for that particular objective will be measured.
Targets - the target value sought for each measure.
Initiatives - what will be done to facilitate the reaching of the target.
The following sections provide examples of some objectives and measures for the four
perspectives.

Financial Perspective
The financial perspective addresses the question of how shareholders view the firm and
which financial goals are desired from the shareholder's perspective. The specific goals
depend on the company's stage in the business life cycle.
For example:
Growth stage - goal is growth, such as revenue growth rate
Sustain stage - goal is profitability, such ROE, ROCE, and EVA
Harvest stage - goal is cash flow and reduction in capital requirements
The following table outlines some examples of financial metrics:

Objective Specific Measure

Growth Revenue growth

Profitability Return on equity

Cost leadership Unit cost

Customer Perspective
The customer perspective addresses the question of how the firm is viewed by its
customers and how well the firm is serving its targeted customers in order to meet the
financial objectives. Generally, customers view the firm in terms of time, quality,
performance, and cost. Most customer objectives fall into one of those four categories.
The following table outlines some examples of specific customer objectives and
measures:
Objective Specific Measure

New products % of sales from new products

Responsive supply Ontime delivery

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 To be preferred supplier Share of key accounts

Customer partnerships Number of cooperative efforts

Internal Process Perspective

Internal business process objectives address the question of which processes are most
critical for satisfying customers and shareholders. These are the processes in which the
firm must concentrate its efforts to excel. The following table outlines some examples of
process objectives and measures:

Objective Specific Measure

Manufacturing excellence Cycle time, yield

Increase design productivity Engineering efficiency

Reduce product launch delays Actual launch date vs. plan

Learning and Growth Perspective

Learning and growth metrics address the question of how the firm must learn, improve,
and innovate in order to meet its objectives. Much of this perspective is employee-
centered. The following table outlines some examples of learning and growth measures:

Objective Specific Measure

Manufacturing learning Time to new process maturity

Product focus % of products representing 80% of sales

Time to market Time compared to that of competitors

Achieving Strategic Alignment throughout the Organization

Whereas strategy is articulated in terms meaningful to top management, to be
implemented it must be translated into objectives and measures that are actionable at
lower levels in the organization. The Balanced Scorecard can be cascaded to make the
translation of strategy possible.
While top level objectives may be expressed in terms of growth and profitability, these
goals get translated into more concrete terms as they progress down the organization and
each manager at the next lower level develops objectives and measures that support the
next higher level. For example, increased profitability might get translated into lower unit
cost, which then gets translated into better calibration of the equipment by the workers on
the shop floor. Ultimately, achievement of scorecard objectives would be rewarded by the

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employee compensation system. The Balanced Scorecard can be cascaded in this manner
to align the strategy thoughout the organization.
The Process of Building a Balanced Scorecard
While there are many ways to develop a Balanced Scorecard, Kaplan and Norton defined
a four-step process that has been used across a wide range of organizations.
1. Define the measurement architecture - When a company initially introduces the
Balanced Scorecard, it is more manageable to apply it on the strategic business
unit level rather than the corporate level. However, interactions must be
considered in order to avoid optimizing the results of one business unit at the
expense of others.
2. Specify strategic objectives - The top three or four objectives for each
perspective are agreed upon. Potential measures are identified for each objective.
3. Choose strategic measures - Measures that are closely related to the actual
performance drivers are selected for evaluating the progress made toward
achieving the objectives.
4. Develop the implementation plan - Target values are assigned to the measures.
An information system is developed to link the top level metrics to lower-level
operational measures. The scorecard is integrated into the management system.
Balanced Scorecard Benefits
Some of the benefits of the Balanced Scorecard system include:
Translation of strategy into measurable parameters.
Communication of the strategy to everybody in the firm.
Alignment of individual goals with the firm's strategic objectives - the BSC
recognizes that the selected measures influence the behavior of employees.
Feedback of implementation results to the strategic planning process.
Since its beginnings as a peformance measurement system, the Balanced Scorecard has
evolved into a strategy implementation system that not only measures performance but
also describes, communicates, and aligns the strategy throughout the organization.

Potential Pitfalls
The following are potential pitfalls that should be avoided when implementing the
Balanced Scorecard:
Lack of a well-defined strategy: The Balanced Scorecard relies on a well-defined
strategy and an understanding of the linkages between strategic objectives and the
metrics. Without this foundation, the implementation of the Balanced Scorecard is
unlikely to be successful.
Using only lagging measures: Many managers believe that they will reap the
benefits of the Balanced Scorecard by using a wide range of non-financial
measures. However, care should be taken to identify not only lagging measures
that describe past performance, but also leading measures that can be used to plan
for future performance.
Use of generic metrics: It usually is not sufficient simply to adopt the metrics used
by other successful firms. Each firm should put forth the effort to identify the
measures that are appropriate for its own strategy and competitive position.

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 END CHAPTER QUIZ:

Q.1 Operationalising strategy depends on

(a)Structure

(b)Culture

(c)Leadership

(d)All of the above

Q.2 Strategic leadership

(a) establish organizational structure

(b) Disallocate resources

(c)Bars communication

(d) None of the above

Q.3 To manage business across cultures, its important to

(a) Acquire factual and interpretive knowledge about the other culture

(b) Avoid cultural bias

(c) Develop cross-cultural skills

(d) All of the above

Q.4 Strategic evaluation and control

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(a) Is the first step in strategic management

(b) Is the last step in Strategic management

(c) is of no importance to strategic management

(d)none of the above

Q.5 The benefit of strategic management control is

(a) to increase losses

(b) to increase costs

(c) To provide guidance and direction

(d)to increase prices

Q.6 Management Control

(a) functions within the framework established by the strategy

(b) are designed to ensure that day-to-day actions are consistent with
established plans and objectives

(c) focuses on events in a recent period

(d) All of the above

Q.7 Strategic control requires

(a) data from more sources

(b) oriented to the future

(c) variable reporting interval

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(d)All of the above

Q.8 The balanced scorecard is

(a) a strategic planning and management system

(b) used extensively in business and industry, government, and nonprofit

organizations

(c) used to align business activities to the vision and strategy of the
organization

(d) All of the above

Q.9 In customer perspective of Balance Scorecard, customers view the firm

in terms of

(a) Time

(b) Quality

(c) Financial objectives

(d)All of the above

Q.10 Balanced Scorecard approach may fail because

(a) Lack of a well-defined strategy

(b) Using only lagging measures

(c) Use of generic metrics

(d) All of the above

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 KEY TO END CHAPTER QUIZZES
Chapter –1

1 (a); 2(b);3 (b); 4(c); 5(d); 6(d); 7(a); 8 (a); 9(c);10(d)

Chapter –2

1 (b); 2(b);3 (c); 4(d); 5(a); 6(b); 7(d); 8 (c); 9(d);10(c)

Chapter –3

1 (d); 2(d);3 (a); 4(a); 5(d); 6(a); 7(a); 8 (d); 9(c);10(d)

Chapter –4

1 (c); 2(a);3 (c); 4(b); 5(a); 6(d); 7(d); 8 (d); 9(d);10(d)

Chapter –5

1 (a); 2(c);3 (a); 4(d); 5(b); 6(d); 7(b); 8 (d); 9(c);10(b)

Chapter –6

1 (c); 2(d);3 (d); 4(a); 5(b); 6(d); 7(b); 8 (b); 9(d);10(b)

Chapter –7

1 (a); 2(c);3 (a); 4(d); 5(c); 6(d); 7(a); 8 (d); 9(d);10(c)

Chapter –8

1 (d); 2(a);3 (d); 4(b); 5(c); 6(a); 7(d); 8 (d); 9(d);10(d)

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 BIBLOGRAPHY
Kamel Mellahi, J George Frynas & Paul N. Finlay (2005), Global Strategic
Management, Oxford University Press

Essentials of Strategic Management, David Hunger & Thomas. L. Wheelen

Pearce John A & Robinson Richard B, Strategic Management: Formulation,

Implementation and Control, McGraw Hill, 11th Edition

www.valuebasedmanagement.net
www.strategicmanagement.net
http://www.csmweb.com/
http://www.reflectionpoint.com/Strategic%20Planning/successful_strategic_mana
gement.htm

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Reference Books/ e-booksource /links for reference
Kamel Mellahi, J George Frynas & Paul N. Finlay (2005), Global Strategic
Management, Oxford University Press

Lynch, R. (2005) "Corporate Strategy" (4th edition), Prentice Hall, UK

Purcell, J. and Boxal, P. (2003) "Strategy and Human Resource Management

(Management, Work and Organisations)", Palgrave Macmillan, UK

Pearce John A & Robinson Richard B, Strategic Management: Formulation,

Implementation and Control, McGraw Hill, 11th Edition

Johnson & Scholes, 2008, Exploring Strategic Change, Pearson Higher

Education, 3rd Edition

http://www.quickmba.com/

http://www.introduction-to-management.24xls.com/en201

www.valuebasedmanagement.net
www.strategicmanagement.net
http://www.csmweb.com/
http://www.reflectionpoint.com/Strategic%20Planning/successful_strategic_mana
gement.htm

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