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A strategic business unit (SBU) is an operating division of a firm which serves a distinct product/ market segment or a well defined set of
customers or a geographical area. Each SBU sets its own strategy within the framework of the overall corporate strategy. The overall
corporate strategy helps the SBUs to specify their scope of operations based on the extent of resources allocated to each.
Functional strategies are derived from divisional strategies and are concerned with specific operational areas such as marketing, production,
finance and human resources. These strategies are planned and implemented at the middle management level through functional policies.
In small businesses or those which engage in a single product or service line i.e. single SBU firms the corporate level strategy serves the
whole business. This strategy is implemented at the middle management level through functional policies. Fig 1.2 depicts the above
relationship.
Strategic Management
Chapter 2 : STRATEGIC PLANNING
2.1 CONCEPT OF STRATEGIC PLANNING
Strategic or corporate planning means a systematic determination of what to do in the future in order to fulfill the organisation's mission and
achieves objectives. It can commence once the firm's mission and core objective have been formulated.
The basic purpose of strategic planning is to protect the organisation against environmental threats and hence ensure its long term survival. It
enable management to combat environmental influences through formulation implementation of corporate strategies. Strategic planning
should lend a sense of purpose to the management. It should create a common understand among different levels of management of the key
or critical issues affecting the business. It should compel management to clarify its priorities, develop criteria for monitoring performance and
think ahead in a systematic way.
2.2 NEED FOR STRATEGIC PLANNING
Henry Fayol (1841 - 1945) used the analogy of a sailing ship to justify the usefulness of business planning. Whilst winds and foul weather can
force a ship to alter course it is necessary to have:
Navigational devices and firm intentions about the best course to follow
The maximum amount of information on the tides, currents, seasonal variations in weather etc, and
Contingency plans for alternative routes in the event of icebergs, hurricanes and so on making impossible the realisation of the
original intentions.
Otherwise the vessel will simply drift and never reach its pre-determined position.
2.3 STRATEGIC PLANNING PROCESS
The main steps in the strategic planning process are:
Recognition of the need to plan
Analysis of the situation. This may cover aspects such as organisation's strengths and weaknesses, environmental constraints and
resource limitations.
Determination of possible alternative courses of action
Selection of the best or optimum alternative. In volatile business environment the choice may be subjective as strategist's value
system such as his risk orientation may come into play
Implementation of the plan. This may involve possible structural change, detailed allocation of tasks and resources, coordination of
activities, overcoming resistance to change etc.
Monitoring the results. This may involve changes to the plans in case actual outcomes vary significantly from planned outcomes.
2.4 TYPES OF PLANNING SYSTEMS
The planning system selected should relate directly to the needs of the organisation. The system may be formal or informal, quantitative or
intuitive or a combination of both or have a short, medium or long term horizon.
Planning systems evolve naturally with growth in the organisation's operations. Initially the firm may engage in basic financial planning only
i.e. prepare annual budgets and functional plans in respect of specific projects.
As the operations expand the management automatically veers into strategic thinking. It begins to scan and analyse its environments,
prepare forecasts, establish procedures for resource allocation, analyse strategic actions of rival firms, assess its own competitive position
etc. Having analysed the environments and its own strengths and weaknesses the firm then establishes definite procedures for evaluating
strategic alternatives. Finally an overall corporate plan emerges by combining the various ad hoc planning activities. Typically with each
stage of evaluation the degree of formalisation of procedures increases and the firm responds by trying to make the processes more flexible
and creative.
a) Formal and informal planning procedures
Formal planning procedures establish set rules for determining plans and lend consistency to the process. Typically a formal corporate
planning system would cover such areas as organisation's objectives, plans for converting opportunities and combating threats, risk
projections, evaluation criteria, forecasts task allocation etc.
The informal planning system on the other hand is characterised by flexibility and is perceived as 'user-friendly'. The organisations who follow
such a planning procedure become more adaptive and responsive to change. However as the procedures are not documented a large
amount of information remains in the head of individual executives. The implementation of the plans could suddenly get disrupted in case
they choose to resign or fall ill.
b) Operational planning
Operational planning is concerned with managing the day to day affairs of the organisation. It is basically lower level planning and is
performed by middle level executives and supervisors. These managers are guided by certain policies, procedures, rules, targets and
budget. All operating managers in different functional areas implement their respective plans in terms of attaining their targets or subgoals as
derived from the organisional objectives.
Apart from focussing on functional plans, operational planning concerns itself with such aspects as scheduling, internal coordination, budgets
and administration, schedules and project networks, recruitment and redundancy, formulating advertising campaigns etc.
c) Strategic planning and strategic management
The current trend as exemplified by Steiner, Miner and Gray is to consider the terms strategic planning, long range planning and corporate
planning as synonymous for all practical purposes. Each of these processes involves assessment and analyses of an organisation's external
environment and its internal capabilities with a view to conceiving its mission, setting objectives and framing policies, plans and procedures
for implementation. In consequence these planning techniques result in stream of actions which are designed to implement a strategy.
The main elements of the strategic or corporate plan are shown in fig. 2.1
alternate forms. The top management may either determine and hand down the plans to lower levels without the latter's participation in their
formation or it may initially express broad guidelines or expectations and subsequently issue concrete action plans. Some firms prefer the
bottom-up approach. In this the departments formulate their own plans and the corporate plan is thereafter built on the basis of the
recommendations of these units. Certain key plans, notably plans for new products, restructuring of organisations, joint ventures etc may not
get assigned to individual departments. These are generally prepared by the central planning unit of the firm.
Top-down planning facilitates coordination and control of activities and decisions can be made quickly. Its disadvantage is that it can result in
domination by people who are ill equipped for the task. The bottom-up approach on the other hand ensures not only participation but
commitment to plans at the lower levels. Its disadvantage is that junior managerial employees may not have the expertise to formulate
sensible plans. Also their plans, though creative and innovative in their own eyes, may be unrealistic from point of view of strategic
management of the entire firm.
In practice a blend of both the Top-down and the bottom-up approaches may emerge with regular interaction between top management and
operating units. The implementation of a plan will involve:
Allocation of responsibility for various tasks
Preparation of budgets
Scheduling activities
Coordination of work
Identifying points when progress will be evaluated
Establishing procedures for review and alteration of plans in the event circumstances change.
2.5 PLANNING TECHNIQUES
a) Gap analysis
The gap analysis technique is a measure of the organisation's potential. It is a formal assessment of evaluation of the strategy currently being
implemented. The need for assessment arises when a new strategy or change to the existing strategy is proposed. The new proposal is
considered in relation to the gap between the expected outcomes of continuing with the existing strategy and the desired outcomes which
could result in the future if the new strategy were to be implemented. The fig. 2.2 below shows the gap analysis. The time period when
assessment of existing strategy is initiated is indicated by point A. The point B represents the future time period for considering the gap
between the expected outcome of following the existing strategy and the desired outcome which may result if the new strategy is
implemented.
The assessment of the gap will be influenced by such factors as the strategic planner's perception of the gap i.e. whether it is significant or
not, his belief that it can be reduced and last but not the least the motivation to reduce it.
The gaps between potential and performance could occur due to the following:
Planned market share not being achieved
Shortfall in development of distribution outlets and intermediaries
Heavy expenditures in R & D failing to yield desired profits
Decline in profits, return on capital employed and asset growth
Deterioration in quality and customer care.
b) Benchmarking
Benchmarking is an effective tool in building competitive advantage. The process involves the setting up of benchmarks or standards to
assess an organisation's own performance and at the same time compare it with that of its competitors. Benchmarking is of three types
internal, external and functional.
Internal benchmarking compares performance of divisions, departments etc. within the same organisation against common standards.
External benchmarking compares an organisations' total performance against that of its competitors. The typical areas of comparison would
include profitability, market share, price earning ratio etc. Functional benchmarking involves comparison of the organisation's performance in
a specific functional area with other firms. The benchmarking technique will succeed provided the benchmarks established are truly based on
industry best practice. Also the information available on competing business should be comprehensive and reasonably accurate.
c) Performance indicators
These are measures of an organisation's performance and can be either result-oriented or effort-oriented. Some examples of results- based
performance measures are:
Sales volumes and revenues
Rates of return on investments
Market share
Growth of assets
Average inventory levels
Examples of effort-oriented measures are:
Number of prospective customers contacted
Number of complaints resolved
Development of relationships with suppliers
Improvement in relations with trade unions
Extent of absenteeism
Research and development effort.
The choice of performance indicators will depend on the organisation's mission and objectives, its size i.e. number of divisions, departments,
S.B.U's etc. and the activities which are critical to the success of the businesses. The indicators selected may be quantitative or qualitative
and the performance measured against standards which are defined by maximum and minimum values of key variables.
Examples of performance standards include:
Average sales revenue per month, quarter etc.
Percentage of defective goods produced
Productivity of each worker and overall productivity of organisation
Number of documents processed in a given time period.
d) Network methods
A network is a schematic description of all activities involved in a project and shows all the interconnecting links between events. The network
assists in scheduling, coordinating and controlling work. It is used to determine the completion times of key activities and the project as a
whole. The two main methods in network analyses are the Critical Path Method (GPM) and the Project Evaluation Review Technique
(PERT). Whilst conceptually both the methods are similar the difference lies in that the CPM assumes individual activity times as
predetermined and constant whereas the PERT uses three alternative times for each activity i.e. optimistic, pessimistic and most likely.
2.6 ORGANISATION PLAN
The overall plan document of an organisation will cover the following aspects:
An overview of the total corporate plan.
The strategic plan. This will specify details of any expansion, divestment, restructuring etc. plans, if envisaged.
The functional plans. These cover plans in respect of production, marketing financial, human resources, R & D etc.
Contingency plans.
Divisional and departmental plans.
Project plans.
Budgets.
Resource mobilisation .
Strategic Management
Chapter 3 : THE PROCESS AND THE PLAYERS
3.1 THE PROCESS
The strategic formulation process is said to commence when a corporation conceives of its mission. The process consists of several
interrelated tasks which result in the formulation, implementation and evaluation of the corporate strategy of the firm. These tasks include:
Defining the mission and business
Setting the corporate objectives
Carrying out environmental appraisal
Performing internal appraisal of the firm
Evaluating strategic alternatives
Making the strategic choice
3.2 THE PLAYERS
a) Role of board of directors
The ultimate legal authority of an organisation is vested in the Board of directors. The Board is responsible to the stockholders for the
following important duties:
Ensuring managers' actions are directed towards achieving corporate objectives.
Approving major financial and operational decisions i.e. choosing capital structures, obtaining loans, approving large-scale
expenditures, assessing risk of default by major customers etc.
Selecting senior managers (who are not directors).
Supporting new strategists, attracting resources and protecting the organisation from outside threats.
b) Role of top management
The top managers of a firm are responsible for the survival and success of the organisation. These may be the Board Chairman, CEO,
Managing Director/ President, Deputy Managing Director/ Vice-President, Executive Director etc. The CEO's role is the most crucial as he,
apart from managing the day to day operations of the firm, is the chief visionary responsible for conceiving the mission, setting the objectives
and formulating and implementing the strategy. The senior management are typically evaluated against the overall financial performance of
the business (ROCE, share price, market share etc.) and on their abilities as individuals to establish a strategic direction for the enterprise.
Evaluation criteria might involve qualities of leadership, team building, employee and investor relations and the successful management of
specific projects.
c) Role of SBU executives
In case of firms organised into SBUs, the SBU managers may formulate strategies in respect of their individual units based on the overall
corporate strategy. They endeavour to achieve the corporate objectives through efficient deployment of the resources allocated.
d) Role of corporate planning staff
Large business firms provide their chief executives with a corporate planning staff. These staff specialists provide support services in areas of
new business opportunities, allocation and use of capital and their resources, marketing research etc. They perform the corporate intelligence
function and rarely ever participate in the strategic choice process.
e) Role of middle level managers
Middle level managers are primarily concerned with operational matters. Their participation in the strategic management process is largely
confined to implementing functional strategies. However, their expertise may be sought for providing data or ideas which can affect future
Strategic Management
Chapter 4 : MISSION AND OBJECTIVES
4.1 MISSION AND BUSINESS DEFINITION
The corporate mission statement describes the firm's basic purpose i.e. why it exists, how it sees itself, what it wishes to do, its beliefs and its
long term aspirations.
The mission statement therefore informs everyone of the corporate vision and purpose, the firm's core values and it's role in society. It should
also provide a good statement of the business definition of the firm by specifying the products, functions and markets it expects to serve. A
dear business definition provides a better focus when top management considers various strategy alternatives with respect to products,
services or markets.
Examples of few mission statements include:
Reliance Industries: To become a major player in the global chemicals business and simultaneously grow in the other growth
industries like infrastructure".
Tata Information Systems: "To be India's most successful and most respected IT company".
Ranbaxy : "To become a $1 billion research based global pharmaceuticals company.
4.2 OBJECTIVES
Objectives are ends which the organisation strives to achieve in order to fulfill its mission. Examples of objectives include:
Increase in the market share
Growth in profits
Quality products or services to customers
Service to society
Objectives should be specific, measurable, attainable and time bound. They provide standards against which to measure organisational
performance. When expressed in specific terms objectives become goals.
4.3 FORMULATION OF OBJECTIVES
The objectives of a firm are formulated by the top management. The following factors influence the formulation of objectives:
The forces in the environment which are represented by the firm's stakeholders. These comprise the owners, shareholders,
government, trade unions, competitors and suppliers.
The enterprise's resources. Larger firms have more resources to combat forces in the environment.
The internal power relationship amongst the top managers. The extent of support management enjoys of others in the organisation
e.g. employees, stockholders etc. will determine the degree of influence.
The past objectives of the firm. These are generally taken as a reference by top managers to set current objectives. The changes to
the past objectives may be incremental in nature depending on the competing claims presented by the stakeholders.
Strategic Management
Chapter 5 : ENVIRONMENTAL APPRAISAL
h) Physical environment
A survey of the physical or natural environment would cover such aspects as natural resources, ecology, climate, location etc.
Business firms depend on different kinds of natural resources. The cost and steady availability of natural resources, raw materials and energy
constitute important strategic considerations whilst deciding on the location of the new plant or shifting of the existing one.
The climate is another aspect of the natural environment which is of interest to business firms whose products are climate dependent.
In the present day most societies are concerned about ecology and environmental pollution in particular. Hence governments actively
intervene in issues relating to protection of wildlife and ocean wealth. Also green issues such as atmospheric pollution which has caused
severe depletion of the ozone layer. Hence business firms are concerned about government legislation and the role of environmental activists
on such issues.
The location of manufacturing plants and distribution warehouses is an important consideration for firms dealing in bulky products or mainly in
exports business. Such firms prefer locations near ports to reduce transportation and freight costs.
The above vital aspects of the physical or natural environment which can affect the business prospects of a firm are considered during the
strategy formulation process.
5.4 ENVIRONMENTAL SCANNING TECHNIQUES
Environmental scanning is normally carried out by means of a search of verbal and written information, spying, forecasting, MIS etc.
The sources of verbal and written information include:
Mass media such as radio and television
Firm's documents, files, MIS, employees etc.
External agencies such as the government, trade associations, marketing intermediaries, customers etc.
Formal studies by consultants, educational institutions, market research agencies etc.
Spying through services of professional agencies, one's own employees and former employees of competitors.
Secondary sources of information such as newspapers, magazines, trade journals, government publications etc.
A wide range of methods and techniques are used in conduct of environmental survey and forecasting in strategic planning. As the main
purpose of environmental survey is forecasting the future state of environmental factors, most of the techniques are based on the statistical
methods used in forecasting. Some of the techniques like scenario writing however are qualitative in nature and are used to predict the future
through application of informed judgement and intuition. Some of the techniques commonly used are discussed in the subsequent
paragraphs.
5.5 MODEL BUILDING
A model reduces an issue to just a few key variables. In model building a number of assumptions are made about the nature of the problem.
The model when constructed will predict events and describe circumstances in which they happen. Schematic models use graphs, charts etc.
to help management predict the future and run an organisation in the most efficient way.
Mathematical models are analogues of relationships between variables seeking to identify cause and effect and hence to predict values for
forecast (dependent) variable. A typical example is the sales forecast determined by such variables as product price, competitor's price,
growth in consumer incomes etc. The forecast will change once the values of those independent variables change.
5.6 STATISTICAL (QUANTITATIVE) TECHNIQUES
Some of the commonly used statistical techniques are:
Regression Analysis whereby a dependent variable is said to be determined by a number of independent (causal) variables.
Trend extrapolation in which researchers fit best fitting curves(iinear, quadratic etc.) through past time series to use for
extrapolation.
Trend correlation in which researchers correlate various time series in the hope of identifying leading and lagging indicators that can
An example of a summarised ETOP in respect of a hypothetical company in the pharmaceutical business is shown in Fig 5.1.
Strategic Management
Chapter 6 : ORGANISATIONAL APPRAISAL
The scanning of the environment enables the firm to spot not only potential threats posed by the environment but also the opportunities
available in it. However prior to deciding on which opportunity to select the firm must first assess its own capabilities with a view to judge
whether it is competent to exploit such an opportunity. To this end the firm needs to carry out the following internal appraisal:
Assess its strengths and weaknesses in different functional areas
Assess its competitive advantages
An understanding of its strength and weaknesses helps the organisation to select suitable opportunities and formulate appropriate strategies
to meet its objectives. In case the appraisal reveals a capability gap then measures can be taken to address the shortcoming such that the
desired objectives can be met.
6.1 ASSESSMENT OF STRENGTHS AND WEAKNESSES IN FUNCTIONAL AREAS
The organisation assesses its strengths and weaknesses in the following functional areas:
Marketing
Finance
Production and Operations
Research and Development
Corporate Resources and Personnel
a) Marketing
The following factors are considered while assessing whether a firm is strategically stronger in marketing than its competitors:
Extent of market share established
Market share of competitors
Quality of product and customer services
Life cycle stage of various products
Effective pricing strategy for product and services
Consumer perception of the products and services
Effective and efficient sales force
Effective and efficient market research system
Effective and efficient distribution channels
The firm's strengths in one or more of the above areas will add to its ability to compete effectively. Whilst some firms may be inclined towards
adopting an approach characterised by low pricing, high promotion and wide distribution others may opt for high prices, high quality and
exclusive clientele. In case a weakness is observed in any area such as the existing product line then product improvement, new product
development or acquisition may be attempted to cover the gap. A gap in 'positioning' would first require ascertaining the consumer's
perceptions. It could then be filled up either by modifying the product to fit their perceptions or changing the product's position in their minds.
Products have been compared to living organisms in the sense that they are born, mature, decline and eventually die. A profitable firm which
has all its products in the mature stage will lose its competitive edge once the decline commences. Hence it is vital that firms keep innovating
and expanding their product line with new products.
Pricing is an important factor and much depends on the consumer's perception of the product's attributes vis a vis its image, quality and
reliability. In case the perception is positive the consumer may be willing to pay a price higher than what the competitor is offering.
In today's competitive market good brand management constitutes a definite advantage and firms are frequently exercising choices of either
allocating separate brand names to individual products or establishing a generic family' brand covering all versions of their products. The
latter approach is cost effective especially where the products fall in the similar usage category (eg. cosmetics), or have a common customer
group or a common channel of distribution. It also facilitates introduction of new products as no additional advertising or promotion costs are
incurred.
The supply chain management linking the manufacturer to the distributor and retailer is another area which if effectively managed can give
the firm an advantage over its competitors. In assessing the distribution function for strengths the firm would need to consider such factors as
the cost of the channel (size of the customers' orders, salaries of sales team, inventory holdup costs etc.), extent of control over distributors
and retailers, reliability of distributors and retailers and geographic coverage.
The effectiveness of the electronic media as an instrument for achieving sales and advertising objectives of large business houses especially
those dealing in consumer goods has been amply demonstrated by the colossal expenditures incurred by these firms on a continual basis.
This form of advertising establishes a firm's products in the minds of the target customer group, promotes brand loyalty and improves the
corporate image. If efficiently and effectively managed advertising can constitute a distinct advantage for the firm.
Some of the techniques that can be used for analysing strengths and weaknesses in the marketing area are:
Marketing audit
Market share analysis
Marketing cost analysis
Product line profit analysis
Sales force productivity analysis
Consumer satisfaction index
Brand monitoring surveys
b) Finance
The following factors are considered whilst assessing strengths and weaknesses in the financial areas:
Financial performance in terms of profitability and productivity
Low cost of capital in relation to competitors
Efficient cash flow management
Balanced capital structure
Quality of relationship with owners, shareholders and credit agencies
Efficient working capital and capital budget system
Efficient tax planning procedures
Efficient internal audit and accounting system
Firms can have some strategic advantages in respect of one or more of the above listed factors. The strengths usually result in greater
financial 'slack or reserves which allow the firm to be flexible and adaptable. A comfortable financial 'slack' allows the firm to exercise greater
choice whilst considering various strategic options.
The competence of the firm's financial executives will largely determine whether the various financial systems designed and currently in force
are operating efficiently and effectively. Some of the techniques that can be used to assess financial performance are explained in the
subsequent paragraphs.
Liquidity Ratios
These indicate a firm's ability to meet its short term obligations such as current liabilities including long term debt which is near maturity.
Current assets relate to inventories, sales, accounts receivable and cash. The cash is used to reduce current liabilities. A commonly used
liquidity ratio is the current ratio which is given by:
Current Ratio = Current Assets / Current liabilities
Too large a current ratio is not desirable as it would imply inefficient use of resources.
In case of slow moving or obsolescent inventories which could indicate inability of the firm to meet its short term debt, the quick ratio is used
to assess its state of liquidity. The quick ratio is given by:
Quick Ratio = (Current Assets - Inventories) / Current Liabilities
Leverage Ratios
These ratios indicate the source of a firm's capital i.e. whether owners or outside creditors. The term leverage is used to denote the
multiplying of profits or losses when using capital with a fixed rate of interest. The amplification of profits or losses is viewed in relation to the
equity held by the common shareholders. The most commonly used ratio is given by:
Leverage Ratio = Total Debt / Total Assets
Another leverage ratio which indicates the extent to which sources of long term financing are provided by creditors is given by:
Leverage Ratio = Long Term Debt / Equity
Activity Ratios
These ratios reflect how efficiently and effectively a firm is using its resources. The asset turn over ratio which indicates how effectively
financial managers are employing their total assets is given by:
Asset Turnover = Sales / Total Assets
The fixed asset turnover on the other hand measures the turnover of the plant and equipment and is given by:
Fixed Asset Turnover = Sales / Net Fixed Assets
The inventory turnover ratio is another commonly used activity ratio. The ratio is given by:
Inventory Turnover = Sales / Inventory
As inventory holding are normally carried at cost, the numerator sometimes used is 'cost of goods sold' in lieu of 'sales'.
The ratio of accounts receivable turnover is a measure of the average collection period. Too high a ratio indicates poor debt recovery. The
blocking off the capital in account receivable also carries the risk of bad debts. A very low ratio, on the other hand, could imply loss of sales
due to the stringent credit terms. These ratios are given by:
Accounts Receivable Turnover = (Sales / Account Receivable Average Collection Period) - (360 / Accounts Receivable Turnover)
Profitability Ratios
These ratios are a reflection of the overall management of the firm's resources. The various profitability ratios are given by:
Profit (net) = Net Earnings / Sales
Return On Investment (ROI) = {Net Earnings / Total Assets Rate Of Return (ROR)} - (Net Earnings / Net Worth)
c) Production and operations
An appraisal of this function would cover the following aspects:
Plant capacity and overall productivity
Efficient planning and control systems
Age of the machines and equipment and whether they are functioning efficiently
The framework provides a checklist for thinking about what makes a business tick. It advocates examination in seven base areas, all
beginning with 'S':
Strategy- a means' to achieve an end i.e; organisational objectives
Structure- system for assigning tasks and delegating authority
Systems- organisational systems consisting of planning, control, information, motivation, appraisal and development which help to
implement strategy
Skills- competence and capabilities of the organisation's personnel
Staff- organisation's personnel
Style- organisation's leadership and administrative skills
Shared values- refer to mission-derived objectives, goals and values which organisation's personnel strive to achieve
6.4 STRATEGIC ADVANTAGE PROFILE (SAP)
The international appraisal of the firm locates its strengths and weaknesses in different functional areas. The external appraisal of the
competition and industry structure enables a firm to pinpoint which of its distinctive strengths can be built into competitive advantages.
Based on the findings, a comprehensive strategic advantage profile(SAP) or competitive advantage profile (CAP) can be drawn. The SAP is
a detailed document which categorises each of the functions or factors into several sub-factors. For example, the marketing function can be
disaggregated into price, product or promotion sub-factors and potential strengths and weaknesses in each of these areas assessed and
graded. A summarised version of the detailed SAP is generally prepared for reference of top management to enable strategic decision
making.
An example of a summarised SAP applicable to a hypothetical company in the consumer goods business, is given at fig. 6.1 by way of
illustration.
Strategic Management
Chapter 7 : STRATEGIC ALTERNATIVES
When considering strategic alternatives a crucial factor that is examined is the mission definition - the business the firm is in or wants to be in.
7.1 STRATEGIC ALTERNATIVES AND BUSINESS DEFINITION
Derek F. Abell has defined business as comprising of the following three dimensions:
customer groups (segmentation of market according to customer types)
customer functions (utilities provided by products to satisfy customer needs)
alternative technologies (functions/ processes adding value to the business).
The choice of products/ services will depend on several factors. Should the line offered be broad/ narrow? Are products to be of high or low
quality? What is offered in terms of customer utility? The alternative strategies can be considered once the business definition with regard to
products or services is clarified.
The choice of markets will depend on the territories, channels and customer types to be served. Should the market served be local, regional
or international? To appoint wholesale or retail distributors? To serve individual customers, industrial firms or government agencies?
The issue of function (or technologies) involves adding value to the business. At each stage from creation to delivery to the end user
processes may be included to add value. The business definition should clarify what stage the firm will focus on i.e. specialisation in only one
stage or complete vertical integration.
Once the initial choice of product, market and functions has been determined various strategic alternatives can be considered to continue,
change or improve efficiency in the above dimensions of business.
7.2 GRAND STRATEGIES
The various strategies which a firm can adopt are classified into four categories: stability, expansion, divestment (or retrenchment) and
combination. These are referred to as grand or generic strategies. The basic features of these categories are described in the subsequent
paragraphs. Fig. 7.1 shows the four grand strategic alternatives along with variants of the expansion strategy.
Firm after fulfilling its original mission recasts same into a new one with more ambitious growth.
Any firm that desires to adopt a diversification strategy must ensure it possesses the required managerial competence. As it will be venturing
into different fields, the management of these businesses will require right corporate leadership, competent executives, skilled workforce and
an efficient structure and systems.
a) Forms of diversification
Diversification is classified into four broad categories:
Vertically integrated diversification
Horizontal diversification
Concentric diversification
Conglomerate diversification
Fig. 7.3 shows the diversification matrix linking various products/ function types to different forms of diversification strategies.
b) Vertical integration
In this form of diversification, firm takes up businesses that are related to its existing business. In other words it starts making products that
serve its own needs. Vertical integration is of two typesbackward and forward integration. Backward integration occurs when a firm
undertakes new activities affecting the supply of its inputs i.e. towards the raw material stage. Forward integration involves activities which
affect the nature of distribution of the firm's output i.e. towards end users. By way of example a firm supplying only shoe upper? integrates
backwards by setting up a tannery to produce its own leather for making soles. In terms of forward integration it commences to assemble the
entire shoe and perhaps even take up the distribution of the product as well.
c) Horizontal integration
In this form of diversification the firm persists in the same type of products at the same level of production or marketing process. This strategy
is implemented via the merger takeover or joint venture routes. The underlying compulsions may be to expand and take on competition in
another territory, increase market share and benefit from economies of scale. By way of example a cosmetics firm taking over its competitor
firm is said to integrate horizontally.
d) Concentric diversification
This is also a form of related diversification. The strategy aims at linking the new business to the existing business in terms of process,
technology or marketing. Concentric diversification is different from vertical integration in that the latter strategy involves new products which
are within the firm's existing process-product chain whereas in case of the former there is a departure from the vertical linkage. Concentric
diversification is of three types:
i) Marketing and technology related
A firm introduces a similar type of product or service through use of related technology. For example a firm manufacturing plastic toys
decides to make other plastic items such as furniture or cutlery and sells through the same distribution channel.
ii) Technology related
A firm introduces a new type of product or service with the help of related technology. For example a bank provides capital financing to large
industrial clients and offers routine banking services to individual customers (savings account/ current account operations).
failure. In view of the serious implications in terms of loss of employment for workers and other employees these strategies are only
considered for adoption when all other strategic options have been exhausted.
Strategic Management
Chapter 8 : STRATEGIC CHOICE
Glueck has defined strategic choice as the decision to select from among the alternative grand strategies considered the strategy which will
best meet the enterprise's objectives. The decision involves focussing on a few alternatives, considering the selection factors, evaluating the
alternatives against these criteria and making the actual choice.
It may be noted that strategic choice is an analytical as well as judgmental task. To perform the task the firm relies heavily on its marketing
research and marketing information systems. This is so because strategic choice finally boils down to choice of products and markets that the
firm will play in.
8.1 CRITERIA FOR STRATEGIC CHOICE
The following criteria for optional strategy choice have been proposed by Kenneth Andrews in his book, The Concept of Corporate Strategy:
Is strategy chosen clearly identifiable? Is it clear to those who have to deal with it subsequently?
Does the strategy fully exploit the opportunities present in the environment?
Is it consistent with the resources of the firm and its competitive advantages and core competences?
Is the chosen level of risk feasible?
Is it appropriate to values and aspirations of the firm?
The selection factors can be classified as objective and subjective factors. The objective factors which are based on analytical techniques are
also referred to as rational, normative or prescriptive factors. The subjective factors, on the other hand, are qualitative in nature and based on
personal judgement. These factors are also referred to as intuitive or descriptive factors. The strategic alternatives generated are analysed
on the basis of the objective and subjective selection factors.
8.2 EVALUATION OF STRATEGIC ALTERNATIVES
The process of evaluation of strategic alternatives begins by limiting the choice of alternatives to a few which are considered feasible. This is
done either by focussing on the business definition or analysing the strategic gap analyses. In considering the business definition the firm can
review the present status of its business products, markets and functions and strategise on the future position it would like to be in.
Alternatively it can set objectives for a future time period and then work backwards to ascertain where it would reach with the current level of
efforts. The difference between the desired and expected performance will indicate the strategic gap. The perception of the strategists on the
nature of the gap will determine the type of strategy to be chosen i.e. stability, expansion or retrenchment.
Once the alternatives have been limited to a reasonable few, the evaluation process can commence. This involves a careful analyses of both
type of selection factors i.e. subjective and objective. There is no fixed method used by strategists. The process is generally an iterative one.
The selection factors are the main evaluation criteria and these need to be considered together as singly neither will provide a
comprehensive perspective on which to base the strategic choice.
The evaluation of the strategic alternatives will provide to the firm a clear and definite direction to enable strategic decision making. The final
strategy or set of strategies selected for implementation will need to be documented into a strategic plan which will include such aspects as
budget for resource allocation, performance evaluation criteria, contingency strategies etc.
8.3 OBJECTIVE FACTORS
Some analytical techniques which are used to consider objective factors are the portfolio analysis, SWOT analysis and industry and
competition analysis. It may be recalled that the SWOT and industry and competition analyses were discussed in chapters 5 & 6 respectively.
a) Portfolio analysis
The portfolio analysis, also commonly referred to as the corporate portfolio analysis, is a set of techniques that are used by a firm as a part of
its internal appraisal. They help the strategists in assessing the status/ health of individual businesses in the firm's portfolio. These
techniques are generally used by multiple SBU firms for competition analysis and corporate strategic planning. Some of the techniques
commonly used are the Boston Consulting Group (BCG) matrix, the General Electric Company (G.E.) matrix and Hofer's product-market
evaluation matrix.
To enable better appreciation of the portfolio techniques it is necessary to understand the concepts of experience curve and product life cycle
which are used in the portfolio approach.
b) Experience curve
Studies conducted by the Boston Consulting Group in the 1970's revealed that production costs generally fell by at least 20 percent
whenever a business's output doubled. The finding implied that increasing the market share should be a primary strategic objective.
The experience curve effects are referred to as cost reduction and efficiency increases which are achieved as a result of a business acquiring
experience in a project, function or activity. These effects differ from economies of scale as they are the outcome of longer experience rather
than a greater volume of output. The costs reduce as a result of the following factors:
The acquisition of know-how
The substitution of capital for labour
Labour stockholding
Higher labour productivity
Better design of equipment or processing
Specialisation of tasks (enhanced experiences from undertaking narrowly specified duties).
The acquisition of greater experience in a particular technology leads to development of expertise in related fields. This in turn, can promote
further technical advances. The experience curve effects represent a barrier to the entry of new firms to an industry because new firms
without experience would face higher costs than the established businesses. The forecasting of experience curve effects influence a firm's
pricing decisions. The firm may assume that a low price will lead to high volume production, which in turn will generate learning and
contribute to increased efficiency. Thus profitability will rise and the market share expand. The quantification of expected experience curve
effects can also help price new products which have been manufactured in the past.
c) Product life cycle (PLC)
Products have been likened to living organisms in that they are conceived and born, mature, decline and eventually die. The introductory
phase is marked by high expenditures towards market research, test marketing, launch tests etc. Financial losses can result in this early
phase. The first customers are likely to be younger, better educated and more affluent than the rest of the population. They will get drawn by
the novelty of the product. Technical problems may occur and many potential customers, anticipating this, may postpone the purchase. No
competition is experienced during this stage. Advertising is normally the most important element of the marketing mix as the purpose is to
create product awareness and brand loyalty.
During the growth stage conventional customers begin to purchase the product. As competition will appear during the stage, advertising
should attempt to broaden the product's appeal and reinforce customer loyalty.
Once the product enters the maturity phase the aim should be to stabilise market share and make the product attractive to new market
segments through improvements in design and packaging. The emphasis should be on additional features, improved quality and wider
distribution. Most customers by now may have either tried the product or decided not to buy it. As competition intensifies suitable strategies
relating to extra promotional activity, price cutting to improve market share or finding new uses for the product may have to be pursued.
The last phase of decline occurs when the market gets saturated. This happens when consumer tastes alter or the product becomes
technically obsolete. Sales and profits fall. The product's life should now be terminated as any additional time, effort, and resources spent to
revitalise it will go waste.
d) BCG matrix
In a multi-SBU firm some businesses may be having a high market share and high profitability whilst others may be having a low market
share and making losses. In respect of some businesses the industry may have an attractive growth rate while in case of others it may be
very poor. The firm's strategists, therefore, have to carry out an in-depth evaluation of the health/ performance of each of its businesses as
well as the performance of the relevant industry as a whole.
The BCG matrix enables the firm to undertake the process of evaluation of the industry growth and the relative position of the firm in the
industry. The matrix, shown in fig. 8.1 classifies the businesses of the firm into the four following categories:
Stars:
These products or SBUs operate in a high growth market and require large amounts of cash to maintain their position. Being in the
growth phase of the PLC they are leaders in their business and generate large amounts of cash. The cash in and out position,
however, is more or less in balance. Stars are good prospects for expansion.
Cash cows:
These operate in a low growth market. They do not need heavy investments and generate a lot of cash. Cash cows provide funds
for overhead, dividends and investments in lagging businesses such as stars and the question marks. As they are in the mature
phase of the PLC, limited expansion may be considered.
Dogs:
These are products or divisions with low growth and a low market share. Their profits are poor and they need cash to survive. They
are normally in the late maturity or declining phase of the PLC. They should be divested or liquidate.
Question marks:
These are high growth-low market share products or businesses. Their cash generation is poor and they need a lot of cash to
maintain or enhance their market share. As they operate in a high growth market it is easier to gain market share for them than for
the dogs. A firm that obtains an early lead can benefit from the experience curve through cost advantages and market leadership. It
can also create entry barrier for new firms. A firm that expects a dominate market share can expand and get quickly converted into a
star. Falling that it should divest at the earliest opportunity.
e) G.E. matrix
The G.E. matrix also referred to as the multi-factor portfolio planning matrix is shown in fig. 8.2:
within them the market shares of the firms. These circles are to be plotted for present and future businesses.
against competitive forces or locate positions in the industry where these forces are the weakest.
h) Value chain concept
The value chain concept also conceived by Michael E. Porter, can be applied to advantage in competitor analysis. Basically value chain is a
tool for identifying ways in which value can be created by a firm. However, firms also use the concept for assessing their competitive position
within the industry by comparing their own value chain with that of their competitors. Fig. 8.5 gives us a diagrammatic representation of the
value chain concept.
possess a high risk orientation otherwise they will not be able to function.
Risk attitudes also vary depending on the internal conditions. A firm which is financially weak and dependent on external financing is unlikely
to undertake risky projects. The managerial risk perception will differ depending on whether the firm's future is at stake or there is little to lose.
In case the preference is for balancing risk then stability strategy will be pursued in major SBU's with expansion in an odd unit. However if
risk is deemed necessary then managers are likely to discard stability as a viable option.
c) Managerial awareness of past strategies
The strategic gap analysis involves a review of current strategy of a firm at a given point in time to assess whether continuation of the
strategy will lead to expected attainment of the desired objectives. In case the gap is perceived to be small, past strategy is generally
continued with.
In large firms managers prefer only incremental changes to past strategies which are under implementation rather than major shifts. This is
so because commitment in terms of resources having already been made any shifts to new areas will render these resources including
personal redundant. However, sudden or rapid changes in the environment may necessitate appropriate modifications to the current
strategies or even their replacement with new strategies. The strategic change is more likely to take place when new managers from outside
are brought in. It is least likely to occur when new managers are promoted from within or the existing management continues at the helm.
The product life cycle can influence a firm's commitment to past strategies. In case of products or services which are in the maturity or
decline stages the need for reassessing past strategies will be more critical than for those which are in the introductory stage.
d) Managerial power relationships
Power or politics influence managerial decision making in a firm. The importance of the decision, the time pressure, the degree of uncertainty
and the style of the decision maker will influence the approach towards decision making i.e., analytical, political or intuitive. An analytical
decision is made after considering all alternatives along with their consequences and choosing the alternative which offers the maximum
gain. In political decision making the manager attempts to merge the competitive demands of various stakeholders such as owners,
customers, suppliers, competitors, government etc. His aim is to achieve a compromise through mutual adjustment and negotiation so that
the decision has support and can be implemented politically. A intuitive decision maker is opposite of the rational decision maker. He relies
heavily on habit or experience, gut feeling, reflective thinking and instinct. His decision making is guided by an intuitive feel rather than hard
core analysis.
The power of lower level staff also influences strategic decision-making. Subordinates can decide to withdraw proposal for strategic change
or provide analytical data which supports their own proposal. Also for a strategy to be a success it has to be first implemented and lower level
managers have the power to make or break a strategy.
e) Managerial perception of CSFs and distinctive competencies
Ohmae treats critical success factors (CSFs) or key factors for success as a business strategy for competing wisely in a industry. A firm's
strategic choice is influenced by the perception its strategists have of the match that exists between CSFs and the firm's distinctive
competencies. If the CSFs in the relevant industry are high product quality, superior R&D and efficient distribution then the firm has to assess
whether it possesses significant strengths or competencies in these areas. If it does then it can consider entering the industry or pursue other
alternatives.
8.5 ORGANISATIONAL CULTURE
The choice of strategy has to be compatible with the company's culture. A firm with a history of conservative operations cannot suddenly be
goaded into rapid expansion. This would not be in tune with its slow growth and quiet style. A firm's culture and style can be changed through
strategy, however this would require a systematic and planned approach.
8.6 THE TIME DIMENSION
The timing of decisions and time pressures are factors which affect not only the strategic decision process but also the quality of the decision.
Due to pressure of time strategists may be unable to gather sufficient data or consider an adequate number of alternatives. This may lead to
impulsive or poor quality decisions.
The timing of decisions such as when to make strategic choice or when to start implementing strategy could be dictated by environmental
conditions. A particular strategic choice can be made when no other alternative appears as attractive, adequate resources are available
Strategic Management
Chapter 9 : THE PROCESS
As stated earlier, prior to making strategic choice, past strategic actions of the firm are taken into consideration. Strategists prefer to adopt
strategies which can be implemented within the existing structure and resources. Only those incremental changes are introduced over a
period of time which will help to bridge the strategic gap and achieve the desired outcomes.
As regards the forward linkage between strategy formulation and implementation, the new or modified strategy selected may necessiate
changes to the organisational structure, functional policies and/ or leadership style.
As strategies are only a means to an end i.e. accomplishment of firm's objectives, these have to be activated through implementation. The
task of implementation includes allocation of resources, possible redesign of structure, formulation of functional policies and a review of the
existing leadership styles.
Strategies lead to plans. Depending on the type of strategy envisaged i.e. stability, expansion, retrenchment etc suitable plans will need to be
formulated. For example, an expansion strategy will lead to new company acquisition plans. The plans prepared will then be translated into
different kinds of programs. These programs will include various goals, policies, procedures, rules and steps to be taken to execute the plan.
The execution of the programs will require shoring up through allocation of funds. A typical program may involve complete redesign of the
packaging of an entire product line. The programs generally comprise projects which are time based and for which the costs are provided
through capital budgeting. Examples of typical projects include erection of new plants, or modernisation of existing ones, relocation of a
factory in a distant site, construction of a housing complex etc.
Broadly the following activities comprise the strategy implementation process:
Resource allocation
Structural implementation
Functional implementation
Behavioural implementation
The above activities are not performed in sequence. Some may be carried out at the same time, others repeated at different times and still
others performed only once.
Strategic Management
Chapter 10 : ALLOCATION OF RESOURCES
10.1 APPROACHES TO RESOURCE ALLOCATION
Resource allocation involves the acquisition and earmarking of various resources such as physical, technical, human and financial for
strategic activities planned to accomplish a firm's objectives.
The sources generally tapped for acquisition of funds may be internal or external. Internal financing is through reserves, retained earnings etc
whilst external funds sources are bank credit, fixed deposits from public, equity etc. The short term finance is used for working capital
requirements and the long term finance for capital investments.
The allocation of resources may be decided at the corporate level i.e. by the Board of Directors and/ or the CEO. This is referred to as the
Top-down approach. In the bottom-up approach resources are allocated after seeking recommendations from operating personnel/ functional
departments. A third approach involves allocating resources through the budgeting process in which allocations are drafted, modified and
finalised jointly.
The various methods employed for allocation of resources:
a) BCG model
In the BCG model a firm's various businesses or SBUs are assessed as either cash cows, stars, question marks or dogs. The cash surplus
generated cash cows can be diverted to maintain the question marks or invested in stars to help convert them into cash cows.
b) Product life cycle
A product life cycle comprises the introduction, growth, maturity and decline stages. During the introduction and growth stages a product may
need to be propped up with additional resources which may have to be diverted from those products which are in the maturity phase and
generating surplus cash.
c) Capital budget
The capital budget is critical as it involves plans for acquiring and distributing capital for large scale investments. Capital expenditures for
mergers, new product lines, increase in plant capacity etc. are catered for in this budget. As capital expenditure plans have a long term
perspective the capital budget is considered an important planning tool for successful implementation of strategy.
d) Zero-based budget
The zero based budget approach involves starting from ab initio i.e. the budget of each department is critically set at zero. The department or
unit projects a new allocation at the start of each and every period. The intended activities have to be specified each time and the expected
costs re-estimated. The zero-base approach attempts to overcome the problem of managers who indulge in excess expenditure to enhance
future allocations. The drawback is the large amounts of time managers spend in periodic assessment of cost and repeated presentation of
budget proposals.
10.2 STRATEGIC BUDGETING PROCESS
The allocation of resources is generally achieved through a mix of the top-down and bottom-up planning approaches. The process involves
planning at both the corporate and SBU levels. The allocation plans are shuttled back and forth till a negotiated final set of budgets is
produced which gives force to the overall plan.
As seen in the fig. 10.1, the strategic budgeting process is a five stage process involving the following:
In stage one, top management initiates the budgeting process by stating the firm's objectives. It also provides the sales forecast
which guides production planning, materials planning, personnel planning, marketing (sales promotion and advertising) planning,
capital planning, cash flow analysis etc.
In stage two, central planning unit or budget department of firm provides the format and related information to the units for preparing
a budget.
During stage three, each unit prepares a preliminary budget. The previous year's budget is taken as a reference to prepare the
budget for the next year. The resources required to accomplish the strategy are clearly specified by each unit.
During stage four, the budget department critically examines each unit's preliminary budgets in the light of the unit's past
performance. Based on its recommendations the top management approves the budgets if they conform with past performance,
expected revenues and the firm's strategy.
In the last stage summary budgets are prepared. The projected receipts and expenditures are first worked out and subsidiary
budgets prepared. Subsidiary budgets include the operating budget which projects material, labour and overhead costs, the financial
budget which projects cash receipts and disbursals, the capital budget which projects new construction, major additions/ restructuring etc. The summary budget, which is essentially a profit and loss or income statement, considers the costs of all subsidiary
budgets and gives a final projection of profit/ loss. In case the budgets meet the firm's objectives, top management approves them
or changes are effected after discussion with concerned units.
The resource allocation process should be strictly tied to the strategic direction of the firm. Otherwise it can result in internal strife. If
retrenchment strategy is in the best interests of the firm then any negotiations to protect a unit can only be at the expense of another unit
which needs cash injection for its sustenance and growth. The unit so deprived will perceive itself as having been 'let down' by its manager.
This can have a major negative impact on the performance of the concerned unit, the career of its manager and the overall work
environment.
Strategic Management
Chapter 11 : STRUCTURAL IMPLEMENTATION
11.1 ORGANISATION STRUCTURE
The term 'organisational structure' is referred to as the system for dividing a firm's total work into units and allocating these units to people
and departments. This structure defines the framework within which the activities occur. When structuring a firm, management needs to
consider such aspects as departmentalization, levels of authority, specialization, supervision, centralisation, decentralization, sizes of
departments, grouping of activities, extent and nature of delegation etc. An outline of the main steps involved in determining the structure of a
firm are shown in fig. 11.1.
The matrix structure has two forms, the adaptive and the innovative. The structures are adopted by firms whose products change frequently
and are short-lived. In the adaptive form the project groups are temporary and are scrapped once the project is completed. Some firms adopt
the innovative structure. They divide themselves into current business groups and innovation groups. The innovators invent and pretest
products and services. The products once ready for the market are transferred to the current business units. This form attempts to combine
the desirable features of the functional, divisional and adaptive forms of organisations.
The matrix structure makes the firm more responsive to crises and change. The functional vertical relationships and the inter-dependent
horizontal relationships lead to operational flexibility. The disadvantage is that conflicts between project groups and functional groups arise. It
requires a high degree of coordination of a number of specialised skills. Also project personnel fear that completion of a project may lead to
discharge rather than reassignment to a new project.
11.4 CHOOSING ORGANISATIONAL STRUCTURE
There is no best form of organisational structure. A structure that fits the organisation's environment and its internal characteristics is
considered the best for that organisation. The organisation's environmental factors such as degree of competition, dependence on
stakeholders etc. and its internal factors such as size, technology, product lines etc. affect and are affected by the strategy.
In general the functional structure is more suited for stable environments which place less demand on inter-departmental coordination and
innovation. The divisional structure, however, is more suited for changing environments which require faster response, more coordination and
communication, and innovation.
If the strategy is to expand through a merger or acquisition then the increase in size will require a changed structure. In case of lagging
businesses, the strategy will be to retrench, in which case some units may be dropped from the structure. The earlier question of strategy
following structure or vice-versa again surfaces. Suffice to say that the process is circular. Structure does impose certain restrictions on
strategy change. However, if major strategic changes affect firm's environmental and internal variables then structural change becomes
unavoidable. Generally firms endeavour to implement most strategies by retaining the broad structure and only fine tuning or altering the
administrative system within the structure.
Strategic Management
Chapter 12 : FUNCTIONAL IMPLEMENTATION
12.1 DEVELOPMENT OF PLANS
Apart from structural review, the implementation of strategy also requires development of functional policies. These provide direction to
middle management on how best to make use of the resources allocated. They guide middle managers in devising operational plans and
tactics to make the strategy work.
Policies are only guides to action. They do not provide prescriptions on how to handle specific situations such as introduction of a specific
product or dismissal of a particular worker. They are general guidelines which help managers to make certain choices.
Policies are developed to ensure that strategic decisions are implemented, there is basis for control and coordination and time spent in
decision making is reduced. Hence policies should specify what is to be done, who is to do it, how it is to be done and when it should be
finished. A follow up mechanism should be indicated to ensure that decision taken will be implemented.
The process involved in establishing policies is quite similar to that used in strategy formulation and choice. Firm's environmental factors,
internal politics and power play, all affect the policy making process as the policies decided will ultimately influence the distribution of
resources. Also internal resistance to change, coalition building and conflicts between units are likely to occur during the development of
policies.
Specialists in each functional area develop plans and policies. The functional areas have traditionally been classified as production,
marketing, finance and personnel. The all pervasive influence of I.T. in modern day businesses demands policy making in this area as well.
Some of the major functional policy issues which are critical to effective implementation of strategy are listed in the subsequent paragraphs.
12.2 MARKETING POLICIES
Marketing plans and policies will address issues such as nature and quality of pricing, promotion, distribution and product lines. These will
also clearly specify the tactics to be employed to counter competition.
a) Products and Markets
Some key issues which need to be addressed in this area are:
Expansion in related products or in new markets?
If new products are to be introduced - how many and when?
If expansion into new markets - which customer groups to target or geographical territories to enter?
Branding - allocate separate brand names to individual products or establish a generic ' family' brand covering all types of products?
Emphasis on quality - appearance, reliability, durability etc.?
b) Pricing
A number of pricing options can be adopted:
Penetration pricing low price is combined with aggressive advertising to capture large market share.
Skimming high/ price policy suitable for established top quality products.
PLC pricing initially high pricing to cover development and advertising costs. The price is systematically reduced in later stages of
cycle to broaden product's appeal.
Loss leading selling a product at less than its production/ purchase cost to attract customers.
Incentives such as discounts, mode of payment, credit terms etc also influence pricing policies.
c) Distribution
HR plans and policies are framed on the basis of strategic choice. In case retrenchment is the chosen strategy then difficult policy decisions
regarding laying off or termination need to be considered. Some firms formulate a long term HR plan as an integral component of the
strategic plan. This requires forecasts of human resource needs. The assessment of firm's environmental factors, both internal and external,
is necessary to progress such planning effort.
12.7 IT POLICIES AND CORPORATE STRATEGY
IT policies need to derive from firm's corporate strategies as a whole. The selection and development of IT systems should relate directly to
firm's objectives. However the process being circular IT policies in turn also assist in formulation of corporate strategy. IT plans and policies
should lead to an efficient administrative system, effective decision making, efficient use of resources and high productivity levels within the
firm. Some of the benefits which can accrue from proper implementation of IT policies are as follows:
Improving operational efficiency
Accurate and efficient monitoring of competitors' activities through sophisticated environmental scanning techniques
Customers relations seeking new customers and maintaining relationships with existing customers through CRM technique
Maintain efficient and continual links between each element of the supply chain i.e. manufacturer, distributor, retailer and consumer.
Integrating marketing with production. For example enabling firm to service niche markets via product differentiation and flexible
manufacturing
Facilitating formulation of high calibre strategies through use of advanced techniques for environmental scanning, construction of
scenario's and SWOT analysis
FT plans and policies significantly affect the overall strategic options avail ableto the firm and play a crucial role in the implementation of
corporate plans. Corporate strategy should focus on integrating IT into all aspects of the firm's operations to ensure that end objectives are
met. Irrespective of the strategy chosen, IT plans and policies have implications for a wide range of issues such as individual tasks and
responsibilities, appraisal, accountability, control and coordination systems, working practices, recruitment and training needs, reward
systems, management decision making procedures etc.
12.8 INTEGRATION OF POLICIES
The functional plans and policies devised need to be integrated well so that the tasks required to implement a given strategy can be
accomplished. Glueck has referred to the following issues which affect integration of functional policies:
Internal Consistency. All functional policies must be consistent with one another. In case the policies are at cross purposes,
implementation of strategy will be affected. For example manufacturer of perfumes may opt for a marketing policy characterised by
high quality, high price and exclusive up market distribution. The production and personnel policies would need to be consistent with
the marketing strategy i.e. manufacture on order only, wide range of perfumes and packaging styles, skilled and highly paid workers.
Trade offs. As policy decisions in one functional area may impact on other areas trade offs become necessary to avoid sub
optimisation. In the example of the perfume manufacturer, operational efficiency would demand mass production with lesser product
variety and not production to order and many models. Thus as a part of the integration process, sacrifices in some functional area
may become unavoidable.
Intensity of linkages. The need to link or coordinate activities of various departments is crucial to the functional policies integration
process. If required necessary specialisation units may be set up to ensure the needed communication and coordination. For
example a firm engaged in specialised high quality technical products would require strong linkage between the R&D and production
departments as the business is capital intensive and manufacturing costs are high.
Timing of policies. The functional plans and policies devised must ensure that lead times within each area are compatible before
implementing the plans. The marketing department must coordinate and confirm product delivery schedules before promising same
to customers. A mismatch could easily result in disgruntled customers and loss of image for the firm.
Strategic Management
Chapter 13 : BEHAVIOURAL IMPLEMENTATION
As stated in chapter 8 strategic choice is influenced by such subjective factors as decision styles, attitude to risk and internal power play
between the strategists. The strategy implementation process is also affected by the behaviour and attitude of the strategists. The chief
strategist, plays a key role in both the above processes through exercise of leadership and administrative skills. Other organisational factors
such as corporate culture, corporate value and ethics and firm's sense of social responsibility also significantly influence implementation of
strategy.
13.1 LEADERSHIP IMPLEMENTATION
Leaders are important to an organisation as they help it cope with change. They ensure that plans and policies formulated are implemented
as planned. Leadership implementation is effected in following ways:
13.2 CHOICE OF LEADER
The successful implementation of strategy chosen will need to be ensured by selecting the right strategist in the right place at the right time.
The criteria employed will include such factors as education, abilities, experience, temperament and personality. The belief that leaders tend
to be made, not born, is now widely accepted in the business world, as is the need for leadership as well as administrative skills among
managers. To compete and grow is global market places firms must concentrate on being creative and innovative and to achieve this they
will need people-centered leaders, not the old style authoritative managers.
The firm must ensure the match between the strategy chosen and the CEO. For example, if a merger or acquisition is on the cards then a
competent manager must be available to assume leadership. If the new unit is to be integrated into the existing structure then the skills and
styles must fit the current business. If a firm moves from a stable strategy to one of expansion then the strategist must be qualified and
experienced enough to lead the diversified new product lines.
As regards managerial responsibility the tasks and decisions should be assigned based on their criticality and urgency. Critical and urgent
strategic decision making should be the prerogative of the CEO. Divisional or functional managers should be responsible for urgent but less
critical decisions whereas senior level staff may deal with critical but less urgent issues.
13.3 LEADERSHIP STYLE AND CLIMATE
The right climate of managerial values and leadership style is essential if a firm is to carry out effective implementation of the chosen
strategy. The term climate here means the nature of leadership, motivation, decision, communication, control processes and the
development of a corporate culture.
The strategic objectives determine the nature of leadership styles and characteristics. If the objective is to expand in new product/ market
areas then desirable leadership style could be entrepreneurial and risk taking. However, if the objective is profitability then the desired
attributes could be conservative, balanced approach, neutral on risk etc. The manager's ability to adapt to new roles will determine how
effective he will be able to handle tasks of strategic importance.
As regards climate let us examine how it affects various aspects of the administrative system:
Leadership processes: Do superiors behave in a manner that encourages subordinates to voice their views freely? Is there a
climate of mutual trust and confidence?
Motivational processes: Do employees work under threat of punishment or for economic rewards? Is their sense of responsibility
high or low? Do they work as a team?
Decision processes: Is decision making concentrated at the top level only? Is it rational and analytical? At what level do the
employees participate?
Communication process: Is it a two way communication? Are the means formal or informal verbal exchanges?
Control process: Is the control concentrated at the top or is there widespread responsibility? Is it too tight or too loose?
13.4 CORPORATE CULTURE
This is a dimension of climate that leaders help to develop. The culture of an organisation consists of customary ways of doing things and its
members' shared perceptions of issues that affect the organisation. A firm's culture evolves gradually. It affects:
Leadership styles
Individual perceptions of colleagues and situations
Assumptions about how work should be performed
vision are not values. The mission or purpose, the fundamental reason for a firm's existence is not a value. Also values should not be
confused with vision which is a picture of the intended future. All the above have their place in a successful firm but values are the foundation
on which these others are built.
Corporate values are the fundamental beliefs on which a firm is built. They are the essence of a firm's identity. They are long lasting and
serve as a beacon for firms to chart their business course. John Kotter, reflecting on corporate culture and values, says, 'At a deeper level,
Corporate culture is about the implicit shared values among a group of people - about what is important, what is good and what is right'.
Values and norms are truly invisible and often a firm's employees are not very aware of their culture or of the role they play in helping to
maintain it. However every firm does have its own culture and its own set of values. Sometimes these are not clear to outsiders or even to
those within. Value driven business firms must articulate their values clearly so that the stakeholders understand what the organisation
stands for.
13.8 ETHICS, BUSINESS AND SOCIETY
No organisation can isolate itself from the society within which it operates. Business provides goods and services to the general public which,
therefore, has a vested interest in how it behaves. Customers demand quality, fair prices, prompt delivery, good after sales service etc.
Suppliers expect quick settlement of bills, shareholders high dividends and employees better wages and working conditions. Occasionally
these requirements conflict and firm's managers have to take ethically contentious decisions on the basis of social norms and attitudes of the
society in which they live.
a) Ethics
Ethics concerns the study of moral principles and how individuals should conduct themselves in social affairs. Ethical considerations in
decision making involve the decision taker's personal feelings about what in his subjective opinion is 'good'.
The question of what represents ethically proper business behaviour is complex because ethical standards vary over time and among
cultures and nations. Managers of firms are also members of a society. When they purchase goods for their own personal use they expect
certain standards to apply and it would be inconsistent of them not to feel obliged to adopt similar standards in their own business affairs.
In resolving ethical problems managers may adopt two approaches. Either the manager sets for himself a code of conduct i.e. predetermines
strict moral principles and adheres to them always or he consciously decides to vary his behaviour according to the demands of particular
situations. The former approach lends consistency to a manager's behaviour but he runs the risk of being labeled as obstinate and
unsympathetic. The latter approach though flexible is resented and may lead to retaliation by those affected by a manager's ethical
inconsistency
b) Ethics and strategy
Ethical issues play an important role in strategic management. Some of these issues are listed below:
Power and responsibility are interlinked. Senior managers of large corporations can hurt or promote interest of a large section of
employees or entire communities.
Consumers are increasingly judging the worth of a firm by the manner in which it tackles ethical and environmental issues.
Cultural influences of societies in which managers reside affects their moral thinking and consequently their strategic decision
making.
Certain business practices are considered unethical throughout the world.
These include 'dumping of products, deliberate violation of laws concerning consumer protection, environmental pollution, employees' health
and safety, equal opportunities etc.
A strategist's personal professional ethics therefore plays a crucial role during the strategy formulation process. Most strategists develop a
philosophy of some sort which helps them to determine hierarchies of professional objectives, identify good and bad occurrences and
evaluate the 'righteousness' of various courses of action. In time they evolve their own criteria against which they assess particular situations.
13.9 SOCIAL RESPONSIBILITY
Corporate social responsibility demands that firms behave as 'good citizens' while pursuing purely commercial goals. The term 'public good'
may have several meanings but most people agree that firms should conduct themselves on the basis of certain fundamental principles.
Strategic Management
Chapter 14 : EVALUATION AND CONTROL
14.1 EVALUATION AND CONTROL PROCESS
Strategy evaluation and control process has three aspects. These are:
Establishing standards and targets for the strategic objectives and plans.
Monitoring activities and comparing actual with target performance.
Implementing measures to remedy deficiencies.
Basically control links input to output and provides feedback to the management. The firm's corporate plan specifies goals and functions/
tasks of various units/ departments and mechanisms are required to ensure effective implementation of the plan. An effective controls system
results in the following benefits:
Improves operational efficiency
Facilitates management of change
Develops a common culture with the firm
Helps in introduction of modern management techniques (TQM, Just-in-Time etc.)
The basic features of the strategy evaluation and control system are shown in fig. 14.1 below:
Strategic Management
Chapter 15 : CORPORATE STRATEGY- PRESENT AND FUTURE TRENDS
15.1 INTRODUCTION
Strategic management is a comparatively young multi-disciplinary field of study. Strategists, in formulating their theories and analytical
frameworks, delve deeply into such diverse fields of study as organisational theory, human resource management, economics, accounting
and finance and marketing.
One of the most complex issues which continues to engage strategists even today is why certain businesses achieve competitive advantage
through superior performance. In the 1980's Porter and others presented the view that competitive advantage resulted from competitive
positioning of the organisation in its environment, based upon highly systematic planning. This view, however, was challenged in the 1990's,
by Prahlad and Hamel, Kay and others, who believed that in a turbulent business environment strategy can be developed incrementally and
that competitive advantage depends upon the ability of the business to build core competencies which cannot easily be replicated by
competitors.
15.2 DEVELOPMENT OF STRATEGIC MANAGEMENT
Some strategists advocate a planned or prescriptive (also called deliberate) approach to strategic management whilst others believe strategy
should evolve incrementally i.e. the emergent approach.
The other issue that has been a subject of debate is whether competitive advantage results from competitive position of the business in its
industry or from business specific core competencies.
Fig. 15.1 shows the development of strategic management in the light of the different strategic approaches. These approaches are discussed
in the subsequent paragraphs.
o
o
Horizontal - firms are generally at the same stage of the value system and are often competitors
Vertical - firms are at different stages of the value system (this includes collaboration with suppliers, distributors and
customers).
In respect of the above issues it may be concluded that strategic management is fundamentally concerned with understanding the nature of
competitive advantage and the means by which it is acquired and sustained. The different approaches discussed provide alternative methods
for understanding the means by which strategy is formulated and implemented. A degree of planning is required but, equally, strategy may
also emerge incrementally. As currently seen future developments in strategic management are likely to focus on collaborative networks and
knowledge management for producing competitive advantages.
The issue of future trends in strategic management would certainly be incomplete without reference to the subject of Information Technology
(I.T.) as a vehicle for harnessing knowledge and fuelling business growth. Let us, therefore, view the latest concepts in strategy formulation in
the area of e-business.
15.13 E-BUSINESS STRATEGY FORMULATION
Some of the challenges faced by firms engaged in e-business are:
Ascendancy of buyers. The internet provides buyers with wide access to information and a platform to make their voices heard to
sellers. In other words they can "aggregate". Buyers can create powerful buying blocks by pooling in their purchases, with each
individual added the unit cost for all decreases.
Networking-based increasing returns model. Network effects mean that as more units are sold the value of each unit becomes
higher. One major way to bring about network effect is by setting a standard. Physical assets are no longer the primary driver of
competitive advantage and profitability. Instead intangible assets like high quality customer service and intellectual capital are
increasingly becoming the source of value. Investment in intangibles will produce the greatest returns.
There is an absolute need for speed in continually bringing innovations to the market and quickly scaling them up. Once the
increasing returns phenomenon starts even the swiftest of followers will find it difficult to keep pace. Even where increasing returns
do not play a role, time to market will make the difference and the race for scale will be relentless.
15.14 KEY SUCCESS FACTORS IN E-BUSINESS
Some of the key factors which will significantly affect success in e-businesses are:
Shift to customer - centricity. In e-business the customer will be at the center of strategic thinking. Firms must embrace ' pull '
strategies i.e. focus on constant adaptation of the product/ service mix to meet evolving customer desires.
Enhance customer value propositions. Firms must exploit every capability of the web to deliver more value than found in real world
stores and make a buyer's experience far from commoditised.
Create rich relationships with customers. The surest way to maximise profitability is to retain important customers through strong
relationships. In e-business a company can nurture customer relationships by accumulating knowledge about them through past
transactions and solicited input, and using that to enrich the buying experience.
Today CRM (Customer Relationships Management), a management tool which embraces above aspects, is being increasingly adopted by
leading firms throughout the world.