FACULTY OF MANAGEMENT STUDIES

DEPARTMENT OF ORGANIZATIONAL STUDIES

BACHELOR OF MANAGEMENT STUDIES – LEVEL 06
THE OPEN
OSU6501 / MCU4201 – STRATEGIC MANAGEMENT
UNIVERSITY
OF SRI LANKA

VOLUME II

STRATEGIC
MANAGEMENT
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LESSON 6

STRATEGY EVALUATION AND CONTROL

Contents
6.1 Introduction
6.2 Organizations Control and Strategic Control
a. Broad View of Organizational Control
b. Definition of Control
c. General Characteristics of the Control Process
6.3 Application of Strategic Control
a. Definition of Strategic Control
b. Purpose of Strategic Control
6.4 Process of strategic control
a. Step 1 Measure Organizational Performance
6.4.1 Strategic audit
6.4.2 Strategic Audit Measurement Methods
6.4.2.1 Qualitative Organizational Measurements
6.4.2.2 Quantitative Organizational Measurements
b. Step 2: Compare Organizational Performance to Goals and
Standards
c. Step 3: Take Necessary Corrective Action

6.5 Information for Strategic Control

a. Management Information System (MIS)
6.5.1 MIS and Management Levels
6.5.2 Symptoms of an Inadequate MIS
b. Management Decision Support System (MDSS)
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6.6 Top Managers and Strategic Control

6.7 Objectives
6.8 Module Summary
6.9 Key Terms
6.10 Review Questions
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6.1 INTRODUCTION

In the previous lessons you have looked at the strategic management process with a focus
on conducting and environmental analysis, establishing organizational direction,
formulating and implementing strategy. This unit deals with a major step in the strategic
management process relating to strategic control. It consists of ensuring that planned
strategies work, taking corrective action, needs arise to ensure success of the system.

In this regard you will examine the salience of organizational control with a view to
understand the context in which more specific strategic control issues develop. You will
then proceed to define strategic control and outline the purposes to the strategic control
process. You will study how the strategic audit can measure organizational performance,
and differentiate between qualitative and quantitative measures. Using this knowledge we
can discuss ways to compare actual organizational performance to goals and standards,
and to explain how to determine how corrective action is appropriate.

This will enable you to explore the link between strategic control and management
information systems. Finally, you will be able to examine the role of top management in
making the strategic control process successful.

6.2 ORGANIZATION CONTROL AND STRATEGIC CONTROL

This section will deal with organizational control in Strategic Management

a. Organizational Control
Controlling an organization includes monitoring, evaluating and improving
various activities that take place within an organization. We will first
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recall the definition of the term control, and then outline the general
characteristics of the control process.

b. Definition of Control (for a manager)

Control consists of making something happen the way it was planned to
take place.
Effective control requires that managers have a clear understanding of the
intended results of a particular action. Only then can they ascertain
whether the anticipated results are occurring and make any necessary
changes to ensure that the desired results do occur. Managers use strategic
control to ensure that plans become reality, so they need a clear
understanding of what reality is planned.

c. General Characteristics of the Control Process

Managers actually control by following three-step procedure for control
measure performance, compare measured performance to standards, and
make corrective action to ensure that planned events actually materialize.

These stated steps are broad recommendations for overall organizational control. More
specific types of organizational control (such as production control, inventory control,
strategic control, and quality control) are based on these same three steps, tailored to the
demands of the specific type of control. This model implies that when performance
measurements differ significantly from standard or planned outcomes, managers take
corrective action to ensure that expected outcomes actually occur. On the other hand,
when performance does measure up to standard or planned outcomes, no corrective action
is necessary, and work continues without interference.

6.3 APPLICATION OF STRATEGIC CONTROL

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Having a general understanding of control managers apply it in organizations, we are

now ready to discuss strategic control specifically. Let us first define strategic control,
then explain why strategic control is important, and finally trace the steps involved in the
process of strategic control.

Strategic Control is a special type of organizational control that focuses on

monitoring and evaluating the strategic management process to make sure that it
functions properly.

a. Definition of Strategic Control

In essence, strategic control ensures that all outcomes planned during the strategic
management process will be materialized.

b. Purposes of Strategic Control

The most fundamental purpose of exercising strategic control is to help top managers
achieve organizational goals by monitoring and evaluating the strategic management
process. As you have seen, strategic management process encompasses assessment of
organizational environments (environmental analysis); establishment of organizational
vision, mission, and goals (establishing organizational direction); development of ways to
deal with competitors in order to reach these goals and fulfill the organization’s mission
(strategy formulation) and setting a plan to translate organizational strategy into action
(strategy implementation). Strategic control provides feedback that is critical for
determining whether all steps of the strategic management process are appropriate,
compatible, and functioning properly.

6.4THE PROCESS OF STRATEGIC CONTROL

Three distinct but related steps comprise the strategic control process within an
organization. As they constitute a special type of organizational control, these steps are
closely related to the more general control model presented earlier. They include
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measuring organizational performance, comparing performance to goals and standards,

and taking necessary corrective actions.

a. Step 1 : Measure Organizational Performance

Before managers can plan actions to make the strategic management process more
effective, they must measure current organizational performance. In order to
understand performance measurements and how a manager can take such
measurements, you have to study two important topics: strategic audits and
strategic audit measurement methods.

6.4.1. Strategic Audit

A strategic audit is an examination and evaluation of organizational

operations affected by the strategic management process.

Such an audit may be very comprehensive, emphasizing all facts of a strategic

management process, or narrowly focuses, emphasizing only a single part of the
process, such as environmental analysis. In addition, the strategic audit can be
quite formal, adhering strictly to established organizational rules and procedures,
or quite informal, allowing managers wide discretion in deciding what
organizational measurements to take and when. Whether it is comprehensive or
focused, formal or informal, the strategic audit must work to integrate related
functions. To satisfy this requirement, strategic audits are often carried out by
cross functional teams of managers.

No single method can be prescribed for performing a strategic audit, and each
organization must design and implement its own audits to meet its own unique
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needs. Table 6.1 presents a worthwhile set of general guidelines on how to

conduct strategic audit.

6.4.2. Strategic Audit Measurement Methods

Managers measure organizational performance by several generally accepted
methods available and one way of categorizing these methods divides them into
two distinct types: qualitative and quantitative. Although this methodology is
useful for developing and understanding of strategic audit measurement methods,
a few methods do not fall neatly into one or the other of these categories – instead
they combine both types.

6.4.2.1. Qualitative Organizational Measurements

This type of measurement give organizational assessments in the form of non-

numerical data that are subjectively summarized and organized before any
conclusions are drawn on which to base strategic control action. Many
managers believe that the best qualitative organizational measurements are
simply answers to critical questions designed to reflect important facts of
organizational operations. An Aeymour Tilles detail has written an article on
the qualitative assessment of organizational performance. This article discusses
several important issues involving one small facet of organizational
performance: organizational routines that result in organizational strategy.

Tille, et al suggests several important questions to ask during qualitative organizational

measurement that focuses on organizational procedures to develop strategy.

1. Is organizational strategy internally consistent? Internal consistency relates to the

cumulative impact of various strategies on the organization. Do strategies serve
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conflicting purpose? According to tiles, a strategy must be judged not only by its
own effects, but also by its relationship to other organizational initiatives.

2. Is the organization’s strategy consistent with its environment? Organizational

strategy must make sense in the light of what is happening outside the organization.
Is organizational strategy consistent with pending or new government regulations,
changing consumer tastes, or trends in the labour supply? Most organizational
problems that arise from inconsistency between strategy and environment do not
reflect extreme difficulty in matching these two variables. However, such problems
emerge simply because organizations always do not consciously work to match
strategy to its environment.

3. Is the organizational strategy appropriate, with the given organizational resources?

Without appropriate resources one cannot make strategies work. Are the
organization’s resources sufficient to carry out a proposed strategy? Without enough
money, people, materials, or machines, it is senseless to pursue any strategy,
however well it may be planned.

4. Is organizational strategy too risky? Together, strategy and resources determine the
degree of risk the organization takes. Naturally, each organization must determine
the amount of risk (or potential for losing resources) it wishes to incur. In this area,
management must assess such issues as the total amount of resources a strategy
requires, the proportion of the organization’s resources that the strategy will
consume, and the time commitment the strategy demands.

5. Is the time horizon of the strategy appropriate? Every strategy is designed to

accomplish some organizational goal within a certain time period. Is the time
allotted for implementing the strategy and for reaching the related organizational
goals realistic and acceptable, given organizational circumstances? Managers must
ensure that time available to reach the goals and the time necessary to implement
the strategy are consistent. Inconsistency between these two variables can make it
possible to reach organizational goals in a satisfactory way.
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Qualitative measurement methods can be very useful, but their application mainly relies
on human judgement. Conclusions based on such methods must be drawn very carefully,
because this subjective judgement, if exercised incorrectly, could easily lead towards
wrongful judgment and render audit results invalid. Strategic control actions based on
invalid audit results will certainly limit the effectiveness and efficiency of the strategic
management process and could even become the primary reason for organizational
failure.

6.4.2.2. Quantitative Organizational Measurements

Quantitative organizational measurements give organizational assessments in the

form of numeric data summarized and organized before conclusions are drawn to
base strategic control action. Data gathered via such measures are generally easier to
summarize and organize than data gathered through more qualitative measurements.
Still interpreting or making sense of quantitative measurements and the corrective
actions they signal can be very difficult and highly subjective. Quantitative
measurements can evaluate the aspects such as number of units produced per time
period, production costs, production efficiency levels, levels of employee turnover
and absenteeism, sales and sales growth, net profits earned, dividends paid, return on
equity, market share, and earnings per share.

In practice, organizations use specially designed methods to quantitatively measure

its overall performance. The following are three measurements commonly used
under quantitative measurements.

1. Return on investment (ROI): This is the most common measure of

organizational performance.
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Recall what you have studied under the course on FINANCIAL

MANAGEMENT AND PROJECT APPRIASAL in the Level 5 courses of this
degree programme. It divides net income by total assets to evaluate the
relationship between the amount of income the firm generates and the amount of
assets needed to operate the organization. Naturally, an ROI value for one year
alone may not provide the manager with much useful information. However
comparing ROI values for consecutive years or consecutive years or consecutive
quarters, or to those of similar companies or competitors, generates a more
complete picture of organizational performance.

Managers must keep in mind several advantages and limitations of ROI as a

measure of organizational performance. However the limitations of ROI should
not discourage managers from using this measurement since it is a relatively
useful measure. Rather, managers must thoroughly understand the limitations
and supplement ROI with such other performance measures as needed.

2. Weighted Performance (Z) Score: This common quantitative measure

numerically weighs and sums five performance measures to arrive at an overall
score. The score becomes a basis for classifying firms as healthy and unlikely to
go bankrupt, or as sick and likely to go bankrupt. The formula is:

𝑍 + 1.2𝑋1 + 1.4𝑋2 + 3.3𝑋3 + 0.6𝑋4 + 1.0𝑋3

Here Z is defined as an index of overall financial health.

The Z score typically ranges from 5.0 to 10.0. According to research, a

score below 1.8 signals a relatively high probability of bankruptcy. Firms
that score above 3.0 have relatively low probabilities of likely. Firms that
score between 1.8 and 3.0 are in a grey area. Knowing and understanding
the Z score for a particular firm can give management an idea of financial
health of the firm and insights towards its improvements.
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3. Stakeholders ‘audit: Stakeholders are people who are interested in a

corporation’s activities because they are significantly affected by
accomplishment of the organization’s objectives. Organizational
stakeholders include.
* Stockholders interested in the appreciation of stock value and dividends,
* Unions interested in favorable wage rates and benefit packages.
* Creditors interested in the organization’s ability to pay its debts.
* Suppliers interested in retaining the organization as a customer
* Government units, who see organizations as tax payers contributing to the
costs of running a society.
* Social interest groups, such as consumer advocates and environmentalists,
and
* the organization’s customers.

In general, managers believe that one very useful measure of organizational

performance is a stake holder’s audit, a summary of the feedback generated by
stakeholder groups. The tone and content of such feedback can be an
extremely valuable indicator of organizational progress toward financial and
non-financial goals.

Activity

List five (ten?) stakeholder groups and each stakeholders measures to assess the short-run
and long-run impact they may have on organization’s performance.

The variety of ways to measure strategic performance, and the variety of environments in
which firms operate suggest that strategic control systems may differ from firm to firm.
These systems depend on the level of environmental turbulence (high or low) and a firm’s
ability to specify and measure, strategic control systems can be described as valuable.
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However, when turbulence is becomes high, control systems need greater flexibility to
remain valuable.

When firms have difficulty specifying and measuring precise strategic objectives, low
environmental turbulence calls for strategic controls that track a number of less precise
indicators of performance. When turbulence is high and precision difficult, strategic
control, though stull desirable, is problematic, due to changing external conditions that
quickly make strategic control systems obsolete. For example, the agricultural technology
industry in the 1990s finds it difficult to specify precise objectives in a highly turbulent
environment, because of global competitive conditions and cost effectiveness of Sri
Lankan agro farmers (and the changing political climate) with regard to low cost product
importation from countries where cost of living is low. (You are aware that the cost of
living in Sri Lanka artificially high due to high cost of prolonged war situation which
ended in 2009 but still the loans obtained during that period to balance the Government
budget are still being paid to various foreign and local financial institutions, and due to
same the underutilization of country resources).

As discussed above there are various ways to measure organizational performance.

Managers must establish and use the methods best suit their organization with all critical
areas targeted by goals, strategies and plans.

b. Step 2: Compare Organizational Performance to Goals and Standards

After taking measurements of organizational performance, managers must compare them
with two established benchmarks: goals and standards. Organizational goals are simply
the output of an earlier step of the strategic management process.

Organizational standards

• Are developed to reflect organizational goals

• They are yardsticks that place organizational performance in perspective
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From firm to firm the specific standards actually established by that companies differ. As
a rule, managers must develop standards in all performance areas that established
organizational goals.

Developed many years ago at General Electric, the following standards are typical of
those used by many firms in the 1990s.

(Robert W. Lewis, “Measuring, Reporting, and Appraising Results of Operations with

Reference to Goals, Plans, and budgets,” In Planning, Managing, and Measuring the
Business : A Case study of Management Planning and Control at General Electric
Company (New York : Controllership Foundation, 1995) for an interesting report that
details the paradox that an over-extensive pursuit of productivity may result in, see Shelly
Reese, “Pushing Productivity Past the Breaking Point” Business and Health, V15 n4,
April 1997, p.31-34).

1. Profitability standards – indicate how much profit General Electric would like to
make in a given time period.

2. Market position standards – indicate the percentage of a total product market that
the company would like to win from its competitors.

3. Productivity standards: indicate various acceptable rates at which final products

should be generated within the organization.

4. Product leadership standards – indicate levels of product innovation that would

make people view General Electric Products as leasers in the market. Innovation
is critical for long-run organization success.

5. Personnel development standards – list acceptable levels of progress in human

resource development area. Development of organization members in all areas is
critical to continued organizational success.
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6. Employee attitude standards – indicate attitudes that General Electric employees

should adopt. Not only are workers evaluated for the degree to which they project
these attitudes, but managers are evaluated for the extent to which they develop
them in their subordinates.

7. Public responsibility standards – indicate acceptable levels of activity within the

organization directed toward living up to social responsibilities.

8. Standards reflecting balance between short-range and long-range goals – indicate

the acceptable long-range and short-range goals and the relationships among them.
Organizations, feels that both long-run and short-run goals are necessary to
maintain a healthy and successful organization.

The process of standard setting has attracted a great deal of interest in the 1990s with the
popularity of the practice of benchmarking. In this control technique, a firm compares
one of its functions, say product design, with that of another firm known for world-class
excellence in that function, say 3M or DuPont.

c. Step 3: Take Necessary Corrective Action

Once you have collected organizational measurements and compared these measurements
to established goals and standards, then as a strategist you should be able to take
appropriate corrective action.

Corrective action is defined as a change in any organization’s operations to ensure that it

can more effectively and efficiently reach its goals and perform up to its established
standards.
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Correct action may be as simple as changing the price of a product or as complicated as a

boardroom struggle, which ends in the firing of the CEO.

Strategic control can also result in changes as in modifying the products a company offers
in the marketplace. In order to attract more customers Browns Group of Sri Lanka can be
sited as an example. It has taken corrective action to improve the design of its stores, its
array, and the market appeal of its advertising campaign.

A thorough understanding of the steps of the strategic control process and their
relationships to the major steps of the strategic management process should guide
corrective action.

When an organization has failed to meet appropriate organizational goals and standards so
that corrective action is necessary. In such situations the actions sought may include
attempting to improve organizational performance by focusing on one or more of the
major steps of the strategic management process. Of course, this analysis could include
improving the strategic management control process itself by enhancing the validity and
reliability of organizational performance measures.

In most situations, corrective action is not necessary if the organization is reaching its
goals and standards. However, management must not automatically assume that this is
the case. Goals and standards may have been set too low, in which case corrective action
should be taken to make them more challenging.

6.5INFORMATION FOR STRATEGIC CONTROL

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Successful strategic control requires valid and reliable information on various measures of
organizational performance. Reliable, timely, and valid information is the lifeblood of
successful strategic control.

To gather valid, reliable, and timely information, virtually every organization develops
and implements some type of formal information systems. Among these systems are
Management Information Systems (MISs) and Management Decision Support Systems
(MDSSs)

a. Management Information Systems (MIS)

A Management Information System is a formal, computer-assisted organizational

function designed to provide managers with information to help their decision making.

Although such information has many different uses a significant portion of it supports
strategic control. Let us look at MIS under the context of strategic control.

Once managers decide what information they need for strategic control, they must collect
and analyze appropriate data and disseminate the information this analysis yields to
appropriate organization members, usually top management. Next, management must
plan and implement strategic control activities in light of this information. Finally,
continuing feedback on the effect of implementing these activities, and on the functioning
of the MIS systems itself, must guide efforts to meet the information needs of strategic
control more effectively in the future.

6.5.1. MIS and Management Levels

Managers at various levels of the organizational hierarchy perform different kinds of

activities. Thus the MIS has to be flexible enough to provide various management levels
with the information they need to carry out their activities. (Recall the various activities
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performed by top, middle, and lower-level managers and their information requirements)
the strategic control and other strategic management tasks are the primary focus of top
management, but all management levels have some role in the strategic management
process, and the MIS should provide them the supportive information they need.

6.5.2. Symptoms of an Inadequate MIS

Since the effectiveness of the strategic control process depends largely on valid and
reliable organizational performance measures, managers must continually assess MIS
functioning to ensure that it meets strategic control needs. Most managers agree that they
must constantly watch for signals that an MIS is not operating effectively. Naturally,
once such symptoms are discovered, managers must take steps to solve whatever
problems that plague the MIS. Once these problems are eliminated, trouble symptoms
should disappear.

Sensing MIS related problems can be quite difficult, or it may be as simple as listening to
the comments of strategic control decision makers. These individuals may complain that
they have too much information of the wrong kind and not enough of the right kind, that
information is so dispersed throughout the company that they must struggle to gather
simple facts, that others sometimes suppress vital information for political reasons, or that
vital information often defies efforts to assess its accuracy and no one can provide
conformation. Managers may bluntly worry that the information they get may be moving
them in the wrong strategic direction at full speed.

In practice, however, it may be quite difficult to determine exactly what problems within
an organization are hampering the effectiveness of the MIS. Answering the following
questions may help the manager to pinpoint strategic control problems related to the MIS.

• Where and how do managers involved in the strategic control process get
information?
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• Can managers involved in strategic control make better use of their contacts to get
information?
• In what strategic control areas is the knowledge of these managers weakest, and
what information might help to minimize such weaknesses?
• Do managers involved in strategic control tent to act before receiving enough
information?
• Do manager involved in strategic control wait so long for information that
opportunities pass them by and they become bottlenecks?

b. Management Decision Support System (MDSS) or Executive Information Systems

(EIS)

Closely related to the MIS is the management decision support system (MDSS) (or
executive information system (EIS)).

A Management Decision Support System is an interdependent set of decision aids

that helps managers make relatively unstructured, perhaps nonrecurring decisions.

The computer (in conjunction with appropriate software) is the main element of the
MDSS, functioning as an analytical tool to assist in judgement decisions. The MDSS,
however, does not pretend to dictate the manager’s decision or impose solutions to
problems. Many managers use an MDSS to help them make strategic control
decisions and other types of strategic management decisions. For example, a
manager may consider how best to implement strategy within an organization by
determining all the different costs of various implementation alternatives. The
MDSS provides and organizes the information and the manager makes the decision
based on it.

The advancement of electronic and communications in microcomputers have made

MDSSs feasible and available to all managers. Continuing developments in
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information analysis software support more subjective decision making.

Contributing to the popularity of the MDSS information to top manages.

6.6 TOP MANAGERS AND STRATEGIC CONTROL

Top managers must understand strategic control and know how in order to take
actions implied by the strategic control process, since strategic management is
primarily the responsibility of top managers, and it is a critical ingredient of
successful strategic management. Therefore top managers must make a solid and
enduring commitment to establishing and using a strategic control system within the
organization.

In order to reach the above mentioned objectives, top managers must ensure that
following interrelated organizational variables are consistent and complementary.

• Organizational structure
• Reward systems
• Information systems
• Organizational culture or organizational value systems (please refer to unit on
organizational culture under this course).

To maintain strategic momentum or leap to a new strategy, top management must

ensure that:

• Reward systems encourage appropriate behavior within the organization.

• The organizational structure contributes to attainment of strategic objectives.
• Values and norms that define the organizational culture are consistent with the
firm’s objectives.
• The information support systems needed to track performance are in place.
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6.7 Objectives

After learning this lesson you will be able to

1. Understand the need for strategic control

2. Use the techniques of strategic control techniques in your organization.
3. Understand the different ways use to compare actual organizational performance
to goals and standards, and to determine what action is necessary and whether that
corrective action is appropriate.

6.8. Module Summary

Organizational control entails monitoring, evaluating, and improving various types of

activities within an organization in order to ensure that events unfold as planned.
Strategic control, a special type of organizational control, focuses on monitoring and
evaluating the strategic management process to ensure that what is supposed to happen
actually does happen. Although strategic control has many different purposes within an
organization, the most fundamental one is to help managers achieve organizational goals
via control of strategic management.

The strategic control process includes three basic steps.

Step 1 Measures organizational performance usually carrying out strategic audits to
determine what actually happening with in the organization
Step 2 Compares organizational performance to goals and standards, by constructing a
case to conclude whether or not what has happened as a result of the strategic
management process is acceptable.
Step 3 Making necessary corrective action in the strategic control process. If events are
promoting organizational goals established within the strategic management process, no
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corrective action is necessary. If events are out of line with plans. However, some type
of corrective action is usually appropriate.

Information that reflects valid and reliable measurements of organizational activities is a

prerequisite for successful strategic control. Recognizing the importance of acquiring and
applying such information, most organizations establish both Management Information
Systems (MISs) and Management Decision Support Systems (MDSSs). These systems
typically use the computer and communication technology in conjunction with specially
tailored software to provide management with needed measures of organizational
performance.

Top managers have an important role in making sure that strategic control is successful.
Upper-level managers must design and implement the strategic control process to
encourage appropriate strategic control behavior within the organization through
organizational reward systems, an organizational structure consistent with strategic
objectives, an organizational culture that supports strategic control, and necessary
information.

6.9 Key Terms

Strategic control
Strategic Audit
Stakeholders’ audit
Organizational standard
Benchmarking
Management Information Systems (MIS)
Management Decision Support Systems (MDSS) Executive Information System (EIS)
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6.10 Review Questions

1. Is strategy evaluation and control is a function of the top management team of an

organization? Discuss giving suitable examples.
2. A sound MIS system plays a major role in strategic control. Analyze this statement
giving suitable examples.

Lesson 7

Strategy Implementation

Contents

7.1 Introduction
7.2 The Nature of strategy Implementation
a. Comparison between strategy formulation and strategy
Implementation.
b. Management perspectives of Strategy implementation.
7.3 Annual objective and strategy implementation.
7.4 Organizational policies and strategy implementation.
7.5 Summary
7.6 Key terms
7.7 Review Questions
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7.1 Introduction

The previous lesson we studied refers to the strategy formulation and evaluation. This
section describes you the action phase of the strategic management process. i.e. the
implementation of the strategy selected by you. The success of the strategic management
exercise depends on selection of the best suitable strategy as well as implementing that
strategy in the best manner. The strategists have to study the present level of functioning
of the organization and translate the strategy into best action plan for the organization to
accomplish the Strategic Management exercise. It has to be noted that the ability to
implement strategies is one off the most valuable of all managerial skills.

The implementation phase of Strategic Management has three interrelated stages.

1. Identification of measurable annual objectives.
2. Development of specific functional strategies.
3. Development and communication of policies to guide decisions.
You will study these factors when going through this lesson.

Implementing strategy may affect the entire tires of the organization from top to bottom,
functional and divisional areas of the business. Therefore it is necessary that the
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strategists to carefully plan for a sound implementation mechanism considering the

factors of the internal environment of the organization, including the organization
structure, leadership styles, organizational culture, communication systems and the like.

7.2 The Nature of Strategy Implementation

Successful strategy formulation exercise done after careful assessment of the

organizational environment and selecting the optimum strategies does not guarantee
successful strategy implementation. Implementation is the application of and operational
part of strategic management exercise. (The following table shows the differences
between strategy implementation and strategy formulation).

a) Comparison between strategy formulation and strategy implementation

Strategy Formulate Strategy Implementation

• Focusses on organizational • Focus on efficiency.
effectiveness.
• Primarily and intellectual process. • Primarily an operational process.
• Requires intuitive and analytical • Requires special leadership and
skills motivational skills.
• Requires coordination among few • Requires co-ordination among many
individuals personnel

The concepts for formulating strategy do not differ much with the size of the
organization or broad long term objectives of the organization. But, on the other hand all
these factors affect the strategy implementation exercise may require changes to
organization structure, add or close departments/facilities, marketing policies,
recruitment, and transfer employees at various hierarchical levels in the organization,
building better information processing systems. These activities of change may differ
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from organization to organization. Therefore, the implementation of strategy may differ

from one organization to the other.

b) Management Perspectives of strategy implementation

The strategy implementation has to be carried out by the managerial personnel of the
organization; not by the strategists. The strategists have to transfer the responsibility
towards managers of the organization. Exception may be found with small organizations
where the owner/CEO/manager plays a key role himself in implementing the strategy. In
large or medium scale organizations, the medium and front line managers have to be
educated on the strategy to improve their motivation and to avoid conflicts and reduce
job stresses which can arise at the time of the implementing strategies since they play a
key role in implementing strategies.

There are several reasons which make the implementation of strategy difficult. Fist is
the organizations resistance to change. Suitable proactive measures have to be taken
when implementing strategies. Can you remember how organizations used to resist for
the changes came across with the introduction of information and communication
technology to organizations in the past, or organizational transformations. Most of such
cases were dealt with workshops for managerial personal in the operational areas with a
view to change their attitudes and to motivate them.

The number of organizational variables involved in the implementing a planned

organizational change is large in number. The correct focus on these variables is
essential for the successful organizational change. Among these variables leadership
style, motivation direction, business processes and functions, customer focus, rewards
system, organizational structure, and communication, moral, decision-making are some
that may affect the organization.
On the other hand these variables are not isolated but interconnected. This makes the
strategy implementation function much more complicated, since the changes to one
variable may have supple effect on some other variable.
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Activity 01

Identify organizational variables which may have …………effects a change in a variable reactivates by
organizational change.

As a result of so many factors affecting change are interconnected, changes take place
with few elements in seldom, sufficient to bring an overall organization change.

Activity 02

How it can affect the organizational productivity and employee motivation, when the salary structure of
the managerial personnel is revised?

The 7 – S model developed by the McKinsey and Company (in late 1970s) may be of help
to you in understanding the links exist in the organization.

Structure

Strategy System

Shared
values

Skills Style

Staff
 - 27 -

Strategy : A set of action aimed at gaining a sustainable advantage over the

competition.
Structure : The organization structure (chat) and associated information that shows
who reports to whom and how tasks are both divided up and integrated.

System : The process and flows that show how an organization operates or a daily
basis (eg. MIS capital budgeting systems manufacturing processes quality
control systems, and performance measuring systems, management
control systems.)

Style : What managers consider to be important by the way they electively

spend their time and attention and how they are symbolic behavior. It is
more important how management behaves than what managers say.
Staff : What companies do to faster the process of developing managers and
shaping the basic values of the management team.

Shared values : The values that go beyond, but usually include statement of goals and
objectives in determining a firm’s destiny. These values are shared to
most of the people in the organization.
Skills : Those dominant activities or capabilities that are developed by the
organization

(Source : ‘R.H. Waterman, Jr., The Seven Elements of “Strategic Fit” Journal Business Strategy : 2 : 3(1982),

67-73

Activity 03
 - 28 -

Carefully study the 7S of your own organization. How does these factors may affect when
implementing a strategy such as a new performance appraisal system or introduction of new electronic
information system?

The issues that you have to look after carefully when implementing strategies includes
establishing annual objectives, devising policies, resource allocation, revising existing
organizational structure, restructuring and reengineering revise reward and incentive
schemes, minimize resistance to change develop a strategy supportive culture, adopt
production and operations processes, develop an effective human resource function and
also downsizing. When strategies focus on major move on the firms direction, the
emphasis on management changes are quite heavy.

The managers and employees of the organization should directly participate in strategy
implementation activities. Recall that we always look at the employees of the
organization as resources and as knowledged workers. They really have valuable
information and suggestions on implementing organizational strategies.

Employees awareness opportunities and threats can create a strategy supportive culture.
The achievements or accomplishments of major competitors such as new products,
product developments, plans, actions and performance should be available to employees
and information on the planned future of the organization can create a change supportive
culture in the organization. This will support the strategist in implementing the strategies
in a comfortable manner.

On the other hand the organization should provide adequate training programmes to
develop skills necessary by the personnel of the organization to meet the challenges of the
changes to the organization.

7.3 Annual Objectives and Strategy Implementation

 - 29 -

Annual objectives guide strategy implementation by converting long-term objectives into

specific, short-term ends. Annual objectives are specific, measurable statements of what
an organizational subunit/department is expected to achieve in contributing to the
accomplishment of the grand strategy of the business. These annual objectives have to be
clearly linked to the long-term objectives of the grand strategy of the organization.
Managers active participation in establishing annual objectives lead to success in strategy
implementation. Establishing of annual objectives serves strategy implementation on
several ways, such as:
(a) Representing the basis of allocating the resources.
(b) As a primary mechanism for evaluating the performance of the manager.
(c) As the major instrument for monitoring progress towards achieving long term
objectives.
(d) Establishing organizational divisional and departmental priorities.
(e) As a basis for strategic control.

In general different managers in the same organization may have different ways of
developing objectives. For example, managers in different departments, subunits or
functional areas may often emphasize different criteria. As a result there will be
difficulties in comparing the performance of the subdivisions and also coordinating
among departments become cumbersome. Therefore, the strategists have to make the
annual objectives made on a consistent manner.

On the other hand, annual objectives become more consistent when each objective clearly
states what is to be accomplished. When it will be done, and how accomplishment will be
measured. The result also have an added advantage of lesser conflicts at workplace
among employees.

Characteristics of annual objectives

 - 30 -

The annual objectives should be measurable in units, consistent, reasonable, create

challenge towards achieving, specific and clear, communicated to the personal throughout
the organization, have a specific time frame, and accompanied by commensurate rewards
and sanctions. On the other hand annual objectives should avoid terms such as
‘maximize’, ‘minimize’, as soon as possible and ‘adequate’, because these terms do not
carry specific values.

When annual objectives are developed they serves as a basis for strategic control.

A functional strategy is the short term activity plan for a key functional area within a
company. These strategies provide more specific details about how the key functional
areas to be managed in the areas future. As a part of the implementation of strategies
these specific functional strategies have to be developed in harmony with the annual
objectives for the purpose of guiding the sub-units more specific manner.

Also keep in mind that the annual objectives should be compatible with the value system
and the policies of the organization.

7.4 Organizational Policies and Strategy Implementation.

Policies are specific guidelines methods, procedure, rules, forma and administrative
practices established to guide the thinking, decision making and action of managers and
their subordinates in implementing and encourage work towards organizational goals.
Policies set boundaries constraints, and limitation and the kinds of administrative action
that can be used to reward and sanction behavior of the personnel. In other words policies
let personnel of the organization to understand what is expected of them. Policies helps
the strategists at the implementation stages in the following manner.

• Provide a basis for management control

• Offer predetermined answer to routine problems.

• Allow co-ordination across sub units of the organization.

 - 31 -

• Facilitates manager’s decision making by reducing time.

• Clarifies what work is to be done by whom.

• Serves as a guide to direct employee behavior.

Expending on the scope of policies, policies may affect one individual department or may
affect the entire organization.

Availability of written policies is more beneficial for the organization. They can be
helpful in managerial decision making.

Policies can vary in their level of strategic significance and they can be extremely
imposed or internally derived. Certain laws imposed by the government are the means of
extremely imposed policies. E.g.(tax regulations – GST)
Examples of organizational policies

• Decentralize organizational activities

• Training policies (income training)

• Promote from within or hire from outside.

• Directly negotiate with employee trade unions.

• Discourage insider trading

Carefully constructed policies enhance by ensuring strategy implementation in several

ways. The examination of existing policies and by ensuring the existence of necessary
policies to guide and control operating activities consistent with current business and
functional strategies. Further, by ensuring communication of policies will help to
overcome the possible resistances to strategic change and facilitate strategy
implementation activities.

7.5 Summary
 - 32 -

To implement the grand strategy of the organization the strategist look for developing
annual objectives. The implementation of the strategy has to carried out by the
management and their subordinates of the organization. Therefore the task of developing
annual objectives and functional objectives are carried out with the co-operation of the
management of the organization as well as their subordinates.

Policies provide another means for directing and controlling decisions and actions at
various operational levels, in a manner consistent with functional and business strategies.
Well-designed policies direct behavior, decision making, and practices to promote
strategic accomplishment.

7.6 Key Terms

1. Annual objectives
2. Divisional strategies
3. Policies

7.7 Review Questions

1. How does the strategy to implemented in an organization by creating a sound
base for strategy implementation?

2. Who should take over the implementation of strategy from the strategy
development team?

3. Why do strategists develop annual objectives with the help of the management
of the organization, when long-term objectives are already available?

LESSON 8
STRATEGY AND ORGANIZATION STRUCTURE
 - 33 -

Contents

8.1 Introduction
8.2 Organizations and Structures
8.3 Different types of organizational structures
8.4 Functional Structures (Centralized Structures)
Advantages Disadvantages
8.5 Divisional Structures
8.6 Matrix Organizational Structures
8.7 Network and virtual Organizations Strategy and Structure
8.8 Stages of Organizational Development and Structure
8.9 Restructuring and Reengineering
8.10 Summery

8.1 Introduction
 - 34 -

Once a suitable strategy is developed, strategists look for plans to implement it.
Implementation of a strategy needs a lot of background work. Organizational structure
and design plays an important role in this situation. You may refresh your memory on
various organizational structures, their merits, demerits and how the structures become
helpful in strategy implementing.

When implementing strategies management of the organization needs to identify suitable

methods to fit the strategy to their organization. Organizational structure helps to
implement Strategy as a tool. On the other hand, structure should be adapted to the
specific needs of the business and its strategy. In 1990 s companies started going towards
decentralization to achieve suitable fit for organizational strategy. Many organizations
have complex, multidimensional structures. Which could be described as the product of
history and circumstance, rather than structure is determined after intense analysis and
various course of actions. Therefore, it might be helpful if the structure be appraised for
their capacity to deliver the key strategies and if the present structure cannot support, such
organizational structure should be changed or adopted in order to meet the strategic needs
of the organization.

8.2. Organizations and Structures

An organization consists of humans and other resources, and has its own goals and
objectives. Therefore, an organization can be defined as the patterned relationships among
people who are engaged in mutually dependent activities with a specific objective. In
achieving organizational goals and objectives it needs to have certain elements to drive
the people in the organization and its internal customers, while they attain their objectives.

Organization exist in the environment and the environment is dynamic in nature.

Therefore an organization should have the flexibility to adapt to the environment where it
exists, while trying to achieve organizational objectives. The capacity of an
organizational to react quickly to threats and opportunities coming from the environment
 - 35 -

and maintain the organizational efficiency is partly depend on its structure. Now let us
understand what is an organizational structure is. The structure of an organization is the
pattern on prescribed roles and role relationships, the allocation of activities to separate
sub-units, allocation of resources to those sub-units, the distribution of authority among
administrative positions and the formal communication network.

Further the organizational structure is the formal plan for achieving an efficient division
of labour and effective coordination of activities of personnel. Depending on the needs of
the organization (in achieving its goals and objectives) different types of organizational
structures are adopted. When changing organizational strategy therefore situation where
the structure has to be changed to implement those strategies. On the other hand, you
would have experienced that the technological advancement specially with information
technology had make changes to traditional norms on span of control in organizations,
thereby warranting changes to the organizational structure.

8.3 Different types of organizational structures

You are already familiar with the common organizational structure. Before proceeding
further let us recall what you have studied under organizational structures.

Different types of organizational structures you are required to be familiar with includes.
i. Functional organizational structures – vertical and horizontal structures
ii Divisional organizational structures
iii Matrix organizational structures
iv. Network structures
v. Virtual organizations

8.4 Functional Structures (Centralized Structures)

 - 36 -

With the evolution of an organizations, most of be organizations tend to develop a

centralized structure. This structure is based on the primary task of the organization such
as production, marking, finance, personnel etc. The diagram below shows a typical
structure and it lists certain advantages and disadvantages of a functional structure.

CEO

Production Marketing Finance Personnel

Dept. Dept. Dept. Dept.

R&D Manufacturing

Advantages Disadvantages

1. CEO in touch with all functional 1. Tendency to neglect strategic

areas
2. Simplified control mechanism
3. Clear definition of responsibilities
issues by senior managers
2. Senior managers over burdened
with routine matters.
3. Difficult to cope up with diversity.
4. Difficult to co-ordinate between
functions
5. Finance to adopt to changes
 - 37 -

Among the drawbacks, this structure limits the senior level managers in making decisions
with strategic perspective, because they are burdened with everyday operational issues.
You are aware that this structure is constructed with a base as business processes. This
causes imposing adverse uniformity of approach between the SBUs as a result, the
strategic decision making efforts by managers do not take place under this system. Today
many organizations change from functional organizational structures and go for structures
having decentralized power, Authority and decision making. A divisional structure is
another type of structure with more decentralized features. Let us look at divisional
structures.

8.5 Divisional Structures

Divisional structures is used when the organizations subdivided in to units on the basis of
products, services geographical areas, process
a) Products (eg. An agrochemical from may have weedicides division, pesticide
division, fungicides division, nutrition (manure division)

b) Services (eg. software organization may have network solutions division, e-

marketing division, software solution division)

c) Geographical areas (eg’ agrochemical from may have divisions as Western

province division, up-country division, Mahaweli Region Udawalawe division)

d) Processes based on different manufacturing division.

(eg. grinding division, molding division painting division, finishing division.) are
common situations of divisional structures.

A divisional structure of an organization is shown below. Note that there may be

centralized services for the organization that are common to all or some of the divisions.
 - 38 -

Finance accounting, information technology/services and human resource management

functions are some of the centralized services that are common with many organization

Head Quarters

Central Services

Division A Division B Division C Division D

Functions Functions Functions Functions

Advantages of this structure

Divisionalizations made under the methods discussed have specific advantages. In the
case where the divisions are made on the basis of geographic area, the divisions can
specialize on the market of that region well. This allows the divisions to make efforts to
develop and offer goods and services tailored to the needs and characteristics of
customers in different geographical areas.

• Possible to put heavy concentration on the business area by the divisional manager
and personnel. E.g., Concentration on agrochemicals on ”Mahaweli Region”.
• Enables to measure the divisional performance making it possible to direct
divisional performance and to direct divisional management on targets.
• Addition of new units (business lines) and disinvestment of existing units is easy.
• Encourages the development of the management personnel and general
management (career development of managers)
 - 39 -

• Facilities ATTENTION TO STRATEGY BY SENIOR MANAGEMENT

• Clarity in accountability of divisional managers.

Among the disadvantages

Some divisional managers function with high level of responsibility, authority and
accountability, therefore they try to achieve are divisional objectives, and of course their
performance is visible and comparable within other divisions. As a result they try to attain
high level of sufficiency and effectiveness. But
Senior managers may find it confusing with regard to their responsibility towards the
company because they may try to maximize profitability of their division but not on the
overall objectives of their group.
Conflicts may arise between the divisions may be due to differences in reward systems.
Pricing strategies, costing (specially when goods processed by one division is transferred
or used by another division) resource allocation, mechanism of strategy formulations or
strategy implementations etc.
In some cases, certain divisions tend to grow rapidly and can become too large (when a
division becomes too large, again it may need restructuring again to maintain its
efficiency).
When the numbers of divisions become large there may be complexities of co-operation.

After studying the above advantages and disadvantages you would have identified the
main advantage of divisional structures, i.e., each division is able to concentrate on the
problems and opportunities of its business environment. However, the divisions created or
intended may not necessarily be the strategic business units (SBUs) though divisions to be
the SBUs may be ideal it is difficult to match SBUs for the reasons of size and efficiency.

Illustration: The National University system of Sri Lanka comes under the Ministry of
Higher Education and then University Grants Commission. Then there are universities
(Division) set up by geography. There you will find University of Peradeniya. Colombo,
Kelaniya, Rajarata, (the Open University of Sri Lanka does not come under this category)
 - 40 -

and other national universties. Then, within the universities sub-divisionalizations are
made on the basis of client group: Clients (the students) comes from different disciplines:
different faculties such as science, engineering, medicine. Management arts, etc.,etc.

Strategists generally find it difficult to determine the basis for divisionalization. In certain
situations it ends up with complex structures. As shown in the above illustration one level
is at geographical region and another level on the basis of clients’ discipline.

Activity 1

What advantages can a CEO expect by changing the organizational structure for a
functional structure to divisional structure, where the business is a medium scale bakery
product manufacturer and a distributor?

Activity 2

Identify possible difficulties a CEO may face when he decided to change the
organizational structure from functional to divisional structure.

In certain cases people like to get the benefits of both these organizational structures when
competing in competitive business environments. The hybrid of the functional and
divisional structures can be met matrix organizational structures.

8.6 Matrix Organizational Structures

 - 41 -

This structure has certain characteristics pertaining to both functional and divisional
structures with the need for high quality decision making and better customer services,
some organizations have changed their structure into a matrix structure, where pure
divisional or functional structures would be inappropriate.

A situation where an organization steps into matrix organization is the expansion of the
operations of the business. For example, when an organization having multiple products
in its manufacturing lines wishes to expand its operations into different geographical areas.
The management may find it more efficient if they decentralize the organizational
decision making process. So the adoption of matrix organizational structure comes helpful.

Structure of a matrix organization

GEO

Finance Personal

AGM AGM AGM

Production Marketing R&D

AGM Production Manager Marketing Manager R & D Manager

Product A Product A Product A Product A
Aon

AGM Production Manager Marketing Manager R & D Manager

Product B Product B Product B Product B
Aon

AGM Manager Product B Marketing Manager R & D Manager

Product C Product C Product C Product C
Aon
 - 42 -

A multinational leasing organization having its operation in different parts of the world
may have, a structure like

CEO

The board of Directors including managing directors of all trading companies

Trading companies

Country 1 Country 2 Country 3 ……………

Product group A

Product
Division
 - 43 -

Product group B
…..
Product group C

Advantages of this type of structure includes

• High quality of decisions making where the conflict of interests. (Otherwise

managers may tend to give less interest on certain products/operations. With the
matrix structure, you can find various groups and managers pay interest on their
area of operations, covering many areas)

• Bureaucracy is minimized and it is replaced with direct contacts.

• Increases managerial motivation.

• Skill development of managers through increased involvement in decision making

(and exposed to strategic issues for the business)

• Fosters creativity and multiple sources of diversity.

Among the disadvantages of this structure are;

• Length of time to make certain decisions may be higher than conventional

structures. (It needs to get approval from two different parties).

• Risk of dilution of priorities – every problem matters equally to the organization

and deserves equal debate, and attention.

• Unclear job takes and responsibilities (call for joint responsibility).

• Back of clarity of role definition and responsibility may calls for “conflict” in the
organization.

• Need to establish strong vertical and horizontal communication system.

Many diversed organizations are matrix structures and when you look at your
environment you will be able to identify that many organizations have matrix
 - 44 -

organizational structures are involved industries such as marketing and distribution,

production, construction, health care, research etc.

Activity 3

Identify a Sri Lankan organization which has a matrix organizational structure.

What specialties do you see with that organization in terms of its operations?

Activity 4

What benefits can be derived from your organization by transforming your organization
into a matrix structure? What difficulties you may expect to face if you are to transform
its structure to a matrix structure?
(If your organization does not have a matrix structure at present).

Strategists look for appropriate structures for their organization depend on the
environment and operations their organization engages in. With the present day
technology and resourcefulness of available manpower, new organizational structures too
are being used by organizations. Among such organizational structurers you find network
and virtual organization.

8.7 Network and virtual Organizations

With the improvements in the cost effectiveness and applications of information

technology (telecommunication technology, computer technology and their joint
technologies) it has become possible and convenient for organizations to develop linkages
between other organizations. Further, it has become convenient to manage linkages
between various activities of an organization.
 - 45 -

This possibility to create and maintain linkages between organizational activities had
changed the conventional organizational structures: to make the organizational structures
flatter and matter resulting in wider span of control for managers.

The advancements of information technology enable the organization to have certain

activities to operate from different locations: even from the other side of the world. So it
can be that the organizations do not have its finance and accounts departments at the same
location, but are scattered all over the world or managed by certain other organizations as
the case may be. This makes that the organizations to operate in a way such that the
organizational resources are scattered over a wide area (even in different geographical
area) but remain connected to key corporate resources (eg. Data, and information,
expertise, hardware, software, .. ) and to its personnel. Clients and suppliers through
information technology. Therefore, you will see that the formal organizational structure
becomes less important, but, it is replaced with networks, which are supported by
information technology infrastructure.

With regard to virtual organizations, they operate in such manner that their clients feel it’s
a real organization and offers goods and services to meet the needs of the customer as of
an organization with a real conventional structure. To recall what a virtual structure is,
“Virtual organization is an organization held together by partnerships, collaborations and
networking but not through formal structure and physical proximity of people”.

Strategies may sometimes find that going for subcontracting by virtual organizations can
cause strategic weakness to the organization in the long run. But, you may have noticed
that most of the organizations tend to go for subcontracting and certain organizations even
had developed reliable contractor network as their key strengths.

So far you have studied several organizational structures with their benefits and
limitations. They can be viewed in terms of their ability to support the organizational
strategy.

Strategy and Structure

 - 46 -

You may have doubts as to which structure is the best for an organization. Of course, the
answer has to be that the structure depends on the strategy of the firm. Since the structure
of an organization links its activities and resources, the structure has to align with the
needs of the organizational strategy.

Studied Chandler, based his research findings on understanding the choice of structure as
a function of strategy, found a common sequence of strategy and structure of
organization. The sequence is

1. Choice of a new strategy

2. Emergence of administrative problems.
3. Shift to an organizational structure that is most suitable with the needs of the
strategy.
4. Improved profitability.
With the above findings you will see that:

1. All forms of organizational structures are not equally effective in implementing a

strategy.
2. Structures seem to have a life of their own.
(Specially for large organizations)
3. Growth of the organizations can make demands for restructuring.
4. Where the firm diversity into related or unrelated products or markets, changes to
structure become essential if the firm is to perform effectively. Further, research
on organizational growth, strategy and structure has shown that there is a
relationship between the characteristics of the firm and structure.
 - 47 -

8.8 Stages of Organizational Development and Structure

Stages characteristics of the firm Typical structure

I. Simple small business with one Simple to functional structure.

product/service or one line of
product service to a small or a
regionalized market.

II. Singular or closely related line of Functional to Divisional

products/services to a larger
market.

III. Expanded but related lines of Divisional to matrix

products/services to diverse large
markets.

IV. Diverse, unrelated lines of Divisional to SBUs.

products/services to large, diverse
markets.

You will see that to complete at different stages a firm require different structures. The
choice of the structure goes in line with the diversity of products/services offered by the
firm and their market characteristics. Therefore, the choice of organizational structure has
to be determined by the strategy pursued by the organization. The strategy will look into
several aspect of the organization in which the structure has a significant impact. Among
these aspects are, segmenting key activities/operations, improve efficiency through
specialization, sensitive and respond to dynamic competitive environments, management
control mechanism between different units, conflict resolution between division and
divisions’ freedom to act. Further while carrying out the said tasks, the structure must
effectively integrate and co-ordinate them and business units to facilitate independence of
 - 48 -

activities and overall control of the organization. The choice of structure reflects strategy
in terms of the

1. Size of the firm

2. Products / services diversity
3. Volatility and competitiveness of the market
4. Internal politics and culture and
5. Information needs of the organization

8.9 Restructuring and Reengineering

In the early 1990’s most of the large to small, public sector to private sector organizations
opted for re-structuring their organizations. You are already familiar with this concept.
Restructuring involves careful study and analysis of the operations, their returns with the
size of the firm in terms of its size of employment and division. Number of divisions or
units and the number of hierarchical levels in the firm’s organizational structure. With an
intention to improve the efficiency and effectiveness of the organization.

Reengineering process involves with the way the organizational tasks are carried out and
improving its methodology. It includes the functions such as redesigning the work, jobs
and improves the process for the purpose of cost reduction, quality improvement of goods
and services and speed.

The process engineering is short term but, the business restructuring affects in the long
term and it directly affect the organizational structure.

Disadvantages

• When compared to centralized structures, divisional structure is costly.

• Needs the divisions to have qualified personnel. This may cause difficulties in
selection. Recruiting and retaining professionals.

8.10 Summary

The structure of an organizational involves with its inception. And tend to change it
according to the changes in its internal and external environment. Such as increase in
 - 49 -

operations, changes in product lines technological advancements etc. The strategy to be

implemented by the organization should well fit.
 - 50 -

LESSON NINE

GLOBAL ISSUES IN STRATEGIC MANAGEMENT

Contents

9.1 Introduction

9.2 Business going across of the borders

a) International Business
b) Growth of International Business
c) Different Forms of International Organizations

9.3 International Trade Agreements

a) General Agreement on Tariffs and Trade (GATT)

b) South Asian Association for Regional Cooperation (SAARC)
c) North American Free Trade Agreement (NAFTA)
d) European Union (EU)
9.4 Strategic Management in global context

a) International Environment Analysis

b) International Organizational Direction
c) International Strategy formulation
d) International Strategy Implementation
e) International Strategic Control
9.5 Summary

9.6 Self-Assessments Questions

9.7 Objectives
 - 51 -

9.1 Introduction

During the recent past the number of firms engaged in business beyond the borders of
their country had risen. Trade names and trademarks are becoming common over the
world. Corporates operate their affiliates or subsidiaries in various countries and the
numbers increase more and more, and are expect to continue further.

Operating in different countries make the strategies to look for new issues. “Different
countries” make you think of different nations, cultures, rules, regulations, economics,
etc. Strategists have to look for these aspects when making strategies to work in the
countries beyond their borders. Therefore, there is a need for understanding the
international management to help you when studying these issues related to global
strategic management.

9.2 Business going out of the boarders

a) International Business

Organizations those conduct business operations across national borders are referred as
international firms or multinational corporations (MNCs). The operations beyond the
borders are conducted by way of business subsidiaries or business affiliates which engage
in all types of operations including purchasing, warehousing, manufacturing, transporting,
marketing and advisory services.

Business organizations select various strategies to enter into other countries. You are
already familiar with some of these strategies. Purchasing of local companies, open
branches, joint ventures with local investors, invest in solely owned companies are among
recent Sri Lankan business experiences.

Why companies want to go beyond their countries? A firm operates in a small village
wants to expand its operations beyond the village: firm operates in a province wants to
expand its area of operations further. Likewise, you are already familiar with many
instances where organizations want to expand their business. The need for expansion
 - 52 -

make businessman to look for new markets, new production facilities and profit making
opportunities. When a business operates within a certain geographical location, they
encounter limited market opportunities. They may find competition, limitation to access
certain resources etc, which in turn will limit their profitability. Therefore, companies
start looking into the opportunities which are beyond the limits of their region or country.
They may find large markets and resources which can be used for expanding their income
and profits. Further, such expansions can help the businessman in reducing their business
risk and increase business stability.

Activity

• List down five Sri Lankan organizations which had expanded their business
operations across Sri Lankan borders.
• What have they identified by expanding their business?

b) Growth of International Business

When discussing the international operations in the strategic management process. It is

required to understand what is meant by international management.

International management involves the performances of management activities across the

national borders where the business is located.

This can be as simple as importing certain resources from foreign countries or marketing
a product in a foreign country or as complicated as collaborating with foreign partners to
manufacture (wholly or partly) and market products throughout the world.

The technological advancements in transportation, information technology,

communication (including television and other mass media) along with the developments
in the economics, political, legal and cultural components of the business environment,
have helped the organizations to expand their business beyond the borders of their
country. The mission statements of certain organizations show that they have included
 - 53 -

components with regard to markets outside their country or invest in foreign countries to
expand their business operations.

These international business operations have affected the day to day lives of many people.
The local market prices of Sri Lankan products such as rubber, tea and many other
agricultural products get their prices from international markets which affects the income
of those who engage in those industries. The imports, specially with fuel are again
affected by international market prices, which directly affect the cost of living of people
of this country. With the changes in the international economics and political situations,
you would have experiences on the changes underwent in Colombo stock exchange
(withdrawals of funds from Sri Lankan share market by foreign investors)

The managers today operate in an international environment and its international

components tend to increase. This increase in internationalization pave way for more
international trade, and demand less barriers for international trade such as high tariffs
and duties imposed by the governments, this has even gone as far as duty free trade zones
established by certain countries enabling them to facilitate international trade.

As organizations try to organize themselves to be in line with the emerging international

trends their managers have to evaluate and monitor the economic and political forces that
drive the trends and their influence on the strategic management processes. Increasing
trend for expanded international trade environment (less restrictions on international trade
by the governments) demand managers to evaluate threats from competitors across the
world. When carrying out the environmental scan, several additional information may be
looked for international concerns: and amongst them are;

• What institutional environment may constrain competitors?

• What rule may govern the actions of competitors?
• What resources are available to minimize the damage (loss) from the actions of
competition?
• What government policies strengthen competitors?
• How can firms influence these government policies?
 - 54 -

Activity

What facilities have been offered by the government of Sri Lanka and its agencies, for Sri
Lankan organizations to go into international markets?

However, you should note that the multilateral and regional trade agreements from a
foundation for all international business operations. You will understand them when
studying this lesson further.

In carrying out business across borders, firms may expand gradually and the organization
may grow from one step to another. Let us look at these expansions.

C) Different forms of international organizations.

You are familiar with domestic business organizations. They deal with activities within
the borders of their home country. From the perspective of domestic business, business
operation made outside the home country are international business. Eg. A Sri Lankan
garment manufacturer who distributes his product outside Sri Lanka is in international
business.

International trade is concerned with the flow of goods, services. knowledge and capital
across the borders of the home country. The focus of the international trade is on
commercial and monitory conditions that affect balance of payment and resource
transfers. A strategic has to give due concern on the international trade since the decisions
of the governments have an impact on the economics of the international trade.

In the case of international business, its literal sense signifies business takes between
nations. Therefore, the world international can thus imply that a firm is not a corporate
citizen of the world but it operates from home base. Therefore, multinational (or global)
business is a preferred term, since nothing is foreign or domestic about the world market
and global opportunities. (As far as this material is concerned our emphasis is on
multinational organizations)
 - 55 -

The domestic organizations face set of uncontrollable derived from the home country.
Multinational organizations face much more complex environment since the managers are
more sets of uncontrollable variables originating from various countries. They have to
cope up with different cultural, legal, political and monitory systems. However, there may
be similarities of certain uncontrollable factors in certain countries (e.g. Markets in certain
European countries)

With this perspective let us look at some common elements.

9.3 International Trade Agreements.

The trend towards going for foreign markets is increasing today. The competitive
environment for goods and services vary significantly across the international markets. It
necessitates the demand for mechanism to look after the fair business practices such as
honour contracts, copyrights etc. The mechanism for payments and for insurance on
foreign trade are essential in international businesses, and there is a requirement for
establishing laws and law enforcement mechanism for them. Otherwise, the trade between
certain countries becomes difficult. Therefore, the governments tend to develop and agree
on to trade agreements to facilitate international trade. Further countries get together form
trade circles to facilitate and develop trade between those countries, such as SAARC. This
type of government circles develop and maintain broad multilateral economic agreements
and narrowly focused regional arrangements. While following this lesson further, you will
study the structure, intentions and provisions of trade agreements that define the
infrastructure within managers used to compete in global markets.

a) General Agreement on Tariffs and Trade (GATT)

The widest body which looks after the world trade at present is the General Agreement on
Tariff and Trade (GATT). GATT is a board, multilateral trade agreement designed to
smooth the flow of goods between nations. Presently with its over 115 nations including
 - 56 -

Sri Lanka that subscribe to this treaty, account for more than 90% of the trade. The world
Trade Organization made the pioneering work to develop GATT, and this treaty is
administered by a Geneva based organization that monitors world trade. The basic aim of
GATT is to liberalize and promote world trade. Since 1948, GATT has functioned on the
principal global forum for negotiating reductions in trade barriers and governing
international trade relations.
Why Sri Lanka became a party to GATT may be a question that comes to your mind. The
main reason comes as Sri Lanka want to make more and more international business and
if Sri Lanka has to make agreements with the other governments, other countries, the task
may become unrealistic or extremely difficult. With GATT it facilities the countries to get
into agreements not between two parties but among many parties, in relation to trade
between countries.

By being a party to GATT the countries can get the benefits of GATT trade agreements
and they have to do abide by its common rules. The planet and Intellectual Property laws
are part of GATT agreements, and the member countries are abide by rules regarding
patent and Copyright laws.

The basic elements those underline the GATT agreements are

• Equal treatment for trade among participating countries.
• Participating countries shall not exercise protection other than custom
tariffs.
• Customs unities and free trade groupings are considered as legitimate
means of trade liberalization, provided they are taken as a whole, and
such arrangements do not discriminate against third countries.
• Member countries can impose certain taxes on imports in situations
such as.
❖ Anti-dumping duties (imported products are sold at loss, imports manufactured
under a subsidized industry).
❖ Fees and other proper charges on services rendered.
❖ Import tax in par with internal taxes on the product concerned based on a general
national treatment principle.
 - 57 -

In 1995 GATT’s functions were taken over by the World Trade Organization (WTO), an
international body that administers trade laws and provides a forum for settling trade
disputes among nations

b) The South Asian Associations for Regional Co-operation (SAARC)

Founded in 1985, SAARC involves in regional cooperation on various matters. It has

bought heads of governments, foreign ministers, and senior diplomats together at regular
intervals to discuss issues involving member nations.

Activity

1. List down the member countries of SAARC.

2. What is the level of trade related arrangement made between Sri Lanka and
other member countries of the SAARC?

South Asian Preferential Trade Agreements (SAPTA)

South Asian Free Trade Area

The main objective of SAPTA is the creation of a single SAARC market that would
optimize SAARC’s position as a competitive production base geared towards serving the
South Asian Region and global market place, through greater specialization and
economies of scale. The emergence of a Free Trade Area would also attract an increased
inflow of foreign direct investment and investor confidence as the institutions and
mechanism for an integrated SAARC economic union begins to take shape.
 - 58 -

Though SAPTA planned to complete its formation by the year 2001, still they have not
accomplished their task and inter-governmental negotiations are still going on.

As a strategist you have to be aware that certain markets are open to you and on the other
hand your market is also vulnerable to foreign competition. As the SAARC country level
you have to be updated with the socio–political-economic environments of the
neighboring countries.

c) North American Free Trade Association

NAFTA is a pact that calls for gradual lifting of tariffs and other trade barriers on goods
produced and sold in North America, including the countries: Canada, Mexico and United
States. NAFTA represents the world’s second largest free trade zone (approx. 365 million
customers) Sri Lankan industrialists may find certain barriers to enter into this free trade
area in some cases, but it is a market where they can make business specially with the size
of the market.

d) European Union (EU)

The largest free trade zone is the European Economic Area (which includes the members
the members of the European Union and the European Trade Association) and it became
effective since 1994. The benefits of European Union (EU) is specially with elimination
of board controls which will eliminate lot of transport costs. (crossing several countries is
costly) and from 1st January 2002, the EU had launched its own currency as Euro.

Further there are several other trade agreements and understandings between several
countries for mutual growth.

Activity

How can be a Sri Lankan exporter benefited by the introduction of Euro currency?
 - 59 -

9.4 Strategic Management in Global Level

a. International Environmental Analysis

The strategists have to understand the global business operational scenario and based on
this understanding they form the goals and objectives for the company. It comprises of
two steps: carry out an international environmental analysis, and prepare international
organizational directions for the company strategy formulation, implementation and
strategic control.

As organizations start to compete in the global market place, they will continue to seek
external reinforcements for their efforts such as international trade, agreements and
favored nations’ national industrial policies. When going global, strategists have to look
for special matters that needs to be strategically managed.
Strategists have to identify present and future strengths, weaknesses, opportunities and
threats (SWOT) that affect their progress towards its goals and objectives. In the
international management this process becomes more complicated for analysis.

• The general environment – social, economic, technological, ethical and

political/legal condition.
• The operating environment – comprises of suppliers, competitors,
customers and labour conditions.
• The international environment and conditions within the organizations.

In the case of a multinational co-operation its operating environment is complex and

usually differ with domestic business in the following terms.

1. Worldwide Infrastructure
2. Global socio-culture
3. Worldwide superstructure
 - 60 -

b. International Organization Directions

Complexity of these global environment of the business may affect the business of firms.
It affects the analysis of its environment. Based on this analysis strategists have to
develop an organizational vision and mission. They decide on the type and extent of
external involvement they want to pursue because this will guide the decision on the
setting of appropriate goals and objectives.

c. International Strategy Formulation

As you are aware of the general model of the strategic management process, you can
follow the same procedures for strategy formulation for international organizations.
Managers may formulate a strategy that will reflect the organizational goals, (which in
turn has to reflect the mission of the organization) based on the results of the
environmental analysis he carried out. In the case of strategies used by many
multinational organizations, they can be broadly categorized into three: such as exporting,
licensing, and direct investment.
These strategies require different levels of commitments from the parent companies. In
many cases, the first level of strategy used by a multinational company is exporting and
then progress through licensing to direct investment. Regardless of the stage and the
direction of the progress of the multinational cooperation, the strategy, formulation should
involve an assessment of the level of commitment and control of foreign operations that
demand by the mission of the organization.

The exporting strategy needs the least investment of all the strategies. The organization
has to carry out processing in the home country and then transfer the products abroad.
This strategy may incur high cost of transportation and give the opportunity to deal with
the rules and regulation of the importing country at a distant level.

d. International Strategy Implementation

 - 61 -

Implementing an international strategy is identified as more challenging and difficult than

that of domestic business strategy. Managers of the multinational organizations have to
design administrative systems and management control systems for their employees in
other countries. When designing administrative systems, they have to take into
consideration the company requirements and the socio-cultural aspects of the people in
their foreign divisions. The managers of the multinational organizations have to make a
match between the company requirements (and the intended corporate culture) and the
cultural aspects of the country they are going to operate in. They may find it difficult to
select methodologies to satisfy the foreign nationals as far as this exercise concerned.

e. International Strategic Control

Different countries have different economies with different currencies, rates of inflation,
taxation procedures and regulations, and other laws. Which make it difficult to compare
performance results with the other countries. In controlling, managers usually tend to use
financial values to reflect performances.

Since strategists have to measure the effectiveness and efficiency for the controlling
purposes they have to extract necessary information for comparison. But due to the
factors said above, comparison of performance become complex. Therefore, a mechanism
have to be designed taking into consideration of many aspects. Due to this complexity
certain comparisons even may be somewhat subjective. The strategists have to develop a
suitable mechanism with wide range of parameters than usually required for the domestic
organization.

Activity

Identify the impact on sales and manufacturing operations faced by a food processing
company which uses beef and pork in their product when operating within the SAARC
countries. What strategies do you suggest?
 - 62 -

Can you compare the performances of international divisions as you do so with the local
companies? Comment

9.5 Summary

Multinational organizations have to adjust the process of strategic management to operate

and account for across the border transactions.

There are rules and regulations coming up to facilitate the international trade. GATT at
the global level and SAARC (for our region), EU at regional levels has started developing
preferential trade agreements among nations. With these agreements, national
governments develop and implement industrial policies that will promote the competitive
success of the organizations in their countries.

The strategists have to be aware of what happens at the local market level and global
environment and have to carry out environmental scanning to identify suitable strategies
that will go along with their company vision and mission. Further, setting up of a
controlling mechanism of its foreign business operations have to be done with due care
since simple comparison may not be possible with the differences exist between countries.

9.6 Self-Assessment Questions

1. Differentiate the role of strategists in a domestic company and multinational

company.
2. How do you explain the need for existence of regulatory bodies made up of
governments to facilitate the foreign trade?

3. Foreign markets offer great rewards but may have huge risks. Comment.

9.7 Objectives
 - 63 -

After studying this lesson, you have gained

• Explain why business organizations go for international markets.

• Recognize different forms of international organizations.
• Explain the trade agreements that facilitate international trade.
• Identify the special aspects that have to be looked for when analyzing the
international business environment.
• Describe the strategies available to international business.
• Describe the aspects that have to be looked into when implementing the strategies
and at the strategic control level.
 - 64 -

STRATEGIC ALTERNATIVES

You are aware of the issue on mergers and acquisitions that take place in Sri Lankan
business environment. Further, the various alternative strategies adopted by organizations
in order to face competition can be seen on business news programmes and they include
changing present business lines, introduction of new products, new promotional
campaigns etc. As such, various strategic options are available to organizations. The
organizations select suitable strategies for them based on their mission and objectives, and
their internal and external environment.

Introduction

The corporate level managers look at carefully the changes that may takes place in their
business environment. The environmental analysis of the business enables the
management to understand the future of the current business lines and other business lines
as well.

You would have noticed that various organizations go for mergers and acquisition and
even modify or transform their current business lines into totally different business lines.

CORPORATE LEVEL STRATEGIES

The corporate managers search for the business opportunities available in the business
environment. You know that there are some Sri Lankan organizations such as Ceylinco
group, Maharajah organization, Upali group etc.. Operate in more than one business line.
Those are referred to as highly diversified organizations. This lesson makes you
understand the diversification strategy of business line and why they go for diversification
of their business line.

TYPES OF STRATEGIES

Integration Strategies
 - 65 -

Business organizations go for acquiring other business ventures to strengthen themselves

in the competitive business environment. By acquiring other companies, they project
more profits in the short run or in the long run with greater stability in the marketplace.
Acquiring organizations may be carried out by way of purchasing the shares of the other
company and obtaining the controlling power of the company or by making offers for
intervention into the management of the company.

Integration strategies that may be available to organizations are:

1. Backward integration also called vertical integration strategies.

2. Forward integration
3. Horizontal integration

When companies want to gain control over their suppliers, distributors and competitors
they may select backwards, forward and horizontal integration strategies respectively. Let
us examine what these integration strategies in detail.

a. Backward Integration

Backward integration strategy looks into the matters of gaining control over the suppliers
of the organization. A company pursuing such a strategy may build and commission
plants and machinery to manufacture raw material/sub-assembly/components that are
required for their present business lines. Further, they may acquire equality (fully or
partially) of the suppliers’ organization to obtain controlling power over the supplier.

Now let us look why organizations go for backward integration. A company seeking
backward integration strategy are affected by one or combination of following reasons.

1. Suppliers at present are unreliable in their services.

When the current suppliers are unreliable the company has to face a lot of stock
out stations, resulting loss of goodwill, loss of sales, penalties due to
nonfulfillment of contracts, frequent stoppages in production lines, and force the
company to hold large inventories etc.
 - 66 -

2. When suppliers charge heavy markup of the goods they supply

i.e. the material supplied by the suppliers are too costly.

3. When the suppliers cannot meet company’s expectations on the input material
especially with quality standards and improvements to quality.

4. To gain control over competitors when the supply of certain inputs to the
manufacturing process in limited to limited number of suppliers. By pursuing
backward integration, the company can limit the level of operations of the
competitors when certain inputs to the industry are channeled to one organization.

If you took at the present day business practices, many organizations do not pursue
backward integration strategy. Instead they go for outsourcing. They look for best deals
from numerous suppliers, by way of negotiating. On the other hand, some organizations
try to develop strong links with few selected suppliers to fulfill their input requirements.
When strong relationships are established with the suppliers the companies can help their
suppliers to develop their products. The firms may offer technical, managerial and
financial assistance to develop the supplier. Such companies may try to maximize their
profitability and stability through mutual benefits through co-operation. This way of
behavior was common in Japanese industries and is common with most of the other
companies today. As an example, a company which orders packaging material from a
packaging material supplier may help to develop new packaging material in co-operation
with their packaging material supplier.

b. Forward Integration

Forward integration refers to the strategies sought by companies to acquire or increase

control over intermediaries between the company and its final customers (end users of the
company’s products) These intermediaries include distributors, agents, export houses,
retailers etc. Sri Lankan examples include those tea estates extending their operations to
exporting activities as well. This strategy enables the companies to gain more control over
the intermediary levels to face market competition to develop relationships with the
customers and save on high margins that have to be paid to the intermediaries.
 - 67 -

c. Horizontal Integration

When a firm carryout strategy to increase or secure its market share by way of seeking
more control over its competitors or even getting ownership, they are called horizontal
integration strategies. A firm that follows horizontal strategy may look for mergers,
acquisitions, and takeovers of competitors in order to get the benefits as synergies,
economies of scale and enhanced understanding of business knowledge, which ultimately
will increase the efficiency and the stability of the firm.

Horizontal integration is common in most of the firms. Overseas examples include

mergers of automobile manufactures (Rolls Royce was bought by German car
manufacture Volkswagen). In Sri Lankan context you are familiar with Keels group’s
purchases of Elephant House Foods division, manufacture and marketer of Elephant
House meat products.

Acquire/control Firm A
competitors:
HORRIZONTAL
INTEGRATION
Firm A

Distribution
Suppliers Firm Channel Customers
Intermediaries

Backward Integration Forward Integration

 - 68 -

INTENSIVE STRATEGIES

Intensive strategies refer to the strategies geared towards improving the competitive
position in their existing line of products. Basically, there are three types of strategies
discussed under intensive strategies;

1. Market penetrations
2. Market development
3. Product development

a. Market Penetration Strategy

This strategy refers to increase the present market share for the existing products of the
firm in the current markets itself. To increase the firm’s market, share the firm will
increase its marketing efforts such as expanding and developing the sales force, new
promotional efforts such as advertising, promotional activities, publicity program etc. For
example, a firm pursuing penetration strategy, say milk powder, may sponsor selected
health / nutrition programs (New Zealand Milk Products Limited, distributor of Anchor
milk powder, sponsored mother’s day celebrations) may carryon intensive marketing
campaigns such as audio and audio- visual advertising programmes in electronic media
and, visual advertisements on bill boards and at the retail shops etc.

b. Market Development Strategy

Market development is the expansion of the firms existing market (in volume) by
expanding its market for the present products into new geographical areas.

Today it is common that most organizations look for new markets specially to foreign
markets. When the firm finds that their domestic market is saturated with their products
(including similar products from competitors and substitutes), then they look for market
development strategy where they try to go across the boarders of their country. When
Japanese manufacturers found their domestic market for electronic goods such as
 - 69 -

television, radios, cameras, and automobiles was structured they started venturing into
European, and Asian Markets.

Among the Sri Lankan business, Siddhalepa of Hettigoda Industries, and semi processed
foods manufacture, Nikado Industries, started exporting their products to new markets.
Further, you may note that the market development strategy is not confine to look for new
markets outside the boundaries of a country, but also may be within the boundaries of the
same country, i.e. the firms may extend its marketing coverage using a wide spread
marketing network.

c. Product Development Strategy

You would have seen that certain manufacturers frequently change the design of their
products in order to,

1. Expand the market share

2. Expand the life cycle of their products
A firm pursuing the product development may go for innovation, improving/ modifying
existing products or services, to increase their sales. With todays experiences you would
have seen that the services industries such as banking and insurance sectors have
introduced various packages for their customers. When examine these packages you will
be able to see that they have become closer to individual customer level, than they had
been earlier. Further, by using new technology into the firm’s business packages, they try
to improve the product or service and their quality standards to attract more customers to
increase company turnover.

Organizations establish research and development (R&D) units to facilitate such product
development efforts. R&D departments in general make constant efforts to upgrade the
present standards of the products of the organization to help the organization in achieving
product development strategy of the organization.

Activity

Name to Sri Lankan companies engage in FMCG’s pursuing intensive strategies.

 - 70 -

DIVERSIFICATION STRATEGIES

Based on the signals a firm gets form its environment the corporate level managers may
think of what they should do next. Specially, when a company sees threats for their line
of business and opportunities in other industries or business lines, then the management
may look for diversification strategies. That is the companies may invest in new lines of
businesses. There are three basic diversification strategies practiced by organizations:

a. Concentric Diversification
b. Horizontal Diversification
c. Conglomerate Diversification

With the increased competition among industries today, most of the organizations find it
difficult to pursue these diversification strategies. Further, managing a diversified
organization needs heavy efforts, and the top management of many companies today do
not pursue diversification strategies but they in turn try to build strong linkages with other
organizations to make collective efforts to gain higher levels of mutual growth for all. But
still organizations go for diversification strategies and you may find Sri Lankan examples
as well. Let us study these strategies in detail.

a) Concentric Diversification

When an organization goes for concentric diversification strategy, they invest in new
product or service lines but within the same area of business that they are currently
engaged.

Concentric Strategy Firm concentrate on their present lines of business

 - 71 -

Invest in new product or services

industries that are related to their
present line of business.

The radio broadcasting company “Sirasa” had made a concentrate diversification and
entered into television broadcasting. Further, they have diversified into organizing or
managing the outdoor musical and entertainment events as well. Through concentric
diversification the “Sirasa” company could gain higher levels of business experiences in
entertainment industry to improve their business efficiency.

“Maliban Group” mutually engaged in manufacturing and distributing biscuits in Sri

Lanka has diverted in the similar lines when they started manufacturing (bottling) of
mineral water bottles and distribution. Further they have started packaging and
distributing milk powder even with the same brand name of the company “Maliban”.

Activity

1. Is the Maliban group expands its operations in related fields? Comment.

2. Identify the investments made by Hettigoda Industries, owners of the brand name
“Siddhalepa”. Does Hettigoda Industries pursue concentric diversification
strategies? Explain.

When looking at international business organizations, the computer giant, International

Business Machines (IBM) corporation had diversified their business lines form
developing and manufacturing hardware had gone to providing IT solutions to their
clients.

b) Horizontal Diversification

A firm is identified as pursuing a horizontal diversification strategy when it starts offering

new products or services that are not related to their present line of business, but to their
same customers.
 - 72 -

c) Conglomerate Diversification

An organization seeks conglomerate diversification when it finds that their basic industry
becomes unattractive to carryout further. The likely situations for market unattractiveness
may be

• The market for the basic product has become saturated

• The sale and profit shows a decline over years.
• Innovations led by technologies making the industry unattractive due to new
products coming with new concepts and excessive competition from strong
competitors.
• Further, the corporate management may find other attractive business
opportunities.

In such situations the companies may go for investing in totally new business lines. It may
need funds to invest, and on top of that the company may seek new management skills to
operate their new business line since the new addition is not familiar to them.

When looking at the business environment you may identify local organizations that have
gone for conglomerate diversification strategies. The Ceylinco Group of Companies are in
the business such as Jewellery, banking real estate properly development, financial
services, stock broking, banking (Commercial + Investment + Merchant), automobile
assembly, insurance, higher education and so on.

Maharaja Group shows the diversified investments (conglomerates) such as radio and
television broadcasting, polymers – PVC, cosmetics (ICL Marketing), milk powder,
importation and distribution of building construction material, shipping plantations.

However, the present day trend towards business organization is that they find that the
conglomerates do not promote synergetic effects. They investor preference in the share
markets shows a trend that they go for non-conglomerates.

Activity
 - 73 -

Identify the unrelated business lines of Ceylon Tobacco Company Limited and EAP
Edirisinghe Group of companies.

Activity:

Write your Summary on Diversification Strategies with an example of your own.

DEFENSIVE STRATEGIES

When organizations find it difficult to survive with present level of operations and need to
be efficient and require resources, they ask for defensive strategies. The defensive
strategies available to an organization are joint ventures, retrenchments, divestiture or
liquidations. Let us look at each of these strategies with more details.

a. Join ventures

You would have seen or heard that may foreign companies form joint ventures with local
companies or public sector organizations to carry out certain business tasks. A joint
venture is a temporary partnership or consortium formed by two or more companies to
work on and to get the benefits from an opportunity available in the environment. The
 - 74 -

specialty of this strategy is that, it does not undertake the project on its own, but jointly
with another organization/s, sharing the risks and benefits among the parties to joint
venture. That is the reason to why we identify joint ventures as a defensive strategy. The
joint ventures that can be seen today are for the purposes of research and development,
distribution of goods – especially across boundaries, licensing agreements, manufacturing
agreements etc.

Therefore, now you can understand that the joint ventures enable the companies to
improve communication, share resources, minimize risks and globalize its operation.

b. Retrenchment

Retrenchment strategy is also called as turnaround or re-organizational strategy. When

organizations find it difficult to face the competition due to their own inefficiency, the
companies may seek cost cutting mechanism to increase its efficiency. You would have
seen that many companies go for reducing their number of employees as a measure to
increase the companies’ efficiency, specially during the late 1990s. Most of these
organizations pursued downsizing of employees were able to improve organizational
efficiency. Among those companies are the IBM corporation, Sri Lanka Transport Board
(SLCTB), Coca Cola Beverages (of Sri Lanka), Diesel & Motor Engineering (DIMO) C
& H Lanka Limited etc. The case of C & H Lanka Limited an export oriented toy
manufacture owned by South Korean and Sri Lankan investors went for a cost cutting
program in 1998. This company cut down their employee number from 6300 to less than
three thousand.

Retrenchment strategy does not always necessitate to retrench staff, but it can be stoppage
of production lines, close down less profitable business lines, launch expense control
methods, and close down outdated factories etc.

When you read business news you would have seen that some organizations go for
retrenchments to make them more competitive. Specially, when companies grow at a high
rate and the management do not make effort to direct company’s growth, then companies
start expands in to various disciplines. Later when the management find it difficult to
manage their organization (and when they find the level of efficiency had gone down)
specially when the competition for all of their business lines increases. The company will
 - 75 -

look for cost cutting and efficiency improvement mechanism. Retrenchment or re-
organizational strategy becomes useful in such situations.

c. Divestitures

When organizations need funds to invest in more profitable ventures they may look into
sell off some of their less profitable business lines and use the proceeds in the areas which
they find more profitable.

Organizations which have highly diversified business lines use divestiture strategy to
concentrate more on their core business lines and thereby try to improve the
competitiveness in their business environment. Further, after failing an attempt to recover
the business through retrenchment strategy a firm may use divestiture strategy to recover
its main business lines. Specially when certain business lines of the firm are identified as
responsible for poor performance, inefficiencies or needs higher attention but gives less or
no support on their main line of business management looks for divestiture strategies.

If you look at recent divestiture strategies carried out in our neighboring country India, the
Tata group (an automobile giant in the south east Asian region) sold its billion Rupee
business line in beauty care product range ‘Lakmee’ to Hindustan Lever Limited with a
view to concentrate on their new automobile production business. Tata group was
developing a mid-size car. Tata Indica, and a manufacturing plant for it in -1998)

Activity

Identify two Sri Lankan business firms which had pursued divestitures.

Planning and Strategy Formulation

 - 76 -

We start with carrying an environmental scanning for the company for strategic planning
process. With the help of SWOT analysis we can identify strengths and weakness inside
the firm and opportunities and threats in the external environment. Based on these we can
formulate strategies. The strategies are of three levels; corporate level strategies, business
level strategies and functional level strategies.

• Corporate- level strategy: develop a plan of action maximizing long-run value.

• Business – level strategy: a plan of action to take advantage of opportunities and
minimize threats
• Functional-level strategy: a plan of action improving department’s ability to
create value.
Having refreshed these strategies let’s look back the environmental scanning for strategy
formulation.

Internal environment (firm analysis)

We look at the internal environment if the firm. When analyzing the internal environment
of the company we have to search for following aspects.

• Core competencies
- In what areas does the company excel?

• Marketing
• Innovation or research and development capabilities
• Efficiency in its operations
• Technology

• Related strengths of the organization

- Other positives for the firm such as:

• Good brand image

• Customer loyalty
• Loyal employees

• Weaknesses
 - 77 -

- Identify in what areas the organization needs due attention or improvement to

cut down its inefficiencies. This includes areas such as employee- employer
relations, marketing, level of technology applied, level of training for
employees (in knowledge improvement, skill development, attitude changing
of a combination of these), etc.

• Financial position of the organization

- Access how good the financial position of the organization is. In assessing the
financial position your knowledge in financial analysis including the rations
may help you.

External Environment

The strategies have to understand the situation and the trends that may affect his decision
making environment. The “PEST” of the environment has to be studies for its trends and
forecasting which helps to improve the company’s decision making.

- Political / Legal and regulatory

- Economic
- Social
- Technological

Of the above PEST factors we have to understand the rate and predictability of change.
They may have the following patterns with regard to speed and the level of predictability
of the external environment situation.

• Slow, predictable change

• Rapid, predictable change
• Slow, unpredictable change
• Rapid, unpredictable change
 - 78 -

Further to what we have analyzed we have to look into the industry within with the
organization is operating. The study of the industry has to begin with understanding the
market structure of the industry. They are as you are aware;

• Monopoly
• Oligopoly
• Monopolistic competition
• Perfect competition.

Please refer to your Managerial Economics course material (MSU3207) to refresh on these
refresh on these topics.

After studying the market structure of the industry we have to study on few other key
characteristics of the industry which might have a strong influence over the strategists’
decision making. Let’s look at them,

• Industry growth rate

- Past, present and projected
- Declining slow growth, moderate growth, high growth
- Factors affecting growth
• Barriers to entry and exist

- High, moderate, low

• Critical success factors

- What does it take to win in this industry?

The fundamentals of competitive strategy

• The central goal of firm must be superior long- term return on

investment
• The fundamental unit of strategic analysis is the industry
• Company economic performance results from two distinct causes

Relative position
Industry Structure
 - 79 -

• Strategy must encompass both industry structure and relative

position within industry.

Industry Structure
• The essence of strategy formulation is coping with competition.
• The state of competition depends on five basic competitive forces
[Porter]
- Industry competitors
- Potential entrants
- Substitutes
- Suppliers
- Buyers

The collective strength of these forces determines the ultimate profit potential
of the company. The strategies have to study the level of strength, their behavior and
potential to control his company when he plans for strategies. These are shown in a
diagram below.
 - 80 -

Power of
Power of Rivalry Among Organizations Suppliers
Buyers

Substitute
Products

1. Rivalry among competitors

• Number and size of competitors or rivalry among competitors;

It may be one strong player and few small players, many small players (eggs market) few
major players (as in the case of iced cream market), one player for the entire market (CTC
for cigarettes), etc., etc.
- Determines industry structure (monopoly, oligopoly, monopolistic
competition etc.)
- Practices of competitors in reacting competitor’s movements.
- Good indicator of how competitive an industry is

• Type of competition
Start with the marketing mix variables that you already know.
- Price
- Product
- Promotion
- Distribution Channels

• Strengths and weakness of competitors

 - 81 -

- Presence of sustained competitive advantage with the competitors

• Competitors’ strategies
2. Threat of substitute product or services

The management has to look into the present and potential substitute products that are
presently available and that may come into the market in foreseeable future. The
substitutes can make substantial influence to the market. The presence of tire rebuilding
has caused market demand for tires to be more elastic. Passengers travel by busses finds
trains, taxis, own transport or hired vehicles as substitutes. Similar effects can be seen
with the products or services having substitutes. These substitutes can be directly for the
product, for the need family or the form of product.

The strategists have to keep in mind that by improving the value and price ratio they are
in a position to control this threat.

3. Bargaining power of suppliers

The raw material supply is vital for the operations of the organization. In this case the
availability and quality of the new material is important for the proper functioning. The
presence of only one major supplier can cause limitations to the company, by way of
controlling the raw material supply or controlling the price. For example, the availability
of good quality leather for leather industry.

Further, sometimes the company may find they cannot change the supplier because of the
entry barriers imposed. These barriers include, training provided to employees, specific
manufacturing processes or machinery requiring the specific quality/ standard material,
loans provided by the suppliers etc.

4. Bargaining power of buyers

When the company has one or few key customers then these customers can dictate terms
to the company on deliveries and price.

5. Threat of new entrants

 - 82 -

When companies find there is a potential for earning profits by entering into a new
industry they may look for the possibility to do so. When new investors enter into the
company’s business lines the profitability and discretion of company usually goes down.
Basically, the company find its present market share is reduced. As a result, they have to
face the losses of their inability to operate with their inability to operate with their
economies of scale in its operations. The company have to look into finding new
strategies to meet the new competition such as new marketing campaigns, changes to the
product quality, product differentiations, and new or more channels of distributions as
well.

Let’s look at this Five Forces Model in Summary.

1. Level of Rivalry in an industry. how intense is the current competition with

competitors?
Increased competition results in lower profits.

2. Potential for entry. how easy is it for new firms to enter the industry?
Easy entry leads to lower prices and profits.

3. Power of suppliers: If there are only a few suppliers of important items, supply costs
rise.

4. Power of Buyers: If there are only a few, large buyers, they can bargain down Prices.

5. Substitutes: More available substitutes tend to drive down prices and profits.
 - 83 -

-Improve price
-Show Industry growth
performance trade- off Threat of substitute products -Lack of differentiation
or services
-Produced by industries -Numerous competitors
- High exit barriers
-Earning high profits

Bargaining Rivalry among Bargaining

power of existing power of
Suppliers competitors buyers

-High concentration Threat of -Bargaining leverage

-Threat of forward new entrants
-Integration -Price sensitivity
-Switching costs

Entry barriers
-Economies of scale
-Product differentiation
-Capital requirements
-Brand identity
-Access to distribution
channels

Activity:
Explain how the five force model of a market is affected with the e – commerce today?
 - 84 -

Structural Analysis and Competitive Strategy

Once the strategist has assessed the forces affecting competition, he can identify
strengths and weaknesses of the company, especially on the following aspects.

- Where does the company stand against substitutes?

- Where does the company stand against the sources of entry barriers?
- How to cope up with the industry rivalry?
An effective competitive strategy takes offensive or defensive action to create defendable
position against competition. Broadly, this involves

- Positioning the company

- Influencing the balance
- Exploiting industry change
With regard to competition the company should look for the following strategic types.

Strategic types and their characteristics

• Defender

- Stable products and markets

- High share
- Focus on efficiency
- Risk averse

• Prospector

- Go with oriented
- Risk taking
- Focus on innovation

• Analyzer

- Hybrid organizations
 - 85 -

- Cash cows finance rising stars

• Reactor

- No clear strategy
- Long periods of inattention followed by frantic activity

Business level Strategies

Further based on the analysis there are strategic choices available to organizations at
business levels, corporate levels and functional levels. We have discussed corporate level
strategies at length. The business level strategies that are identified by Michael Porter are
shown below.

• Porter’s Generic Strategies

1. Differentiation strategy

• Unique product or service

• The companies want to gain a competitive advantage by
making their products different from competitors.
However, managers must keep in mind that differentiation
must be valued by the customer. Successful differentiation
enables to charge more for a product.
• An organization seeks to distinguish itself from
competitors through the quality of its products or services.
Developing an image perceived as unique

2. Overall cost leadership strategy

• Lowest cost producer
• An organization attempts to gain competitive advantage by driving
down organizational costs by way of manufacture at lower cost,
reduce waste and then lower costs than competitor’s prices

3. Focus strategy
• An organization concentrates on a specific regional market, product
line, or group of buyers (market segment)
 - 86 -

• Can then use cost leadership or differentiation

• Firms also choose to serve the entire market or focus on a few
segments.

- Focused low- costs try to serve on segment of the

market but be the lowest cost in that segment.
Focused differentiated.
- Firms again seeks to focus on one market segment
but is the most differentiated in that segment. Volvo
is a good example in safe automobiles.

Number Many Low- Cost Differentiation

of
market
segments Few
Focused Low- Focused
Low Cost Differentiation
Cost Differentiated

Low Cost Differentiation

Strategy

When implementing Business – level strategies (porter’s Generic Strategies) the strategies
have to look into the following

1. Different Strategy
Marketing and sales must emphasize high- quality, high- value image of
the organization’s products or services.

2. Overall Cost Leadership Strategy

Marketing and sales are likely to focus on simple product attributes and
how these product attributes meet customer needs in a low- cost and effective manner.
3. Focus Strategy
 - 87 -

Same approaches used for differentiation and cost leadership, depending

on which one is the proper basis for competing in or for a specific market segment,
product category, or group buyers.

Strategy/ Structure Relationship

Please attach this diagram to Strategy and Organization structure lesson.

Environmental
Factors

Organizational Structure
Capabilities d d

Industry
Standards
 - 88 -

Strategic Management

• A way of approaching business opportunities and challenges.

• A comprehensive and ongoing management process aimed at formulating and
implementing effective strategies which align the organization with its
environment to achieve major organizational goals.
o The creation of SBUs enables the setting of SBU’s mission and objectives
and the allocation of resources across SBUs in the organization
o Senior management need to have a framework to evaluate SBUs and to
assign limited resources among them; hence portfolio analysis
o Many models but only 3 are covered here BCG. PIMS, & GE models.

• Porter’s Competitive Strategies

o Cost leadership
o Differentiation
o Focus

Competitive Strategies: Michael Porter’s Generic Strategies

Cost Leadership

Cost Focus
Competitive advantage FOCUS Competitive Scope

Differentiation
Focus

Differentiation

Broad Narrow
- 89 -
 - 90 -

Situation Analysis Business Level Strategy

SWOT Analysis

Internal Environment- Strengths & Weaknesses

External Environment – Opportunities & Threats

TOWS Matrix
• Technique used in strategy formulation or combining
External analysis
• Opportunities
• Threats
Internal analysis
• Strengths
• Weaknesses

Sample Tows Matrix

From External Analysis

Threats
Opportunities
1
1 2
2 3
3

Strengths SO Strengths
ST Strategies
1 1
2 2 1
3 3 2
3

Weaknesses WO Strategies WT Strategies

1 1 1
2 2 2
3 3 3
 - 91 -

Rebecca J. Morris © Chapter 5

Corporate Portfolio Perspective on Multibusiness companies

• Boston Consulting Group (BCG) matrix;

- Identifying the Strategic Business Units (SBUs) by business area of product

market
- Assessing each SBU’s prospects (using relative market share and industry growth
rate) relative to other SBUs in the portfolio.
- Developing strategic objectives for each SBU.

• McKinsey/GE matrix

The BCG Matrix

BCG matrix is one of the widely used business portfolio approaches to corporate strategic
analysis. This growth share matrix is developed by the Boston Counseling Group

BCG matrix is a sort of graphical presentation of a company’s business. The

relative market growth rate of a business is plotted on the vertical axis and business’s
market share is plotted on the horizontal axis.

This matrix shows four different sections based on the high and low portions
of the market growth rate and the relative competitive position. These four segments of
the matrix are termed as stars, cash cows, dogs and question marks. These notations have
self- explanatory meaning for the business, which falls into such parts of the matrix.

The market growth rate is used to determine the attractiveness, potential

growth and profitability of a company’s businesses in various industries. To use in this
model, the market growth rate is determined using the sales data of the recent past: for
this purpose, the sales may be applied as sales volume in monetary basis or sales of unit
volume basis.

The relative competitive position of the market of the businesses is shown on

the horizontal axis of the diagram. The market shares of different businesses have to be
 - 92 -

identified for the purpose of analyzing the company business. This enables to calculate
the market share of the company and to understand the relative competitive position of
each of the business line of the company. This is expressed as the ratio of the businesses
share in the market. Therefore, we can see that the relative competitive position of the
business provides a basis for comparing the ‘strengths’ of different businesses of the
company. (Recall the SWOT analysis and ‘Strengths’ of a business; this will enable you
to understand why the concept of relative competitive position of business used in the
analysis of business portfolio analysis.)

Let us look at the BCG Growth Share Matrix.

High
STARS
QUESTION MARKS

10%

DOGS
Low CASH COWS

High Low

Relative Competitive Position (Market Share)

or with illustrations,
 - 93 -

Relative Market Share Position in the Industry

High Medium Low

1.0 50 0.0

High +20
Stars (II)
Question Marks (I)

Industry
Sales
?
Growth Medium 0 Cash Cows (III) Dogs (IV)
Rate
(Percent)
Low -20

Market growth rate and the relative competitive position are generally separated
into ‘high’ and ‘low’ and this separation usually carries many assumptions. The market
growth rate is identified as high if the growth rate exceeds 10%. Relative competitive
position in determined as high when the relative market share goes beyond 1.0 or 1.5.
Relative market shares go beyond 1.0 indicates that the company position as the market
leaders in that business, (implying the largest competitor holds a lesser market share of
than the company in business) and a relative market share of 0.25 implies that the
company’s market share of that business is just 25% or one fourth of the market leader’s
sales volume. Further, a small value implies holding a very small market share in the
market and in some situations it indicates insignificant market share.

The business of the organization is plotted on this matrix. When doing so, the
revenue generated by each of the business in taken into consideration, and those are
interpreted on the graph. Each business of the company is shown as a circle and the size
of the circle is drawn proportionate to its contribution to the company’s total revenue. In
other words, a business unit which generate a revenue twice more than the revenue
 - 94 -

generated by another business is depicted by a circle that is twice of the size of the
previous.

Let us study these quadrants in detail:

• Stars – High relative market shares in fast growing industries.

• Question marks – Low relative market shares in fast growing industries.
• Cash cows- High relative market shares in low- growth industries.
• Dogs- low relative market shares in low- growth industries.

Stars

HIGH MARKET Growth RATE + HIGH MARKET SHARE

Stars are question mark businesses that become successful. That is the business having
high marker growth could acquire a significant market share. Stars represent the business
unit that can become good long-rub opportunities in the company’s business portfolio.
Stars face market competition since the competitors and potential competitors see a
growth in the market.

Therefore, the company has to spend more on the marketing expenditure to safeguard the
market position. (its market share). Further, the company has to meet the increase in the
market demand by expanding its production capacities.

For the purpose of investing an expansion of production facilities and the marketing
expenditure there is a requirement of infusion of funds. In many situations the funds
generated by the stars are not sufficient enough and additional funds have to be provided
into the business. Therefore, stars can be seen as businesses that require funds in the short
term as a long-term investment.

Cash Cows

LOW MARKET GROWTH + HIGH MARKET SHARE

The stars that face decline are market growth become cash cows. Cash cows do not
require heavy investments since the market has become matured. As a result,
reinvestment needs in these businesses are low and, due to the high market share, the
 - 95 -

business gets the opportunity to generate more income in excess of reinvestment in the
same. Further, as the company’s position as the market leader, the company get the
benefits of economies of scale, and higher profit margins.

These businesses are called cash cows because they produce a lot of cash for the
company. The company’s task with the cash cows are just earning returns (or milk them)
but not much as investing on it. The excess funds generated by the cash cows are used to
pay the companies bills as well as to invest in other businesses.

Dogs

LOW MARKET GROWTH+ LOW COMPETITIVE MARKET POSITION

Dogs are businesses with poor market shares in low growth markets of a company’s
business portfolio. Because of the maturity (a declining) of the market and heavy
competition (or week competitive position in the market) the companies do not make
efforts to go for investing in such industries. Further, in many cases it can be seen as they
require more management efforts (and funds than they generate in some situation) and
resources which it makes it ineffective and inefficient. The companies at this juncture
decide dogs as the businesses that are for harvesting, divestiture or liquidation.

Activities

1. Identify a company with a multiple product portfolio.

2. Estimate the market share of the company of the business and their market
growth rates.
3. Identify those businesses as the question marks, stars, cash cows and dogs.

Note: As a general practice the growth rate of GNP is used as the cut-off point for the
market growth rate as high and low for the BCG growth share matrix.
 - 96 -

In summary,

BCG (Boston Consulting Group) Matrix

• Provides a framework for senior management in allocating resources across

business units in a diversified firm by
- Balancing cash flows among business units, and
- Balancing stages in the product life cycle (PLC)
• The horizontal axis is the Relative Market Share shown in a log scale.
• Vertical line is usually set as 1.0 Relative Market Share.
• An SBU to the left of this line means it is the market leader in the industry or
segment in which it operates
• Conversely an SBU to the right of this line (1.0 RMS) means it is not the leader

The vertical axis is the growth rate

• 5 levels may be used: product, product lines, market segment, SBU and business
growth rate
• Horizontal line is usually set as 10% Growth Rate
• SBUs above the set value (10% line) represents high growth rates
• Conversely, SBUs below this value depicts slower growth rate

The Strategic Implications of the BCG Matrix

• Stars – Aggressive investments to support continued growth and consolidate

Competitive position of firms.
• Question marks – Selective investments; divestiture for weak firms or those with
uncertain prospects and lack of strategic fit.
• Cash cow – Investments sufficient to maintain competitive position. Cash
surpluses used in developing and nurturing stars and selected question mark firms.
 - 97 -

• Dogs- divestiture, harvesting, or liquidation and industry exit.

Limitations on Portfolio Planning

• Flaws in portfolio planning:

- The BCG model is simplistic; considers only two competitive environment
factors- relative market shares and industry growth rate
- High relative market share is no guarantee of a cost savings or competitive
advantage.
- Low relative market share is not always an indicator or competitive failure
or lack of profitability.
- Multifactor models such as McKinsey/GE matrix are better though
imperfect.

Key Assumption of BCG Matrix

• Stable cost/ price relationship

- Not valid if the firm is pricing on projected lower average unit costs in the
future.
• Market leader influences the average costs
• Profit margin is a functional of market share
- This ignores profitable niches
Strategic Perspectives of Products in Different Quadrants

Four different strategic perspectives

• Investment
• Earnings
• Cash- flow, and
• Strategy Implications
Question Marks (Problem Children)

• Investment – heavy initial capacity expenditures and high R&D

costs
• Earnings – negative to low
• Cash-flow – negative (net cash user)
• Strategy Implications
 - 98 -

- If possible to dominate segment, go after share If not,

redefine the business or withdraw
Stars

• Investment – continue to invest for capacity expansion

• Earnings- Low to high earnings
• Cash-flow – Negative (net cash user)
• Strategy Implications
- Continue to increase market share – even at the expense of
short term earnings
Cows

• Investment- capacity maintenance

• Earnings- High
• Cash – flow – Positive (net cash contributor)
• Strategy Implications
- Maintain market share and cost leadership until further
investment becomes marginal
Dogs

• Investment

- Gradually reduce capacity

• Earnings- High to low

• Cash- Flow

- Positive (net cash contributor) if deliberately reducing

capacity

• Strategy Implications

- Plan an orderly withdrawal to maximize cash flow

BCG Matrix (Three Paths to Success)

• Continuously generate cash cows and use the cash throw- up by the
cash cows to invest in the question marks that are not self-
sustaining
• Stars need a lot or reinvestments and as the market matures, stars
will degenerate into cash cows and the process will be repeated.
 - 99 -

• As for dogs, segment the markets and nurse the dogs to health or
manage for cash

BCG Matrix (Three Paths to Failure)

• Over invest in cash cows and under invest in question marks

- Trade further opportunities for present cash flow
• Under invest in the stars
- Allow competitors to gain share in a high growth market
• Over milked the cash cows

The Corporate Governance Problem

• On the job consumption

- Elaborate and expensive
Perks for top managements.
• Excessive pay not linked to performance
- Down markets and upward spirals of executive pay.
• Empire building
- Buying additional businesses that increase the size of the company without
increasing shareholder wealth.

Corporate Governance Mechanisms

• Board of directors
• Stock- based compensation
• Corporate takeovers
- Takeover constraints
- Corporate raiders
- Greenmail
• Leveraged buyouts
- Managers offer to exchange equity for debt in a leveraged buyout
(purchase of the company)
 - 100 -

.
Please refer to the presentation slides and case
studies used with this course material.
Thank you.