LESSON 1

AN INTRODUCTION TO STRATEGIC MANAGEMENT

OBJECTIVES

To understand the concept of Strategic Management

To know the various definitions of Strategic Management.

CONTENTS
1.1 Introduction
1.2 Definitions of Strategy
1.3 Definitions of Strategic management
1.4 Concepts of Strategic Management
1.5 Origin of the Strategy
1.5.1 The military origins of strategy
1.5.2 The political role of strategy
1.5.3 The academic contribution to strategy
1.5.4 The contribution of practitioners
1.6 The nature of strategy
1.6.1 Strategy from the manager's point of view
1.7 Benefits of strategic management
1.8 Summary
1.9 Assignment questions
1.1 INTRODUCTION
Strategic management is the most exciting of the management disciplines. Strategic
management is about success and failure, about the ability to plan wars and win them.
Big mergers-perhaps the most visible sign of strategic management in action-catch the

headlines. Effective strategic management can transform the performance of an

organization, make fortunes for shareholders, or change the structure of an industry.
Ineffective strategic management can bankrupt companies and ruin the careers of chief
executives.
1.2 DEFINITIONS OF STRATEGY
Many writers have attempted to define strategy. Such definitions emphasize one or
more of the aspects described above. A definition that included all the aspects would
have to be very long.
One of the earliest definitions of strategy comes from the ancient Greek writer
Xenophon: 'Strategy is knowing the business you propose to carry out'. This definition
stresses that strategy requires knowledge of the business, an intention for the future,
and an orientation towards action. This definition also emphasizes the link between
leadership and strategy formulation. Xenophon saw strategy as a direct responsibility of
those in charge, not as a spectator sport.
Kenneth Andrews defined strategy as: The pattern of major objectives, purposes or goals
and essential policies or plans for achieving those goals, stated in such a way as to define
what business the company is in or is to be in and the kind of company it is or is to be'.
Note that in this definition strategy is concerned with both purpose and the means by
which purpose will be achieved. It implies that strategy must address the fundamental
nature of the business in the future. This suggests that strategy will be sensitive to values
and culture as well as to business opportunity. It also implies that managers are able
and responsible for making deliberate choices about the future nature and scope of their
business.
Igor Ansoff offers a brief definition: 'Strategy is a rule for making decisions'. Ansoff also
distinguishes between policy and strategy. A policy is a general decision that is always
made in the same way whenever the same circumstances arise. A strategy supplies
similar principles but allows different decisions as the circumstances differ.
Kenichi Ohmae defines strategy as: The way in which a corporation endeavors to
differentiate itself positively from its competitors, using its relative strengths to better
satisfy customer needs'. This definition addresses both the competitive aspect of
strategy and the need to build capabilities. It also explicitly mentions customers and the
satisfaction of their needs as a driver of strategy.
More' recently and reflecting his perspective as a practicing management consultant,
Michael de Kare-Silver suggests the strategy should have just two elements - future
intent and sources of advantage. He is therefore restating the views that intent and
strategy are inseparable. The word 'source of advantage' has a similar meaning to
capability but emphasizes that capabilities only have value when they meet the real
needs of the customers.

Thus, strategy can be defined as 'Ideas and actions to conceive and secure the future'.
This definition highlights the fact that strategy requires thought about the future but
also effective action to realize the conception. This definition, though brief, does not
imply that strategy cannot have the many aspects discussed above.
It is apparent that definitions of strategy vary. To understand the reasons for this
variation, it may help to have some understanding of where the ideas come from
Military thinkers, political thinkers, academics, and practitioners have all considered the
issue of strategy.
1.3 DEFINITIONS OF STRATEGIC MANAGEMENT
(i) Strategic management is both a skill and an art. It is a skill because there is a body of
knowledge that can be learnt and techniques that can be used with greater or lesser
competence. It is an art because it deals with the future that is unknowable and with the
hearts and minds of people that transcend reason. Good strategic management requires
both clear thought and sound judgment.
(ii) Strategic management is the formal and structured process by which an organization
establishes a position of strategic leadership. Strategic leadership is about the
achievement of sustained comparative advantage over the competition. Strategic
leadership is the outcome of the strategic management process. It is a state of being
rather than a management mechanism. So strategic leadership does not replace
strategic management; it results from it.
(iii) Strategic management skills are not only critical for those who have made it to the
top. Executives and managers at earlier stages of their careers need to have an
understanding of strategic management to increase the value of their contribution in
their present assignments. It can help them to master the corporate jungle and to
achieve individual career aims. It instills the habit of reaching an identified goal by
developing the necessary competence and seizing available opportunities. In short, an
understanding of strategy enhances performance and improves career prospects.
1.4 CONCEPT OF STRATEGIC MANAGEMENT
Strategic management is that set of managerial decisions and actions that determines
the long-run performance of a corporation. It includes environmental scanning, strategy
formulation, strategy implementation and evaluation and control The study of strategic
management therefore emphasizes the monitoring and evaluating of external
opportunities and threats in light of a corporation s strengths and weaknesses.
Originally called business policy, strategic management incorporates such topics as
long-range planning and strategy. Business policy, m contrast has a general
management orientation and tends primarily to look inward with its concern for
properly integrating the corporations many functional activities Strategic management,
as a field of study, incorporates the integrative concerns of business policy with a
heavier environmental and strategic emphasis. Therefore, strategic management has
tended to replace business policy as the preferred name of the field.

1.5 ORIGIN OF THE STRATEGY

1.5.1 The military origins of strategy
The concept of strategy is an ancient one and originated in the study of success in war.
The word strategy comes from the Greek 'stratos' (army) and 'agein' (to lead). The
'strategos' in Athens was an elected general, a post created when Athens was at war with
Persia in 506 BC. The Greeks saw strategy setting as one of the responsibilities of a
leader, a connection continues in modern thinking. The Greeks also gave serious
thought to what kind of person would be suitable to the role and how whey should be
trained. Interestingly, they concluded that intellectual skills, while essential for a good
strategist, were not sufficient unless supported by practical learning gained from
experience.
At about the same time, and quite independently, the Chinese general, Sun Tzu wrote
about strategy, also relating it closely to the duties of a leader: 'Only a brilliant ruler and
an excellent leader, who is able to conduct their intelligence with superiority and
cleverness, is certain to achieve great results. The entire force relies on this for every
move. This is the essence of strategy'.
Sun Tzu saw the aim of strategy as defeating the enemy by fighting as few battles as
possible. He defines priorities for gaining advantage over an adversary. The highest
priority is to foil the enemy's plots, second to ruin his alliances, third to attack his
armies, and lowest of all to besiege his castles. In his view, strategy is as much about
avoiding battles as it is about fighting them. Sun Tzu's book the art of war has
sometimes been used as a management text because of the relevance of its insights to
business strategy.
Perhaps the best-known military strategist of more recent history is Carl Von
Clausewitz. One often quoted sentence highlights an important paradox about strategy
in that good strategies are inherently simple but hard to conceive: Thus, then, in
strategy everything is very simple, but not on that account very easy. Von Clausewitz
saw good strategies as difficult to conceive and even more difficult to implement so that
only very few people ever succeed as strategists.
Military thinking certainly has some relevance to business strategy. Its emphasis on
winning, on the importance of leadership, and on taking action to achieve desired
results is all themes, which resonate. On the other hand, war campaigns are a limited
analogy to the realities which modern enterprises face. The military analogy lacks any
equivalent to the customer. Modern enterprises rarely have the simple hierarchical
structure or obedience to orders, which military models assume. Military writers and
particularly Clausewitz saw war as a zero-sum game. Business competition often allows
opportunities to avoid the destructive results of a zero-sum game by creating diversity.
If we accept the analogy that business is a war then the military model of strategy can be
an important starting point for an exploration of business strategy. Strategy also has a
political role.

1.5.2 The political role of strategy

Niccolo Machiavelli added a political dimension to the study of strategy. The prince
published in the early sixteenth century was notable for its detached observation of
events. Francis Bacon said of Machiavelli 'He set forth openly and sincerely what men
are wont to do and not what they ought to do'.
Machiavelli is also the earliest writer to concern himself with the realities of
implementing strategies. One particular example of this quoted by Jay is how to handle
takeovers. Machiavelli was, of course, writing about a prince taking control of a country.
His advice was that it was necessary either to treat the powerful citizens well or to crush
them so completely so that they could not retaliate. Jay points out that there is a parallel
in hows to manage companies which have been recently taken over and that advice on
such matters is rarely available in conventional management books. Machiavelli moved
beyond the ancient writers in his concern for effectiveness as much as describing ideals.
1.5.3 The Academic Contribution to Strategy
Another major source of knowledge about strategy is provided by academics. Modern
thinking on business strategy first evolved into a recognizable form in the 1960s in the
USA. Writers such as Drucker, Chandler, Ansoff, and Andrews studied the development
of large successful American corporations before and during the Second World War.
Their work set the scene for what is now usually referred to as the 'Classical school' of
business strategy. The classical school saw direction setting strategy formulation as an
important responsibility of top mangers and believed that it could be separated from
strategy implementation. Corporate thinkers in headquarters headed by the chief
executive formulated the strategy: divisional management teams implemented it. The
analogy with the general and his headquarters staff and field officers is clear so that the
classical school seems to have its roots in the military model of strategy. One major
addition to thinking was the introduction of economic goals - particularly return on
capital - as the driving objective of business.
The thinking of the classical school has never been replaced by a better total view of
what business strategy is all about but it has come in for significant criticism from at
least three directions. First, the companies that based their strategies on the classical
theories have not necessarily been more successful .than others who did not. Over-rigid
application of classical approaches led to strategic planning becoming a staff role
separated from, and often not well regarded by, line management. As a result, the
concepts themselves were rejected even though the failures may have resulted from poor
application for the concepts as much as from the limitations of the concepts themselves.
Secondly, it was suggested that the techniques and concepts of the classical school could
well have been appropriate to large companies based in the USA at a time when America
had a dominant share of world economic activity. The same techniques and ideas might
be less relevant in other business contexts. For example, it might be possible for Dupont
in 1960 in a growing chemical market to set worldwide strategies centrally and to expect

them to be implemented successfully. It might not be possible for a small company

struggling in a depressed economy to go about strategy making in the same way.
Thirdly, the classical school thinking was too closely tied to its military and economic
models. Other fields of thought - particular psychology, sociology, and biology - offered
new and relevant ways of thinking about strategy.
The volume of academic writing in the field of strategic management is both very large
and diverse. The value to the business strategist is in providing multiple different ways
of thinking about strategy. It is, however, important to realize that academics are
looking for general patterns that they can prove by analysis. This may not be directly
helpful to the strategist who is seeking a unique solution to a unique strategic dilemma
for a particular enterprise. The academics are seeking to understand the rules; the
manager is seeking to get round the rules for the advantage of his or her own enterprise.
In addition, academics can sometimes seem unaware of the realities of the constraints
and pressures within which managers have to work. Political pressures and imperfect
knowledge can make cold logic less relevantly to the needs of the practicing manager.
Business, success may often come from carrying people along with an imperfect
strategy.
1.5.4 The Contribution of Practitioners
Managers have to face strategic issues and take action to resolve them. Some have
written convincingly about their experiences. Alfred P. Sloan was president and then
chairman of General Motors between 1923 and 1946. The strategic issues facing Sloan
were how to handle the vast enterprise that General Motors had become and how to
catch Ford and had taken a lead in mass production techniques. Sloan pioneered the
Divisionalised Corporation that became a model for many large companies. The
divisionalised form allowed policy making by the center to be separated from execution
by the divisions. It thereby allowed General Motors to become more diverse than Ford
without giving up any economies of scale. The central strategy makers were able to
gather detailed knowledge of what execution involves and so set strategies for the
separate divisions that were both different from each other and achievable.
John Harvey-Jones wrote his book Making it Happen just after he retired as chairman
of ICI. One of his principal dilemmas was how to make the board of ICI work better. As
a result, his particular contributions to the concept of strategy include his insights into
how boards should operate and on the mix of people necessary to devise strategy for a
large organization at the highest level. He also emphasizes the responsibility for
communicating the strategy to all concerned and stresses the importance of people in
making any strategy happen. To him success lies in getting a lager part of a strategy
implemented rather than conceiving a more brilliant strategy. Again Harvey-Jones's
solutions were effective for the particular issues faced by ICI at the time.
Andrew Grove wrote as president and CEO of Intel Corporation. Intel faced particular
issues in the micro-electronic industry. This industry may be a typical of business in
general because of its rapid speed of technological advance. Such a rapidly changing

environment provides an opportunity to study strategic change at higher speed - just as

geneticists study fruit flies because their reproduction cycle is so short. Grove describes
strategic inflexion points in which radical changes in business parameters require
radical strategic change in response. His ideas the relevant to other industries as they
face moments of radical change but may be less useful in slower - moving strategic
contexts.
The advantage of studying strategy as seen by practitioners is that they approach the
issues of strategy from the perspective of practicing managers - the need to take action
to solve a problem. The disadvantage is that the dilemma is different for each case and
so the lessons may not be relevant to other situations.
Many of the concepts and techniques dealing with strategic management have been
developed and used successfully by business corporations such as General Electric and
the Boston Consulting Group. Over time, business practitioners and academic
researchers have expanded and refined these concepts. Initially strategic management
was of most use to large corporations operating in multiple industries. Increasing risks
of error, costly mistakes, and even economic ruin are causing today's professional
mangers in all organizations to take strategic management seriously order to keep their
company in an increasingly volatile environment.
1.6 THE NATURE OF STRATEGY
This lesson is about strategic management. Almost everyone thinks that they know what
strategy is. However, if you ask what the word strategy means to them, the range of
replies is surprisingly varied. To some the term strategic is no more than a synonym for
imporatnt; to others it may be a plan of action and for a third group it might be a
blueprint for success. More considered replies are likely to reveal different shades of
meaning within this broad range. To us, strategic management is about envisioning and
realizing the future. Note that this definition requires that strategy should both provide
an idea of the future and generate the action necessary to realize that idea.
Implementation is part of strategy and not a separate activity.
Strategy may be viewed from different angles, they are as follows,
1.6.1 Strategy from the Managers Point of View
Managers are responsible for the health of their enterprises both in the present and in
the future. Strategic management is the part of their hob that relates to the future. The
future is always uncertain so that strategic management decisions must be made with
information that is always in completed and often wrong. This is not a new issue. It is
not easy for mangers to manage strategically. Henry Mintzberg (1989) has observed and
most managers will be personally aware that: Managers work at an unrelenting pace and
their activities are characterized by brevity, variety and discontinuity. Managers have to
manage strategically within this pattern of work. The objective of strategic management
is to prepare an enterprise for future success to conceive and secure the future of that
enterprise. The objective is to help managers to achieve this.

Strategic management requires both thinking and action. Strategic management only
takes place when action follows thought. Thought on its own may be intellectually
stimulating but it is not strategic management. There are limits to the ability of
managers to foresee the future, to understand the significance of changes, to conceive
strategies, and to implement strategies successfully. Managers need to be aware of these
limits but cannot avoid their responsibility for taking action.
The managers perspective of strategy has three characteristics. First of all, the concern
of managers is with a particular enterprise at a particular time. Secondly, they need to
have a concept of what the future will be like. Thirdly, they have to take action. This is
the essence of strategic management.
1.7 BENEFITS OF STRATEGIC MANAGEMENT
Research has revealed that organizations that engage in strategic management generally
outperform those that do not. The attainment of an appropriate match or fit between
an organizations environment and its strategy, structure, and processes has positive
effects on the organizations performance. Fox example, a study of the impact of
deregulation on U.S., railroads found that those railroads that changed their strategy as
their environment changed outperformed those railroads that did not change their
strategies.
A survey of nearly 50 corporations in a variety of countries and industries found the
three most highly rated benefits of strategic management to be:

Clearer sense of strategic vision for the firm.

Sharper focus on what is strategically important.
Improved understanding of a rapidly changing environment.

To be effective, however, strategic management need not always be formal processes.

1. Where is the organization now? (Not where do we hope it is!)
2. If no changes are made, where will the organization be in one year? Five years? Ten
years? Are the answers acceptable?
3. If the answers are not acceptable, what specific actions should management
undertake? What are the risks and payoffs involved?
Studies of the planning practices of actual organizations suggest that the real value of
strategic planning may be more in the future orientation of the planning process itself
than in any written strategic plan. Small companies, in particular, may plan informally
and irregularly. Nevertheless, a recent study of small businesses revealed that even
though the degree of formality in strategic planning had no significant impact on a
Firm's profitability, formal planners had twice the growth rate in sales. Planning the
strategy of large, multidivisional corporations can become complex and time
consuming. It often takes slightly more than a year for a larger company to move from

situation assessment to a final decision in such a firm, a formalized, more sophisticated

system is needed to ensure that strategic planning leads to successful performance.
Otherwise, top management becomes isolated from developments in the business units,
and lower level mangers lose sight of the corporate mission and objectives.
1.8 SUMMARY
This lesson dealt about the different definitions and concepts of strategic management.
It also discusses about the origin of strategy from the different quarters. The last part of
the lesson enumerates the benefits of the strategic management.
1.9 ASSIGNMENT QUESTIONS
1.
2.
3.
4.
5.

Define Strategy
Give the various Definitions of Strategic management
Explain the Origins of the Strategy
What is the nature of strategy?
What are Benefits of strategic management?

- End of Chapter -

LESSON -2
STRATEGIC VISION

OBJECTIVES

To understand the concept Strategic vision

To analyse the different types of strategic objectives

CONTENTS
2.1 Introduction
2.2 Strategic objectives
2.2.1 Establishing long and short range objectives

2.2.2 Mix of organizational objectives

2.3 Cascade Approach to establishing objectives
2.3.1 Cascade approach to objective setting
2.4 Financial objectives
2.5 Summary
2.6 Assignment questions
2.1 INTRODUCTION
A well-conceived mission statement defines the fundamental, unique purpose that set a
company apart from other firms of its type and identifies the scope of the companys
operations in terms of products including services offered and markets served. It may
also include the firms philosophy about how it does business and treats its employees.
It puts into words not only, what the company is now, but what it wants to become
management strategic vision of the firms future. Some people like to consider vision
and mission as two different concepts: a mission statement describes what the
organization is now; a vision statement describes what the organization would like to
become. We prefer to combine these ideas into a single mission statement. The mission
statement promotes a sense of shared expectations in employees and communicates a
public image to important stakeholder groups in the company task environment. It tells
who we are and what we do as well as what we would like to become.
One example of a mission statement is that of Maytag Corporation: To improve the
quality of home life by designing, building, marketing and servicing the best appliances
in the world.
Another classic example is that etched in bronze at Newport News Shipbuilding,
unchanged since its founding in 1886: We shall build good ships here at a profit if we
can at a loss if we must but always good ships.
Executive leadership is the directing of activities toward the accomplishment of
corporate objectives. Executive leadership is important because it sets the tone for the
entire corporation. A strategic vision is a description of what the company is capable of
becoming. It is often communicated in the mission statement. People in an organization
want to have a sense of mission, but only top management is in the position to specify
and communicate this strategic vision to the general workforce. Top managements
enthusiasm or lack of it about the corporation tends to be contagious. The importance of
executive leadership is illustrated by John Welch, Jr., the successful Chairman and CEO
of General Electric Company (GE). According to Welch: Good business leaders create a
vision, articulate the vision, passionately own the vision, and relentlessly drive it to
completion.

Chief executive officers with a clear strategic vision are often perceived as dynamic and
charismatic leaders. For instance, the positive attitude characterizing many well-known
industrial leaders such as Bill Gates at Microsoft, Anita Roddick at the Body Shop, Ted
Turner at CNN, Herb Kelieher at Southwest Airlines, and Andy Grove at Intel has
energized their respective corporations. They are able to command respect and to
influence strategy formulation and implementation because they tend to have three key
characteristics:
1. The CEO Articulates Strategic Vision for the corporation. The CEO envisions the
company not as it currently is, but as it can become. The new perspective that the CEO's
vision brings to activities and conflicts gives renewed meaning to every one's work and
enables employees to see beyond the details of their own jobs to the functioning of the
total corporation.
2. The CEO Presents a Role for others to identify with and to follow. The leader sets an
example in terms of behavior and dress. The CEO's attitudes and values concerning the
corporation's purpose and activities are clear cut and constantly communicated in words
and deeds.
3. The CEO Communicates High Performance Standards and Shows Confidence in the
Follower's Abilities to meet these standards. No leader ever improved performance by
setting easily attainable goals that provided no challenge. The CEO must be willing to
follow through by coaching people.
Communication is key to effective management of change. Rationale for strategic
changes should be communicated to workers not only in newsletters and speeches, but
also in training and development programs. Companies in which major cultural changes
have taken place successfully had the following characteristics in common:
- The CEO and other top managers had a strategic vision of what the company could
become and communicated this vision to employees at all levels. The current
performance of the company was compared to that of its competition and constantly
updated.
- The vision was translated into the key elements necessary to accomplish that vision.
For example, if the vision called for the company to become a leader in quality or
service, aspects of quality and service were pinpointed for improvement and appropriate
measurement systems were developed to monitor them. These measures were
communicated widely through contests, formal and informal recognition, and monetary
rewards among other devices.
2.2 STRATEGIC OBJECTIVES
Strategic management is concerned with making decisions about an
organizations future direction and implementing those decisions. Basically, strategic
management can be broken down into two phases: strategic planning and ' strategy
implementation. Strategic planning is concerned with making decisions with regard to

1. Defining the organizations philosophy and mission.

2. Establishing long and short-range objectives to achieve the organization's mission.
3. Selecting the strategy that is to be used in achieving the organizations objectives.
Strategy implementation is concerned with making decisions with regard to:
1. Developing an organizational structure to achieve the strategy
2. Ensuring that the activities necessary to achieve the strategy are effectively
performed.
3. Monitoring the effectiveness of the strategy in achieving the organizations objectives.
2.2.1 Establishing Long and Short range Objectives
Long-range objectives specify the results that are desired in pursuing the organizations
mission and normally extend beyond the current fiscal year of the organization. Shortrange objectives are performance targets, normally of less than one year's duration, that
are used by management to achieve the organizations long-range objectives.
As organizations objectives depend on the particular organization and its mission.
Although objectives can vary widely from organization to organization, normally they
can be categorized as follows:
1. Profitability
2. Service to customers, clients or other r recipients
3. Employee needs and well-being
4. Social responsibility
The objectives of an organization are determined by the interaction among the following
factors:
1. Present condition of the organization as determined by an internal organizational
analysis.
2. External environment of the organization as determined by competitive analysis,
environmental scanning and environmental forecasting.
3. Corporate culture of the organization. Corporate culture is the values that 'set a
pattern for an organization's activities and actions.

The compass bearing for organizations is their objectives. The purpose of the
management of any organization is to lead and motivate the employees of the
organization toward the accomplishment of the organizations objectives. Short-range
objectives should follow logically form long-range objectives.
The objectives of an organization result from the interaction among the following
factors:
1. Environmental scanning and forecasting
2. Competitive analysis
3. Internal organizational analysis
4. Organizational culture
Organizational culture is the pattern of beliefs and expectations shared by the
organization's members, which powerfully shape the behavior of individuals and groups
within the organization.
2.2.2 Mix of Organizational Objectives
No one mix or combination of organizational objectives is applicable to all
organizations. The type of objectives that are established depends on the nature of the
particular organization. Ideally, an organizations objectives should be compatible with
its culture and should
1. Match its strengths to opportunities
2. Minimize threats to the organization
3. Eliminate weaknesses in the organization
They should also support the organization's mission and need to be established for every
area of the organization where performance and results directly influence the survival
and success of the organization. The mix of objectives from prior years also influences
the mix of organizational objectives. The degree of achievement of prior objectives
influences the aspiration level of the management team and often serves as a starting
point for determining the mix and exact nature of the objectives for a future time period.
The following items provide potential areas for establishing objectives for most
organizations:
a. Customer Service. Expressed in terms of delivery times or customer complaints.
Example:

To reduce the number of customer complaints by 40 percent over the next three
year
b. Financial Resources. Expressed in terms of the capital structure, new issues of
common stock, cash flow, working capital, dividend payments, and collection periods.
Examples:
To increase work capital to $10 million within five years
To reduce long term debt to $8 million within three years
c. Human Resource. Expressed in terms of rates of absenteeism, tardiness, turnover, or
number of grievances. Also can be expressed in terms of number of people to be trained
or number of training programs that are to be conducted.
Examples:
To reduce absenteeism by 8 percent within three years
To conduct a 40-hour supervisory development program for 300 supervisors at a
cost not to exceed $400 per participant over the next four years
d. Markets. Expressed in terms of share of the market or dollar or unit volume of sales.
Example:
To increase commercial sales to 85 percent of total sales and reduce military sales to
15 percent of total sales over the next three years
To increase the number of units of product X sold by 500, 000 units within four
years
e. Organizational structure. Expressed in terms of changes to be made or projects to be
undertaken.
Example:
To establish a decentralized organizational structure within three years
f. Physical Facilities. Expressed in terms of square feet, 'fixed costs, or units of
production.
Examples:
To increase storage capacity by 15 million units over the next three years.

To decrease production capacity in the West Coast plant by 20 percent within

three years
g. Product. Expressed in terms of sales and profitability by product line or product or
target dates for development of new products.
Example:
To phase out the product with the lowest profit margin within two years
h. Productivity. Expressed in terms of a ratio of input to output or cost per unit of
production.
Example:
To increase the number of units produced per worker by 10 percent per eight
hour day over the next three years
i. Profitability. Expressed in terms of profits, return on investment, earnings per share,
or profit to sales ratio.
Example:
To increase return on investment to 15 percent after taxes within four years
j. Researches and Innovation. Expressed in terms of the amount of money to be spent or
projects to be completed.
Example:
To develop an engine in the medium-price range within five years at a cost not to
exceed $3 million
k. Social Responsibility expressed in terms of types of activities, number of days of
service, or financial contribution.
Example:
To increase our contribution to United Way by 30 percent over the next three
years.
2.3 CASCADE APPROACH TO ESTABLISHING OBJECTIVES
An approach to setting objectives throughout the entire organization is to have the
objectives "cascade" down through the organizational hierarchy. The steps involved in
this approach are outlined below:

1. The objective-setting process begins at the top of the organization with a statement of
mission.
2. Long-range objectives are then established from this statement.
3. Long-range objectives lead to the establishment of performance targets (short-range
objectives) for the overall organization.
4. Long and short-range objectives are then established for each strategic business unit,
major division, or operating unit within the organization.
5. Long and short-range objectives are then established for the functional areas
(marketing, finance, production within each strategic business unit, major division, or
operating unit.
6. The process continues on down through the organizational hierarchy.
The cascade approach to objective setting, as outlined above and as depicted below, does
not imply autocratic or top down management. It merely ensures that the objectives of
individual units within the organization are in phase with the major objectives of the
organization and that the entire objective setting process is coordinated.
2.3.1 Cascade Approach to Objective Setting

2.4 FINANCIAL OBJECTIVES

Objectives are the end results of planned activity. They state what it to be accomplished
by when and should be quantified if possible. The achievement of corporate objectives
should result in the fulfillment of a corporation's mission. Minnesota Mining &
Manufacturing (3M), for example, has set very specific financial objectives for itself.
1. To achieve 10% annual growth in earnings per share
2. To achieve 20%-25% return on equity.
3. To achieve 27% return on capital employed.
Objectives can be expressed in both quantitative and qualitative terms. In both cases,
they should be detailed enough so that the organization's personnel can clearly
understand what the organization intends to achieve.
The qualitative and quantitative objectives for J. C. Penney Company are given below:
1. To achieve and maintain a position of leadership in the businesses in which we
compete.
2. To be a positive force that enhances the interests of our customers, associates,
suppliers, investors, government, and the public at large.
3. To be an attractive investment for our shareholders and creditors, and for the
purpose.
a. To achieve a return on equity in the top quartile of major competitors for the
company as a whole and for each operating division.
b. To achieve consistent growth in earnings at a rate required to meet or exceed
the return-on-equity (ROE) objective
c. To maintain consistency and growth in dividend payout through increased
earnings
d. To maintain a capital structure that will assure continuing access to financial
markets so that we can at reasonable cost, provide for future resource needs and
capitalize on attractive opportunities for growth.
e. To ensure that financing objectives governing the amount, composition and
cost of capital are consistent with and support other corporate objectives.
The finance function provides the financial resources necessary to implement strategy.
Changes in strategy often involve adjustments to financial policies. Product and market
development strategies, for example, may require an increase in working capital as well
as in fixed capital.

A change in strategy will raise the following financial questions:

Are sources of long term and short term financing available to support the new
strategy?
How will the change in strategy affect the company's standing with suppliers of
capital?
How will the change in strategy affect the cost of capital?
Does the new strategy change uses of funds in such a way that new sources of
capital are needed?
Is dividend policy appropriate for the new strategy?
Additional questions for organizations with international operations include:
Are sources of local funding available and properly developed for non-domestic
operations?
How will the strategy be affected by currency depreciation and/or inflation?
How can overall tax be minimized?
How should that transfer of profits from foreign subsidiaries to headquarters be
handled for optimum capital structure?

While most operating strategies guide implementation in the immediate future, the time
frame for financial functional strategies varies because strategies in this area direct the
use of financial resources in support of the business, long-term goals and annual
objectives. Financial operating strategies with longer time perspectives guide financial
managers in long-term capital investment, use of debt financing, dividend allocation,
and the firm's averaging posture. Operating strategies designed to manage working
capital and short-term assets have a more immediate focus. The figure below highlights
some key questions financial strategies must answer for successful implementation.
Key functional
strategies

Capital acquisition

Capital allocation

Dividend and working

capital management

Typical questions that should be answered by the

functional strategy
What is an acceptable cost of capital?
What is the desired proportion of short-and long-term
debt; preferred and common equity?
What balance is between internal and external funding?
What risk and ownership restrictions are appropriate?
What level and forms of leasing should be used in providing
assets?
What are the priorities for capital allocation projects? On
what basis is final selection of projects to be made?
Operating mangers without higher approval can make what
leveled of capital allocation?
What portion of earnings should be paid out as dividends?
How important is dividend stability?

Are things other than cash appropriate as dividends?

What are the cash flow requirements; minimum and
maximum cash balances?
How liberal/conservative should credit policies be?
What limits, payment terms, and collection procedures are
necessary?
What payment timing and procedure should be followed?
Long-term financial strategies usually guide capital acquisition in the sense that
priorities change infrequently over time. The desired level of debt versus equity versus
internal long-term financing of business activities airs a common issue in capital
acquisition strategy.
The timing and amount of cash inflows and outflows are shown by a projection called a
cash budget. Cash budgeting assists in strategy implementation by showing what cash
needs are involved in implementing a new or adjusted strategy. Cash budgets are done
on a monthly or even weekly basis. If flows are volatile or seasonal, cash budgets for
more stable situations may cover longer time periods.
The steps in cash budgeting are as follows:
a. Prepare or obtain the sales forecast for the period of the budget.
b. Determine the cash receipts from these sales and when they will be received.
c. Determine whether any asset sales are planned for the period and include cash to be
realized.
d. Determine disbursements based on production plans, capital expenditures, dividend
payments, federal income taxes, etc.
e. Compare receipts with disbursements for each period to determine whether there will
be a surplus or a deficit.
f. Of there will be a deficit, make arrangements to finance it or adjust tactics in
operations and/or marketing.
Pro-forma statements forecast assets and liabilities as well as income statement items
for a selected future date. The pro forma balance sheets can be prepared in several ways.
One method is to use a cash budget for the period covered. The cash budget provides
figures or allows extrapolation of the balance sheet accounts. In another approach,
historical ratios of assets and liabilities to sales and production are projected into the

future. The pro forum income statement begins with a sales forecast and projects
revenues and expenses on the basis of plan and historical relationships.
Pro forma statements, if properly prepared, allow analysis of the changes in financial
condition and performance for the period covered. Access to personal computers and
spreadsheet programs greatly simplifies the calculations required but does not relive the
analyst from the responsibility of understanding the financial relationships which
underlie the figures. Pro forum statements are not substitutes for cash budgeting,
because it is entirely possible for a company to show a healthy profit on its income
statement and still experience cash flow problems. This can happen when cash inflow is
delayed because of collection problems or when the organization has large, upfront
expenses such as those associated with rapid expansion.
Because the availability of financial resources is one of the key constraints, which limits
strategic choice, proper implementation of all strategies requires consideration of
financial issues. In certain strategies considerable functional expertise in finance is
necessary. For example, retrenchment requires careful long and short-term asset
management. Diversification through acquisition requires the ability to evaluate another
company using, for the most part, publicly available financial data. In organizations that
compete globally, international funds management is a key factor in maintaining profits
against currency shifts.
Objectives should not all be financial. It is important that some objectives set measures
that relate to the fundamental nature of the business and to meeting customer and
stakeholder needs.
2.5 SUMMARY
After reading this lesson you would have understood the term strategic vision, strategic
objectives and financial objectives. In the case of strategic objectives, you would have
analysed the objective setting, approach to objective setting and the need of financial
objectives.
2.6 ASSIGNMENT QUESTIONS
1. Explain how the long and short range objectives could be established?
2. Write a note on Mix of organizational objectives
3. Write a note on the following
i. Cascade Approach to establishing objectives
ii. Cascade approach to objective setting
iii. Financial objectives

- End of Chapter -

LESSON 3
PROCESS OF STRATEGIC MANAGEMENT

OBJECTIVES

To know the tasks of strategic management

To analyse the process of strategic management

CONTENTS
3.1 Tasks of Strategic Management
3.1.1 Analyzing a strategy
3.2 Process of strategic management
3.2.1 Formality of the process
3.2.2 Three Modes of Strategic Making
3.3 Responsibility of strategic management
3.3.1 The role of the Chief Executive Officer (CEO)
3.3.2 The role of the Corporate Planner
3.3.3 The role of Line Managers
3.3.4 The role of the Board of Directors
3.4 Understanding a Company Strategy
3.4.1 Identifying a strategy
3.4.2 Writing a strategy statement
3.5 Single Business Company

3.5.1 Market development

3.5.2 Product development
3.5.3 Horizontal integration
3.6 Diversified Company
3.6.1 Concentric Diversification
3.6.2 Conglomerate Diversification
3.7 Strategic Decision Making
3.7.1 Mintzberg's Modes of Strategic Decision Making
3.7.2 Strategic Decision-Making Process: Aid to Better Decisions
3.8 Summary
3.9 Assignment questions
3.1 TASKS OF STRATEGIC MANAGEMENT
In view of the demands of the task in strategic management, identification of strategy
involves elements of investigative work, clinical analysis, and scholarly reasoning. The
purpose of identifying and articulating the current strategy of an organization as the
first step in strategic analysis is threefold.
1. To provide an understanding of how the organization reached its present status and
current level of performance. Identifying current strategy also tells a great deal about
the background of he organization and may provoke preliminary questions bout the
appropriateness of strategic alignments between the organization and the environment.
2. To provide the first alternative for any set of strategic alternatives. That alternative is
to "continue as is". A change in strategy may not be desirable. Even when a change is
necessary, incremental changes are often the most favorably received. A clear
understanding of the current strategy is necessary to generate reasonable incremental
changes usually require careful defense and robust support based on knowledge of the
current situation.
3. To communicate with other analysis to come to a common understanding of the
situation. Discussion of a strategy statement with others who have performed a similar
analysis is an excellent vehicle for discovering disparities of opinion without dwelling
unnecessarily on areas of agreement.
3.1.1 Analyzing a Strategy

The task of identifying a firm's current strategy requires several kinds of analysis. First,
it is necessary to determine the level or levels of strategy, which are found in the
organization. Next, the components of strategy for each level must be identified and
patterns must be found in those components. Finally, a statement of strategy should be
written.
3.2 PROCESS OF STRATEGIC MANAGEMENT
A process is an identifiable flow of information through interrelated stages of analysis
directed toward the achievement of an aim. Thus, the strategic management model
below depicts a process. In the strategic management process, the flow of information
involves historical, current, and forecast data on the business, its operations, and
environment, which are evaluated in light of the values and priorities of influential
individuals and groups - often called stakeholders - who are vitally interested in the
actions of the business. The aim of the process is the formulation and implementation of
strategies that result in long term achievement of the company's mission and near term
achievement of the objectives. Viewing strategic management as a process has several
important implications. First, a change in any component will affect several or all other
components. Notice that the majority of arrows in the model point two ways, suggesting
that the flow of information or impact is usually reciprocal. For example, forces in the
external environment influence the nature of the mission designed by a company's
strategic mangers and stakeholders. The existence of a given company with a given
mission in turn legitimizes the environmental forces and implicitly heightens
competition in the firm's realm of operation. A specific example is a power company
persuaded, in part by governmental incentives, that its mission statement should
include a commitment to the development of energy alternatives. The firm might then
promise to extend its R & D efforts in the area of coal liquefaction. Obviously, in this
example, the external environment has affected the firm's definition of its mission, and
the existence of the revised mission signals a competitive condition in the environment.
A second implication of strategic management as a process is that strategy-formulation
and implementation are sequential. The process begins with development or
reevaluation of the company mission. This step is associated with, but essentially
followed by, development of a company profile and assessment of the external
environment. Then follow, in order: strategic choice, definition of long-term objectives,
design of grand strategy, definition of short-term objectives, design of operating
strategies, institutionalization of the strategy, and review and evaluation. However, the
apparent rigidity of the process must be qualified.
First, the strategic posture of a firm may have to be reevaluated in terms of any of the
principal factors that determine or affect company performance. Entry by a major new
competitor, death of a prominent board -member, replacement of the chief executive
officer, or a downturn in market responsiveness are among the thousands of changes
that can prompt reassessment of a company's strategic plan. However, no matter where
the need for a reassessment originates, the strategic management process begins with
the mission statement.

Second, not every component of the strategic management process deserves equal
attention each time a planning activity takes place. Firms in an extremely stable
environment may find that an in-depth assessment is not required every five years.
Often companies are satisfied with their original mission statements even after decades
of operational and thus need to spend only a minimal amount of time in addressing the
subject. In addition, while formal strategic planning may be undertaken only every five
years, objectives and strategies are usually updated each year, and rigorous
reassessment of the initial stages of strategic planning is rarely undertaken at these
points.
A third implication of strategic management as a process is the necessity of feedback
from institutionalization, review, and evaluation to the early stages of the process.
Feedback can be defined as post implementation results collected inputs for the
enhancement of future decision-making. Therefore, strategy managers should attempt
to assess the impact of implemented strategies external environments. Thus, future
planning can reflect any changes precipitated by strategic actions. Strategic managers
should also carefully measure and analyze the impact of strategies on the need for
possible modifications in the company mission.
A fourth and final implication of strategic management as a process is the need to view it
as a dynamic system. Dynamic describes the constantly changing conditions that affect
interrelated and interdependent strategic activities. Managers should recognize that
components of the strategic process are constantly evolving, while formal planning
artificially freezes the changing conditions and forces in a company's internal and
external environments, much as an action photograph freezes the movement of a
swimmer. In actuality, change is continuous, and thus the dynamic strategic planning
process must be constantly monitored for significant changes in any components as a
precaution against implementing in obsolete strategy.
The strategic management process was described as the process by which top
management determines the long run direction and performance of the organization by
ensuring that careful formulation, proper implementation and continuous evaluation of
the strategy takes place. Setting the organization's mission, defining what business or
businesses the organization will be in, setting objectives, developing, implementing, and
evaluating strategies and adjusting these components as necessary are all involved in
this process.
While the basic process is similar in most organizations, differences exist in the
formality of the process, levels of managerial involvement, and degree of
institutionalization of the process. This chapter explores the dimensions of the strategic
management process which give its variety and also introduces a model which provides
a basic description of the common components and sequence of the process.
All organizations engage in the strategic management process either formally or
informally. Organizations that consciously engage in strategic management follow some
type of formalised process for making decisions and taking actions that affect their
future direction. In the absence of a formal process, strategic decisions are made in a

piece meal fashion. An informal approach to strategy however does not necessarily
mean that the organization doesn't know what it is doing. It simply means that
organization doesn't engage in any type of formalized process for initiating and
managing strategy. Although it is unlikely that an organization will continue to grow
successfully and to branch out into new ventures without a real understanding of the
pattern of decisions, which produces success, many firms are unaware of the strategy
that underlies their initial success. This is why many established companies fail
miserably when they attempt a program of corporate acquisition, product
diversification, or market expansion. The formality of the process is understandably
quite important.
3.2.1 Formality of the Process
For those organizations that do consciously engage in strategic management, the degree
of formality can vary considerably. The more explicit the procedure to be followed, the
more formal the process is.
Henry Mintzberg has described three distinct approaches, or models, for making
strategy: (1) The entrepreneurial mode, (2) the adaptive mode, and (3) the planning
mode. Of these three modes, the entrepreneurial mode is least formal and the planning
mode is most formal. The mode most likely to be used by an organization is largely a
function of its size and maturity. Larger and more mature organizations are mostly
likely to use the planning mode, while smaller and younger firms are likely to use the
entrepreneurial mode.
Exhibit below outlines the major characteristics of each of Mintzberg's three modes:
3.2.2 Three Modes of Strategic Making
Entrepreneurial mode
1. Strategy making is dominated by active search for new opportunities.
2. Power is centralized in the hands of the chief executive.
3. Strategy making is characterized by dramatic leaps forward in the face of uncertainty.
4. Growth is the dominant goal.
5. Lends itself to organizations that are small and/or young.
Adaptive mode
1. Clear goals do not exist; strategy making reflects a division of power among members
of a complex coalition.

2. The strategy-making process is characterized by the "reactive" solution to existing

problems rather than the "proactive" search for new opportunities.
3. Makes its decisions in incremental serial steps.
4. Decisions are disjointed.
5. Lends itself to large established organizations with great sunk costs and many
controlling groups holding each other in check.
Planning mode
1. Analyst or planner plays a major role in strategy making.
2. Focuses on systematic analysis, particularly in the assessment of the costs and
benefits of competing proposals.
3. Characterized above all by the integration of decisions and strategies.
4. Lends itself to organizations for reasonable size that do not face severe and
unpredictable competition.
3.3 RESPONSIBILITY OF STRATEGIC MANAGEMENT
Successful strategic management involves the cooperation of several levels in the
organization. Our definition of strategic management emphasizes the central role the
top management plays in the process. What top management's role should be, and how
it relates to the corporate planning staff and to line managers.
3.3.1 The Role of the Chief Executive Officer (CEO)
George Steiner, a nationally recognized expert on strategic management, has stated,
"there can and will be no effective formal strategic planning in an organization in which
the chief executive does not give firm support and make sure that others in the
organization understand his depth of commitment". This statement leaves little room
for doubt concerning the importance of the CEO's involvement. In addition to being
personally committed to the process, the CEO must make sure that others in the
organization are aware of his/her commitment. This emphasizes the fact that CEO's
commitment must include hands on involvement.
Exhibit below summarized the role of the CEO in strategic management. As can be
gleaned from the exhibit, the CEO is the one person most responsible for strategic
management. Many attempts at strategic management have failed because a CEO
professed commitment but never became personally involved. Other members of the
organization take their cues from the CEO. If he or she demonstrates involvement,
others are likely to follow. Unfortunately, the reverse is also true. If the CEO exhibits a

lack of involvement, others will interpret this as a sign of disinterest. The importance of
the CEO's active involvement cannot be overstated.
Role of the CEO in Strategic Management
1. The CEO must understand that strategic management is his or her responsibility.
Parts of this task, but certainly not all of it, can be delegated.
2. The CEO is responsible for establishing a climate in the organization that is congenial
to strategic management.
3. The CEO is responsible for ensuring that the design of the process is appropriate to
the unique characteristics of the company.
4. The CEO is responsible for determining whether there should be a corporate planner.
If so, the CEO generally should appoint the planner and see that the office is located as
close to that of the CEO as practical.
5. The CEO must get involved in doing the planning.
6. The CEO should have face-to-face meetings with executives for making plans and
should ensure that there is a proper evaluation of the plans and feedback to those
making them.
7. The CEO is responsible for reporting the results of the strategic management process
to the board of directors.
3.3.2 The Role of the Corporate Planner
As organizations become larger and more complex, staff personnel are often added to
assist in the strategic management/planning process. Usually these staff personnel are
known as corporate planners.
When a corporate planning staff exists, what are its duties? Naturally, the specific duties
of any corporate planning staff are going to vary from organization to organization. In
general, however, these responsibilities can be grouped into five major areas.
a) Helping the CEO discharge the strategic management responsibilities of that office.
b) Coordinating the divisional plans.
c) Helping top management devise the planning system
d) Preparing environmental analysis for divisions and giving them overall guidance.
e) Developing overall corporate plans for top management for such matters as
acquisitions and divestitures.

Note that in none of the above items is the planning staff responsible for the total
development of plans at any level. Rather, the planning staff primarily serves as a
coordinator, adviser, and evaluator.
However, beginning in the early to mid-1980s, many CEOs became disenchanted with
the role that many of their corporate planners were fulfilling. In these companies the
size of the corporate planning staffs and their demands on operating managers had
grown out of control. This often resulted in hostility between the corporate planners and
operating managers. In some companies, operating managers were made to feel like
second-class citizens when compared to the corporate planners. As the chasm between
corporate planners and operating managers widened, strategic planning often grew
further and further away from the real world of customers and competitors. As a result
of these and similar problems, many companies have reduced the size and influence of
their corporate planning staffs.
There is nothing inherently wrong with having a corporate planning staff. It is often very
desirable, provided it operates as it is intended. Corporate planners should function as
coordinators, catalysts, and advisers for top and line managers. They should not do the
planning for any level of management.
3.3.3 The Role of Line Managers
In many cases line managers do not have to be concerned about how to design and
mange the planning system, as this is done at the corporate level. However, in many
companies that have cut back on the number and influence of corporate planners, line
managers are being asked to assume a more active role in the strategic management
process. Daniel Gray, s strategic consultant, recently made the following statement: "It
is now widely accepted that strategic planning is a line management function in which
staff specialists play a supporting role." Michael E. Naylor, General Motor's general
director of corporate strategic planning, reinforces this point: "Planning is the
responsibility of every line manger. The role of the planner is to be a catalyst for changenot to do the planning for each business unit.
At the very least, line managers must understand the strategic management process and
system well enough to be able to provide the inputs required of them. These inputs
naturally vary from situation to situation, but they often relate to operating capabilities.
For example, are there enough machines to supply the demand for the product? Line
managers typically provide information to corporate planners relating to the internal
and external analysis and to the selection of long and intermediate range objectives. The
most visible involvement of line managers is in implementing the chosen corporate and
business strategies by formulating the necessary functional strategies.
Line managers should know what role they are expected to play in the strategic
management process. They should also be aware of corporate level plans so that their
operating plans can be properly formulated. Involving line mangers in the strategic
management process not only provides needed information but also greatly reduces
resistance to any changes resulting from the process.

3.3.4 The Role of the Board of Directors

A board of directors can be characterized as either an inside or an outside board. On an
inside board a majority of the members hold management positions in the organization;
on an outside board a majority of the members do not hold or have not held a position
with the organization. While insiders who are members of a board will ordinarily have
other duties related to the strategic management process by virtue of their corporate
position, the role played by the board as an entity should be basically the same for both
types. A 1983 survey of 119 large companies found that 100, or 84 percent, of their
boards had a majority of outside directors. However, there are signs that this is
changing. For the first time, since the mid-1960s, the makeup of boards is shifting
toward inside boards. The reason for this is increased concern for legal liabilities and the
time required to serve on a board. It has been estimated that today directors have a l-in5 chance of being party to a shareholder suit. Reflecting this trend, the cost of liability
insurance for directors jumped tenfold in the period from 1984 to 1986. Most directors
will not serve unless, some form of liability insurance is provided by the company.
To quote Harvard Professor Kenneth Andrews, The strengthening of the corporate
board of directors has not yet produced a clear or widely accepted conclusion about the
board's role in formulating, ratifying, changing, or evaluating corporate strategy."
Traditionally, boards of directors have been rather passive groups that rubber-stamped
the proposals of the CEO. However, recent lawsuits against boards of directors,
concerning their liabilities to their respective organizations, have caused board
members to become somewhat more active than in the past and to be more concerned
about the activities of their companies. In spite of this trend, little evidence exists to
indicate that directors have become appreciably more involved in the strategy process.
There are many possible reasons for this: many CEOs do not engage in comprehensive
strategic management and therefore have no process in which to involve board
members; other CEOs do not believe their outside directors know enough or have
enough time to be effectively involved in the strategy process; still other CEOs
deliberately do not involve their boards for fear of losing power.
Just what role should a board play in the strategic management process? Professor
Andrews has provided the following answer: "a responsible and effective board should
require of its management a unique and durable corporate strategy, review it
periodically for its validity, use it as the reference point for all other board decisions, and
share with management the risks associated with its adoption." An important
implication of this statement is that the board does not formulate strategy but reviews it
and monitors the process that produces the strategy. Of curse, inside members of the
board may, through their corporate positions, be involved in the formulation of
corporate strategy. However, the board as an entity does not normally formulate
strategy. By serving in a review capacity, the board is in a position to ask questions and
require justification for the proposed strategies. One significant advantage of this
system, especially with an outside board, is that the board is able to provide a different
and objective evaluation of management's proposals. Thus, while the board does not
formulate strategy, it can and should play an important role in the strategic
management process.

3.4 UNDERSTANDING A COMPANY STRATEGY

By identifying the strategy of an organization, we can answer the last question about the
current status of an organization. How is the organization trying to achieve its objectives
and carry out its mission? The need to identify strategy and to state it explicitly exists in
a number of situations. An organization using the informal strategy-making mode may
have no strategy documented at all, but even key managers have an awareness of
strategy without any written statement. Identification of the strategy would be most
important for newcomers who need to understand where the organization is headed and
how their own responsibilities relate to the chosen method of competition. If the
organization has operated in an adaptive strategy-making mode, a survey of successful
decisions over time may a reveal a pattern of which executives are only intuitively aware
but which constitutes a strategy. Any new chief executive needs to discover this pattern
of decisions as part of his or her orientation understood articulation of strategy is a first
step in problem solving. An individual considering a job with a particular organization
might better evaluate his or her prospects by analyzing the organization's past and
current strategies to see whether they afford opportunities for growth and advancement.
For example, the experience and opportunities in an organization engaged in a
turnaround will be very different form these in an organization, which is following a
concentration strategy.
Outsiders can also benefit from such an exercise. Consultants, members of the financial
community, and students analyzing cases all improve their ability to make
recommendations by starting with an understanding of the past and current strategies
of the organization.
3.4.1 Identifying a strategy
One approach to identifying the presence of a strategy is summarized in the flowchart in
exhibit. The numbers beginning the following paragraphs refer to branches in the
flowchart.
EXHIBIT PROCESS FOR STRATEGY IDENTIFICATION
Does an identifiable strategy exist (1)
Yes
Was the strategy formally developed (2)
Yes
Has the strategy been announced in writing (3)
Yes

An organization, which has no explicit strategy, is relatively easy to identify. Its activities
usually don't have a common thread, and executives leap at every opportunity as equally
attractive to turn down all new ideas as equally risky. Lack of strategy does not always
show up on the bottom line, especially in the short run. However, the probabilities of
long-term success are greatly reduced without a consciously developed strategy.
Strategy may exist even when it is not formally developed and explicitly communicated.
Entrepreneurs, for example, may have an intuitive understanding, which they have
never really recorded or even verbalized, of how their company can successfully
compete. Similarly, larger organizations may develop a strategy through a trial-anderror process without really articulating why they are able to exploit certain products
and markets and are not able to be successful with others. The process of identifying
strategy in the entrepreneurial or adaptive mode is similar to a detective process. The
clues are provided by key decisions made over time. Similarities in these decisions allow
the analyst to find patterns. These patterns constitute strategy:
1. If the strategy ahs been developed but not written, it becomes necessary to look for
evidence of strategy rather than for a statement of the strategy itself. The evidence is
then used to construct a strategy statement. This may occur when an organization is in
the early phases of the planning mode.
2. In this situation, a formally developed, written strategy makes identification simple a
process of locating the statement of strategy or an individual who can divulge it. The
situation usually occurs when an organization is in the later phases of planning.
3.4.2 Writing a Strategy Statement
When the process of gathering information about the components of corporate and/or
business strategy has been completed, a statement of strategy should be formulated.
This step is necessary for three reasons:
1. To compare conclusions about company strategy with direct statements in company
documents or pronouncements by executives.
2. To compare your conclusions about the strategy with that of other observers.
3. To summarize your understanding of the current situation.
Corporate strategy: A corporate strategy statement will be more general and probably
shorter than a business strategy statement.
Business strategy: A good business strategy statement should
1. Be stated in active and precise terms.
2. Explicitly relate to the organization's goals.

3. Indicate how the business is competing with regard to products or services, markets,
and processes.
4. Include any unique functional area, corporate climate, or leadership approaches
which characterize the organization and provide it with advantages.
A strategy statement for an independent single-product-line firm in the cosmetic
industry {Estee Lauder) and for an SBU competing in the same industry (Avon Beauty
Products) is given as an example below.
Sample Corporate Strategy Statements
The corporate emphasis of ConAgra Inc. is the food industry. ConAgra seeks
acquisitions in slow-growth segments of the industry, which carry attractive price tags
and require the services of our management team, which is skilled in cost cutting and
product repositioning. Resources are directed to building the managerial skills needed
for these activities. Businesses must achieve a 20 percent return on equity.
The corporate emphasis of Penn Central is investment. Acquisitions, which can produce
attractive returns and growth, are sought in industries such as telecommunications,
food service, media, and financial services. Resources are directed toward analysis and
control to achieve corporate goals of stock appreciation and return on investment.
Sample Business Strategy Statements
Este Lauder, Inc. provides high quality, science-based products for affluent men and
women. Distribution is exclusively through better department stores. Product
development focuses on anticipating tends with formulations, which will produce longterm sales potential.
To ensure desired growth and leadership status in the industry, the company will
continue to allocate resources to R&D in excess of industry averages and to cultivate
relationships with independent research laboratories. Senior management will continue
the personal involvement in operations, which allows quick decision making in response
to market feedback. The company will remain privately held and family-managed.
The Beauty Products Division of Avon Inc. manufactures and distributes cosmetics,
fragrances, and fashion jewelry through a network of independent sales representatives
to women in 32 countries. A cost-efficient manufacturing process and person-to-person
distribution process provide unique service, quality, and cost benefits to customers. In
order to improve the short-term performance, the divisions will emphasize its image
with more advertising and less discounting. It will also focus on improvement in
representative productivity. In order to improve profitability, a brand management
approach will be adopted. In addition, new channels of distribution, which do not
directly compete with independent representatives, will be explored. To achieve a
consumer focus in operations, a decentralized structure will be adopted which will make
the division more responsive to the consumer.

3.5 SINGLE BUSINESS COMPANY

A single business company is one that focuses on single product or service, and
concentrates on small number of closely related products or services. As it concentrates
on one single product or service it is also called as concentration strategy. This is the
strategy followed when an organization concentrates on extending the sales of its
current businesses. The list of companies that initially became successful by following a
concentration strategy includes Coca-Cola, Kellogg, and Mc Donald's.
Following a concentration strategy does not necessarily mean that an organization must
continue to do the same thing in exactly the same ways. It does, however, mean that
whatever is done will be related directly to the current product or service. A
concentration strategy does not keep a company from growing. However, it does limit
the types of growth opportunities that can be pursued. This usually results in a slower
but more controlled and stable growth. There are basically three approaches for
pursuing a concentration strategy - market development, product development and
horizontal integration.
3.5.1 Market Development
The thrust under a market development approach is to expand the markets of the
current business. This can be done, by gaining a larger share of the current market,
expanding into new geographic areas, or attracting new market segments. Coca-Cola has
continued to follow a market development strategy since its inception. It amassed its
impressive market share through large-scale advertising programs, and it has continued
to expand into new geographic areas (most recently international markets such as
China).
3.5.2 Product Development
The thrust under a product development approach is to alter the basic product or service
or to add a closely related product or service that can be sold through the current
marketing channels. Successful product development strategies often capitalize on the
favorable reputation of the company or related products. The telephone company's
introduction of numerous styles of phones and additional services, such as call
forwarding and call holding, is an example of a product development strategy.
3.5.3 Horizontal Integration
Horizontal integration occurs when an organization adds one or more businesses that
produce similar products or services and that tare operating at the same stage in the
product marketing chain. Almost, all horizontal integration is accomplished by buying
another organization in the same business. Unilever's acquisition of Chesebrugh-Ponds
and International Paper's acquisition of Hammermill Paper in 1986 are both examples
of horizontal integration. The major advantage of horizontal integration is that it
provides immediate access to new markets and, many times, eliminates a competitor.

The concentration strategy usually has the advantage of low initial risk because the
organization already has much of the knowledge and many of the resources necessary to
compete in the markets place. A second advantage is that a concentration strategy
allows the organization to focus-its attention on doing a small number of things
extremely well. One does not have to look very far to find examples of companies that
have failed because they spread their talents and resources in too many different
directions. The major drawback to a concentration strategy is that it places all or most of
the organization's resources in the same basket. If sudden changes occur in the industry,
the organization can suffer significantly. One of the most obvious examples in this area
is the U.S. railroad industry. Because the railroads had always followed a concentration
strategy, they were severely hurt by the introduction of the automobile and airplane.
3.6 DIVERSIFIED COMPANY
Diversification occurs when an organization moves into areas that are clearly
differentiated from its current businesses. The reasons for embarking on a
diversification strategy can be many and varied, but one of the most frequently
encountered is to spread the risk so that the organization is not totally subject to the
whims of any one given product or industry. For example, Philip Morris and R.J.
Reynolds have diversified significantly since the time that cigarettes were first linked to
cancer. A second reason to diversify is that management may believe the move
represents an unusually attractive opportunity, especially when compared with other
possible growth strategies. Possible reasons for this attractiveness could be that the
markets of current products and services are saturated, that the profit potential of
diversification looks greater than that of expanding the current business. A third reason
to diversify is that the new area may be especially intriguing or challenging to
management. A fourth reason why diversification can be attractive is to balance out
seasonal and cyclical fluctuations, in product demand.
Most diversification strategies can be classified as either concentric diversification, or
conglomerate diversification. Concentric diversification occurs when the diversification
is in some way related to, but clearly differentiated form, the organization's current
business. Conglomerate diversification occurs when the firm diversifies into an area(s)
totally unrelated to the organization's current business.
3.6.1 Concentric Diversification
The basic difference between a concentric diversification strategy and concentration
strategy is that a concentric diversification strategy involves expansion into a related,
but distinct, area whereas concentration involves expansion of the current business. A
concentric diversification can be related through products, markets, or technology.
Coca-Cola's entry into the orange juice business through its purchase of Minute Mind is
an example of a product-related diversification. Although orange juice is clearly
different from carbonated soft drinks, they are both consumer beverages. AnheuserBusch's introduction of Eagle brand snack foods is an example of a diversification based
on related markets. Beer and snack foods have no relationship as far as product
characteristics, but they are both consumed by many of the same customers. The

decision of 3M to enter the sand paper business was based on the company's knowledge
of coating and bonding technology.
A concentric diversification strategy can have several advantages. The most obvious is
that it allows the organization to build on its expertise in a related area. It also can have
the advantage of spreading the organizations risks. In their study to identify common
characteristics of successful U.S. companies. Thomas Peters and Robert Waterman Jr.,
concluded that "organizations that do branch out but stick very close to their knitting
outperform the others".
3.6.2 Conglomerate Diversification
Most conglomerate diversifications are based on the rationale that expansion into the
area under consideration has a very attractive profit potential. Many large companies,
such as ITT, Gulf & Western, Litton Industries, and Textron, were built during the 1950s
and 1960s by following a conglomerate diversification strategy. More recently, however,
conglomerate diversification strategies have received considerable criticism and have
fallen into general disfavor.
Not only have some well-known conglomerates (such as LTV and Bangor Punta)
experienced difficulties but also research studies have concluded that conglomerate
diversification is not generally as profitable as other forms of growth. This is not
surprising, as conglomerate diversification might involve getting into not only an
unrelated business but also one which the organization knows very little about. A recent
study of 33 large, prestigious U.S. companies over the 1950-1986 period found that
these companies ended up divesting a startling 74 percent of all unrelated acquisitions.
Evidence shows that conglomerate firms which, limit their diversification to three or
four major business categories, are generally more successful than those that don't.
There is little doubt that the right diversification strategy, whether concentric or
conglomerate, can produce profitable results. However, experience, supported by
research, tends to favor concentric diversification over conglomerate diversification
especially when the diversification controls the sharing of activities (such as distribution
channels) and the transferring of skills among the old and new businesses.
3.7 STRATEGIC DECISION MAKING
The distinguishing characteristic of strategic management is its emphasis on strategic
decision-making. As organizations grow larger and more complex with more complexes
with more uncertain environments, decisions become increasingly complicated and
difficult to make. This topic proposes a strategic decision-making framework that can
help people make these decisions regardless of their level and function in the
corporation.
What makes a decision strategic?

Unlike many other decisions, strategic decisions deal with the long-run future of the
entire organization and have three characteristics:
Rare: Strategic decisions are unseal and typically have no precedent to follow.
Consequential: Strategic decisions commit substantial resources and demand a great
deal of commitment from people at all levels.
Directive: Strategic decisions set precedents for lesser decisions and future actions
though out the organization.
3.7.1 Mintzberg's Modes of Strategic Decision Making
One person who has a brilliant insight and is quickly able to convince others to adopt his
or her idea makes some strategic decisions in a flash. Other strategic decisions deem to
develop out of a series of small incremental choices that over time push the organization
more in one direction than another. According to Henry Mintzberg, the most typical
approaches, or modes of strategic decision-making are.
Entrepreneurial mode. One powerful individual makes strategy. The focus is on
opportunities; problems are secondary. Strategy is guided by the founder's own vision of
direction and is exemplified by large, bold decisions. The dominant goal is growth of the
corporation. America Online, founded by Steve Case, is an example of this mode of
strategic decision-making. The company reflects his vision of the Internet provider
industry. Although AOL's clear growth strategy is certainly an advantage of the
entrepreneurial mode, its tendency to market its products before the company is able to
support them is a significant disadvantage.
Adaptive mode. Sometimes referred to as "mudding through", this decision making
mode is characterized by reactive solutions to existing problems, rather than a proactive
search for new opportunities. Much bargaining goes on concerning priorities of
objectives. Strategy is fragmented and is developed to move the corporation forward
incrementally. This mode is typical of most universities, many large hospitals, a large
number of governmental agencies, and a surprising number of large corporations.
Encyclopedia Britannica, Inc., operated successfully for many years in this mode, but
continued to rely on the door-to-door selling of its prestigious books long after dual
career couples made this marketing approach obsolete. Only after it was acquired in
1996 did the company change its marketing strategy to television advertising and
Internet marketing. It now offers CD-ROMs in addition to the printed volumes.
Planning mode. This decision-making mode involves the systematic gathering of
appropriate information for situation analysis, the generation of feasible alternative
strategies, and the rational selection of the most appropriate strategy. It includes both
the proactive search for new opportunities and the reactive solution of existing
problems. The J.C. Penney Company is an example of the planning mode. After careful
study of shopping trends in the 1980s, the retailing company discontinued its sales of
paint, hardware, major appliances, automotive items, and electronics to concentrate on

apparel and home furnishing. Declining personal incomes and greater uncertainty in the
1990s led Penney's to emphasize private brands, this new merchandising strategy
allowed the company to offer the high quality of goods often found in better department
stores at a competitively lower price.
In some instances, a corporation might follow a fourth approach called logical
incrementalism, which is a synthesis of the planning, adaptive, and, to a lesser extent,
the entrepreneurial modes of strategic decision making. As described by Quinn, top
management might have a reasonably clear idea of the corporations mission and
objectives, but, in its development of strategies, it chooses to use "an interactive process
in which the organization probes the future, experiments and learns from a series of
partial commitments rather than through global formulations of total strategies." This
approach appears to be useful when the environment is changing rapidly and when it is
important to build consensus and develop needed resources before committing the
entire corporation to a specific strategy.
3.7.2 Strategic Decision-Making Process: Aid to Better Decisions
Good arguments can be made for using either the entrepreneurial or adaptive modes in
certain situations. In most situations the planning mode, which includes the basic
elements of the strategic management process, is a more rational and thus better way of
making strategic decision. The planning mode is not only more analytical and less
political than are the other modes, but it is also more appropriate for dealing with
complex, changing environments. We therefore propose the following eight-step
strategic decision-making process to improve the making of strategic decisions.
1. Evaluate current performance results in terms of (a) return on investment,
profitability, and so forth and (b) the current mission, objectives, strategies, and
policies.
2. Review corporate governance, that is, the performance of the firm's board of directors
and top management.
3. Scan and assess the external environment to determine the strategic factors that pose
opportunities and threats.
4. Scan and assess the internal corporate environment to determine the strategic factors
that are strengths and weaknesses.
5. Analyze strategic (SWOT) factors to (a) pinpoint problem areas, and (b) review and
review the corporate mission and objectives as necessary.
6. Generate, evaluate, and select the best alternative strategy in light of the analysis
conducted in step 5.
7. Implement selected strategies via programs, budgets and procedures.

8. Evaluate implemented strategies via feedback systems, and the control of activities to
ensure their minimum deviation from plans.
Corporations like Warner-Lambert, Dayton Hudson, Avon products, Bechtel Group Inc.,
and Taisei Corporation have used this rational approach to strategic decision-making
successfully.
3.8 SUMMARY
In this lesson the task of strategic management, different types of process of strategic
management have been discussed with suitable illustrations. After discussing the above
responsibility of strategic management is explained. In the last part with appropriate
example the functions of single business company and diversified company have also
been discussed.
3.9 ASSIGNMENT QUESTIONS
1. What are the tasks of Strategic Management?
2. Explain the Three Modes Of Strategic Making
3. Discuss the various responsibilities of strategic management
4. How a Company Strategy could be understood?
5. Write an essay on Single Business Company
6. Define Diversified Company
7. Write a note on the following:
a. Concentric Diversification
b. Conglomerate Diversification

- End of Chapter LESSON 4

STRATEGY FORMULATION

OBJECTIVES

To know the strategy formulation

To understand the different strategic formulation

CONTENTS
4.1

The importance of the strategy formulation process

4.2

The three logical elements of the strategy formulation process

4.3

Effective strategy formulation processes in practice

4.4

A Strategic Management Model

4.5

Analyzing the Current Status

4.6

Examining the prospects for the future

4.7

Setting long-range objectives

4.8

Conducting an internal analysis

4.9

Assessing the external environment

4.10

Comparing strategic alternatives

4.11

Putting the strategy to work

4.12

Implementing Strategy: Organizational Factors

4.13

Evaluating and Controlling the Strategy

4.14

Results from the strategy formulation process

4.15

Summary

4.16

Assignment questions

INTRODUCTION
Strategy may be defined as ideas and action to conceive and secure the future of the
enterprise. The purpose of the strategy formulation process is to cause strategic thinking
that conceives the future of the enterprise and how that future may be secured. The
strategy formulation process should provide a mechanism to ease the communication of

ideas and to co-ordinate efforts. It should inject structure but not rigidity into the
thinking.
4.1 THE IMPORTANCE OF THE STRATEGY FORMULATION PROCESS
Every enterprise has a strategy at any time. It may be that nobody has ever used the
word strategy and that no deliberate or disciplined process has ever taken place. The
strategy may be to continue to do tomorrow what was done today. This is a somewhat
neutral strategy but it may sometimes be appropriate and effective. It certainly has the
advantage that it is easy to implement and it may be more likely to secure the future
than ill-conceived radical departures into new activities. More often in practice,
however, it is apparent that the future of the enterprise is less secure than it might be so
there is a need to consider and formulate suitable new strategies, which will increase the
chance of success. Such new strategies do not just happen; they result from a
formulation process. The strategy formulation process is important because a better
process should produce better strategies. It is of course, arguable, what better means.

Good strategies are judged by the results not by the quality of the process that generated
them. It is apparent that there is considerable divergence of view among academic
thinkers on what the best strategy process would look like. Successful enterprises adopt
a formulation process that matches their business, their culture and the specific issues
of the context. They certainly do not all go about formulating strategy in the same way.
Management consultants specializing in strategy may offer their clients a proprietary
method for formulating strategy and may claim that this approach offers advantages
over alternative approaches. Such claims are hard to substantiate and the same process
is likely to work better in some contexts than others. Certainly no standardized
approach can ever guarantee success. Gary Hamel has referred to this as the 'dirty little

secret of the strategy industry. He meant that, when management consultants guide
their clients through a process, it is originality, creativity, and effective implementation
that lead to future business success and not the process itself. It is impossible to be
prescriptive about what process will generate the best strategies. In spite of this
awkward fact, most enterprises find it useful to think about the process by which they
formulate their future strategies and to try to improve the process so as to increase the
chances of creative thinking happening.
In practice, strategy processes may be formal or informal, complex or simple. They may
be exactly analytical or based on a broad understanding of important trends. The
process may involve many people of just a few. In one very successful life insurance
company the process is almost entirely informal. The senior six or seven executive
directors meet regularly and discuss strategy among other more immediate matters.
Strategic ideas may be discussed at committees chaired by the same directors so that
any difficulties or objections become apparent. After a period of gradual agreement, the
strategies will be reported to a meeting of the full board. The expectation is that the
board will nod them through. There are no strategic plans written down, and very little
documentation of any kind. All the executive directors maintain, however, that the
strategy is very clear. The company has been highly successful over a long period of
time.
At the other end of the scale, many large multi-divisional companies still operate formal
processes in which individual companies or divisions present their strategies to the
board for review. Such formality may have the important advantage that it causes busy
managers to think about the future. On the other hand, formality may also have the
disadvantage that thinking that is undertaken only to meet the requirements of a
bureaucratic process may be stiff and unimaginative.
The case examples give some indication of the broad range of formality, style, and timescale that occurs within planning processes. In ICI, under the pressure of a crisis, one or
two people conceived a radically new strategy in a period of a few weeks. Marks 8s
Spencer, also experiencing a crisis, found it appropriate to have an off-site meeting for
the entire board and to study a strategy document several hundred pages long.
The strategy formulation process has to be tailored to the current needs of the
organization. The task for the manager is to understand the process that has generated
strategies in the past in that enterprise and to consider how to develop that process in
the future. This may require minor adjustments, such as changes of emphasis,
involvement of new groups of people, or new analysis of data. There is some evidence
that planning processes need several years to bed down and begin to produce results.
This argues for gradual development of the existing process. Sometimes, however, it,
may be appropriate to introduce an entirely new process for formulating strategy so as
to generate new insights about the future of the business and to break out of accepted
patterns of thought. The value of the process is that it can trigger new ideas, capture
ideas for discussion, and clarify ideas for implementation. The process must lead to
ideas about how the future can be secured and must lay the ground for effective action.
The strategy formulation process should, in short, lead to good strategic thinking.

Effective strategic thinking usually has certain characteristics. It considers the

enterprise as a whole and is more about the longer term than the immediate. Strategic
thinking must address both the relationship of the enterprise with its external
environment and its own capabilities and resources. Good strategic thinking is based on
fact and reality and is supported by rigorous analysis. On the other hand, analysis is not
enough; good strategic thinking also requires imagination. An effective strategic thinker
has a good understanding of the present, is able to imagine the future, and is also able'
to think beyond the current constraints in an original way.
The design of the strategy process must cause strategic thinking to happen. It is
important that all parts of the strategy process are appropriate to the context.
The process must be coherent. Good strategic thinking requires the right combination of
analysis and imagination.
Sometimes a strategy formulation process may fail to achieve this balance. This may be
because it is too analytical. The highly formalized approach to strategic planning, which
became very common in the 1960s and 1970s often involved large planning
departments. These did extensive analysis but often failed to generate or communicate
strategic thinking. This may have been because of a lack of imagination or because they
failed to relate well to the line managers with the detailed knowledge of the business.
Mintzberg suggests that highly formalized strategic planning or this kind may actually
prevent strategic thinking.
Processes that are totally informal or not supported by sound analysis can also fail. This
may result in unrealistic lists of desired future outcomes for which the resources are not
available and for which there is no drive to find the resources or to build the capabilities.
4.2 THE THREE LOGICAL ELEMENTS OF THE STRATEGY FORMULATION
PROCESS
The three essential elements of the strategy process are:
Strategic Intent is the driver of the strategy process. Without an underlying intent,
strategy lacks an overall sense of direction and there is no reason to choose one
direction rather than another. Strategic intent provides the answer to the question
'where do we want to go?'
The fundamental role of Strategic Assessment is to provide relevant knowledge about
the strategic context. It has to assess both the outside world and the relative capabilities
of our own enterprise. The role of strategic assessment is to anchor future strategies in
reality. Strategic assessment must address the question where are we now? Potential
future strategies also have to be assessed. Strategic Choice is fundamental to the strategy
process because it is the link to action. It must address the question 'which options will
we choose for getting where we want to be from where we are?' If strategy is to be
anything more than an intellectual relaxation then actions must result from the strategy
process.

The strategy formulation process has three interlocking activities: intending, assessing
and choosing. Each of these activities relates to the other two. In a good strategy
process, the activities fit together into a coherent whole and are in balance. These
interlocking activities produce related result: strategic intent, strategic assessment, and
available options.
4.3 EFFECTIVE STRATEGY FORMULATION PROCESSES IN PRACTICE

While it is impossible to define a universal strategy formulation process that will work
for any enterprise in all circumstances, it is possible to observe the characteristics that
seem to lead to in practice. The eleven points below, derived from as much experience as
from theory, are among the most important.
1. Customer awareness
The process must take account of customer's needs, how existing needs are changing
and what new needs are emerging. This may be called being market-driven but it is
more than mere reaction to customer needs; it is necessary to anticipate future needs.
2. Supplier relationships
The scope of the process is normally the boundaries of the organization. External
relationships with suppliers of all kinds extend the boundaries of the enterprise in an
untidy way. The process has to be aware of changes that affect suppliers and ensure that
their significance is understood.
3. Stakeholder influences
The process must take into account the expectations and influences oi an important
groups or stakeholders. Shareholders, regulators, and lobby groups may be particularly
important in many contexts.
4. Understanding of competence
The process must equally take into account of the competence of the enterprise. As well
as taking an honest view of the relative competence of the enterprise against its
competitors, it must also make a dynamic assessment of their likely response.
5. Awareness of technological change and innovation
The process must be orientated towards change. Understanding the nature of change is
likely to require a sound understanding of how technology is adding value to the
business. This is not the same thing as understanding the leading-edge applications of
technology in the industry.
6. Mix of people involved in the process
Businesses are usually complex so different people have different perspectives and
different fields of knowledge. Marketing people see the world differently and know
different things from development engineers; long-serving employees differently from
newcomers, board members differently from middle managers, central staff differently
from field staff. No one group has a monopoly on useful perspectives so an effective mix
of views is important. An effective moderator may be essential to ensure that views are
heard.

7. Encouragement and understanding of top management

Ultimately the power to take action resides with senior managers and particularly the
chief executive. If the process does not have top management actively behind it then it
will usually fail.
8. Communication of results and reaction to feedback
Good strategies do not appear suddenly. A good raw idea needs to find support from
those who have to make it work. The raw edges of the idea have to be rubbed off. This is
achieved by good two-way communication. Ideas are improved by valid criticism. Secret
strategies are rarely implemented if they affect a large number of people.
9. A sound logic and balance to the process
If the process has been unbalanced in the past, one of the three elements may need more
emphasis than the other two at a particular time to redress the imbalance. Conversely,
one element may already be in place and so can be given less attention.
10. Process design but not over-design
The design of the process requires some thought. It is useful to consider the strengths
and weaknesses of the existing strategy process. The process should be tailored to
address current strategic issues and hence ensure relevance. Some outline of time-scale
and method is necessary. However, the methods must be flexible enough to allow time
to react to findings and delve into critical detail. The balance between analysis and
synthesis is important. The process needs to develop from year to year to avoid the
process becoming a boring and bureaucratic routine.
11. Considered role of external support
Management consultants can make a valuable contribution provided that their role has
been thought through. Consultants can help with process design, provide analytical
support, offer a comparative perspective, and contribute to strategic thinking. They can
also catch attention, contribute objectively in political discussions, and cut across
organizational boundaries. Consultants cannot, however, take responsibility for
implementation nor are they likely to understand their client's business in as much
depth as insiders do.
It is essential that the strategy formulation process is designed to meet the needs of the
enterprise and its business needs. There are dangers in initiating processes that seem to
have worked well in prominent and successful companies. This point is made very
clearly by Campbell who comments that there is still widespread dissatisfaction among
managers with the strategic planning processes as they are practiced in their companies
even after many years of refinement. He attributes much of the problem to imitating the
processes of leading companies rather than designing process appropriate to the specific
needs. In particular it is critical that the process should be clear about how the

enterprise is trying to create value. Campbell illustrates his article with examples of
three different processes in use. The value-creation focus is different for each of the
three, cases. In one the focus is to make dramatic increases in profit; in second it is on
the cost reduction; for the third it is to find incremental performance gains. In each case
the process is successful because it is focused on a particular kind of value and because it
fits the style of the chief executive. The planning techniques, the form of the process,
role of different functions in the process, length, and tone of meetings and follow-up are
all tailored to be coherent with the required focus and style in each case.
4.4 A STRATEGIC MANAGEMENT MODEL
Different organizations may use somewhat different approaches to the strategic
management process; fortunately, however, most successful approaches share several
common components and a common sequence. Furthermore, the components and
sequence can be represented in model form, as shown in Exhibit. This model is
applicable to both single-business and multi-business firms. As indicated by the
categories listed in the center of Exhibit, the strategic management process has been
divided into five major segments:

1. Analyzing the current status

2. Examining the prospects for the future

3. Setting the future course
4. Putting the strategy to work
5. Evaluating and controlling the strategy
The logic behind this breakdown is as follows. Any organization must first analyze and
clearly understand its current status. Once an organization has a firm grip on its present
status, it is in a position to examine its prospects for the future. After its prospects have
been identified the organization must set its future course through careful evaluation
and choice of alternatives. In the next stage, the organization implements the chosen
strategy. In the final stage, the organization evaluates and controls the selected strategy.
It should be noted that the strategic management process is presented as an iterative
process, as indicated by the arrows leading from the bottom of the model back to the
top. The implication is that the process is never-ending and requires constant
evaluations, updating and revising. The double-headed arrows indicate a two-way
relationship; each of the affected variables has an impact on the other. The four major
components and their respective subcomponents are introduced in the following
sections.
In terms of the definition for strategic management, the first three stages of the model
(analyzing the current status, examining the prospects for the future, and setting the
future course) relate to the formulation of strategy. The fourth stage (putting the
strategy to work) relates to implementation of strategy. The fifth stage (evaluating and
controlling the strategy) relates to the continuous evaluation of strategy. Strategy
formulation, implementation and evaluation are all equally important for the strategic
management process to be successful. A breakdown in any one of these areas can easily
cause the enterprise to fail.
4.5 ANALYZING THE CURRENT STATUS
Whether strategic management is being instituted for the first time in a new or existing
company, whether a new president is taking over, or whether a student is analysing an
organization from a case, the organization's current performance, mission, and strategy
must be identified. It is only logical that these variables be analyzed before the
organization's future is mapped out. As obvious as this may be, many managers appear
to ignore this step.
In Exhibit, three groups of variables are depicted as the major determinants of an
organization's current status, mission, past and present performance.
Identifying Mission: Mission defines the basic purposes of the organization. Ideally, an
organization's mission is clearly recognized and widely known throughout the
organization. Even when this is the case, however, an organization may wish to alter or
redefine its mission. Thus an organization should periodically evaluate its mission to

ensure that the mission is current. In situations where the mission has not been clearly
defined, it is absolutely necessary to do so. In small organizations this normally requires
that the owner or owners define exactly what the organization is trying to produce
and/or sell and what market or markets it is trying to serve. In large organizations top
management and the board of directors must agree upon these same issues.
Identifying past and present strategies: It is a well-known fact that Sears, Roebuck and
Company embarked on a conscious strategy to upgrade its quality image in the 1960s.
Prior to implementing this new strategy, Sears first had to identify clearly what its
strategy had been in the past. In other words, before a strategic change can be developed
and implemented, the past and present strategies must be clarified.
General questions to be addressed include the following: Has past strategy been
consciously developed? If not, can past history be analyzed to identify what implicit
strategy has evolved? Is so, has the strategy been recorded in written form? In either
case, a strategy or series of strategies, as reflected by the organizations past actions and
intentions, should be identified.
Diagnosing past and present performance: In order to evaluate how past strategies have
worked and to determine whether strategic changes are needed, the organization's
performance record must be examined. How is the organization currently performing?
How has the organization performed over the last several years? Is the performance
trend moving up or down? These are all questions that the strategist must address
before attempting to formulate any type of future strategy. Evaluating an organization's
performance usually involves some type of in-depth financial analysis and diagnosis. In
Exhibit an arrow has been drawn from the bottom of the model to present and past
performance. This indicates that the present and future performance of an organization
is affected by its present and past strategies and that the strategic management process
is a never-ending process.
4.6 EXAMINING THE PROSPECTS FOR THE FUTURE
The first step in looking toward the future is to decide what the long and intermediate
range objectives should be in light of the current mission. However, these objectives
cannot be accurately established without examining the internal and external
environments. Thus establishing the long and intermediate range objectives and
analyzing the internal and external environments are concurrent processes, which
influence one another. The two-way arrows in Exhibit show these circular relationships.
4.7 SETTING LONG-RANGE OBJECTIVES
Given the mission, what does the organization hope to achieve and accomplish over the
long range? In establishing long-range objectives, the emphasis is on corporate and
divisional level objectives, as opposed to departmental objectives.
The first step is to decide which areas of the organization's business should be covered
by objectives. Common choices include sales, market share, costs, product

introductions, return on investment, and societal goals. Once the areas for objectives
have been decided upon, the next step is to determine the desired magnitudes and
associated time frames for accomplishment.
4.8 CONDUCTING AN INTERNAL ANALYSIS
The basic idea in conducting an internal analysis is to perform an objective assessment
of the organization's current status. What things does the organization do well? What
things does the organization do poorly? From a resource perspective, what are the
organization's strengths and weaknesses? Additional areas that should be investigated
include the organization's structure and its culture. It is usually desirable to analyze
structure in terms of the lines of authority, communication patterns, and work flow.
With regard to culture, the first step is usually to identify corporate norms and mores.
As emphasized earlier, the process of setting long-range objectives is influenced by the
results of the internal analysis. Similarly, the internal analysis should focus on factors
affected by the long-range objectives. Thus there is a circular relationship between these
variables.
4.9 ASSESSING THE EXTERNAL ENVIRONMENT
An organization's external environment consists of everything outside the organization,
but the focus of the assessment is on the external factors that have an impact on the
organization business. Such factors are classified by their proximity to the organization
they are either in its broad environment or in its competitive environment. Broad
environmental factors are somewhat removed from the organization but can still
influence it. General economic conditions and social, political, and technological trends
represent common factors in the broad environment. Factors in the competitive
environment, which is also referred to as the task environment are close to and come in
regular contact with the organization. Stockholders, suppliers, competitors, labor
unions, and customers represent members of the competitive environment. The external
analysis, like the internal analysis, has a circular relationship with the long-range
objectives. This portion of the model concludes the reflective part of the strategic
management process. Having analyzed its current status and examined its prospects for
the future, the organization is then in a position to consider its future course.
Setting the future course
Setting the future course involves generating possible strategic alternatives, based on
the mission and long-range objectives, and then selecting the best alternative.
4.10 COMPARING STRATEGIC ALTERNATIVES
The goal in this phase of the process is to identify the feasible strategic alternatives, in
light of everything that has been done up to this point, and then to select the best
alternative. Given the mission and long-range objectives, what are the different feasible
strategic alternatives? The internal and external environmental analysis also place

specific limitations on the feasible strategic alternatives. For example, the results of an
internal financial analysis could severely limit an organization's options for expansion.
Similarly, the results of an external analysis of population trends might also limit an
organization's expansion plans. Once a set of feasible alternatives has been defined, the
final strategic choice must be made.
The evaluation and final choice of an appropriate strategic alternative involves the
integration of the mission, objectives, internal analysis, and external analysis. In this
phase an attempt is made to select the overall, or grand, strategy that offers the
organization its best chance to achieve its mission and objectives through actions that
are compatible with its capacity for risk and its value structure. Once the grand strategy
has been identified, additional sub strategies must then be selected to support it.
In the case of diversified multi- industry organizations, comparing strategic alternatives
involves assessing the attractiveness of each of the different businesses as well as the
overall business mix. The next step is to evaluate specific alternative strategies for each
business unit. Thus the emphasis in this phase of the model is on the need for
generating strategic alternatives at both the corporate level and the business level.
4.11 PUTTING THE STRATEGY TO WORK
The fourth section of the model emphasizes the importance of translating planned
strategy into organizational actions. Given that the grand strategy and supporting sub
strategies have been clearly identified, what actions must be taken to implement these
strategies? Strategy implementation involves everything that must be done to put the
strategy in motion successfully. Necessary actions include determining and
implementing the most appropriate organizational structure, developing short-range
objectives, and establishing functional strategies.
4.12 IMPLEMENTING STRATEGY
Organizational Factors: Not only does an organization have a strategic history, but it
also ahs existing structures, policies, and systems. Although each of these factors can
change as a result of a new strategy, each must be assessed and dealt with as part of the
implementation process.
Although an organization's structure can always be altered, the associated costs may be
very high. For example, reorganization might result in substantial hiring and training
costs for newly structured jobs. Thus, from a very practical standpoint, an organization's
current structure places certain restrictions on how a strategy should be implemented.
The strategy must fit with current organizational policies, or the conflicting policies
must be modified. Often, past policies heavily influence the extent in which future
policies can be altered. For example, it has been the policy of the A.T. Cross Company
(manufacturers of the world-renowned writing instruments) to unconditionally
guarantee its products for life. This policy is well known and has come to be expected by

many of the company's customers. Because of these expectations, it would now be very
difficult for Cross to discontinue its guarantee policy.
Similarly, organizational systems that are currently in place can affect how the strategy
might best be implemented. These systems can be either formal or informal. Examples
include information systems, compensation systems, communication systems, control
systems, and planning systems.
Implementing Strategy: Functional Strategies; Functional strategies are the means by
which the business strategy is operationalised. Functional strategies outline the specific
short-range actions to be taken by the different functional units of the organization
(production, marketing, finance, personnel, etc.,) in order to implement the business
strategy. The purpose of functional strategies is to make the corporate and business level
strategies a reality.
The formulation for functional strategies plays a major role in determining the
feasibility of the corporate and business level strategies. Of sound functional strategies
cannot be formulated and implemented, it may be that the corporate and /or business
level strategies need to be reworked. As the old saying goes, the functional strategies are
the point where "the rubber meets the road".
4.13 EVALUATING AND CONTROLLING THE STRATEGY
After things, have been put into motion, the next challenge is to monitor continuously
the organization's progress toward its long-range objectives and mission. What types of
managerial controls are needed to ensure that acceptable progress is being made? Is the
grand strategy working, or should revisions be made? Where are problems likely to
occur? The emphasis here is on making the organization's strategists aware of the
problems that are likely to occur and of the actions that should be taken if these
problems do occur. As mentioned earlier, the arrows looping back up from this last
component of the model indicate that the strategic management process is continuous
and never-ending.
4.14 RESULTS FROM THE STRATEGY FORMULATION PROCESS
The strategy formulation process results in strategic choice and supporting strategies.
Robert Grant suggests four critical elements to the results that have to be achieved from
a strategy formulation process:
1. Goals, which are simple, consistent and long-term
2. Profound understanding of the competitive environment
3. Objective appraisal of resources
4. Effective implementation

Clear strategic intent may be expressed as goals. The results of strategic assessment are
an objective and profound understanding of resources and an objective appraisal of the
competitive environment. A good strategic choice is one ingredient of effective
implementation.
On the other hand, Grant's list does not guarantee success. There may also be other
necessary useful results that are not on his list. The items on the list beg further
questions. 'Clearly stated goals' may sound good but may be extremely woolly in their
practical meaning. 'Profound understanding of the competitive environment' is a worthy
aim but how can one know what degree of profundity is adequate? What if the present
competitors are all equally blind to the nature of future change like a group of dodos?
'Objective appraisal of resources' may not be enough as it may be possible to find new
resources to stretch the organization to meet future challenges. Certainly the strategy
formulation process must generate strategies which are capable of implementation but
actions will have to be modified in the light of events so that what is implemented is not
the same as what seemed capable of implementation.
4.15 SUMMARY
After reading this lesson you are able to understand the strategy formulation in
management. If you understand the strategy formulation, it will be easier to set the long
term objectives and short term objectives according to the situation. Besides, these
things you may come to know how the strategy can be implemented and controlled to
manage business in a successful way.
4.16 ASSIGNMENT QUESTIONS
1. What is strategic formulation process?
2. Explain the strategic management model
3. How long range objectives could be setup?
4. Explain the strategic alternatives
5. How the strategy can be evaluated and controlled?

- End of Chapter

LESSON 5
STRATEGIC THRUST

OBJECTIVES

To know the strategic intent

To analyse the strategic assessment
To understand the strategic options

CONTENTS
5.1 Strategic Intent
5.1.1 Strategic intent in practice
5.1.2 The role of leadership in forming strategic intent
5.1.3 Stakeholders and their ability to influence strategic intent
5.1.4 Impact of context on strategic intent
5.1.5 Contrasting views on the nature of strategic intent
5.2 Strategic Assessment
5.2.1 Strategic assessment as part of the strategy formulation process
5.2.2 Selecting analytical frameworks and tools to support strategic assessment
5.2.3 Pulling the strategic assessment together
5.2.4 Strategic assessment of a business as a whole
5.3 Strategic Options
5.3.1 Structure of strategic choice
5.3.2 Grouping options into strategic options
5.3.3 General tests of strategic options

5.3.4 Who should be involved with the choice?

5.3.5 Theoretical frameworks for assisting strategic choice
5.3.6 Strategic choices in the case example
5.4 Summary
5.5. Assignment questions
INTRODUCTION
Implementing broad strategies often involves undertaking several new strategic projects
- specific narrow undertakings that represent part of what needs to be done if the overall
strategy is to be accomplished. These projects or thrusts provide a source of information
from which managers can obtain feedback that helps determine whether the overall
strategy is progressing as planned and whether it needs to be adjusted or changed.
While strategic thrusts seem a readily apparent type of control, using them as control
sources is not always easy to do. Early experience may be difficult to interpret. Clearly
identifying and measuring early steps and promptly evaluating the overall strategy in
light of this early, isolated experience can be difficult.
Two approaches are useful in enacting implementation controls focused or monitoring
strategic thrusts. One way is to agree early in the planning process on which thrusts, or
phases of those thrusts, are critical factors iri the success of the strategy or of that thrust.
Managers responsible for these implementation controls single these out from other
activities and observe them frequently.
The second approach for monitoring strategic thrusts is to use stop/go assessments
linked to a series of meaningful thresholds (time, costs, research and development,
success, etc.,) associated with particular thrusts. Days Inns' nationwide market
development strategy in the early 1980s included a strategic thrust of regional
development via company-owned inns in the Rocky Mountain area. Time problems in
meeting development targets led company executives to reconsider the overall strategy,
ultimately deciding to totally change and sell the company.
5.1 STRATEGIC INTENT
The concept of strategic intent
Strategic intent is the first of the three logical elements of the strategy process. Strategy
is concerned with both ends and means. Strategic intent is concerned with the ends and
purposes of the enterprise and combines a vision of the future with the intent to make
that vision a reality.

A vision is a picture in the mind. Sight is the most vivid of the senses and the word
vision suggests an image of the future that is both three-dimensional and in color. The
vision must go beyond defining the future products or services which the enterprise will
offer to conceiving also how the enterprise will operate as an entity, what its values will
be, and what it will be like to work in. to say that the enterprise will double in size in a
given period fails to meet our criteria for a given statement. In our view a vision
statement provides a visual image, which is exciting, and emotionally energizing, vision
is a necessary part of strategic intent but a vision on its own may be an imaginary or
lacking in substance. Strategic intent may therefore combine vision with the will and the
means to make the vision to become reality.
Nearly all writers on strategy have agreed that clarifying extending the fundamental
purpose of the enterprise is a necessary part of strategy. Andrews saw the creation of
clear purposes and objectives as central to strategy and a clear responsibility of senior
management. More recently, Hamel and Prahalad, who first used the phrase strategic
intent, see it as the heart of strategy and as providing an animating dream for the future.
They see it as providing a sense of direction, discovery, and destiny for every person in
the company. Clearly it is a prime responsibility of top management to generate such
strategic intent and to ensure that it is compelling. Hamel and Prahalad take the view
that strategic intent should stretch the aspirations and should not be constrained by
existing resources.

Rather strategic intent may be seen as the apex of a pyramid of purpose. Such a pyramid
of terms tends to be formed when purpose and strategic intent are discussed. Because
different groups of people will interpret the terms differently and because some of the
terms will tend to overlap in their meanings, there is some value in defining such terms
to improve communication.
5.1.1 Strategic intent in practice
The strategy formulation process should result in the strategic intent becoming clearer,
more developed, and more widely understood. This occurs in practice by a process of

continuing discussion informed by the results of strategic assessment and strategic

options. There are no magic methods to achieve quick results.
The strategic intent has to be acceptable to the various individuals or groups who are
stakeholders in the enterprise. The shareholders are normally the dominant stakeholder
group in a publicly owned business but they are not the only stakeholders to have a
degree of influence on the strategic intent. The strategic intent will owe something to the
history and culture of the enterprise. For many enterprises, success will gradually slip
away unless the strategic intent stretches the enterprise to strive beyond its present
aspirations and practices. One of the key responsibilities of leaders is to cause this
stretching of intent to occur. Finally, the strategic intent may be in part based on an
inspired guess of what the future will be like - a combination of evolving trends and
deliberate effort to affect the future.
Strategic intent is likely to include both goals and vision. Goals are tangible and
quantifiable. When times are hard, the goals will be survival. Once survival seems
assured, the goal for business enterprises is likely to be to increase revenues, profits, or
both. The relative importance of these goals will vary according to the context. In most
publicly quoted companies, the dominant goal is to increase shareholder value. Goals
are necessary but not sufficient for a strategic intent. Goals on their own do not inspire
people. The strategic intent must also outline something unique and inspirational. Great
enterprises seem always to have aspirations beyond producing a profit, something that
makes them unique.

he strategic intent should inspire everyone who works for the enterprise and perhaps
also have an effect on customers and suppliers. It follows that there may be benefits if
the strategic intent can be expressed in a memorable form or as a slogan. This form of
strategic intent may act as a rallying cry. On the other hand slogans can in time
degenerate into meaninglessness. The British Airways slogan "The World's Favorite
Airline" may be an example of both the value and limitations of slogans. British Airways,
if challenged, would have been hard pressed to prove this claim. During the early 1990s
British Airways was receiving high ratings in opinion surveys suggesting that it was at
least one of the world's favorite airlines. The slogan may have been instrumental in
achieving this position and in inspiring staff to improve their service to customers.
Certainly both the slogan and the attempt to be passenger friendly were very visible for a
time. Later in the 1990s, however, the slogan seems to have passed its sell-by-date.
British Airways seemed to become more concerned with painting the tail fins of its
aircraft. The connection between colorful tail fins and passenger favor is obscure. British
Airways customer service no longer stood out from among its competitors. The business
results of the company declined. The slogan had lost its value as a statement of strategic
intent.
An effective strategic intent can usually be expressed in relatively few words -a slogan
may be more effective than a long document. A mission statement may be used as a
means of publicizing the strategic intent of an enterprise. Good mission statements are
pithy and credible. When genuine strategic intent exists, everyone is aware of it; the

mission statement is therefore only a record of what is already known and understood.
Few mission statements achieve this. Too many mission statements consist of
motherhood statement or are the subject of mild skepticism or even mirth among staff.
Lucy Kellaway has suggested that the only way for a company to stand out is by not
having a mission statement at all as they all seem to be the same.
5.1.2 The Role of Leadership in Forming Strategic Intent
The strategic intent may reflect the views of a single inspirational leader. Such leaders
tend to be highly visible and to surround themselves with people who agree with their
vision of the future. As a result, the strategic intent becomes closely related to the leader
but also widely shared and understood. They are obvious examples of this in Jack Welch
and Bill Gates who are often personally associated with the strategic intents of GE (US
General Electric) and Microsoft respectively.
Unfortunately, strong leaders sometimes fail to recognize that their personal objectives
may not be of value when the organization has reached a watershed in its development.
At such times they need to move on and allow a new leader to take control of the helm
but this rarely happens. For example, Geneen at ITT held sway for so long that the
company reflected his persona. It would seem in hindsight that he built a conglomerate
that only he could manage. It took his successors many floundering moves to right the
ship once he left and to steer it to calmer but equally lucrative waters.
The case examples illustrate the importance of leadership in determining strategic
intent. In the ICL case example, it was Robb Wilmot's leadership that caused ICL to
adopt a new and clearly stated strategic intent that drove the company forward.
Conversely, the problems of Marks & Spencer might have been addressed sooner if Sir
Richard Greenbury had been less totally dominant at a time when strategic change
became necessary.
It would seem that leadership has a critical role in forming strategic intent and that it
may be a force for weakness as well as for strength.
5.1.3 Stakeholders and Their Ability to Influence Strategic Intent
Stakeholders are any group with an interest in the activities and results of the
enterprise. The most obvious stakeholder groups are shareholders, managers,
employees, and customers. Suppliers, bankers, the government, society at large may
also be significant stakeholders. Shareholders are generally the dominant stakeholder
group.
Different groups of stakeholders tend to differ in their values and hence will tend to
have different views about what the strategic intent of the enterprise should be. Some
stakeholder groups are more powerful than others and some are more inclined to
exercise their power than others.

Analysis of stakeholder power cannot be precise but it is usually useful to identify the
main stakeholder groups and it considers how their values and expectations for the
enterprise may differ. Some groups of stakeholders may be less coherent than expected.
For instance, among employees, the long serving may have different views from recent
recruits. The analysis has therefore to consider these as separate stakeholder groups.
The role of management is to achieve a strategic intent that satisfies most of the
stakeholders or at least ensures that no powerful stakeholders are left too unhappy.
Unexpected stakeholder groups may suddenly form and have greater power than
expected.
A group of stakeholders who rarely get a mention are the middle managers of
companies. While directors tend to make the decisions that often take organizations into
new directions, many of the strategic decisions that make evolutionary change possible
depend on the goodwill of middle managers to carry them through. In attempting to
pursue their personal ambitions these managers can derail or divert a company from its
chosen strategic direction. Because this happens by stealth it is often not detected or
corrected. For example, two managers in charge of different business units who are
competing for recognition will set out to sell the virtues of their respective organizations
and seek support and patronage for their business unit strategies. If, however, resources
are scarce, this lobbying can take a sinister turn. The individual with the cash cow may
divert resources to it at the expense of the individual with the emergent star, thus
starving the future business for short-term gains.
The Nolan, Norton case example gives some insight into stakeholder power in practice.
The owners, principals, and staff or Nolan, Norton all had different perspectives and
interests about the future of the firm. The success of the merger with KPMG depended
on, among other things, balancing these different perspectives. In the BMW case the
interests and attitudes of Quant family dominated the decisions taken, suggesting that a
dominant shareholder can significantly affect the direction and future of an
organization.
5.1.4 Impact of Context on Strategic Intent
We discuss the importance of the context as defining the background to strategic
management. Context is also a factor in determining strategic intent. Some of the most
common ways in which context matters are as follows:
Organizational History and Culture
Every organization has its own culture. This culture affects what gets done, why things
are done, and how they are done. Cultures form over time as the result of historical
events and the influence of particular individuals who leave their mark. Academics and
practitioners have both studied corporate culture. Culture is of fundamental importance
in defining and often in limiting strategic intent.
The recent history of the enterprise is relevant to understanding both its culture and its
strategic intent. The pattern of recent performance is usually important. For instance, a

company that has been successful for a long period but is now under threat, reacts
differently from one that is beginning to experience success after a long period of
struggle. Recent traumatic events may have left specific scars in the culture and be
crucial in defining the attitudes of key individuals.
Mergers cause two different cultures to come together. The two separate cultures often
remain discernible for many years after the merger. In takeovers the acquiring
company's culture will tend to dominate and may eventually eradicate the acquired
company's culture. Even when the two merger partners are supposedly equal, in practice
one culture usually seems to dominate.
In some organizations the strategic intent has become so much a part of tradition that
they do not need slogans to transmit them. For instance, Daimler Benz has a longstanding tradition of excellence in engineering. It is clearly a part of the strategic intent
of Daimler Benz to maintain this excellence whatever its business goals at a particular
time.
Just as culture can influence strategic intent, so a change in strategic intent is likely to
require a change in culture. There is clearly a balance in practice between the view of the
Cultural School and the prescriptive view of strategies. The Cultural School would hold
that strategic intent is little more than the expression of the culture of the enterprise and
that it is culture, which determines its future. The prescriptive schools would expect a
change in culture to be a requirement of a radically new strategic intent and so require
deliberate action to cause a change in culture.
5.1.5 Contrasting Views on the Nature of Strategic Intent
In sharp contrast to this view that strategic intent is at the very heart of strategy, other
writers have supported the views of Simon and Cyert and March have denied that it is
possible for organizations to have either purpose or intent. Their view is that only
individuals can have intents and purposes. They see organization as consisting of a
number of individuals who negotiate with each other and form temporary alliances
through contracts with other individuals. The outcomes of these behavioral processes
determine the direction that the enterprise takes. This view of the world has a ring of
truth to anyone who has observed the workings of a company board at close quarters;
individual agendas are often as important as any shared intent; committees make
decisions, which owe more to compromise than to principle.
A third view is that the intent of an organization is deeply embedded in its culture.
Under this view, managers have very little scope to make the intent any different from
the embedded purpose. Real change in intent can only occur after a change in culture
and this will necessarily take time. There is evidence to support this point of view from
observing how hard it is for any organization to make dramatic changes in its way of
doing things. For example, IBM was outstandingly successful as a provider of
mainframe computers and this culture had become deeply embedded. IBM has,
therefore, found it much more difficult to succeed in a world where it is selling personal

computers and services. Both these businesses involve selling different products to
different customers through different channels.
These divergent views on the nature and possibility of strategic intent may be more or
less useful depending on the context, so it is necessary to judge how relevant and valid
each point of view might be in any specific context. Most managers will probably find
themselves more in sympathy with the Andrews-Hamel-Prahalad perspective as a
starting point. They will be wiser, however, if they are also aware that this model may
not be the whole truth.
5.2 STRATEGIC ASSESSMENT
Strategic assessment is the second logical assessment is to anchor future strategies in
reality. Thus strategic intent drives towards the future but strategic assessment relates
strategies to the present.
The scope of strategic assessment must address both the internal and external aspects of
the context. External assessment is concerned with changes in the business
environment that will affect the business, with changes in the industry, and with the
activities of competitors. Internal assessment is concerned with the internal resources,
capabilities, and competencies of the enterprise and the potential for these to meet
future customer needs.
Strategic assessment combines analysis with judgment. Analysis without judgment is
sterile while good judgment depends on sound analysis. Assessment is more than
analysis alone. Doing more and more analysis does not necessarily lead to better
assessment. Rather it is important to relate the focus of the analysis to testing potential
judgment. Analysis on its own tends to give undue weight to what can be readily
measured and this can distort judgment, as Albert Einstein is supposed to have said:
'not everything that can be counted counts and not everything that counts can be
counted'. Einstein was, of course, talking about science rather than about management
and his view ahs to be balanced against another well-known saying: 'If your can't
measure it, you can't manage it'. When it comes to strategic assessment and analysis,
these two apparently contradictory statements are both relevant and have to be weighed
against each other. Good assessment leads to the conviction that one has achieved a
balanced understanding of the context and the issues to be resolved. This conviction
comes partly from emotional commitment and partly from the support of sound
analysis.
5.2.1 Strategic Assessment as Part of the Strategy Formulation Process
Strategies may result from formal processes but probably just as often they result from
informal conversations, chance meetings or sudden insights at unexpected moments.
Strategy making may happen continuously or in fits and starts so there are dangers in
thinking of a beginning or an end to the process of formulating strategy. However, if
strategy is formulated using a purposeful process at a particular time. It is likely that it
will prove useful to carry out a strategic assessment early in the process.

The purpose of strategic assessment is to come to a view on the current position of the
enterprise as a whole in its relationship to the outside world. Strategic assessment
relates to a specific enterprise at a specific time. The strategic assessment attempts to
answer the question where are we now?' The answer to this question is partly absolute
but partly dependent on strategic intent, strategic choice, and implementation. The
answer to where are we now?' depends partly on the answers to the questions: where
do we want to go?' how are we intending to get there?' and 'do we have the ability to
implement the necessary changes?' Ultimately, the answers to all these questions must
be coherent so strategic assessment cannot be complete in isolation.
The strategic assessment is set against the background of the context. The aim of
strategic assessment is to understand the context better in relationship to the strategic
intent and potential strategic choices.
Strategic intent defines the underlying purpose for the enterprise and so sets the
foundation for strategic assessment. Strategic assessment cannot have any clear basis
unless there is strategic intent. The assessment of how well we stand today depends on
where we want to be in the future. Equally, strategic assessment may constrain or
expand strategic intent. This is why the arrow between strategic intent and strategic
assessment is double-headed. Similarly there is a close two-way link between strategic
assessment and strategic choice. Some options may seem more attractive as a result of
strategic assessment; some may seem less attractive or even impossible.
Recent operational results are usually relevant m making a strategic assessment. It may
well be that one of the reasons for considering a change in strategy is that recent
performance has not been acceptable. In addition, the process of formulating strategy is
often cyclical so that the assessment in this iteration will take into account the thinking
of previous iterations and the results of attempts to implement earlier strategies.
Strategy formulation will be more credible if earlier strategic thinking and action has led
to visible operational results. Even if earlier strategies have failed, the causes of failure
will inform the present discussion and enrich the strategic assessment.

There are normally particular reasons that trigger the need for strategic assessment at a
particular time. For much of the time, enterprises operate within existing strategies.
Results will not exactly meet targets but the discrepancies can be handled by doing
better tomorrow what was done yesterday. Occasionally it becomes clear that the gap
between expectations and achievement requires more fundamental change. The
awareness of this gap may act as a trigger for new thinking and new strategies. Other
common triggers include the arrival of a new chief executive or a merger. A trigger may
occur in recognition of the need to respond to strategic issues imposed by the strategic
context. The nature of the trigger is likely to influence the agenda and scope for the
strategic assessment.
A fundamental type of trigger occurs when the business is undergoing a change in the
rules that apply in its industry. Andrew Grove refers to these as strategic inflection
points and suggests that such inflection points occur when there is a ten times change in
any basic business parameter such as cost per unit or time to develop a new product.
Whatever the root cause of the trigger, the effect of such a trigger is to cause ci shift from
an operational cycle to strategic cycle as illustrated in figure. The setting up of a task
force to review strategy or the appointment of external consultants to assist with a
strategic review is common symptoms that an enterprise has embarked on a strategic
cycle.

The questions that Strategic Assessment Should Address

A strategic assessment requires conclusions and judgments that never directly follow
from analysis alone. These judgments follow from a process of setting and answering
questions. A good strategic assessment will pose and answer relevant strategic
questions. Examples of the kinds of questions that may be relevant are:

What are our chances of survival if we continue as we are?

Where are the best opportunities for growth given our existing capabilities?
Where are our competitive advantages and disadvantages?
Where can we invest to improve our capabilities most efficiently?
What changes can we realistically implement?

It is very important that strategic assessment should identify and address the particular
questions that are relevant to the context. The strategic assessment starts the process of
identifying the response to these issues. Time and effort need to be spent in formulating
the questions before attempting too much detailed analysis. A key question to ask is
'which questions are the right questions in the current circumstances?'
There is a tendency for students on strategic management courses to rush into applying
the many analytical frameworks available without considering what the important
questions are. This is likely to make the analysis less useful than it might be. Analysis for
its own sake may be a complete waste of time.
Naturally the answers to early question tend to raise other questions. Strategic
assessment is a process not a single analytical framework. It is an art as much as a
science.
5.2.2 Selecting Analytical Frameworks and Tools to Support Strategic
Assessment

The range of analytical tools, techniques, approaches, and frameworks available to

support strategic assessment is very large. Particular contexts are likely to require
analysis peculiar to that context as well as some of the general frameworks. Particular
frameworks tend to be effective at answering particular types of questions and to relate
to particular ways of thinking about strategy.
It is usual to employ more than one framework for analysis. A survey by Wilson
produced the data in Figure from a survey of fifty companies in various industries and
countries.
The survey demonstrates clearly that most companies in the survey were using more
than one technique. The popularity of core competencies may reflect the date of the
survey, which was just after the publication of Hamel and Prahalad's Competing for the
Future. It is also intriguing that Business Process Redesign should be included as a
technique of strategic analysis. The survey suggests that the variety of techniques in use
was broad. Hopefully this would mean that all the companies concerned had carefully
considered what the questions for their strategic assessment should be and had selected
the techniques appropriate to their particular needs. Wilson's survey did not examine
whether this was the case. It is also apparent from this survey that some possible ways of
thinking about strategy-such as the Cultural School or the Environmental School-were
not being applied in the field at that time.
As well as being relevant to the questions asked, the selection of techniques will in
practice depend on what information is available or obtainable within limits of time and
effort.
Table 5.1 Techniques in use in strategic planning processes
Technique
% Using
Core competencies analysis
72
Scenario planning
69
Benchmarking
56
Total quality management
44
Shareholder value analysis
44
Value chain analysis
44
Business process redesign
33
Time-based competition
25
5.2.3 Pulling the Strategic Assessment Together
Strategic assessment involves asking questions, using analysis to answer questions,
reformulating better questions, refocusing analysis and so on. The end result is the rich
picture of a strategic context and the potential choices to be made in the light of a
strategic intent, which may itself be evolving, and becoming clearer.
It is important that the results of strategic assessment are shared among a group of
people-the strategy team. However rational the questionnaire/analysis mechanism may

have been, the values and inclinations of the people involved will introduce an irrational
element into the assessment. Strategic assessment would lead to conviction and so
implies the involvement of both intellect and emotion, both mind and heart.
Irrationality is both inevitable and necessary to provide the commitment to future
action.
Various techniques are available to assist in the process of pulling a strategic assessment
together. It is likely that the attention of the strategy team will focus on a few analytical
techniques. These may therefore contribute to the process of integration of ideas,
consensus, and conviction. The value of computer models may be as much in their
ability to assist communication and agreement as in their ability to extend analysis.
The SWOT (strengths, weaknesses, opportunities, and threats) diagram is one technique
that cannot be omitted from a textbook on strategy. The SWOT diagram is now probably
more commonly used in business schools than in the field. The SWOT is not itself an
analytical technique but may be a convenient way of summarizing the results of other
analysis.
The internal analysis tends to reveal the strengths and weaknesses of the enterprise.
External analysis tends to reveal opportunities and threats. It should be note that in
many cases the same external change may represent both a threat and an opportunity.
An appropriate response can change a threat into an opportunity.
One particular contribution of the SWOT diagram is that it may highlight the
relationships of strategic intent and strategic choice to strategic assessment. Strengths
and weaknesses are not only related to competitors, but also to where we want to go and
how we intend to get there.
5.2.4 Strategic Assessment of a Business as a Whole
One of the dangers of many analytical techniques is that the mass of detail can obscure
the big picture so that the integrity and essence of the business is lost. A powerful
technique for broader assessment is to ask more general questions. Examples of good
questions include:

What business are we really in?

What real customer needs do we satisfy?
What problem do we solve for our customers?

These kinds of questions tend to relate strategic assessment to the strategic intent.
Questions such as these can the process of formulating strategy away form a routine
perspective of the nature of the enterprise. This may help to generate thinking outside
the constraints of everyday work and bring creativity to the formulation of strategy.
5.3 STRATEGIC OPTIONS
Importance of choice in the strategy formulation process

Strategic choice is the third logical element of the strategy formulation process. Choice
is at the centre of strategy formulation. If there are no choices to be made, there can be
little value in thinking about strategy at all. On the other hand, there will always, in
practice, be limits on the range of possible choices. In general, small enterprises tend to
be limited by their resources, whereas large enterprises find it difficult to change quickly
and so tend to be constrained by their past. In large corporations, managers may find
their range of choice limited because some choices are made at a higher level or in
another country. In the public sector, politicians may make the genuine strategic choices
so that the role of the manager is limited to devising how best to implement strategies
rather than to ponder fundamental choices of future direction for themselves.
Even when managers are apparently free to make strategic choices, results may
eventually depend as much on chance and opportunity as on the deliberate choices of
those mangers. When considering future strategies, it may seem that there are clear
choices to be made. When reflecting on outcomes in retrospect, it is often clear that
events, and particularly unexpected events, played a major role in determining results.
When considering choice, it is necessary to take a prescriptive view. Descriptive ways of
thinking may help to explain the outcomes after the event.
In a tidy logical world, any process of choice could be rationally divided into four steps identify options, evaluate the options against preference criteria, select the best option,
and then take action. This suggests that identifying and choosing options can be done
purely analytically. In practice, it may be difficult to identify all possible options with
equal clarity or at the same time. Unexpected events can create new opportunities,
destroy foreseen opportunities, or alter the balance of advantage between opportunities.
Identifying and evaluating options is a useful approach but it has limitations. It is
necessary to remember that the future may evolve differently from any of the options.
Good strategic choices have to be challenging enough to keep ahead of competitors, but
also have to be achievable. Analysis has an important role in making strategic choice but
judgment and skill are also critical. For instance, sometimes it may be better to delay
making a decision whereas at other times a wrong decision may be better than no
decision. Strategic choices that keep options open may be preferable in an uncertain
future to defined strategies for their success on uncertain events happening. Such
judgments require wisdom as much as analytical skill.
These words caution laid the ground for this lesson that might otherwise seem to make
the process of strategic choice sound too mechanistic.
Since strategic choice tends to be so fuzzy, it is useful to define the words being used. We
shall adopt the following definitions:
Choice and strategic choice refer to the process of selecting one option for
implementation.

An option is a course of action that it appears possible to take. The simplest form of
choice is therefore between taking an option and not taking it - doing it or not doing it.
Most choices have more shades of possibility than this.
A strategic option is a set of related options that form a potential strategy. For instance,
it might be an option to enter a new market in a new country. The entry to that market
with a chosen method of distribution and known way of acquiring necessary distribution
resources - in fact, a complete business plan of how to enter the new market successfully
- would become a strategic option.
Chosen strategy is the strategic option that has been chosen.
5.3.1 Structure of Strategic Choice
Figure 5.5 shows how the three logical elements of the strategy formulation process
interlock. The shaded background is a reminder of the importance of context as
determining the issues to be resolved by strategic choice.
Figure 5.6 expands the detail to illustrate the significance of the overlaps. The common
ground between any two circles is of some interest but it is only where all three circles
overlap that logically viable options exist. The chosen strategy emerges as the chosen
viable option. It is where the differing requirements of intent and assessment are most
fully met - that is, where the three logical elements overlap.
The areas where any two circles overlap are also of interest. The criteria for choice
derive from intent and assessment. Feasible options may exist which are not aligned to
strategic intent. This, of course, may raise the question of whether the strategic intent
should be changed. Infeasible options may seem highly attractive and may have
powerful supporters, so the reasons why they are infeasible may need to be carefully
argued with clear evidence in support. Choices of what not to do may sometimes as
important as choosing what to do.

Fig: 5-5 Results of the Strategy Formulation Process

Fig: 5.6. Choosing a strategy from among strategic option

The process of choice starts by identifying available options. The chosen strategy will
have to answer the questions what ', 'how', why', who', and when', so each option will
provide provisional answers to each of these questions.
5.3.2 Grouping Options into Strategic Options
Options about product/markets, resources/capabilities and the method of
implementation have to be combined into a much smaller number of strategic options.
This may be a bottom-up or top-down process. The bottom-up approach implies linking
what might be done in detail into potential strategies that seem to make wider sense.
The top-down approach means testing general ideas of future direction against detailed
options. In practice, the process is likely to combine top-down ad bottom-up thinking.
5.3.3 General Tests of Strategic Options
Each strategic option has then to pass two tests based on the logic. It must be:
1. Aligned in that it conforms to the strategic intent. This test answers the question
'Does this option take us towards where we want to go?'
2. Feasible in that the capabilities and resources necessary for success can be made
available. This answers the question: Will it work?' this test is likely to draw on
the analysis of the strategic assessment. The tests of feasibility require serious
consideration of what will be required to implement the necessary changes.

3. A third test goes beyond logic to answer the question: 'Will this option be
acceptable?' Acceptable means that it will win the approval of both those who will
have to approve it and those who will have to implement it.
Any strategic option has to pass all three tests to be viable. If more than one strategic
option passes these tests, they may have to be compared with each other to choose the
best'. The judgment has to take into account both tangible characteristics such as risk
and return and less tangible matters such as match to values and culture.
In practice, the number of strategic options is rarely large. The tests, though important,
cannot be completely objective.
5.3.4 Who should be Involved with the Choice?
Strategic choice is as much a political as a logical process. In a book it is easier to
describe the logic than the politics. Each context will have its own pattern n of politics,
which will be important in determining both how and what strategic decisions are made.
Questions that may help to reveal the political reality include.

Who stands to gain or lose from a particular strategic choice?

What existing coalitions exist and how will these be affected?
Who may be seen to have originated or supported particular choices or
arguments?

Ultimately, it is likely that a strategic choice will need approval by the board but this
may well be the formal confirmation of a decision that has been made before the actual
meeting. For a clear and realistic exposition of how to influence committees, Parkinson
advises, to focus attention on the members of the committee who are undecided or even
perhaps fail to understand the issues.
Formal approval is necessary but no strategy will be effective unless it also has the active
support of a far wider range of people who both understand the proposed and are
prepared to work to make the necessary changes happen. This issue will be addressed in
a way to achieve the support to involve these people in the process of making the
decision.
Both the logic and politics of the choice may be heavily dependent on the context, in
some cases; strategy is driven solely by competitive advantage. In other cases, there may
be a strategic intent or vision that determines long-term direction so that the strategic
choices are about means rather than direction.
5.3.5 Theoretical Frameworks for Assisting Strategic Choice
Several attempts have been made to provide theoretical frameworks for making
strategic choices. One that was highly influential when first devised was the concept of
Generic Strategies. Porter suggested that the most fundamental choices facing any
business are the scope of the markets that it attempts to serve and how it attempts to

compete in these chosen markets. The scope can either be broad -tackling the whole
market - or narrow - tackling only a particular part of the market. He also suggested that
there were only two effective ways of competing in a market. Companies achieve
competitive advantage either by having the lowest product cost or by having products,
which are different in way, which are valued by customers. The axes of figure are
therefore the scope of the chosen market and the chosen basis of competition.
The four quadrants of figure suggest four possible generic strategies. If the scope is
narrow, the distinction between cost and differentiation becomes unimportant so porter
defined just three 'generic' strategies - cost leadership, differentiation, and focus.
Note that differentiation implies a difference in the perception by clients of the product,
whereas focus implies a difference in target market. In the porter view of generic
strategy, the worst crime (weakest strategy) is being 'stuck in the middle', that is, being
muddled in either of the tow dimensions of figure.
Practicing managers were initially enthusiastic about generic strategies when first
published and the ideas were used extensively. Gradually, however, it became clear that
reality was less black and white in distinction between differentiations and cost. There
are very few companies that can ignore cost however different their product. Equally,
there are very few who will admit that their product is the same as all the others. David
Sainsbury, in a public discussion with Michael Porter, pointed out that the Sainsbury's
slogan 'Good food costs less at Sainsbury's was a clear statement of being stuck in the
middle but had also proved a successful strategy for Sainsbury's over a long period of
time.

Porter's Generic Strategy Model has been extended into the Strategy Clock. This allows
for combinations of the original generic strategies.

The important addition is the 'hybrid' strategy that is an optimal balance between price
and the added value perceived by the customer. This coincides with experience when
purchasing household goods. The offerings may often fall into three broad categories.
These are 'cheap' offerings, which give minimal facilities, and appeal to customers to
whom price is the most important issue. At the other end of the scale are the luxury'
offerings that have demonstrably high quality or numerous features and appeal to
customers who want the best and the most differentiated. In the middle, are the 'goodvalue' offerings that compromise between the two extremes by offering a good trade-off
between price and value? This category often accounts for a sizeable percentage of the
total market. The Sainsbury's slogan 'Good food costs less at Sainsbury's can be seen as
an attempt to capture this middle segment. Sainsbury's was the leading food retailer in
southern England for many years. If it has lost this position this would seem to be
because its original strategy has been successfully imitated rather than because it was a
poor strategy.
5.3.6 Strategic Choices in the Case Example
The ICL case example illustrates how a strategic choice was made in a period of a few
months. It gives some indications of the strategic options open to ICL, at the time and
also how the crisis broadened the options that could be considered. The case example
also shows how creditors, potential partners, the government, and a new management

team were all relevant both to the choice that was made .and to how that choice were
made.
The relevance of different stakeholder groups to making strategic choice is also clear in
the Nolan, Norton case example. In this case, the strategic choice about general future
direction was made over a period of years but the eventual choice of a specific partner
was necessarily made in a period of just a few weeks.
Marks & Spencer clearly have a large number of options for markets and products on a
global basis. This does not necessarily make their strategic choice any easier as, with
such a high performance record from the past, options will have to meet rigorous tests
of feasibility and acceptability both in terms of financial performance and fit with
values.
5.4 SUMMARY
The lesson focused on strategic intent, strategic assessment and strategic options.
Further it explained how the above three factors played a vital role in the context of
business strategic management.
5.5 ASSIGNMENT QUESTIONS
1. Explain the strategic intent
2. Strategic assessment as part of the strategy formulation process
3. Discuss the strategic options.

- End of Chapter -

LESSON -6
CORPORATE LEVEL STRATEGIES

OBJECTIVES
To understand the corporate level strategies at different level

CONTENTS
6.1 The historical development of ideas about corporate strategy
6.2 The impact of financial markets on corporate strategy
6.3 Documenting corporate strategy
6.4 Business scope
6.4.1

Structure, systems, and processes

6.4.2

How the corporate centre is to add value

6.4.3

Corporate strategy in the case examples

6.5 Business Level Strategies

6.5.1

The scope of business strategy

6.5.2

Content of a business strategy document

6.6 Meeting the real needs of customers

6.7 Exploiting genuine competence in business strategy
6.8 Global Strategies
6.9 Summary
6.10 Assignment questions
INTRODUCTION
If an enterprise is involved in several businesses or activities, it will need a corporate
strategy as well as a business strategy for each of the separate businesses. Corporate
strategy addresses the issues of a multi-business enterprise as a whole. Corporate
strategy addresses issues relating to the intent, scope and nature of the enterprise and in
particular has to provide answers to the following questions:

What should be the nature and-values of the enterprise in the broadest sense?
What are the aims in terms of creating value for stakeholders?
What kind of businesses should we be in?
What would be the scope of activity in the future so what should we divest and
what should we seek to add?
What structure, systems and processes will be necessary to link the various
businesses to each other and to the corporate centre?

How can the corporate centre add value to make the whole worth more than the
sum of the parts?

Corporate strategy is of particular concern in diverse enterprises to demonstrate, justify

and extend the value of that diversity.
6.1 THE HISTORICAL DEVELOPMENT OF IDEAS ABOUT CORPORATE
STRATEGY
Ideas on what corporate strategy is and how it should be formulated have changed more
over time than almost any other part of strategic management. This shows that none of
the ideas are completely satisfactory. On the other hand, now new theory completely
replaces previous theories in all contexts so none can be rejected as wrong.
The historical development of thinking on corporate strategy has been well summarized
by Goold et al. A summary and extension of their summary is shown in figure below:
Year
Issues
1950s Over load at centre
1960s Quest for growth
1970s Resource allocation
Value gaps/raiders Poor
1980s performance of
diversification
1990s Defining the core business
Lasting basis for corporate
strategy
2000s Shareholder value

Concepts
Decentralization
General management
skills
Portfolio planning
Value based planning
'Stick to the knitting'

Corporate strategies
Divisionalisation
Diversification
'Balanced portfolios'
Restructuring

Dominant logic Core

competencies

Manageable portfolio Linked

portfolios
Managing portfolio to
Parenting advantage
maximize value creation
Exceeding cost of capital Focus on value/divest if
in all businesses
value being destroyed

During the 1950s, many large companies, which had previously been organized by
function, found that this form of organization was overloading headquarters and that
they would be more efficient if they divided themselves into divisions. General Motors
and other leading US companies had already demonstrated the advantages for divisional
organization as was described in books such as Sloan and Chandler. Mc Kinsey and Co.
built its reputation as a firm of management consultants at this time partly through its
success in assisting a large number of major companies to make the change from
functional to divisional organization.
The 1960s may now be seen as the age of the 'conglomerate. Conglomerates were
companies with a portfolio of unrelated businesses. The conglomerates were created as
a result of multiple acquisitions. After acquisition, the conglomerate usually imposed a
standard management reporting system. This would typically be more sophisticated
than the systems previously in place and had the effect of tightening financial control

and making managers very much aware of the importance of 'making their numbers'.
On the other hand, these systems could not be tailored to the diverse nature of the
businesses acquired. The conglomerates could grow fast partly because the financial
markets awarded them high P/E (price/earnings) ratios. The high market valuations
were a result of the high visibility of the conglomerates and probably also because
analysts admired the tighter control and better financial reporting which the
conglomerate parents imposed. There was a belief at the time that a good manger could
manage anything and that a good control system could be applied to any type of
business. Conglomerates such as ITT under the leadership for Harold Geneen grew from
nowhere to being among the largest companies in the world during the decade of the
1960s.
The fashion in corporate strategy changed again in the early 1970s. The Boston
Consulting Group (BCG) led by Bruce Henderson grew to prominence at this time. BCG
largely built its reputation as a management-consulting firm by applying the methods of
portfolio analysis. This technique offered untidy conglomerates a method of reviewing
their portfolio of past acquisitions. Certainly the management control systems of most
conglomerates were designed to control each separate business as an entity. Questions
about the scope of the enterprise as a whole and the relationships between the different
businesses needed a new approach. By the 1970s, investors were becoming more
suspicious of conglomerates and portfolio analysis offered a basis for planning some
much-needed rationalization.
The trend towards rationalization accelerated in the early 1980s when the bestselling
book, In Search of Excellence was published. This book had a major impact on
management thinking. The phrase 'Stick to the knitting' particularly caught the popular
imagination and ushered in a period where the fashionable corporate strategy was to
restructure around core businesses and to dispose of poorly performing divisions.
During the 1990s, the concern to have a clear core business tended to continue and has
depended into a focus on core competence. There was also a tendency to question the
value of scale for its own sake as it became apparent that some large companies were
slow moving in a world where the pace of change was increasing. It seemed that there
might sometimes be diseconomies of scale. Mergers and management buyouts increased
as larger companies split into separate core businesses and disposed of non-core
businesses. This process led naturally to demonstrate that the headquarters of multibusiness enterprise was adding value as a parent so that the enterprise as a whole was
more valuable than the sum of its parts.
While the historical pattern described above is probably a fair sketch of the most
important issues with which corporate strategy has been concerned over the last half
century, it should be clear that the different frameworks and techniques tended to be
suited to addressing particular issues. These issues may still occur and so any of the
ideas may still be appropriate in particular contexts. In general, the techniques are now
available as a tool kit to answer the questions to be addressed in creating a corporate
strategy.

The current emphasis is on achieving value for shareholders over the long term. The
significance for corporate strategy is to apply these techniques widely to ensure that
attention is focused on businesses that create value and to divest those that do not.
6.2 THE IMPACT OF FINANCIAL MARKETS ON CORPORATE STRATEGY
The focus on shareholder value relates closely to the fact that most large publicly owned
companies, particularly in the USA and UK, are very sensitive to their standing in
financial markets. Total shareholder value is determined by .the increase in the share
price and by the stream of expected future dividends. The former is more important
than the latter during bull markets, the latter more important in market downturns. The
share price may be heavily influenced by analysts who tend to calculate the price of a
share by applying a price/earnings (P/E) multiple to the earnings per share (EPS). Both
factors in this product are somewhat subjective and sometimes open to manipulation.
The expected P/E is determined by somewhat subjective assessment such as whether
the share is a 'growth stock' or the nature of the industry. The EPS is determined by
accounting principles that tend to relate to historic costs more than future value. In
general, mangers in public companies must be sensitive to the linkages between their
strategies and the price of their shares, but also aware that these linkages are somewhat
fickle. One obvious example of this linkage is when a company chooses to demerge one
or a group of its businesses. A common motivation for demerging is to increase the value
of the set of businesses to share holders because some parts merit a higher P/E ratio
than the whole.
Amram and Kulatilaka take this argument a step further by suggesting that many
strategic choices can be valued directly by markets by assessing them as financial
options. To some extent, this allows managers to replace their own judgments about
likely future outcomes directly by market valuations. They suggest that this will result in
more disciplined decisions and link strategy more directly to building shareholder value.
These questions begin to move beyond issues of corporate strategy into the more
technical field of financial strategy.
Corporate strategy addresses the question for the extent of the corporation and is
therefore necessarily closely related to mergers and acquisitions (M&A). M&A activities
involve a wide range of intermediaries such as investment bankers, accountants, and
lawyers, all of whom tend to benefit from the number of transactions irrespective of the
strategic logic of those transactions. Secondly, managers themselves often have personal
financial interests and their careers at stake in merges. There may be attractive stock
options or higher compensation on offer from the merged company. There may be a
choice between acquiring or being acquired, with power and hence better career
prospects tending to move to the acquirer. Top appointments are particularly important.
It may be that the crucial reason that the merger proposed between Glaxo-Wellcome
and Smith Klein Beecham did not happen in 1998 was because the question of who
should get the top job could not be resolved.
It is apparent that financial markets have an extremely potent effect on corporate
strategy and have to be taken into account in practice. Market pressures are likely to

outweigh the logic laid out in books such as this one - perhaps to the detriment of longterm outcomes.
6.3 DOCUMENTING CORPORATE STRATEGY
Formal documents on corporate strategy are less common than for business strategies,
however, the chairman's statement in the annual report of a public company often gives
some indications of the corporate strategy. Chairman's statements rarely answer all the
questions suggested. This may be because the enterprise has not addressed all the
questions or because the chairman's statement is slanted towards the needs of public
relations or to impress financial analysis.
Clearly it is often useful to a corporation to record the answers to the questions of
corporate strategy in a short written document. The format of this document is not
important and but it should describe the following clearly and succinctly.
6.4 BUSINESS SCOPE
The rationale for overall scope of the business should be explained in terms of core
competence, technological focus, shareholder value, parenting skill, geographical scope,
or necessary market share to compete. Techniques such as parenting advantage or
portfolio management may assist in providing the rationale for the business scope.
Visible choices on divestments or acquisitions should be seen to fit with this rationale.
6.4.1 Structure, Systems, and Processes
It should be apparent what the dominant dimension to organizational structure is. The
commonest forms are independent businesses linked by a headquarters umbrella,
functional organization, geographical organization, or a matrix combining more than
one of these dimensions. There should be a clear rationale as to why this organization is
appropriate. The systems and processes should support the organization and there
should be an analysis of the principal systems in place, assurances that their quality is
adequate, and that their design is appropriate to support the organization.
6.4.2 How the Corporate Centre is to Add Value
This should answer the question of the nature of corporate advantage and how it will be
enhanced. This is perhaps the least common element to be publicly mentioned in
statements of corporate strategy. This may be because it has not been considered or
possibly because an honest statement of the facts might lead to embarrassment at high
levels in the company.
6.4.3 Corporate Strategy in the Case Examples
Only BMW and Marks and Spencer are large and diverse enough for the distinction
between corporate and business strategy to have much significance.

BMW, although a large business, is still predominantly in the motorcar market. Its
corporate strategy would need to address the issues of the relationship of its dominant
business with its other interests in motorcycles and aero-engines. The relationship
between Rover and BMW does not seem to have been thought through in strategic
terms. This is more an issue of business than corporate strategy because the tow
companies are in the same business.
M&S has its major businesses in retailing (subdivided into clothes, food, and home
furnishings) and financial services. The issues for its corporate strategy certainly include
the future geographical scope of each of these businesses. In addition, there is an issue
on the extent to which it should focus on a single M&S image and value-set worldwide or
seek to exploit its other brand names such as Brooks Brothers. It has issues about how
best to organize its logistical processes to support its wide geographical spread and its
sharp variations in the degree of market penetration.
6.5 BUSINESS LEVEL STRATEGIES
Introduction
A business strategy describes how a particular business intends to succeed in its chosen
market place against its competitors. It therefore represents the best attempt that the
management can make at defining and securing the future of that business. A business
strategy should provide clear answers to the questions:

What is the scope of the business (or offering) to which this strategy-applies?
What the current and future needs of customers and potential customers of this
business?
What are the distinctive capabilities or unique competence that will give us
competitive advantage in meeting these needs now and in the future?
What in broad terms needs to be done toe secure the future of our business?

These questions should have been addressed during the process of strategy formulation.
The processes and techniques and processes may have contributed to answering them.
In this lesson, we are concerned with some of the practical issues that arise when
thinking and analysis leads into action and commitment. We are concerned also with
what makes the difference between good and indifferent business strategies.
We suggest that a good business strategy will meet six tests of quality:

It will be correctly scoped.

It will be appropriately documented.
It will address real customer needs.
It will exploit genuine competencies.
It will contribute to competitive advantage.
It will lay the ground for implementation.

The paragraphs below examine each of these tests in turn.

6.5.1 The Scope of Business Strategy

Each separate 'business' should have its own business strategy so that a multiple
business enterprise will have a number of separate business strategies.
Mathur and Kenyon have examined this question rigorously. They suggest that there
should be a separate competitive strategy for each 'offering' defined as the unit of
customer choice, the unit of customer choice depends on what the customer is
comparing when he or she makes the buying decision. Their many examples offerings
suggest, for instance, that a 100g jar of Nescafe might be a separate offering from a 200g
jar of Nescafe if the closest substitute for the customer is the same size jar of another
make of instant coffee. They see the tow different sizes of jar as being different offerings
and therefore requiring different business strategies. This is certainly theoretically
elegant but may present a few problems in practice. To divide businesses so finely is
likely to be too much work and it is unlikely that it would be possible ever to implement
such fine-grained strategies. There is often a conflict between theoretical rigor and
practical constraints.
In practice, the problem is more often the reverse of the Nescafe example in that a
business is defined too broadly and, consequently, a single strategy is expected to apply
to all its facets. One reason for this is that a division or region considers a 'business
strategy' for its business that includes several distinct offerings. If the genuinely
different needs of the different offerings are not separated, the resulting strategies can
only be muddled and less useful than they might have been.
There is a need for a balance in choosing the scope for each business. If the scope of the
business is defined at too low a level, the work becomes too much. If the level is too
high, the analysis loses its rigor. In practice, the problem is usually that this question of
scope is never clearly posed, not that it would be difficult to provide a workable answer.
6.5.2 Content of a Business Strategy Document
There is a tendency for strategy documents to be too long. It should be possible to read
the whole document at a sitting and find it easy to understand. However, the document
should give clear answers to the questions posed above, concisely and persuasively. Key
facts and summarized analysis should support the answers. It may be appropriate to
refer to more detailed documents or to include telling details.
It would be wrong to be too prescriptive in terms of the format for a business strategy
document but the five headings below are likely to be included.
1. Statement of strategic intent for the business
This should describe in general terms the business as it expects to become in the future.
It should outline in practical and tangible terms how this future is different from the
present. Clearly, the strategic intent for the business has to relate to the strategic intent
for the enterprise as a whole and be coherent with any other corporate strategies.

2. Principal findings of strategic assessment

Typically, the strategic assessment will have involved detailed analysis of the external
business environment and the capabilities of the enterprise. Only the most important or
most surprising results need to be recorded. However, this section should provide a
reasoned assessment of current status and future prospects of the business, if present
strategies were to be continued. This then makes the case for change in business terms.
3. Strategic choices which have been made and supporting rationale
This section has to summarize the options that have been identified and the choices
made. The reasons for preferring one direction to another have to be spelt out and must
be persuasive. The rationale for strategic choice should be based on a rigorous analysis
of the basis of competitive advantage and how that will relate to the demonstrable
capabilities of the enterprise. It is also desirable to show how the choice matches the
strategic intent of the enterprise as a whole.
4. Statement of goals and objectives
The overall goal is to realize the strategic intent of the business. More measurable
supporting goals are also very valuable. Objectives should not all be financial. It is
important that some objectives set measures that relate to the fundamental nature of the
business and to meeting customer and stakeholder needs.
5. Outline of strategic initiatives
This section will outline the principal actions to be undertaken to make the strategy
happen.
6.6 MEETING THE REAL NEEDS OF CUSTOMERS
The needs of customers are one major driver of business strategy. It is essential to
understand the needs and to identify how to satisfy these needs more fully, more
exactly, or more profitable than competitors. Business strategy is therefore about
beating competitors in meeting customer needs; beating competitors for other purposes
may be fun but it is a distraction.
It follows form this that a deep analysis and understanding of customers needs is
essential to produce a good business strategy. It is necessary to understand the nature
and scope of customer needs, how these needs differ between different groups or
individuals, how these needs are changing. It is normally the responsibility of the
marketing function to understand these needs. Business strategy is therefore market
driven and likely to have very heavy involvement of marketing people. This does not;
however mean that a business strategy is the same thing as a marketing strategy.
Business strategy is also heavily influenced by strategic intent, by financial and human
constraints, and in fact, by everything that makes the chief executives job different form
the marketing director.

In the BMW case example, there is no evidence that BMW defined clearly exactly how
the BMW/Rover combination was expected to look from the customers point of view or
how it would help BMW to meet customers needs better. Five years after the take-over,
the BMWs brand strategy still looked like two separate companies. In 1999, Rover
launched the Rover 75 that appears to compete almost directly with its BMW executive
models. At the same time, BMW was developing the MX5, a four-wheel drive vehicle, in
apparent competition with Rover's Land Rover range. BMW may have had a clear
strategy for how the merged entity would meet customer needs but we cannot detect it.
6.7 EXPLOITING GENUINE COMPETENCE IN BUSINESS STRATEGY
The second major driver of business strategy is the competence of the enterprise. We
have described various analytical techniques for measuring resources and identifying
capabilities. The ultimate goal is to identify a unique core competence that can provide
the basis for differentiating ourselves from our competition. This is not easy to do and
probably more business strategies go wrong because they failed to be honest in their
assessment of their own capabilities that because they misunderstood customer needs.
In the Nolan, Norton case example, the widening impact of information technologies
caused the scope of Nolan, Nortons consulting assignments to broaden and to require
larger teams with broader-skills in people and change management. This was
recognized during the process of formulating strategy and one of the reasons for selling
tout to Peat, Marwick was to provide this wider skill base.
6.8 GLOBAL STRATEGIES
Globalization: A challenge to strategic management
Not too long ago, a business corporation could be successful by focusing only on making
and selling goods and services within its national boundaries. International
considerations were minimal. Profits earned from exporting products to foreign lands
were considered frosting on the cake, but not really essential to corporate success.
During the 1960s, for example most US companies organized themselves around a
number of product divisions that made and sold goods only in the United States. All
manufacturing and sales outside the United States were typically managed through one
international division. An international assignment was usually considered a message
that the person was no longer promotable and should be looking for another job.
Today, everything has changed. Globalization, the internationalization of markets and
corporations, has changed the way modern corporations do business. To reach the
economies of scale necessary to achieve the low costs, and thus the low prices, needed to
be competitive, companies are now thinking of a global (worldwide) market instead of a
national market. Nike and Reebok, for example, manufacture their athletic shoes in
various countries throughout Asia for sale in every continent. Instead of using one
international division to manage everything outside the home country, large
corporations are now using matrix structures in which product units are interwoven

with country or regional units. International assignments are now considered key for
any one interested in reaching top management.
As more industries become global, strategic management is becoming an increasingly
important way to keep track of international developments and position the company
for long-term competitive advantage. For example, Maytag Corporation purchased
Hoover not so much for its vacuum cleaner business, but for its European laundry,
cooking and refrigeration business. Maytag's management realized that a company
without a manufacturing presence in the European Union would be at a competitive
disadvantage in the changing home appliance industry.
Globalization presents a real challenge to the strategic management of business
corporations. How can any one group of people in any one company keep track of all the
changing technological, economic, political-legal, and socio-cultural trends around the
world? This is clearly impossible. More and more companies are realizing that they must
shift from a vertically organized, top-down type of organization to a more horizontally
managed, interactive organization. They are attempting to adapt more quickly to
changing conditions by becoming learning organizations.
6.9 SUMMARY
This lesson briefed the different levels in corporate strategies, in which the business
level strategy, business scope and particularly the global strategy that is highly essential
in the present day context have also been explained.

6.10 ASSIGNMENT QUESTIONS

1. Discuss the Business Scope in the light of strategy management
2. Explain the different business level strategy.
3. Discuss the global strategy.

- End of Chapter LESSON 7

STRATEGIC ALLIANCES

OBJECTIVES
To Understand and Analyse the Strategic Alliances
CONTENTS
7.1 Introduction
7.1.1 Reasons for strategic alliance
7.1.2 Mutual Service Consortia
7.1.3 Joint Venture
7.1.4 Licensing Arrangement
7.1.5 Value-Chain Partnership
7.2 Stability Strategies
7.2.1 Pause/proceed with caution strategy
7.2.2 No change strategy
7.2.3 Profit strategy
7.2.4 Efficiency-improvement in stabilization strategy
7.2.5 Risk management as a stabilization strategy
7.3 Expansion Strategies
7.3.1 Variants of expansion strategy
7.3.2 Intensive growth strategy
7.3.3 Diversification strategy
7.4 Retrenchment Strategies
7.4.1 Retrenching Profitability
7.4.2 Turnaround
7.4.3 Bankruptcy Reorganization

7.4.4 Liquidation
7.4.5 Retrenchment to fund other SBUs
7.4.6 Retrenchment decision
7.4.7 Problems in retrenchment
7.5 Combination Strategies
7.6 Focused Segment Strategies
7.7 Building Strategic Flexibility
7.8 Summary
7.9 Assignment questions
7.1 INTRODUCTION
A strategic alliance is a partnership of two or more corporations or business units to
achieve strategically significant objectives that are mutually beneficial. Alliances
between companies or business units have become a fact of life in modern business.
Some alliances are very short term, only lasting long enough for one partner to establish
a beachhead in a new market. Others are more long lasting and may even be the prelude
to a full merger between the two companies.
7.1.1 Reasons for Strategic Alliance
Companies or business units may form a strategic alliance for a number of reasons
including:
1. To obtain technology and/or manufacturing capabilities. For example Intel formed a
partnership with Hewlett-Packard to use HPs capabilities in RISC technology in order to
develop the successor to Intel's Pentium microprocessor.
2. To obtain access to specific markets. Rather than buy a foreign company or build
breweries of its own in other countries, Anheuser-Busch chose to license the right to
brew and market Budweiser to other brewers, such as Labatt in Canada, Modulo in
Mexico, and Kirin in Japan.
3. To reduce financial risk. For example, because the costs of developing a new large jet
airplane were becoming too high for any one manufacturer, Boeing, Aerospatiale of
France, British Aerospace, Construcciones Aeronauticas of Spain, and Deutsche
Aerospace of Germany planned a joint venture to design such a plane.

4. To reduce political risk. To gain access to China while ensuring a positive relationship
with the often, restrictive Chinese government, Maytag Corporation formed a joint
venture with the Chinese appliance maker, RSD.
5. To achieve or ensure competitive advantage. General motors and Toyota formed
Nummi Corporation as a joint venture to provide Toyota a manufacturing facility in the
United States and GM access to Toyota's low-cost, high-quality manufacturing expertise.
Cooperative arrangements between companies and business units fall along a
continuum form weak and distant to strong and close. The types of alliances range from
mutual service consortia to joint ventures and licensing arrangements to value-chain
partnerships.
7.1.2 Mutual Service Consortia
A mutual service consortium is a partnership of similar companies in similar industries
that pool their resources to gain a benefit that is too expensive to develop alone, such as
access to advanced technology. For example, IBM of the United States, Toshiba of
Japan, and Siemens of Germany formed a consortium to develop new generations of
computer chips. As part of this alliance, IBM offered Toshiba its expertise in chemical
mechanical polishing to help develop a new manufacturing process using ultraviolet
lithography to etch tiny circuits in silicon chips. IBM then transferred the new
technology to a facility in the United States.
In another example, General Motors, Procter & Gamble, and six other companies
purchased $20 million of equity in a small artificial intelligence company called
Teknowledge. GM hoped that Teknowledge's expert systems software would help it to
design cars and to prepare factory schedules. The other members of the consortium had
similar hopes. The mutual service consortia are a fairly weak and distant alliance. There
is very little interaction or communication among the partners.
7.1.3 Joint Venture
A joint venture is a "cooperative business activity, formed by two or more separate
organizations for strategic purposes, that creates an independent business entity and
allocates ownership, operational responsibilities, and financial risks and rewards to each
member, while preserving their separate identity/autonomy. Along with licensing
arrangements, joint ventures lay at the mid-point of the continuum and are formed to
pursue an opportunity that needs a capability from two companies or business units,
such as the technology of one and the distribution channels of another.
Joint ventures are the most popular form of strategic alliance. They often occur because
the companies involved do not want to or cannot legally merge permanently. Joint
ventures provide a way to temporarily combine the different strengths of partners to
achieve an outcome of value to both. For example, the pharmaceutical firm Merck &
Company agreed with the chemical giant DuPont Company to form, under joint
ownership, a new company called DuPont Merck Pharmaceutical Company. Merck

provided the new company with its foreign marketing rights to some prescription
medicines plus some cash. In return, Merck got access to all of DuPont's experimental
drugs and it's small but productive research operation.
Extremely popular in international undertakings because of financial and political-legal
constraints, joint ventures are a convenient way for corporations to work together
without losing their independence.
Disadvantages of joint ventures include loss of control, lower profits, probability of
conflicts with partners, and the likely transfer of technological advantage to the partner.
Joint ventures are often meant to be temporary, especially by some companies who may
view them as a way to rectify a competitive weakness until they can achieve long-term
dominance in the partnership. Partially for this reason, joint ventures have a high failure
rate. Research does indicate, however, the joint ventures tend to be more successful
when both partners have equal ownership in the venture and are mutually dependent on
each other for results.
7.1.4 Licensing Arrangement
A licensing arrangement is an agreement in which the licensing firm grants rights to
another firm in another country or market to produce and/or sell a product. The
licensee pays compensation to the licensing firm in return for technical expertise.
Licensing is an especially useful strategy if the trademark or brand name is well known,
but the MNC does not have sufficient funds to finance its entering the country directly.
Anheuser-Busch is using this strategy to produce and market Budweiser beer in the
United Kingdom, Japan, Israel, Australia, Korea and the Philippines. This strategy also
becomes important if the country makes entry via investment either difficult or
impossible. The danger always exists, however, that the licensee might develop its
competence to the point that it becomes a competitor to the licensing firm. Therefore, a
company should never license its distinctive competence, even for some short-run
advantage.
7.1.5 Value-Chain Partnership
The value-chain partnership is a strong and close alliance in which one company or unit
forms a long-term arrangement with a key supplier or distributor for mutual advantage.
Value-chain partnerships are becoming extremely popular as more companies and
business units outsource activities that were previously done within the company or
business unit. For example, DuPont contracts out project engineering and design to
Morrison Knudsen; AT&T, its credit card processing to Total System Services; Northern
Telecom, its electronic component manufacturing to Comptronic and Eastman Kodak,
its computer support services to Businessland.
Another example of a value-chain partnership is the long-term relationship between a
company or business unit with a supplier or distributor. To improve the quality of parts
it purchases, companies in the U.S. auto industry, for example, have decided to work
more closely with fewer suppliers and to involve them more in product design decision.

Such partnerships are also a way for a firm to acquire new technology to use in its own
products. For example Maytag Company was approached by one of its suppliers.
Honeywell's Micro switch Division, which offered the expertise in fuzzy logic technology
- a technology Maytag did not have at that time. The resulting partnership in product
development resulted in Maytag's new IntelliSense dishwasher. Unlike previous
dishwashers that the operator had to set, Maytag's fuzzy logic dishwasher automatically
selected the proper cleaning cycle based on a series of factors such as the amount of dirt
and presence of detergent.
A strategic alliance is partnership of two or more corporations or business units to
achieve strategically significant objectives that are mutually beneficial. Conglomerate
diversification has been criticized as providing less value than has concentric
diversification, primarily because it is more difficult to keep track of unrelated business
units than related ones. Partially because of this, many companies are currently
divesting units unrelated to their primary business. As more corporations become
involved in international operations through acquisition, strategic alliances and other
options, expect conglomerate diversification to become even less popular.
Firms that are unable to finance alone the huge costs of developing a new technology
may coordinate their R&D with other firms through a strategic alliance. By the 1990s,
more than 150 cooperative alliances involving 1, 000 companies were operating in the
United States and many more were operating throughout Europe and Asia. These
alliances can be (a) joint programs or contracts to develop a new technology, (b) joint
ventures establishing a separate company to take a new product to market, (c) minority
investments in innovative firms wherein the innovator obtains needed capital and the
investor obtains access to valuable research. For example, Hewlett-Packard Company
formed an alliance in 1996 with Microsoft, Oracle, and Netscape Communications to
create an "electronic business framework" to bring together several Internet related
technologies. Some of their goals are to develop the remote installation and upgrading
of software by network administrators, systems of secure electronic payments over the
Internet, and integrate the Internet with telephone-based services such as telemarketing
and customer service.
When should a company by or license technology from others instead of developing it
internally? A company should buy technologies that are commonly available, but make
those that are rare, valuable, hard to imitate, and having no close substitutes. In
addition, outsourcing technology may be appropriate when:
1. The technology is of low significance to competitive advantage.
2. The supplier has proprietary technology.
3. The supplier's technology is better and/or cheaper and reasonably easy to integrate
into the current system.
4. The company's strategy is based on system design, marketing, distribution, and
service - not on development and manufacturing.

5. The technology development process requires special expertise.

6. The technology development process requires new people and new resources.
Strategic alliances involve developing cooperative ties with other organizations.
Alliances are often used by not-for-profit organizations as a way to enhance their
capacity to serve clients or to acquire resources while still enabling them to keep their
identity. Services can be purchased and provided more efficiently through cooperation
with other organizations than of they were done alone. For example, four Ohio
universities agreed to create and jointly operate a new school of international business.
Alone, none of the business schools could afford the $30 million to build the school.
7.2 STABILITY STRATEGIES
A corporation may choose stability over growth by continuing the current activities
without any significant change in direction. Although, sometimes viewed as a lack of
strategy, the stability family of corporate strategies can be appropriate for a successful
corporation operating in a reasonably predictable environment. They are very popular
with small business owners who have found a niche and are happy with their success
and the manageable size of their firms. Stability strategies can be very useful in the short
run, but they can be dangerous if followed for too long as many small town businesses
discovered when WalMart came to town. Some of the more popular of these strategies
are the pause/proceed with caution, no change, and profit strategies.
7.2.1 Pause/Proceed with Caution Strategy
A pause/proceed with caution strategy is, in effect, a timeout - an opportunity to rest
before continuing a growth or retrenchment strategy. It is a very deliberate attempt to
make only incremental improvements until a particular environmental situation
changes. It is typically conceived as a temporary strategy to be used until the
environment becomes a more hospitable or to enable a company to consolidate its
resources after prolonged rapid growth. This was the strategy Dell Computer
Corporation followed in 1993 after its growth strategy had resulted in more growth than
it could handle. Explained CEO Michael Dell, "they grew 285% in two years, and they
having some growing pains". Selling personal computers by mail enabled it to under
price Compaq Computer and IBM, but it could not keep up with the needs of the $2
billion, 5600 employee-company selling PCs in 95 countries. Dell was not giving up on
its growth strategy, it was merely putting it temporarily in limbo until the company
could hire new managers, improve the structure, and build new facilities.
7.2.2 No Change Strategy
A no change strategy is a decision to do nothing new - a choice to continue current
operations and policies for the foreseeable future. Rarely articulated as a definite
strategy, a no change strategy's success depends on a lack of significant change in a
corporation's situation. The relative stability created by the firm's modest competitive
position in an industry facing little or no growth encourages the company to continue on
its current course, making only small adjustments for inflation in its sales and profit

objectives. There are no obvious opportunities or threats nor much in the way of
significant strengths or weaknesses. Few aggressive new competitors are likely to enter
such an industry. The corporation has probably found a reasonably profitable and stable
niche for its products. Unless the industry is undergoing consolidation, the relative
comfort a company in this situation experiences is likely to encourage the company to
follow a no change strategy in which the future is expected to continue as an extension
of the present. Most small town businesses probably follow this strategy before WalMart moves into their areas.
7.2.3 Profit Strategy
A profit strategy is a decision to do nothing new in a worsening situation, but instead to
act as though the company's problems are only temporary. The profit strategy is an
attempt to artificially support profits when a company's sales are declining by reducing
investment and short-term discretionary expenditures. Rather than announcing the
company's poor position to shareholders and the investment community at large, top
management may be tempted to follow this very-seductive strategy. Blaming the
company's problems on a hostile environment (such as anti-business government
policies, unethical competitors, finicky -customer's and/or greedy lenders),
management defers investment and/or cuts expenses (such as R&D, maintenance and
advertising) to stabilize profits during this period. It may even sell one of its product
lines for the cash flow benefits. Obviously the profit strategy is useful only to help a
company get through a temporary difficulty. Unfortunately the strategy is seductive and
if continued long enough will lead to a serious deterioration in a corporation's
competitive position. The profit strategy is thus usually top management's passive,
short-term, and often self-serving respond to the situation.
As unusual it may be, it is conceivable that a company would choose zero sales growth
along with high prices and high profits instead of a more rapid rate of sales growth
obtained through price competition and consequently low profitability. In fact, a welladministered company will recognize the trade-off between growth and profitability.
Since market share is sticky downward, gaining a market share at the expense of current
profitability may be justified by the prospect of the future profitability the added market
share brings. But, if a company believes it will be unable to capitalize on the added
market share, it might be better to stabilize sales and increase profits today. From these
comments, it can be seen that a leveling off of sales may be - and should be - a conscious
policy. Organizational strategists always have a rather wide range within which they can
control sales, or any other single parameter. If the company is profitable, but has chosen
not to expand, the profits can be used either in the payment of dividends or for the
retirement of securities, either debt or equity.
Recall that the decision as to whether to grow should be based on the special
competences an SBU has relative to its competitors or relative to other SBUs in the
corporate portfolio. If the company does not have any special distinctive competences,
an obvious objective should be tried to attain such competencies. In this connection, all
the strategies discussed above for improving profitability, product attractiveness, and so
forth are available. A company can be better than its competitors in R&D, marketing,

production, possession of patent or other rights, ability to influence the government,

management expertise, and/or work-force qualifications and motivation. In short,
anything, which helps a company win out over competitors, is a distinctive competence.
In addition to trying to build strengths and eliminate weaknesses, SBUs can select from
among certain strategies, which are especially applicable to periods of stabilization. Two
of these are efficiency improvement and risk management.
7.2.4 Efficiency-Improvement in Stabilization Strategy
A particularly useful strategic focus during periods of stable sales is efficiency
improvement. Labor costs can often be cut through various motivational strategies.
Donnelly Mirrors, Inc. of Holland, Michigan, has a Scanlon-type group incentive plan,
which has allowed it to remain profitable when its major customers, the major auto
companies, have suffered declines. Lincoln Electric Company, of Cleveland, Ohio, has an
incentive plan, which offers individual piece rates along with large year-end bonuses
based upon group and individual performance. Many companies motivate employees
through participative approaches such as quality circles, suggestion boxes, open-door
policies, and so forth. Periods of level sales offer good opportunities to look into and
initiate such plans.
Efficiency improvement can also be obtained through fixed-asset management of
reduction. If sales are not increasing, any improvement in fixed-asset efficiency can
allow the elimination of some of these assets. For example, Cabot Corporation, a major
producer of corrosion-resistant pipe, located in Kokomo, Indiana, made major
improvements in its plant in Arcadia, Louisiana, during a recent recession. Machines
were rearranged, and the workflow, redesigned to shorten and speed up the production
process. Some machines and materials-handling devices were completely eliminated
unit product costs have declined significantly. Now that the company has a significant
advantage over its competitors, a distinctive competence, it might choose to pursue a
growth strategy. On the other hand, Cabot may decide to raise prices during periods of
economic resurgence, thereby reaping current profits rather than a growth in sales. It is
not intended here to dwell much on the details of proves improvement, but merely to
suggest that a period of planned sales stability offers a good opportunity for improving
efficiency.
7.2.5 Risk Management as a Stabilization Strategy
In addition to efforts to improve current and future profitability through more efficient
use of people and machines and efforts to develop distinctive competencies through
product development, quality improvement and so forth, the SBU strategists must also
consider the riskiness of the company's situation. If stock values are in fact determined
in risk-return space, as modern portfolio theory suggests, it is as useful to reduce risk, as
it is to increase return. During periods of stabilized sales, the strategists have a good
opportunity to earn high returns, and since investment needs are diminished, to
distribute those returns to stockholders in the form of dividends or repurchase of
company stock. But the strategists can also refuse the riskiness of the company by debt

reduction, making long-term supply and marketing contracts, negotiating favorable

labor agreements, and establishing solid customer relationships.
7.3 EXPANSION STRATEGIES
Expansion strategy, also called as growth strategy signifies something different from
stable growth strategy or stability strategy. When a firm increases the level of objectives
higher than what it has achieved in the immediate past in terms of market shares, sales
revenue, etc., or strategic decisions centre round increased functional performance in
major respects, we have typical cases of growth strategy. Another kind of growth
strategy is typically found when new products are added to the existing line, or
dissimilar products are taken up for production and sale, or business activities are
expanded through acquisition, merger or amalgamation of firms. In a sense, growth
strategy differs from stability strategy in that the former implies exponential growth
while the latter implies an extrapolation of growth based on past performance.
Growth strategy is associated with strong managerial motivation in its favor. Expansion
is a rewarding phenomenon in several ways. Larger size means higher executive
compensation. It satisfies power and recognition needs. To seize market share from
competitors or to enter challenging new fields is not only exciting and satisfying but also
leads to a sense of achievement. Besides, growth is often perceived as an index of
effectiveness which has greater news value than stability.
Limits to growth: Is expansion an unmixed blessing?
Going by the experience of executives who have been on the lookout and capitalized
opportunities for growth, as well as the success attained by companies pursuing
continuous growth as their primary objective. It would seem that growth is always
preferable to no-growth or zero-growth. One viewpoint in this connection is that there
are compelling reasons, which are bound to set the limit to growth sooner or later. First,
there are self-imposed limits. Growth strategy is one of the most difficult to manage.
Growth often hides serious underlying problems, which do not come to light until the
growth rate stops, or a decline is experienced. The second category of limits to growth
are said to be the environmentally imposed limits. These include the inevitable decline
in population growth, scarcity of resources, and the compulsion of protecting the
environment, the side effects of technological advance, public attitudes and government
regulations.
Managers of companies, which have expanded quickly often, end up stretched so thin
that they lose the ability to focus on the strengths that brought success in the first place.
The influence of the growth compulsion on basic investment decisions is a threat to the
company's health. Expansion often has the effect of making companies active in areas in
which they are not well suited.
In small-scale operations, the relevance of the scale of operation to the economics is of
permanence. Small-scale operation, no matter how numerous, are always less likely to
be harmful to the natural environment than large scale ones, simply because their

individual forces of nature. There is wisdom in smallness if only on account of the

smallness and patchiness of human knowledge, which relies on experiment far more
than on understanding. The greatest danger invariably arises from the ruthless
application. On a vast scale, of partial knowledge such as we are witnessing in the
application of nuclear energy, or the new chemistry in agriculture, of transportation
technology, and countless other things.
7.3.1 Variants of Expansion Strategy
Growth or expansion in the volume of a business of a company implying a substantial
stepping up of sales revenue, market share or net earnings may be achieved by different
approaches. The variants of growth strategy are differentiated as follows:
1. Intensive growth strategy
2. Diversification strategy
Types of diversification strategy, which may be considered as alternatives are:
A. Horizontal diversification
i. Concentric diversification
ii. Conglomerate diversification
B. Vertical diversification
i. Forward integration
ii. Backward integration
7.3.2 Intensive Growth Strategy
Internal growth, which consists of increasing the sales revenue, profits and market share
of the existing product line or services, is generally known as intensive growth strategy.
It involves concentration of resources in a high growth product or market segment and
is a widely used growth strategy. If the product is not in the maturity stage of the life
cycle, this is a particularly attractive strategy. It is often suited to firms with a small
market share irrespective of whether the product is in the high growth stage or maturity
stage of its life cycle.
7.3.3 Diversification Strategy
At some point of time in the process of intensive growth, it is no longer possible for a
firm to expand in the basic product market. It is not able to grow any more through
market penetration. Then it must consider adding new products or markets to its
existing business line. This approach towards growth is known as diversification.

Diversification strategy is thus defined as a strategy in which, the growth objective is,
sought to be achieved by adding new products or services to the existing product or
service line.
7.4 RETRENCHMENT STRATEGIES
Another grand strategy, usually reserved for emergencies is retrenchment.
Retrenchment means, 'reduction, curtailment, or excision' (Webster's third new
international dictionary), and few corporate-managements are willing to do that. When
a retrenchment strategy is followed, the goal is often survival. Actually, retrenchment
should be considered as viable an option as growth. Prompt excision of losing
businesses has been the hallmark of many successful corporate - level managers.
Although growth often an objective per se, retrenchment seldom is.
A dictionary definition of retrenchment is 'reduction, curtailment, excision, cutting
down of expenses', or in the military sense, 'a defense work...constructed within another
to prolong the defense when the enemy has gained the outer work' (Webster's Third
New International Dictionary). Organizational strategists in both senses use the term.
Retrenchment means cutting back - reducing sales or production capacity.
The second dictionary definition above illustrates the attitude most strategists take
toward retrenchment. It is a strategy to be followed only after competitors have 'gained
the outer work' and defeat is imminent. This suggests that retrenchment is to be
pursued as a strategy only when the company has been outdone by its competitors or is
threatened by market force. It is true that few companies intentionally cut back on sales.
Thus, retrenchment is often viewed as a reactive strategy rather than proactive.
The focus here is not upon retrenchment as an objective, but upon strategies, which
tend to be successful in meeting organizational goals during periods of retrenchment. It
is doubtful that retrenchment per se is often adopted as a goal.
But, the goals of profitability, risk reduction, enhancement of future earnings capability,
and so forth, are as relevant during periods of retrenchment as any other time.
7.4.1 Retrenching Profitability
There are several ways that a company can retrench effectively. First, it is possible to cut
back on sales by simply increasing the price. This does not mean that the company has
'given up'. Sharpco Fabricators, Inc., a manufacturer of land-clearing equipment and
heavy equipment repair facility in Monroe, Louisiana, recently retrenched by raising
prices the company had been doing well. Sales and profits had increased every year
since the company was founded in 1972. But, the growing number of customers who had
to be serviced, the increasing employee force, and the requirement to continually
expand production facilities was more and more burdening the owner/manager, James
Sharplin. Sharpco' primary strength was its good reputation for quality. This resulted,
Sharplin felt, from the personal attention he gave every job and every customer. He had
no intention of expanding his operation beyond a size, which he could personally

supervise. This was accomplished by increasing the hourly rates for repair work, the bid
prices for contract jobs, and the list prices for land clearing equipment. Sales declined
significantly, profits increased and Sharpco was able to sustain its excellent reputation
for quality.
Even though the recession, which began in 1979, intensified in 1982, causing a further
reduction in sales, Sharpco still earned record profits that year. Sharplin feels that the
retrenchment has been a good strategy. In addition to the improved profit picture, he
now has more free time and is able to do a better job of supervision. An additional
benefit accrued form the retrenchment. Sharpco's land-clearing equipment sales had
recently declined because most of the timberland in northern Louisiana had been
cleared and Sharpco's customers were trying to sell their land clearing equipment, not
buy more. Because of the decreased demands of the business, Sharplin was able to
spend time improving the repair and parts segment of his business to replace the
disappearing sales in the land clearing equipment area. This suggests that rapid
retrenchment might often be a good strategy for business segments, which are declining.
Then attention can be paid to developing replacement products and markets.
7.4.2 Turnaround
Retrenchment is often considered a kind of turnaround strategy. If sales and/or profits
have declined because of market forces or internal weaknesses, the organizational
strategists may decide upon one of three approaches: (1) increase sales with the
expectation of improving profits at some time in the future, (2) increase sales and
profits, (3) increase profits while allowing sales and productive capacity to decline.
If the first approach is taken, sales might be obtained through aggressive price
competition, additional marketing expenditures, and of forth. This is particularly useful
for companies that have high fixed costs. For such companies, when sales exceed the
breakeven point, profits increase rapidly with additional increases. Expending
promotional funds or forgoing revenues through price breaks can be viewed as an
investment for building company sales to a profitable level over time. This can certainly
be overdone, though.
If sales and profits are to be increased together, it is often best to take a dual approach,
paying attention to marketing and production. Marketing expenditures might be
increased and efforts made to spend marketing funds more efficiently. At the same time,
unless sales increase rapidly, it may be necessary to decrease production costs. This can
be accomplished through more efficient use of capital and/or labor. This kind of dual
focus is probably the most common king of turnaround strategy except for extreme
cases. An extensive study by Hambrick and Schecter showed that, for industrial product
business units, successful turnarounds were related to efficiency improvements and
market share increases.
Reducing sales and production capacity intentionally is usually reserved for extreme
cases. In these situations, turnaround may be accomplished by lopping off poorly
performing segments of the business, disposing of related assets, and enhancing the best

performing parts of the business. Often a turnaround specialist is employed such

purposes. In the classic style of turnaround specialists, Dunlop released hundreds of
employees, sold assets, established a new organizational structure and attempted to
increase the profitability of his division.
7.4.3 Bankruptcy Reorganization
The federal bankruptcy law allows companies to seek protection from creditors while
attempting to reorganize and become profitable again. Prior to 1978, it was assumed
that companies would declare bankruptcy only if they were insolvent. However, the 1978
bankruptcy code contains no reference to insolvency as a prerequisite for filing. In order
to obtain court protection against creditors, a company need only file a bankruptcy
petition with one of the U.S. bankruptcy courts. Unless the petition is deemed by the
bankruptcy judge to be in bad faith, creditors are immediately barred from taking action
to collect debts, labor agreements and other contracts are voided at the option of the
company, and the company comes under the control of the U.S. Bankruptcy Court.
The court's control is usually exercised through the office of the U.S. Trustee, a specialist
in bankruptcy matters, in each bankruptcy district. The company has 120 days, a period
which can be extended indefinitely by the bankruptcy judge to prepare a plan of
reorganization. Typically, the reorganization plan provides for the repayment of some
portion of the debts, which were outstanding at the time of the filing and discharge of
the rest.
When a company files for protection under chapter 11, it typically obtains a significant
cash windfall as accounts receivable flow in and accounts payable no longer have to be
paid. When Manville Corporation filed for bankruptcy on August 26, 1982, the
companies owed over $300 million in accounts payable and had receivables of about the
same amount. Within three months, Manville's cash balance exceeded $200 million.
Under chapter 11, company-managers are free to continue the "ordinary course of
business". With the approval of the bankruptcy judge, who consults with various
committees made up of creditors and stockholders representatives, rather extreme
actions can be taken. For example, Samboo's restaurants sold off most of its divisions
and assets while in chapter 11, yet continued a long downhill slide in profitability.
Braniff Airlines, a major international carrier before its bankruptcy filing, emerged from
chapter 11 - reorganization with flights to only twenty U.S. cities. A number of
companies, including Wilson Foods Corporation and Continental Airlines, cancelled
labor contracts by filing under chapter 11, and many more have obtained concessions
from labor unions by threatening to file for bankruptcy.
Even in the rare bankruptcy cases where creditors are eventually paid in full payment is
usually made without interest, except to certain secured creditors. Consequently, a
company almost always benefits at its creditors expense after filing for chapter 11 reorganization, at least in the short run. In addition to the corporations mentioned
above, the following U.S. companies, among thousands more, took the chapter 11 route

in the 1982-1984 period: Osborne Computer, Revere Copper and Brass, Bobbie Brooks
clothing, and Baldwin United.
In the early 1980s the business failure rate in the United States was at a post depression
high. An extensive study by Altman concludes that the increased failure rate resulted
mainly from four factors: (1) low real economic growth, (2) low stock prices, (3) a slow
money supply growth, and (4) an increased rate of business formation. However, the
benefits available to corporate mangers under the 1978 bankruptcy law were surely a
factor.
7.4.4 Liquidation
The most extreme retrenchment strategy is outright liquidation, either under the
provisions of the U.S. Bankruptcy Code or without filing for bankruptcy. In a sense, the
public is liquidating publicly traded companies, continuously through the sale of their
stock. When we think of liquidation, however, we normally mean the sale of the
company's assets. Since few companies liquidate without being insolvent, proceeds from
such sales normally do not cover all creditor claims. Stockholders, common and
preferred, usually receive nothing. Chapter 7 of the U.S. Bankruptcy Code envisions
what is called a "hammer sale". The assets of the company are simply auctioned off and
the proceeds allocated among creditors and other claimants as prescribed by the code.
Liquidation does not have to be the result of bankruptcy. It may logically be chosen as a
strategy if corporate strategists believe that he stock market undervalues the company
stock. If it is the company's earning power, which is undervalued, seeking to be acquired
is a reasonable approach. In this way, the whole company is sold as a unit. Sometimes
the stockholders receive cash for their shares. At other times, they receive a combination
of cash and debt or equity securities - or just securities. When Manville Corporation
bought Olinkraft in 1978 some Olinkraft stockholders received cash. Others received one
Manville Corporation preferred share in exchange for each Olinkraft common share
held. Stockholders who received preferred shares were free to sell them on the open
market for cash.
If it is the company's assets, which are undervalued and not the unique synergy among
those assets represented by the company's earning power, it might be desirable to
liquidate, sell off the assets, pay the liabilities, and distribute the remainder of the
proceeds to the stockholders. This is very rarely done. One reason for this is that the
amounts invested in fixed assets tend to become an 'exit barrier' in the minds of the
organizational strategists.
7.4.5 Retrenchment to fund other SBUs
Short of liquidation, many SBUs find it necessary to retrench significantly because
corporate level strategists desire disinvestment in one SBU in order to invest in others.
As previously suggested, it may even be best for some single - SBU companies to
retrench slowly, allowing equipment and facilities to run down and sales to fall off, but
earning high profits in the process. Companies, which do this, can pay high dividends.

This would be particularly appropriate for a business with competence only in a certain
market segment, which happens to be declining without a significant chance of
revitalization. Just as a company can increase its market share by price competition,
perhaps at the expense of current profitability, the opposite is also possible. If the
company has a high market share, it can earn profits by increasing prices, even though
that may cause the market share to erode. A company which correctly anticipates the
demise of an industry before its competitors do can slowly price itself out the business,
leaving its competitors to participate in the death throes of the industry. Plans for
competing in dying industries are called end game strategies.
7.4.6 Retrenchment Decision
Most people and Americans especially believe that growth is not only desirable, but also
essential. Grow or die is an accepted axiom. When a company actively pursues growth,
as most do, this is called a growth strategy. Only when businesses are forced into it do
they commonly plan to allow sales to stabilize. Most organizational strategists view
declining sales as a sign of failure. Even when strategists admit to following a
retrenchment strategy, it is usually only seen as a necessity during an unhappy
interlude, after which growth will resume.
To the extent that company management is the constituency being served, sales growth
is always desirable as long as the company remains profitable. Larger company size
usually carries with it both prestige and higher executive salaries. So, growth becomes
an objective, and profitability a constraint. However, if the objective is to maximize
return for stockholders or for a corporate parent, this concentration upon growth may
not be entirely appropriate. If growth is achieved at the expense of future profitability, it
may be to the detriment of all concerned. For example, a company may choose to cut
product costs by reducing quality and then compete in the market place on the basis of
price. This may increase sales and profits until the change in product quality becomes
apparent to customers. In the long run, sales may decline and the company's reputation
for quality could be permanently hurt.
Like decisions about other objectives, those relating to whether and to what extent to
seek sales growth should be based on sound business reasoning, not on an emotional
aversion of retrenchment. There are cases where companies have followed the most
extreme retrenchment policy, liquidation with distribution of the proceeds to
stockholders, with excellent results. If a company's liquidation value is above the market
value of its securities, liquidation may be a reasonable alternative.
The decision of whether or not to seek sales growth cannot simply be based upon
whether the relevant market is growing. The most important criterion for the growth,
stabilization or retrenchment decision is probably the company's degree of distinctive
competence in the product or service areas. IBM was not a major competitor in the
typewriter market until the company invented and patented the ball-element, or electric
typewriter. IBM chose to grow rapidly in this area and quickly became dominant at the
upper end of the office typewriter market, even though the market was growing only
moderately. At the same time, Olivetti, a marketer of premium office typewriters, was

forced to accept a retrenchment strategy. This ultimately resulted in Olivetti being

combined with Underwood; a company, which concentrated upon moderately, priced
typewriters. IBM's patent ran out in the late 1970s, and other manufacturers were then
able to market ball-element typewriters. But by that time the entire office typewriter
industry was beginning to decline because of the availability of word processors, and
most typewriter manufacturers were forced t retrench. Thus, this one small industry
segment illustrates both how an individual company's growth strategy can be somewhat
independent of industry trends at various points in time and how that of competitors in
the aggregate cannot.
The urgency with which growth should be sought is largely dependent upon the degree
and stability of a company's distinctive competencies.
7.4.7 Problems in Retrenchment
Downsizing (sometimes called 'rightsizing') refers to the planned elimination of
positions or jobs. This program is often used to implement retrenchment strategies.
Because the financial community is likely to react favorably to announcements of
downsizing from a company in difficulty, such a program may provide some short-term
benefit such as raising the company's stock price. If not done properly, however,
downsizing may result in less, rather than more, productivity. One study of downsizing
revealed that at 20 out of 30 automobile related U.S. industrial companies, either the
wrong jobs were eliminated or blanket offers of early retirement prompted managers,
even those considered invaluable, to leave. After the layoffs, the remaining employees
had to do not only their work, but also the work of the people who had gone. Because the
survivors often didn't know how to do the departed's work, morale and productivity
plummeted. In addition, cost-conscious executives tend to defer maintenance, skimp on
training, delay new product introductions, and avoid risky new businesses - all of which
leads to lower sales and eventually to lower profits.
A good retrenchment strategy can thus be implemented well in terms of organizing, but
poorly in terms of staffing. A situation can develop in which retrenchment feeds on itself
and acts to further weaken instead of strengthening the company. Research indicates
that companies undertaking cost-cutting programs are four times more likely than
others to cut costs again, typically by reducing staff. In contrast, successful downsizing
firms undertake a strategic reorientation, not just a bloodletting of employees. Research
shows that when companies use downsizing as part of a larger restructuring program to
narrow company focus, they enjoy better performance.
Consider the following guidelines that have been proposed for successful downsizing.
Eliminate unnecessary work instead of making across the board cuts. Spend the time
to research where money is going and eliminate the task, not the workers, if it doesn't
add value to what the firm is producing. Reduce the number of administrative levels
rather than the number of individual positions. Look for interdependent relationships
before eliminating activities. Identify and protect core competencies.

 Contract out work that others can do cheaper. For example, Bankers Trust of New
York contracts out its mailroom and printing services and some of its payroll and
accounts payable activities to a division of Xerox, Outsourcing may be cheaper than
vertical integration.
Plan for long-run efficiencies. Don't simply eliminate all postponable expenses, such
as maintenance, R&D, and advertising, in the unjustifiable hope that the environment
will become more supportive. Continue to hire, grow and develop - particularly in
critical areas.
Communicate the reasons for actions. Tell employees not only why the company is
downsizing, but also what the company is trying to achieve. Promote educational
programs.
Invest in the remaining employees. Because most survivors in a corporate downsizing
will probably be doing different task from what they were doing before the change, firms
need to draft new job specifications, performance standards, appraisal techniques, and
compensation packages. Additional training is needed to ensure that everyone has the
proper skills to deal with expanded jobs and responsibilities. Empower key
individuals/groups and emphasize team building, identify, protect, and mentor people
with leadership talent.
Develop value-added jobs to balance out job elimination. When no other jobs are
currently available within the organization to transfer employing a growth strategy for a
specified time and then using stable growth for a specified time.
Using a turnaround strategy and then employing a growth strategy when conditions
improve.
7.5 COMBINATION STRATEGIES
Most business organizations use some type of combination strategy, especially when
they are serving several different markets. Certain types of strategies lend themselves to
combination with other strategies. For example, a divestment strategy in one area of an
organization is normally used in combination with one or more strategies sin other parts
of the organization. Combination strategies, which can be either simultaneous or
sequential, are the norm. The following are just a few of the possible combination
strategies.
Simultaneous
1. Divesting an SBU, product line, or division while adding other SBU's product lines or
divisions.
2. Retrenching in certain areas or products while pursuing a growth strategy in other
areas or products.

3. Using an endgame strategy on certain products and growth strategies on other

products.
Sequential
A combination strategy is used when an organization simultaneously employs different
strategies for different organizational units. A combination of strategies is used more
often than any single generic strategy with the exception f growth strategies. In fact,
most multi-business organizations use some type of combination strategy, especially
when they are serving different markets. Certain generic strategies lend themselves to
being used in combination with other strategies. For example, harvesting, divesting, and
liquidating strategies are usually used in combination with one or more strategies for
other parts of the organization. Coco-cola was pursuing a combination strategy in 1983
when it divested its wine spectrum at the same time that it was expanding Columbia
Pictures and its soft drink business.
7.6 FOCUSED SEGMENT STRATEGIES
This strategy focuses on a particular market segment. A particular buyer group, a
geographic market segment, may define the segment sought or a certain part of the
product line. As opposed to low-cost and differentiation strategies, which have industry
wide appeal, a focus strategy is based on the premise that the firm is able to serve a well
defined but narrow market better than competitors who serve a broader market. The
basic idea of a focus strategy is to achieve a least-cost position or differentiation, or both,
within a narrow market.
7.7 BUILDING STRATEGIC FLEXIBILITY
The need to incorporate strategic flexibility is an important consideration in the design
of strategies. Because forecasting environmental conditions is uncertain, decision
makers enhance their chances of profitability if they strive for an optimal level of
flexibility in their strategic plans. Several approaches to increasing such flexibility can
be suggested:
1. State a strategy in general terms so that those implementing it have some discretion in
terms of their unique situations.
2. Review strategies frequently.
3. Treat strategies as rules with exceptions so that an aspect of a strategy can be violated
if such action can be justified.
4. Keep options open.
While flexibility in a strategic plan will lessen the plan's benefits by increasing cost,
shortening planning and action horizons, and increasing internal uncertainty, an overly

rigid stance in support of a particular strategy can be devastating to a firm faced with
unexpected environmental turbulence.
7.8 SUMMARY
In the light of strategic alliances the three important factors such as stability strategies,
expansion strategies and retrenchment strategies have been discussed in this lesson. It
is much useful for the business to take it in a right way.
7.9 ASSIGNMENT QUESTIONS
1. Explain the stability strategies
2. Discuss the Expansion strategies
3. What are the effects of retrenchment strategies?
4. Write a note on combination strategies.
5. Brief the focused segment strategies

- End of Chapter LESSON 8

COMPETITIVE ANALYSIS

OBJECTIVES

To understand the competitive analysis

To apply the SWOT analysis in strategic management

CONTENTS
8.1 Identifying Competitors
8.1.1 Defining the competitive environment
8.1.2 Competitors Strengths and Weaknesses
8.1.3 SWOT Analysis

8.2 Customer Analysis

8.2.1 Customer profiles
8.2.2 Buyer behavior
8.3 Segmentation
8.3.1 Reasons for Divestment
8.4 Customer Motivations
8.5 Market Analysis
8.5.1 Marketing strategies
8.5.2 Marketing issues
8.5.3 Options for markets and products/services
8.6 Profitability Analysis
8.7 Summary
8.8 Assignment questions
INTRODUCTION
Organizations do not exist in vacuum. They operate within a competitive industry
environment. Analysing its competitors not only enables an organization to identify its
own strengths and weaknesses but also helps to identify opportunities for and threats to
the organization from its industry environment.
Michael E. Porter has postulated that the competitive environment within an industry
depends on live forces; the maneuvering for position among the current competitors
within an industry, the threat of new entrants into the industry, the bargaining power of
customers, the bargaining power of suppliers, and the threat of substitute products or
services being introduced into the industry.
The third level of external analysis is likely to consider competitors both individually
and in groups. Although, this is often an important piece of analysis, it is difficult to
describe general as the information available, and hence the analysis, which is possible,
varies markedly from one industry to another. In some industries (such as insurance or
many consumer products, for instance), very detailed information is made available by
an industry association or independent m on storing agencies. For these industries there
is likely to be value in analyzing the available data in some detail both of the industry as
a whole and for individual competitors. Obviously there are some types of important

information that are not recorded in industry databases. In other industries (such as the
chemical industry and management consulting, for instance), there is much less
systematic and public collection of information. In these cases it may be valuable
carefully to aggregate competitive information from the diverse pieces of information
collected from multiple sources. In some industries and particularly in emerging
markets, all information is scarce. Here competitive intelligence has become a
specialized skill with its own professional body of practitioners and with at least some
parallels to military espionage.
In some industries, the competitors may divide naturally into strategic groups. These
are subsets of the whole that have similar characteristics and tend to compete most
closely with each other. Clearly competitors in our own strategic group are worthy of the
greatest attention. Some strategic groups may be small enough for the action of one
player to cause individual responses from others. In these cases the principles of game
theory or military strategy may be useful as the basis for analysis.
One approach to competitive analysis is to use these Five forces as conceptual
framework for identifying an organization's competitive strengths and weaknesses and
threats to and opportunities for the organization from its competitive environment. For
example, the "threat of new entrants" depends on the barriers to entry and reactions
from existing organizations that the new entrant can expect. Porter identified the
following six major barriers to entry:
1. Economies of scale - here the basic notion is that as a plant or facility gets larger
and volume increases, the average cost per unit of output drops because each succeeding
unit absorbs part of the fixed costs, thus, new entrants would either have to make a large
investment or enter at a cost disadvantage.
2. Product differentiation - brand identification forces new entrants to spend
heavily to overcome customer loyalty.
3. Capital requirements - the need to invest large amounts of capital in nonrecoverable expenditures such ad advertising and R&D creates a barrier to entry.
4. Cost advantages independent of size - proprietary technology, assets purchased
at pre-inflation prices, government subsidies, or favorable locations can also create
barriers to entry.
5. Access to distribution channels - limited wholesale or retail channels and the
more that existing organizations have these tied up make entry difficult.
6. Government policy - licensing requirements and limiting access to raw materials
are examples of government policies that can limit entry.
8.1 IDENTIFYING COMPETITORS

Competitive analysis can also be conducted through the application of a comprehensive

checklist of questions. Some of the key areas that might be examined about a particular
industry include marketing practices, market structure, financial conditions,
competitive conditions, operating conditions, and production techniques.
Regardless of the method employed, the end result of a competitive analysis should give
the management of an organization a comprehensive understanding of its competitive
environment. This understanding should enable management to further assess its
strengths and weaknesses and partially ascertain opportunities for and threats to the
organization form its industry environment.
Description of forces governing competition
Figure summarizes information about the five major forces that govern competition.
Collecting and assessing data about each of the sub elements can then conduct
competitive analysis
Maneuvering
for position
among
competitors
Degree of
competition
depends on

Number of
competitors and
whether they are
roughly equal in
size.

Threat of new
entrants

Bargaining
power of
suppliers

Power of
Barriers to entry suppliers is
determined by
include
whether

Economics of
scale.

Whether an
Product
industry growth is
differentiation.
slow.
Whether
product/service
lacks
differentiation or Capital
switching costs. requirements.
Switching costs
are fixed costs
buyers face in

Threat of
substitute
product or
services
Substitute
products that
A customer group deserve the most
is powerful if
attention from an
organization are
those that
Bargaining
power of
customers

It is dominated
by a few
companies and is It is concentrated
and buys in large
more
volume.
concentrated
than industry it
sells to.
Its product is
The products it
unique,
purchases are
differentiated or
standard or
has built up
undifferentiated.
switching costs.
The product it
purchases from a
It poses a
component of its
credible threat of
product and
integrating
represent a
forward.
significant fraction
of its cost.

Trends have been

improving their
price performance
trade-off with the
industry's
products.
Are produced by
industries earning
high profits.

changing
suppliers.
Whether fixed
costs are high or
product is
perishable.

Industry is not an
Cost advantages
It earns low
important
independent of
customer of the profits.
size.
supplier groups.
The products are
Access to
unimportant to the
Whether exit
distribution
quality of the
barriers are high.
channels.
customer's
product or service.
Whether rivals are
The products do
Government
diverse in
not save the
strategies, origins, policy.
customer money.
and culture.
The customers
pose a threat of
integrating
backward to make
the industry's
product.
8.1.1 Defining the competitive environment
While the organization is affected by trends in the broad environment, those trends, are
often, felt by the organization's competitors also. In the competitive environment,
however, events often have unequal impact. Because of this unequal impact, it is the
competitive environment in which strategy can be most useful. For example, in the
American wine industry, all competitors are subject to changing consumption trends,
which originate in the social environment. As the population ages and has a higher
average level of education it turns away from 'hard' liquor, wine becomes more popular.
The wine cooler, a mixture of wine and fruit juice, with high consumer appeal and high
margins, was introduced in the mdi-1980s and soon became the fastest growing product
in the industry. Gallo wine, the dominant competitor in the industry, was in the best
position to capitalize on this opportunity. Gallo's introduction and promotion of their
Bartles and James wine cooler had a significant impact on their competitors. In less
than a year, B&J had reached number 1 status in the industry while the other brands,
including the original wine cooler, California Coolers, lost share. The effect of the broad
environmental trend on wine producers was shaped by Gallo's response to that trend.
The competitive environment is the arena in which goals and objectives are actually
pursued. Constraints on strategic choices come from the structure of the industry, the
competitor's strategies, and the market.
Exhibit: FORMAT FOR IDENTIFYING KEY COMPETITORS

List competitors with product line(s) most similar to that/those of your company
1.
2.
3.
List of competitors who serve customer needs most similar to yours
1.
2.
3.
List of competitors with geographic scope similar to yours
1.
2.
3.
List of competitors who provide a price/performance value similar to yours
1.
2.
3.
List of competitors in order by market share until your market share is reached
1.
2.
3.
List as many competitors as are necessary to complete the categories. Key competitors
will be those that appear in the top three of any one list and those that reappear on more
than one list.
1.

2.
3.

Exhibit Format for Analysis of Key Competitors

(Rate each key competitor on the categories below)
Category

Competitor Names
B
C
D

Growth capacity
Cost position
Customer franchise
Management style
Scope of operations
Product performance
Market responsiveness
R&D capabilities
Image of quality
Market share
Financial strength

8.1.2 Competitors Strengths and Weaknesses

A major focus in determining a firm's strengths and weaknesses is comparison with
existing (and potential) competitors. Firms in the same industry often have different
marketing skills, financial resources, operating facilities and locations, technical knowhow, brand image, levels of integration, managerial talent, and so on. These different
internal capabilities can become relative strengths (or weaknesses) depending on the
strategy the firm chooses. In choosing strategy, a manager should compare the
company's key internal capabilities with those of its rivals, thereby isolating key
strengths or weaknesses.
In the major home appliance industry, for example, Sears and General Electric are
major rivals. Sear's major strength is its retail network. For GE, distribution -through
independent franchised dealers - has traditionally been a relative weakness. With the
financial resources to support modernized mass production, GE has maintained both
cost and technological advantages over its rivals, particularly Sears. This major strength
for GE is a relative weakness for Sears, which depends solely on subcontracting to

produce its Kenmore brand appliances. On the other hand, maintenance and repair
service are important in the appliance industry. Historically, Sears has strength in this
area because it maintains a fully staffed service component and spreads the costs over
numerous departments at each regional service centers and local contracting with
independent service firms by its local, independent dealers.
8.1.3 SWOT Analysis
SWOT is an acronym for the internal Strengths and Weaknesses of a business and
environmental Opportunities and Threats facing that business. SWOT analysis is a
systematic identification of these factors and the strategy that reflects the best match
between them. It is based on the logic that an effective strategy maximizes a businesss
strengths and opportunities but at the same time minimizes its weaknesses and threats.
This simple assumption, if accurately applied has powerful implication for successfully
choosing and designing an effective strategy.
Strengths and weaknesses can be defined as follows:
Strengths: Strength is a resource, skill, or other advantage relative to competitors and
the needs of markets a firm serves or anticipates serving. Strength is a distinctive
competence that gives the firm a comparative advantage in the market place. Financial
resources, market leadership, and buyer supplier relations are examples.
Sheer size and level of customer acceptance proved to be key strengths around which
IBM built its successful strategy in the personal computer market. Braniffs limited
financial capacity was a weakness that management did not sufficiently acknowledge,
leading to an unsuccessful route expansion strategy and eventual bankruptcy after
deregulation. Relative financial capacity was a weakness recognized by Piedmont
Airlines, which charted a selective route expansion strategy that has been quite
successful in a deregulated airline industry.
Understanding the key strengths and weaknesses of the firm further aids in narrowing
the choice of alternatives and selecting a strategy. Distinct competence and critical
weakness are identified in relation to key determinants of success for different market
segments; this provides a useful framework for making the best strategic choice.
SWOT analysis can be used in at least three ways in strategic choice decisions. The most
common application provides a logical framework guiding systematic discussions of the
businesss situation, alternative strategies and, ultimately, the choice of strategy. What
one manager sees as an opportunity, another may see as a potential threat. Likewise,
strength to one manager may be a weakness from another perspective. Different
assessments may reflect underlying power considerations within the organization, as
well as differing factual perspectives. The key point is that systematic SWOT analysis
ranges across all aspects of a firms situation. As a result, it provides a dynamic and
useful framework for choosing a strategy.

A second application of SWOT analysis is illustrated in figure. Key external

opportunities and threats are systematically compared to internal strengths and
weaknesses in a structured approach. The objective is identification of one of four
distinct patterns in the match between the firms internal and external situations. The
four cells in figure represent these patterns. Cell 1 is the most favorable situation; the
firm faces several environmental opportunities and has numerous strengths that
encourage pursuit of such opportunities. This condition suggests growth-oriented
strategies to exploit the favorable match. IBMs intensive market development strategy
in the personal computer market was the result of favorable match between strengths in
reputation and resources and the opportunity for impressive market growth. Cell 4 is
the least favorable situation, with the firm facing major environmental threats from a
position of relative weakness. This condition clearly calls for strategies that reduce or
redirect involvement in the products/markets examined using SWOT analysis.

In cell 2, a firm with key strengths faces an unfavorable environment. In this situation,
strategies would use current strengths to build log-term opportunities in other
products/markets. Heyhound, possessing much strength in intercity bus transportation,
still faces an environment predominated by fundamental, long-term threats, such as
airline competition and labor costs. The result was product development into no
passenger services, followed by diversification into other businesses. A business in Cell 3
faces impressive market opportunity but is constrained by several internal weaknesses.
The focus of strategy for such firms is eliminating internal weaknesses to more
effectively pursue market opportunity.
A major challenge in using SWOT analysis lies in identifying the position the business is
actually in. a business that faces major opportunities may likewise face some key threats
in its environment. It may have numerous internal weaknesses but also have one or two
major strengths relative to key competitors. Fortunately, the value of SWOT analysis

does not rest solely on careful placement of a firm in one particular cell. Rather, it lets
the strategist visualize the overall position of the firm in terms of the product/market
conditions for which a strategy is being considered.
8.2 CUSTOMER ANALYSIS
Customers as Constituents: It is common to seem to place the customer first by
saying something like, only through serving customers can a company exist and
prosper in the long run. If exist and prosper means provide a high return to
shareholders in future years, then serving the shareholder is the primary goal and the
customer is merely a means to that end. Let us consider the difficulties of serving
customers in meaningful ways.
If the customers are the primary constituency, there are only two things the
organization strategist can offer: (1) a lower price for a given quality and quantity of
good or service, and (2) a higher quality or quantity of good or service for a given price.
Simply offering low price and quality high price and quality is not performing a service
to the customer, who undoubtedly ahs other ways to obtain such average value. Quality
means the degree of excellence of the entire bundle of goods and services offered the
customer. It can be thought of as the degree to which purchase of the companys
products and services improves the customers quality of life. For example, a company,
which sells an item with a very low failure rate but has no service organization, may be
offering lower quality than a company with an excellent service organization but twice
the failure rate. A company with a service-oriented sales force which ensures that the
customers product selection matches actual customer needs is offering higher quality
than a company which sells an identical product line but to whoever will buy it.
Price, too, should be broadly construed. The term means the cost at which something is
obtained. In some parts of the country, farmers sell fruits and vegetable in the field. The
price is lower than that available in supermarkets. However, to purchase a bag of
apples from the supermarket, a homemaker may have to drive a block or two and pay
the store cashier perhaps $3.00. On the other hand, the homemaker might drive ten
miles, climb an apple tree, and pick the apples, paying a farmer only $1.00 for them. The
customers cost in this case is probably much higher. The price, in the sense used here,
includes not only the $1.00 paid the apple grower but also the cost of the gasoline and
wear and tear on the car, as well as the value of the homemakers time. It still may be
that the homemaker has received a bargain in the farm-fresh apples. The opportunity to
enjoy fresh air and sunshine along with the absolute knowledge that the apples are fresh
may be worth much more than the added costs. But the price is higher. By making
available farm-grown produce, the farmer may in fact be offering higher quality and
higher price.
In general, it is difficult to serve customers as a primary constituency, either through the
higher quality or quantity or quantity or through lower prices. If the price is lower than
the market demands, then the product will have to be rationed, thereby becoming of
lower average quality to customers. In fact, to those customers who are prevented from
obtaining the product it has zero quality. It is possible, of course, to give preference to

one customer over another to give a relative a 50 percent discount, for example.
However, it is very difficult to offer much more than the market requires for customer in
general.
When the owner of Village Hardware in. St. Louis decided that every home should have
a smoke alarm, he learned this lesson. Well. He offered smoke alarms at below cost, 50
percent lower than prices elsewhere in St. Louis. Nearly 200 people were at his door the
morning the sale began, and he was out of smoke alarms before noon. Many customers
were inconvenienced, by either having to wait in line for the product or having to drive a
significant distance only to find that they were to receive zero quality, that is, no product
at all. Only when goods and services are rationed, (or the number of customers limited)
can the customers interest actually be the primary goal of corporate strategists. Even
then, the goal must be to serve the interests of some selected group of customers and not
those of customers in general.
8.2.1 Customer Profiles
Perhaps the most valuable result of analyzing the operating environment is an
understanding of the composition of a firms customers. In developing a profile of
present and prospective customers, managers are better able to plan the strategic
operations of the firm, anticipate changes in the size of markets, and allocate resources
supporting forecast shifts in demand patterns. Four principal types of information are
useful in constructing a customer profile: geographic, demographic, psychographic, and
buyer behavior.
Geographic: It is important to define the geographic area from which customers do or
could come. Almost every product or service has some quality that makes it variably
attractive to buyers from specific locations. Obviously, a successful regional
manufacturer of snow skis in Wisconsin should think twice about investing in a
wholesale distribution center in South Carolina. On the other hand, advertising by a
major Myrtle Beach (South Carolina) hotel in the Milwaukee Sun-Times could
significantly expand the hotels geographically defined customer market.
Demographic: Demographic variable are most commonly used for differentiating
groups of customers. The term refers to descriptive characteristics that can be sued to
identify present or potential customers. Demographic information (such as sex, age,
marital status, income and occupation) is comparatively easy to collect, quantify, and
use in strategic forecasting, and it is the minimum data used as the basis of a customer
profile.
Psychographic: Customer personality and lifestyle are often better predictors of
purchasing behavior than geographic or demographic variables. In such situations, a
psychographic study of customers is an important component of the total profile. Recent
soft-drink advertising campaigns by Pepsi-Cola (the Pepsi generation), Coca-Cola
(catch the wave), and 7UP (Americas turning 7UP) reflect managements attention
not only to demographics but also to the psychographic characteristics of their largest
customer segment-physically active, group-oriented non professionals.

8.2.2 Buyer Behavior

Buyer behavior data can also be used in constructing a customer profile. This includes a
multi face ted set of factors used to explain or predict some aspect of customer's
behavior with regard to a product or service. Information on buyer behavior such as
usage rate benefits sought, and brand loyalty can significantly aid in designing more
accurate and profitably targeted strategies.
8.3 SEGMENTATION
It is also called as divestment strategy or divestiture strategy involves selling off or
shedding business units or product divisions, or segments of business operations to
redeploy the resources so released for other purposes. While selling off a business
segment or product division is one of the common forms of divestment, it may also
include selling off or giving up the control over a subsidiary, or a demerger whereby the
wholly owned subsidiaries may be floated off as independently quoted companies. An
example of divestment strategy is the sale of Samrat Hotel by the Indian Tourism
Development Corporation. Closing down of two out of the five textile units under Delhi
Cloth Mills may be cited as another example.
Although divestment of a business unit or subsidiary by one company may be linked
with the acquisition of a unit divested by another firm, it would not be correct to
suppose that divestment and acquisition are opposite numerical sides of the same coin.
8.3.1 Reasons for Divestment
The divestment strategy may be called for under different circumstances. It may be an
unavoidable decision, not necessarily a sign of failure. The basic objective underlying a
divestment strategy is to prevent any particular unit or segment of business being a drag
on the total profitability of the enterprise, particularly when opportunities of alternative
investments exist. Thus divestment may be a sensible positive decision and not one
which results form a helpless situation and is reluctantly agreed upon. Executives may
prefer divestment as a deliberate strategic decision for reasons such as:
(1) A firm may have a favorable competitive position and satisfactory earnings in a
product market. But to sustain and develop its position in that segment the firm may be
required to deploy resources - financial, technical, or managerial-, which are lacking. In
that situation, the appropriate strategy should be to divest and withdraw from the
particular segment for better utilization of the available resources in some other product
- market. To cite an instance, many American companies had entered the energy sector
when oil prices shot up in the seventies. Soon after they realized that oil and natural gas
exploration and use demanded heavy investments over an extended period before
reasonable returns could be expected. Many of these companies decided on divestment
of the operations in oil and gas sector in the early eighties because of their inability and
unwillingness to make necessary investments.

(2) If the profitability or growth performance of any unit of business or subsidiary that
held out promises earlier proves to be unsatisfactory due to unexpected emergence of
strong competitors, rise in costs or falling off of demand, the most sensible policy would
be to divest and seek better returns in other areas. The General Electric Corporation and
Radio Corporation of America decided to withdraw from the US computer market as
they were unable to cope with the rapidly changing technology and markets, and, in
particular competition from IBM.
(3) Sometimes, a strategic reassessment of the quality and extent of business diversity
may prompt divestment of one or more business segments with a view to simplifying the
range of enterprise activates and thus ensure better management and improve
efficiency.
(4) Divestment strategy may be unavoidable in the face of a financial crisis involving
liquidity problems, which may even threaten the survival of the firm as a whole. The
immediate concern of the firm in that situation may be to divest itself of operations
responsible for drawing of cash, and to use the disposal proceeds either to strengthen
the core businesses, or to meet the financial liquidity problem. An example of this
situation was found in the case of Dunlop, U.K., deciding to shed most of its European
tyre businesses to Sumitomo, Japan and its stake in Dunlop Malaysian Industries to
Pegi, the Malaysian group of enterprises.
Historically divestment is known to be a rather infrequent event as compared with
acquisitions and mergers. Possibly this is due to the fact that divestment is an
irreversible decision so far as the divesting firm is concerned. No firm having divested
any of its units generally looks forward to acquiring it again.
Divestment to be effective should be carried out in a manner and at a time so as to
realize the maximum value from divestment as well as to ensure that replacement
investment is worthwhile. This requires a combined study of the implications of
divesting particular units or segments of business, and the potential returns from
alternative investment opportunities, even though the immediate concern may be to
reduce the burden of fixed-interest bearing loans.
A possible implication of divestment, which may be overlooked by management, is the
existence of interdependencies between the loss-making activity likely to be divested
and the remaining activates of the firm. For instance, divestiture of a product market
may result in fixed overheads being spread over a smaller volume of output or
economies of scale in purchasing, and other operations may involve higher costs, and
customers demand may suffer if the divested product is one item in a complete line of
products. However, it does not imply that a firm can never drop an unprofitable product
from the range of products. What is important is to recognize the possibility of
interdependencies.
8.4 CUSTOMER MOTIVATIONS

The level of motivation demonstrated by employees in an organization is

complimentary. In most instances, the degree of motivation exhibited by employees is
influenced by leader effectiveness. Furthermore, a highly motivated management team
in combination with highly motivated employees can bring about substantial increases
in performance and can significantly increase the likelihood that organizational
objectives will be achieved. Many variables influence the level of motivation, of
employees in an organization. However, the main variable explored in this section is the
organizational reward system.
In most cases, the organizational reward system is one of the most effective motivational tools available to organization. The design and use of the
organizational reward system reflects management's attitude about performance and
significantly influences the entire organizational climate.
Organizational rewards include both intrinsic and extrinsic, that is received as a result of
employment of the organization. Intrinsic rewards are internal to an individual and are
generally derived from involvement in certain activities or tasks. The feelings of
satisfaction and accomplishment that are derived from doing a job well are examples of
intrinsic rewards. Extrinsic rewards are tangible rewards that are directly controlled and
distributed by the organization. An employee's pay and hospitalization, insurance are
examples of extrinsic rewards.
Many extrinsic benefits such as hospitalization and retirement programs depend only on
an employee's continued employment with an organization However, pay raises and
promotions are controllable by management and should be used to encourage good
performance on the part of all employees.
Incentive pay plans attempt to tie pay to performance and are used by many
organizations to motivate employees. Unfortunately, most incentive programs are
designed only for top management. Lower levels of management and operative
employees do not normally participate. In order for pay to be an effective motivator in
strategy implementation, it should be tied to performance and used at all levels within
the organization.
Many other factors within organization influence the level of motivation of employees.
Peter Drucker has suggested several personal characteristics of managers that can
significantly lower the level of motivation among employees.
Lack of integrity of character.
Tendency to focus on people's weaknesses rather than on their strengths - Interest in
who is right rather than what is right.
Disposition to value intelligence more than integrity.

Motivated employees are something that some organizations have, and many others
wish they had. In the final analysis, motivated employees play a significant role m the
successful achievement of organizational objectives.
8.5 MARKET ANALYSIS
As a critical functional area, marketing has received increasingly greater attention in the
competitive business world since the early modern era. The old concept of marketing
has been replaced by a new concept. The old concept focused on the firm's existing
products or services and considered marketing to consist of selling and promotion to
maximize sales at a profit. The new concept, in contrast, focuses on the firm's existing
and potential customers and seeks to earn profit through customer satisfaction with an
integrated marketing programme. Implementation of strategy hinges a great deal on
marketing policy providing guidelines for managerial decision-making and action to
carry out the marketing functions - in accordance with the chosen strategy.
8.5.1 Marketing Strategies
Marketing consists of those activities intended to move products or services from the
producer to the consumer or market. The basic role of marketing in an organization is to
have the right products or services in the right quantity at the right place at the right
time. When this role is performed effectively, profits are earned and customers are
served efficiently. Marketing strategy is concerned with matching existing or potential
products or services with the needs of customers, informing customers that the products
or services exist, having the products or services at the right time and place to facilitate
exchange, and assigning a price to the products or services.
The marketing strategy selected by an organization is dependent on whether the
organization is attempting to reach new or existing customers and whether the
organization's products or services are new or already exist. A classification system for
marketing strategies based on the type of customer and types of product or service is
illustrated in Figure.
Customer
Existing
Products Existing Market penetration
or
Product
New
Services
development

New
Market development
Diversification

With a marketing penetration strategy, the organization attempts to gain greater control
in a market in which it already has a product or service. Management must carefully
consider several factors in using a market penetration strategy. These include:
The reaction of competitors.

 The capacity of the market to increase usage or consumption and/or the availability of
new customers.
The costs involved in gaining customers from competition, stimulating more usage or
consumption, or attracting new customers.
A market development strategy consists of introducing the organization's existing
products or services to customers other than the ones it currently serves. Considerations
in using a market development strategy include:
The reaction of competitors.
An understanding of the number, needs, and purchasing patterns of the new
customers.
Determination of the organization's adaptability to new markets.
An organization using a product development strategy creates a new product or service
for existing customers. Considerations in a product development strategy include:
The competitive response.
The impact of the new product or service on existing products or services.
The ability of the organization to deliver the product or service.
With a diversification marketing strategy, an organization offers a new products or
service to new customers. Considerations in using a new product or service
strategy include:
Developing a considerable knowledge of the new customer's needs: Making certain
that the new product or service meets those needs.
Knowing that the organization has the human talent to serve the new customers.
After the basic marketing strategy is determined, more specific strategies are required.
These activities are often called the marketing mix. They include:
Determining the exact type of product or service that is to be offered.
Deciding how the product or service is to be communicated to customers
Selecting the method for distributing the product or service to the customer.
Establishing a price for the product or service.

 Determination of the appropriate marketing mix is crucial in the success of any

organization. Figure outlines several questions that when answered give direction in
determining the appropriate marketing mix for a particular organization.
Questions in determining the appropriateness of marketing mix
consistency:
1. Do the individual elements of the mix fit together to form a logical relationship, or are
they fragmented?
2. Does the mix fit the organization, the market, and the environment into which it will
be introduced?
Sensitivity
1. Are customers more sensitive to certain marketing mix variables than others?
2. Are customers more likely to respond favorably to a decrease in price or an increase in
advertising?
Cost
1. What are the costs of performing the various marketing mix activities?
2. Do the costs exceed the benefits in terms of customer response?
3. Can the organization afford the marketing mix expenditures?
Timing
1. Is the marketing mix properly timed?
2. Is promotion scheduled to coincide with product or service availability?
Product positioning is often used as an aid in developing a marketing strategy. Product
positioning uses marketing research techniques to determine where the proposed
and/or present brands or products are located in the market. Product positioning
enables managers to decide whether they want to leave their present product and
marketing mix alone or whether they want to reposition the product. Production
positioning allows an organization to develop marketing strategies oriented towards
target customers. Developing strategies of this type is frequently called target
marketing. For example, an organization might develop a combining strategy that
involves combining relatively homogenous submarkets into a larger target market.
8.5.2 Marketing Issues

The familiar "four P's" of marketing (product, price, place, and promotion) provide a
good starting point for consideration of the requirements of strategy implementation in
the marketing function. In general, the mix of these marketing elements should be
appropriate, and the plans for each of the elements must also be appropriate.
The marketing function is consumer-oriented. Marketing decisions are based on the
careful identification of consumer needs and on the design of marketing strategies to
meet those needs. Some observers have suggested that a shift is occurring in the
underlying nature of markets so that a "mass market" no longer exists. This theory looks
that markets have been fragmented into a number of segments and that ability to target
products and services has become critical to the success of all organizations.
Number, diversity, and rate of change characterize products or services. A limited
product line with few new products being introduced is not likely to implement a growth
strategy, unless the product is in the early stages of the product lifecycle. A wide line is
often pruned in a retrenchment strategy so that only the most profitable items remain,
even though market share may be lost. In a product development strategy, the rate of
new product development may be the single most important strategic issue.
A number of pricing options are available. A lower price will be desirable to increase
volume. However, in the early stages of the product life cycle, a "skim the cream"
approach may be justified to establish image. Pricing is a complex issue because it is
related to cost-volume profit trade-offs and because it is frequently used as a
competitive weapon. Pricing policy changes are likely to provoke competitor response.
Using price to jockey for position can lead to price wars, which usually hurt all
participants.
The distribution system brings the product or service to the place where it can best fill
customer needs. Access to distribution can mean all the difference between success and
failure for a new product. Because many products require support from distribution
channels in the form of prompt service, rapid order processing, or parts inventory, the
choice of distributors, wholesalers, and jobbers is extremely important. The increasing
costs of transportation as a percentage of total costs must also be factored into the
choices made concerning distribution.
Promotion is more than advertising. Promotion refers to the methods, which are used
to put products and services in the public eye. Products and services may be promoted
through personal selling, print and electronic media, displays, use of logos on related or
unrelated products, and sponsorships. The location, size, and nature of markets, which
the business strategy defines, will guide promotion mix decision and should indicate the
content of promotional material as well.
8.5.3 Options for Markets and products/services
The most obvious type of option relates to which products or services to offer in which
markets. Igor Ansoff was the first to suggest the diagram shown in figure for structuring
this decision.

The axes of the diagram are product (including services and any form of offering),
market need (which can be any group of potential customers whether defined by their
needs, inclinations, or income bracket), and market geography (geographical location).
The model defines four cells for the present market geography. The top-left of these cells
represents the present status of the business. The possible future choices about products
and markets can be represented as movements within or away from this cell.
One set of choices is possible within the existing product/market set
'Do nothing' - that is, continue present strategies. This strategy is important, as it is
usual to compare any proposed change with the 'do nothing' option as a baseline. The
'do nothing' option is rarely viable for the long term as it is likely that competitors will
gradually take the market by improving their products, their processes, or their
relationships.
'Withdraw' - leave the market by closing down or selling out. This appears to be a
negative option but may be necessary to focus available resources into areas of greater
strength. It is common in declining markets to see some of the competitors selling out to
others who can operate the combined operation more cheaply.
'Consolidate' - attempt to hold market share in existing markets. This is a defensive
option, which usually involves cutting costs and perhaps prices. It is more common in
markets that are mature or beginning to decline.
'Market penetration' - increase market share in the same market. This is a more
aggressive option and usually involves investing in product improvement, advertising or
channel development. Acquiring the businesses of competitors who are withdrawing
from the market may be a necessary related resource option.
8.6 PROFITABILITY ANALYSIS
Profitability is the net result of a large number of policies and decisions chosen by an
organization's management. Profitability ratios indicate how effectively the total firm is
being managed. The profit margin for a firm is calculated by dividing net earnings by
sales. This ratio is often called return on sales (ROS).
A second useful ratio for evaluating profitability is the return on investment -or ROI, as
it is frequently called - found by dividing net earnings by total assets.
The ratio of net earnings to net worth is a measure of the rate of return or profitability of
the stockholder's investment. It is calculated by dividing net earnings by net worth, the
common stock equity and retained earnings account.

RISKS
No one competitive strategy is guaranteed to achieve success and some companies that
have successfully implements one of Porter's competitive strategies have found that they
could not sustain the strategy. As shown in Table, each of the generic strategies has its
risks. For example, a company following a differentiation strategy must ensure that the
higher price it charges for its higher quality is not priced too far above the competition,
otherwise customers will not see the extra quality is not priced too far above the
competition, otherwise customers will not see the extra quality as worth as the extra
cost. This is what is meant in Table by the term cost proximity. Procter & Gamble's use
of R&D and advertising to differentiate its products had been very successful for many
years until customers in the value-conscious 1990s turned to cheaper private brands. As
a result, P&G was forced to reduce costs until it could get prices back in line with
customer expectations.

Managerial attitudes toward risk

Managerial attitude toward risk vary from comfort if not exhilaration with high risk to
strong risk aversion. The risk averters probably view the firm as very weak and will
accept only defensive strategies with very low risks. Three polar conditions with regard
to risk can be conceived.
Risk attitudes can change, and vary by industry volatility and environmental
uncertainty. In very volatile industries, executives must be capable of absorbing greater
amounts of risk; otherwise, they cannot function. Exhibit below provides an interesting
example of how risk attitudes can change and are important to strategic thinking in
volatile conditions.
Risk attitudes can also vary on the basis of the internal conditions. Thus, assessing the
manager's perception of risk will help you to understand the potential acceptability of a
given strategic option. Insofar as they influence managerial attitudes, risk attitudes of
the managers and stockholders will eliminate some strategic alternatives and highlight
others. For instance, if risk is being balanced, managers are likely to pursue stability in
major parts of the business with expansion in one or a few SBUs. But if risk is seen as
necessary, firms are likely to eliminate stability as a viable option.

8.7 SUMMARY
This lesson discussed about the identification of the competitors. After identifying the
competitors, the SWOF analysis has been explained in this context. In business the first
and foremost factor is the customer followed by market and particularly the profit.
Hence the analyses on customer, market and profit have also been discussed.
8.8 ASSIGNMENT QUESTIONS
1. How the competitors could be identified?
2. Explain the SWOT Analysis in the light of competition
3. Explain Customer Analysis
4. Write a short note on Segmentation
5. How the Customer can be motivated?
6. Brief the Market Analysis
7. Discuss the Profitability Analysis

- End of Chapter LESSON 9

ENVIRONMENTAL ANALYSIS

Objectives

To understand the Environmental analysis in the strategic management process

To know about the forecasting in business

Contents
9.1 Requirements of Environmental Analysis
9.2 Defining the broad environment.
9.2.1 The Economic sector
9.2.2 The Technological sector
9.2.3 The Social Sector
9.2.4 The Political Sector
9.3 Global Environment - Dimensions
9.3.1 Location and coordination of functional activities
9.3.2 Location and coordination issues
9.3.3 International strategy options
9.3.4 Public image
9.4 Environmental forecasting
9.4.1 Delphi technique
9.4.2 Brainstorming
9.4.3 Trend-Impact Analysis
9.5 Economic forecasting
9.6 Uncertainty
9.7 Scenario Analysis
9.7.1 Scenario development
9.7.2 Estimating scenarios.
9.8 Summary

9.9 Assignment questions

Introduction
Environmental analysis is a critical component of strategic management because it
produces much of the information, which is required to assess the outlook for the future.
The environment is a significant source of change. Some organizations become victims
of change, while others use change to their advantage. Organizations are more likely to
be able to turn change to their advantage if they are forewarned. This is a major purpose
of the environmental analysis process
9.1 REQUIREMENTS OF ENVIRONMENTAL ANALYSIS
The environmental analysis phase of the strategic management process seeks to uncover
relevant information rather than extensive information; it rewards the pursuit of quality
rather than quantity. Furthermore, the process must be future-oriented to provide for
adequate response time, whether the desired response is to capitalize on a trend or to
influence its direction. Finally, the information must be translated into a form that
facilitates its use in strategic planning. From these requirements, environmental
analysis can be divided into three major steps:
1. Defining: Determining the bounds and relevant sectors of his environment.
2. Scanning and forecasting: Ensuring that information is available concerning the
defined environment.
3. Interpreting: Packaging information into forms that are useful for planning.
9.2 DEFINING THE BROAD ENVIRONMENT
Every organization is subject to general trends which are felt in many industries and
which are not usually amenable to influence by a single organization. These trends can
be classified as technological, economic, social, and political according to the sector of
the environment from which they come. The force of trends varies with the geographical
scope of competition, so it is helpful to identify the scope of the sector, which requires
scanning.
9.2.1 The Economic Sector
The fluctuations of local, national, and world economies are related in many ways, but it
is still important to make separate assessments based on organizational scope. Local
conditions can moderate or deepen the effects of national economic trends. The
underdeveloped nations are characterized by rising populations, low standards of
education, and lack of a transportation and commercial base. In the developing nations,
gross national product is rapidly increasing, but wages are low and consumer goods
scarce. Most critical is the unevenness of income and wealth, the rapidity of change, and
the political instability, which can threaten organizations operating in such areas.

9.2.2 The Technological Sector

Technology refers to the means chosen to do useful work. Technological trends include
not only the glamorous invention that revolutionizes our lives, but also the gradual
painstaking improvements in methods, materials, in design, in application, in diffusion
into new industries and in efficiency. It includes hardware, software and live ware. For
centuries, the simple process of handling business correspondence has involved
dictation, transcription, and final review and signature. Technological improvements,
which made the process more efficient, include the creation of a standardized shorthand
writing system, the invention of the typewriter, the use of voice recording machines for
dictation, and the use of the microcomputer for transcription and editing. All four
represent technological change even though only the typing, recording, and word
processing activities involve machines.
9.2.3 The Social Sector
The behavior patterns of individuals and groups reflect their attitudes, beliefs and
values. The social environment includes the attitudes and values of society as well as the
behavior, which is motivated by those values. A community's attitudes toward legalized
gambling, the composition of families and households, and the preference for fast food
over home cooking are all manifestations of the social environment. The impact of the
social sector is felt in changing needs, tastes and preferences of consumers, in relations
with employees, and in the expectations of society about how the organization should
fulfill its citizenship role.
9.2.4 The Political Sector
The political sector of the environment presents actual and potential restrictions on the
way an organization operates. These restrictions can take the form of (1) laws which
require or prohibit certain actions, (2) regulations which interpret and detail laws, or (3)
avenues for reporting relationships and oversight functions. The differences among
local, national, and international subsectors of the political environment are often quite
dramatic.
9.3 GLOBAL ENVIRONMENT - DIMENSIONS
Although industries can be characterized by the global multidomestic distinction, few
pure cases of either exist. Thus, a multinational competing in a global industry must, to
some degree, also be responsive to local market condition. Similarly, the multinational
firm, competing in a multidomestic industry cannot totally ignore opportunities to
utilize intra-corporate resources in competitive positioning. The question then becomes
one of deciding, which corporate functional activities should be performed where and
what degree of coordination should exist between them.
9.3.1 Location and Coordination of Functional Activities

Typical functional activities of a business include purchases of input resources,

operations, research and development, marketing and sales, and after-sales service. A
multinational corporation has a wide range of possible location options for each of these
activities and must decide which set of activities will be performed in how many and
which locations. A multinational corporation may desire each location to perform each
activity, or it may have the activity centered in one location to serve the organization
worldwide. For example, research and development may be centralized in one facility to
serve the entire organization.
The multinational corporation must also decide the degree to which these activities are
to be coordinated with each other across different countries. Coordination can be
extremely low, allowing each location to perform each activity autonomously.
Conversely, coordination can be extremely high, with the activities in different locations
tightly linked together.
9.3.2 Location and Coordination Issues
Some of the issues related to the critical dimensions of location and coordination in
international strategic planning. It shows the different functional activities performed
by the organization for each dimension. A company must decide where after-sale service
should be performed throughout the world and the extent to which the service should be
standardized.
Addressing these issues for a particular firm depends on the nature of the industry and
the type of international strategy pursued by the firm. The industry can be characterized
along a continuum between multidomestics at one extreme and global at the other. In a
multidomestic industry, competition occurs within each country; consequently, little
coordination of functional activities across may be necessary. However, as the industry
becomes global, the firm must begin to coordinate an increasing number of functional
activities in order to effectively compete across countries.
9.3.3 International strategy options
The basic international strategies derive from considering the location and coordination
dimensions. If the firm is operating in a multidomestic industry, choosing a countrycentered strategy implies low coordination of functional activities and geographical
dispersion of organization activities. This allows each subsidiary to closely monitor the
local market condition it faces and the freedom to respond competitively.
A high coordination and geographical concentration of the multinational's activities
results from choosing a pure global strategy. Although some activities, such as aftersales service, may need to be located in each market, the activities need to be tightly
controlled so that standardized performance occurs worldwide. For example, IBM
expects the same high level of marketing support and service for its customers,
regardless of their location.

The final two types of strategies are a high foreign investment with extensive
coordination among subsidiaries and an export-based strategy with decentralized
marketing. These two strategies can represent the choice to remain at a particular stage,
such as an exporter, or they can represent transition strategies as multinational moves
to a global strategy.
9.3.4 Public Image
Domestically, the public image is often shaped from a marketing viewpoint. The firm's
public image is considered a marketing tool that is managed with the objective of
customer acceptance of the firm's product in the market. Although this dimension
remains a critical consideration in the multinational environment, it must be properly
balanced with concern for organizational claimants other than the customer. The
multinational firm is a major user of national resources and a major force in the
socialization processes of many countries. Thus, the MNC must manage its image with
respect to this larger context by clearly conveying its intentions to recognize the
additional internal and external claimants resulting from multinationalization.
9.4 ENVIRONMENTAL FORECASTING
No one can deny that economic, technological, political, and social change is a part of
organizational life. Given that fact, the obvious question is, how can these changes be
forecast?
To say the least, forecasting is a most difficult process. At this point it may be consoling
to recall some humorous forecasting rules.
1. It is very difficult to forecast, especially the future.
2. Those who live by the crystal ball soon learn to eat ground glass.
3. The moment you forecast you know you're going to be wrong - you just don't know
when and in which direction.
4. If you're right, never let them forget.
Regardless of the strong possibility of error, to be successful, organization must forecast
their future environment. Several studies have examined the impact of environmental
analysis and forecasting on organizational performance. One study found that increased
knowledge, through environmental analysis and forecasting was positively correlated to
profitability. Several popular methods of forecasting are:
9.4.1 Delphi Technique
The Delphi technique is a popular method for forecasting and can be used to forecast
trends in economic, technological, political and social forces. The Delphi technique can
perhaps best be understood by examining it in the steps outlines below:

Step 1: Experts on the subject being forecast are used.

Step 2: The experts are kept apart and asked for their forecasts on the subject under
study. The experts give their answers by a letter to a coordinating forecaster.
Step 3: The coordinator determines the consensus opinion from the individual forecasts.
Another questionnaire is then sent to the experts giving what the consensus opinion was
and asking if they would like to change their opinion in light of the results. This step is
repeated until the experts stop changing their opinions. When this happens, the final
consensus opinion of the experts is used as a forecast for the subject under study.
Problems may arise in using the Delphi technique owing to the difficulty of accurately
explaining the problem situation to the experts. Determining a consensus opinion from
the individual forecasts may also be difficult.
9.4.2 Brainstorming
Brainstorming is a technique that is primarily used to produce creative ideas for solving
problems, but it can also be used in forecasting. Basically, brainstorming involves
presenting a particular subject to a group of people and allowing them to present their
forecasts on the subject. Brainstorming generally consists of three phases. In phase one,
members of the group are asked to present spontaneously their ideas on the future of
the subject under study. The group is told that producing a large quantity of their ideas
is desired, and that they should not be concerned about fee quality of their ideas. Four
basic rules are observed in the first phase.
1. No criticism of forecasts is allowed.
2. No praise of forecasts is allowed.
3. No questions or discussion of forecasts is allowed.
4. Combination and improvements of forecasts that have been presented are
encouraged.
During the second phase, the merits of each forecast are reviewed, which often leads to
additional alternatives. Alternatives with little merit are eliminated in this phase. In the
third phase, one of the alternatives is selected, normally through group consensus.
9.4.3 Trend-Impact Analysis
Trend-impact analysis is also used in environmental forecasting and is conducted along
the following general steps.
1. Past history of a particular phenomenon is extrapolated with the help of a computer.
2. Panel of experts specifies a set of unique future events, which could have a bearing on
the phenomenon under study.

3. Panel of experts indicates how the trend extrapolation would be affected by the
occurrence of each of these events.
4. Computer then modifies the trend extrapolation using these judgments.
5. Panel of experts then reviews the adjusted extrapolation and modifies the inputs.
9.5 ECONOMIC FORECASTING
Several approaches are used in economic forecasting. Econometric models describe
economic activity in terms of a system of mathematical equations. These equations are
designed to describe interrelationships among various sectors of the economy. The
number of relationships specified in the model depends on many factors and determines
how detailed a representation of the economy the model is. Of course, even the largest
model in existence oversimplifies the working of the actual economy. Econometric
models are used not only to forecast economic variables but also to assess the impact of
changes in government spending or proposed tax changes.
Leading indicators are also used in economic forecasting. A leading indicator is any
measure of the economy that moves in the same manner as the economy but does so
several months ahead of the economy.
Surveys are also used in economic forecasting. Almost all economic data is compiled by
means of surveys or interviews. One method of forecasting industry demand is trend
analysis. Trend analysis involves determining the pattern that exists in time-series data.
Trends can be either linear or exponential, and can be either increasing or decreasing.
The major disadvantage to trend analysis is that it assumes that all of the major
variables influencing the industry will remain constant. Dramatic changes in either
political, or social, or technological forces can change the trend projection.
Econometric models can also be used to forecast economic activity at eh industry level.
Industry econometric models use a set of mathematical equations to describe competing
product demands, supplies, prices, general business conditions, promotional
campaigns, and so on.
Multiple and linear regression and correlation analysis can also be used in industry
forecasting. Linear regression expresses the statistical relationship that exists between
two variables. Multiple regression attempts to link changes in the dependent variable to
changes in two or more independent variables. Correlation analysis explains how closely
two variables move together.
9.6 UNCERTAINTY
Environmental uncertainty is the degree of complexity plus the degree of change
existing in an organization's external environment. Environmental uncertainty is a
threat to strategic managers because it hampers their ability to develop long-range plans

and to make strategic decisions to keep the corporation in equilibrium with its external
environment.
Most industries today are facing an ever-increasing level of environmental uncertainty.
They are becoming more complex and more dynamic. Industries that used to be
multidomestic are becoming global. New flexible, aggressive, innovative, competitors
are moving into established markets to rapidly erode the advantages of large previously
dominant firms. Distribution channels vary from country to country and are being
altered daily through the use of sophisticated information systems. Closer relationships
with suppliers are being forged to reduce costs, increase quality, and gain access to new
technology. Companies learn to quickly imitate the successful strategies of market
leaders, and it becomes harder to sustain any competitive advantage for very long.
Consequently, the level of competitive intensity is increasing in most industries.
In hypercompetitive industries such as computer, competitive advantage comes from an
up-to-date knowledge of environmental trends and competitive activity coupled with a
willingness to risk a current advantage for a possible new advantage.
9.7 SCENARIO ANALYSIS
It is sometimes argued that it is so difficult to forecast the future that it is better not to
attempt forecasting at all. Scenario planning offers a fundamentally different approach
that does not depend on forecasting the future. Rather it postulates possible future
scenarios without making any assessment of the likelihood that any one scenario will
occur. Scenario planning was pioneered in Shell.
Scenario planning involves the creation of a number typically two to four complete
scenarios of the future, each of which is self-consistent but significantly different from
the others. For instance, one scenario might postulate a serious and long-lasting
economic recession coupled with rising trade tariffs-a pattern last experienced in the
1930s. A second scenario might postulate a second Russian revolution resulting in a
strongly nationalistic and anti-Western government. A third might postulate some
major technological breakthrough transforming the price structure of the industry. The
task is then to undertake an assessment of the likely effects of each scenario on the
company and to identify the actions necessary to survive and succeed. While the future
may evolve like none of the scenarios, die process of planning forces new ways of
thinking which may be more valuable than the plans themselves.
Under scenario planning, the purpose of he strategy process is to help managers to
develop better mental models so that they can deal with change as it occurs. It turns
planning into learning exercises and places the emphasis on the process of planning
rather than the resulting plans. It is therefore reason of the Learning and Cognitive
schools.
Scenario planning is being used to an increasing extent, but it does require considerable
time and effect to achieve the best results. The original Shell pioneers emphasized that it
took several iterations before the full benefits were achieved. The benefits were as much

in new ways of thinking about the world and understanding of the forces driving change
than in any specific actions which resulted from the scenario planning exercises.
Because of the high degree of time, effort, and commitment required. Scenario planning
is more commonly used in very large companies than in middle-sized or small
companies and is probably most useful in industries, such as oil, where planning
horizons have to be long.
9.7.1 Scenario Development
A variety of approaches are used in social forecasting, including time series analysis and
the judgmental techniques described earlier. However, scenario development is
probably the most popular of all techniques. Scenarios are imagining stories that
integrate objective and subjective parts of other forecasts. They are designed to help
mangers anticipate changes. Because scenarios can be presented in an easily understood
form, they have gained popularity in social forecast situations. The following process can
develop scenarios.
1. Prepare the background by assessing the overall social environment under
investigation (such as social legislation).
2. Select critical indicators and search for future events that may affect the key trends
(e.g., growing distrust of business).
3. Analyze reasons for past behavior for each trend (e.g., perceived disregard for air and
water quality).
4. Forecast each indicator in at least three scenarios, showing the least favorable
environment, the likely environment, and the most favorable environment.
5. Write the scenario from the viewpoint of someone in the future and describe
conditions then and how they developed.
6. Condense the scenario for each trend to a few paragraphs.
Scenarios prepare strategic managers for alternative possibilities if certain trends
continue, thus enabling them to develop contingency plans.
Scenario writing appears to be the most widely used forecasting technique after trend
extrapolation. Originated by Royal Dutch Shell, scenarios are focused descriptions of
different likely futures presented in a narrative fashion. The scenario thus may be
merely a written description of some future state, in terms of key variables and issues, or
it may be generated in combination with other forecasting techniques.
An industry scenario is a Forecast description of a particular industry's likely future.
Such a scenario is developed by analyzing the probable impact of future societal forces
on key groups in a particular industry. The process may operate as follows:

1. Examine possible shifts in the societal variables globally.

2. Identify uncertainties in each of the six forces of the task environment (for example
potential entrants, competitors, likely substitute, buyers, suppliers, and other key
stakeholders).
3. Make a range of plausible assumptions about future trends.
4. Combine assumptions about individual trends into internally consistent scenarios.
5. Analyze the industry situation that would prevail under each scenario.
6. Determine the sources of competitive advantage under each scenario.
7. Predict competitor's behavior under each scenario.
8. Select the scenarios that are either most likely to occur or most likely to have a strong
impact on the future of the company.
9.7.2 Estimating Scenarios
Corporate scenarios are proforma balance sheets and income statements that forecast
the effect each alternative strategy and its various programs will likely have on division
and corporate return on investment. In a survey of Fortune 500 firms, 84% reported
using computer simulation models in strategic planning. Most of these were simply
spreadsheet based simulation models dealing with "what if questions.
The recommended scenarios are simply extensions of the industry scenarios. For
example, industry scenarios suggest the probable emergence of a strong market demand
in a specific country for certain products; a series of alternative strategy scenarios can be
developed. The alternative of acquiring another firm having these products in that
country can be compared with the alternative of a green-field development. Using three
sets of estimated sales figures for the new products over the next five years, the tow
alternatives can be evaluated in terms of their effect on future company performance as
reflected in its probable future financial statements. Proforma balance sheets and
income statements can be generated with spreadsheet software such as Lotus 1-2-3 or
Excel, on a personal computer.
To construct a scenario, follow these steps:
First, use industry scenarios to develop a set of assumptions about the task
environment. For example, 3M requires the general manager of each business unit to
describe annually what his or her industry will look like in 15 years. List the optimistic,
pessimistic, and most likely assumptions for key economic factors such as the GDP
(Gross Domestic Product), CPI (Consumer Price Index), and prime interest rate, and for
other key external strategic factors such as governmental regulation and industry
trends. This needs to be done for every country/region in which the corporation ahs

significant operations that will be affected by each strategic alternative. The same
underlying assumptions should be listed for each of the alternative scenarios to be
developed.
Second, develop common-size financial statements for the company's or business
unit's previous years, to service as the basis for the trend analysis projections of pro
forma financial statements. The scenario box form in Table is shown below.
a. Use the historical common-size percentages to estimate the level of revenues,
expenses, and other categories in estimated pro forma statements for future years.
b. Develop for each strategic alternative a set of optimistic, pessimistic, and most likely
assumptions about the impact of key variables on the company's future financial
statements
c. Forecast three sets of sales and cost of goods sold figures for at least five years into the
future.
d. Analyze historical data and make adjustments based on the environmental
assumptions listed earlier. Do the same for other figures that can vary significantly.
e. Assume for other figures that they will continue in their historical relationship to sales
or some other key-determining factor. Plug in expected inventory levels, accounts
receivable, accounts payable, R&D expense, advertising and promotion expenses, capital
expenditures, and debt payments, among others.
f. Consider not only historical trends, but also programs that might be needed to
implement each alternative strategy.
Scenario table for Generating Financial Pro Forma Statements

Factor
GDP
CPI
Other
Sales
units
Dollars
COGS
Advtg &
Mktg
Interest
Expenses

Last Historical Trend

year average analysis

Projections
191919Comments
O P ML O P ML O P ML

Plant
expansion
Dividends
Net
profits
EPS
ROI
ROE
Others
Note: O Optimistic, P Pessimistic, ML Most Likely
The result of this detailed scenario construction should be anticipated net profits, cash
flow, and net working capital for each of the tow alternatives for five years into the
future. A strategist might want to go further into the future if the strategy is expected to
have a major impact on the company's financial statements beyond five years. The result
of this work should provide sufficient information on which forecasts of the likely
feasibility and probable profitability of each of the strategic alternatives could be found.
Obviously these scenarios can quickly become very complicated, especially if three sets
of acquisition prices and development costs are calculated. Nevertheless this sort of
detailed "what if" analysis is needed to realistically compare the projected outcome of
each reasonable alternative strategy and its attendant programs, budgets, and
procedures.
9.8 SUMMARY
After going through this lesson you may understand the environmental analysis, global
environmental dimensions, environmental forecasting, risk and uncertainty in business
strategic management.
9.9 ASSIGNMENT QUESTIONS
1. What the requirements of Environmental Analysis
2. Write short notes on
a. The Economic sector
b. The Technological sectorc. The Social Sector
d. The Political Sector

3. Explain the global environment dimensions

4. Write short notes on:
a. Delphi technique
b. Brainstorming
c. Trend-Impact Analysis
d. Brief the Economic forecasting
e. Discuss the uncertainty in strategic management
f. Scenario analysis

- End of Chapter LESSON 10

P E S T ANALYSIS

OBJECTIVES

To know about the PEST Analysis

To understand the Industry Analysis

CONTENTS
10.1 Industry Analysis
10.1.1 Porter's approach to Industry analysis
10.1.2 Analyzing Industry Structure
10.1.3 A closer look at Competitors
10.2 Types of Industries
10.3 Competition in Global Industries

10.4 Strategy Alternatives

10.4.1 Skim Strategy
10.4.2 Penetration Strategy
10.4.3 Dump Strategy
10.4.4 Explore Strategy
10.5 Summary
10.6 Assignment Questions
INTRODUCTION
The PEST analysis is the most common approach for considering the external business
environment. PEST standing for political, economic, social and technological change
roughly defines the scope of what is required but the word PEST is no more than a
convenient mnemonic.
The underlying thinking of the PEST analysis is that the enterprise has to react to
changes in its external environment. This reflects the idea that strategy requires a fit
between capabilities and the external environment and so it is necessary for an
enterprise to react to changes.
Political changes might be expected to include, for instance, general changes in the
domestic political climate, the effects of European integration, the after-effects of the
break-up of the Soviet Union, government change, world power shifts, as well as specific
legislation and regulation.
Economic changes is likely to include the effects of economic cycles, patterns of world
trade, currency conversion rate changes, commodity prices, changes in capital markets,
labor markets and rates, and economic effects on suppliers and particular groups of
customers.
Social change includes the effects of demographic patterns, tastes and habits, and
concerns about the environment and sustainable development.
Technological change covers the effects of technological change on products, processes,
and distribution channels.
The PEST analysis is very general in nature and this makes it difficult to give clear rules
on how best to apply it in varying circumstances. Global or geographically dispersed
enterprises will have to conduct separate PEST analysis for different regions as trends
occur at different rates in different places.'

The value of the PEST is likely to relate directly to the quality of the effort put into it.
This time spent thinking about how external change will affect the enterprise and its
industry is likely to be well spent.
10.1 INDUSTRY ANALYSIS
An industry is a group of firms producing a similar product or service, such as soft
drinks or financial services. An examination of the important stakeholder groups, such
as suppliers and customers, in a particular corporation's task environment is a part of
industry analysis.
10.1.1 Porter's Approach to Industry Analysis
Michael porter, an authority on competitive strategy contends that a corporation is most
concerned with the intensity of competition within its industry.
10.1.2 Analyzing Industry Structure
Michael Porter ahs popularized the technique of industry analysis in a number of
articles and two books. Porter argues that there are five forces, which work together to
determine the type and direction of pressures on profitability that will be found in a
given industry. When these forces of competition are favorable, there will be less
downward pressure on profitability, and the industry should have a higher average level
of profitability. When the structural factors are unfavorable, there will be more
downward pressure on profitability and a correspondingly lower average level of
profitability. A company, which is competing in an industry with an unfavorable
structure, must find a ways to gain an advantage over its competitors, which will allow it
to earn above average level of profitability. If no competitive advantage can be
developed, it may be possible to change the structure of the industry. If changing the
structure is not a viable alternative, the company should consider exiting the industry. A
company, which is operating in an industry with a favorable structure, should work to
maintain the structure.
10.1.3 A Closer Look at Competitors
Exhibit below summarizes in graphic form the key elements of industry analysis. This
approach provides an understanding of the broad competitive forces, which influence
average industry profitability. The strategist must also take a closer look at competitors.
The first step in this process is to identify them. This requires defining the industry in
functional terms (what the product or service does) rather than physical terms (what the
product or service is). This allows the strategist to work with a list of competitors, which
is broad enough to include the key competitors, but not so broad that valuable resources
are wasted in analysis of no critical competitors. Using a functional rather than a
physical definition of the industry will yield a broad industry definition. Taking care to
formulate a precise definition will prove the needed focus. Exhibit provides examples of
Functional and precise industry definitions.

The definition in the exhibit would include close substitutes to long-distance telephone
service such as facsimile transmission and would be more useful for strategy analysis.
There may be hundreds of companies that make products that are close substitutes and
thus should be considered competitors. All are not equally important to the
environmental analysis of a particular organization. Key competitors may fall in several
categories. The dominant company in an industry should receive careful scrutiny. A
company may be dominant by virtue of its cost position, its research and development
skills, its marketing clout, its customer service, or any of a number of ways that
competitive advantage can be achieved. Anheuser Busch, Coca-Cola, and IBM have all
played this role in their industries. Another category of key competitors is those who are
pursuing strategies are similar to the company of interest. Companies, which pursue the
same strategy in an industry, are known as a strategic group. They have answered the
question of how to compete in the same way and should be carefully monitored. Finally,
companies in the industry may change from one strategic group to another and firms
should watch of trends, which indicate changing strategies by competitors.
Exhibit lists the five forces of competition and shows how each affects profitability, all
other things being equal. It is important to remember, however, that all other things are
seldom equal. It is important to remember, however, that ail other things are seldom
equal. That is, each of these forces operates simultaneously with the others so that the
stronger forces will predominate. For example, if the force of rivalry is very strong,
average profitability may be low even if all the other forces are mildly favorable.
Five Forces of Competition and Their Effects on Average Industry
Profitability
(ALL OTHER THINGS BEING EQUAL)
Forces
Rivalry
Power of suppliers
Power of buyers
Threat of new entrants
Threat of substitutes

Effect on
Average profitability
Average profitability
Average profitability
Average profitability
Average profitability

Rivalry: The force of rivalry reflects the interactions among competitors who produce
products or services that are close substitutes for each other. These competitors are
collectively known as the industry. An industry, which is characterized by firms trying to
edge out each other for market share is said to be experiencing rivalry. Rivalry is more
intense than ordinary competition. Firms take actions, which may damage their own
profitability in the short run with the idea that it will hurt competitors more, and in the
long run, the initiating firm will gain some advantage over the others. Rivalry is usually
exhibited in price wars, advertising barrages and product proliferation. Rivalry is
damaging to industry profitability because it is costly. Businesses generally try to
minimize rivalry within the bounds of law; however, many factors can create or escalate
rivalry in an industry and they should be carefully monitored as part of the
environmental analysis process. As rivalry increases, average profitability is pushed
down, all other things being equal. Rivalry is greater when:
There are many small firms in an industry or when there is no clearly dominant firm
to set and enforce standards for competition.
Market growth rate slows because each firm must begin to take sales from competitors
if it wishes to maintain historic growth rates.
It is difficult to leave the industry. This occurs when there is no market for assets of
the industry or when government regulations prohibits exit.
There is chronic overcapacity, and there is great incentive to cut prices to move
products and provide some contribution toward fixed costs. Industry wide, this practice
can lead to price wars.
Industry products/services are undifferentiated. When price is the only distinguishing
factor for the buyer, there is great incentive to gain share by lowering price, a practice
that can also result in price wars.
Competitors are diverse. A new company, acquisitions, or changes in management can
introduce new values, ideas about competition, and practices to an industry. As current
competitors respond to new strategies, rivalry may escalate.
Power of Suppliers: Suppliers provide the inputs necessary for the production of the
product or delivery of the service by the industry. Organizations within an industry
compete with each other as well as with organizations outside the industry for labor, raw
materials, and capital. When suppliers are able to dictate the terms on which supplies
will be obtained, and the industry is not able to pass the cost of these terms along to the
customer, there is downward pressure on industry profitability. If suppliers are in a
position to dictate such terms, they are said to be powerful.
Powerful suppliers can reduce industry profitability by influencing cost, quality, and/or
availability of inputs. Suppliers are powerful if

 There are no substitutes for the input they precede.

The industry does not generate significant volume for the suppliers.
The supplier industry is concentrated.
The supplied input makes a significant contribution to the final appearance or
function of the industry product.
The suppliers provide a credible threat of forward integration.
The industry would incur switching costs if they change supply sources.
Power of buyers: The term 'buyers' refers both to the immediate customer for the
product as well- as the consumer. In some industries there may be several intermediate
customers between the industry and the final consumer, in others the industry sells
directly to the consumer of the product. The more buyers are able to dictate the terms
under which they will make their purchases, the more powerful they are.
Powerful buyers can exert bargaining leverage in their dealings with the industry or
because of price sensitivity they may curtail purchases. Buyers are powerful when,
They are concentrated.
They generate significant volume for the industry.
They are informed about the product or service.
They provide a threat of backward integration.
Substitute products exist.
Purchases form industry constitutes a large percentage of total purchases.
Product/service is undifferentiated.
Entry barriers: An analysis of the prospects for the beer industry in 1970 would have
presented a comfortable picture for companies producing brands like Schlitz, Falstaff,
and Carling - if the forces of rivalry, buyers, and suppliers had been considered. Each of
the companies had a respectable share of a growing national market. The acquisition of
Miller by the international conglomerate Philip Morris was the key change that caused
disaster, or near disaster, for several national brands. Miller, backed by the resources of
Philip Morris, began and aggressive fight for position in the industry, and AnheuserBusch responded with equal vigor. Many lesser competitors were lost as the giants
battled for market share. As the previous example illustrates, the competitive
environment can be dramatically altered by the acquisition of one of the competitors or

by the development of competitive capabilities by an organization not previously

competing in the industry. Such situations make it necessary to consider entry barriers.
Entry barriers are the factors, which put new entrants at a cost disadvantage relative to
competitors already established. When new entrants are subject to higher operating
costs than established competitors, they may find other more attractive opportunities.
Even if they persist with their plans for entry, current competitors can defend their
positions from a position of strength. Entry barriers are higher when,
Economies of scale exist for current competitors in the industry. New entrants must
incur the capital costs of large production facilities to keep their unit costs down and
maintain competitive prices, or they may forego the large employees to, management
must consider other staffing alternatives. Harley-Davidson, for example, worked with
the company's unions to find other work for surplus employees by moving work into
Harley plants that was previously done by suppliers.
Capital investment but has higher unit costs and higher prices. Higher prices, in turn,
make it difficult to gain share from established competitors who enjoy a more favorable
cost position.
Absolute cost advantages exist for current competitors in the industry. Absolute cost
advantages exist when current competitors have lower costs. This may be due to patents,
favorable long-term supply contracts, or experience in operations. "Brand loyalty and
product differentiation are present in the industry. Users view the product/service as
unique and are fewer prices sensitive. This makes it difficult for new competitors to
establish a market position
Government regulation limit new competitors.
Start-up costs are high.
Current competitors move to make it difficult for new entrants to establish
themselves. This may be done by cutting prices in markets where new products are
being tested as long as such pricing is not predatory.
It should be noted that entry barriers are most effective against start ups. The only entry
barrier, which seems to be consistently effective against entry by acquisition, is the
reaction of existing competitors.
Substitute products: Industry sales and profitability are limited by what the
customer will pay for a given level of quality or service when alternatives are available.
Commercial banking companies often switch from high-fructose corn sweeteners to
sugar when the price of sugar decreases and switch back when the price of sugar
increases. As a result profits in the high-fructose corn syrup industry are limited by the
price of sugar. When there is a strong threat of substitution, average profitability can
suffer.

The threat of substitution holds down industry profits by allowing buyers options. The
threat of substitution is greater when,
Switching costs are not significant.
Substitutes provide about the same value for cost.
Buyers are in the habit of substituting.
10.2 TYPES OF INDUSTRIES
Over time most industries evolve through a series of stages form growth through
maturity to eventual decline. The strength of each of six forces mentioned earlier varies
according to the stage of the industry evolution. The industry life cycle is useful for
explaining and predicting trends among the six forces driving industry competition. For
example, when an industry is new, people often buy the product regardless of price
because it fulfills a unique need. This is probably a fragmented industry - no firm has
large market share and each firm serves only a small piece of he total market in
competition with others. As new competitors enter the industry, prices drop as a result
of competition. Companies use the experience curve and economies of scale to reduce
costs faster than the competition. Companies integrate to reduce costs even further by
acquiring their suppliers and distributors. Competitors try to differentiate their products
from one another in order to avoid the fierce price competition common to a maturing
industry.
By the time an industry enters maturity, products tend to become more like
commodities. This is now a consolidated industry - dominated by a few large firms, each
of which struggles to differentiate its products from the competition. As buyers become
more sophisticated over time, purchasing decisions are based on better information.
Price becomes a dominant concern, given a minimum level of quality and features. One
example of this trend is the videocassette recorder industry. By the 1990s, VCRs had
reached the point where there were few major differences among them. Consumers
realized that because slight improvements cost significantly more money, it made little
sense to pay more than the minimum for a VCR. The same is true of gasoline.
As an industry moves through maturity toward possible decline, its products growth
rate of sales slows and may even begin to decrease. To the extent that exit barriers are
low, firms will begin converting their facilities to alternate uses or will sell them to
another firm. The industry tends to consolidate around fewer but larger competitors.
10.3 COMPETITION IN GLOBAL INDUSTRIES
Global industries, in contrast, operate worldwide, with MNCs making only small
adjustments for country-specific circumstances. A global industry is one in which all
MNCs activities in one country are significantly affected by its activities in other
countries. MNCs produce products or services in various locations throughout the world
and sell them, making only minor adjustments for specific country requirements.

Examples of global industries are commercial aircraft, television sets, semiconductors,

copiers, automobiles, watches and tires. The largest industrial corporations in the
worked in terms of dollar sales are, for the most part, multinational corporations
operating in global industries.
The factors that tend to determine whether an industry will be primarily
multidomestic or primarily global are:
a. Pressure for coordination within the multinational corporations operating in that
industry.
b. Pressure for local responsiveness on the part of individual country markets.
To the extent that the pressure for coordination is strong and the pressure for local
responsiveness is weak for multinational corporations within a particular industry, that
industry will tend to become global. In contrast, when the pressure for local
responsiveness is strong and the pressure for coordination is weak for multinational
corporations in an industry, that industry will tend to be multidomestic. Between these
two extremes lie a number of industries with varying characteristics of both
multidomestic and global industries. The dynamic tension between these two factors is
contained in the phrase Think globally, act locally.
Porter defines a global industry as "an industry in which a firm's competitive position in
one country is significantly affected by its position in other countries". In these
industries, markets are world markets and competitors may come from any nation. The
relative positions of the United States, Japan, Western Europe and USSR in a few of the
high-technology global industries are shown in Exhibit below:
Table: 10-1 How the United States Ranks in the Application of High
Technology
USA Japan Europe USSR
Biotechnology
8.9
5.7
4.9
1.8
New materials
7.7
6.3
6.0
3.8
Optoelectronics 7.8
9.5
5.7
3.6
10.4 STRATEGY ALTERNATIVES
Once management chooses to enter a new country, there are a number of generic
strategy types that may be followed. In very broad terms, a firm may choose to follow a
skim, penetrate, dump, or explore strategy. The level of commitment the organization
wants to make in the country dictates the choice of strategy.
10.4.1 Skim Strategy

A skim strategy usually involves a low-risk exporting or licensing approach. The

objective is to minimize investment of resources so that the rate of return is high.
10.4.2 Penetration Strategy
A penetration strategy involves a long-term commitment to new national markets with
large investments in local facilities and long-term relationships with local customers and
suppliers. IBM ahs committed to a penetration strategy in its international efforts by
building manufacturing facilities and establishing local sales groups in each of its
overseas market areas.
10.4.3 Dump Strategy
A dump strategy is used when a company wants to deal with problems of overcapacity.
Excess production is sold in international markets at a low price as a way of stabilizing
production and unloading costly inventories. Those companies that follow a dump
strategy usually do so on a short-term basis and make little attempt to associate their
company name with their efforts. Companies in the United States have followed a dump
strategy in the past in areas such as household appliances, chemicals and plastics. In
recent years, the Japanese have been accused of dumping in the consumer electronics
and semiconductor markets. The most important points to remember about this
strategy are that it takes a very short-term view of the market opportunity in those
countries where the dumping takes place. A dumping strategy may even be illegal if the
price is below cost.
10.4.4 Explore Strategy
An explore strategy involves making a limited investment in a country so that the
company can acquire some experience and contacts. The objective of the strategy is to
get a close look at the market to see if the company should make a larger commitment at
a later time.
10.5 SUMMARY
This lesson dealt about the Important PEST analysis which is very essential for strategic
management. Apart from this analysis the industry analysis, types of industries, the
different kinds of strategies to be adopted in industries, and the strategy alternatives are
also discussed.
10.6 ASSIGNMENT QUESTIONS
1. Discuss the industry analysis
2. Explain Porter's approach to industry analysis
3. Brief the types of industries

4. Write a note on Competition in global industries

5. Write short notes on the following:
a) Skim strategy
b) Penetration strategy
c) Dump strategy
d) Explore strategy
e) Strategy Alternatives

- End of Chapter LESSON 11

BUSINESS PORTFOLIO ANALYSIS

OBJECTIVES

To understand Portfolio Analysis

To analyse the different models of Portfolio Analysis

STRUCTURE
11.1 Introduction
11.1.1 International Portfolio Analysis
11.1.2 Advantages and Limitations of Portfolio Analysis.
11.2 BCG Matrix
11.3 GE Business Screen
11.4 McKensey's 7-S Framework

11.4.1 Importance of McKinsey Framework in Strategic Planning and

Management
11.5 Hofer and Schendel's Matrix
11.6 Directional Policy Matrix (DPM) Model
11.7 Summary
11.8 Assignment questions
11.1 INTRODUCTION
The methodology developed to assist managers in the strategy evaluation and selection
process is known as business portfolio analysis. Among the various approaches of this
type, the most popular seem to be the growth-share matrix, and GE Business Screen.
Companies with multiple product lines or business units must also ask themselves how
these various products and business units should be managed to boost overall corporate
performance.
How much of our time and money should we spend on our best products and business
units to ensure that they continue to be successful?
How much of our time and money should we spend developing new costly products,
most of which will never be successful?
One of the most popular aids to developing corporate strategy is a multi business
corporation is portfolio analysis. Although its popularity has dropped since the 1970s
and 1980s when over half of the largest business corporations used portfolio analysis, it
is still used by 27% of Fortune 500 firms in corporate strategy formulation. Portfolio
analysis puts corporate headquarters into the role of an internal banker. In portfolio
analysis, top management views its product lines and business units as a series of
investments from which it expects a profitable return. The product lines/business unit's
form a portfolio of investments that top management must constantly juggle to ensure
the best return on the corporations' invested money. This concept can also be used to
develop strategies for international markets.
11.1.1 International Portfolio Analysis
To aid international strategic planning, portfolio analysis can be applied to international
markets. Two factors form the axes of the matrix. A country's attractiveness is composed
of its market size, the market rate of growth, the extent and type of government
regulation, and economic and political factors. A products competitive strength is
composed of its market share, product fit, contribution margin, and market support.
Depending on where a product fits on the matrix, it should either receive more funding
or be harvested for cash.

Portfolio analysis might not be useful, however, to corporations operating in a global

industry rather than a multidomestic one.
11.1.2 Advantages and Limitations of Portfolio Analysis
Portfolio analysis is commonly used in strategy formulation because it offers certain
advantages:
1. It encourages top management to evaluate each of the corporations businesses
individually and to set objectives and allocate resources for each.
2. It stimulates the use of externally orient data to supplement management's judgment.
3. It raises the issue of cash flow availability for use in expansion and growth.
4. Its graphic depiction facilitates communication.
Portfolio analysis, does, however, have some very real limitations that have caused
some companies to reduce their use of this approach:
1. It is not easy to define product/market segments.
2. It suggests the use of standard strategies that can miss opportunities or be
impractical.
3. It provides an illusion of scientific rigor when in reality positions are based on
subjective judgment.
4. Its value-laden terms like cash cow and dog can lead to self-fulfilling prophecies.
It is not always clear what makes an industry attractive or where a product is in the life
cycle.
11.2 BCG MATRIX
Originally developed by the Boston Consulting Group (BCG), the growth-share matrix
approach postulates that all except the smallest and simplest organizations are
composed of more than one business. These businesses within an organization are
called its business portfolio. The BCG approach proposes that a separate strategy be
developed for each of these largely independent units.
In order to visually display an organization's business portfolio, BCG developed a fourquadrant grid as shown on figure. The horizontal axis indicates the market share of the
business relative to its major competitor and characterizes the strength of the
organization in that business.
The market share for any particular year is calculated as follows:

Relative market share (current year) = business unit sales (current year) /
leading competitor's sales (current year)
The vertical axis indicates the percent of growth in the market in the current year and
characterizes the attractiveness of the market for the business unit.
The market growth is calculated as follows:
Market growth rate (current year) = [total market (current year) - total
market (previous year) / total market (previous year)] * 100

The lines that divide the matrix into four quadrants are somewhat arbitrarily set. A high
market growth rate is taken to be in excess of 10 percent. The demarcation between high
and low relative market shares is set at 1.5. This means that if particular business units'
current sales are 1.5 times or greater than its leading competitor's sales, then it is
considered to have a high relative market share. These lines of demarcation are not
absolutes and can be modified to fit the particular needs of an organization.
Furthermore, in actual practice the market growth rate axis is plotted on a linear scale,
whereas the relative market share is plotted on logarithmic scale.
BCG describes the four quadrants of the growth-scale matrix as follows:
1. Cash cows have low growth and high market share. Because of high market share,
profits and cash generation should be high. The low rate of growth means that the cash
demands should be low. Thus, large cash surpluses are normally generated by cash
cows. They provide the cash to meet the needs of the overall company and are thus the
foundation of the company.

2. Dogs are business segments or units that have low market share and low market
growth. The low market share normally implies poor profits. Because the growth rate is
low, investments to increase market share are frequently prohibitive. Unfortunately, the
cash required maintaining a competitive position often exceeds the cash generated.
Thus, dogs often become cash traps. Generally dogs are harvested or divested.
3. Problem children are business units that have low market share and high market
growth rate. Their cash needs are high because of their growth, and the cash generated
is low because of their market share. Because growth is high, one strategy for a problem
child is to make the necessary investments to gain market share and become a star.
When the market growth rate slows, the unit can then become a cash cow. Another
strategy is to divest the problem children that management feels cannot be developed
into stars.
4. Stars are business units with high growth and high market share. Because of the high
growth and high market share, stars use and generate large amounts of cash. Stars
generally represent the best profit and investment opportunities. Obviously the best
strategy of stars is to make the necessary investments to maintain or improve their
competitive position.
The following steps are generally followed in using the growth-share
matrix in strategy evaluation and selection:
1. Divide the company into its business units. Many organizations perform this step
when they establish strategic business units. On the matrix, a circle is used to depict
individual business units.
2. Determine the business unit's relative size within the total organization. Relative size
can be measured in terms of assets employed within the business unit as a percentage of
the total assets or sales of that business unit as a percentage of total sales. On the
matrix, the area within the circle indicates the business unit's relative size.
3. Determine the market growth rate for each individual business unit.
4. Determine the relative market share of each individual business unit.
5. Develop a graphical picture of the companys overall portfolio of businesses.
6. Select a strategy for each business units based on its position in the company's overall
portfolio of businesses.
Strategy selection suing the growth share matrix assumes that the primary objectives of
the organization are growth and profitability. The advantage of multi business
organizations is that they can transfer cash form business units that are highly profitable
but have low growth potential to other units that have high growth and high profit
potential. Strategy selection among the various business units is designed to produce a
balanced portfolio in terms of the generation and uses of cash.

Thus, relative market share and the market growth are the two fundamental parameters
that influence strategy selection. Relative market share determines the rate at which the
business unit generates cash. A business unit with a relatively high share of the market
compared to its competitors should have higher profit margin and thus higher cash
flows. On the other hand, the market growth rate has a twofold influence on strategy
selection. First, the market growth rate influences the ease of gaining market share. In
slow-growth markets, increases in markets share generally comes from decreases in
competitors, market, and share. Second, the market growth rate determines the level of
opportunity for investment. Growth markets provide an opportunity for plowing cash
back into the business unit and compounding the return on investment. This
opportunity can also present problems because the faster a business unit grows, the
more cash it needs to finance the growth. Of course, businesses do have external sources
of cash such as debt, and equity financing, but the BCG approach assumes that external
debt would have to be met ultimately through internal cash flows.
BCG uses market share to determine the strategic choice for individual business units.
The four major strategic choices identified are:
1. To increase market share
2. To hold market share
3. To harvest
4. To divest
Table below identifies the strategic choices for business units within each quadrant of
the growth-share matrix. It would also seem that business units that have holding or
increasing market share as their strategic choice would likely use an overall cost
leadership or a differentiation strategy.
The growth share matrix can also be sued to prepare a portfolio display for the
organization at separate points in time (present, three to five years ago, and forecasted
three to five years from now. This gives management a picture of what the results of its
strategic choices have been and might be.

The BCG Growth Share Matrix is a very well known portfolio concept with some clear
advantages. It is quantifiable and easy to use. Cash cows, dogs, and stars are an easy to
remember way to refer to a corporations business units or products. Unfortunately the
BCG Growth-Share Matrix also has some serious limitations.
The use of highs and lows to form four categories is too simplistic.
The link between market share and profitability is not necessarily strong. Low-share
businesses can also be profitable.
Product lines or business units are considered only in relation to one competitor, the
market leader. Small competitors with fast-growing market shares are ignored.
Growth rate is only one aspect of industry attractiveness.
Market share is only one aspect of overall competitive position.
11.3 GE BUSINESS SCREEN
General Electric, with the assistance of the McKinsey and Company Consulting firm,
developed a more complicated matrix. GE business screen includes nine cells based on
long-term industry attractiveness and business strength/competitive position. The GE
business screen in contrast to the BCG growth-share matrix includes much more data in
its two key factors than just business growth rate and comparable market share. For
example, at GE, industry attractiveness includes market growth rate, industry
profitability, size and pricing practices, among other possible opportunities and threats.
Business strength or competitive position includes market share as well as technological
position, profitability, and size among other possible strengths and weaknesses.
The individual product lines or business units are identified by a letter and plotted as
circles on the GE business screen. The area of each circle is in proportion to the size of

the industry in terms of sales. The pie slices within the circles deceit the market share of
each product line or business unit.
To plot product lines or business units on the GE business screen, follow
these four steps:
Step 1: Select criteria to rate the industry for each product line or business unit. Assess
overall industry attractiveness for each product line or business unit on a scale from 1
(very unattractive) to 5 (very attractive).
Step 2: Select the key factors needed for success in each product line or business unit.
Assess business strength/competitive position for each product line or business unit on
a scale of 1 (very weak) to 5 (very strong).
Step 3: Plot current position of each product line or business unit on a matrix
Step 4: Plot the firm's future portfolio assuming that present corporate and business
strategies remain unchanged. It there a performance gap between projected and desired
portfolios? If so, this gap should serve as a stimulus to seriously review the corporation's
current mission, objectives, strategies, and policies.

Overall the nine cells GE business screen is an improvement over the BCG growth share
matrix. The GE business screen considers many more variables and does not lead to
such simplistic conclusions. It recognizes, for example, that the attractiveness of an
industry can be assessed in many different ways, and it allows users to select whatever
criteria they feel are most appropriate to their situation. This portfolio matrix does have
some shortcomings:
It can get quite complicated and cumbersome.

 The numerical estimates of industry attractiveness and business strength/competitive

position give the appearance of objectivity, but they are in reality subjective judgments
that may vary from one person to another.
It cannot effectively depict the positions of new products or business units in
developing industries.
11.4 MC KENSEY'S 7-S FRAMEWORK
A framework for strategic management, which has received considerable attention of
management consultants and strategists, is McKinsey's 7-S framework developed in the
late 70s by McKinsey Company, a reputed management consultancy firm in the United
States.
The framework rests on the proposition that effective organizational change is best
understood in terms of the complex relationship between strategy, structure, systems,
style, skills, staff and shared value for super-ordinate goals, the seven S's. A
diagrammatic view of the framework is presented hereafter.
Stated in general terms, the proposition of the 7-S model suggests that there are
multiple factors, which influence an organizations ability to change, and its proper
mode of change. Since the variables are interconnected, significant progress cannot be
made in one area unless corresponding progress is made in other areas too.

The relevance of the model to strategic management is based on the 7-Ss, which stand
for policy areas vital to long-term organizational success. Strategy is the means to
achieve organizational purpose. Structure, in the context of 7-S framework, is an
addition to the organizational tool kit. It is comparable with the super structure of an
organization, which indicates to what extent the activities are specialized, and the ways
in which the organizational tasks are integrated and coordinated. But the relationship
between strategy and structure does not generally yield structural solutions to
organization problems. The key lies in execution of strategy.
Rules, regulations, and procedures constitute 'systems' in the 7-S framework, which
complement the organizational structure. The systems may be called the 'infrastructure'
and include subsystems relating to production planning and control, cost accounting
procedures, capital budgeting, recruitment, training, and development planning and
budgeting, performance evaluation etc.
The term 'Staff carries a specific meaning in the 7-S framework. It refers to the way
organizations induct young recruits into the mainstream of activities and the manner in
which they manage their careers as the new entrants develop into managers. 'Skills'
refer to the distinctive competence which reflects the dominant skills of an organization,
and may consists of competence in terms of engineering skills, or competence in the
area of new product development, customer service, quality commitment, market
power, and so on.
'Style' is another variable, which may determine the effectiveness of organizational
change effort. According to the 7-S framework, the style of an organization becomes
evident through the patterns of actions of the top management team over a period of
time, the emphasis laid on aspects of business, reporting relationships, and aspects of
organizational culture.
Shared values or super ordinate goals in the McKinsey model refer to the set of
values and aspirations that go beyond the formal statement of corporate objectives. In
other words, these are fundamental ideas around which a business is built and which
constitute its main values. Typical examples are: Hewlett-Packard's "innovative people
at all levels in organization" as the dominant aspiration or value; AT&T's "universal
services" goal; customer service which guides IBM's marketing drive.
11.4.1 Importance of McKinsey framework in strategic planning and
management
McKinsey's 7-S framework is essentially a multivariate model of organizational change.
It is recognized as a powerful expository tool in as much as it highlights several
organizational interconnections having critical significance for effecting organizational
change. It underlines the criticality of action plans in the seven areas reflecting an
organizations capability of bringing about shifts in strategy. Effective implementation of
strategy is thus shown to be conditioned by the ability of management to bring all the 7Ss into harmony. When the 7 Ss are in good alignment an organization is poised and
energized to execute strategy to the best of its ability.

The McKinsey's model also provides a convenient means of checking whether an

organization has the necessary conditioning for implementing strategy. Again, once
implementation is in progress, if the results fall short of expectations, the model
provides the basis on which the causes of shortfall may be diagnosed and remedial
measures adopted. Further, organizational capabilities may be evaluated along each of
the seven dimensions.
11.5 HOFER AND SCHENDEL'S MATRIX
This analytical model designed by Charles Hofer consists of a three-by-five matrix
wherein business units are classified on the basis of two parameters, viz., the
product/market evolution of the units and their competitive positions. As in the case of
Business planning grid of the 'stoplight' strategy model, circles represent the relative
size of the respective industries and the relative market share of the concerned business
is shown by shaded parts of the circle. Stages in product/market evolution are plotted
on the vertical axis of the matrix divided into five segments, development, growth, shake
out, maturity to saturation, and decline. The competitive position is plotted against the
horizontal axis in three segments -strong, average, and weak.
Strategic approaches for any particular business unit may be considered depending
upon the stage of its product market evolution and competitive strength. If the market
share of a business is large and it is in the development or growth stage, it would require
more resources to be deployed to develop its competitive position. It has the potential to
be in the 'star' category as in BCG matrix. For a business in the development stage
having low market share, a strategy to improve the market share is called for. However,
management should consider a divestment strategy if any business with low market
share belongs to a relatively small industry-, even if it is in the development or growth
stage. Resources available as a result of divestment may be redeployed in other business
units with strong competition.
A business with high market share may be in the shake-out or maturity Stage of
evolution. Additional investment may be made in that case so as to maintain its market
share. Such a business may be looked upon as a potential 'cash cow' as in BCG matrix.

Any business which has a low market share and in the decline stage may have to be
divested in the long run although it may be currently generating cash. It may be said to
belong to the 'dog' category of business as in BCG matrix.
11.6 DIRECTIONAL POLICY MATRIX (DPM) MODEL
Developed by Royal Dutch Shell, this model aims at placing each product/market unit
on a matrix according to its rating based on tow variables, business sector prospects and
company's competitive capabilities. The various zones of the matrix are thus associated
with different combinations of business sector prospects and company's competitive
strength or weakness. The type of strategy or resource allocation, which is appropriate,
is suggested for the product/market units falling in the respective zones. The application
of this model hinges on the identification of two sets of criteria: (1) criteria by which the
prospects for business sector may be judged to be favorable or unfavorable, and (2)
criteria by which the company's competitive position may be judged to be strong or
weak.

In the above diagram of the directional policy matrix are indicated the types of strategy
for SBUs falling in the various zones. The key words are briefly explained below:
Leader - the SBU, which is in an enviable position of being the largest producer with
the lowest unit costs and a superior technical position, may be regarded as leader in the
business sector. In such a position, the product needs to have absolute priority of
support by way of resource allocation to hold the market share.
Try harder - this position indicates attractive sector prospects but average competitive
capability. Products located in this zone ought to be provided with necessary resources
so as to move them at least to position of equality.
Double or quit - product in this zone with attractive sector prospects but weak
competitive ability should be governed by discrete choice of strategy. Out of these
products may be found some with bright future. The strategy should be to select and
back up the right product.
Growth - product in this zone with average to strong competitive ability (being one
among two to four major competitors) and with at least average sector prospect are
suited for growth strategy supported by adequate production capacity and product R&D.
Custodial - a product is located in the custodial zone of the matrix when the company
has a weak competitive ability or sector prospect or both in combination. The company
must bear with the situation and make good the overall position with the help of other
product units.
Cash generation - with a strong competitive position in a sector, which is unattractive
form the point of view of business prospects, a company may be able to earn satisfactory
profits and generate cash.

Phased withdrawal - the strategy of phased withdrawal is indicated where a company

is in an average to weak competitive position in a low growth business sector with little
prospect of generating substantial cash. Attempts should be made in such a situation to
realise the value of assets and invest the money in more profitable business segments.
Disinvest - SBUs running in losses with uncertain cash flows are located in this zone. A
divestment strategy is called for in this case so that resources thereby released may be
put to better use.
11.7 SUMMARY
After studying this lesson you are able to understand the International Business
Portfolio and different Matrices used in that.
11.8 ASSIGNMENT QUESTIONS
1. Explain in detail about the business portfolio matrix?
2. Explain briefly about BCG matrix?
3. Write short note on GE business screen?
4. Explain briefly about McKinsey's system?
5. Write short note on Directional Policy Matrix?
6. Write a note on Hofer and Schendel's Matrix?

- End of Chapter LESSON 12

SHAREHOLDER VALUE ANALYSIS

OBJECTIVES

To understand the Shareholder Value Analysis

To know the various Finance Performance and their Measurement

CONTENTS
12.1 Shareholder Value Analysis

12.2 Finance Performance - Performance Measurement

12.2.1 Measuring Performance
12.2.2 Appropriate Measures
12.2.3 Activity-Based Costing
12.2.4 Primary Measures of Corporate Performance
12.2.5 Traditional Financial Measures
12.2.6 Stakeholder Measures
12.2.7 Shareholder Value
12.2.8 Balanced Scorecard Approach:
12.2.9 Evaluating top Management
12.2.10 Using Benchmarking to Evaluate Performance
12.2.11 International Measurement Issues
12.2.12 Strategic Information Systems
12.2.13 Problems in Measuring Performance
12.3 Determinants of Strategic Options
12.3.1 Options for Markets and Products/Services
12.3.2 Options for Building Resources, Capabilities, and Competence
12.3.3 Options in Methods of Implementation
12.4 Summary
12.5 Assignment questions
12.1 SHAREHOLDER VALUE ANALYSIS
Strategy is concerned with ensuring the future success of the business and therefore
implies a need to define what success means. The traditional measures of business
success have included earnings per share (EPS), return on investment (ROI), and return
on capital employed (ROCE). These measures suffer from shortcomings. All depend on

accounting methods that are designed to support reporting requirements rather than
long term value creation. As exclude risk, dividend policy, and the time value of money.
Recently many leading businesses have adoptee shareholder value analysis with a view
to avoiding these shortcomings. SVA estimates the economic value of an investment
poor strategy by discounting expected future cash flows by the cost of capital. SVA has
been fully described by Rappaport.
The total value of an enterprise may also be assess as the sum of the net present value
(NPV) of its cash flows from operations over a forecast period, an estimated residual
value at the end of that forecast period, and the current value of any marketable
securities.
The objective of using SVA is to focus management decisions of all kinds, including the
evaluation of future strategies, onto creating shareholder value. Figure below illustrates
a framework for doing this.
The shareholder value is determined form the valuation components of cash generated
from operations, discount rate, an amount of gearing. Alternative strategies directly
affect the value drivers - such as rate of sales growth, operating profit margins, and
working capital requirements - which in turn drive the valuation components. Obviously
the diagram will vary in detail for each enterprise and a tailored computer model will
assist in the manipulation of data. The benefit of SVA is that it provides a link between
strategy and long-term value creation for the dominant stakeholder group - the
shareholders.

12.2 FINANCE PERFORMANCE - PERFORMANCE MEASUREMENT

12.2.1 Measuring performance
Performance is the end result of activity. Which measures to select to assess
performance depends on the organizational unit to be appraised and the objectives; to
be achieved. The objectives that were established earlier in the strategy formulation part
of the strategic management process dealing with profitability, market share, and cost
reduction, among others should certainly be used to measure corporate performance
once the strategies have been implemented.
12.2.2 Appropriate measures
Some measures, such as return on investment (ROI), are appropriate for evaluating the
corporations or divisions ability to achieve a profitability objective. This type of measure
however, is inadequate for evaluating additional corporate objectives such as social

responsibility or employee development. Even though profitability is a corporation's

major objective, ROI can be computed nobly after profits are totaled for a period. It tells
what happened after the fact - not what is happening or what will happen. A firm,
therefore, needs to develop measures that predict likely profitability. These are referred
to as steering controls because they measure variables that influence future profitability.
One example of this type of control is the use of control charts in Statistical Process
Control (SPC). In SPC, workers and managers maintain charts and graphs detailing
quality and productivity on a daily basis. They are thus able to make adjustments to the
system before it gets out of control.
Behavior and output controls
Controls can be established to focus on either actual performance results (output) or on
the activities that generate the performance (behavior). Behavior controls specify how
something is to be done through policies, rules, and standard, operating procedures, and
orders from a superior. Output controls specify what is to be accomplished by focusing
on the end result of the behaviors through the use of objectives and performance targets
or milestones.
Behavior and output controls are not interchangeable. Behavior controls (such as
company procedures, making sales to potential customers, and getting to work on time)
are most appropriate when performance results are hard to measure but the cause-effect
connection between acuities and results is clear. Output controls (such as sales quotas,
specific cost reduction, or profit objectives, and surveys of customer satisfaction) are
most appropriate when specific output measures have been agreed on but the causeeffect connection between activities and results is not clear.
12.2.3 Activity-Based Costing
It is a new accounting method for allocating indirect and fixed costs to individual
products or product or product limes based on the value added activities going into that
product. This accounting method is thus very useful in doing a value-chain analysis of a
firm's activities for making outsourcing decisions. Traditional cost accounting, in
contrast, focuses on valuing a company's inventory for financial reporting purposes. To
obtain a units cost, cost accountants typically add direct labor to the cost of materials.
Then they compute overhead from rent to R&D expenses, based on the number of direct
labor hours it takes to make a product. To obtain unit cost, they divide the total by the
number of items made during the period under consideration.
Traditional cost accounting is useful when direct labor accounts for most of total costs
and company products just a few products requiring the same processes. This may have
been true of companies during the early part of the twentieth century, but it is no longer
relevant today when overhead may account for as much as 70% of manufacturing costs.
The appropriate allocation of indirect costs and overhead has thus become crucial for
decision-making.
12.2.4 Primary measures of Corporate Performance

The days when simple financial measures such as ROI or EPS were used alone to assess
overall corporate performance are coming to an end. Analysts now recommend a broad
range of methods to evaluate the success or failure of a strategy. Some of these methods
are stakeholder measures, shareholder value, and the balanced scorecard approach.
Even though each of these methods has its supporters as well as detractors, the current
trend is clearly toward more complicated financial measures and an increasing use of
nonfinancial measures of corporate performance. For example, research indicates that
companies pursuing strategies founded on innovation and new product development
now tend to favor nonfinancial or financial measures.
12.2.5 Traditional financial measures
The most commonly used measure of corporate performance in terms of profits is
return on investment (ROI}. It is simply the result of dividing net income before taxes
by total assets. Although using ROI has several advantages, it also has several distinct
limitations. Although ROI gives the impression of objectivity and precision, it can be
easily manipulated.
Earnings per share (EPS), dividing net earnings by the amount of common stock, also
has several deficiencies as an evaluation of past and future performance. First, because
alternative accounting principles are available, EPS can have several different but
equally acceptable values, depending on the principle selected for its computation.
Second, because EPS is based on accrual income, the conversion of income to cash can
be near term or delayed. Therefore, EPS does not consider the time value of money;
Return on equity (ROE), dividing net income by total equity, also has its share of
limitations because it is also derived from accounting based data. In addition, EPS and
ROE are often unrelated to a company's stock price. Because of these and other
limitations, EPS and ROE by themselves are not adequate measures of corporate
performance.
12.2.6 Stakeholder measures
Each stakeholder has its set of criteria to determine how well the corporation is
performing. These criteria typically deal with the direct and indirect impact of corporate
activities on stakeholder interests. Top management should establish one or simpler
stakeholder measures for each stakeholder category so that it can keep track of
stakeholder concerns.
12.2.7 Shareholder value
Because of the belief that accounting based numbers such as return on investment,
return on equity, and earnings per share are not reliable indicators of a corporation's
economic value, many corporations are using shareholder value as a better measure of
corporate performance and strategic management effectiveness. Real shareholder value
can be defined as the present value of the anticipated future stream of cash flows from
the business plus the value of the company if liquidated. Arguing that the purpose of a
company is to increase shareholder wealth, shareholder value analysis concentrates on

cash flow as the key measure of performance. The value of a corporation is thus the
value of its cash flows discounted back to their present value, using the business's cost of
capital as the discount rate. As long as the returns from a business exceed its cost of
capital, the business will create value and be worth more than the capital invested in it.
The New York consulting firm Stern Stewart & Company devised and popularized two
shareholder value measures: economic value added (EVA) and market value added
(MVA). Well known companies such as Coca-Cola, General Electric, AT&T, Whirlpool,
Quaker Oats, Eli Lily, Georgia- Pacific, Polaroid, Sprint, Teledyne, and Tenneco have
adopted MVA and/or EVA as the best yardstick for corporate performance. Accounting
to Sprint's CFO, Art Krause, "unlike EPS, which measures accounting results, MVA
gauges true economic performance".
Economic value added (EVA) has become an extremely popular shareholder value
method of measuring corporate and divisional performance, and may be on its way to
replacing ROI as the standard performance measure. EVA measures the difference
between the pre-strategy and post-strategy value for the business. Simply put, EVA is
after-tax operating profit minus the total annual cost of capital.

The annual cost of borrowed capital is the interest charged by the firm's banks
and bondholders.
To calculate the cost of equity, assume that shareholders generally earn about 6%
more on stocks than on government bonds. If long-term treasury bills are selling
at 7.5%, the firm's cost of equity should be 13.5% - more if the firm is in a risky
industry. A corporations overall cost of capital is the weighted average cost of the
firm's debt and equity capital.
Total the amount of capital invested in the business, including buildings,
machines, computers, and investments in R&D and training.
Multiply the firm's total capital by the weighted-average cost of capital.
Compare that figure to pretax operating earnings. If the difference is positive, the
strategy is generating value for the shareholders. If it is negative, the strategy is
destroying shareholder value.

Market value added (MVA) measures the stock markets estimate of the net present
value of a firms past and expected capital investment projects. To calculate MVA,
1. First, add all the capital that has been put into a company - from shareholders,
bondholders, and retained earnings.
2. Reclassify certain accounting expenses, such as R&D, to reflect that they are actually
investments in future earnings. This provides the firms total capital. So far, this is the
same approach taken in calculating EVA.
3. Using the current stock price, total the value of all outstanding stock, adding it to the
company's debt. This is the company's market value. If the company's market value is
greater than all the capital invested in it, the firm has a positive MVA - meaning that
management has created wealth. In some cases, however, the market value of the

company is actually less than the capital put into it - shareholder wealth is being
destroyed.
Coca-Cola and General Electric tend to have the highest MVAs. In 1993, IBM had the
lowest MVA of 200 large U.S. firms - a negative $23.7 billion. In 1995, that honor went
to General Motors with a negative MVA of $17,803 billion. Studies have shown that EVA
is a predictor of MVA. Consecutive years of positive EVA generally lead to a soaring
MVA. Research also reveals that CEO turnover is significantly correlated with MVA and
EVA, whereas ROA and ROE are not. This suggests that EVA and MVA are more
appropriate measures of the markets evaluation of a firm's strategy and its management
than are the traditional measures of corporate performance.
12.2.8 Balanced Scorecard Approach - Using Key Performance Measures
Rather than evaluate a corporation using a few financial measures, Kaplan and Norton
argue for a "balanced scorecard", including nonfinancial as well as financial measures.
The balanced scorecard combines financial measures that tell the results of actions
already taken with operational measures on customer satisfaction, internal processes,
and the corporation's innovation and improvement activities - the drivers of future
financial performance. Management should develop goals or objectives in each of four
areas.
1. Financial: how do we appear to shareholders?
2. Customer: how do customers view us?
3. Internal business perspective: what must we excel at?
4. Innovation and learning: can we continue to improve and create value?
Each goal in each area for example avoiding bankruptcy in the financial area is then
assigned one or more measures, as well as target and an initiative. These measures can
be thought of as key performance measures - measures that are essential for achieving a
desired strategic option. For example, a company could include cash flow, quarterly
sales growth, and ROE as measure for success in the financial area. It could include
market share competitive position goal and percentage of new sales coming from new
products customer acceptance goal as measures under the customer perspective. It
could include cycle time and unit cost manufacturing excellence goal as measures under
the internal business perspective. It could include time to develop next generation
products technology leadership objective under the innovation and learning perspective.
12.2.9 Evaluating top management
Through its strategy, audit and compensation committees, a board of directors closely
evaluates the job performance of the CEO and the top management team. Of course, it is
concerned primarily with overall corporate profitability as measured quantitatively by

return on investment, return on equity, earnings per share, and shareholder value. The
absence of short-run profitability certainly contributes to the firing of any CEO.
1. Management audits are very useful to boards of directors in evaluating
managements handling of various corporate activities. Management audits have been
developed to evaluate activities such as corporate social responsibility, functional areas
such as the marketing department, and divisions such as the international division, as
well as to evaluate the corporation itself in a strategic audit.
2. Primary measures of divisional and functional performance. During
strategy formulation and implementation, top management approves a series of
programs and supporting operating budgets from its business units. During evaluation
and control, actual expenses are contrasted with planned expenditures and the degree of
variance is assessed. This is typically done on a monthly basis. In addition, top
management will require periodical statistical reports summarizing data on such key
factors as the number of new customer contracts, volume of received orders, and
productivity figures.
3. Responsibility centers. Control systems can be established to monitor specific
functions, projects or divisions. Budgets are one type of control systems that is typically
used to control the financial indicators of performance. Responsibility centers are used
to isolate a unit so that it can be evaluated separately from the rest of the corporation.
Each responsibility center, therefore, has its own budget and is evaluated on its use of
budgeted resources. The manager responsible for the center's performance heads it. The
center uses resources to produce a service or a product. There are five major
responsibility centers. The type is determined by the way the corporations control
system measures these resources and services or products:
i. Standard cost centers. Primarily used in manufacturing facilities, standard
costs are computed for each operation on the basis of historical data. In
evaluating the centers performance its total standard costs are multiplied by the
units produced. The result is the expected cost of production, which is then
compared to the actual cost of production.
ii. Revenue centers. Production, usually in terms of-unit or dollar sales, is
measured without consideration of resource costs. The center is thus judged in
terms of effectiveness rather than efficiency. The effectiveness of sales region, for
example, is determined by comparing its actual sales to its projected or previous
years sales. Profits are not considered because sales departments have very
limited influence over the cost of products they sell.
iii. Expense centers. Resources are measured in dollars without consideration
for service or product costs. Thus budgets will have been prepared for engineered
expenses and for discretional expenses. Typical expense centers are
administrative service and research departments. They cost organization money,
but they only indirectly contribute to revenues.

iv. Profit centers. Performance is measured in terms of the difference between

revenues and expenditures. A profit center is typically established whenever an
organizational unit has control over both its resources and its products or
services. By having such centers, a company can be organized into divisions of
separate predict lines. The manager of each division is given autonomy to the
extent that she or he is able to keep profits at a satisfactory level. Some
organizational units that are not usually considered potentially autonomous can,
for the purpose of profit center evaluation, be made so. A manufacturing
department, for example, can be converted from a standard cost center into a
profit center. It is allowed to charge a transfer price for each product it sells to the
sales department. The difference between the manufacturing cost per unit and
the agreed upon transfer price is the units profit. Transfer pricing is commonly
used in vertically integrated corporations and can work well when a price can be
easily determined for a designated amount of product.
v. Investment centers. Because many divisions in large manufacturing
corporations use significant assets to make their products, their asset base should
be factored into their performance evaluation. Thus it is insufficient to focus only
on profits, as in the case of profit centers. An investment centers performance is
measured in terms of the difference between its resources and its services or
product. The most widely used measure of investment centers performance is
return on investment (ROI).
12.2.10 Using Benchmarking to Evaluate Performance
Benchmarking is the continual process of measuring products, services and practices
against the toughest competitors or those companies recognized as industry leaders.
Benchmarking, an increasingly popular program, is based on the concept that it makes
no sense to reinvent something that someone else is already using. It involves openly
learning how others do something better than ones own company so that one not only
can imitate, but perhaps even improve on their current techniques. The benchmarking
process usually involves the following steps:
1. Identify the area or process to be examined. It should be an activity that has the
potential to determine a business unit's competitive advantage.
2. Find behavioral and output measures of the area or process and obtain
measurements.
3. Select an accessible set of competitors and best-in-class companies against which to
benchmark. These may very often be companies that are in completely different
industries, but perform similar activities.
a. Calculate the differences among the company's performance measurements
and those of the best in class and determine why the differences exist.
b. Develop tactical programs for closing performance gaps.

c. Implement the programs and then compare the resulting new

measurements with those of the best-in-class companies.
Benchmarking has been found to produce best results in companies that are already well
managed. Apparently poor performing firms tend to be overwhelmed by the discrepancy
between their performance and the benchmark - and tend to view the benchmark as too
difficult to reach.
12.2.11 International Measurement Issues
The three most widely used techniques for international performance evaluation are
return on investment, budget analysis, and historical comparisons. Rate of return was
widely used measure. However, ROI can cause problems when it is applied to
international operations. Because of foreign currencies, different rates of inflation,
different tax laws, and the use of transfer pricing, both the net income figure and the
investment base may be seriously distorted.
12.2.12 Strategic Information Systems
Before performance measures can have any impact on strategic management, they must
first be communicated to those people responsible for formulating and implementing
strategic plans. Strategic information systems can perform this function. They can be
computer based or manual, formal or informal. One of the key reasons for the
bankruptcy of international harvester was the inability of the corporation's top
management to precisely determine its income by major class of similar products.
Because of this inability, management kept trying to fix ailing businesses and was
unable to respond flexibly to major changes and unexpected events. The information
system allows to reordering to be done automatically by computers without any
managerial input. It also allows the company to experiment with new products without
committing to big orders in advance.
Multinational corporations are adopting a complex software system called R/3 from the
German company SAP AG. The R/3 software system integrates and automates order
taking, credit checking, payment verification, and book balancing. Because of this
systems ability to use a common information system throughout companys main
operations around the world, it is becoming the business information systems global
standards. R/3 is nevertheless not for every company. The system is extremely
complicated and demands a high level of standardization throughout a corporation. Its
demanding nature often forces companies to change the way they do business.
12.2.13 Problems in Measuring Performance
The measurement of performance is a crucial part of evaluation and control. The lack of
quantifiable objectives or performance standards and the inability of the information
system to provide timely and valid information are two obvious control problems.
Without objective and timely measurements, it would be extremely difficult to make
operational, let alone strategic decisions. Nevertheless, the use of timely, quantifiable

standards does not guarantee good performance. The very act of monitoring and
measuring performance can cause side effects that interfere with overall corporate
performance. Among the most frequent negative side effects is a short-term orientation
and goal displacement.
Short-term orientation
Top executives report that in many situations they analyze neither the long-term
implications of present operations on the strategy they have adopted nor the operational
impact of a strategy on the corporate mission. Long-run evaluations are often not
conducted because executives (1) don't realize their importance, (2) believe that shortrun considerations are more important than long-run considerations, (3) aren't
personally evaluated on a long term basis, or (4) don't have the time to make a long-run
analysis. There is no real justification for the first and last reasons. If executives realize
the importance of long-run evaluations, they make the time needed to conduct them.
Even though many chief executives point to immediate pressures from the investment
community and to short-term incentives and promotion plans to support the second
and third reasons, evidence does not always support their claims.
Many accounting based measures do, however, encourage a short-term orientation. One
of the limitations of ROI as a performance measure is its short-term nature. In theory,
ROI is not limited to the short run, but in practice, it is often difficult to use this
measure to realize long-term benefits for the company. Because managers can often
manipulate both the numerator (earnings) and the denominator (investment), the
resulting figure of ROI can be meaningless. Advertising, maintenance, and research
efforts can be reduced. Mergers can be undertaken that will do more for these years'
earnings than for the divisions or corporation's future profits. Expensive retooling and
plant modernization can be delayed as long as a manager can manipulate figures on
production defects and absenteeism.
Goal displacement
Monitoring and measuring of performance can actually result in a decline in overall
corporate performance. Goal displacement is the confusion of means with ends and
occurs when activities originally intended to help managers attain corporate objectives
become ends in themselves - or are adapted to meet ends other than those for which
they were intended. Two types of goal displacement are behavior substitution and suboptimization.
Behavior substitution
Behavior substitution refers to a phenomenon when people substitute activities that do
not lead to goal accomplishment for activities that do lead to goal accomplishment
because the wrong activities are being rewarded. Mangers, like most people, tend to
focus more of their attention on those behaviors that is clearly measurable than on those
that are not. Employees often receive little to no reward for engaging in hard to measure
activities such as cooperation and initiative. However, easy to measure activities might

have little to no relationship to the desired performance. Rational people, nevertheless,

tend to work for the rewards that the system has to offer. Therefore, people tend to
substitute behaviors that are recognized and rewarded for those behaviors that are
ignored, without regard to their contribution to goal accomplishment.
Sub optimization
Sub optimization refers to the phenomenon when a unit optimizes its goal
accomplishment to the detriment of the organization as a whole. The emphasis in large
corporations on developing separate responsibility centers can create some problems for
the corporation as a whole. To the extent that a division or functional unit views itself as
a separate entity, it might refuse to cooperate with other units or divisions in the same
corporation if cooperation could in some way negatively affect its performance
evaluation. The competition between divisions to achieve a high ROI can result in one
division's refusal to share its new technology or work process improvements. One
divisions attempt to optimize the accomplishment of its goals can cause other divisions
to fall behind and thus negatively affect overall corporate performance. One common
example of sub optimization occurs when a marketing department approves an early
shipment date to a customer as a means of getting an order and forces the
manufacturing department into overtime production for this one order. Production
costs are raised, which reduces the manufacturing departments overall efficiency. The
end result might be that, although marketing achieves its goals in sales, the corporate as
a whole fails to ach.eve the expected profitability.
12.3 DETERMINANTS OF STRATEGIC OPTIONS
In practice, the process for choosing a strategy may be structured something like in the
figure below, although the reality is likely to be much messier. The structure of this
chapter is based on this figure.
The process of choice starts by identifying available options. The chosen strategy will
have to answer the questions what, how, why, when, so each option will provide
provisional answers two each of these questions.
There are likely to be different kinds of options. Figure below shows three typesproducts/services/markets, resources/capabilities, and method of progress - that are
typical but not necessarily exhaustive.

12.3.1 Options for Markets and Products/Services

The most obvious type of option relates to which products or services to offer in which
markets. Igor Ansoff was the first in structuring this decision.
The axes of the diagram are product including services and nay form of offering, market
need which can be any group of potential customers whether defined by their needs,
inclinational or income bracket, and market geography geographical location.
12.3.2 Options for Building Resources, Capabilities, and Competence
Just as strategic assessment was necessarily concerned with both the internal and
external perspectives, so strategic choice has to consider options about resources,
capabilities, and competencies, as well as those for markets and products, it may well be,
therefore, that the strategic assessment has identified strengths and weaknesses in
existing resources and capabilities in comparison with competitors. This may lead to

identifying the improvements needed either to share up weakness or to build on existing

strengths. It is also likely that potential market/product options will require supporting
changes in resources and capabilities.
The time-scales for developing resources and capabilities may be very long and may be
longer than the time-scale for market entry. For instance, people are a major resource,
but changing the overall mix of people in a company is likely to take years or decades.
Strategic options about building skills and experience may therefore have to precede
choices to enter new markets or to develop individual products. Similarly, computer
systems usually take several years to develop and install and then may be in place for a
decade or more. Information technology investments may therefore have to be seen as
much as a strategic building, of future capability as being justified on immediate costbenefit grounds.
It may be, of course, that thinking should be about capability options first and market
options, second, so that we are looking for ways to build unique competencies and then
to seek markets and products to demonstrate them.
There are likely to be multiple links between market/product options and
resource/capability options. Entry into new markets is likely to require acquiring access
to new distribution channels and product support. New products may require a
fundamental rethink or development resources and field staff skills. While the resource
needs are the most obvious, the capabilities needed to succeed may be much more
subtle. For instance, the resources may need to be world-class and all the pieces may
have to fit into a working whole.
12.3.3 Options in Methods of Implementation
There are likely to be options in methods of implementation. There are four main
methods by which companies can grow their capabilities - internal development,
acquisition, contractual arrangements, and strategic alliances.
1. Internal development
Internal development is perhaps the most obvious approach to growth. It involves
developing the necessary skills among existing staff and acquiring the necessary
production capacity piecemeal. The main disadvantage of internal development is that it
takes time during which competitors may move faster or opportunities may be lost. On
the other hand, the risks may be lower than for other methods.
2. Acquisition
Acquisition is a very common implementation option, particularly in countries such as
the UK and USA where the structure of financial markets and equity ownership makes
take-over relatively easy to achieve. Take-over and mergers have sometimes been very
dominant as the means of implementing strategies that M&A has sometimes become
almost a synonym for strategy. There can be real advantages to acquisition, particularly

if there is good fit with what is acquitted. Synergy can occur, although less often than
expected. The disadvantages of mergers are that they can cause deep operational and
psychological turmoil, which can distract the people who have to make them work.
Competitors can take advantage of this turmoil, as they are free to concentrate on
customers rather than on internal changes. One real problem is that the thinking about
mergers and acquisitions is often less then objective. Senior managers and professional
advisers tend to benefit from mergers in the short term whatever the long-term
outcome. There is also a tendency for the strategic rationale for the merger to be lost in
the excitement of the chase. Often, too, pressure from competing acquirers can cause
the price to rise to too high a level. Many acquisitions may be beneficial at the right price
but may destroy shareholder value at too high a price.
3. Contractual arrangements
Contractual arrangements come in many different forms. Consortia are groups of
companies that form a joint entity for a specific purpose - such as building the channel
tunnel. When the project is finished, the consortium breaks up and the separate
partners may find themselves competing, possibly in different consortia, for the next
project. This form is common in the civil engineering and defense industries.
Franchising is another form of contractual arrangement and is commonest in retailing
well-known High Street names such as the Body Shop and McDonald's are franchises.
The franchisee pays the franchiser a fee for services and royalties, typically for use of the
company name, business approaches, and central advertising. The franchisee is half way
between an employee and an independent entrepreneur with his risk limited by the
success of the brand name and by the support and advice provided by the franchiser.
Licensing is a third form of contractual arrangement. A common example is when a
small incentive company licenses its product or patent to be manufactured and
marketed by others. This can allow quick growth by avoiding the need to build
manufacturing or distribution capability. At the same time, the intellectual property
rights for the invention are retained. Licensing is probably most frequent in high
technology businesses and the creative arts. Agents are a longstanding means of doing
business, particularly in foreign countries or specialized markets where volumes of
business may be too low to justify a permanent presence. The agent is familiar with local
requirements and calls for additional support from the principal when opportunities
arise. The difficulties with agents include conflicts of interest when the same agent acts
for competing principals or is simply inert.
All the above arrangements have in common the need for a written contract which binds
the two or more parties into a clear agreement as to who will do what and pay what.
Such contracts will normally have a defined duration. The contracts can be very varied
to suit the needs of each individual. Disputes can be handled through the courts, by
agreed arbitration procedures, or by not renewing the contract at the expiry of the
contractual term.
4. Strategic alliances and partnerships

Strategic alliances and partnerships have come into vogue over the last ten years. While
there may be contracts between the parties, there is a wider intention to cooperate at a
strategic level, to share information, and to work together in a way that goes beyond a
clear contractual arrangement. It is argued that in a rapidly changing world, strategic
alliances are the only way in which the necessary speed of response and global spread
can be achieved. There are dangers in strategic alliances in that the objectives of the two
parties may drift part over time and the arrangement is hard to terminate neatly because
of the lack of firm contracts. The Rover-Honda alliance is an example of an arrangement
that seemed to work well for a time but ended messily when Rover was acquired by
BMW.
12.4 SUMMARY
After reading this lesson you will be able to know the shareholder value analysis,
financial performance and their various measurements, evaluating top level
management other related aspects.
12.5 ASSIGNMENT QUESTIONS
1. Explain in detail about performance measurement?
2. Write short notes on shareholder value analysis?
3. Write short notes on traditional performance measures?
4. Write short notes on responsibility centers?
5. Explain in brief about determinants of strategic options?

- End of Chapter LESSON 13

SIX SIGMA STAGES & KAIZEN'S APPROACH

OBJECTIVES

To understand the concept of Six Sigma

To know the Kaizen's approach

STRUCTURE

13.1 History of 'Six Sigma'

13.1.1 Introduction to the new Six Sigma
13.2 Kaizen's approach
13.2.1 Introduction
13.2.2 Japanese kaizen
13.2.3 Kaizen attitudes
13.2.4 Kaizen and Japanese companies
13.2.5 Kaizen in practice
13.2.6 Kaizen in the west
13.2.7 An approach for the west
13.3 Focus customers
13.4 Continuous improvement.
13.4.1 Principles of kaizen
13.4.2 Kaizen and innovation.
13.4.3 Kaizen and teian system
13.5 Summary
13.6 Assignment questions
13.1 HISTORY OF 'SIX SIGMA'
Motorola lacked a common metric for sharing and comparing improvement initiatives,
and this deficiency served as a major barrier to alignment. Then, in late 1985, quality
engineer Bill Smith, frustrated by his associate's rejection of his quality measurement
ideas, scheduled a meeting with Bob Galvin. After listening to smith's point of view,
Galvin instructed Jack Germain, the corporate vice-president of quality, to build on
smith's ideas.
As a result, smith and a team of quality managers created a three-day program entitled
"design for manufacturability", facilitated by a Motorola university designer, Ann Dille,
DFM defined the "six steps to Six Sigma" and became the first required training
program for all technical personnel worldwide. Another Motorola engineer Craig

Fullerton, developed and taught, "Six Sigma design methodology" today called design
for Six Sigma by most other companies. The Six Sigma design methodology focused on
ensuring winning product design. Six Sigma now aligned all quality efforts around a
common measurement process, and Six Sigma goals drove every team worldwide. Six
sigma's success led Motorola's managers to set an even more aggressive goal, from 10X
to 100X improvement.
Six Sigma began as an initiative for improving quality rather than as a methodology for
continuous business improvement. Once organizations achieved the six-sigma goals,
they stopped improving - they became good enough. This mindset caused complacency
that allowed quality to actually deteriorate.
The old Six Sigma was just a standard measure of goodness.
13.1.1 Introduction to the new 'Six Sigma'
Motorola University developed the new Six Sigma because we had to. We had to see
Motorola businesses as well as customers and suppliers struggling with the same critical
issues. We knew that the classic Six Sigma methodology focus on defects and variability
reduction had served business managers quite effectively during much of the 1990s, and
had helped customers and suppliers to apply Six Sigma dramatically improve their
business processes. But Six Sigma was losing its relevance to most business leaders.
They perceived the methodology as too complex, effective only in manufacturing and
engineering environments and too slow in yielding results. We could also see, however,
that many of our leaders had taken the important elements of Six Sigma - like
understanding customer requirements, continuously driving process improvement, and
suing statistical analysis to drive fact based decision making and moved them into a
broad integrated approach that flawlessly executed their full business strategies The new
Six Sigma builds on .the power of the six-sigma methodology pioneered in the 1980s
and introduced to many businesses in 1990s, yet it benefits and helps customers and
suppliers to implement the methodology.
The new Six Sigma is an overall business improvement method. The new Six Sigma
solves the paradox that leaders find themselves in today of attempting to simultaneously
achieve short term financial gains through fast business improvement projects while
building future capability in both key talent and critical processes.
By integrating tools and processes such as scorecards, business process redesign, high
performance teams, and continuous monitoring of key business metrics the new Six
Sigma provides a practical approach and useful tools for leaders looking to drive
balanced execution.
Table below outlines the four key leadership principles, discerned through studying
organizations that successfully implement Six Sigma. These leadership principles
anchor the new Six Sigma.

The new Six Sigma integrates best practices processes with tools designed to help
leaders in driving their business strategy for dramatic short-term business result while
building sustained future capability.

Table below shows some of the best practices that were included in the new Six Sigma
methodology.

In this case, the new Six Sigma approach suggested that, to be successful, teams must be
given clear targets, a specific set of deliverables, and reasonable but challenging
timelines. Excited about the potential for breakthrough improvement, the team worked
diligently toward creating its team charters. Through this charter development activity,
the apex leadership team members discovered how differently each of them initially saw
each project. Left to their own devices, each member would have provided different
direction and communicated different expectations to various team members, a formula
for team frustration and confusion. Instead, members carefully worked through
objectives, deliverables, metrics, and timelines for each team. By the time, the
chartering process concluded, the apex leadership team felt confident that not only had
they identified the highest impact improvement opportunities, but they also now had
the right team resources positioned to execute on those opportunities.

Leadership supply is just the beginning of where we're taking Six Sigma. By
incorporating ideas form finance, operations research, computer science, and
organizational psychology, we're creating the near and distant future of Six Sigma. We
believe Six Sigma's future includes broad areas of applications that haven't yet been fully
explored, including diverse uses ranging from improving financial reporting and the
future of black belts to better innovation and successful philanthropy.
In the future, Six Sigma will play a significant role in helping executives manage risk and
improve shareholder returns. Just as traditional applications of Six Sigma build trust in
customer relationships by ensuring that products and services consistently deliver as
promised, we believe Six Sigma can also enhance trust with analysts and shareholders.
Experts have identified the recent breakdown of integrity in traditional financial
reporting processes, epitomized by extreme examples such as Enron, and WorldCom, a
failure of the self-regulating mechanisms in both government and industry. When used
correctly, we believe Six Sigma can help investors regain confidence in financial
reporting.
13.2 KAIZEN'S APPROACH
13.2.1 Introduction
Although Kaizen is a Japanese concept, many organisations in the west have adopted its
systematic common sense with great success. Kaizen successfully utilized in the west is a
combination of the best of traditional Japanese practice with the strengths of western
business practice by merging the benefits of teamwork with the creativity of the
individual.

13.2.2 Japanese Kaizen

Kaizen is in essence a very simple concept formed from the two characters: KAI
meaning change and ZEN meaning good, thus together in one word they literally mean
improvement. Kaizen became part of Japanese management theory in the mid-1980s
and management consultants in the west quickly took up the term using it to embrace a
wide range of management practices which were regarded as primarily Japanese and
which tended to make Japanese companies strong in the areas of continual
improvement rather than innovation.
According to theory, the great strength of Japanese companies lies in their attention to
processes rather than result. They concentrate the efforts of everyone in the
organization on continually improving imperfections at every stage of the process. In the
long term, the final result is more reliable, of better quality, more advanced, more
attractive to customers and cheaper. Through Kaizen therefore the company will be able
to produce better products or services at lower prices, and provide greater customer
satisfaction.
13.2.3 Kaizen Attitudes
Most Japanese people are by nature, or by training, attentive to detail and they feel a
strong obligation to be responsible for making everything run as smoothly as possible,
whether it is in family life or at work. That is one reason why kaizen works so well in
Japan. However, in the west, this attitude may not be so consistent. To encourage the
kaizen attitude within a western organization requires a major change in corporate
culture to one that admits problem, encourages a collaborative attitude to solving them,
devolves responsibility to the most appropriate level, and promotes continuous training
in skills and development of attitudes.
13.2.4 Kaizen and Japanese companies
The traditional Japanese approach to kaizen embeds it in a hierarchical structure,
although it gives considerable responsibility to employees within certain fixed
boundaries. The key features of this management approach are:
Attention to process, rather than results
Cross functional management
Use of quality circles and other tools to support continuous improvement
Japanese organizations have so far been able to take a longer-term view of profit than
their western competitors because of their specific sources of financing. The Japanese
tax system does not favor short-term investors and as a result, most organizations and
their shareholders are focused on long-term success and profitability. Without the
pressure of shareholders looking for regular short-term profits, they can take time and
money to achieve market share and profit in the longer term.

They are also able to undertake long term research and development and to examine
and improve all the processes they are currently involved in. a western company may
focus all its efforts on producing a new product that will sell quickly; a Japanese
company is likely to spend more time breaking down the process of production and
making improvements continuously. Although the individual improvements may be
small, the cumulative effects can be impressive.
13.2.5 Kaizen in practice
The traditional Kaizen approach:
1. Analyses every part of a process down to the smallest detail.
2. Sees how every part of the process can be improved.
3. Looks at every employee's actions, equipment and materials can be improved.
4. Looks at ways of saving time and reducing waste.
If kaizen is to be applied across an entire organization, however, team will need to
examine much larger issues.
13.2.6 Kaizen in the West
Once Kaizen practices were identified as a key element in the success of large Japanese
manufacturers such as Toyota, western organizations, slowly, but surely, began to take
an interest in the philosophy and practice of these companies. Particularly enticing to
manufacturers from Japanese competition were claims that kaizen:
leads to the reduction of waste.
can increase productivity by at least 30 percent where no previous improvement
process was in place
is relatively cheap to introduce - it requires no major capital investment
can lower the break-even point
enables organizations to react quickly to market changes
is appropriate in both slow and fast moving economies as well as growing or mature
markets.
UK companies such as Rover and Rolls Royce have adapted and implemented kaizen
practices with great success.

Percentage of Senior Managers Aware of Kaizen:

Large companies 94%
Small/medium size companies 44%
Percentage of Senior Managers in Large Companies with Experience of Kaizen:
Manufacturing sector 88%
Service sector 53%
These figures suggest that although the pioneers were European subsidiaries of
Japanese companies or other companies with a Japanese link a large number of other
companies have recently started to follow the kaizen route.
Kaizen is viewed as a positive influence like:
It is an essential powerful concept that has a great deal to offer
It leads to higher quality goods and services
It can lead to a more efficient organization
It improves business results
It helps eliminate waste
Three main points that emerged out of concern among companies having implemented
kaizen are:
1. It is difficult to achieve kaizen in practice, because it requires a complete change in
attitude and culture, and needs the energy and commitment of all employees. It also
requires a substantial investment of time.
2. It is difficult to maintain enthusiasm for several reasons:
- Some people see kaizen as a threat to their jobs;
- A lot of poor ideas tend to be put forward as well as good ones, which can be
demotivating;
- By implication, there is never complete satisfaction.
3. Continuous improvement is not sufficient on its own, major innovations are also
needed. There is a danger of becoming evolutionary rather than revolutionary.

Sometimes it may be better in the long term to improve the way things are done, but it
may not make commercial sense in the short or medium term.
None of the concerns are reasons for not introducing kaizen, as with thought and
planning all of them can be overcome or mitigated, as we shall see, but managers need
to be aware of them and spend time thinking about them, rather than abandoning
kaizen before it has a chance to yield positive results.
From the point-of-view of employees and unions another fear often voiced about kaizen
and Japanese practices in general is the fear that people might improve themselves out
of a job or asked to do more work for no additional rewards.
In Japan, the previous commitment, to lifetime employment tended to remove these
fears, but in the UK the commitment may understandably be less.
Initial considerations
Although some western companies have taken continuous improvement to mean merely
the introduction of sophisticated suggestion shames to bring continued and long-term
results, the introduction of kaizen involves considerable more sweeping changes in
attitudes, structures, and processes. If it is not to consider only as the latest
management idea - here today and gone tomorrow -senior management need to think
about the impact and implications of kaizen, as well as about the practicalities of
introduction. In particular:
- Senior management commitment is essential.
- Senior managers must be aware of maize's role in the overall business strategy.
- All employees should understand Kaizen's role in their work.
- Kaizen should be linked to personal development and enablement.
13.2.7 An approach for the west
As the desire for cultural change sweeps through western companies, whatever their
size, kaizen can be seen as a way of effectively achieving that change. Although we have
so far stressed the attitudinal or qualitative changes involved, an equally important part
of kaizen is its quantitative element. It is only by combining measurement with
attitudinal change that kaizen can be effective. The diagram, below represents in a
simple schematic format the main points involved in creating a kaizen based
organization in the west:

It is the role of the strategic management to be responsible for the implementation of an

effective mission, reward an organisational structure. It is the responsibility of tactical
and strategic managers to exhibit and practice sound leadership, promote good
teamwork, and ensure that people understand their roles. It is also the responsibility of
everybody in the organization, from the front line through to the board, to measure
themselves and their team, to identify in quantitative terms areas for improvement, to
generate ideas to change practice and procedures and measure again to ensure this
improvement has been achieved.
Each time a process or service is measured, it can be analyzed, areas for improvement
found and implemented, and a new standard achieved and measured. The cycle then
continues through further analysis and improvements as shown in the diagram below.

In a company, which wants to adopt kaizen principles, it is everybody's responsibility to

be involved in this cycle of improvement. Everyone must therefore be given the
knowledge, skills and tools to participate fully not only within their own team, but also
within cross-functional teams and across the organization as a whole.
A frequent difficulty encountered when organizations begin to introduce kaizen in the
west is that many employees lack the confidence to take on greater responsibility or to
make decisions for themselves. In addition to training in skills, tools and knowledge it is
therefore vital to ensure that the right climate for change is established.
Core values
The core values of a kaizen programme which everyone in an organization needs to
aspire to be:
Trust and respect for every individual and the organizational belief that
Each individual should value and respect every other individual, not just people
in his or her own department, their own specialization, or their own level.
Every individual should be able to openly admit any mistakes he/she made or
any failings that exist in his/her job, and try to do a better job the next time.
Progress is impossible without the ability to admit the mistakes.
It is out of these values, that the kaizen culture develops and creates kaizen people who
exhibit:

 Attention to detail
Forward looking approach
Receptivity to constructive advice
Willingness to take responsibility
Pride in his or her work and organization
A willingness to cooperate.
13.3 FOCUS CUSTOMERS
A focus strategy involves concentrating on a particular group of customers, geographic
markets, or product line segments in order to serve a well defined but narrow market
better than competitors who serve a broader market. The basic idea is to achieve least
cost position or differentiation or both, within a narrow market.
Example: Focus strategy at Black & Decker
Black & Decker has built a worldwide reputation for quality products in the power tool
business. The company diversified by buying the McCulloch gasoline chain saw
company and developing a medical power tool product division. But m 1983, realizing
that it had made a mistake, it began to refocus on its original business - power tools - by
divesting itself of these two businesses.
13.4 CONTINUOUS IMPROVEMENT
Every organization in order to achieve the objectives and to increase its market share
has to improve the quality of products and services it offers to its customers and is
required to maintain the quality on the continuing basis. This requires a well-defined
and structured quality system. This can be achieved through the implementation of the
kaizen practice.
In kaizen, the improvement is based on suggestions made by the employees and the
improvement is maintained throughout willingly without any external process.
Kaizen is a Japanese management concept; kaizen means improvement, particularly
continuous improvement.
13.4.1 Principles of kaizen
The important principles of kaizen are:
i. Kaizen requires resourcefulness

ii. Kaizen requires educating and training people to be resourceful

iii. Kaizen refers to pursuing a purpose
iv. Kaizen requires transfer of know-how
v. Kaizen sometimes means eliminating something.
The success of the improvement result from will to do and the hard work. Mere hard
work will not ensure success. Hard work accompanied by resourcefulness forms the
winning combination. Resourcefulness refers to the ability to take close look at the
methods that are being used and question the way it is being done currently and
suggesting the means to do it in a best possible manner. Kaizen approach results in
improvement of the process by making the best use resourcefulness of the employees.
13.4.2 Kaizen and innovation
Innovation implies significant breakthrough level progress by only a limited number of
people who are professionally trained. Kaizen improvement means a continual and
gradual and incremental improvements made by all the employees. This is an
improvement by participation of all the employees including the executives and
management.
Thus, innovation and inventions are the two paths to achieve progress. By innovation
company makes a dramatic progress and kaizen believes in Incremental and small
improvements. The kaizen improvements do not demand heavy investments where as
innovations demand huge investments, kaizen is risk free whereas innovations are quite
risky prepositions. Kaizen does not result in revolutionary improvement and create a
climate for participation of every one using common sense and logical improvements.
The difference between innovation and kaizen are represented in the table below.

13.4.3 Kaizen and teian system

The word teian means suggestion or proposal. Kaizen teian is a companywide system for
the employee's continuous improvement proposals. It is an organized way of bringing
forward the ideas of each individual employee, irrespective of however small it may be.
This system differs from suggestion scheme in the way that instead of restricting to only
big suggestions and rewards by few people, it encourages participation and creative idea
contribution by all the people in the company, thus, cumulating small ideas and
improvements into a big stream of improvements and benefits.
The kaizen teian system is referred to as walking suggestion scheme as the employees
ask suggestions to each employees regarding how the work can be improved.
Stages in the development of kaizen-teian
There are three stages of development in kaizen-teian system:
Stage I: Encouragement and motivation of the employees to participate in the activity.
Stage - ll: Development of creative abilities of the employees to participate and forward
improvement proposals. Stage - Ill: Emphasis on the results of the activity.
Cycle of kaizen-teian activity
Kaizen-teian proposal activity represents a cycle with four major components:
i. Persuading people to participate and work
ii. Monitoring them to write proposals either implemented or unimplemented
iii. Review, evaluation of proposals and guidance
iv. Award payments and recommendation
In this cycle, if all the elements are carried out smoothly, the proposal activity will also
run smoothly, and one idea will lead to another, and continuous improvement will be
translated into improved productivity. If the flow is blocked at any key points, proposal
activity will become irregular and the movement will become slow. The proposal activity
should be managed to ensure the smooth circulation of this flow. The first thing to
consider than creating a proposal system is to outline its rules and devising steps to
make all the elements run smoothly without any bottlenecks. The critical success factor
in this system is review and guidance of proposals. When people submit their ideas for
evaluation and no response from the evaluator will make them feel dejected and
frustrated. The insensitive comments of the proposal reviewers can sometimes skill on
employee's improvement imitative. When review, evaluation and guidance aspect of the
system function properly, it can be a greater motivating force that will attract many
excellent proposals. This force is really more effective than money awards from the
management.

Good proposals
A good proposal is one that
i. Is effective
ii. Has a wide range of applications
iii. Can be implemented
iv. Represents a major idea
v. Is ingenious
vi. Eliminates the causes of problems
vii. Corresponds to the policy goals of the company
viii. Solves problems that affect all employees
ix. Does not cost a lot of money
Dimensions of proposals
The process of implementing the proposals is broken down in to several levels and is
designed to encourage participation, develop skills and achieve results.
Level Zero (Represents Zero Energy, Zero Interest and Zero Responsibility): At
this level no one really knows what kind of problems the department has. Nobody
is either bothered or interested in suggestions for improvements. No proposals or
creative ideas will come at this stage.
Level One (Noticing and Pointing out Problems): People most put all energy into
job if they want to do it better. When there are problems, people should notice
them and recognize that something should be done about them. But just knowing
something and saying anything is not enough people need to point out the
problems to others. This is a pre-step for improvement.
Level Two (Finding Causes of Problems, Raising Ideas and Proposing Solutions):
At this stage, employees point out the problems and think about measures to
cope with problems. This process unfolds in several steps. Employees must find
out what causes the problems, think remedial measures with their colleagues and
supervisors. They must notice the material aspects of the problem, analyze them
and restructure them in to a solution. All of these actions strengthen their skills.
Awards paid at this level serve as incentives to further develop those skills.

Level Three (Making Designs, Implementation): At this stage, several concrete

counter measures are studied, and decisions are made to accept or reject. Once
accepted, the proposals are implemented. Effect of the implementation at this
level of effort is awarded by payments that inform the employee that his or her
creative effort had a positive conclusion. The award also informs others about
these developments.
13.5 SUMMARY
This lesson dealt about the Six sigma stages (it includes old sigma and new sigma) a
metric for sharing and comparing initiative activities and the Japanese Kaizen's
approach. They are much useful to get the success in business.
13.6 ASSIGNMENT QUESTIONS
1. Write short notes on Six Sigma?
2. Explain in detail about Kaizen's approach?
3. Write short notes on focused customers?
4. Explain kaizen-teian approach?
5. Explain in brief about continuous improvement in kaizen system?

- End of Chapter LESSON - 14

IMPLEMENTING STRATEGY

OBJECTIVES

To know the various impacts on strategy

To understand the stages of implementation

CONTENTS
14.1 Introduction
14.1.1 Linking actions to ideas

14.1.2 Communicating strategy

14.1.3 Issues in strategy communication
14.1.4 Functional area strategies
14.1.5 Cross-functional implications of strategy implementation
14.2 Implementing process
14.2.1 Strategy and organization structure
14.2.2 Organizational growth and stages of development theories
14.2.3 Leadership and organization climate
14.2.4 Resource allocation
14.2.5 Planning and control system for strategy implementation
14.3 Internal development
14.3.1 Identifying target industries for internal entry
14.4 International development
14.4.1 Stages of International Development
14.5 Centralization versus Decentralization
14.6 Summary
14.7 Assignment questions
14.1 INTRODUCTION
In this lesson, we consider some important aspects of strategy implementation. On the
business level, these include specifying the requirements of the business strategy for
each of the functional areas and resolving any functional area conflicts in the interest of
the organization as a whole. On the corporate level, a number of issues arise around the
merger tactic to implement growth and diversification strategies. Corporate strategy
implementation also requires proper alignment of the organizations structuring
mechanisms, its control systems, its reward systems, and managements approach to
leadership. Exhibit below shows factors, which affect strategy implementation.
Strategy implementation is concerned with making decisions with regard to
developing an organizational structure to achieve the strategy, staffing the structure,

providing the leadership and motivation to the staff, and monitoring the effectiveness of
the strategy in achieving the organizations objectives.

14.1.1 Linking Actions to Ideas

The strategist has a number of tools, which can be used to put strategy into action.
These tools should be utilized in a manner that is both comprehensive and consistent.
Comprehensive implementation refers to the range of techniques employed. An
organization, which seeks an increased reliance on new products and customers to
broaden its revenue base, has a wide selection of techniques available to make the shift.
A typical approach might include increased resource allocation to both research and
development and marketing, a shift in the reward system to encourage the extra
attention needed by new activities, and a change in the way activities are grouped as well
as in reporting relationships. Furthermore, it is necessary to track the progress of new
endeavors, compare progress with original plan and provide the resulting information to
those parts of the organization, which can take appropriate action. The use of functional
strategies, the organization structure, the reward system, the control systems, and the
information systems to implement changes in strategy constitutes a more
comprehensive approach. Consistent implementation minimizes conflicting signals
when several techniques are being used. A conflict could occur, for example, when shifts

in structure to allow for managerial attention to new products are implemented under a
reward system which focuses sales force attention on repeat sales to current customers.
Lack of comprehensiveness and consistency are manifest in different ways. Failure to
implement comprehensively is wasteful because all techniques are not used. The danger
of contradictory signals is that individuals are left to resolve contradictions on their own
and the unifying power of a common direction for effort is dissipated in numerous
uncoordinated decisions.
Whether an organization seeks improved implementation of its current strategy or must
adjust current implementation techniques to the requirements of a new strategy. The
same basic concerns must be addressed.
1. The requirements of the strategy must be defined for groups and individuals.
2. These groups and individuals must receive organizational support necessary to fulfill
the requirements.
Implementing strategy is the work of the entire organization. Top managers must work
through others rather than taking actions directly. This requires skills in administration;
an understanding of what motivates human behavior, and a grasp of how the parts of
the organization interact. These skills are not so much learned as developed.
14.1.2 Communicating Strategy
Before a strategy can be implemented it must be clearly understood. A clear
understanding of strategy gives purpose to the activities of each organization member. It
allows the individual to link whatever task is at hand to the overall organizational
direction. This is mutually enhancing and gives meaning to the task. It also provides the
individual with general guidance for making decisions and enables him or her to direct
efforts toward activities that count. For example, the manager of SBU slated for
divestment would not waste effort preparing a proposal to fund additional capacity. On
the other hand, knowledge of the pending divestment might be so demoralizing that the
organization would lose the mangers best efforts while the manager seeks employment
elsewhere. Thus, there may be disadvantages as well as advantages to communicate
strategy. Several issue which should be considered in deciding how or whether to
announce strategic decisions.
14.1.3 Issues in Strategy Communication
The desirability of the direct announcement of a strategy depends on several factors.
a. Proprietary Nature of Strategy
The wider the dissemination of information concerning strategic decisions, competitive
moves, or shifting emphasis, the greater the likelihood that it will reach a competitor
who could subvert the move decision or shift. A strategy, which will provide or exploit

an unpublicized advantage, may be best kept undisclosed. The advantages of

organizational commitment would be offset by the loss of surprise. If the strategy will
divulge proprietary information, it should be shared only on a need to know basis.
b. Political Impact of Strategy
It is not always possible to achieve consensus concerning the appropriate strategic
directions for an organization. If a number of top managers participate in the
formulation process, it is not unlikely that there will be differences of opinion about the
final choice. The differences of opinion may have been settled in a way that created
animosity in the losers. In an organization, where relationships are strained, factions
may form around strong individuals, and the strategy may be judged and supported
according to who is backing it rather than upon its own merits. In such a situation, it
may be more efficient to communicate the strategy piecemeal rather than as a whole.
Strategy communication that sparks infighting will hinder implementation more than it
will help.
c. Expectations Aroused by Strategy
The announcement of a strategy gives all organizational stakeholders a means of
evaluating operations and performance. It also raises and defines expectations about the
future of the organization, which may prove embarrassing to management if unforeseen
circumstances arise and diminish performance. For this reason, many public
announcements of strategy are retrospective, indicating what has been attempted and
how well the objectives have been met.
An organization, which announces strategy, is subject to criticism from security
analysts, to fluctuations in stock prices, to government scrutiny, and to buyer and
supplier moves, as well as to union responses. Communication of strategy should be
preceded by consideration of the expectations and resulting responses by stakeholders
that may be generated.
d. Motivational Impact of Strategy
A clear statement of strategy may either inspire or demoralize. The effect of a given
communication must be considered in light of the personal implications for the
individuals required to implement it. Growth strategies have enjoyed popularity
because, among other things, the rewards - both financial and career - are perceived as
greater for all concerned. Retrenchment strategies are full of financial and personal
unpleasantness even though they may be necessary to maintain long-term viability. At
the corporate level, considerable differences may exist among the strategies of various
business units.
e. Decisional Impact of Strategy
Strategy is often an evolving understanding of where the organization is going and how
it plans to get there. An announced strategy brings closure to the formulation question

and focuses on implementation. This closure is not always desirable, because lower
levels of management can make significant contributions to the strategy as they work
through the implementation process. Therefore, before top management announces a
strategy, they should be certain that closure of the formulation phase is desired.
Whether or not organization wide communication is chosen as the first step in
implementation, it is necessary to relate each level of strategy to the level below it.
Corporate strategies are implemented through business strategies, and business
strategies are implemented through functional level strategies and tactics. Strategies on
all levels are constrained by organizational policies, and resource allocations, and
leadership, structure, and organizational systems support them.
14.1.4 Functional Area Strategies
A myriad of details about how the organization will act to implement its overall strategy
must be resolved on the functional level. Resolving these details also clarifies and
defines strategy for most part of the organization. Functional area strategy
implementation communicates strategy, but only that part which is relevant to the
specific functional areas. A number of strategic and tactical issues are likely to arise in
the functional areas during this process. Some of the most common are discussed below.
a. Marketing Issues
The familiar four P's of marketing i.e. product, price, place, and promotion provide a
good starting point for consideration of the requirements for strategic implementation
in the marketing function. In general, the mix of these marketing elements should be
appropriate, and the plans for each of the elements must also be appropriate. The
marketing function is consumer oriented. Marketing decisions are based on the careful
identification of consumer needs and on the design of marketing strategies to meet
those needs.
b. Operations Issues
The operations for production function have responsibility for the procurement and
transformation of raw materials into products or services. This involves securing raw
materials, making decisions to make or buy parts and components, maintaining
adequate inventory, designing and scheduling production, ensuring quality control, and
making capacity adjustments. Decisions in the operations area determine a large
proportion of the organizations cost and are reflected in measures of efficiency and
productivity. Decisions in this area also affect the performance and reliability of the
product. Operations issues related to a changing strategy include the following
questions:

Is capacity adequate for projected sales under the new strategy? What is the
timeliest and cost effective method for matching capacity with demand? How
does the strategy affect current methods of matching seasons and cyclical shifts
in demand with operations flexibility?

What degree of vertical integration makes sense under the new strategy?
Are production methods and processes adequate to meet the cost and quality
requirements of the strategy?
Are inventory levels adequate? Is inventory control properly maintained?
Are sources of raw materials and employees adequate for the change? Will new
training be needed?

The operations function often receives the brunt of international competition. Nondomestic producers have cost advantages because of lower wage rates. Many large and
small companies are turning to outsourcing, offshore manufacturing and importing.
Outsourcing shifts component manufacturing to overseas suppliers while maintaining
domestic assembly. Offshore manufacturing shifts the entire production function
overseas. Importing is the purchase and subsequent resale of products produced by
foreign companies.
c. Financial Issues
The finance function provides the financial resources necessary to implement strategy.
Changes in strategy often involve adjustments to financial policies. Product and market
development strategies, for example, may require an increase in working capital as well
as in fixed capital.
d. Research and Development Issues
The need to develop or improve products and production processes is met by the
research and development (R&D) function. The more important innovation is to the
strategy of the organization, the more implementation will require consideration of
strategic issues in R&D. The focus of R&D may be basic research, which advances
knowledge with no particular commercial application in mind, or it may be applied
research, which seeks marketable products from basic knowledge. Only organizations
with considerable financial resources undertake basic research to implement strategy
Not only is the payback period considerably longer, but also the success rate is very low
and considerable investment is usually required to capitalize on the output of the
research. The division of R&D effort between product and process research is relevant to
strategy. Growth strategies, such as product development, clearly require R&D emphasis
on providing new products. With a cost of leadership strategy, the production processes
should be under constant scrutiny by R&D to make efficiency improvements.
Some organizations maintain an offensive R&D stance so that leadership in new product
introductions or process improvements is maintained. It also involves a make or buy
decision.
e. Personal Issues
An important issue, which involves all the functional areas, is the availability of human
resources to implement the strategy. Personnel questions include:

- Does the strategy require significant new skills? If so, how can they be obtained in a
timely and cost-effective manner?
- Are salary and benefits administered in a way that will promote implementation of the
strategy?
In many organizations, a separate but related function is that off industrial relations.
Few strategies can successfully be implemented in the face off union opposition.
Retrenchment, for instance, requires a high degree of union management cooperation.
Strategic questions relating to labor relations include:

Is the new strategy likely to provoke union resistance? Will the resistance extend
to strikes, slowdowns, or other work disruptions?
Can the changing strategy be presented in a way that will enhance cooperation?

14.1.5 Cross-functional implications of strategy implementation

Failure to integrate the functional area strategies is failure to consider the crossfunctional implications of strategy when the critical issues of strategy are appraised.
Functional area specialists have goals and objectives, which, if carried to maximization
are likely to conflict. Marketing, on the other hand, wants to provide the customer with
as many options as possible. Operations personnel fight for narrow product lines with
few variations, while marketing personnel are likely to argue for wider product fines
with numerous options for color, accessories, and so on. In each case the functional
specialist may be doing his or her best for the organizations in relation to the function
he or she represents. However, this can lead to unnecessary conflict and poor strategy
implementation unless it is explicitly managed.
Considering the following can identify cross-functional implications of strategy:
- Formulation. Careful consideration of the strengths and weaknesses of the
organization includes a review of the functional areas, which should alert managers to
potential conflicts.
- Trade-offs. A strategy, which is comprehensive, should spell out certain major tradeoffs.
- Communication. Communication of the strategy is a way of giving functional areas
the same information
- Participation. Functional managers who have some part in the process of
formulating and implementing strategy are in a better position to understand what is
required of them.
- Close lateral relations. As functional specialists have closer contact with each
other, trade-offs can be better assessed.

- Multifunctional experience. Many organizations require that managers spend part

of their tenure in functions other than their own specially walking in the others shoes
gives tremendous insight into the practices and problems of others.
- Coordination. As part of the implementation process of identifying strategic issues
for each of the functional areas, the cross-functional implications of a change in strategy
should be addressed.
14.2 IMPLEMENTING PROCESS
To implement the chosen strategy, it is necessary that structural and administrative
mechanisms are established that will be compatible with the strategic direction. Four
different but interrelated aspects of the process may be considered in that context.
i. Organization structure
ii. Resource allocation
iii. Planning and control
iv. Functional policies and administration
14.2.1 Strategy and Organization Structure
Organization structure refers to the network of organizational arrangements and
relationships formally established on a durable basis. It consists among other things of
mechanisms to ensure that parts are linked and work together effectively. Distinction is
sometimes made between tow aspects of the organization structure, viz. (i) the super
structure i.e. groupings based on activities forming departments or divisions; this is
generally depicted in the organization chart; and (ii) the infra structure i.e. authorityresponsibility relations, channels of communication, specialization etc.
Theoretical analysis and empirical studies have given rise to different viewpoints
regarding the nature of relation between a firm's strategy and its structural implications.
A dominant opinion holds that strategy is an independent variable and the structure of
organization should conform to the strategy. In other words, this view suggests that
structure follows the strategy of a contention in this respect is that structure is not
necessarily a dependent VP and that it can influence the strategic choice through
perception of the strategic issues. A third viewpoint suggests that the relationship
between strategy and structure or the precedence of one over the other depends on
organizational slack or resource constraints.
14.2.2 Organizational growth and stages of development theories
Chandler's study of the growth of American enterprises and the stages of development
discerned by him have led to the emergence of organization growth models is based on
the stages of development identifiable in the process of growth of firms. The concept of

organizational growth model is founded on the hypothesis that as a firm evolves it tends
to go through different stages of growth and development, and that at different stages of
development firms require different forms of organization to meet the economic,
conditions and competitive situations typical of those stages. Broadly speaking, the
stages of development theories based on organizational growth models essentially
consist of three propositions.
i. Changes in managerial style and organization structure are associated with the growth
of firms;
ii. There is a continuum of organizational forms and as a firm develops there is a
movement away from a simple form toward more complex forms; and
iii. The development occurs in three stages - a small, single product company (stage 1)
leads to a specialized functional company (stage 2) which finally leads to a multiproduct
diversified company (stage 3).
Cannon has given a detailed description of the model of organizational growth
distinguishing between five stages as shown in below table.

As is seen from the table, according to Cannon, the predominant characteristic of

companies in stage 1 entrepreneurial stage is that it is a one-man show. The top person
makes all strategic and operational decisions though a few key persons may assist him.
He manages all affairs through an informal structure and communication system. There
is minimal need for coordination and control as most employees report directly to the
boss.

With the growth of sales volume specialization becomes necessary and operating
decisions are delegated to managers in charge of functional departments. There is group
decision making in strategy formulation. The structure is formalized and is based on
areas of functional responsibility. Companies then move into stage 2 functional
developments. Further, growth with diversification and operations involving multiple
products prompts companies to move into stage 3 decentralization through
divisionalisation. The organisation is divided into semi-autonomous profit centers or
product divisions. The divisional managers make all operating decisions relating to their
respective units/divisions. Strategic planning and decisions are handled by top
management at the corporate headquarter. However, the decentralized organization
structure typical of stage 3 development gives rise to new problems and complexities of
resource allocation of efforts and control. At this stage, companies may move into stage
4 proliferations of staff specialists to resolve the problems thrown up in stage 3.
Increasing dependence on staff assistance in decision making leads to slower
communications and problems of line-staff conflict; when companies may be compelled
to move into stage 5 recentralization. It really implies movement back to stages 1 and
2. Corporate management makes strategic decisions and the organization structure is
based on functional specialization along with tightening of controls. Thus Cannons
model will be seen as basically a 3-stage cycle of development: entrepreneurial,
functional, and divisional.
14.2.3 Leadership and organization climate
The form of organization of a firm besides establishing the inter relationship between
the differentiated units and subunits also seeks to regulate the pattern of managerial
behavior and supplements the managerial efforts to achieve the organizational
objectives. The structure of organization, however, is a necessary but not sufficient
condition for successful implementation of strategy. Poor results may be as much
manifest in an organizationally perfect company as success is in an ill organized
company. Discerning executives in an ill organized company may recognize the
necessity of adjustment and adapt their actions to the informal but more effective
arrangement outside the formal structure. Two other dimensions of strategy
implementation are thus suggested to be of equally critical significance, leadership and
organizational climate.
The choice of leadership is closely related to the nature of strategy to be implemented.
For, it is of foremost importance to ensure that the right type of executives is associated
with the process of implementation at the corporate head quarters and the SBUs.
This may involve:
a. Changing the existing leadership at different levels.
b. Developing appropriate leadership styles.
c. Initiating career development for future executives, and

d. Using OD techniques for change.

Implementation of a new strategy sometimes requires the chief executive to be replaced
by a new incumbent. Chief executives may also be replaced when they are unable to
effectively deal with the demands of dynamic environment. Indeed, the choice of a
strategy is sometimes possible after the existing chief executive has been replaced.
Public ads are quite frequently seen inviting professionally qualified persons to apply
confidentially for executive positions to man product divisions or functional
departments and even for chief executive position in growing concerns.
The quality of leadership is a vital element of the role of executives in the
implementation of strategic decisions. Chester Barnard defined leadership as the quality
of the behavior of individuals whereby they guide people or their activities in organized
effort. The range of skills and abilities, which make for effective leadership, is seldom
expected to be possessed by a single individual so as to take acre of all aspects of the
strategic process. Collectively, the chief executive and top managers must be capable of
fulfilling the task, which are required to be performed in the process. According to
Chester Barnard, the four areas of leadership behavior consist of the determination of
objectives, the manipulation of the means control of the instrumentality of action, and
the stimulation of coordinated action. The elements of strategy development and
implementation necessitate effective, leadership in all these areas. The role of the chief
executive as organization leader is both crucial and onerous. Successful implementation
of strategy requires that the organization leader act as its promoter and defender. He
must integrate the conflicting interests, which necessarily arise around him. He must
ensure that the organizations essential needs are met; and he must be the judge of
results. Above all, he has also the responsibility for developing a climate conducive to
the business mission.
Organizational climate generally refers to the quality of the internal environment which
conditions in turn the quality of cooperation, the development of individuals, the extent
of members dedication or commitment to organizational purpose, and the efficiency
with which that purpose becomes translated into results. The nature of climate is
determined by the processes of leadership, motivation, decision-making,
communication and control and by the corporate culture. The indicators of a favorable
climate may thus be suggested with reference to more important dimensions of climate
as follows:

Dimensions of Leadership Style: Management styles may have different

orientations. These are referred to as dimensions of leadership style as manifested
through the orientations. Top management of organizations may differ in their
orientations reflecting any one of the following dimensions of style:

Khandwala, on the basis of his extensive studies on management styles, found that when
the management style was appropriate to the environment faced and the strategy
chosen accordingly, firms could achieve the goals more effectively. He differentiated
between seven types of management styles on the basis of 5 dimensions. Top

management styles were classified as: 1. Entrepreneurial, 2. Neo-scientific, 3. Quasiscientific, 4. Muddling-through, 5. Conservative, 6. Democratic, 7. Middle of the road,
their distinctive characteristics varying in terms of a) risk-taking, b) technocracy, c)
organicity, d) participation, and e) coercion.
The types of leadership styles along with the orientations of management are shown
below:

The environmental conditions, which were matched by different types of management

styles and proved effective were found to have characteristics distinguishable in terms
of:
i. Degree of turbulence or volatility
ii. Degree of hostility (risk involved)
iii. Heterogeneity of market conditions
iv. Social, economic, political, and legal constraints, and
v. Complexity of technologies
The following table shows environmental conditions matched by corresponding
management styles:

While it is important for the management style to be appropriate of the chosen strategy
to ensure effective implementation. Increasing attention has recently been given to the
significance of compensation incentives and career development plans for the top
executives which must be needed to match which the strategic choice. It is thus argued
that to motivate top executives to achieve the strategic objectives, their achievements
should be linked with appropriate compensation incentives and career development
plans, taking into account the executives abilities, experience, education, personality
and style of management.
14.2.4 Resource allocation
Decisions bearing on the allocation of resources have vital significance in the process of
strategy implementation. In a single product firm, it may involve assessment of the
needs of the different functional departments. In the multidivisional organizations it
implies the resource needs of different SBUs or product divisions. Resources may be
said to consist of money, facilities and equipment, materials, supplies and services, and
personnel.
14.2.5 Planning and control system for strategy implementation
The process of strategy formulation is referred to in current literature as strategic
planning and is distinguishable from management planning and control for strategy
implementation. Strategic planning is defined as the process of deciding on the
objectives of the organization, on the changes in the objectives on the resources used to
attain these objectives, and on the policies that are to govern the acquisition, use and
disposition of these resources. It involves matching of the external economic, political

and social environments to corporate capabilities and setting the long-term objectives
and goals of the organization as well as the policies and strategies to achieve the
objectives. As Anthony has put it, strategic planning is a process having to do with the
formulation of long range strategic plans and policies that determine or change the
character or direction of the organization. In an industrial company, this process
includes planning that affects the objectives of the company the acquisition and
disposition of major facilities, divisions, or subsidiaries, policies of all types, including
policies as to management control and other processes, the markets they service and
distribution of channels for serving them, the organization structure, research and
development of new product lines, sources of new permanent capital, and dividend
policy and so on.
As distinguished form of strategic planning, the system of management planning and
control is associated with the ongoing administration of an enterprise. It is the process
by which managers assure that resources are obtained and used effectively and
efficiently in the accomplishment of the organizations objectives. It accepts the
corporate objectives evolved by strategic planning as givens and attempts to relate the
organizational resources to the objectives in order to arrive at a time-phased statement
of the corporate goals and objectives and operational plans. Thus, the management
planning and control system may be regarded as the medium through which the
strategic objectives, policies and plans are translated into more specific, measurable,
attainable and meaningful goals and plans. Conceptually, it is a part of the total concept
of strategy-a segment of the strategy implementation phase.
The management planning system involves the preparation of annual plans formalizing
the overall corporate goals and objectives in terms of sales, costs, margins, profits, and
return on capital, broken up as necessary, in relation to products, operations, and
geographic location of the activities. It may also involve the development of longer term
action plans defining the possible ranges of sales and market share, costs, profits, capital
expenditure, expected return on investment, and the operational plans in terms of
money, men, and materials, which would be required over the time span in order to
achieve the predetermined corporate objectives. The formal planning system should
ensure that the executives, with participation from managers at lower levels, break down
the institutional objectives into functional and divisional objectives, thus translating
strategic considerations into management considerations for specific time periods.
The planning and control system to be effective requires the organisation structure to be
such that it defines authority and responsibility in terms of job to be accomplished.
For effective implementation of strategy, the essential elements of the planning and
control system should consist of
i. An appropriate organization structure that defines authority and responsibility
in terms of the job to be accomplished;
ii. Goals and targets of organizational units based on the input-output relationship in
the relevant operations;

iii. A reporting system that can quickly diagnose deviations from the desired results,
particularly in those areas which represent key variables in operations;
iv. A follow-up mechanism to ensure prompts remedial action by proper analysis,
review, and coordinated action.
v. Participation and support of all levels of management and supervisory personnel.
The planning device commonly used to implement strategy is the budget. As an
instrument for putting plans and policies into effect the budget enables management to
formalize goals and targets to quantitative/financial terms. Moreover, budgeting
requires the participation of managers at different levels in the development of plans
and policies. A motivational force is thus built into the process of planning and control,
which is a vital necessity for successful implementation of the strategy. Its usefulness
notwithstanding, budgeting has also its inherent limitations. But on balance, many of
the limitations may be found to lie not in the budget or the process of budgeting in the
lack of management awareness of the limitations or the improper use of budgets.
Implementation of strategy involves a wide range of policy decisions to be made
including those relating to the functional areas. The purpose of policy as a guide to
decision making is to pull out and clarify strategy, to provide a basis for interpreting
strategy which is usually stated in general terms. A carefully selected policy sharpens the
meaning of the strategy and guides specific decisions in a direction that supports the
strategy.
14.3 INTERNAL DEVELOPMENT
Entry through internal development involves the creation of a new business entity in an
industry, including new production capacity, distribution relationships, sales force and
so on. Joint ventures raise essentially the same economic issues because they are also
newly started entities, although they create complicated questions about the division of
efforts among the partners and how effective control has been.
The first important point in analyzing internal development is that it requires the firm
to confront directly the two sources of entry barriers into an industry structural entry
barriers and the expected reaction of incumbent firms. The entrant through internal
development must pay the price of overcoming structural entry barriers and face the
risk that existing firms will retaliate. The cost of the former usually involves up-front
investment and start up losses, which become part of the investment base in the new
business. The risk of retaliation by existing firms can be viewed as an additional cost of
entry, equal to the magnitude of the adverse effects of retaliation multiplied by the
likelihood that retaliation will occur. The appropriate analysis of a decision to enter will
balance the following cost and benefits:
i. The investment costs required to be in the new business, such as investment in
manufacturing facilities and inventory;

ii. The additional investment required to overcome other structural entry barriers, such
as brand identification and proprietary technology;
iii. The expected cost from incumbents retaliation against the entry balanced against;
ix. The expected cash flows from being in the industry.
Many capital budgeting treatments of the entry decision neglect one or more of these
factors. For example, too often the financial analysis assumes the industry prices and
costs prevailing before entry and measures only the clearly visible investment necessary
to the business like constructing manufacturing facilities and assembling a sales force.
Ignored are the more subtle costs of overcoming structural entry barriers, such as
established brand franchises, distribution channels tied up by competitors, competitors
access to the most favorable sources of raw materials, or the need to develop proprietary
technology. Also new entry can raise the prices of scarce supplies, equipment, or labor,
which means that the entering firm must bear higher costs.
Another factor often neglected is the effect the entrant's new capacity will have on the
supply demand balance in the industry. If the internal entrants addition to industry
capacity is significant, is efforts to fill its plant will mean that at least some other firms
will have excess capacity.
Even more neglected in the entry decision is the impact of the probable reactions of
existing firms.
14.3.1 Identifying target industries for internal entry
The expected profitability of the firms in an industry depends on the strength of the five
competitive forces: rivalry, substitution, bargaining power of suppliers and buyers, and
entry. Entry acts as a balance in determining industry profits. If an industry is stable, or
in equilibrium, the expected profits of entrants should just reflect the height of
structural barriers to entry and the legitimate expectations of entrants about retaliation.
The potential entrant, calculating its expected profits, should find that they are normal
or average profits, even though the profits of incumbents may be high. Because the
entrant must overcome structural entry barriers and bear the risk of reaction from going
firms, it faces higher costs than the successful firms in the industry and these costs
eliminate its above average profits. If the costs of entry did not offset the above average
returns, other firms would already have entered and driven profits down to the level
where the cost of entry and the benefits of entry cancel. Thus it will rarely pay to enter
an industry in equilibrium unless the firm has special advantages - market forces are at
work that eliminates the returns.
Prime targets for internal entry by a firm fall into one of the following categories.
1. The industry is in disequilibrium
2. Slow or ineffectual retaliation from incumbents may be expected.

3. The firm ahs lower entry costs than other firms.

4. The firm has distinctive ability to influence the industry structure.
5. There will be positive effects on firms existing businesses.
1. Industries in disequilibrium
Not all industries are in equilibrium.
a. New industries: In new, rapidly growing industries, the competitive
structure is usually not well established and the costs of entry may be much less
than they will be for later entrants. Probably no firm will be locked fro supplies of
raw materials, created significant brand identification, or have much proclivity to
retaliate to an entry. Growing firms may face limits on the rate at which they can
expand. However, a firm should not enter a new industry just because it is a new
industry. Entry will not be justified unless a full structural analysis lead to the
prediction of above average profits for a period longs enough to justify the
investment. It is also important to note that in some industries the cost of entry
for pioneers is greater than for firms entering later, just because of the costs of
pioneering. Finally other entrants may well be forthcoming into a new industry,
and in order for it to expect profits to remain high the firm must have some
economic basis for believing that later entrants will face entry costs higher than
its own.
b. Rising Entry Barriers: Increasing entry barriers mean that future profits
will more than offset the current costs of entry. Being first or one of the early
entrants can minimize entry costs and also sometimes yield an advantage in
product differentiation. However if many other firms also enter early, this door
may be closed. Thus the premium in such industries is on moving early and then
facilitating the rise in entry barriers to block later entrants.
c. Poor Information: A long run imbalance between the cost of entry and
expected profits may be present in some industries because of lack of recognition
of this fact by potential entrants. This situation may occur in back water or
obscure, industries which do not come to the attention of many established firms.
2. Slow or ineffectual retaliation
There may also be a favorable imbalance between expected profits and the cost of entry
in industries whose incumbents are profitable but are sleepy, poorly informed or
otherwise impeded from timely or effective retaliation. If a firm can be among the first
to discover such an industry, it can reap above average profits.
Industries that may be ripe targets for entry do not have the characteristics leading to
vigorous retaliation and possess some other unique factors.

Incumbent's cost of effective retaliation outweighs the benefits. The firm considering
entry must examine the calculation each significant incumbent will make in deciding
how vigorously to retaliate. It must forecast how large profit erosion the incumbent
must bear if it tries to inflict losses on the entrant. The entrant not only can choose
industries in which incumbents are less likely to retaliate but also can influence the
probability of retaliation.
There is a paternal dominant firm or tight group of longstanding leaders. A dominant
firm with a paternal view toward the industry may have had to compete and may be slow
to learn. The leader may see itself as the protector of the industry and its spokesperson.
Incumbents costs of responding are great given the need to protect their existing
businesses. For example, responding to an entrant who is using a new distribution
channel may alienate existing distributors loyalties. Opportunity is also present if an
incumbents response to a new competitor will cut into its sales, will help legitimize the
strategy of the entrant, or will be inconsistent with the incumbents image in the market
place.
3. Lower entry costs
A more common and less risky situation where market forces do not negate the
attractiveness of internal entry is an industry in which not all firms face the same entry
costs. If a firm can overcome structural entry barriers into an industry more cheaply
than most other potential entrants, of if it can expect less retaliation, a firm can reap
above average profits from entry. The firm also may have special advantages in
competing in the industry that outweigh entry barriers.
The ability to overcome structural entry barriers more cheaply than other potential
entrants usually rests on the presence of assets or skills drawn from the entrants
existing businesses or on innovation that provide a strategic concept for entry. The firm
can look for industries in which it as capability to overcome entry barriers because of
proprietary technology, established distribution channels, a recognized and transferable
brand name, and so on. If many other potential entrants have the same advantages, then
these advantages will probably be reflected in the balance between the cost of entry and
the benefits of entry. However, if the firm's ability to overcome structural entry barriers
is unique or distinctive, the entry is likely to be profitable.
4. Distinctive ability to influence industry structure
Internal entry will be profitable despite the market forces if the firm has some
distinctive ability to change the structural equilibrium in the target industry. If the firm
can increase mobility barriers in the industry for subsequent entrants, for example, the
structural equilibrium in the industry will change. The initiator will then be in a position
to reap above average profits from entry. Also entry into a fragmented market can
sometimes start in motion a process that greatly increases mobility barriers and leads to
consolidation.

5. Positive effect on existing businesses

Internal entry will be positive, even in the absence of the conditions described above, if
it ahs a beneficial impact on the entrants existing businesses. This impact occurs
through the improvement of distributor relations, company image defense against
threats and so on. Thus even if the new business earns an average return, the company
as a whole will be better off.
Xerox's proposed entry into national digital data transmission networks may be an
example of entry on this basis. Xerox seems to try to build a broad base in the office of
the future. Since data transmission among computers, electronic mail and elaborate
linkage of company locations is likely to be part of this future - as well as conventional
copying - Xerox may be trying to protect its existing strong base even though it ahs no
special advantages in the data network business.
Generic concepts for entry
Some common approaches to entry, which rest on various concepts for overcoming
entry barriers more cheaply than other firms, are as follows:
Reduce product costs. Finding a way to produce the product at lower cost than
incumbent: Possibilities are - - an entirely new process technology; a larger plant,
reaping greater economies of scale, more modern faculties, incorporating technological
improvements, shared activities with existing businesses that yield a cost advantage.
Buy in with low prices. Buy into the market by sacrificing returns in the short run to
force competitors to yield share. The success of this approach depends on competitor's
unwillingness or inability to retaliate in the face of the particular strengths of the
entrant.
Offer a superior product, broadly defined. Offer an innovation in product or service
that allows the entrant to overcome product differentiation barriers.
Discover a new niche. Find an unrecognized market segment or niche which has
distinctive requirements the firm can cater to. This move allows the entrant to overcome
existing barriers in product differentiation.
Introduce a marketing innovation. Find a new way to market the product, which
overcomes product differentiation barriers or circumvents distributors power.
Use piggybacked distribution. Build an entry strategy on established distribution
relationships drawn from other businesses.
14.4 INTERNATIONAL DEVELOPMENT
An international company is one that engages in any combination of activities from
importing/exporting to full-scale manufacturing in foreign countries. The multinational

corporation in contrast, is a highly developed international company with a deep

involvement throughout the world, plus a worldwide perspective in its management and
decision-making. For multinational corporations to be considered global, it must
manage its worldwide operations if they were totally interconnected. This approach
works best when the industry has moved from being multidomestic to global.
Strategic alliances, such as joint ventures and licensing arrangements, between an MNC
and a local partner in a host country are becoming increasingly popular as a means by
which a corporation can gain entry into other countries, especially less developed
countries. The key to the successful implementation of these strategies is the selection of
the local partner. Each party needs to assess not only the strategic fit of each companys
project strategy, but also the fit of each company's respective resources. A successful
joint venture may require as much as two years of prior contacts between two parties.
The design of an organization structure is strongly affected by the company's stage of
development to international activities and the types of industries in which the company
is involved. The issue of centralization versus decentralization becomes especially
important for a multinational corporation in both multidomestic and global industries.
Stages of International Development
Corporations operating internationally tend to evolve through five common stages, both
in their relationships with widely dispersed geographic markets, and in the manner in
which they structure their operations and programs. These stages of international
development are
Stage 1. Domestic Company: The primarily domestic company exports some of its
product through local dealers and distributors in the foreign countries. The impact on
the organizations structure is minimal because an export department at corporate
headquarters handles everything.
Stage 2. Domestic Companies: With Export Division. Success in stage 1 leads the
company to establish its own sales company with offices in other countries to eliminate
the middlemen and to better control marketing. Because exports have now become
more important, the company establishes an export division to oversee foreign sales
offices.
Stage 3. Primarily Domestic Companies: With International Division. Success
in earlier stages leads the company to establish manufacturing facilities in addition to
sales and service offices in key countries. The company now adds an international
division with responsibilities for most of the business functions conducted in other
countries.
Stage 4. Multinational Corporations: With Multidomestic Emphasis. Now a fullfledged multinational corporation, the company increases its investments in other
countries. The company establishes a local operating division or company in the host
country, such as ford of Britain, to better serve the market. The product line is

expanded, and local manufacturing capacity is

established. Managerial functions like product development, finance, marketing,
and so on are organized locally. Over time, the parent company acquires other related
businesses, broadening the base of the local operating division. As the subsidiary in the
host country successfully develops a strong regional presence, it achieves greater
autonomy and self-sufficiency. The operations in each country are nevertheless,
managed separately as if each is a domestic company.
Stage 5. Multinational Corporations: With Global Emphasis. The most
successful multinational corporations move into a fifth stage in which they have
worldwide personnel, R&D, and financing strategies. Typically operating in a global
industry, the MNC denationalizes its operations and plans product design,
manufacturing, and marketing around worldwide considerations. Global considerations
now dominate organizational design. The global MNC structures itself in a matrix form
around some combination of geographic areas, product lines, and functions. All
managers are now responsible for dealing with international as well as domestic issue.
Research provides some support for the stages of international development concepts,
but it does not necessarily support the preceding sequence of stages. For example, a
company may initiate production and sales in multiple countries without having gone
through the steps of exporting or having local sales subsidiaries. In addition, any one
corporation can be at different stages simultaneously, with different products in
different markets at different levels. Firms may also leapfrog across stages to a global
emphasis. The widespread growth of the Internet is changing the way business is being
done internationally. Nevertheless, the stages concept provides a useful way to illustrate
some of the structural changes corporations undergo when they increase their
involvement in international activities.
14.5 CENTRALIZATION VERSUS DECENTRALIZATION
A basic dilemma a multinational corporation faces is how to organize authority centrally
so that it operates as a vast interlocking system that achieves synergy, and at the same
time decentralize authority so that local managers can make the decisions necessary to
meet the demands of the local market or host government. To deal with this problem,
MNCs tend to structure themselves either along product groups or geographic areas.
They may even combine both in a matrix structure -the design chosen by 3M
corporation and Asia Brown Boveri (ABB), among others. One side of 3Ms matrix
represents the company's product divisions; the other side includes the company's
international country and regional subsidiaries.
Two examples of the usual international structures are nestle, and American Cyanamid.
Nestles structure is one in which significant power and authority have been
decentralized to geographic entities. American Cyanamid has a series of centralized
product groups with worldwide responsibilities.
The product group's structure of American Cyanamid enables the company to introduce
and manage a similar line of products around the world. This enables the corporation to

centralize decision making along product lines and to reduce costs. The geographic area
structure of nestle in contrast, allows the company to tailor products to regional
differences and to achieve regional coordination. This decentralizes decision making to
the local subsidiaries, as industries move from being multidomestic to more globally
integrated, multinational corporations are increasingly switching from the geographic
area to the product group structure.
Simultaneous pressures for decentralisation to be locally responsive and centralization
to be maximally efficient are causing interesting structural adjustments in most large
corporations. This is what is meant by the phrase "think globally, act locally. Companies
are attempting to decentralize those operations that are culturally oriented and closest
to the customers - manufacturing, marketing and human resources. At the same time,
the companies are consolidating less visible internal functions such as research and
development, finance, and information systems, where there can be significant
economies of scale.
14.6 SUMMARY
After reading this lesson you will be in a position to under the various stages of
implementation and its impact elaborately.
14.7 ASSIGNMENT QUESTIONS
1. Briefly explain in detail about implementing strategy?
2. Explain the implementing process?
3. Write short notes on internal development?
4. Write short notes on international development?
5. Write in brief about centralization vs. decentralization?
6. Write short notes on functional area strategies?
7. Write a note on resource allocation?
8. Explain in detail about the theories of development and its stages?

- End of Chapter LESSON 15

ACQUISITIONS & BUILDING CULTURE

OBJECTIVES

To understand the concept of acquisitions, joint venture and different cultures

CONTENTS
15.1 Acquisitions
15.1.1 Techniques of Merger, Acquisition or Take-Over
15.1.2 What motivates executives to initiate mergers and acquisitions?
15.1.3 Pros and cons of mergers and acquisitions.
15.1.4 Who benefits from mergers and acquisitions?
15.1.5 Why are mergers not always successful?
15.1.6 Guidelines for effective mergers
15.2 Joint Venture
15.2.1 Why are joint ventures promoted?
15.2.2 Problems of joint venture.
15.3 Building culture for successful implementation
15.3.1 Organization culture
15.3.2 Origin of organizational cultures.
15.3.3 Identifying and classifying organizational cultures
15.3.4 Organizational culture grid
15.3.5 Hypothetical culture
15.3.6 Types of organizational culture

15.3.7 Changing organizational cultures.

15.4 Summary
15.5 Assignment questions
15.1 ACQUISITIONS
Combination of two or more firms is known as merger. It may be brought about in two
ways: (i) acquisition of one business unit by another, or (ii) creation of a new company
by complete consolidation of two or more units. A combination of two or more business
units in which one acquires the assets and liabilities of the other in exchange for cash or
shares and/or debentures, is generally known as merger through acquisition or
absorption. When all the combining units are dissolved and a new company is formed to
take over the assets and liabilities of those units against issue of new shares or
debentures, it is described as amalgamation or consolidation. Merger by way of
acquisition as well as merger by way of consolidation is widely recognized as desirable
strategies of external growth.
15.1.1 Techniques of Merger, Acquisition or Take-Over
Mergers may take place with a cooperative, friendly approach on the part of the
combining firms, or it may be accomplished by one firm through a bid to take over
another with a hostile approach. A friendly merger takes place when tow companies
agree upon the benefits of merger and work together to achieve it. It results in a
negotiated acquisition of one firm by another. A hostile merger often called take-over
involves one firm acquiring control over another firm that resists it. Purchasing in the
open market a sizable amount of shares of the target company generally does this.
Some recent instances of takeover bids in India made headlines on account of the legal
and technical issues involved. In 1983 attempt was made by the London based
industrialist, Swaraj Paul, to buy up shares in escorts and DCM, making a bid for
takeover of the management of the two companies. Purchase of shares was apparently
encouraged by the non-resident investment scheme of the union ministry of finance, the
implications of which were still to be analyzed. One of the implications was the possible
destabilization of the existing management of corporate enterprises. Another none-toodesirable implication was the possibility of foreign multinationals making inroads in the
Indian market.
15.1.2 What motivates executives to initiate mergers and acquisitions?
Various considerations underlie the decision of companies to merge or to go in for
acquisition of other companies. For a firm intending to acquire or takeover another
firm, merger may be desirable to enable the existing management to achieve one or
more of the following goals.
i. To attain a higher growth rate than is possible through internal growth strategy

ii. To bring about an increase in the price earnings ratio and market price of shares
iii. To purchase a unit for better use of investible funds
iv. To have quick access to resources already developed by another firm through R&D
and innovative management
v. To reduce competition by acquiring competing firms
vi. To fill the gap in the existing product line
vii. To add new products (diversify) when the existing product has reached the peak in
its life cycle
viii. To secure tax advantage by acquiring other firms with accumulated losses, which
can be set off against the current or future profits
ix. To improve the efficiency of operations and attain higher profitability through
potential synergistic effects
x. To improve the stability of earnings and sales by acquiring firms with the sales and
earnings to complement business fluctuations
Considerations motivating firm's executives to agree to its acquisition or takeover by
another firm may be one or more of the following:
1. To have access to resources to improve stability of operations and efficiency of
management.
2. To secure a higher growth rate with additional resources.
3. To ensure increase in the value of owners investments in shares.
4. To extend the owning family's involvement in other business fields by diversifying
their holdings and investments.
5. To resolve management problems, e.g. dissensions among senior executives,
succession crisis etc.
6. To reduce the burden of wealth and property of taxes of individual or family-owned
firms.
In the United States, conglomerate mergers are often initiated to achieve higher growth
without attracting Anti-Trust laws. In India, this was not likely to be a motivating factor
till July 1991 due to provisions of the MRTP Act.
15.1.3 Pros and cons of mergers and acquisitions.

As growth strategies, mergers and acquisitions have been quite popular in all advanced
countries. This is obviously because of the benefits expected to be derived by either or
both the combining firms. The following advantages are related with the strategy.
a. Economies of large-scale operation.
b. Better utilization of funds to increase profits.
c. Diversification of activities for stability and higher profits.
d. Achievement of progress and influence in industry.
e. Increased productivity by reason of a more efficient and effective utilization of all
resources.
f. Failing firms, which need financial support and revamping of management, are
revived through merger with more resourceful and efficient firms.
g. Often it is cheaper to buy or acquire an existing firm than to build a new business,
plant or market from search.
h. Under certain conditions, market entry is more easily possible through acquisition of
existing firms. Thus, acquisition may be an appropriate strategy where existing market
shares are accompanied by patronage entry barriers along with product differentiation
and advertising expenditure, or where competitors are capable of fighting back price
competition because of their operating efficiency or financial resources.
i. Merger or acquisition not only secures for an expanding firm the necessary working
plant and equipment more quickly than building up capacity on its own, but it may also
help the firm to avoid the problems of access to scarce the raw materials and
distribution network.
j. For an expanding firm, limitation of managerial resources either to implement the
growth process or to manage the expanded volume of business can be overcome by
acquiring an existing business with requisition management competence.
However, mergers and acquisitions are not always successful. According to Harry Levin
son many mergers have been disappointing in their results and painful to their
participants primarily due to psychological reasons arising out of the neurotic wish to
become big by all means and because of condescending attitude of the senior partner
towards the junior organization.
Research studies on the value of mergers have shown that the growth rate and
profitability of the combined organization tend to decline as compared with the
performance of the combining firms. Executives of the acquired firm often lose their
status, authority and even their jobs. From the social point of view mergers give rise to

monopolistic conditions with increased concentration of economic and political power,

higher prices, restricted supply, and other abuses of monopoly.
15.1.4 Who benefits from mergers and acquisitions?
An increasingly larger number of mergers and acquisitions taking place in recent
decades in the industrial countries unmistakably show that executives have a strong
preference for mergers and acquisitions, rather than internal growth, as convenient
means of corporate growth, achieving market entry, diversification, and presumably also
as means of improving operational efficiency and realizing potential profitability gains.
And yet, research evidence on the post-merger performance of the combined firms in
USA and UK seems to indicate that mergers have in many cases resulted in significant
reduction in the efficiency of the combined undertakings as measured by profitability
and shareholders wealth. A possible explanation of the persistent trend of mergers may
be the managerial motives underlying the phenomenon. Obviously, the size of the firm,
growth and market share offer both pecuniary and non-pecuniary attractions to the
senior executives of companies, given the divorce between ownership and management
control. Thus executives have strong reasons to pursue acquisition and merger
strategies for the benefits of growth and size etc. within certain limits and without
seriously hurting the shareholders interest.
15.1.5 Why are mergers not always successful?
Going by the research evidence, mergers have not been generally successful from the
shareholders point of view. There are also evidences to show that they have not been
successful in many cases form the point of view of management. The question therefore
is: what prevents the successful consummation of mergers? The possible reasons for
failure of mergers may be one or more of the following lapses on the part of
management:
i. Failure of management to establish merger objectives, which fit into the overall
corporate strategy. Kitching, in his study of the outcome of mergers in the U.S.A., found
that acquisitions were largely accidental and did not fit into a pattern of planned
strategic growth, and that, even if acquisitions did form part of a thought - through
management programmed thinking was often dangerously shallow. Indeed, the
objectives of merger should stem from corporate strategy since merger or acquisition is
one of the means of achieving corporate goals.
ii. Management's failure to consider the relative merits of internal and external means of
achieving corporate goals. Considering the low rate of success, mergers should be
recognized as more risky than internal growth strategy. Yet managers often regard
merging per se as a major goal of the firm rather than as a means. Newbould in this
study of horizontal mergers in UK found that in the large majority of cases internal
growth strategy was neither formally nor informally considered as an alternative before
any of the mergers were undertaken.

iii. Lack of serious consideration of the financial stake. Not infrequently pricing of
acquisitions is characterized by an attitude of recklessness, and on occasions there is
considerable over pricing and high premiums paid by acquiring firms. Sometimes over
pricing is due to unrealistic assumptions made about the future earnings. This again
reflects inadequate scrutiny of the merger plans. Indeed, the very short time gap
between the first discussion of a merger possibility and public announcement is hardly
conducive to a serious analysis of the financial aspects and other implications of the
merger proposed.
iv. Insufficient familiarity of the management of acquiring firms with the business of the
acquired firms. Failure of mergers is often due to the facile assumption that
management expertise can be carried over from one type of activities to another.
Actually human problems and complex structuring of organizational relations are
sometimes beyond the capability of the management of acquiring firms. This again may
be due to the lack of any serious analysis of the merger proposal.
v. Lack of preparation with post-merger planning, organization and control.
Undoubtedly, the post-merger phase of management action is as important for success
as the pre-merger considerations. Newbould's study of mergers in UK showed that half
the number of firms in his sample had not taken positive steps after the merger to
benefit from the combined operations. In many cases, there was more eagerness for
acquisition than for rationalization.
15.1.6 Guidelines for effective mergers
Mergers and acquisitions involve a complex set of decisions to be made as regards
financial arrangements, organizational changes and adjustments of different kinds.
Thus, it is necessary that i. First, a separate plan and programme should be drawn up so as to ensure a smooth
transition from the pre-merger to the post-merger stage.
ii. Secondly, executive responsibilities should be realigned for necessary implementation
of the plan and programme.
iii. Thirdly, the management information system should be redesigned for effective top
management control.
On the basis of own experience with merges, an American executive has suggested the
following guidelines for carrying through the process of merger or acquisition
effectively.
i. Specify clearly the merger objectives, especially earnings objectives.
ii. Work out and specify the gains of shareholders of both the combining units.
iii. Be sure that the management of the acquired company is or can be made competent.

iv. Note the existence of important dovetailing resources but do not expect perfect
compatibility.
v. Initiate the process of merger with the active involvement of the chief executive.
vi. Clearly define the business that the company is in.
vii. Identify and check on the strengths, weaknesses and key performance factors for
both the combining units.
viii. Anticipate the problems and discuss them early with the other company so as to
create a climate of trust.
ix. Be sure that the merger does not pose a threat to the present management team.
x. People should be of prime consideration in planning for merger and structuring the
organization.
15.2 JOINT VENTURE
When two or more independent firms mutually decide to participate in a business
venture, contribute to the total equity capital and establish a new organization, it is
known as a joint venture. As a growth strategy, joint venture may be regarded as a cross
between internal and external growth. Firms within a country as well as firms in
different countries may participate in a venture, though instances of joint venture
happen to be more common among firms in different countries.
A tie-up between Tata Industries Ltd, and IBM World Trade Corporation led to the
setting up of Tata Information Systems Ltd, with Tata and IBM each holding 50%
equity. Hindustan Computers Ltd. and Hewlett-Packard of USA have formed HCL-HP, a
joint venture organization, which has set up a multipurpose plant in NOIDA, Delhi's
satellite city.
15.2.1 Why are joint ventures promoted?
As a strategy joint ventures may offer several advantages. A number of studies in the
United States have shown that the main purposes of joint ventures within the country
were controlling, influencing or reducing competition and/or influencing suppliers.
Generally, joint ventures between companies within a country may take place for one or
more of the following reasons.

It may enable new technology to be introduced more conveniently.

High risks involved in new ventures may be reduced through joint ventures.
Smaller firms joining hands may be able to compete with larger organizations.
Firms in different countries may also find it beneficial to jointly establish a new
enterprise for different reasons, e.g.

The amount of capital outlay to be made by the respective parties may be less
than what it would be otherwise for any one of the parties.
The import content of a project may be conveniently financed by foreign equity
participation.
Entry of multinational corporations is rendered easier by joint ventures in
developing countries as host governments generally do not favor foreign
companies setting up branch establishments or subsidiaries.
Increased sales through joint ventures help in reducing production and
marketing cost.

15.2.2 Problems of joint venture

Promotion of joint ventures, particularly those across national borders, requires careful
consideration of the terms and conditions relating to equity participation voting rights,
dividend remittance, and management control. Often there are legal restrictions on
foreign investment. For instance, the Foreign Exchange Regulation Act has laid down
limits of permissible foreign shareholding in Indian companies. Differences in culture
and differences in the stages of economic development of the countries to which the
parties belong are also known to have created problems for joint ventures across
national borders. Joint ventures between unequal partners often tantamount to quasimergers and may attract anti-monopoly regulations.
15.3 BUILDING CULTURE FOR SUCCESSFUL IMPLEMENTATION
15.3.1 Organization culture
Anthropologists have defined culture as a set of habitual and traditional ways of
thinking, feeling and reacting that are characteristic of the ways a particular society
meets its problems at a particular point in time. Organizations also have cultures.
Organizational culture is the pattern of beliefs and expectations shared by the
organizations members, which powerfully shape the behavior of individuals and groups
within the organization. Organizational cultures provide a guide to how things are done
and how people relate within the organization.
Culture in an organization is analogous to personality in an individual. Just as people
have relatively enduring and stable traits, which influence their attitudes and behaviors,
so do organizations. In addition, certain groups of traits or personality types can be
identified because they consist of common elements. Organizations can be described as
in similar terms: warm, aggressive, friendly, open, innovative, conservative, and so
forth. An organizations culture is transmitted in many ways, including long standing
and often unwritten rules, shared standards about what is important, prejudices,
standards for social etiquette and demeanor, established customers on how to relate to
peers, subordinates, and superiors, and other traditions that clarify to employees what is
and is not appropriate behavior.
15.3.2 Origin of organizational cultures

Ideally, an organizations culture should develop and evolve from its statement of
philosophy. However, it is not unusual for an organizations culture to be different from
the ideals expressed in the corporate philosophy. The clearest understanding of an
organizations culture comes from an examination of the practices of its management
team. The day-to-day behaviors of management shape and determine the culture.
Many organizations trace their culture to an individual who personified the major values
of the organization. Robert Wood of Johnson & Johnson, Harley Procter of Procter &
Gamble, Walt Disney of Walt Disney productions, and Thomas j. Watson, Jr. of IBM left
their imprint on their organizations. In organizations that cannot point to such an
influential founder of other top manager, culture appears to develop in response to the
specific environment in which the organization operates and to the needs of its
employees. Four factors that contribute to the origin of an organizations culture have
been identified its history, environment, staffing process, and socialization process.
History
Employees are aware of the organizations past and this awareness builds culture. To a
great extent, the way things are done is a continuation of the way thing has always been
done. The existing values, which may have been deliberately established, are
continuously and subtly reinforced by experiences. The status quo is also reinforced by
the tendency of people to resist strongly changes in beliefs and values. For example,
executives of Walt Disney Productions reportedly pick up litter unconsciously because of
the Disney vision of an immaculate Disneyland.
Environment
Because all organizations must interact with their environment, the environment plays
an important role in shaping an organizations culture. Organizations that operate within
a highly regulated environment, such as public utilities, develop cultures totally
different from organizations that face fierce competition to industries with rapidly
changing technology, such as the computer industry. In fact, since deregulation, many
organizations in the communications, banking, and airlines industries are no longer
sheltered by their regulated environment and must change their cultures. The question
is whether the change can come fast enough to ensure their success and survival.
Staffing process
Organizations tend to hire, retain, and promote people who are similar to current
employees in important ways. A person's ability to fit in can be an employees and
customers. Organizations that are low in this dimension are likely to maintain nonparticipative relationships with employees and customers.
15.3.4 Organizational culture grid
Four major organizational cultures emerge from this two dimensions grid, as illustrated
in below table.

i. Interactive cultures. These cultures are strongly oriented to satisfying the needs of
employees and customers. Good service is an important aspect of these cultures.
Interactive cultures respond to competition and new technologies rather than shaping
the environment.
ii. Integrated cultures. These cultures are also strongly oriented to satisfying the
needs of employees, and customers, but are innovative in new products or services.
iii. Entrepreneurial cultures. Highly innovative in developing new products and
services, these cultures generally have a low orientation toward people in that decision
making tends to be non-participative.
iv. Systematized cultures. These cultures focus on maintaining procedures, and
policies, and systems of ongoing activities. Primarily the external environment drives
decision-making.
15.3.5 Hypothetical culture

A classification of the corporate cultures of several organizations as they have been

described in the media illustrates the use of the grid. For example, Apple computer has
been designated as being proactive in the development of new products and very high
on people. Thus, it would be classified as strongly integrated. IBM would also be
classified as integrated, but would probably be closer to the center due to a combination
of other cultural elements. Sears and McDonalds are both hypothesized to be interactive
and illustrate that companies in different industries can have similar cultures. Ford is
hypothesized to have a systematized culture, whereas Merrill Lynch is hypothesized to
have an entrepreneurial culture.
15.3.6 Types of organizational culture
Another method of classifying cultures uses four categories, which re determined by the
degree of risk associated with the organizations activities and the speed with which
organizations and their employees get feedback on whether their strategic decisions are
successful. There are many different ways to dissect the culture of an organization and
indeed there are many definition of organization culture; for example Deal and Kennedy
identify four generic cultures. These are:
Tough guy macho culture - a world of individualists who regularly take high risks
and get quick feedback on whether their actions were right. Teamwork is not important
and every colleague is a potential rival. In this culture the value of cooperation is ignored
and there is no opportunity to learn from mistakes. In tends to reward individuals who
are temperamental and shortsighted. Among the organization or professions in which,
they claim, this culture prevails are police and other emergency services, surgeons,
construction, cosmetics, management consulting, venture capitalists, advertising,
television, movies, publishing sport - the entire entertainment industry.

 Work hard/play hard culture - fun and action are the rule here but employees
take few risks and to expect feedback. In this culture activity is the key to success.
Rewards accrue to persistence and the ability to find the need, and fill it. Because of the
need for volume, team players that are friendly and outgoing thrive. According to them,
sales organizations, real estate, computer companies, automotive distributors, door to
door sales, mass consumer sales companies, office equipment manufacturers, and retail
stores are likely to have this culture.
Bet your company culture - a high risk slow feedback organisation. Pressures to
make the right decisions are always present in this environment. Typically, it refers to
companies that invest large sums now to recover them over time. Examples include oil
companies, airplane manufacturers, capital goods companies, mining and smelting,
investment banks, architectural firms, computer design companies, actuarial function
within insurance, and the armed forces.
Process culture - it includes slow feedback organizations employees must focus on
how things are done rather than the outcome. Employees in this atmosphere are
cautious and protective. Those who thrive are orderly, punctual, and detail-oriented
organisations such as banks, insurance companies, financial services, government
utilities, and heavily regulated industries such as pharmaceuticals.
It should be obvious that no organization will precisely fir into either one of these
classification methods. In fact, within any organisation there may be a mix of cultures.
For example, sales may be closer to the work hard/play hard category and research and
development may be closer to a bet your company category.
15.3.7 Changing organizational cultures

Organizational objectives are sometimes not achieved and strategies are ineffective
because of their incompatibility with the organizations culture. However, changing a
corporate culture is a long, difficult process. In fact, massive cultural reorientations are
probably unreasonable in most situations. Allen Kennedy an expert on organizational
culture, believes there are only five reasons to justify large scale cultural change; if the
company has strong values that don't fit its changing environment; if the industry is
very competitive and moves with lightening speed; if the company is mediocre or worse;
if the company is about to join the ranks of the very largest companies, or if it is smaller
but growing rapidly.
Although massive cultural reorientation may be unreasonable in most situations, it is
still possible to strengthen or fine-tune the current situation. A statement of corporate
philosophy that is consistently reinforced by the policies and procedures of the company
is a useful tool for strengthening the culture.
On the other hand, many organizations that are hard pressed to change their culture
seem to find it easier just to fire the senior management team and replace them with a
new team. This view is based on the assumption that most organization promotes
people who fit the prevailing norms of the transition and therefore, the easiest if not the
only way to change the culture is to change the senior management.
15.4 SUMMARY
This lesson explained about the techniques of merger and acquisitions. Further it stated
about the pros and consequences of merger and acquisition and also about the benefits
of the above. The last part of the lesson discussed about the joint venture and building
culture for successful implementation.
15.5. ASSIGNMENT QUESTIONS
1. Write short notes on acquisitions?
2. Write short notes on joint ventures?
3. Explain about building culture for successful implementation in detail?
4. Write short notes on types of organisational culture?
5. Write short notes on culture grid?

- End of Chapter LESSON 16

STRATEGIC CAPABILITIES

OBJECTIVES

To know about strategic capabilities

To understand the Enterprise Resource Planning

CONTENTS
16.1 Strategic capabilities
16.1.1 Planned change
16.1.2 Adaptability as a strategic capability
16.2 Enterprise Resource Planning
16.2.1 What is ERP?
16.2.2 Business modeling for ERP
16.2.3 Salient features of ERP implementation
16.2.4 Steps in implementing ERP
16.2.5 Guidelines for ERP implementation
16.3 Summary
16.4 Assignment questions
16.1 STRATEGIC CAPABILITIES
The purpose of this lesson is to examine how enterprises can build the strategic
capability essential to their future survival in turbulent times. Strategy is mainly about
the future, which at best is only partially predictable. It follows that planned change
alone is inadequate as a mechanism for managing the future. While some uncertainty
can be handled by planned change, some can only be handled by being responsive to
new challenges and opportunities, as they occur. This means that even if an enterprise
has understand its capabilities, analyzed its opportunities, set strategies to success by
optimizing it in the future, it is still necessary for it to be able to handle unexpected
events. To do this, it needs to be adaptable.

Managers need also to concern themselves with the ability of their organization to
exploit new opportunities and threats. This requires them to consider how the
origination should develop the capability of adaptive learning so that it can track
dissonant elements and adapt to them and then incorporate these adaptive skills into
planned learning. This does not mean that there is no planning of change but that there
is an additional ability to adapt to the unforeseen and be capable of planned learning.
16.1.1 Planned change
Planned change as a mode of strategy formulation and implementation implies that the
organization is operating in an environment in which the future may either be predicted
or created. Where such predictability exists, prescriptive models and approaches can be
sued to position the organization to exploit them. This often means applying a set of
rules to project the organization from the present into the future. This prescriptive
model of implementing a preconceived strategy has natural attractions to managers who
like to feel that they have taken appropriate and necessary steps to succeed in the future.
It fits naturally within the traditional view that managers are responsible for the
command and control of the enterprise. It does, however, imply that the enterprise can
determine the future state by its own actions and that it can control or neutralize
competitor responses. This is only true under very particular circumstances such as a
near monopoly or cartel. It may be appropriate, for instance, for utility companies to
take this view. The local gas or electricity company may be able to dominate a
geographical area despite the efforts of regulators and competitors. Managers in these
organizations can devise structures and systems that seek to create order and routine as
a means of achieving control. Such organizations tend to manage external disruption by
the application of predetermined rules and procedures. In this sense, such organizations
tend to be procedural and formalistic in their culture, organization, and processes and
find that this approach serves them well. Safety and security of supply-demand that they
operate to stringent standards and create a mindset that is preconditioned towards
conformity and pre-planned behavior. Command and control concepts tend to influence
their management practices and tend to preclude adaptability as an organizational
competence.
16.1.2 Adaptability as a strategic capability
Organizations that operate in strongly competitive markets cannot take an approach
based solely on plans that anticipate a predictable future. Instead, strategists have to
allow for future uncertainty and find ways of dealing with it. They have to be able to
sense change quickly and respond to it. They have to be more adaptive and find
evolutionary routes to survival. This means that, like an army preparing for battle, they
need to hone their techniques, define different possible scenarios, and define different
approaches to handle each scenario and practice their moves until it becomes second
nature to them. Armed in this way, they enter battle prepared to respond to their enemy.
These contrasts strongly with the approach taken by many who plan a campaign based
on a single most likely scenario and hope that they have chosen the right options form
the many on offer.

Companies that have taken adaptive routes have realized that to be adaptive they need
to spread accountability and responsibility more widely across the organization and
have built cultures that are tolerant of change and risk. Examples that seem to have
achieved adaptability include Hewlett-Packard, Sony and Asia Brown Boveri (ABB).
In 1966, Hewlett-Packard built digital controllers; in 1968 its first hand held calculators,
in 1980 its first personal computer. Today it is recognized as a major supplier of laser
and Inkjet printers, PCs and palmtops. It is acknowledged to have a culture of
innovation and a workforce who welcome and react favorably to change and challenge.
The adaptability of Hewlett-Packard appears to originate in the values of its founders
and in the attitudes of its employees who seem well attuned to continuing change.
There is adaptability of mind, so that new ideas are embraced and sued and also
adaptability of an organization, so that the capability of an organization can be quickly
transformed to match the needs of new situations and opportunities presented to it.
Adaptability is not the same as flexibility. The car tyre is flexible in that it bends, and
distorts to absorb shocks and unevenness on road surfaces but it returns to its original
shape when it comes to rest. A rubber tyre would be adaptable, if it were able to change
thread patterns, size and strength of the tyre walls to meet the different terrains.
Adaptability is not necessarily a function of size; some small to medium sized
organizations are rigid in structure and mindset. Often these companies that are family
owned or where control rests in the hands of a founder or founders. They tend to
perpetuate the strategies that made them successful in the first instance and reject any
questions that validity of continuing the original strategy into the future.
Conversely, large organizations with established bureaucracies can modify their
strategic drivers and their organizational focus to be adaptable in the markets they seek
to exploit. The primary source of advantage was low wage rates, then high volume large
scale facilities, and focused production. Today the emerging source of competitive
advantage is high flexibility.
Some attempts have been made to identify the general characteristics of organizations
that will improve their chances of responding successfully to rapid change. The
strategists from their research concluded that the five keys to success are:

The ability to be sensitive to changes in the external environment

The quality of their leadership of change
Effectiveness to linking strategy to operational change
The tendency to treat human begins as assets rather than liabilities
The ability to maintain coherence as change occurred

16.2 ENTERPRISE RESOURCE PLANNING (ERP)

Globalization and technological changes are the two forces, which are influencing the
national economies across the globe. The global marketing is witnessing a shifting of

power from the manufacturer to the giant retailers who are orienting themselves to
customer needs. The organization is under tremendous pressure to outperform their
competitors. To retain their market share and competitive position, organizations are
responding to unprecedented market demands and ever demanding customers by being
cost competitive and now be reengineering the business process. This is changing the
way the business is being done. Now, entering into Internet era, the core aspect of
process focus in business and implementation of these aspects to achieve competitive
advantage can be achieved through "Enterprise Resource Planning".
16.2.1 What is ERP?
Enterprise resource planning is defined as the process that is capable of planning all the
resources of the enterprise to achieve a specified goal over a fixed period of time through
system integration. ERP integrates all the functions and departments of an enterprise
from supplies to the end users. Every aspect of enterprise finds its place in ERP,
16.2.2 Business modeling for ERP
The pre-step to apply ERP approach to any business is the process mapping of the
business. The development of a business map comprises of core business processes or
the activities that are carried out by the business. It is a diagrammatic representation of
the business as a main system indicating the sequence and interconnection of all the
subsystems that the system comprises.
ERP is developed for a particular enterprise, based upon the long range of plans of the
business, business objectives and business modeling. ERP is developed in order to
provide logistic support to the organization to manage the processes that are the part of
the business model.
16.2.3 Salient features of ERP implementation
ERP brings together people with different functions and it produces, develops and leads
to a sweeping change throughout the organization. Thus, the implementation of ERP
should be managed by a proper change strategy. ERP demands the commitment of time
and resources and also the best people to handle it to ensure the success. The role of a
consultant is crucial in implementing ERP and the consultant should be able to set the
expectations of the users at various level keeping in mind the overall objectives of the
business.
Customization of ERP is essential to make it suitable by changing the core package. The
ERP should be customized to suit the business objections and user requirements.
The important issues, which contribute to the success of ERP, are:
i. Functionality
ii. Technology

iii. Implement ability of the solution.

16.2.4 Steps in implementing ERP
The various steps involved in implementation of ERP are:
1. Identification of the needs of the ERP implementation package

Need for quick flow of information

Effective management information system for quick decision making
Elimination of annual records handling
High level of integration between functions

2. Evaluation of existing situation of business

Through understanding of existing process

Procedures and methods for performing processes
Evaluation criteria for assessment
Present records, documents, and manuals

3. Decision regarding the desired situation of business through benchmarking.

4. Re-engineering the business processes to achieve the desired results.

Reduce cycle time

Reduction of number of decision points
Streamlining the flow of information

5. Evaluation of various ERP packages. The available ERP packages are to evaluated on
the basis of

Local or global presence

Investment in R&D
Target market
Price
Modularity
Obsolescence
Cost of implementation
Post-implementation support
Ease of implementation

16.2.5 Guidelines for ERP implementation

Guidelines for ERP implementation are given below in Table 16.1

Table 16.1 Guidelines for ERP implementation

The steps in implementation of ERP are represented in the figure below:

16.3 SUMMARY
This lesson dealt about the strategic capabilities which are necessary for the enterprises.
Further, it described about the Enterprise Resource Planning and the steps for
implementation involved in it.
16.4 ASSIGNMENT QUESTIONS
1. Write short notes on strategic capabilities?

2. Explain in detail about Enterprise Resource Planning?

- End of Chapter LESSON - 17

STRUCTURING THE ORGANIZATION

OBJECTIVES

To know about the different organizational structures

To understand the implementation of corporate restructure

CONTENTS
17.1 Structuring the Organization
17.1.1 Types of Organizational Structure
17.1.2 Network Structure
17.2 Corporate Restructuring
17.2.1Organizational Designs for Corporate Entrepreneur ship
17.3 Implementation of Corporate Restructuring
17.4 Resource Audit
17.5 Summary
17.6 Assignment Questions
17.1 STRUCTURING THE ORGANIZATION
Organization structure refers to the network of organizational arrangements and
relationships formally established on a durable basis. It consists, among other things, of
mechanisms to ensure that parts are linked and work together effectively. Distinction is
sometimes made between two aspects of the organization structure, the super structure
i.e. Groupings based on activities forming departments or divisions; this is depicted in
the organization chart; and the infra structure i.e. Authority responsibility relations,
channels of communication, specialization etc.

Theoretical analysis and empirical studies have given rise to different viewpoints
regarding the nature of relation between a firm's strategy and its structural implications.
A dominant opinion holds that strategy is an independent variable and the structure of
organization should conform to the strategy. In other words, this view suggests that
structure follows the strategy of a firm. Another contention in this respect is that
structure is not necessarily a dependent variable and that it can influence the strategic
choice through perception of the strategic issues. A third viewpoint suggests that the
relationship between strategy and structure of the precedence of one over the other
depends on the degree of organizational slack or resource constraints.
17.1.1 Types of organization structure
The commonly used structures of organization may be divided into three broad
categories: functional, divisional or multi-divisional and adaptive structures.
A functional organization structure is one in which units or departments are created
based on the grouping of similar or related activities or functions, the number and types
of departments so created depending upon the nature, volume and importance of the
activities to be performed. Thus, while in a small manufacturing firm, there may be only
three functional departments, production, marketing and accounts, for a large
organization it may be necessary to create separate departments for purchasing, finance,
and personnel functions. Each primary department may also consist of smaller subunits
if the differentiation of activities so justify. Within the production department for
instance, secondary units may be created for engineering, inspection and quality control
functions, thus providing for increased specialization of each unit.
Obviously, the functional structure of organization is conducive to a high degree of
specialization of tasks as each unit or department is assigned a single activity. There is
no duplication of functions, efforts and use of resources because each functional
department caters to the needs of the entire organization. All the functional heads are
directly accountable to the chief executive; hence it is possible for him to resolve all inter
functional problems, as well as ensure coordination of different functions for
organizational effectiveness. However, with the growth in size, increased complexities,
and diversity of operations, the functional structure gives rise to different problems.
Functional managers dealing with the affairs of multiple products or diversity of
operations lose their grip over the essential tasks. The work becomes unwieldy, and sub
unit problems tend to be ignored. The chief executive is hard pressed with day-to-day
administrative matters and can spare little time to devote to major policy issues or
strategic long term planning. Coordination and control become more difficult as
subunits are multiplied in the functional departments.
The divisional or multi-divisional structure of organization is more suited to large,
growth oriented firms with diversified operations. In a divisional structure, activities are
grouped according to the types of products manufactured, or different market
territories. The organizational units so created are treated as autonomous segments of
business, and the managers heading these divisions have functional authority in relation
to all matters pertaining to the division. Indeed, within the product or market division,

sub units may be created on the basis of functional departmentation, the divisional
manager being responsible for the performance of the division as a whole. The principle
underlying the divisional structure is federal decentralization.
The superiority of the divisionalised organization stems from the following features:
i. It focuses the vision and efforts of managers directly on business performance and
results.
ii. With the decentralization of authority relating to the divisional activities, the top
management is free to devote a greater attention to strategic planning ad major policy
decisions.
iii. The danger of self-deception, of concentrating on the old and easy rather than on the
new and coming, or of allowing unprofitable lines to be carried on the backs of the
profitable ones, is much lessened.
iv. Management by objectives can be more effective within a divisional structure. The
number of people or units under one manager is no longer limited by the span of
control; it is only limited by the much wider span of managerial responsibility.
v. The impact of such a structure on the development of tomorrow's managers is
considerable. Greater the autonomy enjoyed by the principal officers of the divisions,
greater do these become proving ground for the development of managers in the top
echelons of the company.
vi. It facilitates inter divisional comparison of managerial performance and thus aids
strategic decisions to be made on more objective basis.
Adaptive organizations are structural patterns, which really consist of systems built
into existing organizations to cope with specific problems or complexities. Two major
types of adaptive organizations have been developed over time.
Project organization is a temporary structural arrangement set up within an existing
organization to achieve specific objectives relating to one time projects like developing a
new product, installing a plant, building an office complex, etc. a project organization is
headed by a project manager in charge, who is placed in a middle management position
and reports directly to the chief executive. The personnel of the project organization are
drawn from different functional departments of the firm. On completion of the project
they return to the parent departments.
Project organizations are generally set up
a. when any work undertaken is unfamiliar or involves special problems and requires
exclusive managerial attention.

b. when there are specific objectives achievement of which is crucial in view of high
stakes involved e.g., contractual obligation, time bound commitment opportunities to be
availed of, and
c. when the nature and scope of activities are not amenable to efficient management
through routine procedures.
From the point of view of the total organization, project wise structuring is helpful in
three ways:
1. The regular business of the organization can be pursued without any disruption of
normal activities. The project management is exclusively convinced with the task of
completing the project on time and in accordance with standards of performance
relevant to its goals.
2. The project manager being wholly accountable for the results, there is better
management and control over project activities.
3. Since the project organizations relate to the nature of the projects, there is greater
flexibility and responsiveness to the situation.
The distinctive advantages notwithstanding, there are several drawbacks as well which
accompany project organizations. They often give rise to conflicts between the project
and functional managers as the latter consider the project manages prerogatives to be
unwarranted encroachment of functional authority Hence necessary support and
cooperation are not always available of successful completion of the projects. Besides,
frequent transfers and assignment of personnel to different projects disturb the stability
of functional departments. The training and development of personnel in relation to
their fields of specialization are disrupted if they are shifted from project to project.
Above all, long-term development of management capabilities may be ignored on
account of priorities assigned to project activities.
Another type of adaptive structural arrangement is the matrix organization. This
arrangement is the matrix management and functional departmentation so as to derive
the benefits of both. The functional structure cannot cope with new and complex
problems, and suffers from the drawbacks of narrow approach. On the other hand,
project organizations are temporarily established in a horizontal relationship with the
functional departments. An attempt is made in matrix organization to use a multiple
command system that includes not only multiple associated organizational culture and
behavior patterns. The matrix organization is formed around specific products or
projects with individuals assigned to a project and a functional department. It provides
horizontal groupings of a number of functions to accomplish project objectives under
the direction of a project manager. Thus it serves two purposes. One technical expertise
is developed in the functional departments, which become the permanent base of
personnel. Secondly, the autonomous project organizations integrate the activities of the
specialized functional departments.

In a matrix organization, several projects may be simultaneously undertaken.

Completed projects are deleted from the structure and new projects are added.
Specialized personnel are deputed from the functional departments to different,
projects. They are placed under the overall guidance and direction of project managers
and on completion of the projects, which return to the parent departments or are loaned
to ether projects.
Matrix organization provides a flexible and adaptable structure ideally suited to cope
with the requirements of a changing environment. If facilitates pooling of expertise for
projects that require inter-disciplinary or inter-departmental cooperation. Secondly,
services of qualified and experienced personnel form functional areas can be utilized in
a number of projects. They are exposed to complex and varied problems in project work,
which adds to their experience and provides them opportunities to show their worth.
They can maintain high technical standards through regular contact with the parent
departments. Since they work under the lateral coordinating authority of project
managers, there is speedy exchange of information among them and decision-making as
well as action programme can be expedited.
17.1.2 Network structure
A newer and somewhat radical organizational design, the network structure is an
example of what could be termed a "nonstructural" by its virtual elimination of in-house
business functions. Many activities are outsourced. A corporation organized in this
manner is often called a virtual organization because it is composed of a series of project
groups or collaborations linked by constantly changing nonhierarchical, cobweb like
networks. The network structure becomes most useful when the environment of a firm
is unstable and is expected to remain so. Under such conditions, there is usually a strong
need for innovation and quick response. Instead of having salaried employees, it may
contract with people for a specific project or length of time. Long-term contracts with
suppliers and distributors replace services that the company could provide for itself
through vertical integration. Electronic markets and sophisticated information systems
reduce the transaction costs of the market place, thus justifying a 'buy' over a 'make'
decision. Rather than being located in a single building or area, an organizations
business functions are scattered worldwide. The organization is in effect, only a shell,
with a small headquarters acting as a broker, electronically connected to some
completely owned divisions, partially owned subsidiaries, and other independent firms
or business units linked together by computers in an information system that designs,
produces, and market a product or service
The network organization structure provides an organization with increased flexibility
and adaptability to cope with rapid technological change and shifting patterns of
internationals trade and competition. It allows a company to concentrate on its
distinctive competencies, while gathering efficiencies from other firms who are
concentrating their efforts in their areas of expertise. The network has however
disadvantages. The availability of numerous available partners can be a source of
trouble. Contracting out functions to suppliers/distributors may keep the firm from
discovering from any synergies by combining activities.

But the structural relations in this type of organization, though beneficial in terms of
specialization and coordination achievement of tasks, may also give rise to problems
unless the organizational culture and behavior patterns are suitable conditioned.
Sometimes, functioned specialists have dual assignments in two different projects. This
may lead to conflict between the project managers. Besides, functional personnel
deputed to project work have dual reporting relationship. They have to report to the
project managers as well as to the departmental heads. The situation becomes
problematic when a functional department is required to take care of operational
matters for several projects.
17.2 CORPORATE RESTRUCTURING
Restructuring, as defined by Guth and Ginsburg, is "the birth of new businesses within
existing organizations, that is, internal innovation or venturing; and the transformation
of organizations through renewal of the key ideas on which they are built, that is,
strategic renewal, define corporate restructuring." A large corporation that wants to
encourage innovation and creativity within its firm must choose a structure that will
give the new business unit an appropriate amount of freedom while maintaining some
degree of control at headquarters.
Burgelman proposes that the use of a particular organizational design should be
determined by the strategic importance of the new business to the corporation and the
relatedness of the units operations to those of the corporation. The combination of these
two factors results in nine organizational designs for corporate entrepreneurship. The
figure below depicts clearly the design proposed by Burgelman.
17.2.1 Organizational designs for corporate entrepreneurship

Organizational designs for corporate entrepreneurship

1. Direct integration: A new business with a great deal of strategic importance and
operational relatedness must be a part of the corporations mainstream. Product
champions - people who are respected by others in the corporation and how know how
to work the system - are needed to manage these projects.
2. New product business department: A new business with a great deal of strategic
importance and partial operational relatedness should be a separate department,
organized around an entrepreneurial project in the division where skills and capabilities
can be shared.
3. Special business units: A new business with a great deal of strategic importance
and low operational relatedness should be a special new business unit with specific
objectives and time horizons.
4. Micro new ventures department: A new business with uncertain strategic
importance and high operational relatedness should be a peripheral project, which is
likely to emerge in the operations divisions on a continuous basis. Each division has its
own ventures department.
5. New ventures division: A new business with uncertain strategic importance that is
only partly related to present corporate operations belongs in a new venture division. It
brings together projects that either exist in various parts of the corporation or can be
acquired externally; sizable new business is built.
6. Independent business units: Uncertain strategic importance coupled with no
relationship to present corporate activities can make external arrangements attractive.
7. Nurturing and contracting: When an entrepreneurial proposal might not be
important strategically to the corporation but is strongly related to present operations,
top management might help the entrepreneurial unit to spin off from the corporation.
This allows a friendly competitor, instead of one of the corporations major rivals, to
capture a small niche.
8. Contracting: As the required capabilities and skills of the new businesses are less
related to those of the corporation, the parent corporation might spin off the
strategically unimportant unit, yet keep some relationship through a contractual
arrangement with the new firm. The connection is useful in case the new firm eventually
develops something of value to the corporation.
9. Complete spin-off: If both the strategic importance and the operational
relatedness of the new business are negligible, the corporation is likely to completely sell
off the business to another firm or to the present employees in some form of employee
stock ownership plan.
Organizing for innovation has become especially important for those corporations that
want to become more innovative, but their age and size have made them highly
bureaucratic with a culture that discourages creative thinking. These new structural

designs for corporate entrepreneurship cannot work by themselves, however. The

entrepreneurial units must also have the support of management and sufficient
resources. They must also have employees who are risk-takers, willing to purchase an
ownership interest in the new venture, and a corporate culture that supports new
ventures.
17.3 IMPLEMENTATION OF CORPORATE RESTRUCTURING
A recent approach to strategy implementation used to improve operations is called
reengineering. Reengineering is the radical design of business processes to achieve
major gains in cost, service or time. It is not in itself a type of structure, but it is an
effective way to implement a turnaround strategy.
Reengineering strives to break away from the old rules and procedures that develop and
become ingrained in every organization over the years. These may be a combination of
policies, rules and procedures that have never been seriously questioned because they
were established earlier. These may range from credit decisions are made by the credit
department to local inventory is needed for good customer service. These rules of
organization and work design were based on assumptions about technology, people and
organizational goals that may no longer be relevant. Rather than attempting to fix
existing problems through minor adjustments and fine-tuning existing processes, the
key to reengineering is to ask - if this were a new company, how would we run this
place?
Michael Hammer, who popularized this concept, suggests the following principles for
reengineering:
Organize around customers, not tasks. Design a persons or department job
around an objective or outcome instead of a single task or series of tasks.
Have those who use the output of the process to perform the process. With
computer based information systems, processes can now be reengineered so that the
people who need the result of the process can do it themselves.
Subsume information processing work into the real work that produces
the information. People that produce information can also process it for use instead
of just sending raw data to others in the organization to interpret.
Treat geographically dispersed resources as though they were centralized.
With modem information systems, companies can provide flexible service locally while
keeping the actual sources in a centralized location for coordination purposes.
Link parallel activities instead of integrating their results. Instead of having
separate units perform different activities that must eventually come together, have
them communicate while they work so that they can do the integrating.

 Put the decision point where the work is performed, and build control
into the process. The people who do the work should make the decisions and be selfcontrolling.
Capture information once and at this source. Instead of having each unit
develop its own database and information processing activities, the information can be
put on a network so that all can access it.
Organizing a company's activities and people to implement strategy involves more than
simply redesigning a corporations overall structure; it also involves redesigning the way
jobs are done. With the increasing emphasis on reengineering, many companies are
beginning to rethink their work processes with an eye toward phasing unnecessary
people and activities out of the process. Process steps that had traditionally been
performed sequentially can be improved by performing them concurrently using crossfunctional work teams. Restructuring through fewer people requires broadening the
scope of jobs and encouraging teamwork. The design of jobs and subsequent job
performance are, therefore, increasingly being considered as sources of competitive
advantage.
Job design refers to the study of individual tasks in an attempt to make them more
relevant to the company and to the employees. To minimize some of the adverse
consequences of task specialization, corporation have turned to new job design
techniques: job enlargement - combining tasks to give a worker more of the same type of
duties to perform; job rotation - moving workers through several jobs to increase
variety; and job enrichment - altering the jobs by giving the worker more autonomy and
control over activities. The job characteristics are a good example of job enrichment.
17.4 RESOURCE AUDIT
The resource audit is a straightforward analysis of the quantity and quality of the
resources available. It may be useful to consider four general headings, of which the
fourth may not meet a rigorous definition of resources:
Physical resources, buildings, equipment, and so on.
Human resources, skills, know-how, strong teams, good management and so on.
Financial resources ability to raise cash, rich parent and so on.
Other resources and intangibles, goodwill, brand names, trade relationships and so
on.
The aim of a resource audit is to compare the quality and extent of resources with the
resources of present and possible future competitors.
Uniqueness is a particularly important aspect of quality. For instance any recognized
brand name ahs unique expectations associated with it that can provide opportunities

for building credibility for new products or services. Patents, license, and copyrights
may similarly offer unique opportunities during their finite lives.
It may be effective to analyze resources by function. This has the practical advantage
that in many businesses the board includes the heads of the various functions. These
individuals may therefore report their assessment of the strengths and weaknesses of
their function to their assembled board colleagues. This means that responsibility for
undertaking the assessment and for subsequently taking action falls to the same person.
Resource audit is a simple and basic technique and may be useful as a first step.
17.5 SUMMARY
In this lesson structuring the organization is explained. Different types of organization
are explained. Restructuring of corporate and its implementation are described. At the
end of the lesson, the concept of Resource Audit is also briefed.
17.6 ASSIGNMENT QUESTIONS
1. How corporate restructuring can be implemented?
2. Write short notes on corporate restructuring?
3. Write short notes on resource audit?
4. How structuring process can be carried out in an organization?
5. Explain the different types of organization structures?
6. Write short notes on network structure

- End of Chapter LESSON 18

CORE COMPETENCIES

OBJECTIVES

To identify the core competence

CONTENTS

18.1 Introduction
18.2 Identifying core competence
18.3 The roots of core competence for a typical manufacturing business
18.4 The roots of core competence for a typical professional service firm
18.5 The sourcing decision
18.6 Deployment
18.7 Summary
18.8 Assignment questions
18.1 INTRODUCTION
Core competence is the rare and most valuable internal attribute of all. Core competence
is a group of related capabilities that confers competitive advantage. True core
competence is rare but worth a great deal when identified.
18.2 IDENTIFYING CORE COMPETENCE
Core competence is defined as 'a technical or management subsystem which 4r
integrates diverse technologies, processes, resources and know-how to deliver products
and services which confer sustainable and unique competitive advantage and added
value to an organization.
The core competence of an enterprise is, by definition, hidden and unique. By definition
it confers special capability to its owner. An organizational capability often encompasses
an organizations core competence and covers a variety of skills, processes and best
practices that convert core competence into products and services. Companies,
particularly large companies, may have many capabilities, derived from their own
extensive resources and their ability to acquire additional resources as needed in the
open market. Their core competence, if any remains unique. The ability to differentiate
between general capabilities and true core competence can make the difference between
success and failure. The tests for core competence include

Essential to corporate survival in the short and long term

Invisible to competitors.
Difficult to imitate
Unique to the enterprise.
Result from a mix of skills, resources and processes.
A capability which the organization can sustain overtime.
Greater than the competence of the individual.
Essential to the implementation of the strategic intent of the enterprise.

Essential to the development of core products and eventually to end products.

Essential to the strategic choices of the enterprise.
Marketable and commercially visible.
Few in number.

The Table below illustrates how the concept of core competence differs from and
extends previous thinking:

Identifying core competence is much harder than finding the capabilities used by an
organization. A starting point for identifying the core competence of an organization is
to dissect the different t subsystems that make up the total operating entity.
It therefore makes sense to start the search for the core competence of the organization
in its technical subsystem although this may not be where it is eventually found. The
reason for this is that the technical subsystem, although unique due to patents and other
similar monopoly providing resources, may not be the eventual source of the
organizations competitive strength. In helping organization identify their core
competence, the authors found that the core competence can reside in any one of these
three systems. For example, an asset-based organisation found that its core competence
was in the technical subsystem and was conceiving, designing, and constructing
complex physical networks. Another company with a similar asset profile found its core
competence in the administrative subsystem in that its volumes of data to gain
competitive advantage. A third company in the insurance sector found its core
competence in its institutional subsystem in that its core competence was in the way it
managed its distribution channels.
18.3 THE ROOTS OF CORE COMPETENCE FOR A TYPICAL
MANUFACTURING BUSINESS
Figure below illustrates how a core competence can be traced for a manufacturing
organization. It shows how the different technologies and other skills combine in a core
competence that then produces products, subcomponents, processes, and knowledge
based person specific professional services that can be sold directly or incorporated into
the process and products.

18.4 THE ROOTS OF CORE COMPETENCE FOR A TYPICAL

PROFESSIONAL SERVICE FIRM
Figure below illustrates core competence analyzer for a professional service organization
where the knowledge is the business. Here the Figure shows that the skills of the staff
mingle with the collective knowledge and experience of the organization and its culture
to deliver a core competence that is different form that of a similar organization. The
culture determines the personality, mindset and interpersonal skills of the professional
staff working for the business and is applied at the time of recruitment and during their
working life with the firm.

Core competence has now been used extensively in the field and there is a growing body
of literature on how the concept can be used in practice.
During the 1990s the concern to have a clear core business tended to continue and had
deepened into a focus on core competence. There was also a tendency to question the
value of scale for its own sake as it became apparent that some large companies were
slow moving in a world where the pace of change was increasing. It seemed that there
might sometimes be diseconomies of scale. Demergers and management buyouts
increased as larger companies split into separate core businesses or disposed of noncore businesses. This process led naturally' to pressure to demonstrate that the
headquarters of a multi business enterprise was adding value as a parent so that the
enterprise as a whole was more valuable than the sum of its parts.
Core competency is something that a corporation can do exceedingly well. It is a key
strength. It may also be called a core capability because it includes a number of
constituent skills. When these competencies or capabilities are superior to those of the
competition, they are called distinctive competencies. Although it is typically not an
asset in the accounting sense, it is a very valuable capability- it does not wear out. In
general the more core competencies are used, the more refined they get and the more
valuable they become. To be considered a distinctive competency, the competency must
meet three tests:
i. Customer value: it must make a disproportionate contribution to customer
perceived value.

ii. Competitor unique: it must be unique and superior to competitor capabilities.

iii. Extendibility: it must be something that can be used to develop new
products/services or enter new markets.
Even though a distinctive competency is certainly considered a corporations key
strength, a key strength is not always considered to be a distinctive competency. As
competitors attempt to imitate another company's competence in a particular functional
area, what once was a distinctive competency becomes a minimum requirement to
compete in the industry. Even though the competency may still be a core competency
and thus strength, it is no longer unique.
Where do these competencies come from? A corporation can gain access to a distinctive
competency in four ways.

It may be an asset endowment, such as a key patent, coming from the founding of
the company - Xerox grew on the basis of its original copying patent.
It may be acquired from someone else - Whirlpool bought a worldwide
distribution system when it purchased Philips appliance division.
It may be shared with another business unit or alliance partner - apple computer
worked with a design firm to create the special appeal of its Apple II and Mac
computers.
It may be carefully built and accumulated over time within the company -Honda
carefully extended its expertise in small motor manufacturing from motorcycles
to autos and lawnmowers.

For a functional strategy to have the best chance of success, it should be built on a
distinctive competency residing within that functional area. If a corporation does not
have a distinctive competency in particular functional areas, that functional area would
be a candidates for outsourcing.
18.5 THE SOURCING DECISION: WHERE SHOULD FUNCTIONS BE
HOUSED?
Where should a function be housed? Outsourcing is purchasing from someone else a
product or service that had been previously provided internally Outsourcing is becoming
an increasingly important part of strategic decision-making and an important way to
increase efficiency and often quality. Firms competing in global industries must in
particular search worldwide for the most appropriate suppliers. In a study of 30 firms,
outsourcing resulted on average in a 9% reduction in costs and 15% increase in capacity
and quality.
Management services and information systems were the first functional areas to be
heavily outsourced. Sales, marketing, and customer service are now becoming likely
candidates for outsourcing.

The key to outsourcing is to purchase from outside only those activities that are not key
to the company's distinctive competencies. Otherwise, the company may give up the
very capabilities that made it to successful in the first place, thus putting itself on the
road to eventual decline. Therefore, in determining the functional strategy, the strategist
must:
Identify the company's or business unit core competencies.
Ensure that the competencies are continually being strengthened.
Manage the competencies in such a way that best preserves the competitive advantage
they create.
An outsourcing decision depends on the fraction of total value added that the activity
under consideration represents and by the amount of potential competitive advantage in
that activity for that company or business unit. A firm should always produce at least
some of the activity or function has the potential for providing the company some
competitive advantage. Full vertical integration should only be considered, however,
when that activity of function adds significant value to the company's products or
services in addition to providing competitive advantage.
Outsourcing does, however, have some disadvantages. Some companies have found
themselves locked into long-term contracts with outside suppliers that are no longer
competitive. Some authorities propose that the cumulative effects of continued
outsourcing steadily reduce a firm's ability to learn new skills and to develop new core
competencies. A study of 30 firms with outsourcing experience revealed that
unsuccessful outsourcing efforts had three common characteristics:
The firms finance and legal departments and their vendors dominated the decision
process.
Vendors were not prequalified based on total capabilities.
Short-term benefits dominated decision-making.
18.6 DEPLOYMENT
An adaptive organizational system that is strategically focused will need to take both
perspectives into account and mould the organization to ride both currents. Those
organizations that wish to survive over the long term without intermittent periods of
turbulence and disorientation must learn or evolve in the way that living system do so
that they anticipate and/or influence the future and therefore are not surprised by it.
Organizations that operate in complex or turbulent environments must become adaptive
to survive and thrive. They need to understand their different parts and also understand
how these different parts relate and interact to make the whole much greater than the
sum of the parts. This leads us to require the organization to understand its core
competence. A comparison of the interpretation with the real world experience enables

the individual to confirm or modify the scheme so that it can better interpret new
occurrences in the future. What seems to be emerging as a critical faculty in these
turbulent times is the ability of the organization to learn from its history. By studying
past successes and failures, an organization can determine which of its organizational
capabilities have the adaptability to enable it to face and overcome future challenges or
exploit future opportunities. However, such a study must have a reference point. It
seems that the most meaningful reference point is the core competence of the
organization. Others such as strategic assets or end products or brand images are but
outcomes of the effective deployment of the organizations core competence.
18.7 SUMMARY
This lesson discussed about the identification of core competence and the root of core
competence for a manufacturing business and professional service firm.
18.8 ASSIGNMENT QUESTIONS
1. Explain core competence in detail?
2. Write short notes on outsourcing?
3. Write short notes on deploying?

- End of Chapter LESSON - 19

COMPETITIVE ADVANTAGE

OBJECTIVES

To understand the concept competitive advantage

To anlayse the global competitive advantage and their components

CONTENTS
19.1 Competitive advantage
19.2 Global competitive advantage
19.2.1 Comparative advantage
19.2.2 Production economies of scale

19.2.3 Global experience

19.2.4 Logistical economies of scale
19.2.5 Marketing economies of scale
19.2.6 Economies of scale in purchasing
19.2.7 Product differentiation
19.2.8 Proprietary product technology
19.2.9 Mobility of production
19.2.10 Impediments
19.3 Using resources to gain competitive advantage
19.3.1 Determining the sustainability of an advantage
19.3.2 Providing sustainable competitive advantage
19.4 Identification of competitive advantage
19.5 Positioning competitive advantage
19.6 Assessing competitive advantage
19.6.1 Cost-based advantage
19.6.2 Advantage from a differentiated product or service
19.6.3 First mover advantage
19.6.4 Time based advantage
19.6.5 Technology based advantage
19.7 Competitor intelligence system
19.7.1 Need for a competitor intelligence system
19.8 Summary
19.9 Assignment questions

19.1 COMPETITIVE ADVANTAGE

Scanning and analyzing the external environment for opportunities and threats is not
enough to provide an organization a competitive advantage. Analysts must also look
within the corporation itself to identify internal strategic factors - those critical
strengths and weaknesses that are likely to determine if the firm will be able to take
advantage of opportunities while avoiding threats. This internal scanning is often
referred to as organizational analysis and is concerned with identifying and developing
organizations resources.
A resource is an asset, competency, process, skill, or knowledge controlled by the
corporation. A resource is strength if it provides a company with a competitive
advantage. It is something the firm does or has the potential to do particularly well
relative to the abilities of existing or potential competitors. A resource is a weakness if it
is something the corporation does poorly or doesn't have the capacity to do although its
competitors have that capacity. Barney, in his VRIO framework of analysis, proposes
four questions to evaluate each of firm's key resources.
Value: does it provide competitive advantage?
Rareness: do other competitors possess it?
Limitability: is its costly for others to imitate?
Organization: is the firm organized to exploit the resource?
If the answer to these questions is "yes' for a particular resource, that resource is
considered strength and a distinctive competence.
Evaluate the importance of these resources to ascertain if they are internal strategic
factors - those particular strengths and weaknesses that will help determine the future
of the company. This can be done by comparing measures of these resources with
measures of the company past performance, the company's key competitors, and the
industry as a whole. To the extent, that a resource is significantly different from the
firms own past, its key competitors, or the industry average, the resource is likely to be
a strategic factor and should be considered in strategic decisions.
19.2 GLOBAL COMPETITIVE ADVANTAGE
The sources of global advantage stem broadly from four causes: conventional
comparative advantage, economies of scale or learning curves extending beyond the
scale or cumulative volume achievable in individual national markets, advantages from
product differentiation and the public good character of market information and
technology.
19.2.1 Comparative advantage

The existence of comparative advantage is a classic determinant of global competition.

When a country or countries have significant advantages in factor cost or factor quality
used in producing a product, these countries will be the sites of production and exports
will flow to other parts of the world. In such industries, the strategic position of the
global firm in those countries possessing a comparative advantage is crucial to its world
position.
19.2.2 Production economies of scale
If there are economies of scale in production that extend beyond the size of major
national markets, the firm can potentially achieve a cost advantage through centralized
production and global competition. Sometimes advantages of vertical integration are the
key to achieving global production economies, because the efficient scale of markets.
Achieving production economies necessarily implies movement of exports among
countries.
19.2.3 Global experience
In technologies subject to significant cost declines due to proprietary experience, the
ability to sell similar product varieties in many national markets can bring benefits.
Cumulative volume per model is greater if the model is sold in many national markets,
leading to cost advantage for the global competitor. Global competition can allow faster
learning, even if the learning curve flattens at cumulative volumes achievable eventually
by competing in an individual geographic market. Since a company can gain experience
potentially by sharing improvements among plants, a cost advantage from global
competition potentially can be gained even if production is not centralized even if
production takes place in each national market.
19.2.4 Logistical economies of scale
If an international logistics system inherently involves fixed costs that can be spread by
supplying many national markets, the global competitor ahs a potential cost advantage.
Global competition may also allow the achievement of economies of scale in logistics
that stem from the ability to use more specialized systems, such as specialized cargo
ships. For example Japanese firms have achieved significant cost savings in the use of
specialized carriers to transport raw materials and finished products in steel and autos.
Operating at world volume may allow a complete rethinking of logistical arrangements.
19.2.5 Marketing economies of scale
Although many aspects of the marketing function must inherently be carried out in each
national market, there may be potential marketing economies of scale that exceed the
size of national markets in some industries. The most obvious are in industries in which
a common sales force is deployed worldwide. There may also be potential marketing
economies through global use of proprietary marketing techniques. Since the knowledge
gained from one market can be sued at no cost in other markets, the global firm can
have a cost advantage. Some brand names have carryover among geographic markets,

although usually the firm must invest to establish its brand name in each one. However,
some brand names develop recognition internationally through trade press, technical
literature, cultural prominence, or other reasons that do not require investments by the
firm.
19.2.6 Economies of scale in purchasing
When there are opportunities to achieve economies of scale in purchasing as a result of
bargaining power or lower suppliers cost in producing long runs, which go beyond what
is needed to compete in individual national markets, the global firm will have a potential
cost advantage. For example worldwide producers of television sets appear to be able to
purchase transistors and diodes at lower costs. Such an advantage is most probable
when the volumes purchased by the industry are moderate compared to the size of the
industry producing the raw materials or components, if purchases are large, most
bargaining leverage may well have been exhausted.
19.2.7 Product differentiation
In some businesses, particularly technologically progressive ones, global competition
can give the firm an edge in reputation and credibility. In the high fashion cosmetic
industry, for example, a firm significantly benefits form a presence in Paris, London,
and New York in order to have the image to compete successfully in Japan.
19.2.8 Proprietary product technology
Global economies can result from the ability to apply proprietary technology in several
national markets. This ability is particularly important when economies of scale in
research are large relative to the sales of individual national markets. Computers,
semiconductors, aircraft, and turbines are industries in which technological advantages
of global scale firms appear to be particularly great. Some advances in technology are so
costly as to virtually require global sales to recoup them. Global competition can also
give the firm a series of taps into technological developments worldwide to improve its
technological competitiveness.
19.2.9 Mobility of production
An important special case of economies due to scale and sharing of proprietary
technology arises where the production of a product or service is mobile.
Often the sources of global advantage occur in combination and there can be
interactions among them. For example, production economies can provide the basis for
invasion of foreign markets, which then leads to logistical economies or those from
purchasing.
The significance of each source of global advantage clearly depends on one of two
things. First how significant to total cost is the aspect of the business subject to global
economies? Second, how significant to competition is the aspect of the business in

which the global competitor ahs an edge? An advantage in an area that represents a
fairly low percentage of total costs can still be extremely important to competitive
success or failure in some industries. In this case, even a small improvement in cost or
effectiveness brought about by global competition can be significant.
19.2.10 Impediments
There are a variety of impediments to achieving these advantages of global competition,
and they can block the industry from becoming a global industry altogether. Even when
the advantages of global competition outweigh the impediments overall, the
impediments can still yield viable strategic niches for national firms that do not compete
globally. Some of these impediments are economic and raise the direct cost of
competing globally. Others do not necessarily affect the cost directly but raise the
complexity of the managerial task. A third category relates to purely institutional or
governmental restraints that do not reflect economic circumstances. Finally, some
impediments can relate solely to perceptual or resource limitations of industry
incumbents.
19.3 USING RESOURCES TO GAIN COMPETITIVE ADVANTAGE
Proposing that a company's sustained competitive advantage is primarily determined by
its resource endowments, Grant proposes a five-step resource based approach to
strategy analysis:
i. Identify and classify the firm's resources in terms of strengths and weaknesses.
ii. Combine the firm's strengths into specific capabilities. Corporate capabilities (often
called core competencies) are the things that a corporation can do exceedingly well.
When these capabilities/competencies are superior to those of competitors, they are
often called distinctive competencies.
iii. Appraise the profit potential of these resources and capabilities in terms of their
potential for sustainable competitive advantage and the ability to harvest the profits
resulting form the use of these resources and capabilities.
iv. Select the strategy that best exploits the firm's resources and capabilities relative to
external opportunities.
v. Identify resource gaps and invest in upgrading weaknesses.
As indicated in step 2, when organizations resources are combined, they form a number
of capabilities.
19.3.1 Determining the sustainability of an advantage

Just because a firm is able to use its resources and capabilities to develop a competitive
advantage does not mean it will be able to sustain it. Two characteristics determine the
sustainability of a firm's distinctive competency: durability and limitability.
Durability is the rate at which firms underlying resources and capabilities (core
competencies) depreciate or become obsolete. New technology can make a company's
core competency obsolete or irrelevant. For example, Intel's skills in using basic
technology developed others to manufacture and market quality micro processors was a
crucial capability until management realized that the firm had taken current technology
as far as possible with the Pentium chip. Without basic R&D of its own, it would slowly
lose its competitive advantage to others.
Limitability is the rate at which firms others can duplicate underlying resources and
capabilities. To the extent, that a firm's distinctive competency gives it competitive
advantage in the market place; competitors will do what they can to imitate that set of
skills and capabilities. Competitor's efforts may range from reverse engineering to hiring
employees from the competitors to outright patent infringement. A core competency can
be easily imitated to the extent that it is transparent, transferable, and replicable.
Transparency: The speed with which other firms can understand the
relationship of resources and capabilities supporting a successful firms strategy.
For example, Gillette has always supported its dominance in the marketing of
razors with excellent R&D. a competitor could never understand how the sensor
razor was produced simply by taking one apart. Gillette's
sensor razor design was very difficult to copy, partially because the
manufacturing equipment needed to produce it was so expensive and
complicated.
Transferability: The ability of competitors to gather the resources and
capabilities necessary to support a competitive challenge. For example, it may be
very difficult for a wine maker to duplicate a French winery's key resources of
land and climate, especially if the imitator is located in Iowa.
Replicability: The ability of competitors to use duplicated resources and
capabilities to imitate the other firm's success. For example, even though many
companies have tried to imitate Procter & Gambles success with brand
management by hiring brand managers away from P&G, they have often failed to
duplicate their success. The competitors failed to identify less visible
coordination mechanism or to realize that brand management style conflicted
with the competitor's own corporate cultures.
An organizations resources and capabilities can be placed on a continuum to the extent
they are durable and cant be imitated by another firm. This continuum of sustainability
is depicted in figure below. At one extreme are slow-cycle resources, which are
sustainable because patents, brand names, geography, and the like shield them. These
resources and capabilities are distinctive competencies because they provide a
sustainable competitive advantage. Gillette's sensor razor is a good example of a product

built around slow cycle resources. The other extreme includes fast cycle resources,
which face the highest imitation pressures because they are based on a concept or
technology that can be easily duplicated, such as Sonys walkman. To the extent that a
company ahs fast cycle resources, the primary way it can compete successfully is
through increased speed from lab to marketplace. Otherwise, it has no real sustainable
competitive advantage.

19.3.2 Providing sustainable competitive advantage

The best business strategies are those, which use the capabilities of the firm to address
customer needs in a way, which leads to sustainable competitive advantage. In practice,
business strategies may have to tolerate less lofty achievements than long-term
sustainable advantage.
The business strategy has to address the issue of competitive advantage realistically in
the context of that business. This may require an admission that former competitive
advantages are being eroded so that the strategy is as much defensive as offensive.
As John Kay has pointed out, businesses, like people, have to go through good times and
bad times. It is probably impossible to achieve competitive advantage permanently and
the excellent corporation that can achieve a permanent and irreducible lead is a myth.
The business strategy must describe what the basis of competition is, how this basis is
changing, and how the strategies take advantage of these changes.
19.4 IDENTIFICATION OF COMPETITIVE ADVANTAGE
They are identified on the basis of the diagnosis and analysis of strengths and
weaknesses. Competitive advantages could consist of a superior quality, superior service
or technical assistance, a strong brand name, a unique or innovative product or service,
or the status of being a full line producer with wide distribution. Such advantages result
from the strength of superior skills or resources, lower costs of manufacturing or
distribution, lower cost of capital, design expertise, good trade relationships, fast and

flexible resource capabilities, and so on. Identification of these involves careful analysis
of the various factors identified.

The advantage of size deserves special treatment since many believe bigger is better. A
larger size in relation to the competition is normally viewed positively. It can give
strength by allowing some potential weaknesses associated with a larger size.
Diseconomies of scale can result from rapid increases in size. The organization becomes
more difficult to manage. Large firms often become the targets of regulators, legislators,
consumer activists, and competitors; many equate size with the potential for misuse of
power. Small firms often thought to have an advantage of flexibility that allows them to
change and maneuver, while larger firms or units find it difficult to do this.
Another dilemma associated with size is relationship to goals. A number of studies have
suggested that size is not directly correlated with better performance. For example,
expansion may entail internal diseconomies of scale.

Expansion strategies carry with them seeds of potential competitive disadvantage where
sheer size creates new management problems. There are advantages in situations where
strengths and weaknesses can go along with a large size.
Ohmae suggests that managers should use their analysis of strengths and weaknesses in
ways, which lead to competitive advantage:
i. The first approach is to readjust resource allocation t strengthen certain areas of the
business. If a management allocates resources exactly the same way competitors do,
there will be no change in competitive position. So this approach suggests that resources
could be concentrated in areas where there are key success factors (KSF) so that firm
can gain a strategic advantage. Even though, a firm may have no more total resources
than competitors, it can achieve distinction if it focuses those resources on one crucial
point. One typical example is the use of market segmentation. A Japanese shipbuilder
segmented customer groups into seven markets and ship types in to 12 product
categories. After identifying key product market groups, it focused its resources and
attention on these sectors to gain competitive advantage.
ii. It may be that the KSF struggle is being waged, but a firm may exploit differences
between it and a competitor. Here the strategist either makes use of the technology,
sales network, and so on of those of its products which are not directly competing with
the product of competitors or makes use of other differences in the composition of
assets. Thus relative superiority is used to avoid head on competition. For example, a
Japanese film producer who could not compete with Fuji on the basis of an image
problem associated with its name. Advertising could not overcome the negative
connotations. However it had a relative advantage in its cost of production; hence, it
lowered prices and started to do battle on economic issues where it possessed
superiority.
iii. A competitor in a well established stagnant industry may he hard to dislodge. Here
an unconventional approach may be needed to upset the key factors for success that the
competitor has used to build an advantage. The starting point is to challenge accepted
assumptions about the way business is done, or the nature of products or processes and
gain a novel advantage by creating new success factor. For example, a camera
manufacturer wondered hwy photographs have to go through the negative stage before
being printed, or why a camera couldn't have a built in flash to spare users the trouble of
finding and fixing an attachment.
iv. Finally, a competitive advantage may be obtained by means of innovation, which
open new markets or lead to new products. Innovation often involves finding new ways
of satisfying the customer's utility function. Suppose that in manufacturing coffee, to
determine the utility function of target customers is superior taste. What determines
coffee taste? Kind and quality of beans, type of roast, fineness of grind, time between
grinding and brewing, water hardness and temperature, style of brewing, and so on.
Some of these are beyond the manufacturer's control. But others involve degree of
freedom. Water hardness could probably be overcome by incorporating a re-enterable

filter in the machine. The approach here is to think creatively for innovations, which
expand degrees of freedom to accomplish goals and develop new strengths.
In each of these approaches, the principal point is to avoid doing the same thing as the
competition on the same battleground. So the analyst must decide which of these
approaches might be pursued to develop a sustainable distinctive competence.
19.5 POSITIONING COMPETITIVE ADVANTAGE
Competitive advantage is the means by which one business can win. in competition with
another. Corporate advantage is the means by which a multi-business corporation can
add value to its businesses beyond what they would be worth on their own. Strategic
assessment of multi-business companies will need to assess how much and by what
means the corporate headquarters adds value. It may be the value that added the
headquarters is small, or even negative, in many enterprises. This issue is of interest
both in practice and for research.
In practice, the cost of headquarters is relatively easy to measure. If the headquarters is
adding little value, the costs of floating and operating constituent businesses as separate
businesses might be less than the cost of the headquarters Shareholders could then hold
shares in the separate companies and choose to buy or sell these as they pleased. The
argument is in short, that stock markets are better in sorting out investment portfolios
than corporations. Many mangers of subsidiary companies and divisions will support
the general view that group is a waste of their time and money.
Collis and Montgomery conducted a research study among a group of fifty companies
who were struggling to create corporate strategies by which corporate headquarters
could add value to their business. They found that some of the companies are working
on core competence; some were restructuring their portfolios, while others are
concentrating on building learning organizations. They concluded that it was necessary
to pull these dimensions into a coherent whole to optimize corporate advantage. This
thinking resulted in the Triangle of corporate strategy. This provides a possible
framework for the strategic assessment of corporate advantage.
The centre of the triangle is the vision, goals, and objectives, which is what we have
referred to as strategic intent. The three sides of the triangle are the resources,
businesses and the organizations, systems and processes. Competitive advantage is
shown at the corner of the triangle where resources and businesses meet. Corporate
advantage is the result of a good match between a business and its resources-being well
fitted to its opportunities. The other two corners are marked as co-ordination and
control. Appropriate co-ordination and control occur when the organization, systems
and processes are appropriate to businesses and processes respectively.

Collis and Montgomery claim that their research demonstrated that better corporate
advantage resulted when there were a balance between eh various elements of their
Triangle of Corporate strategy. Because of the inter-relationships implied, there is no
single solution that leads to the best pattern of strategy. Rather strategies will vary along
a number of dimensions and the most successful strategies were aligned in these
dimensions as indicated:

The SWOT diagram is usually most effective when only the most important half dozen
or so points are listed in each quadrant. Reducing much longer lists or strengths,
weaknesses, opportunities, and threats can be a valuable sauce of discipline and insight.
This reduction process involves making judgments about relative importance between
variables that cannot be related analytically - for instance, the cost of providing
improved service versus the value to the customer of that service.
An ideal strategy would use the strengths to exploit the opportunities while at the same
time defending against the threats and hiding the weaknesses. In practice, it is rarely so
simple.
19.6 ASSESSING COMPETITIVE ADVANTAGE
One of the most important aims of strategic assessment is to discover whether the
proposed options and eventual choices deliver competitive advantage. Successful
business strategies are those that use the capabilities of the firm to address customer
needs in a way that leads to sustainable competitive advantage. Competitive advantage
has characteristics similar to the Holy Grail: it is highly desirable, hard to define or
measure, and may even be imaginary. Because of its central role in ensuring success
there has been more written about competitive advantage than about almost any other
single aspect of strategic management.
Observations of most industries would suggest that clear-cut competitive advantage is
the exception rather than the rule and strategic choices can rarely guarantee to deliver
it. More often within a group of competitors, there are one or two clear leaders and one
or two clear stragglers. Each of the rest of the group often has strengths and weaknesses
in particular segments of a market that is not completely homogenous. The decisionmakers have to make their choices based on an accurate assessment of the current
positioning and a realistic view of what is possible for the future in terms of competitive
leadership. A clearly expressed strategic intent is often helpful in this decision-making
process.
Competitive advantage may more often be relative, rather than absolute. While
admitting that competitive advantage may be a little hard to nail down, no one denies its
importance and its central role in determining business success. This role has been well
summarized by John Kay: Corporate success derives from a competitive advantage
which is based on distinctive capabilities which is most often derived from the unique
character of a firm's relationships with its suppliers, customers, or employees, and
which is precisely identified and applied to relevant markets.
This neatly balances the need to identify capabilities and to choose appropriate markets.
Competitive advantage comes from matching internal capabilities to external
opportunities. In assessing whether the options and eventually the choices will deliver
sustainable competitive advantage. It is necessary to test the proposals against the
different ways in which competitive advantage can be achieved for a time.
19.6.1 Cost-based advantage

This is the most obvious way of achieving competitive advantage. Customers are always
aware of the price and will choose the lowest price if all else is equal. Low prices are only
sustainable if costs are low.
19.6.2 Advantage from a differentiated product or service
If the offering is different in a way that customers value then it may offer a competitive
advantage.
19.6.3 First mover advantage
The first player to adopt some new product or approach may derive competitive
advantage just because it was first. Such advantage may occur if the first mover is able to
grab a large share of the available market while its offering is still unique. By the time
that competitors have imitated the offering, the first mover may have achieved
economies of scale or brand recognition, which sustain its advantage. Obviously, if there
are high costs for customers to switch suppliers, this will contribute to the first mover's
advantage.
Unfortunately, while it is easy to find examples of companies who have done well by
being first into a new market, there are also many examples of fast followers who have
been able to grab the lead even after a late start. Later starters can avoid the mistakes of
the leaders and so save both time and money in their launch. Table gives some
examples.
Table below also shows the risks of offering such examples. Many of the winners may
be winners for a limited time. The successful first mover may yet be overtaken by a fast
follower yet to appear or a first-mover into a new direction. Even more successful
followers of followers may overtake successful fast followers.

19.6.4 Time based advantage

There are other occasions in which time can be a source of competitive advantage. Time
can often be as important as price in modern business. For instance, the time to bring
new products to market can be critical in high technology and fashion markets where
product lives are short. The earlier offering has longer to earn its development cost in

the market place. Much play has been made of the ability of Japanese manufacturers to
design and produce new models more quickly and to manufacture them more cheaply
than Western competitors. These examples were cited more often before Japanese
industry encountered the difficulties of the 1990s but these difficulties are certainly not
because the Japanese are fast developers of new products.
In other circumstances the ability to deliver quickly or with very tight time limits may be
as important as price. Many customers will pay more for fast or reliable delivery. For
instance, some specialized components may be essential for work to proceed in a large
building project. Since delays in the delivery of the component will stop the whole
project, the ability to deliver faster than the competition provides a competitive
advantage. The value of this advantage may be very high as it relates to the cost of delay.
19.6.5 Technology based advantage
Rapid advances in technology can have important effects on the basis of competition.
The most obvious examples of this result from the rapid advances in computer and
communications technology. One relevant current example is the Internet - a technology
that generates new business opportunities for providers of services and new ways for
existing business to communicate with their customers. The shares in many companies
providing services on the Internet have achieved very high prices in stock markets even
though many of them are only serving very limited needs of their customers. The biggest
winners in Internet service provision will be those who harness the power of the
Internet to serve day-to-day needs. For example, Charles Schwab, a stockbroker, has
stolen a lead in selling securities on the Internet. As a result, Schwab has moved from
being a small brokerage company to being a very significant one.
The Internet will affect most enterprises as users rather than as providers. There are
already pressures on companies to participate in E-commerce and the implied threat
that those who do not will be left behind. In fact, inappropriate participation may be
worse than non-participation. Those who succeed will have made sure that they deliver
real benefits to their customers and have developed the right internal capabilities to
deliver quality results. Past experience of other technologies suggests that those who get
it wrong may experience the "bleeding edge' of technology for themselves.
The overall lessons on technology-based advantage are that innovation may be a source
of business advantage and that innovation may be based on technology. The trick of
achieving competitive advantage from technology is to harness the technology to create
business innovation rather than exploit technology for its own sake.
Any of the above means of achieving competitive advantage may be relevant in a
particular context. The practitioner, however, cannot rely on general prescriptions but
must rather understand the true basis of competition of their particular business. This
basis of competition is likely to be changing and the winners will be those who
understand the present rules of competition and how those rules will change in the
future. It is also essential to remember that success in the future will depend on finding
new patterns of competitive advantage since the old patterns are known to all and

therefore commonly available. Thinking outside the box seems to be the prime means
of achieving competitive advantage.
19.7 COMPETITOR INTELLIGENCE SYSTEM
19.7.1 Need for a competitor intelligence system
Intelligence data on competitors can come from many sources: reports filed publicly,
speeches by a competitors management to security analysis, the business press, the sales
force, a firms customers or suppliers that are common to competitors, inspection of a
competitors products, estimates by the firms engineering staff, knowledge gleaned from
managers or other personnel who have in the competitors employment and so on. It is
unlikely to support a full competitor analyses could be compiled in one massive effort.
The data to make the subtle judgments implied by these questions usually come in
trickles rather than rivers a must be put together over a period of time and to yield a
comprehensive picture of the competitive situations.
Compiling the data for a sophisticated analysis probably requires more than just hard
work. To be effective, there is the need for an organized mechanism, some sort of
competitor intelligence system to insure that the process is efficient. The elements of a
competitor intelligence system can vary according to the particular firms needs, based
on its industry, its staff capability, and its management interests and talents. Figure
below diagrams the functions that must be performed in developing the data for
sophisticated competitor analysis and gives some option for how each function might be
performed. In some companies one person can perform all these functions effectively,
but this seems to be exception rather than the rule. There are numerous sources for field
data and published data, and many individuals in a company can usually contribute.
Furthermore, compiling, cataloging, digesting and communicating these data in an
effective fashion are usually beyond the capabilities of the person.
One observes a variety of alternative ways firms organize to perform these functions in
practice. They range from a competitor analysis group that is part of the planning
department and performs all the functions to a competitor intelligence coordinator who
performs the compiling, cataloging and communication functions, to a system in which
the strategist does it all informally. All too often, however, no one is made responsible
for the competitor analysis at all. There seems to be no single correct way to collect
competitor data, but it is clear that someone must take an active interest or much useful
information will be lost. Top management can do a lot to stimulate the effort by
requiring sophisticated profiles of competitors as part of the planning process. As a
minimum, some manager with the responsibility to serve as the focal point for
competitor intelligence gathering seems to be necessary.
Each of the functions can also be performed in a number of different ways, as noted in
figure. The options shown cover a range of degrees of sophistication and completeness.
A small firm may not have the resources or staff to attempt some of the more
sophisticated approaches, whereas a company with a large stake in successfully, reading
some competitors should be probably be doing all of them. Whatever the level of

sophistication, the importance of the communication function cannot be stressed

enough. Gathering data is a waste of time unless they are used in formulating strategy,
and creative ways must be devised to put these data in concise and usable form to top
management.
Whatever the mechanism chosen for competitor intelligence gathering, there are
benefits to be gained from one that is formal and involves some documentation. It is all
too easy for bits and pieces of data to be lost, and the benefits that come is too important
to handle haphazardly.

19.8 SUMMARY
This lesson introduced the concept of competitive advantage. After introducing the
concept, this lesson explained the global competitive advantage and their divisions. It
also described the identification of competitive advantage and the assessment of the
same.
19.9 ASSIGNMENT QUESTIONS
1. Explain competitive advantage.
2. Write short notes on global competitive advantage.
3. How competitive advantage can be positioned in an organization?
4. Write short notes on competitive intelligence system.
5. How do you assess competitive advantage in an organization?

- End of Chapter LESSON - 20

VALUE-CHAIN ANALYSIS

OBJECTIVES

To understand the concept value chain analysis

To know how this concept is used in business?

CONTENTS
20.1 Value-chain analysis
20.2 Industry value-chain analysis
20.3 Corporate value-chain analysis
20.4 The value chain approach
20.4.1 Identifying primary activities
20.4.2 Inbound logistics
20.4.3 Operations
20.4.4 Outbound logistics
20.4.5 Marketing and sales
20.4.6 Service
20.4.7 Identifying support activities
20.4.8 Procurement
20.4.9 Technology development
20.4.10 Human resource management

20.4.11 Firm infrastructure

20.5 Using the value chain in internal analysis
20.6 Summary
20.7 Assignment questions
20.1 VALUE-CHAIN ANALYSIS
A good way to begin an organizational analysis is to ascertain where firm's products are
located in the overall value chain. A value chain is a linked set of value creating activities
beginning with basic raw materials coming from suppliers, moving on to a series of
value added activities involved in producing and marketing a product or service, and
ending with distributors getting into the final goods into the hands of the ultimate
consumer. The below figure is an example of a typical value chain for a manufactured
product. The focus of value chain analysis is to examine the corporation in the context of
the overall chain of value seating activities, of which the firm may only be a small part.

20.2 INDUSTRY VALUE-CHAIN ANALYSIS

The value chains of most industries can be split into two segments, upstream and
downstream halves. In analysing the complete value chain of a product, note that even if
a firm operates up and down the entire industry chain, it usually has an area of primary
expertise where its primary activities lie. A company's center of gravity is the part of the
chain that is most important to the company and the point where its greatest expertise
and capabilities lie are its core competence. According to Galbraith, a company's center
of gravity is usually the point at which the company started. After a firm successfully
establishes it at this point by obtaining a competitive advantage, one of its first strategic
moves is to move forward or backward along the value chain in order to reduce costs,
guarantee access to key raw materials, or to guarantee distribution. This process is
called vertical integration.
20.3 CORPORATE VALUE-CHAIN ANALYSIS
Each corporation has its own internal value chain of activities. Porter proposes that a
manufacturing firms primary activities usually begin with inbound logistics (raw
materials handling and warehousing) go through an operations process in which a
product is manufactured, and continue on to outbound logistics (ware housing and
distribution), marketing and sales, and finally to service (installation, repair, and sale of

parts). Several support activities such as procurement (purchasing), technology

development (R&D), human resource management, and firm infrastructure
(accounting, finance, strategic planning), ensure that the primary value chain activities
operate effectively and efficiently. Each of a company's product lines has its own
distinctive value chain. Because most corporations make several different products or
services an internal analysis of the firm involves analyzing a series of different value
chains.
The systematic examination of individual value activities can lead to a better
understanding of a corporations strengths and weaknesses. According to porter,
"differences among competitor value chains are a key source of competitive advantage".
Corporate value chain analysis involves the following steps:
i. Examine each product lines value chain in terms of the various activities involved in
producing that product or service. Which activities can be considered can be considered
strengths or weaknesses.
ii. Examine the linkages within each product lines value chain. Linkages are the
connections between the way one value activities for example marketing is performed
and the cost of performance of another activity for example quality control. In seeking
ways for a corporation to gain competitive advantage in the market place, the same
function can be performed in different ways with different results. For example, quality
inspection of 100% of output by the workers themselves instead of the usual 10% by
quality control inspectors might increase production costs, but that increase would be
more than offset by the savings obtained from reducing the number of repair people
needed to fix defective products and increasing the amount of salespeople time devoted
to selling instead of exchanging already sold but defective products.
iii. Examine the potential synergies among the value chains of different product lines or
business units. Each value element, such as advertising, or manufacturing, has an
inherent economy of scale in which activities are conducted at their lowest possible cost
per unit of output. If a particular product is not being produced at a high enough level to
reach economies of scale in distribution, another product could be used to share the
same distribution channel. This is an example of economies of scope, which result when
the value chain of two separate products or services share activities, such as the same
marketing channels or manufacturing facilities. For example, the cost of joint
production of multiple products can be less than the cost of separate production.
20.4 THE VALUE CHAIN APPROACH
Figure below shows a typical value chain. The value chain disaggregates a firm into its
strategically relevant activities in order to understand the behavior of the firm's cost and
its existing or potential sources of differentiation. A firm gains competitive advantage by
performing these strategically important activities - what we have called key internal
factors - more cheaply or better than its competitors.

Every firm can be viewed as a collection of value activities that are performed to design,
produce, market, deliver and support its product.

As portrayed in figure, these activities can be grouped into nine basic categories for
virtually any firm at the business unit level. Within each category of activity, a firm
typically performs a number of discrete activities that may represent key strengths or
weaknesses for the firm. Service activities, for example may include such discrete
activities, as installation, repair, parts distribution, and upgrading - any of which could
be a major source of competitive advantage or disadvantage. Through the systematic
identification of these discrete activities, managers using the value chain approach can
target potential strengths and weaknesses for further evaluation.
The basic categories of activities can be grouped into two broad types. Primary activities
are those involved in the physical creation of the firm's product or services, its delivery
and marketing to the buyer, and its after-sale support. Overarching each of these are
support activities, which provide inputs or infrastructure allowing the primary activities
to take place on an ongoing basis.
20.4.1 Identifying Primary Activities
Identifying primary value activities requires the isolation of activities that are
technologically and strategically distinct. Each of the five basic categories of primary
activities is divisible into several distinct activities, such as the following:
20.4.2 Inbound logistics

Activities associated with receiving, storing and disseminating inputs to the product,
such as material handling, warehousing, inventory control, vehicle scheduling, and
returns to suppliers.
20.4.3 Operations
Activities associated with transforming inputs into the final product form, such as
machining, packaging, assembly, equipment, maintenance, testing, printing, and facility
operations.
20.4.4 Outbound Logistics
Activities associated with collecting, storing, and physically distributing the product to
buyers, such as finished goods warehousing, material handling, delivery vehicle
operations, order processing, and scheduling.
20.4.5 Marketing and Sales
Activities associated with providing a means by which buyers can purchase the product
and inducing them to do so, such as advertising, promotion, sales force, quoting,
channel selection, channel relations, and pricing.
20.4.6 Service
Activities associated with redoing service to enhance or maintain the value of the
product, such as installation, repair, training, and parts supply and product adjustment.
The primary activities most deserving of further analysis depend on the particular
industry. Yet, in any firm, all the primary activities are present to some degree and
deserve attention in a systematic internal analysis.
20.4.7 Identifying Support Activities
Support value activities arise in one of four categories and can be identified or
disaggregated by isolating technologically or strategically distinct activities. Often
overlooked as sources of competitive advantage, these four areas can typically be
distinguished as follows:
20.4.8 Procurement
Activities involved in obtaining purchased inputs, whether raw materials, purchased
services, machinery and so on. Procurement stretches across the entire value chain
because it supports every activity - every activity uses purchased inputs of some kind.
Different people typically perform many discrete procurement activities within a firm,
often.
20.4.9 Technology Development

Activities involved in designing the product as well as in creating and improving the way
the various activities in the value chain are performed. We tend to think of technology in
terms of the product or manufacturing process. In fact, every activity a firm performs
involves a technology or technologies, which may be mundane or sophisticated, and a
firm has a stock of know-how for performing each activity. Technology development
typically involves a variety of discrete activities, some performed outside the R&D
department.
20.4.10 Human Resource Management
Activities necessary to ensure the recruiting, training, and development of personnel.
Every activity involves human resources, and thus human resource management
activities cut across the entire chain.
20.4.11 Firm Infrastructure
Such activities as general management, accounting, "legal, finance, strategic planning,
and all others decoupled from specific primary or support activities but essential to the
entire chains operation.
20.5 USING THE VALUE CHAIN IN INTERNAL ANALYSIS
The value chain provides a useful approach to guide a systematic internal analysis of the
firms existing or potential strengths and weaknesses. By systematically disaggregating a
firm into its distinct value activities across the nine activity categories, the strategist has
identified key internal factors for further examination as potential sources of
competitive advantage.
20.6 SUMMARY
This lesson explained about the value chain Analysis both in industry and corporate. It
also described the various approaches to the value chain analysis. The last part of the
lesson explained, how the Value Chain Analysis could be used in internal analysis.
20.7 ASSIGNMENT QUESTIONS
1. Explain in detail about the value-chain analysis
2. Write short notes on value-chain approach

- End of Chapter -