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Strategic Management

Chapter 1 : NATURE OF STRATEGIC MANAGEMENT


1.1 CONCEPT OF STRATEGIC MANAGEMENT
The term strategy is derived from the Greek word 'strategos' which means 'generalship' i.e. the science or art of planning and directing large
scale military movements and operations. In business parlance strategy may be defined stream of management decisions that determine the
purpose and direction of the enterprise. These management decisions serve as a route map to guide the enterprise towards its desired
destination as specified in its mission lent.
Examples of strategic decisions include :
Financing of business- (e.g. equity or loan capital)
Pricing of products to gain competitive advantage in the market place
Diversification, acquisition and divestment
Restructuring of organisation
Retrenchment of employees
Recognition of trade unions
1.2 LEVELS OF STRATEGY
Large businesses generally devise strategies at three levels :
Company (Corporate) level
Division/ subsidiary level Functional level
Fig 1.1 illustrates the type of strategies planned at different management tin firms with multi-business-units

Fig. 1.1 Different Levels of Strategy


Corporate level strategies integrate and coordinate all the firm's activities and are the responsibility of senior management. They define the
very nature of the business, the lines of activity (product/ service) that the firm should pursue and the overall allocation of resources.
Corporate strategies essentially cover long term business planning and embrace such aspects as risk analysis, investment appraisal,
statistical forecasting, acquisition and divestment and integration of marketing with all other functions of the firm.
Divisional strategies flow from corporate strategies. The creation of Strategic Business Units (SBU) ensures that the operations of divisions or
other subsidiaries conform to corporate plans.

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.

Fig 1.2 Strategy Level - Single SBU Firm

1.3 EVOLUTION OF STRATEGIC MANAGEMENT


Glueck traces the development of strategic management as arising from the use of planning technique by managers. In most businesses in
earlier times the focus of the manager's job was on day to day planning. As businesses began to expand the managers found it difficult to
coordinate operations due to increased complexity and rapid changes in the environment. Hence they tried to anticipate the future through
preparation of budgets and control systems such as capital budgeting and management by objectives (MBO). Though budgeting provided
financial control it lacked emphasis on the future. Hence long-range planning appeared. This produced first generation plans i.e. a single plan
for the most likely future.
Today's approach is called 'Strategic Planning' which focuses on second generation planning i.e. analysis of business and the preparation of
several scenarios for the future. Contingency strategies are then formulated for each of the likely future scenarios. Strategic planning helps to
formulate strategy. It is a part of the wider process of strategic management which deals with aspects of implementation and control of the
chosen strategy.
Hofer refers to evolution of strategic management in terms of four paradigm shifts. These include :
'Ad-hoc policy making'. This was resorted to in the mid 1930's by the early entrepreneurs dealing in a single product, limited
customers and narrow markets.
'Planned policy formulation' replaced ad-hoc planning as businesses began to expand and a need was felt to integrate functional
areas in a rapidly changing environment.
'Strategy' paradigm emerged in the early 1960's in response to rapid environmental changes which triggered the need to examine
the basic relationship between businesses which had become increasingly complex and their environments.
The 'strategic management' paradigm came about in the 1980's. It cussed on two broad areas, namely, the strategic approaches
and methods of business firms and the responsibilities of general management, generated revolutionary thinking in the field of
general management.
According to Toffler, futuristic organisations would "no longer be responsible simply for making a profit or producing goods but for
simultaneous contributing to the solution of extremely complex ecological, moral, politic racial, sexual and social problems".
1.4 STRATEGIC MANAGEMENT PROCESS
Strategic management has been defined in several ways. Glueck has referred to it as a "stream of decisions and actions which lead to the
development of an effective strategy or strategies to help achieve corporate objectives".
The strategic management process is depicted in a model shown at fig 1.3

Fig. 1.3 Strategic Management Process


As may be seen from the fig the phases of the model are as follows :
Strategy formulation: This involves defining mission, purpose and objectives of business; scanning the environment for threats
and opportunities; assessing the internal organisation for strengths and weaknesses; evaluating various strategic alternatives and
choosing the strategy.
Strategy implementation: This involves allocation of resources; design of suitable organisation structure to meet needs of strategy;
formulation of various plans and policies in functional areas of finance, marketing, production and personnel; behavioural aspects
such as leadership styles and climate, corporate values and culture, business ethics and social responsibility.
Strategy evaluation: This involves evaluation of organisational performance to enable control of the strategy implementation
process.

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

Fig. 2.1 Major Element of the Strategic or Corporate Plan


Whilst strategic planning deals with issue of strategic formulation only strategic management is an all encompassing process and covers
aspects of implementation and control of strategy as well.
d) Contingency planning
Organisations prepare contingency plans to cater for emergent or extraordinary situations. These contingent situations may be caused by
problems such as strike, adverse government legislation, machine breakdowns, major fires, loss of major customer or supplier etc. At the
strategic level contingency plans take into account catastrophies such as major industrial accidents, natural disasters, acts of terrorism etc.
The steps involved in formulation of a contingency plan are:
Identification of possible contingent situations that may affect the overall business. Minimal importance may be attached to
contingencies which are likely to have low impact or are least likely to occur.
Assessment of risk level and formulation of appropriate risk strategy. In determining the risk strategy top management may be
guided by their risk orientation i.e. risk taking or risk averting ability.
Formulation of the contingency plan. The plan should clearly designate people who will take control in the various emergency
situations. The plan should also clearly specify the priorities as also the specific task, responsibility and authority delegated to each
person.
e) Top-down/bottom-up planning
Top-down planning involves strict supervision of the entire planning process by the top management of the firm. This approach has two

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.

Fig. 2.2 Strategic Gap analysis

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 .

Targets and definite time frames for achieving each target.

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 choices at the top management levels.


f) Role of consultant
Many organisations do not have a corporate planning department. The reason may be their small size, financial constraint or infrequent
requirement. These firms hire professionals, individuals or agencies, for consultancy work. The consultants offer a range of business services
which include corporate planning and strategy. Many consultants today offer expertise in the area of business portfolio restructuring.
g) Stakeholders
Stakeholders are people or groups with a vested interest in the performance of the firm. They include shareholders, customers, creditors,
suppliers, competitors, employees, trade unions, local and national government etc.
Each stakeholder has invested something in the firm in the form of work, finance or other resources. Hence he expects a reward from the
organisation and will exert his influence to obtain the same. The nature and extent of reward will depend on his status as a major or minor
stakeholder.
Some examples of expectations of various stakeholder groups are :
Customers want low prices, high quality products and services and extensive guarantees.
Shareholders desire high dividends and appreciation in share's market price.
Suppliers are concerned with prompt settlement of bills, less stringency in delivery periods etc;
Employees demand high wages and job security.
Fig 3.1 provides a detailed listing of the common expectations of various stakeholder groups:

Fig. 3.1 Stakeholders Expectations

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

5.1 THE ENVIRONMENT


The word environment literally means conditions and circumstances surrounding and affecting people's lives. To a business firm environment
means the sum total of conditions, events and influences that surround and affect it.
The environment in which a business firm exists may either be internal or external. The internal environment refers to all factors (players)
within an organisation which could provide strengths or weaknesses of a strategic nature.
The players in the internal environment comprise of stakeholders i.e. owners, shareholders, competitors, etc; and the influences exerted by
them are further discussed in chapter 6. The external environment on the other hand consists of various forces which may either present an
opportunity or pose a threat to the firm. Typically these external forces exist in the following sectors:
Political
Social
Demographic
Economic
Supplier
Technology
Physical
5.2 SWOT ANALYSIS
SWOT is the acronym for 'strengths, weaknesses, opportunities and threats'. Typically strength and weaknesses exist within the organisation
whereas opportunities and threats are normally encountered in the external environment. A few examples of areas where opportunities may
be present are:
International market
Mergers or acquisition of competing firms
Introduction of new products/ services
Development of new markets or penetration of existing ones
Control of distribution network
Improvement of relations with suppliers
A few examples of areas where threats may emerge are:
Competitors
Government legislation
Technical obsolescence
Sudden changes in customer preferences
Over-dependence on main supplier or major customer
Upheavals in physical environment
Volatility in or collapse of the stock market
A few examples of sources of strengths and weaknesses existing within the firm are:
Customer relations
Production efficiency
R & D skills (eg. new product development)
Quality control and quality assurance
Distribution network
Advertising and sales promotion
Market research facilities
Cash flow management
Organisation culture

Human resources potential


Corporate image, social responsibility and brand equity
5.3 EXTERNAL ENVIRONMENT
The various forces comprising the external environment of a firm are discussed below:
a) Political environment
A country's political system defines the manner in which its industry is organised. In a socialist country there is much state intervention and
control. Under capitalism market forces dominate.
In most countries central, state and local governments have enacted laws which affect the way in which business operates. The laws relate
to such matters as wages, price control, product quality, restrictive trade practices, equal employment opportunities, workers' safety and
health, environmental protection etc.
Government legislation may therefore affect strategic choices of business firms. Some examples of increases in business opportunities as a
result of government actions are:
Government departments are large purchasers of goods and services.
Government helps firms to survive and grow through subsidies, tax concessions etc.
Government protects domestic industry from 'unfair' foreign competition i.e. large scale dumping of goods.
b) Social environment
The values and attitudes of society, in general, and customers, in particular, can affect a business firm's strategy. These values get reflected
in lifestyle changes and hence affect the demand for products and services.
The buying and consumption habits of people, their language, customs and traditions, tastes and preferences and educational level also
create opportunities or pose threats to business. Social environment of business also imposes demands of social responsibility on firms.
Today business is being asked to take on the responsibility of improving the quality of life in our society.
c) Demographic environment
Demographic factors such as size, growth rate, age and sex composition of the general population also affect the market for goods and
services.
The countries with high population growth rates represent a growing demand for products. Labour shortage and rising wages encourage
development of automation and other labour saving technologies. The governments of developing countries experiencing population
explosion, however, encourage labour intensive methods of production. A heterogeneous population with its varied preferences, tastes,
beliefs, values etc. will create mixed demand patterns and hence call for different marketing strategies.
d) Economic environment
A country's economic state determines the business strategies adopted by firms. Some of the economic factors which affect business are the
stage of economic development, level of economic resources, level of income, distribution pattern of income and assets etc.
In communist countries where economies are centrally planned the state plans, controls and regulates the economy. In free market
economies the factors of production (land, labour, capital) are privately owned and production occurs at the behest of the enterprise. The
mixed economies under which both state and private sectors co-exist experience a mixed degree of state participation. The nationally
important or strategic industries are owned by file state.
In countries which attract large foreign investments and incomes are steadily rising the business prospects are bright. In some developed
countries the economies have reached saturation levels and replacement demand accounts for a major portion of the total demand for many
consumer durables. In developing countries, on the other hand, replacement demand is negligible.
The stage of the business cycle i.e. whether economy is in a state of depression, recession, recovery or prosperity can affect attainment of a

firm's objectives and result in success or failure of strategy.


The monetary policies (interest rates) and fiscal policies (tax rates for firms) also have a major impact on a firm's fortunes.
e) Supplier's environment
The cost and availability of all the factors of production i.e. raw materials, sub-assemblies, capital, energy etc. are affected by the nature of
relationship between the firm and the supplier.
The power the supplier has to raise prices and reduce the firm's profits will depend on the following factors:
whether he is the sole supplier
whether substitute materials are available
whether he is able to control the channel ahead i.e. integrate forward
whether the buyer firm can integrate backward i.e. purchase or control the supplier.
f) Competitor's environment
The state of competition needs to be continually monitored for presence of the following factors:
entry and exit of competitors
substitutes for existing products and services
relative market share of competitors
major strategic initiatives adopted by competitors
The entry of new competitors will depend on the type and number of barriers to entry. Some of the barriers to entry could be scarcity of raw
materials, economies of scale, product differentiation, access to marketing channels and likely response of existing firms.
The availability of cheaper substitutes of same or better quality for the firm's products may erode its competitive edge
Strategic changes initiated by one competitor firm can pose a threat or opportunity and trigger matching responses throughout the industry.
The stepped up competition could be on the basis of price, quality, service etc.
Any of the above factors may critically affect attainment of firm's business objectives.
g) Technological environment
The term technology means the utilisation of materials and processes necessary to transform inputs into outputs. Understanding technology
requires knowledge and operating a technology requires skills.
New technologies affect materials, processes, work locations and organisational forms. They benefit some people by providing jobs, higher
incomes and a variety of goods; they harm others by creating technological redundancy.
Technical changes affect the product or service lifecycle. Initially the product has high sales growth, then it matures and finally it declines. At
times it may become necessary to invest in research and development to improve a product so that its lifecycle can be extended or to replace
it near the end of its lifecycle.
Advanced technologies require highly educated and trained personnel. These technologies require new work patterns, incentive systems and
fresh attitudes towards acceptance of change.
The recent advances in technology such as the internet, mobile telephony, video-conferencing and genome research are likely to have a
major impact on firms in the I.T. and related industries in the near future. The strategists in these businesses can ill afford to ignore such
revolutionary changes in the technology environment as they may offer major opportunities for the achievement of objectives or threaten the
existence of the firm.

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

be used for forecasting.


5.7 QUALITATIVE TECHNIQUES
A few important qualitative techniques are explained below:
The Delphi method. This method is based on seeking opinion of experts rather than on numerical extrapolation and statistical
technique. It takes advantage of the knowledge and experience of experts who offer opinions over several rounds till a consensus
emerges.
The Multiple Scenarios technique. This method requires researchers to build pictures of alternative futures, each internally
consistent and having a certain probability of occurring. The process of building scenarios is meant to stimulate contingency
planning.
The Brainstorming technique is a process wherein participants are encouraged to be open, inventive and as imaginative as
possible. The issue is discussed from different angles and ideas allowed to build by themselves. The ideas generated during such
sessions are separately evaluated from point of view of costs, benefits and implications.
The Morphological Analysis (MA) technique is an extension of the brain storming process. In this additional dimensions are added to
the original idea to generate still further ideas. Each idea is then critically evaluated leaving briry the best for critical investigation.
5.8 PROBLEMS IN FORECASTING
Business forecasting is an extremely difficult and notoriously unreliable exercise due to the following reasons:
The firm has no control over many variables such as taxes, interest rates, consumer incomes etc. which are determined by
government policies. These policies can change unexpectedly.
It is difficult to predict consumer tastes and preferences with any degree of certainty. These can change suddenly.
Technological changes are difficult to forecast.
An abrupt disruption of the existing supply and distribution channels can take place.
In view of the above factors it is not possible for all firm's forecasts to be accurate and there are bound to be winners and losers in any truly
competitive market. However, to the extent that a firm's forecasts are accurate its strategies will be well founded and its business will
succeed.
5.9 ENVIRONMENTAL DIAGNOSIS AND ETOP
Environmental diagnosis refers to the decisions made by the firm's managers after assessing the information on opportunities and threats
collected? during the environmental survey. The managers need to decide from the available data which information to believe and which to
ignore.
The purpose of environmental scanning is to ensure that a firm's strategic response to changes in the environment is timely and appropriate.
The Environmental Threat and Opportunities Profile (ETOP) is a comprehensive profile of all the opportunities and threats present in the
environment which are specific to the firm. The profile is developed from the various information gathered during the survey of various
environmental sectors such as political, economic, social, technological etc. The information is diagnosed and] placed is such a way that the
impact of environmental trends in terms of opportunities and threats is easily understood. The environmental trends on diagnosis are
generally categorised as positive, negative or neutral developments and serve as an importance reference for top management in the
planning of strategies.
A summarised version of the ETOP is also presented to the top management to aid in decision making during the strategy selection phase.
Their decision will largely be guided by their perception of the gap between the expected 1 and desired results. The quality of the diagnosis
preformed by the managers will depend on the following factors:
Experience of the managers
Motivation level
Risk orientation
Time pressure and stress level
Team spirit and cohesiveness amongst the managers
Power play amongst the managers
Power of stockholders, suppliers, major customers etc.

Nature of environment i.e. stable, hostile, volatile etc.

An example of a summarised ETOP in respect of a hypothetical company in the pharmaceutical business is shown in Fig 5.1.

Fig. 5.1 ETOP of a Hypothetical Firm


As may been seen from fig. 5.1 the firm faces potential threats from rival companies which are larger in size, from government's safety and
anti-pollution laws which will add significantly to costs and on erratic supply of raw materials. The export market presents an excellent
opportunity which the firm can suitably exploit. It should consider exports as a thrust area considering the favourable trends in the
government and social sectors. To reduce competition and improve its market share it can consider adopting strategy of expansion through
the merger or acquisition route. The benefits likely to accrue are increased size, economics of scale and synergies in operations, distribution,
R&D etc.

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

Availability and cost of raw materials and sub-assemblies


Capability of engineering staff especially design and quality control personnel
Cost of production in relation to competitors
Efficient inventory control system
Effective maintenance policy
Advantageous plant location
Degree of vertical integration
In the production and operations function the firm could derive competitive advantages through development of efficient planning and control
systems, improvement in productivity, efficient utilisation of plant capacity and by suitable location of its plant.
Some of the techniques which could be employed to assess performance in this area are:
Analysis of plant capacity utilisation
Analysis of cost production
Analysis of inventory
d) Research and development
The Research and Development function can provide competitive advantage through development of new or improved products, materials
and processes. The resulting efficiencies can lead to substantial cost advantages and in turn significantly add to firm's profitability.
The various factors for assessment in the area are:
State of laboratories and testing facilities for undertaking research
Quality and experience of technical staff
Development capability for new products, materials and processes
Ability to meet customer requirements for product improvement e.g. creative packaging, product and material utility etc.
Work culture whether conductive to creativity and innovation.
Top management support in terms of resource allocation
A firm's R&D capability carries immense potential and can lead to several competitive advantages. In time these advantages could develop
into the core competence of the firm and influence its ultimate destiny. A core competence provides a long-term competitive superiority to the
firm. Whilst competitive advantage results from functional strength and can be imitated, core competence has lasting roots in technology and
R&D. To acquire core competence firms must invest heavily in technology and R&D and develop proprietary products which give them long
term advantages. (para 6.2 also refers)
The management of firm engaged in the computer and pharmaceuticals industries places much greater emphasis on R&D activities as
compared to firms in many other industries. This is reflected in comparatively higher resource allocations to R&D in their budgets. While
some firms may prefer to innovate with new products and materials others may be inclined towards developing new applications or
improvements to the existing product line. The track record of a firm in developing new products or registering patents will influence its future
strategic decisions i.e. whether to expand its R&D base further or continue at existing level.
e) HRM and corporate capabilities
A firm's success or failure largely depends on its ability to select, train, motivate, develop and manage its human resources. The role of the
top management in efficiently and effectively managing its human resources will be a critical factor in the firm's achieving its mission and key
objectives.
Some of the important considerations to be assessed in this area are:
Corporate image, prestige and value systems
Quality, expertise and experience of firm's personnel
Organisation climate, structure, systems and procedures
Personnel policies concerning staffing, appraisal and promotion and training and development
Quality of relations with government and trade unions
Adequacy of resources in terms of money, men, materials, technology and facilities etc. and their efficient deployment

Effective management information and computer systems


A firm with strengths in one or more of the above areas will be better poised to handle competition in its respective industry. The top
management should view employees as assets to be used strategically. They should be closely involved with the organisation and their
commitment level should be raised to correspond with that of the firm's requirements and key goals.
Most firms today have a HR specialist in the senior management team or on its board of directors. Human resource managers are expected
to create value for the firm through improvements in such areas as productivity, quality, creativity and development of corporate skills. The
possession of an HR strategy, in fact, signifies the importance the firm attaches to the HR function. The policy should aim to create shared
values, a common work culture, easily understood targets and a simple work allocation system. Employees should be encouraged to be
innovative, quality conscious, flexible and adaptable to change.
In today's technology ridden business world it would be inappropriate not to mention the impact of Information Technology (IT) in corporate
planning and decision making. Information technology can be a competitive advantage in the following ways:
Links firm to its customers and suppliers
Helps management in planning and implementing strategies
Improves quality management e.g. TQM relies heavily on computerised production and IT
Facilitates business re-engineering
Enables firm to respond quickly to changes in environment
Facilitates integration of marketing with production
Improves general management control by facilitating monitoring of key performance indicators
A firm's management therefore needs to identify critical areas in which its IT strengths lie and can generate a competitive advantage. It may
be interesting to note that information itself can be used to derive a competition advantage. A well managed information system can play a
crucial role in:
Competitor analysis
Provision of databases for corporate planning
Environmental scanning
SWOT analysis
Management of customer and supplier relationships
6.2 ASSESSMENT OF COMPETITIVE ADVANTAGE AND CORE COMPETENCE
The internal appraisal of the firm, which is intended to assess the strengths and weaknesses of the firm in various functional areas, also
helps to identify its competitive or strategic advantages. A competitive advantage means a superior or distinctive competence in some
functional area relative to the competition. The functional area could be marketing, production, finance, technology etc.
A competitive advantage is a distinctive business strength which results in a cost or differentiation advantage for the firm. On the other hand,
every strength need not be a competitive advantage. Only a strength that is superior or distinctive relative to competition can be a competitive
advantage.
The competitive advantage enjoyed by a firm at a given time can be imitated by its competitors. Hence, in order to retain its competitive edge
a firm must possess some enduring strength which cannot be easily imitated by its competitors. This core strength can be a competency in
technology/process engineering capability of an extraordinary kind or any other expertise. It lies at the root of the businesses/products of the
firm and stronger competitive advantages can emerge from it.
Competitive advantage appraisal needs a sharper focus than strength and weaknesses analysis. Strength can be mostly located through
internal appraisal whereas identifying competitive advantages requires internal as well as external appraisal i.e. industry and competition
analysis. The industry and competition analyses techniques help to compare firm's strengths and weaknesses with that of its competitors in
terms of market share, customer services and! satisfaction, brand image etc. These techniques are further explained in chapter 7.
6.3 THE SEVEN 'S' FRAMEWORK
The seven 'S' framework was developed in 1980 by Mckinsey & Co. The framework is a model of how organisations achieve success.
Management consultants have used the technique to re-appraise firms planning to implement new growth strategies,

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.

Fig. 6.1 SAP of a Hypothetical Consumers Goods Firm


As may be observed from fig. 6.1 the firm has definite strengths in the financial and corporate management areas. The management needs
to adopt a more proactive strategy to combat the emerging competition through product innovation, pricing strategy, aggressive promotion
etc. A venture into the export market can also be considered. The weaknesses in the production function could be translated in competitive
advantages through progressive replacement of old machinery with 'state of the art' equipment and stablising relationships with suppliers.
This is a strategic imperative and should be planned over the short or medium term.

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.

Fig. 7.1 Strategic Alternatives


a) Stability strategy
The stability grand strategy is adopted when a firm seeks to improve its functional performance in the business dimensions of customer
groups, customer functions and alternative technologies either singly or jointly. In other words the firm's products, markets and functions will
remain the same and the emphasis; will be on improving functional efficiencies through better deployment and uitilisation of resources. The
strategy aims at maintaining the firm's present position in the present product market. The expectation is that the desired objective in terms of
income and profits will be achieved through such incremental improvements in functional efficiencies. The stability strategy is adopted when
the environment is perceived to be relatively stable or pursuing an expansion strategy is considered too risky.
b) Expansion strategy
The expansion strategy is adopted when the firm seeks sizeable growth and attempts to substantially expand the scope of its customer
groups, customer functions and alternative technologies either simply or jointly. Expansion involves a redefinition of the business through
addition of new businesses or enlargement in scope of the existing businesses.
The firm adopts an expansion strategy when:
the environment presents expansion opportunities which it decides to exploit.
An increase in its size will create competitive advantage and lead to increased market share.
It expects to derive advantage of economies of scale from the experience curve.
As seen in the fig. 7.1, the expansion strategy has two broad variants the intensification and the diversification strategies. In intensification,
the firm achieves growth within the current businesses whereas in diversification it attempts growth by entering new businesses which are

outside the existing portfolio.


There are different variants within both the intensification and the diversification strategies. Intensification can be pursued through market
penetration strategy, market development strategy and product development strategy. Diversification also has three variants and can be
pursued through vertically integrated diversification, concentric diversification and conglomerate diversification. Each of these strategies is
discussed in greater detail in a subsequent part of the chapter.
c) Retrenchment strategy
Retrenchment or divestment strategy is adopted when a firm desires to significantly reduce or abandon the scope of either its customer
groups, customer functions or alternative technologies. The strategy seeks to redefine the business of the firm through partial or total
dropping of products, markets, functions.
The retrenchment strategy is adopted when:
Environmental threats loom large and the firm wants to shed unprofitable business
Resources from loss making businesses are required to be diverted to profitable ones to ensure their Stability
Products/ processes become obsolete
Competition turns aggressive or industry suffers from over capacity. Retrenchment strategies are further discussed in the chapter
d) Combination strategies
Firms engaged in several businesses adopt the grand strategies of stability, expansion and retrenchment either simultaneously across
different businesses or at different times in the same business. The combination strategy is adopted when no single one can meet the
requirements of various businesses. As the businesses may be part of different industries each will require a different strategic response.
The adoption of a combination strategy becomes necessary when a firm's products are in different stages of the lifecycle. Environmental
factors also compel use of such a strategy. In times of economic prosperity, expansion may be the grand strategy to follow. In recession,
however, some industries fare well while others suffer. At such times combination strategy makes sense for a multi-industry firm.
7.3 APPROACHES TO GRAND STRATEGIES
There are several variations of the four generic grand strategies. Glueck has proposed four dimensions along which the grand strategies can
be defined. The dimensions refer to various approaches for carrying out a grand strategy. The dimensions are internal and external, related
and unrelated, horizontal and vertical (backward and forward) and active and passive.
The four grand strategies when considered along with their dimensions give rise to 32 different types of strategies (4 grand strategies x 4
dimensions x 2 types of each dimension). These when considered along with the three dimensions of business definition (customer groups,
customer function and alternative technologies) give rise to a total of 96 strategic options. Whilst strategic alternatives may abound not all of
them may be feasible to adopt. Strategists generally restrict their choices to a few major strategic alternatives.
7.4 DIMENSIONS OF GRAND STRATEGIES
The various approaches for carrying out grand strategies are explained below:
a) Internal/ external dimension
A firm adopts the internal dimension approach when it decides to pursue a strategy entirely on its own. The external dimension approach is
followed when the strategy is pursued in association with another firm.
b) Related/ unrelated dimension
The related dimension approach involves adopting a strategy related to the existing business definition of the firm i.e. in terms of its existing
products, markets and functions. However when the strategy adopted is unrelated to the existing business definition the external dimension is
said to operate.

c) Horizontal/ vertical dimension


When a firm decides to adopt a strategy aimed at serving addition products and markets which complement the existing business definition it
is said to pursue the horizontal dimension approach. However when strategy aims at expansion or contraction of existing business definition
through use of alternative technologies then the vertical dimension is said to operate.
d) Active/ passive dimension
The active dimension approach is followed when a firm adopts an offensive strategy in anticipation of environmental threats and
opportunities. However when a defensive strategy is adopted in response to environmental threats and opportunities then the passive
dimension approach is said to be followed.
7.5 INTENSIFICATION STRATEGIES
The intensification strategy is a variant of the grand strategy of expansion. It approaches expansion via the internal dimension. It aims at
strengthening the firm's product/ market position in its existing business. This strategy is best explained by Ansoff s product market
expansion grid. Fig. 7.2 shows the grid.

Fig. 7.2 Ansoff's Product Market Expansion Grid


As may be seen from the figure the intensification strategy can be achieved through three routes: market penetration, market development
and product development. The fourth alternative is diversification. This involves new products and new markets and is outside the scope of
intensification.
a) Market penetration strategy
Through this route the firm tries to achieve growth through existing products in existing markets i.e., it tries to increase its market share by
penetrating deeper into the same markets with the same products.
b) Market development strategy
The firm pursues this strategy to achieve growth through existing products in new markets. As in market penetration strategy the firm stays
with the same product but seeks new markets/ market segments/ new uses. The strategy can be implemented either by expanding the
market territory and gaining new customers or by devising new uses for the existing products and gaining new customers on that basis.
c) Product development strategy
This strategy is pursued to achieve growth through new products in existing markets. The term new products here means improved products
or substitutes serving the same needs. Unlike the market penetration and market development strategies where the firm stays with current
products in this case the firm develops improved products satisfying the same market. In other words the firm adheres to its current product
mission and does not introduce any new products as that would amount to diversification.
7.6 DIVERSIFICATION STRATEGIES
Diversification is another variant of the grand strategy of expansion. It is a set of strategies that involves all the dimensions of strategic
alternatives. It may involve the internal or external, related or unrelated, horizontal or vertical and active or passive dimensions either singly
or jointly. In simultaneously departing from both familiar products and familiar markets and entering new markets with new products,
diversification expands the firm's portfolio of businesses.
Diversification is adopted due to the following reasons:
Firm seeks growth in assets, income and profits.
Firm seeks flexibility in portfolio to reduce vulnerability of other businesses.
Firm has surplus resources from existing businesses which after meeting needs of intensification can be used for diversification.

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.

Fig. 7.3 Ansoff's Diversification Matrix

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).

iii) Marketing related


A firm provides similar types of products with help of unrelated technology. For example a firm manufacturing washing machines makes
domestic appliances such as geysers and ovens to the same customer type.
e) Conglomerate diversification
This strategy involves pursuing businesses which are unrelated to its current business definition either in terms of customer groups, customer
functions or alternative technologies. The new businesses/ products are tot unconnected with the existing ones. For example a tobacco i.e.
cigarette manufacturing company diversifies into the software or hotel construction business.
f) Merits/ demerits of diversification strategies
As seen from the preceding paragraphs diversification can be related or unrelated to the current businesses. The vertical integration and the
concentric diversifications constitute the related category whilst conglomerate diversification falls in the unrelated category. Diversification
related to the current businesses normally poses a lesser risk as there will be sharing of skills and competencies and greater synergy among
the businesses. The merits and demerits of each of the diversification strategies are listed in fig. 7.4

Fig. 7.4 Merits/ Demerits of Diversification Strategies


7.7 MERGERS AND ACQUISITIONS
As stated previously merger and acquisition (or take over) strategies represent forms of horizontal diversification. They approach expansion
via the external dimension route. Whilst mergers take place when the objectives of both the buyer and seller firms are matched acquisition
results when one firm decides to acquire another either with consent of other firm (friendly takeover) or against the wishes of the other firm
(hostile takeover).
A merger is the combining of two or more firms. It takes place when one firm acquires the assets and liabilities of other in exchange for stock
or cash or both firms are dissolved, their assets and liabilities are combined and new stock is issued. For the firm which acquires another it is
an acquisition and for the firm which is acquired it is a merger.
There are many reasons why a firm may desire to merge. These are grouped under buyer's and seller's motives:
a) Buyer's motives for merging
To increase value of firm's stock
To increase growth rate of firm
To stabilise firm's earnings and sales
To balance or fill out the product line
To reduce competition by purchasing the competition
To acquire a needed resource instantly e.g. latest technology
To increase efficiency and profitability through synergy
To avail tax benefits
b) Seller's motives for merging
To increase value of owner's stock and investment
To increase firm's growth rate
To acquire resources to stabilise operations and make them more efficient
To deal with top management problems of succession, dissension etc.
Prior to a merger taking place the following important issues come up for consideration:
The match between the objectives of the two firms
The extent of synergy that is likely to develop as a result of the strategic advantages (skills, resources etc.) possessed by each

Valuation of seller firm, sources of merger financing etc.


Management control post-merger. The transformation in size, structure, staff etc. of the merged firm could present control difficulties
which could threaten its smooth functioning
7.8 JOINT VENTURE STRATEGIES
Mergers and acquisitions can occur through absorption i.e., when firm takes over another or through consolidation i.e., when two or more fir
combine to form a new firm. A joint venture is a special case of consolidation which two firms engage in a temporary partnership or
'consortium' for a specified purpose.
Joint ventures occur when two firms desire to derive benefits of synergy by combining their strategic advantages and distinctive
competencies. These may also occur when participating firms jointly decide to share the business risks or overcome such problems as import
quotes, tariffs etc. Joint ventures present an effective strategy for joint sharing of risks, expertise and costs. They result in increasing market
share, redefining competition and in some cases importing the latest technology. Some firms also opt for joint ventures abroad to overcome
restrictive legislation at home or to avail of business opportunities present in the international market.
7.9 SYNERGY
A major reason for entering into mergers and acquisitions is pursuit of synergy with the newly created firm. Synergy occurs when two or more
activities or processes complement each other so that the total output is significantly greater than what it would be if the activities were
undertaken individually. In other words making two plus two equals five.
Synergy exists when strengths of two firms more than compensates for their joint weaknesses. Sales synergy occurs when several products
have the same salesmen, warehouses, distribution channels and advertising, operating synergy occurs when firm deals with many products.
This leads to higher utilisation of facilities and personnel and the spreading of overheads. Investment synergy results when many products
use common facilities in factory R&D, machinery, equipment etc. Management synergy occurs from management experience of both firms in
handling problems in different locations industries.
7.10 DIVESTMENT, TURNAROUND OR LIQUIDATION
The retrenchment strategy is implemented through divestment, turnaround or liquidation. It is pursued when a firm experiences the need to
reduce its products, markets or functions. The strategic decisions focus on functional improvement through reduction of activities in business
units with negative cash flow.
The retrenchment strategy involves redefining of the business by divesting a major product line or an SBU. The firm may also curtail some
market territories and/ or reduce its functions. For example when a firm decides to sell its entire output to a single customer it permits that
firm to carry out its distribution function. In other words it becomes a 'captive company". Some of the conditions which make it necessary for a
firm to follow the retrenchment strategy are given below:
Firm's performance is poor i.e. negative profit and cash flows.
Firm has failed to meet its objectives and is under pressure from stakeholders to improve performance
Firm has developed internal weaknesses such as aging machinery, high employee turnover, managerial incompetence and
perceives itself as incapable of dealing with environmental threats.
Firms perceives better opportunities else where to utilise its strengths
Turnover strategy maybe implemented by the existing CEO and its management team, by seeking services of a turnaround specialist or
consultant or by replacing the existing team including the CEO. Whilst improving internal efficiency, work culture and morale may be
considered as crucial turnaround factors. The firm would also need to focus on financial and strategic issues. A focussed strategic plan
involving analysis of competition and industry analysis, review of marketing and production plans and the implementation of strategic plan
through targets feedback and corrective actions.
Divestment strategy may be implemented through outright sale of the business unit or by selling a portion of the unit as an independent firm.
In the latter option the selling firm would retain partial ownership/ control.
A liquidation strategy, which involves closing down a firm and selling its assets, may be implemented in planned way. A planned liquidation
ensures a systematic sale of assets, such as real estate, buildings, machines etc. to ensure maximum benefits to the firm and its
shareholders.
The divestment and liquidation strategies are the hardest strategies to follow as the firm's management perceives these as an admission of

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.

Fig. 8.1 BCG Growth - Share Matrix

e) G.E. matrix
The G.E. matrix also referred to as the multi-factor portfolio planning matrix is shown in fig. 8.2:

Fig. 8.2 G.E. Matrix


The G.E. matrix is used by firms to rate their businesses against two main parameters i.e. industry or market attractiveness and business
strength. The industry attractiveness is a product of several factors such as industry potential, its current size, rate of growth, structure and
profitability. The firm's business strength is a product of such factors as its current market share, growth rate, ability to compete on price and
quality, corporate image, brand image etc.
As may be seen from the figure the upper left zone, the lower right zone and the central diagonal zones represent businesses which are
strong, weak and medium respectively in terms of the overall attractiveness. On the basis of these ratings the businesses can be correctly
located in their respective cells and appropriate strategic alternatives adopted to either expand, maintain and build or retrench them.
The G.E. model is all encompassing in that it takes into account overall industry attractiveness of which industry growth, as considered by
BCG model, is only one component of it. Similarly the G.E. model considers all dimensions of a firm's business strength and not only the
relative market share as in the case with the BCG model. The G.E. model therefore is an expanded version of the BCG model.
f) Hofer's product/ market evaluation matrix
Hofer and Schindel have criticized the BCG analysis as they claim that growth rate is not always linked to profitability and that market share
cannot be easily defined. They have also pointed out inadequacies in the GE model which they say does not accurately represent new
businesses in new industries that are just starting to grow.
As a remedy to the above two models, Hofer in his 15 cell matrix, as shown in fig. 8.3, has analysed businesses in terms of their competitive
position and stage of product/ market evaluation. The circles in the figure represent the sizes of the industries involved and the pie wedges

within them the market shares of the firms. These circles are to be plotted for present and future businesses.

Fig. 8.3 Hofer's Product/ Market Evaluation Portfolio Matrix


As may be seen in fig. 8.3, business A represents a product/ market with a huge growth potential and needs large investments i.e. expansion
to grow and increase market share. Business G represents a 'cash cow' which generates surplus cash that can be used for development of
A. Business B is probably a 'dog' being in a relatively weak position and may need to be retrenched. Business D appears to be heading for
total decline and can be considered for divestment.
g) Industry and competition analysis
Industry and competition constitute a major component of the firm's environment. An analysis of this component is an essential prerequisite
to strategy formulation. The industry analysis reveals the industry attractiveness and firm's competitive position within the industry. The
analysis provides information on the number of players in the industry, their market shares and installed capacities and their relative strength
within the industry. It also indicates the strength of the competitive forces in the industry and industry profitability/ attractiveness. By analysing
industry and competition a firm is able to determine its own competitive position within the industry.
The growth potential and the profitability of the industry are the main parameters for assessment of industry attractiveness. All industries are
not equally attractive and do not offer equal opportunities for sustained growth and profitability. A firm has to assess whether a particular
industry is growing, stagnant or in a stage of saturation. Also what are the limits to growth and the level of profitability - high, medium or low.
Based on its assessment of industry attractiveness the firm can strategise regarding the industries it should enter and the ones it should
avoid.
The firm's competitive position within the industry also helps to evolve strategy. The task of strategy is to place the firm in a favourable
position with respect to the competition. Basically, this means designing products and services which are superior to those of the competitors.
In any industry some firms are more profitable than others due to their stronger competitive position. Hence a firm has to build a competitive
advantage in order to gain a higher market share in the chosen industry.
An analysis of industry broadly covers such aspects as industry environment, structure, attractiveness, performance, practices and emerging/
future trends. Specifically, the following factors need to be examined:
Industry demand, products and their characteristics, level of technology etc.
Industry environment whether it is fragmented, emerging, declining or global in nature.
Industry structure i.e. number of players and their relative market shares and the state of competition (monopoly, oligopoly etc.)
Entry barriers in the industry in terms of economies of scale, product differentiation, capital needs, cost advantage of the players.
Experience curve of the players, access to the distribution channels, government policy etc.
Industry performance with regard to production, sales, profitability and technological advancement.
Industry practices in areas of marketing such as product, price, promotion, distribution and R&D policies.
Forecasting emerging/ likely future pattern of the industry with regard to its attractiveness/ profitability.
Most aspects of competition analysis gets covered in industry analyses as competition and competitive forces are an integral part of the
industry structure. Michael E. Porter gave a new thrust to the concept of competition in his model, shown in fig. 8.4 which classifies
competitive forces into five categories.

Fig. 8.4 Porters Five Forces Model of Competition


As seen in fig. 8.4 these five forces, which shape competition and determine profitability in an industry, are the threat from the new entrants,
bargaining power of customers, bargaining power of suppliers, rivalry among established players and the threat from substitute products or
services. The strength of these forces may vary from industry to industry and also within a given industry over time. These forces deeply
influence industry attractive-ness/ profitability as the elements of cost and investment which are needed to become a player in the industry
are controlled by them.
A firm should understand these forces in the industry and how they are likely to affect it. It has to devise a strategy to enable it to take a
competitive position from where it can defend itself best against these forces. Thus the aim of any strategy will be to either build defenses

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.

Fig. 8.5 The Value Chain


As seen in the fig. 8.5, Porter identifies nine distinct activities which create value in any firm. These consist of five primary activities and four
support activities. The five primary activities are:
Inbound logistics i.e. bringing materials into the business
Operations i.e. product design, manufacturing etc.
Outbound logistics (sending the products out)
Marketing and sales
Service
The four support activities are:
Firm's infrastructure
Human resources
Technology development
Procurement
The four support activities occur in each of the primary activities of the firm also. For example the support activity of human resource
management is carried out in each of the primary activities as well. The primary and support activities together generate avast matrix of value
creating activities in the firm. Value creation depends not only on how well each department performs but also on how well they coordinate
their activities and create maximum possible value for the firm.
In analysing the value chain of the competitor, the firm identifies its strengths and weaknesses and then formulates its own strategy to exploit
the rival's weaknesses and defend itself against his strengths.
i) SWOT analysis
The issues of environmental appraisal and organisational appraisal were discussed in detail in chapters 5 & 6 respectively. The SWOT
technique was also explained in chapter 5. The two profiles, ETOP and SAP, now can be merged and analysed to narrow down the strategic
alternatives to ones which are feasible.
By way of illustration SWOT profile, of a hypothetical firm in the software business is shown in fig. 8.6

Fig. 8.6 SWOT Profile of a Hypothetical Firm


Based on the information given in the fig. 8.6 it may be seen that the firm has definite strength in the functional areas of corporate capabilities
and resources. The environment shows the domestic market to be sluggish. As government policies are favourable and the international
market shows potential, the firm should intensify marketing efforts to attract orders from abroad. The expansion strategy appears to offer a
feasible approach as firm possesses strengths in corporate competence and financial and personnel resources.
Firm may also consider suitable mergers or acquisitions, as a part of the expansion strategy, provided substantial synergy benefits are likely
to accrue. Any strategy formulated through the SWOT analysis technique will depend on certain other factors as well. A strategy of expansion
will only be selected provided top management has an inclination for risk-taking. Prior to making a strategic choice various subjective factors
will need to be considered when analysing the feasible alternatives that emerge from the SWOT analysis.
8.4 SUBJECTIVE FACTORS
Many executives have little or no preference for sophisticated decision making techniques. They invariably rely on assumptions and the
collective wisdom of the group. The group deliberates on strategic issues and once a consensus position begins to emerge, the CEO
endorses the position. In due course the consensus position, after some modifications, becomes policy. These policies evolve from a process
of creating commitment. The creeping commitment approach to strategic decision making can also be traced to other subjective factors.
These are explained in the subsequent paragraphs.
a) Managerial perceptions of external dependence
Firms depend on various stakeholders, such as owners, competitors, customers, government and community for their survival and prosperity.
The more dependent a firm is on these external forces the less its flexibility in exercising strategic choice.
External dependence is only a constraint to the extent it is perceived to be one. It need not always restrict alternatives. A firm can adopt
proactive strategies to reduce dependence rather than allow it to control its choice-making. For example consider dependence on a supplier.
If the gap in performances is perceived to be significant due to this factor, the firm can find new suppliers or vertically integrate to produce the
input or it can enter into a merger or joint venture to reduce the dependence. Hence, managers need not limit themselves or their strategies
due to external dependence factors.
b) Managerial attitude to risk
Managerial attitudes toward risk vary depending on the stakes involved. The strategic decision maker may adopt one of the three postures
i.e., risk neutral, risk averter or risk taker. The three postures are represented in fig. 8.7

Fig. 8.7 Risk Postures


In fig. P1 and P2 represent the probability of taking the decision while the ordinate is the stakes. As may be seen, for the same probability it
takes a lot of stakes for a risk averter to be induced to take any decision while a risk taker is doing it easily.
Risk attitudes also vary depending on industry volatility and environmental uncertainty. In case of very volatile industries, managers should

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

within the firm and a favourable trend exists in the environment.


The sudden actions of competitors can trigger matching strategic responses from a firm. Conversely if a firm expects that a particular strategy
will provoke an aggressive response from the competitor then it should only pursue such strategies if it has the capability to counter.
8.7 CONTINGENCY STRATEGIES
Contingency strategies are necessary as a backup in situations where the occurrence of an event or its timing can not be predicted. The
examples of such scenarios include:
Onset of next economic recession
Loss of a major customer or supplier
Entry of aggressive new competitor
Major systems failure e.g., firm's entire computer system
Strikes by distributors
Natural calamities
The preparation of contingency plans enables to firm to react quickly to changes in future environments, even though, it is not known when
they will occur. Contingency plans involve simulations, scenario building and what if type of analysis. The process of contingency planning
consists of the following steps:
Identification of key environmental factors likely to affect firm's performance, (the criteria applied should be the probability of their
happening and their potential to damage the firm).
Formulating a draft plan based on the most probable assumptions
Modifying the plan assuming that some of the less probable events will occur
Finalisation of plan including variations of the assumptions underlying the plan
Contingency planning carries a major advantage in that firm's responses to chance events can be predetermined and actions decided in a
calm and unhurried manner after due consideration of the consequences.
8.8 STRATEGIC PLAN
The strategic or corporate plan is a part of the total organisation plan (chapter 2, para 2.6 refers). It contains comprehensive information on
the chosen strategies and the manner in which these are to be implemented within the organisation. The document will cover the following
aspects:

Mission, business definition and objectives


Assessment of environmental opportunities and threats and the critical success factors
Assessment of firm's strengths and weaknesses
Strategy chosen along with the assumptions underlying it
Contingency strategies along with conditions under which they are to operate
Budget specifying allocation of resources for strategies and a time schedule for their implementation.
Criteria for evaluating performance and success of strategy
The strategic plan document once approved is communicated to the firm's middle management who will be responsible for its
implementation. Many firms formulate their corporate plans to coincide with their national plans i.e., five year plans. The document is also
meant to apprise the general public what the firm symbolises and what it aspires to achieve in the future.

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.

Fig. 10.1 Strategic Budgeting Process

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.

Fig. 11.1 Determination of Organisation Structure


11.2 STRUCTURE AND STRATEGY
Structure follows strategy in the sense that once a strategy has-been selected the organisational framework of the business will usually have
to be changed in order to implement that strategy: For example, expansion may lead to divisionalisation which creates more levels in
management hierarchy and wide spans of control of managers. Diversification strategy can increase the number of departments or divisions
in a firm. In high-tech firms it is important that structure follows strategy as structure needs to keep pace with the latest innovations in
technology. Also organisation's structure must be flexible and capable of quick adjustments in case of environmental changes.
On the other hand the structure of a firm can influence its strategy formulation process. This is so because a firm's structural form (line and
staff, matrix, market or product departmentation etc.) can affect internal communications, interpersonal relations and other strategic
perspectives. Firms with organisation systems based on advanced information technology can use the latest IT trends to support and hence
influence the strategy formulation process.
The issue of strategy versus structure is further elaborated in the subsequent para 11.4 of chapter.
11.3 BASIC STRUCTURES FOR STRATEGY
A firm should ensure that its structure is appropriately designed. Its total activities should be grouped into meaningful units and duplication of
efforts or excessive specialisation avoided. It is judged to be more effective when its strategy is properly implemented with the right
organisation structure.
The basic forms organisational structure are explained below:
a) Entrepreneurial Structure
This is the primitive form of structure. It is adopted by small firms dealing in a single product or service and covering local markets only. The
owner who is also the boss takes all decisions whether operational or strategic in nature. Fig. 11.2 shows the entrepreneurial structure form.

Fig. 11.2 Entrepreneurial Structure


b) Functional Structure
In the functional type of organisation the boss groups the employees by the type of work or activities the organisation performs. These
activities are classified as production functions, marketing functions, finance functions etc. Fig. 11.3 shows the functional type of structure.

Fig. 11.3 Functional Structure


The functional structure leads to economies of scale and specialisation. These result in increase in organisational efficiency. The
disadvantage of the functional structure is that it often creates difficulties in coordination and integration of units. It also creates line-staff
conflicts.
c) Divisional Structure
The divisional structure evolved as firms began to grow by expanding the variety of functions performed. In this form of structure the work is
divided on the basis of the type of products made, type of customers served or territorial locations. Separate divisions or groups are created
for each type. The functional structure may still operate within each division. Fig. 11.4 shows the divisional type of structure.

Fig. 11.4 Divisional Structure


The divisional structure maximises coordination of sub-units and increases speed of response to environmental changes. The drawback of
this type of structure is that the divisional level goals assume greater importance than the overall objectives of the firm.
d) Matrix Structure
The matrix organisation is a combination of the project and functional patterns of departmentalisation. Authority flows vertically within
functional departments while authority of project managers flows horizontally crossing vertical lines. Thus matrix organisation is created when
project management is superimposed on a stable hierarchical functional structure. Fig. 11.5 depicts the matrix organisation.

Fig. 11.5 Matrix Structure

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

Efficiency and effectiveness of distribution channels.


Type of channels to be used - direct to consumers, producer to retailer or producer to wholesaler?
Intensity of distribution number of sales outlets to be opened depend on demand and dispersion of customers.
Choice of distributors. Such factors as reliability, warehousing capacity, competing lines etc are considered in choosing distributors.
Extent of control that can be exercised over the channel.
d) Promotion
The promotion mix consists of advertising, personal selling, sales promotion and publicity. The aspects considered include:
Selection of advertising media.
Frequency of appearance and timing of ads.
Selection of promotional techniques such as free samples to enter new markets, reduced price offers to encourage repeat purchase,
money off coupons to attract customers to the premises etc.
Use of direct marketing techniques such as direct mail, telephone, catalogues etc.
The marketing policies should not only mesh with overall corporate strategy but also be consistent with other functional policies. For example
price is critical in relation to volume cost-profit conditions which affect production and the financial position. Hence integration of functional
policies is crucial to achievement of firm's objectives.
12.3 FINANCIAL POLICIES
The financial plans and policies provide guidelines on sources and utilisation of capital. These will also establish accounting procedures for
inventory and the accounting methods to be used (LIFO, FIFO etc) for valuation of assets. Specifically the aspects covered by financial
policies include:
Capital structure mix i.e. proportion of short-term debt, long-term debt, preferred and common equity.
Efficiency and effectiveness of resource utilisation in terms of capital investments, fixed asset acquisition, current assets, loans and
advances, dividend policy etc.
Maximising market valuation of the firm.
Extent to which internally generated profits are reinvested within the firm.
Guidelines on decisions regarding leasing versus buying of fixed assets.
Relationship with credit agencies such as banks and financial institutions.
Financial policies are formulated within the framework of corporate strategy. For example when evaluating proposals for investments in
projects, managers will select high risk projects if expansion is the desired strategy. If retrenchment strategy is being preferred then low risk
projects will be selected.
The successful implementation of financial policies will enable a firm to:
Replace capital assets when necessary
Pay loan and debenture interest when it falls due and repay the capital on maturity
Accumulate adequate reserves to meet contingencies
Facilitate steady long term growth
Ensure ready availability of funds at the lowest cost.
12.4 PRODUCTION AND OPERATIONS POLICIES
These policies will address such aspects as:
Present capacity, number of shifts, overtime etc.
Whether augmentation of capacity is required in the short/ long term; location of new facilities.
Inventory safety level. Also adequacy and reliability of suppliers.
Emphasis on quality control and use of techniques such as SQC.
Emphasis on maintenance with regard to investments on replacement or maintenance of plant and equipment.
Introduction of new technology and processing systems.

Sourcing of inputs single supplier or multi-sourcing.


To make or buy items based on cost comparison of purchase costs versus making costs.
Production and operations policies will be established keeping in mind overall corporate strategy. If expansion strategy is desired through
internal means then firm should have adequate capacity to support such expansion. If retrenchment is being considered then production
volume will need to be reduced to avoid build-up of inventories. In the area of make or buy decisions if retrenchment is the preferred strategy
then cost tradeoffs of making versus buying will play an important role. If expansion strategy is desired for new products a firm may either opt
for buying special products to complete the line or make them itself.
Thus production and operations policies must not only be properly coordinated but should match well with marketing policies to ensure that
strategy is correctly implemented.
12.5 R&D POLICIES
The R&D function concerns acquisition of new technical knowledge in areas of new products, processes, materials and working methods. It
is very interlinked with the production and marketing functions. Some of the activities may be initiated by the marketing department on
identification of consumer demands or by the production department which may seek methods of manufacture.
Some of the key issues which influence formulation of R&D policies:
Focus on product or process improvements.
Emphasis on basic research or commercial development
Purchase of patents and know how from external sources.
Invent new products in-house or outsource their development.
R&D budget-costs and benefits. Evaluation of R&D.
In case the past record of the R&D department has been satisfactory then firm's top management will encourage R&D efforts through higher
budget allocations. R&D plays an important role in strategy making especially if a firm has developed competitive strengths or core
competencies in the field. R&D is used as a potent strategic tool by firms to reduce or eliminate etition in their industry.
12.6 HRM POLICIES
HRM policies are normally formulated after the other major functional policies have been determined. The firm must first decide its strategic
objectives, specify its production and marketing policies, organisation structure and operational plans and then address the issue of how best
to manage the human resources required to implement the chosen options. The HRM plans and policies are formulated to provide such
guidance. Specifically the areas covered include:
Adequacy of work force and extent of hiring and retraining
Methods of recruitments - advertising or personal contact?
Types of people required in terms of skills, attitudes and performance capabilities.
Methods of selection - informal interviews or psychological testing?
Maintenance of work force - motivation and reward systems i.e. payment policies, incentive plans etc.
Training and employee development capabilities.
Labour relations - work rules, discipline etc.
Management succession programs.
HR policies are affected by firm's environmental factors, internal and external, and these need to be considered during the formulation stage.
Some of the external factors are:
Legal framework - laws on collective bargaining, right to strike, employee participation in management etc.
Political factors - government legislation and attitude of political party in power towards industrial relations and employment matters.
Economy - unemployment, inflation rates etc.
Social trends - quality of work life, employment opportunities for women, attitude towards work and working hours etc.
Technological environment - changes in working methods, computerization and I.T., technological innovations etc.
The internal factors which influence HR policy making are degree of centralisation, present state of morale, nature of workforce (skills,
education etc.), attitude of owners towards employee relations etc.

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

Attitudes towards what is right or wrong


Organisational culture may be innovative, conservative or a mix of the two. It creates norms of behaviour, attitude and perception, myths,
feelings etc. Charles Handy has classified culture into the following four types:
Power culture: This type of culture is common in small entrepreneurial organisations. The organisation is dominated by either a
very powerful individual or a dominant small group. Strategic decisions and many operational ones are made by the centre and very
few are devolved to other managers. Such an organisation's ability to respond to environmental change becomes limited.
Role culture: This type of culture is common in traditional bureaucracies such as government departments. The task of
management in a role culture is to manage procedure. There is usually a high degree of decentralisation and the organisation is run
by rules and laid -down procedures. These organisations respond slowly to change due to slow decision making process.
Task culture: This type of culture is found in firms engaged in projects. The tasks are non-repetitive in nature and work teams are
flexible, multi-disciplinary and consist of experts. Strategic planning tends to concentrate on the task in hand.
Person culture: In this type of culture the members of the organization work for their own benefit. This type of culture can be found
in learned or professional societies, religious organisations, trade unions etc.
To change the existing culture of an organisation may require injection of new staff, incentive schemes for acceptance of new working
methods, whole hearted management support of new ideas etc.
13.5 ORGANISATION DEVELOPMENT (OD)
Organisation development is an aspect of leadership implementation that involves change processes. It is defined as a large range effort to
improve an organisation's problem-solving and renewal processes through a more effective and collaborative management of organisation
culture. To implement change consultants use a variety of techniques which include survey feed-back, confrontation meetings, team building
sessions, transactional analysis etc.
Kurt Lewin has suggested three stages for overcoming resistance to change:
Unfreezing - getting rid of existing practices and ideas that stand in the way of change. Awareness of the need and benefits of
change can be introduced through the techniques mentioned above.
Changing - teaching employees to think and perform differently
Refreezing - establishing new norms and standard practices. Refreezing involves the consolidation and stabilisation of the new
change.
13.6 LEARNING ORGANISATION
The term learning organisation is sometimes applied to firms operating in turbulent environments. They train and develop their employees on
a continual basis for the purpose of introducing new working methods and systems. These firms are better able to cope with environmental
and other change because they can accommodate unpredictability. They are characterized by motivational leadership, efficient internal
communications, marketing orientation and an enquiring organisational climate that constantly challenges the status quo. These firms
develop adaptive capabilities in a world of increasing complexity and rapid change. Peter Senge in his book Fifth Discipline defines a
learning organisation as 'a group of people who are continually enhancing their capabilities to create their future'.
All the above components of leadership implementation affect successful implementation of strategy. The culture and climate dimensions
place exceptional demands on strategists committed to implementing change through exercise of administrative and leadership skills. A firm's
strengths and weaknesses in these areas can make or break its strategy.

13.7 CORPORATE VALUES


Corporate or core values are of paramount importance when building a lasting firm. Collins and Pornas define corporate values as the
organisation's essential and enduring tenets - a small set of guiding principles; not to be confused with specific cultural operating practices;
not to be compromised for financial gain or short term expediency.
Values run deep. They are timeless guiding principles that drive the way a firm operates. A firm's goals, specific targets that help to realise a

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.

Some of the commonly accepted principles are:


Concern for the quality of life including life at work
Concern for the physical environment
Fair reward for effort and enterprise
Interest and involvement in activities of the wider community
No misrepresentation in advertising or fraudulent activities
No unfair discrimination in hiring, promotion or dismissal of employees
Compliance with laws and established customs of the community.
A number of grey areas exist in the field of corporate social responsibility. Some of these are:
Private firms compete with each other for market share. In the process successful businesses acquire bigger market shares while
others either go into liquidation or are taken over by remaining firms. At what point in its development should a successful firm stop
expanding and instead stabilise its market share to avoid giving the impression that it is monopolistic?
Large, profitable firms contribute immense revenue for the state and provide community with goods and income from employment.
Should the state in recognition of above favour the business community when drafting legislation?
In case of consumers being ignorant of the risks attached to use of certain products, should this lack of knowledge be exploited?
Should a foreign company utilise child labour in host countries where such a practice is permitted? In other words are social
responsibility standards transferable between countries?
Some strategists are against corporate involvement in local communities due to the following reasons:
It leads to business assuming a disproportionately influential role in local affairs.
It creates over dependence of the community on the business firms.
There is no such thing as 'free lunch'. Ultimately the expenditures are recovered through higher prices which affects consumers of
the goods.
Many large, profitable firms, however, opt to behave in socially responsible ways as cooperation and support of the community is vital to their
long term survival and commercial success. Some of the benefits that accrue from such involvement are:
Projection of a 'green' image which is good for business and leads to higher sales.
Sponsorship of charitable and community events attracts valuable publicity.
Firm's image as a good employer helps to attract and retain high calibre workers.
Use of energy conservation and anti pollution environmental methods leads to reduced production costs and increased corporate
efficiency.
The foregoing paragraphs amply illustrate how several issues concerning behavioural implementation i.e. leadership styles, corporate
culture, corporate values, ethics and social responsibility significantly affect the strategy formulation and implementation processes. Whilst
the extent of influence exerted by each of these factors may vary, collectively they carry much potential which can cause success or failure of
a strategy. Therefore strategists can only afford to ignore them at their own peril.

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:

Fig. 14.1 Strategy Evaluation and Control System


14.2 FACTORS INFLUENCING PROCESS
The players involved in strategy formulation also play a crucial role in the strategy evaluation and control processes. These include the Board
of Directors, the CEO, senior and middle level managers, the audit committee and the financial analysts.
The strategic evaluation process faces certain constraints. The first being how much control to exercise - too strict or too loose. Next is the
reliability and validity of measurement techniques and lastly the resistance to evaluation experienced within the firm. The control process
continually monitors strategy in the context of organisational and environmental change and takes necessary steps to adjust the strategy to
the new requirements.
14.3 STRATEGIC CONTROL
The three basic types of strategic control are:
Premise Control - This involves monitoring the external environment and the internal organisation for changes which affect key
assumptions of strategy. Depending on the assessment, strategists may decide on the nature or timing of corrective action. External
environment changes may involve government legislation, competitor policies etc. Organisational factors may include resignation of
top executives, significant R&D development etc.
Implementation Control - The purpose of this type of control is to assess whether plans, programmes and projects are actually
steering the firm towards accomplishing its strategic objectives. The commitment of resources and monitoring their efficient
utilization is an important aspect of this control. If strategy involves marketing a new product then evaluation of customer response
during pre-testing stage becomes a critical function of implementation control. The result of the pre-test may be used by strategists
to continue with or opt for alternate product launch.
Strategic Alert Control - This type of control system is linked to contingency planning. The environment is continuously scanned for
occurrence of sudden and unexpected events which have a profound impact on strategy and immediate remedial measures are
applied. Such events could be a natural disaster (earthquake, floods etc.), fall of a state or central government, lighting industrial

strike, dramatic turnaround in a competitor's strategy etc.


In addition to the above a broad surveillance of the environment is also carried out through a firm's information and intelligence systems.
Such surveillance augments the efforts of the other control systems in monitoring and identifying internal/ external events for their potential
impact on the strategy in force.
14.4 STRATEGIC VERSUS OPERATIONAL CONTROL
The purpose of strategic control is to continually assess environmental changes to identify events that may affect firm's strategy. The two
techniques normally used to evaluate strategic control are strategic momentum control land the strategic leap control. The strategic
momentum control is used by firms which operate in relatively stable environments. The technique focuses on maintaining the existing
strategic momentum through management of the key success factors. Using this technique strategists also evaluate their own strategy by
comparing it with that adopted by other firms. The strategic leap control technique is used by firms operating in relatively unstable
environments. The technique requires firms to adapt by making strategic leaps in response to environmental change. The firm identifies key
strategic issues and synergies through computer based simulation modeling of the organisation and its environment. Thereafter several
future scenarios are developed and likely strategic responses are formulated for each of them.
Operation control on the other hand is aimed at allocation and use of firm's various resources. The evaluation techniques for this type of
control system are based on internal analysis rather than environmental scanning. These include financial analysis ratio, budgetary control,
network techniques such as PERT and CPM, management by objectives (MBO) etc. MBO is a process that involves evaluation of a firm's
performance against objectives which are established through mutual consultation between managers and employees. Since the objectives
are set with participation of employees their commitment to achieving same is assured.
14.5 PERFORMANCE INDICATORS
The performance standards are normally set after analysis of the strategic tasks in key functional areas. If the strategic task is further
penetration of existing markets then increase in sales revenue would be the key indicator for evaluating enhanced market share.
The performance indicators may be result-oriented or effort-oriented. Examples of results based performance measures are:
Sales volumes and/ or revenues
Rate of return on investment
Average inventory levels held
Market share
Growth of assets
Some examples of effort based performance indicators are:
Number of potential customers contacted (may not lead to sales)
Number of complaints processed
Extent of relationships with suppliers
Efforts made to improve industrial relations
Rate of absenteeism
Frequency of reports submitted to higher management
Research and Development activities (may not have led to tangible results)
Certain performance indicators cannot easily be measured in quantitative terms. These are corporate social responsibility, ethical behaviour,
employee's personal development etc.

14.6 ORGANISATIONAL SYSTEMS


The firm's various organisational systems provide vital support to the strategic evaluation and control process. The role played by these
systems is explained in brief:
Information system - The various reports generated through the management information system (MIS) help to keep track of the

actual performance of different units and the firm as a whole.


Control system - The preceding paragraphs have explained in sufficient detail the role of the control system in enforcing strategic
behaviour so that the firm moves towards achieving its declared objectives. It only needs to be added that strategists try and ensure
integration of both the formal (direct) and informal (indirect or social) controls as both are considered vital to making the strategy
work. If the chosen strategy is expansion, somewhat informal controls may be preferred for speedy implementation. However to
implement a stable strategy which requires short-term efficiency of operations, use of more formal controls may become necessary.
Appraisal system - The system makes use of quantitative and subjective factors to assess performance of units as well as their
managers. The methods used to appraise will depend on the nature of the strategy chosen. Expansion strategies aim at long term
improvements whilst a stability strategy will focus on efficiencies in current operations. The common performance appraisal methods
used are rating scale and ranking method etc.
Motivation system - The system aims to stimulate positive behaviour so that firm's employees will be encouraged to achieve its
strategic objectives. Firms introduce a system of incentives, both monetary (salary, bonus, ESOP etc.) and non-money (reward,
recognition etc.). The nature and scale of incentives will depend on firm's capacity to pay, its culture, similar industry practices,
statutory obligations etc.
Development system - The system encompasses various stages covering recruitment of personnel, education and training of
managers to impart required knowledge, skills and altitudes, career planning and grooming of managers for top positions and the
development of the organization through planned interventions to make it more responsive and adaptive.
Planning system - The role of the planning system is basically confined to the strategic formulation process. However as forward
linkages do exist between formulation of strategy and implementation of plans, planning managers do get involved in the
implementation process. In some firms strategic planning is a centralised function performed by staff specialists only. The packaged
plans are passed on to the line managers for implementation. In other firms the overall corporate strategy is formulated at the top
whilst responsibility for SBU level strategy formulation and implementation is decentralised and vested with the respective SBU
heads. The centralised system is considered suitable for the entrepreneurial business whilst the decentralised system is better
suited for the divisional form of organisation. The latter planning system fosters greater responsibility on SBU heads and assures
their commitment to the strategic plans.

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.

Fig. 15.1 Development of Strategic Management


15.3 PLANNED OR PRESCRIPTIVE STRATEGY
The planned approach involves analysis of business and its environment, setting of well defined corporate and business objectives and
formulation, section and implementation of strategies which allow objectives to be achieved (Chapter 1, para 1.4 also refers). The approach
has been criticised as being rigid as it lacks flexibility required to combat change in a volatile environment. The planned or prescriptive
approach is often linked to the competitive positioning approach.
15.4 EMERGENT OR INCREMENTAL STRATEGY
The emergent approach adopts the position that strategy must be evolved incrementally over time (chapter 8, para 8.4c also refers). For
businesses operating in rapidly changing environments, strategy will tend to evolve as a result of the interaction between stakeholders and
between the business and its environment. The emergent approach results in increased organisational flexibility. It can promote
organisational learning by providing an internal culture for managers to think and act creatively rather than act within the rigid frame-work of
planned strategy. The drawback of this approach is that it may result in lack of purpose in strategy. Also there being no explicit objective the
evaluation of performance becomes difficult.
15.5 COMPETITIVE POSITIONING
The competitive positioning approach dominated strategic management in the 1980's. The analysis of competitive position begins with
Porter's five forces framework (Chapter 8 para 8.3g refers). The framework is used to analyse the nature of competition in the organisation's
industry. This is followed by selection of the appropriate grand or generic strategy together with value chain analysis (Chapter 8, para 8.3h
refers). The above approach ensures support to a strategy based on either differentiation or cost leadership.
The approach was criticised in the 1990's as it over emphasised the role of the industry in determining profitability and undermined the
importance of the individual business. Despite the criticism it has been widely acknowledged that Porter's work has given strategic

management many of its most practical and applicable analytical tools.


15.6 RESOURCE OR CORE COMPETENCE-BASED STRATEGY
The 1990's also witnessed the rise of what is known as resource or core competence based strategic management. The major difference to
the competitive positioning approach is that importance has been given to the role of the individual business in achieving competitive
advantage. According to Prahlad and Hamel a core competence is some combination of resources, skills, knowledge and technology which
distinguishes an organisation from its competitors in the eyes of the customers. This distinctiveness results in competitive advantage.
The critics of the approach say that it lacks the well-developed analytical frameworks of the competitive positioning approach and undermines
the potential importance of the business environment in determining success or failure.
The approach also emphasises organisational learning, knowledge management and collaborative business networks as sources of
competitive advantage.
15.7 INTEGRATED APPROACH TO STRATEGY
The prescriptive and competitive positioning approaches are often seen as related to each other because they both adopt a highly structured
view of strategic management. Similarly the emergent and competence based approaches are often linked to each other because of their
shared focus on organisational knowledge and learning.
On the other hand the prescriptive and emergent approaches are often viewed as being diametrically opposed just as in the case with the
competitive positioning and competence based approaches. The fact, however, is that these approaches are in many ways complementary
as they only reflect different perspectives of the same situation. The contribution of each approach to an integrated understanding of strategic
management is summarised below:
Planned/ prescriptive approach - a degree of planning is essential to give direction to the firm's strategy and to help evaluate its
performance
Emergent/ Incremental approach - plans need to be flexible to enable firms to learn and adapt to environment changes
Competitive positioning approach - highlights the importance of the environment and provides useful frameworks/ tools for analysing
business in the context of its industry
Resource/ competence based approach - highlights the importance of the business and helps in identifying sources of competitive
advantage which are specific to the firm.
In the light of the above, strategy must be both inward and outward looking i.e., planned and emergent. By integrating the approaches a
better appreciation of competitive advantage and strategic management, as a whole, can be gained.
15.8 FUTURE THINKING IN STRATEGIC MANAGEMENT
The two prominent areas of interest which are currently engaging the minds of academics and will continue to do so in the near future are
collaborative management and knowledge management. Let us consider these separately.
a) Collaboration and competitive behaviour
In recent years a lot of research has been conducted to determine the extent to which collaboration between businesses (as opposed to
competition) helps in attainment of competitive advantage.
The competence based approach suggests that business should concentrate upon developing core competencies so as to achieve
competitive advantage. Any activities which are not considered as core should be outsourced to other organisations. However, rather than
relinquishing complete control to outside sources it may be beneficial to form some sort of alliance or network with them. The advantages of
such collaborative networks are:
Allows firms to focus on their core competencies and core activities
Allows firms to combine core competencies and derive benefits of synergy
Improves flexibility and ability to respond
Reduces bureaucracy and allows flatter organisational structure
Increases efficiency and reduces costs
Makes it difficult for competitors to imitate Collaboration can be of the following types:

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).

The formation of collaborative network involves:


Identifying core competencies
Identifying non-core activities for outsourcing
Achieving the internal and external linkages in the value/ supply chain to enable effective coordination of activities and enhance
responsiveness
Collaboration can provide a variety of benefits such as linking of core competencies of collaborating firms, sharing of resources and
technology, better control of suppliers, better access to customers, reduced competition as also risk. The problems which can arise from
collaboration are mismatch in objectives and changing requirements of the firms, cultural differences and coordination and integration
problems.
15.9 VIRTUAL ORGANISATIONS
A virtual organisation may be defined as a network of linked businesses who coordinate and integrate their activities so effectively that they
give the appearance of a single business organisation. The above coordination and integration has been facilitated by the advancements
made in information and communications technology (ICT).
ICT linkages enhance a firms potential for building competitive advantage. They increase flexibility and efficiency and make it difficult for
competitors to replicate the activities of the network. The linkages to suppliers and customers also improve as also information flows required
for strategic decision making.
15.10 ORGANISATIONAL LEARNING AND KNOWLEDGE MANANGEMENT
Organisational learning and knowledge management involve the creation, development and dissemination of knowledge within the
organisation. The knowledge can be:
Explicit knowledge whose meaning is dearly stated and the details can be recorded and stored (e.g. procedures)
Implicit or tacit knowledge - which is often unstated and difficult to record and store. It is based on individual experience and helps to
build core competence and competitive advantage (e.g. understanding of a particular technology)
It is the role of the knowledge management to ensure that the above forms of individual knowledge become organisational learning.
15.11 TYPES OF ORGANISATIONAL LEARNING
Peter Senge (1990) clarified learning in leading organisations into two types:
Adaptive learning - which focuses on change in response to environmental developments
Generative learning - which focuses on building new competencies or identifying/ creating opportunities for leveraging existing
competencies in new competitive areas.

15.12 EFFECTIVE KNOWLEDGE MANAGEMENT


Knowledge management is concerned with the creation of new knowledge, storage and sharing of knowledge and the control of knowledge.
It is an important element in building core competencies which must be distinctive and difficult to imitate.
Knowledge management can be successful or effective if the following are overcome:
Barriers to learning and knowledge creation
Difficulties in storing and sharing knowledge, especially tacit knowledge.
Difficulties in valuing and measuring knowledge.

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.

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