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A
(III Year)























Paper 3.6

Strategic anagement


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Paper - 3 : Strategic anagement

Unit 1

The business system objectives oI the business setting up and balancing the
objectives mission vision goals

Strategic analysis oI Iunctional areas Production marketing human resources
Iinance analyzing corporate capabilities SWOT

Unit 2

Corporate strategy nature and scope process oI strategic planning
Iormulation oI strategy project liIe cycle portIolio analysis : BCG matrix GE
matrix Stop High Strategy Directional policy matrix.

Strategic management Strategic decision making business level sub strategies

Unit 3

Generic strategic alternatives stability strategy growth strategy retrenchment
strategy combination strategy and turnaround strategy

Strategic alternatives horizontal, vertical diversiIication active and passive
alternatives

Unit 4

External growth strategy Merger, Acquisition amalgamation joint venture
Problems

Organisational structure and corporate development line and staII Iunctions
Evolution oI organization structure management oI change

Unit 5

Implementation oI strategy elements oI strategy leadership and organizational
climate Planning and control oI implementation

Unit

ERP`s Ieatures and applications Packages BaaN, MARSHALL SAP
Iunctional Ieatures and implementation diIIiculties



Reference :

1. Micheal porter, 'Corporate strategy, Competitive advantage.
2. Peter Drucker, 'Management tasks, responsibilities and practices.
3. Bhatacharya, 'Achieving managerial excellence, McMillan Indian Ltd.,
4. Jauch and Glueck, 'Business Policy and strategic management, McGRaw
Hill 1983
5. Azhar Kazmi 'Business Policy and Strategic management.
6. Francis Cherunilam, 'Business Policy and Strategic management,
Himalaya.


4:rse aterial Prepared by:

Dr K S andrasekar,
Senior Lecturer in Management,
University oI Kerla, Trivandrum 695034
NTENTS
Units


Unit 1


Lesson 1.1 The business system

Lesson 1.2 Objectives oI the business

Lesson 1.3 Mission vision goals

Lesson 1.4 strategic analysis oI Iunctional areas

Lesson 1.5 Analyzing corporate capabilities

Lesson 1.6 SWOT


Unit 2


Lesson 2.1 Corporate strategy

Lesson 2.2 Process oI strategic planning

Lesson 2.3 Formulation oI strategy

Lesson 2.4 Project liIe cycle

Lesson 2.5 PortIolio analysis

Lesson 2.6 Strategic decision making


Unit 3


Lesson 3.1 stability strategy

Lesson 3.2 Growth strategy

Lesson 3.3 Retrenchment strategy

Lesson 3.4 Turnaround strategy

Lesson 3.5 DiversiIication


Unit 4


Lesson 4.1 Mergers & acquisition

Lesson 4.2 Amalgamation strategy

Lesson 4.3 joint venture strategy

Lesson 4.4 Organizational structure and corporate Development

Lesson 4.5 Line and staII Iunctions

Lesson 4.6 Management oI change


Unit 5


Lesson 5.1 Implementation oI strategy

Lesson 5.2 Elements oI Strategy

Lesson 5.3 Leadership And Organisational Climate

Lesson 5.4 Planning And Control or Implementation





Unit


Lesson 6.1 ERP

Lesson 6.2 ERP Package : BaaN

Lesson 6.3 ERP Package : MARSHALL

Lesson 6.4 ERP Package : SAP

Bibliography

Model Test Paper

STRATEGI ANAGEENT

Unit -1
Less4n 11 THE USINESS SYSTE


111 Intr4d:cti4n :

The McKinsey analysis discovered Iour quite distinct phases oI strategic
management evolution .in phase I, Iinancial planning, management Iocuses on the
preparation oI budgets with an emphasis on Iunctional operation. Most
organization has a budgeting process, in at least rudimentary Irom, as a way oI
allocating resources among Iunctional units, subsidiaries, or project. The second,
Iorecast- based planning Iollows naturally Irom the Iirst as managers project
budget requirements beyond the one year cycle. This phase represents an eIIort
to extend managers` attention beyond the immediate Iuture as scenarios are
developed which describe their expectations about Iuture time periods. Budgets
are oIten constructed Ior several years at a time and are rolled over annually so
that the appropriateness oI a budgeted amount can be reviewed several times
beIore it is operationalzed. Phase 2 planning is very 'now oriented. Current
operations and characteristics are stressed in analyses oI the Iirm and there is little
attention to or patience Ior considering operational options or development oI
strategic changes. The business portIolio oI a phase 2 Iirm is oIten viewed as the
Iinal expression oI strategy rather than as an input to the strategy Iormulation
process. Current structure and business activities may be considered Iixed, not as
strategic variables.

Phase 3, external oriented planning requires a signiIicant change in
management viewpoint. Planners are required to about an external orientation and
tools and procedures Ior environmental and internal assessment. Concern centers
on understanding the organization`s environment and competitive position and
generating ideas about how the company might better Iit its environment. Several
choices, contingency plans, are oIten devised Ior how the company might Iit its
environment. Lower level planners and managers are oIten involved in the
process oI generating choices, an activity that soon puts top management in the
position oI choosing a plan in which it had little involvement in developing.

Phase 4, strategic management, evolves as top management senses the
need to more heavily invest in the planning process because oI its lack oI
understanding oI or involvement in the details oI earlier plan development.
strategic management is the meshing oI Phase 3 planning and operational
management into one process. It is analysis and conclusion that takes place year-
round and ties perIormance evaluation and motivational programs to strategy.


112 Deliberateness 4f Strategy:

Sometimes outsiders impute strategy to the behavior oI Iirms. Obviously,
students analyzing case studies are placed in this position when they impute
strategy Irom the data they are able to generate on the Iirm`s operations.
Similarly, journalists and the managers oI competing Iirms may impute strategy to
a Iirm`s behavior; and it may or may no0t accurately reIlect the real strategy in
place. Outsiders may also imply intent to an imputed strategy. That is; they
assume not only that the strategy they imputed Irom the Iirm`s behavior`s is the
real strategy its employees are implementing, but they imply that this strategy is
the one intended Ior the Iirm by its management. Seldom is this the case.

Mintzberg developed a taxonomy which is useIul Ior discussing the
realism and deliberateness oI strategy. First, he distinguished between strategy
that is the result oI a plan, and oI a pattern oI behavior. He reIerred to them as
'strategy as plan and 'strategy as pattern, respectively. Strategy as pan is a
chosen course oI action; it could be a real strategy (one intended Ior
implementation) or a ploy (a tactical move whereby a competitor may be
inIluenced into making a mistake). Some people think that Coca-Cola`s rumored
change in Coke`s Iormula in ht emid-1980s was such a poly. The implication is
that Coca-Cola had not intended to really change the Iormula. The implication is
that Coca-Cola had not intended to really change the Iormula, introduced a new
product with a diIIerent Iormula that tasted a lot like a competitor`s product, and
Iinally graciously conceded to continue producing the old Iormula product when
the public demonstrated a preIerence Ior it over the new--"similar to a
competitor`s 'Iormula. (Incidentally, iI this was in Iact a poly, it has to rank
among the top marketing moves ever attempted by any business. Coca-Cola
reaped an immediate increase in market share oI about 15 percent that thrust them
once again into unquestioned dominance in the huge U.S. soIt drink market).
Strategy as plan, when implemented, may or may not be what the Iirm ends up
with. That is, the planned strategy could ultimately be either realized or
unrealized. II it is realized, then the entire process would be a textbook case oI
strategy Iormulation and implementation in the sense that the Iirm successIully
implemented what was intended.

But what happens iI he planned strategy is implemented and, Ior some
reason, the strategy that is realized is not the intended one? We might say that the
planned strategy was unrealized, and the realized strategy (the one that seems to
describe what the company is actually doing) arises out oI some consistency in
the behavior oI the company. Mintzberg and Waters call this unintended realized
strategy, 'strategy as pattern, or a pattern in a series oI actions by the
organization. Strategy as pattern is what you will end up with when you impute
strategy to the behavior oI a company you are analyzing in a case study, or what
journalists produce when they attribute a strategy to a company based only on its
actions.

'Thus, a realized strategy could be either a deliberate strategy as plan, or
an 'unelaborated strategy as pattern. II the realized strategy was planned and
also accurately the Iirm`s actions, then strategy as pattern and strategy as plan
would be synonymous. However, when realized strategy is not intended strategy
(that is, it was either not what was intended by management when they draIted a
planned strategy, or they draIted a planned strategy, or they draIted no strategy at
all ), then it simply 'grew out oI the activities oI the company. In Mintzberg`s
terms it 'emerged as a pattern oI behavior in the absence oI intention, or despite
unrealized intention.

A realized strategy is what a company is actually doing. II it is the one intended
by management then it is deliberate. II not, then the intended strategy was
undrealized, and the realized strategy is emergent. An emergent strategy is, by
deIinition, not deliberate. However, a manager may choose nor to consciously
Iormulate strategy and, instead, 'go with the emergent one. But even here, the
resultant emergent strategy could not have been deliberate in the same way an
intended strategy would have been. OIten it is convenient to distinguish between
intended and emergent strategies. When management perIorms no strategic
management at all, they still will have a realized strategy that is emergent. This
emergent strategy could be recognized by outsiders (and insiders Ior that matter)
even though it may not have been intended my management.

Q:esti4n:

1. What is business policy? Why it is important Ior companies?
2. Under what circumstances strategic management is useIul?
3. What are the commitment oI top management in strategic outlook?



LESSN 12 ETIVES THE USINESS


121 Intr4d:cti4n

The objective is the starting point oI the marketing plan. Once environmental
analyses and marketing audit have been conducted, their results will inIorm
objectives. Objectives should seek to answer the question 'Where do we want to
go?` The purposes oI objectives include:

O To enable a company to control its marketing plan.
O To help to motivate individuals and teams to reach a common goal.
O To provide an agreed, consistent Iocus Ior all Iunctions oI an organization.

All objectives should be SART i.e. SpeciIic, Measurable, Achievable,
Realistic, and Timed.

O Specific - Be precise about what you are going to achieve
O eas:rable - QuantiIy you objectives
O Acievable - Are you attempting too much?
O Realistic - Do you have the resource to make the objectives happen (men,
money, machines, materials, minutes?)
O Timed - State when you will achieve the objectives (within a month? By
February 2010?)

122 Examples 4f SART 4bjectives:

Some examples oI SMART objectives Iollow:

1 Pr4fitability bjectives

To achieve a 20 return on capital employed by August 2007.

2 arket Sare bjectives
To gain 25 oI the market Ior sports shoes by September 2006

3 Pr4m4ti4nal bjectives

To increase awareness oI the dangers oI AIDS in India Irom 12 to 25 by June
2004.

To insure trail oI X washing powder Irom 2 to 5 oI our target group by
January 2005.

4 bjectives f4r Gr4t

To survive the current double-dip recession.

5 bjectives f4r Gr4t

To increase the size oI out German Brazilian operation Irom $200,000 in 2002 to
$400,000 in 2003

bjectives f4r randing

To make Y brand oI bottled beer the preIerred brand oI 21-28 year old Iemales in
North America by February 2006.

These are many examples oI objectives. Be careIul not to conIuse objectives with
goals and aims. Goals and aims tend to be more vague and Iocus on the longer-
term. They will not be SMART. However, many objectives start oII as aims or
goals and thereIore they are oI equal importance.





123 bjectives 4f gr4t:

AnsoII Matrix as a marketing tool was Iirst published in the Harvard
Business Review (1957) in an article called Strategic Ior DiversiIication`. It is
used by marketers who have objectives Ior growth.

AnsoII`s matrix oIIers strategic choices to achieve the objectives. There
are Iour main categories Ior selection.

arket Penetrati4n

Here we market our existing products to our existing customers. This means
increasing our revenue by, Ior example, promoting the product, repositioning the
brand, and so on. However, the product is not altered and we do not seek any new
customers.

arket devel4pment


Here we market our existing product range in a new market. This means that
the product remains the same, but it is marketed to a new audience. Exporting the
product, or marketing it in a new region are examples oI market development.

Pr4d:ct devel4pment

This is a new product to be market to our existing customers. Here we develop
and innovate new product oIIering to replace existing ones. Such product are then
marketing to our existing customers. This oIten happens with the auto markets
where existing models are updated or replaced and then marketed to existing
customers. this oIten happens with the auto markets where existing models are
updated or replaced and then
marketed existing customers.
Diversificati4n

This is where we market completely new products to new customers there are to
type oI diversiIication, namely related and unrelated diversiIication. Related
diversiIication means that we remain in a market or industry with which we are
Iamiliar. For example, a soup manuIacturer diversiIies into cake manuIacture
(i.e. the Iood industry ). Unrelated diversiIication is where we have no previous
industry nor market experience Ior example a soup manuIacturer invests in the
roil business

AnsoIIs matrix is one oI the most will know Irameworks Ior deciding upon
strategies Ior growth.

1 2 4 Setting 4bjectives based 4n c4mpetiti4n:

Five Iorces analysis helps the marketer to contrast a competitive
environment. It has similarities with other tools Ior environmental audit,
business or SBU (Strategic Business Unit) rather than a single product or
range oI products. For example. Dell would analyses the market Ior
business computers i.e. one oI its SBUs.

Five Iorces looks at Iive key areas namely the threat oI entry, the
power oI buyers, the power oI substitutes, and competitive rivalry

Te treat 4f entry

O Economies oI scale e.g. the beneIits associated with bulk
purchasing
O The high or low cost oI entry e. g. how much will it cost Ior the
latest technology.
O Ease oI access to distribution channels e.g. Do our competitors
have the distribution channels sewn up?
O Cost advantages not related to the size oI the company e.g.
personal contracts or knowledge that larger companies do not own
or learning curve eIIects.
O Will competitors retaliate?
O Government action e.g. will new laws be introduced that will
weaken our competitive position?
O How important is diIIerention? e.g. The Champagne brand cannot
be copied. This desensitizes the inIluence oI the environment.

Tis p4er 4f b:yers

O This is high where there a Iew, large players in a market e.g. the
large grocery chains.
O II there are a large numbers oI undiIIerentiated, small suppliers
e.g. small Iarming businesses supplying the large grocery chains.
O The cost oI switching between suppliers is low e.g. Irom one Ileet
suppliers oI trucks to another.

Te p4er 4f s:ppliers

O The power oI suppliers tends to be a reversal oI the power oI
buyers.
O Where the switching costs are high e.g. Switching Irom one
soItware supplier to another.
O Power in high where the brand is powerIul e.g. Cadillac, Pizza
Hut, MicrosoIt.
O There is a possibility oI the supplier integrating Iorward e.g.
Brewers buying bars.
O Customers are Iragmented (not in clusters) so that they have little
bargaining power e.g. Gas/Petrol stations in remote places.

Te treat 4f s:bstit:tes

O Where there is product-Ior-product substitution e.g. email Ior Iax.
Where there is substitution oI need e.g. better toothpaste reduces
the need Ior dentists.
O Where there is generic substitution (competing Ior the currency in
your pocket) e.g. Video suppliers compete with travel companies.
O We could always do without e.g. cigarettes.

4mpetitive Rivalry

O This is most likely to be high where entry is likely; there is the threat oI
substitute products, and suppliers and buyers in the market attempt to
control. This is why it is always seen in the center oI the diagram.

eman`s Strategy l4ck

The Strategy Clock` is based upon the work oI CliII Bowman. It`s another
suitable way to analyse a company`s competitive position in comparison to the
oIIering oI competitors. As with Porter`s Generic. Strategies, Bowman considers
competitive advantage in relation to cost advantage or diIIerentiation advantage.
There a six core strategic options.

pti4n 4ne-l4 price/l4 added val:e

O Likely to be segment speciIic.

pti4n t4-l4 price

O Risk oI price war and low margins/need to be cost leader`.


pti4n tree-Hybrid

O Low cost base and reinvestment in low price and diIIerentiation

pti4n f4:r - Differentiati4n

a) without a price premium

O Perceived added value by user, yielding market share beneIits.

-) with a rice premium

O Perceived added value suIIicient to bear price premium

pti4n five-f4c:sed differentiati4n

O Perceived added value to a particular segment` warranting a premium
price.

pti4n Six - increased price/standard

O Higher margins iI competitors do not value Iollow/risk oI losing market
share

pti4n Seven - increased price/l4 val:es

O Only Ieasible in a monopoly situation

pti4n eigt - l4 val:e/standard price

O Loss oI market share


125 bjectives 4f delivering Val:e:

The value chain is systematic approach in examining the development oI
competitive advantage. It was created by M.E. Porter in his book, Competitive
Advantage (1980). The main consists oI a series oI activities that creat and build
value. They culminate in the total value delivered by an organization. The
margin` depicted in the diagram is the same as added value. The organization is
spit into primary activities` and support activities`.

Primary Activities

n-ound Logistics

Here goods are received Irom a company`s suppliers. They are stored until they
are needed on the production/assembly line. Goods are moved around the
organization.
Operations

This is where goods are manuIactured or assembled. Individual operations could
include room serviced in an hotel, packing oI books/videos/games/ by an online
retailer or the Iinal tune Ior a new car`s engine.

Out-ound Logistics

The goods are now Iinished, and they need to be sent along the supply chain to
wholesalers, retailers or the Iinal consumer.

Marketing and Sales

In true customer orientated Iashion, at this stage the organization prepares the
oIIering to meet the needs oI targeted customers. This area Iocuses strongly upon
marketing communications and the promotions mix.

Service

This includes all areas oI service such as installation, aIter-sales service,
complaints handling, training and so on.

S:pp4rt Activities

Pr4c:rement

This Iunctions is responsible Ior all purchasing oI goods, services and materials.
The aim is to secure the lowest possible price Ior purchases oI the highest possible
quality. They will be responsible Ior outsourcing (components or operations that
would normally be done in- house are done by other organizations), and
Purchasing (using IT and web-based technologies to achieve procurement aims).

%echnology Development

Technology is in important source oI competitive. Companies need to innovate to
reduce costs and to protect and sustain competitive advantage. This could include
production technology, internet marketing activities, lean manuIacturing,
customer Relationship management (CRM), and many other technological
developments.

Human resource management HRM)
Employees are an expensive and vital resource. An organization would manage
recruitment and selection, training and development, and rewards and
remuneration. The mission and objectives oI the organization would be driving
Iorce behind the HRM strategy.


Firm nfrastructure

This activity includes and is driven b corporate or strategic planning. It includes
the Management InIormation System (MIS), and other mechanisms Ior planning
and control such as the accounting department.

Q:esti4n:

1. Write a note a Value chain.
2. What are the methods oI deciding the objectives oI a business?
3. How competition is playing a role in deciding the objectives?

LESSN 13 ISSIN - VISIN - GALS

131 issi4n

Mission is the description oI an organization`s reasons Ior existence, its
Iundamental purpose. It is the guiding principle that drives the processes oI goal
and action plan Iormulation, 'a pervasive, although general, expression oI the
philosophical objectives oI the enterprise. Mission should Iocus on 'long-range
economic potentials, attitudes toward customers, product and service quality,
employee relations, and attitudes toward owners. It provides identity, continuity
oI purpose, and overall deIinition, and should convey the Iollowing categories oI
inIormation.

1. Precisely why the organization exists, its purpose, in terms (a) its basic
product or service, (b) its primary markets, and (c) its major production
technology.
2. The moral and ethical principles that will shape the philosophy and charter
oI the organization.
3. The ethical climate within the organization.

Thus mission outlines the Iirm`s identity and provides a guide Ior shaping
strategies at all organizational levels. The role played by mission in guiding the
organization is an important one. SpeciIically it.

1. serves as a basis Ior consolidation around the organization`s purpose.
2. provides impetus to and guidelines Ior resource allocation.
3. deIines the internal atmosphere oI the organization, its climate.
4. serves as a set oI guidelines Ior the assignment oI job responsibilities.
5. Iacilitates the design oI key variables Ior a control system.

Deal and Kennedy claim that a strong culture is the key to long-term corporate
success and that culture has Iive elements:

1. Business Environment,
2. Values,
3. Heroes (People Who PersoniIy Values),
4. Rites And Rituals (Routines oI Day-To-Day Corporate LiIe),
5. The Cultural Network (Communication Systems).

The mission statement describes primarily the second oI these cultural Iactors,
corporate values. The strong cultural companies studies by Deal and Kennedy all
had 'a rich and complex system must be believable in that the company`s
behavior should correspond to it over both the short and long term. In this way it
can serve as the Ioundation Ior the development oI respect Ior and pride in the
Iirm by management, owners, customers, suppliers, and others who interact with
it.

Broad-based acceptance oI the values represented by mission can lead to three
characteristics oI Iirms that accomplish this acceptance:

1. They stand Ior somethingthe way in which business is to be conducted
is widely understood.
2. From the topmost levels oI management down through the Iirm`s
organization structure to the lowest level oI production jobs, the values are
accepted by all employees.
3. 'Employees Iees special because oI a sense oI identity which distinguishes
the Iirm Irom other Iirms.

Many examples oI Iirms that have these characteristics as a result oI a Iinely
honed sense oI cooperation and value acceptance are presented by Deal and
Kennedy. A Iew oI these are listed here, along with the slogans that have come to
represent their value systems.

O Dupont: 'Better things Ior better living through chemistrya belieI that
product innovation, arising out oI chemical engineering.
O Sears, Roebuck: 'Quality at a good pricethe mass merchandiser Irom
Middle America.
O Dana Corporation: 'Productivity Through peopleenlisting the ideas and
commitment oI employees at every level in support oI Dana`s strategy oI
competing largely on cost and dependability rather than product
diIIerentiation.
O Chubb Insurance Company: 'Underwriting excellencean overriding
commitment to excellence in a critical Iunction.
O Price Waterhouse and Company: 'Strive Ior technical perIection (in
accounting).
O PepsiCo`s overall mission is to increase the value oI our shareholder`s
investment. We do this through sales growth, cost controls and wise
investment oI resources. We believe our commercial success depends
upon oIIering quality and value to our consumers and customers;
providing products that are saIe, wholesome, economically eIIicient and
environmentally sound; and providing a Iair return to our investors while
adhering to the highest standards oI integrity.
O SBI s mission is 'To retain the bank`s position as the premier Indian
Iinancial services group, with world class standards and signiIicant global
business, committed to excellence in customer, shareholder and employee
satisIaction, and to play a leading role in the expanding and diversiIying
Iinancial sector, while continuing emphasis on its development banking
role.
O BPL`s service mission is to support the vision oI the company becoming
the most customer-oriented company in the country, by building a
proactive service organization that continuously strives to create customer
satisIaction, by internalizing the best practices oI customer relationships
management.
O Reliance`s mission is to evolve into a signiIicant international inIormation
technology company oIIering cost-eIIective, superior quality and
commercially viable soItware services and solutions. Reliance will adhere
to strong internal value systems such as pursuit oI excellence, integrity and
Iairness, and these principles will maniIest themselves in all oI Reliance`s
interactions with its clients, partners and employees.
O The Videocon Group is committed to create a better quality oI liIe Ior
people and Iurthering the interests oI society, by being a responsible
corporate citizen.

REATING HAPPINESS

We will bring happiness into every home, oIIering high quality consumer
durables at aIIordable prices, spreading the culture oI convenience, entertainment
and comIort, Iar and wide.

AHIEVING PRGRESS

We will pursue innovative technologies in the Iields oI Electronics and Energy,
create products and services that will improve the quality oI liIe, realize the goals
oI the world community and protect the environment.

SUSTAINIG PRGRESS

We will be a source oI pride to our business associates by ensuring mutual
prosperity and growth through the implementation oI Iorward-looking corporate
strategies, aimed at identiIying opportunities and responding intelligently to the
dynamics oI change.

PURSUING EXELLENE

We will provide a conducive environment Ior enabling our employees to develop
their potential and make a signiIicant. Contribution to the Group`s success.

Mission typically is not considered a part oI a Iirm`s strategy set. It reIlects the
essential preIerences oI owners and managers Ior what the Iirm will do. Strategy
will accomplish the task oI reducing mission to operational terms. As such
mission is somewhat a personal choice oI a Iirm`s dominant group oI actors and is
an input to the strategy Iormulation process. Mission should address the basic
purpose oI the Iirm, the reasons Ior which it exists. Statements oI mission can be
made up oI goals and descriptions oI the means Ior achieving them. However,
mission-related goals are oIten qualitative as opposed to quantitative. Some owner
groups preIer to state broad goals as the organization`s purpose and deIer to
management to set strategy as the way to achieve them.

In some organizations questions about purpose are leIt solely to owners, whether
widely dispersed stockholders acting through a board oI directors, the small group
oI owners oI a closely held corporation, or the sole owner oI a small business. In
these cases managers are inIormed oI the owners` expectations and these goals
serve as overriding constraints or guidelines on the activities and operations oI
managers. In other Iirms managers may participate in the process oI deciding on
purpose, along with owners or their representatives. Managers may eve be called
upon to submit basic purpose choices to owners Ior aIIirmation or veto.

The importance oI a generally understood and accepted notion oI purpose cannot
be overstressed. The sole owner oI a $30 million-a-year industrial supply Iirm
decided, upon reaching IiIty years oI age, that he no longer saw the purpose oI his
company as primarily a generator oI cash Ilow Ior him and his Iamily. Instead he
decided its purpose was to generate wealth ultimately through acquisition by a
larger company. The change in purpose Irom a short-term cash generator to a
well-groomed acquisition target necessitated a set oI dramatic alterations in the
way business was conducted on a day-to-day basis by key managers. Things that
had been previously assigned low priority-market development, product
development, asset reinvestment, development oI career commitments by
employees and managers, and so on-suddenly became essential goals, the
achievement oI which, over time, would serve the new mission.

Although many managers tend to develop qualitative mission statements, they can
be expressed as a set oI quantitative goals stated in Iinancial terms. As such they
speciIy the major Iinancial outcomes expected by owners and managers Irom
operation oI the organization. Examples include market share, market growth,
cash Ilow, stock perIormance, and dividend payout.

Sappire Inf4tec Ltd:

To play a vital role in bringing the Global Revolution in IT enabled services with
out unidirectional eIIorts (integrating People, Process and Technology, giving a
Iace-liIt to small medium enterprises, while being conducive Ior the betterment
and upliItment oI our society; and be a leader Ior world class IT solutions. Such
like-mindedness and the attitude to be conducive in making the world a global
village, made the minds unidirectional. Minds oI the seasoned SAP & ERP
(Enterprise Resource Planning) Consultants with hands on experience in IT,
Telecom or related industries to stud the corona oI Indian industries with a
SAPPHIRE INFOTECH (P) LTD. Was Iormally launched on the 12
th
oI April,
1999.

Visi4n 2000 4f SII

The Institute plans to introduce specialized courses on windows-based application
soItware and RDBMS shortly.

Plans have been Iinalized Ior completing the 'Annexe building, to augment
training capacity and to meet the long Ielt requirements oI larger class rooms, a
ConIerence Hall, an Auditorium and large PC laboratories. This would help to
enlarge the activities oI the Institute.

The Institute to become 'Think-Tank Ior the Bank and its Associates. The
Institutes to open up eventually its training, soItware development and
Consultancy services to other banks in India and Ior developing countries in
South East Asia and AIrica.

133 G4als and 4bjectives:

1. A goal in an expected result. Synonyms Ior goal include the words aim,
end, and objectives.
2. A qualitative goal is an aspiration toward which eIIort is directed; a goal
to be reached Ior but not necessarily grasped, rather than a quantitative
level oI a certain variable. Thus, a Iirm might aspire to be a good corporate
citizen.
3. A quantitative goal is one intended to be reached, a quantiIied expected
result. There are two types: (1) A hurdle goal value is a certain level oI a
quantitative goal that is to be exceeded (synonyms include instrumental
and interim goal); (b) a Iinal or overall quantitative goal is a value that
should be achieved. A Iinal goal could be established without hurdles have
been reached. Achieving a ten percent increase in total revenue within
three years would be a Iinal goal. Hurdle goals would be the targeted
revenue increase intended at the end oI Years 1 and 2.

Exibit : Relati4nsips Am4ng Types 4f G4als

Goals Qualitative Final Values

Objectives


Aims Quantitative Hurdle (Interim) Values

Exibit : Examples 4f Types 4f Strategic G4als and Teir Definiti4ns

G4al Type Definiti4n Examples

Qualitative An aspiration 'Good corporate citizenship
'Ethical practices
Improved quality oI liIe
'Heightened awareness

Quantitative
(Final Goal)
Numerical aim '6 percent increase in sales
'Raise ROI by percent

Hurdle goal Minimum to be
reached win a
timeIrame
'Increase sales by percent per year Ior
there

Andrews suggested that breaking up the system oI corporate goals and the
character-determining major (actions) Ior attainment leads to narrow and
mechanical conceptions oI strategic management and endless logic-chopping.
According to the other view, goal setting and the Iormulation oI means Ior
achieving goals are distinct activities that call Ior the stabilization oI goals
Iollowed by selection oI the proper strategic alternatives. The ultimate separation
oI goals and strategy results in applying the word strategy only to statements
about the means Ior achieving goals. A set oI goals would be established Iirst and
then discussions about strategy would Iocus on deciding the best ways to achieve
them. However, this view can result in semantic conIusion. II the word strategy
applies to means, then what word will be used to reIer to goals plus the means Ior
achieving them? In practice goals plus means are oIten also called strategy.

G4al set A collection oI quantitative and qualitative goals Ior a particular
organizational level.

Acti4n plan A description oI the means by which activity is expected to be
directed toward striving Ior speciIied goals.
Strategy A set oI goals and their action plans Ior a particular strategy level.

Organizational goals maniIested as either qualitative or quantitative values would
be tied to action plans that identiIy the appropriate ways to work toward them. A
single-line business would thus have a set oI goals and related action plans that
together deIine how it should compete within its business segment. This set oI
goals and action plans would be called its business-level strategy. It could also
have strategies, still made up oI goals and action plans, Ior other strategy levels.
This point is covered in the next action.

'Policy and 'tactic are other terms that have been deIined in many diIIerent
ways. We use policy to reIer to standing directions, instructions that vary little
with changes in strategy. Thus organization can have vacation policy, a policy on
absenteeism, aIIirmative action policy, and so on. Policy tends to have Iewer
competitive implications than strategy when used in this way. However, in many
curricula the management course is called business policy. A tactic is a short-term
action taken by management to adjust to internal or external perturbations. They
are Iormulated and implemented within a strategic eIIort, usually with the
intention oI keeping the organization on its strategic track.

S4cietal G4als

Societal goals (also called enterprise goals), in organizations that employ societal
strategy, would occupy the topmost levels oI an organization`s hierarchy oI goals.
In those that to not develop a separate societal strategy, these goals would be
woven into corporate-, business-, and Iunctional-level strategies. Societal goals
mainly address expectations about the Iirm`s societal legitimacy. Sometimes
included in statements called creeds or guiding philosophies, societal goals
identiIy the major ways in which the organization will operate so as to stay within
the legal, ethical, and cultural constraints placed on it by society. Although they
guide the behavior oI people at all levels oI the organization, they have particular
relevance Ior the decisions oI key managers related to balancing the claims on the
Iirm oI society`s interest groups and institutions, owners, and managers (which
we reIer to generally as the Iirm`s stakeholders).

Legitimacy goals should address the overall role oI the Iirm in the daily
Iunctioning oI society. They should include goals that pertain to the major social
issues and legislation oI the day. 'Some examples are pollution standards, the
Iirm`s antidiscrimination position, saIety in working conditions, and sexual
harassment.




4rp4rate levels G4als

Corporate-level goals consist oI quantitative and qualitative outcomes that
encompass management`s expectations about the optimal combination and types
oI business that make up the company. They direct the integration oI the
particular collection oI businesses that makes up the overall organization and they
serve as behavior speciIications Ior staII members at the corporate level.

:siness-Level G4als

Goals at the business level speciIy the anticipated perIormance results oI each
SBU. Their values are intended to balance with those oI equivalent variables Ior
other SBUs and thereby contribute to the achievement oI corporate level goals.
For example, a corporate-level Iinal goal oI sales growth oI 5 percent in one year
could be achievable partly by acquisition or divestiture moves, but primarily
through the contributions oI sales increases by present. SBUs. ThereIore, in this
case an average cross SBU sales increase oI 5 percent could satisIy the corporate-
level target and one would expect each business-level strategy to contain a sales
growth element that deIines that SBUs 'contribution so to speak, to the corporate
level sales growth goal.

Business-level goals integrate the activities oI the SBUs Iunctional departments
and guide the behavior oI business unit managers. In other words business
satrategy deIines the role oI each Iunctional area relative to each other and to
resource requirements and availability. One might say that business-level strategy
balances the roles oI organizational Iunctions within each business unit in terms
oI their contributions toward reaching higher level goals.

:ncti4nal-Level G4als

At this level goals are set Ior each oI the Iunctional departments into which each
SBU is organized. The point oI Iunctional-level goals is to deIined several aims
Ior each department in such a way that their achievement would result in
achievement oI business-level goals. Thus to reach a business-level target oI 5
percent sales growth, it might be necessary Ior the personnel department to recruit
and screen twenty-Iive production workers and three more clerical people; Ior
marketing to raise advertising costs by a certain amount increase the number oI
sales representatives by a speciIied number within a certain region, and hire one
more inside salesperson; and so on. These Iunctional requirements become, either
directly or indirectly, goals oI the respective Iunctional departments to e achieved
within appropriate time Irames.

G4al 4rm:lati4n

Four sets oI Iactors aIIect the nature oI an organization`s collection oI goals: (1)
The present goals (and action plans); (2) the set oI strengths weaknesses, threats,
and opportunities that result Irom environmental and internal analysis; (3) the set
oI political inIluences within which individual compete over goal preIerences; and
(4) the personal values oI the organization`s key managers that shape their
preIerences.

Present G4als and Acti4n Plans

The degree oI success experienced by an organizaatio in reaching past or present
goals and in implementing related action plans provides insight into the need Ior
new or modiIied goals. Failure to meet the goal oI retired Chairman Willard
Rockwell, Jr., to build a $1 billion Rockwell International consumer products
division led company managers, under the leadership oI new chairman and CEO
Robert Anderson, to adopt a new goal: $1 billion in Ioreign sales. This change
seems to have been precipitated by the widespread realization that the previous
consumer products goal was not likely to be achieved.

Direction Ior goal Iormulation at any organizational level also exists in the
strategy oI the next highest organizational level. These higher levels` goals have
the eIIect oI partially deIining the context within which goals are to be set at
lower levels. For example, when corporate goals are stated in terms oI long-term
proIitability and sales growth, then business-level goals should be consistent with
them. OI course, more inIormation would be required about the other Iactors that
aIIect goal Iormulation, but at least corporate goals serve signiIicantly to deIine
the goal choices available Ior the business level. Similarly, business-level goals
can structure the Iormulation oI goals at the Iunctional level and thereby deIine
the context oI Iunctional-level goals. Think Ior a moment oI the diIIiculties that
might be encountered by a Iunctional department manager, say, the marketing
director, in trying to manage the department without any idea oI what business-
level goals were important to top management.

Te Data Set

The contents oI an organization`s environmental and internal data set provide
major clues Ior goal Iormulation. Threats and opportunities (determined by
analysis and Iorecasts oI the organization`s external circumstances), along with
weakness and strengths (oI the organization`s internal state oI aIIairs, in the
present and Iuture time Irames), can be transIormed into goal sets at appropriate
organizational levels.

At the corporate level, goals are Iormulated to deIine the optimal collection oI
types oI businesses in which the organization is engaged. The Iirm`s data set can
be the primary source oI inIormation about what types oI businesses would be
most conducive to Iuture success. The internal portion oI the data set highlights
problems with existing operations; the external part points out merger possibilities
as well as types oI operations to avoid. Forecasts can identiIy potential problems
with the present collections oI businesses.

Existing business-level goals can e evaluated against the contents oI the data set
as well. Since business-level goals address business unit perIormance and
competition, such Iactors as perIormance shortcomings, competitive position,
latent capabilities, potential obstacles, and new opportunities can be discovered
through the environment and internal analysis and their respective parts oI the
resultant data set.

The data set is also intended to provide major inputs into decisions about the
appropriateness oI Iunctional-level goals. At this level the portions oI the data set
that reIlect internal strengths and weaknesses play a critical role in goal setting.
One might Iind, Ior example, during Iinancial analysis that the Iirm`s selling and
administrative expenses are excessively high as a percentage oI sales. Further
analysis might show that sales growth has slowed and that turnover oI salespeople
is high. Goals could be set Ior the marketing department that reIlects more
desirable perIormance along these dimensions. Marketing action plans would then
be modiIied to achieve the new goals.

G4al 4rm:lati4n Te4ries

Many explanations have been oIIered in the management literature Ior how
organizational goals are Iormulated. Mintzberg notes that, during this century,
organizational goal Iormulation theories have undergone a complete reversal Iorm
the 'rational man view (one goal setter setting a single organizational goal)
through the coalition bargaining view (many goals, many goal setters) to the
political arena view no organizational goals, power games among individuals).

Some examples oI the inIluential goal Iormulation theories that have appeared
over the past several decades Iollow, in chronological order:

Barnard (1938): Organizational goals are Iormed by a 'trickle-up
process in which subordinates expectations are
adopted by a consensus-based acceptance process.

Papandreou (1958) A top manager Iorms the organization`s goals as a
multivariate Iunction oI the preIerences oI inIluential
actors.

Cyert and March (1963): Multiple goals emerge Irom the bargaining among
various coalitions that Iorm out oI the parrying Ior
control and personal power by key actors.

Simon (1964): Goals are constraints on proIit maximization imposed
by decision makers bounded rationality.

Granger (1964): Hierachy oI gals results Irom a process oI screening,
Iiltering, and narrowing broad expectations to more
Iocused, speciIic subgoals in a reasonably logical
Iashion.

AnsoII (1965) New organization goals are tried out iteratively as
means Ior closing gaps between present goals and
hoped-Ior results.


Allison (1971) (1) Organization process modes-reasonably stable
goals emerge as incompatible constraints the represent
the quasi-resolution oI conIlict among internal and
external interest groups; (2) bureaucratic politics
modes key players play politics to product goals
they agree with as individuals.

Georgiou (1973): Personal goals oI individual come and go as
organizational goals according to the short-term
victories oI key managers as they engage in political
combat. There are no organizational goals as such.

Hall (1978) Goals are set according to three processes, the
appropriateness oI which depends upon two
contingencies, concentration oI power and amount oI
goal-preIerence conIlict: problem solving
concentrated power, no preIerence conIlict; and
bargaining balanced power, preIerences in conIlict.

MacMillan (1978) Organizational coalition members demand coalition
commitment to personal goals; the coalition responds
by developing commitment to generalized versions oI
individual members` goals. These generalized goals
(not the speciIic goals oI individuals) become the
organization`s goals.



Q:esti4ns:

1. What are the methods oI developing a mission statement?
2. Write the vision statement oI InIosys and analyze the same.
3. What are the various methods oI deciding the goal oI companies?


LESSN 14 STRATEGI ANALYSIS UNTINAL AREAS

141 LEVELS STRATEGY:


There is wide diversity in strategic management literature oI levels attached to the
diIIerent levels oI strategy that may exist in a Iirm. For example, Thompson and
Strickland propose Iour levels: corporate strategy, business strategy, Iunctional
area support strategy, and operating-level strategy. They go on to say, 'Each layer
|is| . progressively more detailed to provide strategic guidance oI the next level
oI subordinate managers. Lorange deIines three levels Ior a typical
divisionalized corporation: PortIolio strategy (corporate level), business strategy
(division level), and strategic programs (Iunctional level). He deIines the Iocus oI
each as Iollows:

1. PortIolio strategy: Developing the desired risk/return balance among the
businesses oI the Iirm.
2. Business strategy: Source oI competitive advantage oI a particular
business relatie to its competition.
3. Strategic programs: Bringing to bear Iunctional managers` specialized
skills on the development oI programs.

He notes that smaller Iirms may involve only the last two oI these, but in any Iirm
there rarely would be more than three. HoIer, et.al list Iour levels oI strategy Ior
business organizations. First, strategy at the societal level is concerned with the
deIinition oI a Iirm`s role in society. It would speciIy the nature oI corporate
governance, political involvement oI the Iirm, and trade-oIIs nature oI corporate
governance, political involvement oI the Iirm, and trade-oIIs sought between
economic and social objectives. The second strategy level is corporate strategy
which addresses (1) the nature oI the Iirm`s business and (2) management oI the
set oI businesses necessary to achieve its goals. Third, business strategy addresses
how the Iirm should be positioned and managed so as to compete in a given
business how the Iirm should be positioned and managed so as to compete in a
given business or industry. Finally, Iunctional area strategy is the lowest level oI
corporate strategy. It is concerned with their respective Iunctional area
environments. Newman and Logain present two levels-business strategy and
Iunctional policyIor non diversiIied Iirms, and a total oI three (with the addition
oI corporate strategy) Ior diversiIied Iirms. Higgins identiIies Ior levels oI
strategy: societal response strategy (enterprise strategy), mission determination
strategy (corporate level), primary mission strategy (business level), and mission
supportive strategy (Iunctional level).

He deIines their contents as Iollows:

1. Societal response strategy. how the Iirm relates to its societal constituents.
2. Mission determination strategy. the organization`s Iield oI endeavor.
3. !rimary mission strategy. how the organization will achieve its primary
mission.
4. Mission supportive strategies. how primary mission strategy will be
supported.

Another model proposes Iive level oI strategy but the levels are not tied to
organizational structure. Glueck, et al suggest that the levels oI planning activity
consist oI corporate, sector, shared resource unit (SRU), natural business unit
(NBU), and product market unit (PMU). The advantages oI this system are (10 it
separates the strategic management process Irom organization structure to a large
degree and (2) pushes it Iather down the organization than traditional systems do.
These characteristics stem Irom Iocusing planning level selection on strategic
issues or problems shared by the organization`s activities rather than on the
organization levels oI its business activities.

Corporate level planning is that which involved identiIying trends and
Iormulating strategy in global, technical, and market arenas, responsibility Ior
which rests with corporate headquarters in most cases. Sector level planning,
where sectors represent national and technological boundaries, may involve
several SBU`s product categories, or even product/service-based division oI an
organization. Shared resources unit planning calls Ior the development oI strategic
Ior activities oI the business that are shared by SBU`s or the various product-
market Iocuses which the company might have.

Natural business units, '.are largely selI-contained businesses with control over
the key Iactors that govern their success in the marketplace-their market position
and cost structure. Finally, product-market unit planning is the lowest level at
which planning takes place and those activities that directly relate the company`s
output to its markets.

There are many other interpretations oI the levels oI strategy. They diIIer
primarily in terms oI the organizational levels to which they apply. Those
discussed above and most oI the others have a number oI commonalities. First,
the uppermost levels in each scheme tend to concern the problem oI Iitting the
organization to its environment; lower levels address the problem oI integrating
Iunctional areas in ways consistent with upper-level strategy. Second, the topmost
level tends to involve structuring the set oI acquisitions oI divisionalized Iirms
and is usually called corporate-level strategy. Third, they contain a business or
strategic business unit (SBU) level oI strategy that applies almost equally to a
Iirm comprised oI only one line oI business and to the individual subsidiaries oI
multibusiness corporations.

Finally, the various schemes include a Iunctional level oI strategy that represents
the ways in which Iunctional departments are expected to respond to business-
level and, in turn, corporate-level goals and action plans.

During the mid-1980s some authors began to include the Iourth level: enterprise
or socictal goals and action plans. Societal strategy was intended to capture the
essential ways in which the Iirm was expected to respond to goals related to the
major social issues conIronting it.

Interpreted Iundamentally, then, there are Iour primary levels oI strategy: societal-
level, corporate-level, business-level, and Iunctional-level. The concerns oI
societal, corporate, and business-level strategy are clearly cross-Iunctional. That
is, they contain implications Ior each oI a Iirm`s Iunctional areas (although more
distantly removed in the case oI societal-and corporate-level strategy), whatever
they may be and regardless oI the type oI Iirm. By contrast, Iunctional area
strategies are more operationally Iocused than the others. The process oI
determining how each Iunctional area should be managed is a more specialized
problem, deIined largely by the practice and theory applicable to each Iunctional
(or operational) area. That is, the content oI marketing strategy is the subject oI
marketing texts and courses, Iinance strategy can be Iound in Iinance texts and
courses, personal strategy in personal texts and courses, and so on.

142 :ncti4nal-Level Strategy:

In contrast with the other levels oI strategy, Iunctional strategies serve as
guidelines Ior the employees oI each oI the Iirm`s subdivisions. Which ones oI
these segments or Iunctional areas are included in a Iirm`s Iunctional strategy set
is itselI a matter oI strategy. For example, whether to have an R & D department
or not in the Iirst place is a strategic decision. Functional goals and action plans
are developed Ior each oI he Iunctional parts oI the Iirm to guide the behavior oI
people in a way that would put the other strategies into motion. II part oI a Iirm`s
business-level strategy were a target oI a 10 percent increase in sales to be
brought about by market penetration, Ior example, marketing strategy might
include a change in compensation policy Ior salespersons and a speciIied increase
in the advertising budget. In that way marketing strategy would provide some
detail about how the marketing aspects oI the market penetration action plan
would be implemented. Similarly, Iinancial strategy would consist oI a set oI
guidelines on how the Iinancial elements oI the Iirm would be put into eIIect.
Personal strategy, production strategy, research and development strategy, and
appropriate other Iunctional strategy areas would do the same.

143 Pr4cess 4f Internal Analysis

There are two Iundamental ways to conduct an internal analysis: vertical end
horizontal. For the vertical approach, strengths and weaknesses are identiIied at
each organizational level. The horizontal analysis corresponds to the Iunctional
areas oI the SBUs. Strength and weaknesses are identiIied Ior each Iunction. We
preIer the horizontal approach because it seems to be more universally applicable.
Analysis can be Iocused on Iunctional departments, or whatever basis oI
departmentalization has been used in a particular organization.

The major dimensions oI each area are outlined and discussed in the subsections
that Iollow. They are intended as beginning points Ior analysis to Iormulate their
own evaluation systems Ior each case study or organization analyzed. Stevenson
Iound that managers seem to use three types oI criteria in identiIying strengths
and weaknesses: historical, competitive, and normative. Analyzing Iunctional
areas by historical criteria means comparing present values with their historical
counterparts and identiIying strength and weaknesses on the basis oI those
comparisons.
Competitive comparisons involve assessing similarities and dissimilarities with
successIul competitors and Iinding strengths and weaknesses accordingly.
Similarly normative comparisons are those where present characteristics are
compared with ideal values as perceived by the analyst or an expert opinion. In
practice the process oI identiIying strengths and weaknesses can be one oI the
most educational top managers can have especially enlightening are the
enumeration and discussion oI weaknesses. Since responsibility Ior the
perIormance oI SBUs and Iunctional oIten rests with single manager,
identiIication oI weaknesses at these levels can be painIul and embarrassing Ior
these people. These discussions must be handled careIully to prevent alienation
and to bring about constructive solutions to whatever problems are revealed.
However, the analyst must make sure that all weaknesses are identiIied, even
though some Ieeling may be hurt.

The process oI internal analysis involves the Iollowing steps:

1. PerIorm a complete Iinancial analysis.
2. Comprehensively identiIy the major Iunctional areas that make up
SBU operations.
3. Enumerate the critical operational Iactors oI each Iunctional area.
4. IdentiIy both qualitative and quantitative variables to describe
perIormance oI the SBU on each operational Iactors.
5. Conduct research to assign either qualitative or quantitative values to
the variables identiIied in (4).
6. Organize Iindings by Iunction according to whether they represent
strengths or weaknesses.

144 Identificati4n 4f aj4r :ncti4nal Areas:

Whatever organization is analyzed, the analyst should select a comprehensive set
oI categories that deIine the Iirm`s operations. These categories, or Iunctional
areas, can vary Irom one organization to another, and depend upon whether the
analyst is conducting a vertical or a horizontal analysis. We have selected Ior
discussion oI horizontal analysis the common Iunctional areas oI marketing,
personnel, production, and R&D, along with organization structure, present and
past strategies, and external relations (in addition to Iinance, which was discussed
earlier). Although most organizations will have these Iunctions in operation, the
analyst should not restrict the internal analysis to them. The particular set oI
Iunctions Ior which data are gathered should be tailored to the Iirm in question.
The key characteristic oI the set oI Iunctions selected must be comprehensiveness.
Analysis should make sure that all pertinent are covered.

perati4nal act4rs 4f Eac :ncti4nal Area

AIter identiIying the appropriate Iunctional areas to study in the internal analysis,
the next step is to decide what aspects oI each one to analyze. By the time most
students take a course in strategic management, they have completed course in
each Iunctional area and topics related to them. Those courses and the texts used
in them are the best sources oI evaluative criteria Ior the Iunctions oI
organizations.

Marketing: Consistent with marketing convention, this Iunction is analyzed by
examining the operqating characteristics oI the organizations` products/services,
price, promotion, distribution, and new product development systems. Interest is
Iocused on all aspects oI each oI these systems that have not already been
identiIies as part oI the Iinancial analysis. Examples oI checkpoints Ior each
Iactor are as Iollows:

1. Products/services

a. Market share
b. Penetration
c. Quality level
d. Market size
e. Market expansion rate

2. Price

a. Relative position (leader or Iollower)
b. Image
c. Relationships to gross proIit margin

3. Promotion

a. EIIectiveness
b. Appropriateness oI emphases
c. Budget as percent oI sales
d. Is return measurable, acceptable?

4. Distribution

a. Delivery record
b. Are other methods more appropriate?
c. UnIilled orders
d. Costs

5. New product development

a. New product introduction rate
b. Sources oI ideas eIIective?
c. Extent oI market Ieedback
d. Success rate

The problem is not to identiIy simply what the organization`s marketing
department is doing, but instead what it is doing particularly well or poorly.

Pers4nnel and Uni4n Relati4ns: The overall purpose oI he personnel Iunction is
to manage the relationship between employees and the organization. ThereIore,
internal analysis oI the personnel Iunction is an assessment oI the strengths and
weaknesses oI that relationship. This Iunction can be analyzed by examining the
Iollowing Iactors and questions or others tailored to the organization:

1. Job analysis Iactors

a. Are necessary skills present?
b. Are all necessary jobs present?
c. Are selection and placement systems eIIective?
d. Recruiting capability
e. Training eIIectiveness

2. Job evaluation Iactors

a. Pay scales appropriate?
b. Image oI pay scale within labor market
c. Do pay diIIerential reIlect job content diIIerences?
d. Adequacy oI beneIits

3. Turnover/absenteeism
4. Turnover rate
5. Absenteeism rate
6. Attitude oI employees, managers
7. Seasonality a Iactor?
8. PerIormance evaluation

a. Reliability
b. Validity

9. Union-management relations

a. Unions representing employees
b. Bargaining positions
c. Quality oI relations
d. Negotiation schedule

Pr4d:cti4n: The production or manuIacturing area`s strengths and weakness
relate to the origination`s ability to produce its products/services at the desire
quality level on time at the planned-Ior-costs. Examples oI evaluative Iactors Ior
production are the Iollowing:

1. Facilities and equipment

a. Capacity level
b. Per-unit costs oI manuIacturing
c. Obsolescence; today, Iuture
d. Level oI technology applied
e. Process optimality
I. Replacement, maintenance

2. Quality level

a. DeIective units
b. Inspection costs
c. RemanuIacturing costs
d. Competitive position
e. Consistency

3. Inventory

a. Level, turnover
b. Costs and trends
c. Is inventory rationally maintained?

4. Procurement

a. Sources
b. Quality oI inputs
c. Constant lead times

5. Planning, scheduling

a. Formal system
b. Is demand smoothed?
c. Excessive overtime charges?
d. Productivity

For most service organizations, the process oI providing the service can be
roughly equated to the production oI a product. Costs oI providing the service, as
well as quality oI the service delivered, can be the Iocus oI analysis. Wheelwright
suggests evaluating production strategy by analyzing its consistency and
emphasis. First, the analyst should evaluate the consistency oI production strategy
with business strategy, other Iunctional strategies, and with the overall business
environment. The categories within production strategy itselI should exhibit a
high level oI consistency as well. Then, the extent to which production strategy is
Iocused on Iactors oI success should be evaluated. This involves making sure that
priorities among production activities are appropriate to business strategy, that
business level opportunities have been addressed, and that production strategy is
communicated, understood, and integrated with other Iunctional strategy
managers.

Research and Development: Research and development (R&D) provides technical
analysis and support to other departments, and designs products or processes to
meet market needs and thereby generate a proIit. Operation oI R&D must strike a
balance between practicality and creativity in order to contribute successIully to
proIit goals. Overemphasis on practical matters can impair Iuture proIitability
because Iew innovations will be generated. Overemphasis on creativity could
result in generation oI Iew marketable product ideas while researchers explore the
Irontiers oI their scientiIic disciplines. The correct balance between creativity and
practicality Ior a particular Iirm is a strategic issue that cannot be decided
absolutely. That is, this balance is a Iunction oI the extent to which the
organization required either innovation or market emphasis and that issue is a
Iunction oI business-level goals and action plans.

Conducting an internal analysis oI the R&D Iunction involves identiIying
strengths and weaknesses in R&D activities such as the Iollowing:

1. Demand Ior R&D

a. Is demand Ior R&D services stable?
b. Is R&D Iunding stable?
c. Is R&D Iunding vulnerable to proIit variations?

2. Facilities and equipment

a. Are Iacilities and equipment state-oI-the-art?
b. Is obsolete equipment expendable?
c. Is space a problem?

3. Market and production inputs

a. Does market inIormation get Ied into the R&D process?
b. Does production inIormation inIluence the R&D process?
c. Are marketing and production inIluences balanced?

4. Planning and scheduling

a. Are jobs planned and scheduled?
b. Are costs eIIectively monitored?
c. Are human resource needs planned?

5. Is the level oI uncertainty associated with the type oI R&D activity is
which the organization is involved appropriate Ior the intended level oI
risk?

rganizati4n: Organization structure must support strategies and Iacilitate their
successIul implementation. To do so, structure must prevent a certain set oI
problems Irom materializing. These problems are the characteristics that are
searched Ior to determine the appropriateness oI a change in structure. Changing
structure is risky. ThereIore, it should not e tampered with unless there is either a
problem present that must be corrected or one that can reasonably be expected to
develop iI a change is not made. In either case, though, organization structure
should be changes only because oI speciIic problems. That is, there is no
absolutely best structure, but only the structure that minimizes organization-
related problems.

Some oI the criteria that can be used to analyze organization structure are as
Iollows:

1. Does structure make sense?

a. Is it conIusing?
b. Are there too many levels?
c. Are there horizontal communication channels?
d. Does it expedite communication?
e. Are the Iorms oI organization used appropriate?

2. Accountability and control

a. Does structure Iix responsibility?
b. Are there single Iunctions assigned to more than one person?
c. Are there too many committees?

Present strategies

Whether present strategies are stated explicitly or must be inIerred Irom behavior
oI the organization, the goals and action plans currently applicable must e
identiIied and analyzed. The idea is to determine which strategies are working
(that is, which action plans are being implemented in such a way that their
associated goals are being met) and which ones are not. InIormation about the
relative success oI current strategy can the e Ied into the process oI Iormulating
and implementing new strategies. In this way problems associated with existing
strategies can e corrected by Iormulating modiIication or replacements Ior them
and eIIective strategies can e improved upon, retained as is, or extended so what
strategic success is Iacilitated.

The Iollowing steps can be Iollowed to evaluate current strategy at an oI the Iour
levels oI strategy:

1. Select strategy levels Ior analysis.
2. IdentiIy present goals and action plans at each level.
3. Determine extent to which short- and long-term goals have or have not
been met.
4. determine which action plans have and have not been eIIective.

OI course, a strategy successIully carried out constituted a positive attribute oI the
Iirm, and one unsuccessIully implemented is a problem to be deal with. For an
internal analysis, however, the point is to identiIy strategies that are particularly
eIIective they become strengths. Examples include McDonald`s consistency,
Coca-Cola`s distribution strategy, Miller Lite`s marketing strategy, and Nissan`s
production strategy. Weaknesses are strategies that have been especially
unsuccessIul in their operation.

Q:esti4ns:

1. Why Iunctional area strategies are considered crucial?
2. What are the reasons Ior the strategies to go by Iunctional areas?
3. Give examples oI Indian companies soley practicing based on Iunctional
areas?

LESSN 15 ANALYZING RPRATE APAILITIES

151 Intr4d:cti4n:

A great deal must be learned about an organization so that strategy Iormulation
decisions can be based upon appropriate inIormation. It almost goes without
saying that strategists must understand all there is to know about the internal
operations oI an organization beIore strategy can e eIIectively Iormulated and
implemented. The external inIluences acting on the Iirm also must be analyzed,
documented, and understood to mange the strategy process eIIectively. This
chapter Iocuses on conducting both external and internal analysis Ior the purpose
oI generating inIormation Ior strategy Iormulation.

An organization`s environment consists oI two parts: The industry within which it
operates (Ior multibusiness Iirms, the industry is usually considered the activity`
in which the Iirm generates the majority oI its revenue), and other environmental
dimensionseconomic, political/legal, social and technological. The section oI
this chapter devoted to internal analysis Iirst addresses Iinancial analysisthe
process oI learning about the Iinancial perIormance oI the Iirm or organization.
Very oIten Iinancial analysis will bring to light several Iinancial strengths and
weakness that are indicative oI strategic or operating capabilities and problems
within the various strategy levels and within Iunctional areas.

Financial analysis is typically Iollowed by internal diagnosis oI Iunctional areas.
This process identiIies strengths and weaknesses within such areas as marketing,
personnel, research and development, and others.

Together these Iour analytical activities-environmental, industry, and Iinancial
analysis and internal diagnosis oI Iunctional areasare undertaken to generate a
data set consisting oI strengths, weaknesses, threats, and opportunities that
comprehensively descries the internal and external characteristics oI the
organization. This inIormation is then used as input to the strategy Iormulation
process. It is Iactored with data about past strategies, mission, corporate culture,
and managers` values, and so on to evaluate the success or Iailure oI present
strategies. As a result present strategies can be modiIied, leIt as they are or
replaced as necessary in a particular situation.

The key to eIIective strategic management is to make major managerial decisions
that shape actions by the Iirm that will correspond positively with the context
within which those actions ultimately take place. On the other hand, the action
context is dictated to a great degree by conditions external to the Iirm. These
conditions constitute the Iirm`s operating 'environment. To some extent the Iirm
can shape the overall environment to its advantage. Henry Ford`s introduction oI
mass production oI automobiles stimulated the U.S. economy in a manner that
invigorated consumer markets oI his products. Genentech, the recombinant DNA
research Iirm, made biotechnical advances that had proIound impacts, not just on
Genentech`s operating circumstances, but on the Iuture oI humankind as well.
Nonetheless, Iew Iirms enjoy a scale oI impact that allows major shaping oI the
overall climate in which they operate, particularly over the long run. Instead
we4ll-managed business enterprises adapt to environmental change so that they
can take advantage oI opportunities that arise and minimize the otherwise adverse
impacts oI environmental threats. This involves assessment oI present
environmental circumstances (Ior reaction) and the Iorecasting oI Iuture
conditions (Ior proaction).

A data set has both present and Iuture time Irames as internal and external,
positive and negative Iactors are Iorecast into Iuture periods. Environmental and
industry analysis involves Iilling the right-hand sectors oI the data set with
inIormation pertiment to a particular Iirm.

Analysis oI the internal operations oI the organization results in a collection oI
strength and weaknesses that would Iill the leIt-hand cells oI the data set model.

Environmental conditions aIIect the entire strategic management process.
Management`s perceptions oI present and Iuture operating environments and
internal strengths and weaknesses provide inputs to goal and actions plan choices.
They can also aIIect the manner in which implementation and internal
circumstances will dictate the eIIectiveness oI strategies as they are implemented
(including alternation in the environment itselI).

Both environmental and industry analysis procedures consist oI Iour interrelated
processes:

1. Developing an assessment taxonomy to outline major environmental
dimensions.
2. DeIining environmental boundaries (the 'relevancy envelope)
3. Monitoring and Iorecasting change in key variables.
4. Assessing potential impacts on the Iirm (or industry) in terms oI whether
they are treats oI opportunities.

152 4rmal Vers:s Inf4rmal Scanning:

Sensing the pulse oI environmental threats and opportunities is a natural and
conditions process in business planning. In many organizations it is done on an
inIormal basis. The construction Iirm executive who learns Irom a golIing
colleague oI a request Ior bids on a major construction project is gaining
inIormation that could aIIect the perIormance oI his IirminIormation that would
be not more valuable had it been acquired through more systematic means.
Discovering changes in tax statues by perusing the Wall Street Journal is not less
important than learning about them through a well-established monitoring system
within the Iirm`s tax accounting oIIice. Indeed, the talent Ior acquiring valuable
inIormation through inIormal means oIten marks the successIul entrepreneur and
manager.

To rely totally on inIormal means, however, increasingly exposes the Iirms to
missed opportunities and unIoreseen threats. A reined-out golI game or an
overlooked column in the Wall Street Journal can have proIound implications,
even iI the implication themselves go unnoticed. ThereIore, a systematic approach
to environmental assessment is important Ior the management oI uncertainty and
risk.

One Iormal approach to generating data about environmental conditions is survey
research. The use oI both original and contracted survey research Ior purposes oI
evaluating the present corporate environment oIIers a lot oI promise Ior
strategists. For analysis oI external concern in the present, survey research is a
way to accurately identiIy the attitudes oI selected population groups toward the
company. In Iact, virtually any external constituency`s attitudes toward the
organization can be assessed through survey research methods.

The dimensions oI environment can be generally classiIies by set oI key Iactors
that describe the economic, political/legal, technological, and social surroundings.
These, in turn, can be overlaid by the various constituents oI the Iirm, including
shareholders, customers, competitors, suppliers, employees, and the general
public (Exhibit 2-3). To assess environmental conditions, concern is Iocused on
opportunities and threats that exist, or may arise, through impacts on and by the
Iirm`s constituents.

Key Ec4n4mic Variables

Firms that anticipate economic change and identiIy the constituents through
which that change will be applied; can better adapt goals and action plans. By the
late-1990s, major oil producing Iirms has shiIted their source oI supply Iorm
middle-eastern countries to Venezuela because oI uncertainties about the political
and economic environment oI the Middle East. Shareholder expectations oI
Iinancial return are dictated in part by alternative investments and their associated
return and risks. Interest rates, tax policies, shareholder incomes, availability oI
Iunds Ior margin-purchased equity investments, and expectations oI Iuture
economic circumstances will shape changes in equity investor proIiles and/or the
Iinancial perIormance expectations oI the Iirm`s owners. In the early 1980s, high
returns on money market instruments (representing corporate and government
debt) led to massive shiIts Irom equity holding s by private investors to those
shorter-term debt instruments. In many cases this disturbed long-standing
shareholder composites (making more room Ior institutional investors to those
shorter-term debt instruments. In many cases this described long-standing
shareholder composites (making more room Ior institutional investors, Ior
example) and pressured management to Iocus more closely on generating higher
short-term returns. Personal income, savings, employment, and price-level trends
can have dramatic eIIects on the attractiveness oI a Iirm`s products or services in
output marketsnot only Iinal markets, but intermediate markets as well. In
eIIorts to reduce costs during inIlationary periods, automotive manuIactures
during he 1980`s reduced their reliance on outside suppliers Ior automobile
components. This, in turn, led many component manuIactures to retrench or
redirect their marketing eIIorts elsewhere (e.g. replacement parts).

Similarly, total sectoral outputs, movements in private-sector capital replacement
and expansion, government spending, and the allocation oI the consumer dollar
can have dramatic impacts between and within industrial sectors. Each can be set
oII macroeconomic changes well outside the control oI the Iirm, yet may be
buIIered by appropriate strategic action. Twenty years oI inIlation, Ior example,
increased consumer use oI $50 and $100 bills in retain trade. Among other
implications, this meant that many retailers had to replace cash drawers, or entire
cash registers, to accommodate these denominations. More signiIicantly, the
collapse oI he Soviet Union has led to decreased government spending in the U.S.
on deIense items. Many thousands oI prime deIense contractors and their
subcontractors spent the early-1990s trying to develop new strategies based on
non-military products.

Economic conditions Iaced by competitors can play a large part in shaping a
Iirm`s strategies and policies. The movement oI manuIactures out oI the 'snow
belt to areas oI the country with lower energy costs could provide decisive
competitive advantages vis-avis those who remain. Transportation costs, on the
other hand, could reduce those savings. Competitors selling to diverse markets
might realize less volatility in their capital bases and abilities to compete across
economic cycles than might a Iirm with a narrow product/market scope. In any
case it is important to recognize that the economic conditions Iaced by the
competition may be diIIerent in Iorm and substance Irom those Iaced by the target
Iirm.

The capacity, reliability, and, in some case, the survivability oI suppliers are
largely a Iunction oI their economic climate. Both debt and equity capital markets
oIten realize signiIicant swings as a result oI overall economic conditions. The
Iirm accessing these markets experiences the repercussions. Federal discount rates
and change in reserve requirements have both short-term and long-term
implications in primary capital markets, and oIten aIIect the private sector
borrower through secondary markets. The available supply oI goods and services
can be aIIected by the overall economic health oI suppliers, including their
productivity, alternative markets, and cost structures. To the extent that the target
Iirm represents a major market Ior a supplier. To the extent that the target Iirm
represents a major market Ior a supplier, that Iirm becomes a signiIicant Iactor in
the economic climate the supplier experiences. The choice oI multiple versus
singular sources oI supply might be dictated by assessments oI suppliers`
economic bases as well as by the degree oI control the buying Iirm can maintain
over them. Though could also provide buying leverage Ior the Iirm or represent
new opportunities Ior backward integration.

The economic climate oI the Iirm is also maniIested through employees. Wage
and beneIit escalations are oIten as much a Iunction oI he overall econimci
circumstances employees Iace as they are unilateral policy set Iorth by employers.
Rising consumer prices are usually translated into expectations and/or demands
Ior increased compensation. ShiIts in employment status, including societal and
regional unemployment levels, can increase or decrease these pressures.
Economic conditions usually aIIect employees unevenly, thus requiring creative
policy adaptation. Depression oI gousing markets in the early 1980s` Ior example,
led a number oI large employers to buy homes Irom transIerred executives, who
were unable to sell them at reasonable prices, iI at all. This inadvertently put a
number oI these Iirms into the real estate 'business (albeit on a relatively small
scale), typing up capital and eIIort.

Clearly, economic conditions have wide-reaching eIIects on the general public.
These can be as abstract as an alteration in high birth rate rends or as direct as
changes in personal income. Conversely, public expectations and behavior
substantially determine the health or inadequacy oI the economy, through earning,
spending, and saving patterns. In any case the general public is so interwined in
the mechanics and psychology oI a Iirm`s economic climate that movement by
one can have dramatic implications Ior the other. Kinder-Care Learning Centers,
Inc., a chain oI child care centers, both proIited by the economic (and social)
trend toward working mothers and contributed to the trend by providing necessary
child care at reasonable cost. The overall impact was synergistic.

Finally, in assessing he economic dimension oI a Iirm`s environment, it is
important to recognize the interrelated nature oI the participants. The multiplier
eIIect in macroeconomics has its micro counterpart. Raw data on prices, wages,
savings, government spending, manuIacturers` shipments, and the like are
valuable in themselves but represent only the Iront line oI a truly comprehensive
analysis.

Key P4litical/Legal Variables

Business Iirms, like people, are touched directly and indirectly by political/legal
inIluences at all levels oI government (Iederal, state, and local). These inIluences
run the alphabetic gamut Irom antitrust to zoning. The scale oI Iacteral
intervention in business is matched only by its turbulence. The Center Ior the
Study oI American Business concluded that Iedral regulation oI business 'cost the
American economy more than $100 billion on 1980. Approximately $5 billion
represented the administrative costs oI the major regulatory agencies, and the
balance, compliance costs.

In addition to serving as regulatory bodies, governments also represent a major
Iactor in the private sector through Iiscal policy. Taxation and government
spending can represent both opportunities and threats, depending upon the nature,
timing, and position oI the impacted enterprise. And, oI course, Iiscal policy can
have dramatic impacts on the overall economic climate oI the Iirm.

Shareholders are aIIected by governments in a variety oI ways. Changes in tax
structures can aIIect tax exposure on corporate payouts when treatments oI capital
recovery versus earnings distributions are considered. To the extent that
corporations themselves are shareholders, intercorporate shareholding can be can
aIIect the 'tradability oI shares as well as dictate corporate disclosures. Laws
dealing with pension Iunds and other Iorms oI institutional investing can
exhilarate or impair changes in investor proIiles. Incorporation laws oIten
constrain Ilexibility in capital restructuring. All oI these impositions, in turn,
requirements. Governments-mandated sales prohibitions (e.g., on certain
Iirearms) can limit markets. Similarly, export restrictions (national and interstate
can impose market constraints. Conversely, public policies targeting industries Ior
rejuvenation or expansion can open up a host oI market opportunities (such as
trade-adjustment programs in energy and steel). Social legislation (e.g.,
environmental protection, health, consumer protection) can create markets Ior
new classes oI products and services as well as limit those where noncompliance
exists.

Politics and law are inIluenced by, and have an impact on, competitors. Antitrust
can sustain or impair industry structures and thereby aIIect the nature oI present
and Iuture competition. Import restriction can limit Ioreign competitions. Patent
laws provide competitive protection Ior patent holders. Governments themselves
can be suppliers (e.g., mineral rights). And, oI course the viability oI suppliers as
a whole can be aIIected by all Iorms oI political/legal inIluences. During mid-
1993, hospital administrators in the state oI maine estimated that they were about
a 20 percent vacancy Ior a large number oI Iacilities. Retrenchment become
necessary to survival Ior a large number oI Iacilities. The maine legisilature asset-
sharing among institutions. This minor legal change alone may save countless
millions oI dollars in miane`s health care industry by eliminating unnecessary
duplication oI equipment purchases and operations. Cooperation among hospital
is no longer an antitrust violation. Similarly, state legislatures adopting mandatory
automobile insurance laws have had dramatic aIIects on their states` insurance
industries.

Protection oI employees is clearly a major matter in any Iirm. Wage laws, labor
statutes, equal employment opportunity, accupational saIety and health, employee
privacy,and pension Iunds controls all represent areas oI strategy concern. Further
the public sector competes with the private sector Ior employees. through support
oI education and training programs, the public sector also represents a source oI
labor.

Finally,the political/legal climate is both a Iunction and a determinant oI
public sentiments. Federal regulatory reIorm (including deregulation ) is a prime
example. Public expectations oI business behavior can cause, and be caused by,
shiIts in partition politics, which in turn can aIIect the overcall socioeconomic
climate in which private sector enterprises operate. Expansionary and
technologically aggressive moods on the part oI the general public have their
counterparts in business and industry, though they need not always be similarly
timed (wall street, the public, and Washington are occasionally out oI phase in
this regard ).

Assessing and Iorecasting the political/legal environment require
creativity and sensitivity to industry-speciIic matters. Unlike the economic
environment, the political/legal environment requires largely 'soIt calculus
where numerical relationships and extrapolations are oIten unavailable or
inappropriate.

Key Tecn4l4gical Variables

Electronics, bioengineering, chemicals, energy, medicine, and space are but a Iew
oI the Iields in which major technological change have opened new areas to
private enterprise. In some cases entire industries have emerged seemingly
overnight (such as genetic engineering), bringing with them new opportunities,
and new threats, in the marketplace. In other cases technological changes within
industries have brought new Iorms oI product competition (e.g. micro
technologies in electronics) have led to diIIerent competitive advantages in
production costs and product quality. In all instances the Iirm subject to
technological obsolescence or intent on maintaining some Iorm oI technological
leadership must stay abreast oI technological innovation, and to the extent
possible, Iorecast Iuture technological change and its potential Ior acceptance.
That Timex vastly underestimated market acceptance oI the digital watch early in
its liIe cycle is but one oI many instances oI technological displacement having
adverse eIIects on those caught unaware.

Technological change has had implications Ior shareholders, primarily through
communications and inIormation processing. High-speed, computer-based market
reports are reaching increasingly larger proportions oI stock market participants.
On-line oIIice and in-the-home displays mean quicker reaction time in market
'plays, and the proliIeration oI FAX machines and worldwide e-mail systems
make round-the-clock real-time communications commonplace.

New products and process resulting Irom technological innovation can result in
redeIinition oI customer bases or customer demands. The design oI new,
relatively lightweight diesel engines opened up a host oI opportunities in the
passenger-car industry. Computer-aided design and computer-aided
manuIacturing (CAD/CAM) have led to the expectation oI shorter lead times and
much closer tolerances in many industrial and consumer products industries (e.g.,
aerospace and automobiles). The home inIormation revolution not only may
expand markets Ior consumer product retailers, but may well lead to better
inIormed, more discerning retail customer.

So too the nature oI competition can be redeIined as technological advances
unIold. In the oil-well wire-line (or 'logging) industry, new techniques sallow
in-the-well sensing oI critical geophysical characteristics (temperatures, pressures,
etc.) while drilling gear is in place. Older technologies require expensive and
time-consuming removeal oI the gear beIore these measurements can be made.
Thus those Iirms with access to the new technology have a marked, competitive
advantage. Price is no longer a signiIicant Iactor when the competition Ior
business is between those with and those without the technology.

In acquiring the advantages oI new technology, a Iirm might rely heavily on its
suppliers. ManuIacturers may turn to equipment suppliers Ior the latest in
robotics, or Iood processors to pharmaceutical or chemical Iirms Ior the latest in
preservatives. In each case technological advantage is passed through the
production chain, with competitive diIIerentials possible at each stage.

Sources oI supply can also be redeIined with technological innovation. Fiber
optics, Ior example, may well displace metal wire as a primary medium in
telecommunications. Telecommunications Iirms thus would turn to the glass
industry instead oI the wire industry Ior this critical material.

Employees continually experience the impact oI technology by virtue oI changes
in requisite skills and job assignments. Automation has led to the conversion oI
hand labor to higher skills needed in machine design, operation, and maintenance.
Even work routines are aIIected. As telecommunicating attracts ever-greater
interest, more and more types oI work may be accomplished more eIIectively and
eIIiciently away Irom the traditional workplace (at home or at local oIIices).

Finally, technological change looms large in the overall picture oI public
experiences and expectations. DissatisIaction with technological lags in the steel
industry led to government investigations. Fear about runaway advances in
bioengineering have resulted in selI-imposed restring among Iirms involved.
Expectations oI technological solutions to serious socioeconomic problems (e.g.,
energy may have implication Ior public policy and Ior strategic adaptations within
aIIected industries. And oI course everyday liIe is changed permanently by
technology. The spread oI Automatic Teller Machines in banking has
dramatically changed our banking habits. Not many people under-thirty remember
the pre-ATM day when consumer had diIIiculty accessing their cash on weekends
because the banks were closed. The time we save preparing Iood by microwave
oven we now lose by watching video-taped movies at home!

Few Iirms are leIt untouched by technological change, although some may be
more severely or rapidly aIIected than others. To the extent that technological
innovation is a key Iactor oI success in a given industry, it must be monitored and
Iorecast aggressively. In al cases at least a general sensitivity to the technological
environment is a primary component oI successIul strategic planning.

Envoronmentsl boundaries can be at least generally established by examining the
Iirm`s strategic postures regarding:

1. Geographic diversity
2. Product/market scope
3. Sources oI supply
4. Sources oI capital
5. Technology/innovation
6. Regulatory vulnerability
7. Return horizon on Iixed commitments
8. Overall Ilexibility

The depth and breadth oI environmental scanning also are constrained by
available resources. Larger Iirms can oIten make substantial resource
commitments within planning units to conduct Iormalized scans on a continual
basis. Smaller enterprises, however, rarely can make such communications and
must rely on intermittent or more closely Iocused analysis.

REASTING

In many cases the environmental Iorecaster needs in make multiple Iorecast so
that contingency goals and action plans can be developed. For example, a single-
point Iorecast oI interest rates one year hence may be a dangerous premise upon
which to base on expansion strategy. Instead well reasoned multiple Iorecasts oI
interest rates can lead to contingency expansion strategies, one oI which could be
implemented as certain economic conditions unIold.

Forecasts can be made in the context oI reasonable ranges. Here the analyst is less
concerned with anticipation oI precisely what the Iuture will bring useIul when
the Iorecasting horizon is more distant. For example, one might predict a decrease
in Iederal deIense spending in the range oI 5-10 percent per year over the next
Iive years or continued Japanese investment in U.S. industry, but at a level not to
exceed that oI, say, 1989. The general direction oI change is addressed within the
conIines oI anticipated limits.

4recasting Tecniq:es

Though a multitude oI Iorecasting techniques might be catalogued, only a Iew
have received recognition in strategic management circle. These techniques can
oIten be used in conjunction with each other to identiIy opportunities and threats.

Trend extrapolation is probably the most widely used. Most simply put, this
involves picking a tracking Iactor or environmental variable, noting its trend
(statistically or otherwise), and extending that trend into the Iuture. Lead and lag
correlates oIten are used in the process. Linear and nonlinear statistical models
and techniques can be used when hard numerical data exist. This normally
involves line Iitting to historical data, and extending the line into Iuture periods.
Most spreadsheet programs and some operating systems have easy-to-use trend
line extrapolation routines build into them. OI course, more sophisticated
packages like SPSS (Statistical Package Ior the Social Sciences) and SAS
(Statistical Analysis SoItware), installed on most computer mainIrame systems
and also available in microcomputer versions, allow detailed trend line analysis.

As with other Iorecasting techniques, the validity and reliability oI trend
extrapolation must be careIully evaluated in each application. Parameters must be
appropriately selected, and intrinsic or environmental constraints identiIied. II this
is not done, incorrect Iorecasts can result extrapolating the growth oI a young
blade oI grass could easily yield a tree.

Forecasting by analogy is another widely used technique, although it is not a
Iormal Iorecasting method. It involves identiIication oI precursor or concurrent
events and simple recognition oI the relationship. For example, one might have
been able to Iorecast a decline in public interest in the Space Shuttle program aIter
the Iirst launch since there was a similar decline reaction to Columbus`
unspectacular second voyage to the New World. In this case the Iorecaster is
really examining series oI analogous (though not identical) events. Because
Iorecasting by analogy is used where historical data are inadequate Ior the more
Iormal trend extrapolation, its validity and reliability are open to challenge.

Delphi represents yet another Iorecasting procedure. Developed by the Rand
Corporation, it basically involves the use oI expert opinion through anonymous,
miterative, controlled Ieedback among a group oI participants (the expert panel).
Normally the panel is polled bgy questionnaires in a search Ior opinions on
reasonably well-deIined issues. Each member responds with a Iorecast and
reasons Ior it. These responses are then satistically compiled and Ied back
anonymously to al member Io the panel. This routine continues through
subsequent iterations as the inIormation is reprocessed by the experts and new
Iorecasts are generated. Ideally the composite results will move toward a
consensus. Though this technique is employed Iairly widely in public and private
sector planning, it would be oI limited use to the student case analyst.

Simulations and econometric models are designed as numerical interpretations oI
real-world systems (e.g., national economies, ecologies, production systems).
They involve the estimation oI theoretical and empirically based relationships,
which, when taken together interact quantitatively to produce Iorecast outcomes.
Computers are normally use to make the calculations.

A particular advantage oI these techniques is the ability to perIormance sensitivity
analysis. Here the analyst changes assumptions or estimation within the model to
generate varying outcomes. For example, in a dynamic population Iorecasting
model, one might wish to assess the impact oI changes in personal income on
population mobility. By varying the income variables in the model, the analyst
examines this impact on whatever mobility variables the model contains, thus
assessing their sensitivity to income changes. In doing so the analyst is able to
evaluate the model itselI, as well as gain some understanding oI contingency
outcomes.

Cross-impact analysis is a Iorecasting technique designed to assess the
interactions among Iuture environmental conditions. The analyst begins by
assuming that a set oI Iuture environmental circumstances will come true (e.g.,
Iour new industry entrants, each holding a 5 percent market share within six
years). Through the use oI matrix analysis, the analyst then attempts to assess the
impact oI these circumstances on the possibility and timing oI others (such as
price competition). II nothing else, the analyst is able to expose Iorecasting
inconsistencies and to clariIy underlying assumptions in the Iorecasts themselves.

Finally, scanning and monitoring are Iorecasting methods insoIar as they involve
Iuture thinking. The scan is the equivalent oI a 360-degree radar sweep, but
monitoring is the choice Ior speciIic environmental variables or Iactors that are
tracked over time. The latter marely helps reIine the make the gathering and
processing oI environmental inIormation more eIIicient. For example, an
environmental scan may identiIy a somewhat subtle shiIt in the packaging
industry toward paper containers Ior liquid consumer products. A Iirm interested
in this matter might then choose to monitor industry shipments in that product
category closely, and ultimately generate a Iorecast oI Iuture volume. The Iorecast
could involve any oI the other techniques.

153 Ind:stry Analysis

Industry analysis complements analyses oI the other dimensions oI a Iirm`s
environment. It Iocuses on the industries in which the Iirm competes. The breadth
and depth oI industry analysis and the boundaries Ior inIormation gathering are
deIined by these industries. Thus industry analysis involves the same processes as
those identiIied earlier Ior environmental analysis, except that it logically must be
preceded by identiIication oI the appropriate industries Ior analysis along with
descriptions oI the various characteristics oI those industries.

Industry analysis is relevant in any oI these situations:

1. The Iirm`s strategy deIines the business in terms oI speciIic industries.
2. The Iirm is Iacing new Iorms oI extra-industry competition.
3. The Iirm is contemplating entry into a new industry.

An industry perspective is also useIul Ior the student case analyst in that it
provides the basis Ior gaining Iamiliarity with the products, competition, resource
requirements, and constraints peculiar to a line oI business.

The industry perspective must be use cautiously since an individual Iirms or
business unit can hardly be considered completely protected Irom direct extra
industry, inIluences. For example, relaxation in occupational saIety and health
standards Ior an industry may come at the same time that an individual Iirm is
singled out Ior stricter compliance enIorcement. The analyst, thereIore, is
cautioned to assess direct environmental inIluences as well as the portion oI the
environment that aIIects overall industry conditions. Michael E. Proter developed
an assessment model Ior analyzing industry structure that Iocuses on the Iorces
imposed on the process oI competing by Iive inIluences: The intensity oI rivalry
among competitors, the threat oI new entrants, the threat oI substitute products the
bargaining power oI suppliers, and the bargaining power oI buyers or customers.

Defining an Ind:stry

In general an industry is nothing more than cluster oI economic units (Iirms or
business units within Iirms) that are grouped together Ior analytical or cooperative
purposes. Trade associations themselves deIine criteria Ior membership and
establish networks Ior inIormation sharing and cooperation. Thus the American
Board Builders and Repairers Association deIines its own industry scope and
becomes a private sector inIormation depository (among other Iunctions) within
the conIines oI the scope.

A more universal taxonomy Ior analytical purpose is that provided by the U.S.
Government`s Standard ndustrial Classification (SIC) scheme. It is designed ot
Iurnish a common Iramework Ior gathering, tabulating, analyzing, and cross-
reIerencing data in a uniIorm Iashion. The SIC clusters 'establishments (as
opposed to legal entities or Iirms) together on the basis oI the primary type oI
activity in which they are engaged (normally deIined by product or service
category). These clusters are named and coded to provide the needed uniIormity
and comparability. The more digits in the code, the more narrowly deIined is the
cluster. The coding scheme results in a nesting arrangement oI 'divisions,
'major groups, 'groups, and 'industries. Industries are assigned a Iour-digit
code. Additional digits are used Ior subdivisions within industries.

P4rter`s ive 4rces 4del 4f 4mpetiti4n

The nature oI competition in an industry in large part determines the content oI
strategy, especially business-level strategy. Based as it is on the Iundamental
economics oI the industry, the very proIit potential oI an industry is determined
by competitive interactions. Where these interactions are intense, proIits tend to
be whittled away by the activities oI competing. Where they are mild and
competitors appear docile, proIit potential tends to be high. Yet a Iull
understanding oI the elements oI competition within an industry is easy to
overlook and oIten diIIicult to comprehend.

Porter has identiIied Iive basic Iorces that collectively describe the state oI
competition in an industry:

1. The intensity oI rivalry among competitors.
2. The threat oI new entrants to the market.
3. The amount oI bargaining power possessed by the Iirm`s/industry`s
suppliers.
4. The amount oI bargaining power possessed by the Iirm`s/industry`s
customers
5. The extent that substitute products present a threat to a Iirm`s/industry`s
products

These Iorces assist in identiIying the presence or absence oI potential high
returns. The weaker are Porter`s Iive Iorces, the greater is the opportunity Ior
Iirms in an industry to experience superior proIitability. More generally,
understanding how these Iorces aIIect competition within an industry allows the
strategist to identiIy the most advantageous strategic position.

The actors within an industry on whom these Iorces exert pressure are,
respectively, the industry`s competing Iirms themselves, potential new entrants to
the industry`s markets, suppliers (vendors), customers, and makers oI substitute
products.

Obviously, the starting point Ior conducting an analysis oI the Iive Iorces oI
competition is to identiIy all the competitors, potential new entrants, and major
suppliers, the demographic oI customers, and makers oI and nature oI substitute
products. Competitors would not only have to be identiIied, but various
distinguishing data about the industry would also have to be speciIied. For each
competitor this data would include market share, product line
diIIerences/similarities, market segments served, price/quality relationships
represented by products, growth/decline trends, Iinancial strength diIIerences, and
any other inIormation that will help describe the industry.

Using Porter`s model to analyze an industry Ior a particular Iirms, involves
estimating the strength oI each Iorce, identiIying its underlying source, and then
Iormulating a strategy that will create an advantage Ior the Iirm. An advantage
could be established by deIining a position Irom which to deIend itselI against
strong Iorces somewhere in the model. DraIting an oIIensive posture to take
advantages oI weak Iorces in the industry, or designing a way to Iavorably alter
the Iorces.

The key task oI the analyst is to understand the underlying causes oI each oI the
competitive Iorces at work. With this knowledge, a company`s strengths or
weaknesses can be clariIied, and the most Iertile areas Ior draIting competitive
thrusts can be deIined. Also, knowing the magnitude oI competitive Iorces allows
the strategist to identiIy the most important trends that are emerging as
opportunities and threats.

Next, we`ll identiIy typical characteristics oI each competitive Iorce, and the
kinds oI Iactors that can create strength Ior the Iive sets oI competitors.

Ind:stry 4f Rivalry am4ng 4mpetit4rs

Some industries appear 'sleepy because oI a low level oI rivalry among
competitors. An example might be industrial Iasteners, the manuIacturers oI nuts
and bolts and other devices used to connect the components oI products. A large
number oI quite small manuIacturers accept low levels oI proIitability as a cost oI
staying in business. Competition is low key with little eIIort and expense devoted
to diIIerentiating brands or single products. Such Iirms oIten product a catalog
and send representative to trade shows to demonstrate products, or use sales
Iorces or independent sales representatives Ior selling. They usually compete on
the basis oI price, delivery times, or the convenience oI either large or small lot
sizes. There are virtually no screw machine companies advertising on television!

On the other hand, some industries are characterized by high level oI competitive
activity. For example, the brewing industry has many competitors who battle
Iiercely with each other over market share. There is little natural diIIerentiability
in beer, so brewing Iirms develop complex promotional and advertising programs
to try to gain the upper hand in consumer awareness. We have seen ads, appeals,
posters, jingles, demonstrations, sales and many other types oI promotional and
advertising program by beer brewers and distributors to diIIerentiate their product
on the basis oI taste, brewing process, alcohol content, social acceptance,
ingredients, price, 'naturalness, similarly to Ioreign beer brads, dissimilarity to
Ioreign beer brands, strength oI Ilavor, weakness oI Ilavor, and so on; Lately,
small retail location-based breweries have been popping up all over the country
who make their own beer.

For breweries oI given revenue size, capital investment is large so exit barriers are
high. There are Iew alternative uses oI a deIunct brewery. So participants Iight it
out intensely Ior a share oI the huge beer market.

1 Relative equilibrium in size and power among a large number oI
competitors
2 Slow or stagnant growth oI industry demand such that expansion oI one
competitor would come at the expense oI others.
3 UndiIIerentiated products and low switching costs.
4 High Iixed costs oI product perishability
5 Even small capacity additions generate large volume increases which raise
pressure to cut prices.
6 High exit barriers causing Iirms to bear low or negative returns on
investments
7 Wide spectrum oI strategies and types oI Iirms which generates conIusion
and Irequent 'collisions in the market. The opposite case might be an
oligopoly like the automobile industry where most actions are reactions to
another competitor and rivalry is somewhat orderly, albeit intense.

:yers

For an industry, buyers can usually be broken into three categories: Consumer,
industrial, and commercial customers. Consumers, or purchasers oI the Iirm`s
service or product Ior their own use, are Iurther divided into 'bundles oI
demographics which collectively identiIy all the various market segments that are
present. Firestone, Ior example, sells tires directly to the people who will be
driving on them through its own retain outlets. The various products that make up
its line cater to the needs oI diIIerent sets oI demographic descriptions oI people.

Industrial buyers are companies that purchase the Iirm`s product or service to be
used as a component in its product. Continuing with the Firestone example,
automobile manuIacturers who put Firestone tires on new cars, would be one
group oI its set oI industrial buyers. By contrast, commercial buyers would be
other companies that sell Firestone`s products to consumers. AS example would
be any oI the large discount stored chains that handle Firestone tires, like Wal-
Mart, K-Mart, Sears, etc.

Buyers, whether consumer, industrial, or commercial, can enjoy positions oI
strength over the Iirm Irom which they purchase products by superior bargaining
power. For example, a large retailer ('commercial buyer to its supplier) with a
loyal customer base and high volume oI sales oI the product in question, may be
able to virtually dictate price, shipping arrangements, order quantity, quality level,
and other Iactors to its vendors.

Similarly, an automobile manuIacturer could have a powerIul bargaining position
over a Iire maker or the entire tire industry iI a large volume oI tires was sought
Ior installation on a popular auto line. (OI cours, the wise tire maker would
prevent itselI Irom becoming too dependent on one buyers by strenuously
soucingbuying Irom several producers oI the same componentsto prevent
dependency on too Iew suppliers. Thus it has a strong bargaining position on
matters oI price, quality, delivery times, etc., as its suppliers compete with one
another to gain Iavor with its buyers.

An industry`s buyers tend to be powerIul relative to the Iirms they are buying
Irom when the conditions listed below apply (keep in mid that these Iactors apply
as well to a group on consumers and to industrial and commercial buyers)

1 Buyers are concentrated as in cooperatives, or they account Ior a large
volume oI purchases.
2 Products are undiIIerentiated or standardized.
3 The seller`s component represents a large portion oI the total cost oI the
buyer`s Iinished product. When the seller`s product has a small cost share,
buyers tend to be less price-sensitive.
4 Buyers are earning low proIits and are thus more price sensitive than iI
they were highly proIitable.
5 The sellers` product is not critical in one way or another to the buyer. II
it`s critical to the quality, price, appeal, etc., oI an industrial buyer group`s
Iinished product, Ior example, then the sellers will have power over the
buyers.
6 There is a threat that buyers can integrate backward to make the suppliers`
product.

An industry`s commercial buyers (retailers) have, in some cases, an additional
source oI bargaining power over their manuIacturing vendors. They can inIluence
customers` purchase decision. This capability allows retailers to gain price,
delivery time, order quantity, and other concessions Irom their suppliers that other
classes oI buyers might not receive.

S:ppliers

Providers oI goods and services to an industry have power over their customers
through their ability to set price and control quality, delivery time, and order
quantity. II these customers cannot successIully play oII one supplier against
another to protect themselves, then the industry`s proIits can be drained oII by
suppliers.

1 The power oI suppliers is high in the Iollowing situations:
2 There are Iew suppliers who are more concentrated than their customers
3 Suppliers` product is diIIerentiated
4 Customers! Switching costs are high.
5 There is little pressure on suppliers to protect themselves Irom substitutes
or replacements Ior their product.
6 When suppliers have the capability to integrate Iorward. A supplier oI
engines to a manuIacturer oI lawnmowers would have a strong bargaining
position iI the mower company realized the engine supplier`s ability to
make the whole-lawnmower.
7 The industry is not one oI the major customers oI the supplier. Important
customers would be protected Irom aggressive moves by the supplier
because oI their mutual interests: unimportant customers would not enjoy
this position.

An interesting example oI the power oI suppliers is the unusual relationship
between the growers oI seed shrimp and the growers oI mature shrimp in the
shrimp mariculture industry in the country oI Ecuador. The preIerred seed stock
(baby shrimp placed in growth ponds to grow to a marketable size) are wild post-
larval shrimp (called 'PLs) netted in the country`s estuarine areas by Iishermen.
These PL shrimp are much hardier than their hatchery-grown substitutesas
many as 80 percent oI the hatchery-grown PLs die beIore reaching maturity
compared with a mortality rate oI about 20 percent Ior the wild ones.

The problem is that the supply oI wild PLs Iluctuates dramatically Irom year-to-
year with climatic conditions. In some years there are not enough wild PLs to
stock all the growth Iarms. In other years there is an oversupply oI wild PLs.
During the years oI wild PL undersupply, the price oI hatchery-grown PLs
skyrockets and the PL hatchery operators thrive. Indeed, they have the power
during these years to control the proIitability oI the much larger (in terms oI
revenue) mature shrimp mariculture industry. But during the wild PL oversupply
years, they may receive no revenue at all. For Ecuadorian shrimp hatchery
operators, periods oI extremely high bargaining power and virtually no bargaining
power may be separated by only a Iew months.

S:bstit:te Pr4d:cts

The shrimp industry example above also demonstrates the plight oI an industry
Iacing a substitute Ior its product. Although it is an extreme case, seed shrimp
hatchery operators really only have an industry an all during the years when their
product`s substitute, wild seed shrimp, are in short supply. Hatchery operators are
spending heavily on research to increase the survival rate oI their product. II they
are successIul in this endeavor, then they may be able to displace the wild seed
shrimp industry altogether.

During years when there are not quite enough wild seed shrimp to go around,
shrimp growers use some hatchery grown seed stock. Their availability limits the
price that the wild PL Iishermen can charge Ior their product. This price ceiling is
typical oI all industries Iacing substitutes.

ManuIacturers oI products and suppliers oI services must constantly scan their
environments Ior the potential emergence oI substitutes. The most dangerous
substitute are those that show potential Ior improving price-perIormance trade-
oIIs and those made by Iirms or industries earning high proIits. In these cases,
strategies must be Iormulated to protect against displacement by the substitute
product/service.

P4tential Entrants

New entrants to an industry pose several threats to existing competitors. New
competitors can reduce the market share oI all participants by dividing the 'pie
into more pieces. They also may bring new technology or greater resources not
available to present competitors and achieve a high market share position quickly
to the determent oI al existing participants.

Corporate parent Iirms that diversiIy into an industry by acquisition are especially
dangerous to existing competitors both because oI their 'deep pockets and
potential management expertise. A restaurant in the tourism-driven town oI
Newport, Rhode Island, rapidly gained market share Irom other restaurants in
town when it was acquired by a large international corporation. The parent made
capital available to the restaurant and aIter a major Iacilities overhaul, hiring oI
proIessional management, and implementation oI other proIit oriented moves, the
restaurant quickly became oI 'industry leader in Newport. Although corporate
ownership does not guarantee success oI a restaurant this example points out the
threat to current participants presented by corporate diversiIication into their
industry.

The threat oI new entrants to an industry is high when barriers to entry are low.
Low entry barriers would apply in the Iollowing situations:

1 Low economies oI scale. That small independent pizza parlors exists side
by-side with the units oI national chains oI pizza stores indicates the there
are Iew economies oI scale in his industry. Thus, one Iinds and would
expect Irequent appearance oI new pizza places in just about every town
and neighborhood.
2 UndiIIerentiated products in an industry leads` to new entrants. Most
Americans can`t tell a good shrimp Irom a bad one. As a result, Ecuador`s
dominant market position in the lucrative U.S. shrimp market is under
attack by shrimp growers Irom al over the world.
3 Low capital requirements Ior start-up in an industry leads to new entrants.
An extreme example is the house painting business where capital coasts
are minimal. Every community sees the appearance oI a large number oI
new house painters every year.
4 Low switching costs leads to new entrants because customers sense little
incentive to stay with current suppliers. Homeowners Irequently change
rubbish pickup companies because there is little incentive to stay with
current provider. Compare this situation with the costs oI changing Irom
an oil heating system to gas, or visa versa.
5 Easy access to distribution channels
6 Low Iamiliarization costs-where 'learning the ropes in the industry easy
or inexpensive Ior new entrants.

Conducting an industry analysis Iollowing Porter`s model involve collecting data
and developing explanations Ior the ways in which industries competition is
aIIected by the Iive Iorces.


154 inancial analysis

Financial statements can reveal much about a Iirm`s operating strength and
weaknesses. They also serve as a basis Ior predicting Iuture Iinancial
developments. To the extent that the perIormance oI all parts oI an organization is
ultimately reIlected in the magnitude oI entries in a Iirm`s Iinancial statement
Iinancial analysis can structure or bound the question oI how well a strategy
working.

Comprehensive Iinancial analysis consists oI Iour elements: ratio analysis oI the
Iirm`s historical Iinancial perIormance, interpretation oI cash Ilow position,
analysis oI retained earnings position, and predictions oI Iuture Iinancial
statements.

All Iindings oI the Iinancial analysis should be reduced to strengths and
weaknesses oI the Iirm and located accordingly in the data set Ior the present time
Irame. Then expected changes in each item can be Iorecast.

inancial Rati4 Analysis

Financial ratio analysis (FRA) is a process whereby the analyst or manager
determines the degree oI Iinancial health represented by the Iirm`s Iinancial
statements. Toward that goal there are a number oI ways in which FRA can be
useIul.

First, it can aid in interpreting and evaluating income statements and balance
sheets by reducing the amount oI data contained in them to a workable amount.
AIter computing several key ratios whose numerators and denominators are made
up oI selected items Irom the statements, a comprehensive analysis oI the Iirm`s
Iinancial position can be conducted by evaluation the resulting ratio.

Second, FRA can make Iinancial data more meaningIul. Any ratio strikes a
relationship between the numbers in its numerator and denominator. By selecting
sets oI numbers that are logically related, only a Iew ratios may be necessary to
comprehensively analyze a set oI Iinancial statements.

Third, ratios help to determine relative meningitides to Iinancial quantities. For
example, the magnitude oI a Iirm`s debt has little meaning unless it, is compared
with the owner`s investment in the business. Thus the debt/equity ratio strikes a
relationship between these quantities such that their relative magnitudes can be
established.

Because oI these advantages, FRA can help managers or external analysis make
eIIective decisions about the Iirm`s credit worthiness, potential earnings, and
Iinancial strengths and weaknesses. It involves simply selecting the Iinancial
entities to be compared Irom either the income statement or the balance sheet,
dividing one by the other, and comparing the product with a base. This
comparative base could be a history oI ratios Ior the Iirm (trend analysis), average
ratio values Irom past periods computed Irom Iinancial statements oI other Iirms
in the same industry (industry average comparison), or a combination oI the two.

To use the Iirst oI these approaches, a ratio`s historical values are computed to
determine whether its trend is increasing, decreasing, or constant. The second
approach requires availability oI industry average Iinancial ratios that were
computed in the same way as those oI the Iirm under analysis. There are several
published sources oI data Ior such comparisons.

inancial Dimensi4ns

The Iinancial structure oI a business has several dimensions. Each Iinancial
dimension may be measure by several ratios, but the Iinancial dimensions
themselves normally are not directly measurable. To analyze a Iirm`s Iinancial
structure comprehensively, then, one must select a set oI ratios made up oI
subsets, each oI which represents a dimension. In this section Iinancial
dimensions are explained Iirst. Then the ratios that collectively measure each
dimension are discussed. The method oI computation Ior each one is presented,
Iollowed by its interpretation.

Liq:idity: The liquidity oI a Iirm is its ability to pay current liabilities as they
come due (current liabilities are debts due within one year). The only Iunds
available Ior payments oI short-term debt are either cash or other current assets
readily convertible to cash. Consequently liquidity is measured by ratios that
strike a relationship between current liabilities and selected current assets.

Current assets are those normally expected to into cash in the coure oI a
merchandising cycle. Ordinarily they include short-term notes and accounts
receivable (due within the next twelve month ), inventory, and marketable
securities (at current realizable values).

Current liabilities are short-term obligation Ior the payment oI cash due on
demand or within a year. Ordinarily they include short-term notes and account
payable Ior merchandise, current portion oI long-term debt, taxes due, and other
accruals.

Interpretation: This ratio is a rough indention oI a Iirm`s ability to service its
current obligations. Generally the higher the current ratio, the greater is the
'cushion between current obligations and a Iirm`s ability to pay them. The
stronger ratio reIlects a numerical superiority oI current assets over current
liabilities. However, the composition and quality oI current assets are a critical
Iactor in the analysis oI an individual Iirm`s liquidity.

Interpretation: Also known as the 'acid test ratio, that is a reIinement oI the
current ratio and is s more conservative measure oI liquidity. The ratio expresses
the degree to which a company`s current liabilities are covered by the most liquid
current assets. Generally any value oI less than one to open implies a reciprocal
'dependency on inventory to liquidate short-term debt.

4verage: Coverage reIers to a Iirm`s ability to service debt that involves interest
or premium payments. Ratios that measure coverage consist oI one component to
estimate Ilow oI Iunds into the Iirm and another Ior periodic payments on debt.

Interpretation: This ratio is a measure oI a Iirm`s ability to meet interest
payments. A high ratio may indicate that a borrower would have little diIIiculty in
meeting the interest obligations oI a loan. This ratio also serves as an indicator oI
a Iirm`s capacity to take on additional debt.

Pr4fitability: This Iamiliar dimension oI a company`s Iinancial structure
concerns managements ability to control expenses and to earn a return on
committed Iunds. Ratios that measure proIitability usually consist oI a proIit
element and one that represents the amount oI Iunds invested in whatever aspect
oI the Iirm is oI interest to the analyst.

Net proIit can be calculated either beIore or aIter taxes. Robert Morris Associates
and the Iollowing explanation use net proIit beIore taxes. The analyst should
ensure that the ratio elements used to compute the proIitability ratios (and other as
well) are the same as those used to compute the industry average against which
the ratio`s value will be compared. Also note that the Iollowing two ratios are
converted to and reported as percentages.

Interpretation: This ratio expresses the rate oI return on tangible capital employed
(called net worth or capital or owners` equity less intangibles). While it can serve
as an indicator oI management perIormance, the analyst is cautioned to use it in
conjunction with other ratios. A high return, normally associated with eIIective
management, could indicate and undercapitalized Iirm. A low return usually an
indicator oI ineIIicient management perIormance could reIlect a highly
capitalized, conservatively operated business.

Interpretation: This ratio expresses the return on total assets and measures the
eIIectiveness oI management in employing the resources available to it. II a
speciIic ratio varies considerably Irom the ranges Iound in published sources, the
analyst will need to examine the makeup oI the assets and take a closer look at the
earnings Iigure. A heavily depreciated plant and a large amount oI intangible
assets or unusual income or express items will cause distortions oI this ratio.

Leverage: The extent to which the Iirm relies on debt as opposed to owner`s
capital (net worth) is its leverage position. A highly leveraged Iirm is one with a
high proportion oI debt relative to owner`s investment.

Interpretation: This ratio expresses the relationship between capital contributed
creditors and that contributed by owners. It expresses the degree oI protection
provided by the owners Ior the creditors. A lower ratio generally indicates greater
long-term Iinancial saIety. A Iirm with a low debt/worth ratio usually has greater
Ilexibility to borrow inb the Iuture. A more highly leveraged company has more
limited debt capacity. Generally the order or preIerence given to this ratio is
arranged on a continuum such that a low negative ratio is characterized as a weak
debt/worth position and a high positive ratio value is perceived as a strong
debt/worth position.

Interpretation: This ratio measures the extent to which owner`s which owner`s
(net worth) has been invested in plant and equipment (Iixed assets). A lower
ration indicates a proportionately smaller investment in Iixed assets in relation to
net worth, and a better 'cushion Ior creditors in case oI liquidation. Similarly, a
higher ratio would indicate the opposite situation. The presence oI substantial
leased Iixed assets (not shown on the balance sheet) may lower this ration
deceptively. The order oI preIerence normally given this ratio is the same as
debt/worth.

Activity: Activity ratios, also called 'eIIiciency or 'turnover ratios, measure
how eIIectively a Iirm`s assets are managed. Examining the relationship between
a measure oI sales and an asset account is their purpose.

Interpretation: This ratio measures the number oI times inventory is turned over
during the year. High inventory turnover can indicate better liquidity or superior
marketing. Conversely it can indicate a shortage oI needed inventory Ior sales.
Low inventory turnover can indicate poor liquidity, possible overstocking,
obsolescence, or, in contrast to these negative interpretations, a planned inventory
buildup in reparation Ior Iuture material shortages. A problem with this ratio is
that it compares one day`s inventory (at the end oI the accounting period) with
cost oI goods sold and does not take seasonal Iluctuations into account. One way
to resolve this problem when suIIicient data are available is to calculate cost oI
sales and average inventory by month to develop turnover ratios Ior each month.
Further, it may prove extremely useIul to break up cost oI sales and inventory by
diIIerent classes oI products.

Predicting inancial Perf4rmance

The Iinancial impact on the Iirm oI a strategic change is presented in pro Iorma
(predicted) Iinancial statements. These statements include a cash budget, an
income statement, and a balance sheet prepared over the appropriate planning
periods. Typically the income statement and balance sheet are projected Iurs tot
show expected sales and expenses (income statement), the level oI assets
necessary to generate those sales (leIt side oI the projected balance sheet), and the
way in which assets will be Iinanced (the right side oI the projected balance
sheet). Then a Iunds Ilow statement is prepared to give more detail on cash or
working capital transactions expected to be necessary Ior operations to proceed as
planned (although one approach calls Ior constructing the cash budget Iirst).

There are Iour approached to projecting Iinancial statements: The present-oI-sales
method, the statistical-relationship method, the budgets-and-ratios method, and
the breakeven sales method. All require a sales Iorecast as a Ioundation Ior
predicting other components.

Q:esti4ns:
1. What is the need Ior environmental scanning?
2. Under what circumstances the companies have to go by their corporate
capabilities?
3. What is core competence? Give examples.
4. Explain Micheal Porter`s generic model.

LESSN 1 SWT

11 Intr4d:cti4n:

SWOT analysis is a tool Ior auditing an organization and its environment. It is the
Iirst stage oI planning and helps marketers to Iocus on key issues. Once key issues
have been identiIied, they Ieed into marketing objectives. It can be used in
conjunction with other tools Ior audit and analysis, such as PEST analysis and
Pouter`s Iive-Iorces analysis. It is very popular tool with marketing students
because it is quick and easy to learn. SWOT stands Ior strengths, weaknesses,
opportunities, and threats. Strength and weaknesses are internal Iactors. For
example, a strength could be your specialist marketing expertise. A weakness`
could be the lack oI a new product. Opportunities and threats are external Iactors.
For example, an opportunity could be a developing market such as the internet. A
thereat could be new competitor in your home market. During the SWOT
exercise, list Iactors in the relevant boxes. SWOT analysis can be very subjective.
So not rely on it too much. Two people rarely come-up with the same Iinal
version oI SWOT. TOWS analysis is extremely similar. It simply looks at the
negative Iactors Iirst in order to turn them into positive Iactors. So use it as guide
and not a prescription. In order to succeed, business needs to understand what
their strengths are and where they are vulnerable.

SuccessIul businesses build on their strengths, correct weaknesses and protect
against vulnerabilities and threats. Just as important, they have an eye on their
overall business environment and spot new opportunities Iaster than competitors.
SWOT analysis stands Ior Strengths, Weaknesses, Opportunities and Threats
Analysis. The technique looks at where the company has an advantage compared
to its industry and where it is weak.

12 Effective SWT analysis

To be eIIective SWOT analysis needs a methodical and objective approach. It is
too easy Ior a company to look at itselI and Iail to see any problems, or to see
strengths that are not real. We can help combat this by providing a Iully objective
view which can then be used to support and enhance your business and
marketing planning.

SWOT analysis are undertaken by businesses at the start oI planning to
identiIy organizational strengths, weaknesses, opportunities and threats. They
should not be seen as a process in isolation ant it is important that decisions are
taken based on the Iindings. A SWOT starts with an external analysis oI the
business environment, oIten called a PEST analysis, and then looks at the
organization`s internal strength and weaknesses, relative to internal Iactors such
prior perIormance and also to external Iactors, which may have been highlighted
in the PEST analysis. The Iinal stage is to combine the analyses to look at
opportunities and threats Iacing the organization and to draw up plans to take
advantage oI the opportunities and to counter the threats.

When examining political Iactors, you need to look at any political changes that
could eIIect your business. What laws are being draIted? What global change is
occurring? Legislation on maternity rights, data protection health & saIety,
environmental policy, should be considered, Ior example. As an example, take a
company employing a large number oI women. Changes in maternity rights may
have a major impact on such a business the aware business will keep an eye out
Ior changes in such legislation.

OIten the political Iactors spill over into economic Iactors. For example,
tax is usually decided by politicians, based on a mixture oI political and economic
Iactors. Interest rates, in many countries are decided by a central bank, but
political Iactors may still be important. The Iall oI the Soviet Union caught most
businesses and Western Governments by surprise but not all. Some companies
notably Shell Petroleum had picked up signals that all was not well in Russia.
Many oI these were related to economic problems within the oviet Union. Other
economic Iactors include exchange rates, inIlation levels income growth, debt &
saving levels (which impact available money) and consumer & business
conIidence. The current state oI world stock markets is a typical example oI the
volatility oI economic Iactors.

These areas are global, but it is also important to look at Iactors aIIecting
individual industries. Are paper costs rising? For a book, magazine or newspaper
publisher, the price oI paper is a crucial economic measure. The UK soItware
industry is currently complaining oI a shortage oI computer programmers which
is driving up wage costs. Again the global picture can be important. Some
companies are now using programmers in countries like India Ior soItware
development. This helps them keep costs down and leads to competitive
advantage over companies with higher costs.

Advances in technology can have major impact on business success with
companies that Iail to keep up oIten going out oI business. Technological change
impacts social-cultural attitudes. For example the way people spend their leisure
has changed dramatically over the last 30 or so years. As well as advances in your
own industry, think about the likely impact oI new technologies the Internet,
EDI, mobile phones, and the increasing advances in computing and computers.
Look out Ior any technology that could make producing your product easier. And
watch out Ior the technology that could make your product obsolete.

Finally, all this inIluences and is inIluenced by social Iactors the
elements ath build society. Social Iactors inIluence people`s choices and include
the belieIs, values and attitudes oI society. So understanding changes in this area
can be crucial. Such changes can impact purchasing behavior. Typical things to
look at Ior each oI these Iollow : consumer attitudes to your product & industry
environmental issues (especially iI your involves hazardous or potentially
damaging production processes) the role oI women in Society attitudes to
health attitudes to wealth attitudes to age (children, the elderly, etc.)

Added complication when looking at social and cultural Iactors are
diIIerences in ethnic and social groups. Not all groups have the same attitudes
and this impacts how they view products and services. Demographic changes can
also play a major part.


13 4mpiling a PEST analysis:

On way oI compiling a PEST analysis Ior your business is to take a
LARGE sheet oI paper. In the top leIt corner, put the heading Political; in the top
right corner, Economic; bottom leIt Socio cultural; bottom right
technological.

For each heading, think oI every Iactor that possibly have an impact on
your business. Think laterally just because something seem unlikely does not
mean that it will not have and inIluence in the Iuture. Having compiled a list oI
key Iactors, think oI inter-relationships between Iactors. For example, the rise oI
the Internet (technological Iactors) is likely to inIluence consumer purchasing
(social Iactors) while an awareness oI prices in other markets through electronic
commerce may lead to a narrowing oI cross-border price diIIerence (economic).
Connect up al inter-related Iactors. You will Iind that some areas have more
connections than others. These are oIten the areas that some areas have more
connections than others. These are oIten the areas that will have the greatest
potential impact on your company. These are the aspects that you most need to be
aware oI, in your marketing planning and represent Iuture opportunities and
threats.

The Iinal stage in a PEST, analysis is to use the results, - Prepare
contingency plans to prepare Ior nay threats identiIied. It there are Iactors that
lead to businedd opportunities, then include these in your planning. For example,
your target customer group may be growing Iaster than other sectors. This is an
opportunity to increase production to take advantage oI more potential customers.
However beIore the results are used eIIectively, you should also develop an
understanding oI your own companies capabilities. This comes Irom a SWOT
analysis.

14 Devel4ping SWT analysis:

A SWOT analysis builds on the results oI the PEST analysis, which looks
at the company`s external environment. Its purpose is to identiIy company
strengths and weaknesses so that strengths can be maintained or increased and
weaknesses corrected. A Iurther purpose is to identiIy opportunities and threats
resulting Irom external Iactors especially those that have an impact on the
company`s strengths and weaknesses. Company strengths and weaknesses need to
be identiIied in all aspects oI the business.


- relative to the rest oI the market (i.e. compared to competitors)
- relative to previous perIormance or expected perIormance
- relative to customer demand (Ior example all companies in an industry
may Iail to satisIy a particular customer need. This is a weakness and the
Iirst company to match this customer need will have a strength relative to
the other companies in the industry.

It is also important to realize that opportunities arise out oI weaknesses.
Correcting a weakness presents a marketing opportunity. Similarly, Iailing to
maintain a strength is a threat to he company. A preliminary approach Ior carrying
out a SWOT analysis is to list perceived company strengths, weaknesses,
opportunities and threats under each oI these headings. Ensure that no weaknesses
cancel out company strengths and potential threats to the company strength or
opportunities that could arise out oI correcting weaknesses.

On the above list, highlight key areas oI concern or areas that require
action. These become the Iocus Ior Iuture planning. This approach is preliminary
as it does not evaluate the relative importance oI each issue. A Iurther approach
is to list key aspects in a table and score them out oI 5, where 5 is a major
strength and 1 a major weakness. Scoring can be based on the Iollowing Iactors
relative to the overall industry relative to major competitors or the next largest
competitor relative to expected perIormance relative to previous perIormance.

An item that won on all 4 categories would be a major strength and vice
versa Ior weaknesses. Areas where the company has better perIormance than
competitors, but where perIormance is below expectations would receive a higher
score than where perIormance has improved but still is weaker than competitors.

The Iollowing is list oI some oI the things that should be considered:

Marketing Aspects

Market share and market segments addressed Competitive Structure
Customer base (quality size, loyalty, etc). Demand Iorecasts Product range
and quality. Services provided Distribution capabilities and costs Sales
eIIectiveness Promotional eIIectiveness. Image and reputation Pricing options
Speed to market Customer service R&D and Innovation / New products.
Marketing skills and experience International / export market capabilities.

Operational / Manufacturing Aspects

Production / ManuIacturing Iacilities (age, quality, speed.) Economies oI scale
Skills (Employee, technical, etc.) Product Iailure rate Flexibility Costs
Supply / raw material availability.

Human Resource Aspects

- Employees skills, motivation, dedication and experience Employee
satisIaction Employee costs Work environment StaII turnover rate
Management and Organisational Aspects Management skills and experience
Leadership and team skills Ability to respond to market change Flexibility and
adaptability

Financial Aspects

Cost oI capital ProIitability / Return on investment Financial Stability Sales
/ Employee Cash availability

This scheme allows the company to identiIy where it is strongest against
competitors the company`s competitive advantage and against previous and
expected perIormance.

Finally aIter compiling the list, management should start to consider whether
action is needed regarding each identiIied item. A way Iorward here is to rank
each item on importance to the company.

Low perIormance (i.e. a score oI 1 or 2) and high importance should be the major
priority. Similarly, high perIormance (4 or 5 score) and high importance indicates
areas where perIormance needs to be maintained.

Conversely, low importance and low perIormance can be given a lower priority,
while low importance items that are viewed as strengths can be ignored. It is
better to spend time and money improving or maintaining areas that matter to the
company than worrying about perceived strengths that do not add anything
worthwhile to the company. This can be summarized as:

1. Low priority monitor Ior changes. Focus on only iI Iinances and time
allow.
2. Medium priority Iocus on aIter the high priority items have been looked
at, or iI Iinances allow.
3. High priority main Iocus. Ensure adequate Iinance to address issues. The
results oI this analysis then Ieed into a marketing or organization strategic
plan.

A SWOT Analysis is an eIIective way oI analyzing your company`s potential by
identiIying your Strengths and Weaknesses, and to examine the Opportunities and
Threats which may aIIect you.

Carrying out an analysis using the SWOT tool will be enough to reveal changes
which can be implemented easily and gain results.

To carry out a SWOT Analysis eIIectively, get a team together Irom the various
departments oI your company Ior a -rain storming session. II possible use a
whiteboard and write down all ideas and comments that might be raised. Later
you can edit each one and delete anything not relevant.

The best method is to split the whiteboard into a 4 sections as Iollows:


Strengths


Weaknesses

Opportunities


Threats

List down answers to the Iollowing questions:

Strengths:

What are your advantages?
What do you do well?
What makes you diIIerent Irom your competition?

Consider this Irom your own point oI view and Irom the point oI view oI the
people you deal with. It`s important to be honest and realistic. Ensure your team
Ieels comIortable and understands the purpose.

Weakness:

What could be done better?
What is done badly?
What should be avoided?
What causes problems or complaints?

It is important to be realistic not and Iace any unpleasant truths as soon as
possible.

Opportunities

Where are the good chances Iacing you?
What are the interesting trends?

Examples oI opportunities can be:

Changes in technology and markets
Changes in government policy or regulations
Changes in social patterns, population, liIestyle changes, economical
Local and global events

Treats

What obstacles do you Iace?
What is your competition doing?
Are the speciIications Ior your products or services changing?
Is changing technology threatening your business?
Do you have bad debt or cash-Ilow problems?

Once the SWOT analysis has been completed, mark each point with the
Iollowings:

Things that MUST be addressed immediately
Things that can be handled now
Things that should be researched Iurther
Things that should be planned Ior the Iuture.

Now that each point has been prioritized, set an action point Ior each and assign it
to a person, add a deadline.

Although the SWOT analysis will assist in identiIying issues, the action plan will
ensure that something is done about each one. With complicated issues a Iurther
brainstorming session might be done to analyze it Iurther and decide what action
to take.

15 SWT Analysis 4f Indian Parmace:tical Sect4r:

Strengts

Cost Competitiveness
Well Developed Industry with Strong ManuIacturing Base
Well Established Network oI Laboratories and R&D inIrastructure
Access to pool oI highly trained scientists, both in India and abroad
Strong marketing and distribution network
Rich Biodiversity
Competencies in Chemistry and process development

Weakness

Low investments in innovative R & D
Lack oI resources to compete with MNCs Ior New Drug Discovery
Research and to commercialize molecules on a worldwide basis.
Lack oI strong linkages between industry and academia.
Lack oI culture oI innovation in the industry
Low medical expenditure and healthcare spend in the country
Inadequate regulatory standards
Production oI spurious and low quality drugs tarnishes the image oI
industry at home and abroad

pp4rt:nities
SigniIicant export potential
Licensing deals with MNCs Ior NCEs and NDDS.
Marketing alliances to sell MNC products in domestic market
Contract manuIacturing arrangements with MNCs
Potential Ior developing India as a centre Ior international clinical trials
Niche player in global pharmaceutical R&D

Treats

Product patent regime poses serious challenge to domestic industry unless
it invests in research and development.
R&D eIIorts oI Indian pharmaceutical companies hampered by lack oI
enabling regulatory requirement. For instance, restrictions on animal
testing outdated patent oIIice.
Drug Price Control Order puts unrealistic ceilings on product prices and
proIitability and prevents pharmaceutical companies Irom generating
investible surplus.
Export eIIort hampered by procedural hurdles in India as well as non-traiII
barriers imposed abroad.
Lowering oI tariII protection

Q:esti4ns:

1. What is PEST analysis?
2. Write a note on TOWS Matrix?
3. Explain the need to undertake SWOT analysis in the Indian context.
Less4n 21 4 Strategy

211 Ev4l:ti4n 4f Strategic





It has increased both in its level oI detail and in its importance as the complexity
oI the environment has increased. Between World War II and the early 1960s,
-usiness policy, Iollowing the so-called prostrate paradigm, addressed the
problem oI coordinating he operations oI the various Iunctional departments oI
the Iirm. Policies were established by top management to integrate activities that
each department was to carry out. Thus policy served to standardize and speciIy
behavior within Iunctional departments. Strategy was usually viewed as an
implicit concept reserved Ior the topmost managers. In the top manager`s mind,
this concept, reserved Ior the top, most managers. In the top manager`s mind, this
concept, environmental characteristics, certain organizational goals, and political
circumstances, along with years oI management experience, all came together ot
reduce what was hoped would be the right collection oI policies. Strategy was
seldom analyzed once it was decided on by top management, and rarely changed.
When operations did not meet expectations, it was policy that typically was
analyzed and modiIied. Most Iirms were single-line businesses; business policy
making was conducted in large part at what is known today as the business level.

The rapid rise during the 1950s and early 1960s in the number oI interest groups
making demands on organizations oI all kinds, along with the proliIeration oI
mergers and acquisitions, began to strain the applicability oI the relatively simple
business-policy approach to management. Divisional zed Iirms no longer had a
single line oI business. Thus a diIIerent set oI policies was needed Ior each
subsidiary and managers sought a common thread that might bind them together.
The internal complexity oI Iirms had increased in an attempt to deal with the
complexity oI a pluralistic society. Davis and Bloodstream describe social
pluralism as a society 'in which diverse groups maintain autonomous
participation and inIluences in the social system. Business is merely one such
inIluence (interest group) and competes with many other groups Ior time, money,
Xer4x n4t clear 4f LS 2 Paragraps
Please refer te b44k
interest, allegiance, or attention. Increasingly organization that were operated
without an understanding oI, or respect Ior, the various interest-group inIluence
have been subjected to successIul attacks by these groups. Electric utilities were
Iorced by many interest groups to cease or radically change the nature oI nuclear
power plant construction projects. Through the pressure oI consumer groups,
automobile manuIactures have been made to correct deIiciencies in their products.
Industrial polluters were required by environmental groups to clean up or stop
harmIul discharges. Product labeling requirements were tightened, Equal
Employment Opportunity assurances became stricter and product saIety standards
were improved. These changes, and hundreds oI others, were bought about largely
by the political actions oI interest groups. Their activities oIten resulted in
enactment oI legislation that today regulates the conduct oI business.

In response to this growth in the dimensions oI Iirms` environments, and also to
the growth in the number oI Divisional zed Iirms, strategy increasingly became
interpreted as the link between an organization and its environment. All oI the
'policy problems remained, but they were compounded by a baIIling set oI
external claims, and also by the needs imposed by multiple product lines and
business-level activities.

Because oI its inability to deal with these Iactors, the business-policy model
underwent several evolutionary changes and emerged as what was later called
strategic planning. Dubbed the initial strategy paradigm, this view oI corporate
management Iocused heavily on the process oI strategy Iormulation with
emphasis on environmental pressures, yet it had Iour major shortcomings. First it
did not clearly diIIerentiate between corporate-level strategy (question related to
the collection oI business activities a divisional zed company owned) and
business level strategy (how to compete within a particular business activity).

Second, the initial strategy paradigm was unclear about the nature oI relationships
between strategy and the operation oI the various Iunctional areas oI business.
How does the task oI marketing management, Ior example, change with diIIerent
strategic Iocuses and how can the Iunctional areas be integrated into an eIIective
whole? Such questions largely went unanswered.

Third, this paradigm was incomplete in its discussion oI the role oI general
management. Some authors contended that strategic planning was the province oI
only top managers, whereas others claimed that all mangers should be involved in
strategic planning.

Finally, there was disagreement about whether strategy included both goals and
action plans, or just action plans.

The strategic management paradigm, although still in its inIancy, is the third step
in the evolution oI thought about strategy, and it addresses the shortcomings oI
strategic planning. As initially codiIied by Schedule and HoIer, strategic
management is Iar Irom representing a consensus. Yet there is perceptible
movement toward consolidation around many oI its principles. In particular, there
is now a widely accepted distinction between corporate-level business-level, and
Iunctional-level strategy. A Iourth strategy level, enterprise strategy, has been
proposed by An oII, but the concept has not endured (enterprise strategy was
deIined as describing the interaction oI a Iirm with its environmentit is now Ielt
by many that this interaction is best incorporated in each oI the other strategy
levels and not reserved only Ior a separate category oI strategy.) In some ways
related to AnsoII`s concept oI enterprise strategy, a more global strategic
orientation is described by Magazines and Reich; they call it international
strategy. Here too, during the early 1990s the idea oI isolating global issues and
direction in a separate strategy level has given way to the practice oI
incorporating international competitive matters into all levels oI strategic decision
making.

The strategic management paradigm not only distinguishes among diIIerent levels
oI strategy but is suIIiciently adaptable to accommodate the need Ior this
expanded scope oI strategic thinking.

Next, strategic management address the issue oI Iunctional integration by
identiIying various Iunctional strategies. At the same time, responsibility Ior
strategic thinking is viewed within this paradigm as the responsibility oI
manager`s not just top-level executives. Although there is much work to be done
in learning how best to integrate Iunctional strategy with other strategy levels, the
strategic management paradigm lays the groundwork Ior the conduct oI such
research.

Finally, by separating the steps oI goal Iormulation and strategy (action plan)
Iormulation, this paradigm is more objective, more teachable, and less mysterious
than earlier interpretations. It may help to continue the increase in popularity oI
strategy-Iocused management and thus expand the competitiveness oI U.S.
business in the international marketplace.

212 Researcing Strategic anagement`s Effectiveness:

The weight oI numbers tends to Iavor the studies that have supported the positive
eIIects oI strategic management. Only a Iew have not supported it. In 1957 the
StanIord Research Institute analyzed some 400 Iirms and concluded that those
that plan outperIorm those that do not in terms oI sales and proIit growth. One oI
the most convincing studies was undertaken by Thune and House in 1970. They
identiIied two groups, Iormal planners and inIormal planners, among eighteen
matched pairs oI companies in six industries. The two groups were then compared
by sales, return on stockholders` equity and total capital, earnings per share and
stock prices. One result that is important Ior our purposes is that the Iormal
planners were signiIicantly better perIormers on the three proIit-related ratios that
were the inIormal planners. Another test oI the Iormal planners compared their
perIormance beIore planning with their perIormance aIter planning was begun.
AIter-planning perIormance was superior to preplanning perIormance. Also in
1970, East lack and McDonald showed correlation between planning and
perIormance.

In a replication oI the Thune and House study by Harold in 1972, the previous
Iindings were upheldIormal planners continued to outperIorms inIormal
planners. Another oIten-cited study, by Rue and Fulmer in 1972, also lends
support to the planning-perIormance relationship, at least Ior producers oI durable
goods. However, Ior businesses in service and nondurable product industries,
planners were not signiIicantly better perIormers than no planners.

In 1974 Wood and LaIarge Iound that banks that planned Iormally perIormed
better than those that did not. More support was oIIered by Karger in learning
how best to integrate Iunctional strategy with other strategy levels; the strategic
management paradigm lays the groundwork Ior the conduct oI such research.

Finally, by separating the steps oI goal Iormulation and strategy (action plan)
Iormulation, this paradigm is more objective, more teachable, and less mysterious
than earlier interpretations. It may help to continue the increase in popularity oI
strategy-Iocused management and thus expand the competitiveness oI U.S
business in the international marketplace.

212 Researcing Strategy anagement`s Effectiveness:

The weight oI tends to Iavor the studies the have supported the positive eIIect oI
strategic management. Only a Iew have not supported it. In 1957 the StanIord
Research Institute analyzed some 400 Iirm and concluded that those that plan
outperIorm those that do not in term oI sales and proIit growth. One oI the most
convincing studies was undertaking by Thune and house in 1970. They identiIied
to groups, Iormal planners and inIormal planners, among eighteen matched pairs
oI accompanies in six industries. The two groups were then compared by sales,
return on stock prices. One result that is important Ior our purposes is that the
Iormal planners were signiIicantly better perIormers on the three proIit- related
ratio that were the inIormal planners. Another test oI the Iormal planners
compared their perIormance beIore planning with their perIormance aIter
planning was begun. AIter-planning perIormance was superior to preplanning
perIormance. Also in 1970, East lack and Mc Donald showed correlation between
planning and perIormance.

In a replication oI the Thune and House study by Harold in 1972, the pervious
Iinding were upheld-Iormal planners continued to outperIorm inIormal planners.
Another oIten-cited study, by rue and Fulmer in 1972, also lends support to the
planning-perIormance relationship, at least Ior producers oI durable goods.
However, Ior business in service and nondurable product industries, planners
were not signiIicantly better perIormance then no planners.

In 1947 wood and LaIarge Iound that banks that planned Iormally perIormed
better then those that did not. More support was oIIered by karger and Alkalis in
1975, when they showed the same result Ior the machinery, chemicals, drugs, and
electronics industries. However, drug and electronic Iirms in their sample did not
show as strong a relationship between planning and perIormance as did the other
two types.

Later studies in this area have tended not to support the Iindings oI the earlier
work. In research conducted by kallman and Shapiro and kudla, and Plenitudes
and tezel during 1980, no positive relationship was seen between planning and
perIormance. The only study since the mid-1979s we Iound which showed a
positive relationship was one by Burt in Australia in 1979. He showed that the
higher the quality oI the planning program, the better was perIormance.

213 Te rise and fall 4f c4rp4rate strategy:

EARLY 1960S: Harvard proIessors ken Andrews and C. Roland Christensen
articulate the concept oI strategy as a tool to link together the Iunctions oI a
business and assess a company`s strength and weaknesses against competitors.

EARLY 1960S: General Electric emerges as the pioneer in strategic planning,
crating a large, centralized staII oI planners to ponder the Iuture. Consultant Mc
Kinsey & Co. helps GE view its products in terms oI strategic business units,
identiIy competitors Ior each, and evaluate its position against them.

1963: Under Iounder Bruce D. Henderson, Boston Consulting Group becomes the
Iirst oI many strategic boutiques. BCG pioneers a series oI concepts that tack
Corporate America by storm, including the 'experience curve and the 'growth
and market-share matrix.

1980: Harvard proIessor Michael E. Porter`s book Competitive Strategy provides
a generation oI MBA- trained executives with new models to plot strategy based
on economic theories.

1983: New GE Chairman Jack Welch slashes the corporate planning group and
purges scores oI planners Irom GE`s operating units. Numerous companies Iollow
his lard.

EARLY 1980S:Battered by global competition, turn away Irom strategic planning
and begin to Iocus on operational improvement. Executives embrace the total
Quality movement and the teachings oI guru Edward Deming.

LATE 1980S: Corporate America begins massive downsizing and reengineering
oI operations to increase eIIiciency and productivity. Guru Michael Hammer
leads the reengineering revolution.

NOW: A bevy oI new books are out Irom a new group oI strategy gurus who are
capturing the attention oI corporate executives and redeIining the process oI
strategy creation.

214 4ntrib:ti4n by anagement Gr4:ps:

2141 Gary Hamel:

OI the new generation oI strategy gurus, no one is in greater demand these days
than Gary Hamel. Within that past 18 months, the lanky 41-year-old academic has
delivered nearly 75 speeches and built a consulting company that is generating
revenues oI $20 million year.

Together with University oI Michigan proIessor C.K. Prahalad, Hamel has
redeIined the world oI corporate strategy. For decades, strategists spent much oI
their time Iiguring out how to position products and businesses within an industry.
Instead, Hamel argues strategy should be Wal-Mart Stores Inc. did in retailing or
Charles Schwab did in the brokerage and mutual-Iund businesses.

Hamel urges managers to determine their company`s 'core competencies, or key
corporate skills, and to create 'strategic intent based on these skills and the
development oI others to invent a new Iuture. 'Strategy has to be subversive, 'he
declares. 'II it`s challenging internal company rules or industry rules, it is not
strategy.
Hamel also urges clients to 'democratize the strategy-creating process 'It is
imagination and not resources that is scarce, 'he says. 'So we have to involve
hundreds, iI not thousands, oI new voices in the strategy process iI we want to
increase the odds oI seeing the Iuture.

Hamel changes his own Iuture in 1978 when he quit a job as a hospital
administrator and went to the University oI Michingan Ior a PhD in international
business. At Michigan, be met Prahalad. 'We shared a deep dissatisIaction with
the mechanistic way strategy was carried out, 'Hamel says. The pair wrote a
series oI inIluential essays published in the Harvard Business Review and put
their ideas into a book, competing Ior the Future, in late 1994. It has become
gospel to managers around the world, many oI whom seek advice Irom Hamel`s
Iirm, Strategos Inc. in Menlo Park, CaliI.

2142 Abrian Sly4tsky:

While other strategic-planning gurus start with the capabilities and skills oI a
company, Abrian J. Slywotsky begins with customers. A Iounding partner oI
Boston-based Corporate Decisions Inc., Stywotsky maintains that too much oI
strategy has been based on a mindset that Iailed to understand what customers
want and need.

He urges managers to begin the strategy process by studying where stock market
value is migrating in an industry. ShiIts in value-Ior example, Iront Sears,
Roebuck & Co. to Wal-Mart Stores Inc.-usually reIlect shiIting customer
priorities. By Ialling out oI touch with those needs, one U.S. company aIter
another has lost ground to new, aggressive rivals. Companies such as MicrosoIt
Nucor, and Starbucks have captures growth and stock market value by having
what Slywotsky says are 'superior business designs-conIiguring resources and
going to market based on a keen understanding oI customers` priorities 'Strategy
is about or a diIIerent one? How are any customers and prospects changing? II
any business model was good Ior yesterday`s customers how does it have to
change to keep them?

A Harvard-trained lawyer, Slywotsky returned to the university Ior his MBA in
1978. AIter a three-year stint with consultant Bain & Co., he Iounded corporate
Decisions in 1983. His novel views oI strategy, detailed in his book Value
Migration, have won audiences at such major companies as Sears, Philips
Electronics, and Scarle Pharmaceuticals.

Slywotsky`s corporate Ians Iind much appeal in his notion that strategy has paid
Ior too much attention to simple gains in market share. By instead examining the
business designs that are capturing stock-market value, Slywotsky says, managers
can Iind templates Ior changes within their own organizations.

2143 ames 44re:

James F, Moore, Iounder and chairman oI Cambridge-based GeoPartners
Research Inc., is an unlikely corporate strategist. For one thing, his PhD is in
cognitive paychology. For another, he once taught art and photography in a New
Haven high school-hardly typical training Ior any would-be counselor to
Corporate America.

But with the recent publication oI The Death oI Competitions, the 47-years old
Moore has quickly distinguished himselI as an original thinker and hot New Age
strategist. Moore relives heavily on metaphors Irom biology and ecology to help
managers better understand the dynamics oI competition and create successIul
strategy.

He urges clients at such companies as AT&T, ABB Asea Brown Boveri, Royal
Dutch/Shell Group, and Hewlett-Packard to view themselves as part oI a
'business ecosystem. 'Why? 'The new paradigm requires thinking in terms oI
whole systems, he says. 'Seeing your business as part oI a wider environment.

That demands viewing business opportunities not simply Irom the perspective oI
a solo player but as one player among many, each 'co-evolving. With the others.
That`s sharply diIIerent Irom the convential idea oI competition, in which
companies work only with their own resources and do not extend themselves
using the capabilities oI others.

Among other things, Moore Iavors seeking out partners to create something oI
value, achieve market coverage, and block alternative ecosystems. In later stages
oI the business ecosystem, members must look beyond their community Ior new
ideas and work to prevent partners and customers Irom deIecting. And all the
while, be says, companies must reach out to customers to predict how
marketplace change may occur. 'The major challenge Ior many companies is to
get other to co-evolve with their wision oI the Iuture, 'says Moore, 'In a global
market, you want to make use oI the other playersIor capacity, innovation, and
capital. 'In the corporate Golapagos, It`s co-evolveor die.

215 Ev4l:ti4n 4f market related strategies:

Markets are shiIting, today`s competitor is tomarrow`s collaborator, and products
and services are developed and sold in Internet time. Old generation strategy,
marked by Iixed goals, reliable assumptions, and a 'point A to point B approach
is obsolete. It Iails to accommodate relentless changethe one constant that
aIIects every aspect oI business. Managers spend too much time Iorecasting,
analyzing, and measuring strategies Ior a Iuzzy guess at 'what could be and not
enough time acting on the here and now. Competing on the edge changes all that.
Instead oI locking into a too structured approach to strategy, companies that
compete on the edge create a constant Ilow oI large and small competitive with a
loosely Iormed organization where most planning happens at the enough
Ireedomto adapt, change, and ultimately reinvent the Iirm time and again.
Moves are complicated and unpredictable and they allow the company to
developing strategy today, as is recognizing patterns oI change. A competing-on-
the-edge strategy achieves this by relying on Iive key activities: improvisation,
coadaptation, regeneration, experimentation, and time pacing.





Q:esti4ns:

1. What are the contributions to corporate strategy by Management gurus?
2. What are the important aspects oI corporate strategy?
3. Trace the evolution oI corporate strategy.
LESSN 22 PRESS STRATEGIES PLANNING

221 Intr4d:cti4n

Strategic planning is a management tool, period. As with any management tool, it
is used Ior one purpose only: to help an organization do a better job to Iocus its
energy, to assess and adjust the organization`s direction in response to a changing
environment . In short strategic planning is a disciplined eIIort to product
Iundamental decisions and actions that shape and guide what an organization is,
what is does, and why is does it, with a Iocus on the Iuture.

The process is strategic because it involves preparing the best way to respnd to
the circumstances oI the organization`s environment, whether or not its
circumstances are know in advance; nonproIits oIten must respond to dynamic
and even hostile environments. Being strategic, then means being clear about the
organization`s objectives, being aware oI the organizatio`s resources, and
incorporation both into being consciously responsive to a dynamic environment.
The process is about planning because it involves intentionally setting goals (i.e.,
choosing a desired Iuture) and developing an approach to achieving those goals.
The process is disciplined in that it calls Ior a certain order and pattern to keep in
Iocused and productive. The process raises a sequence oI questions that helps
planners examine experience, test assumptions, gather and incorporate
inIormation about the present, and anticipate the environment in which the
organization will be working in the Iuture.

Finally, the proves is about Iundamental decisions and actions because choices
must be made in order to answer the sequence oI questions mentioned above. The
plan is ultimately no more, and no less, then a set oI decisions about what to do,
why to do it, and how to do it. Because it is impossible to do everything that
needs to be done in this world, strategic planning implies that some organizational
decisions and actions are more important than others and that much oI the
strategy lies in making the tough decisions about what is most important to
achieving organizational success.

222 Val:es Tat S:pp4rt S:ccessf:l Strategic Planning:

S:ccessf:l strategic planning:


Leads to action
Builds a shared vision that is values-based
Is an inclusive, participatory process in which board and staII take on a
shared ownership
Accepts accountability to the community
Is externally Iocused and sensitive to the organization`s environment
Is based on quality data
Requires and openness to questioning the status quo.
Is a key oI eIIective management

223 Difference beteen strategic planning and l4ng range planning

The major diIIerence between strategic planning and long range planning is in
emphasis. Long range planning is generally considered to mean the development
oI a plan oI action to accomplish a goal or set oI goals over a period oI several
years. The major assumption in long range planning as that current knowledge
about Iuture conditions is suIIiciently reliable to unable the development oI these
plans. For example, in the late IiIties and early sixties, the American economy
was relatively stable and thereIore predictable. Long range planning was very
much in Iashion, and it was a useIul exercise. Because the environment is
assumed to be predictable, the emphasis is on the articulation oI internally
Iocused plans to accomplish agreed upon goals.

The major assumption in strategic planning, however, is that an organization must
be responsive to a dynamic, changing environment. Some would argue that this
was always the case. Nonetheless, in the nonproIit sector a wide agreement has
emerged that the environment is indeed changing in dynamic and oIten
unpredictable ways. Thus, the emphasis in strategic planning is on understanding
how the environment is changing and will change, and in developing
organizational decisions which are responsive to these changes.

224 Strategic Planning 4del:

Many books and articles describe how best to do strategic planning, and many to
go much greater lengths than this planning response sheet, but our purpose here is
to present the Iundamental steps that must be taken in the strategic planning
process. Below is a brieI description oI the Iive steps in the process. These steps
are a recommendation, but nto the only recipe Ior creating a strategic plan; other
sources may recommend entirely diIIerent steps or variations oI these steps.
However, the steps outlined below describe the basic work that needs to be done
and the typical products oI the process. ThoughtIul and creative planners will add
spice to the mix or elegance to the presentation in order to develop a strategic plan
that best suits their organization!

Step ne-Getting Ready

To get ready Ior strategic planning, an organization must Iirst assets iI it is ready.
While a number oI issues must be addressed in assessing readiness, the
determination essentially comes down to whether an organizatin`s leaders are
truly committed to the eIIort, and whether they are able to deveote the necessary
attention to the 'big picture. For example, iI a Iunding crisis looms, the Iounder
is about to depart, or the environment is turbulent, then it does not make sense to
take time out Ior strategic planning eIIort at that time.

An organization that determines it is indeed ready to begin strategic planning
must perIorm Iive tasks to pave the way Ior an organized process:

IdentiIy speciIic issues or choices that the planning process should address
ClariIy roles (who does what in the process)
Created a Planning Committee
Develop an organizational proIile
IdentiIy the inIormation that must be collected to help make sound
decisions.

The product developed at the end oI the Step One is a Workplan.

Step T4 - Artic:lati4n issi4n and Visi4n

A mission statement is like an introductory paragraph: it lets the reader know
where the writer is going, and it also shows that the writer knows where he or she
is going. Likewise, a mission statement must communicates the essence oI an
organization to the reader. An organization`s ability to articulate its mission
indicates its Iocus and purposeIulness. A mission statement typically describes an
organization`s in terms oI it:

Purpose why the organization exists, and what it seeks to accomplish
Business the main method or activity through which the organization
this it IulIill this purpose
Values the principles or belieIs that guide an organization`s members as
they purpose the organization purpose.

Whereas the mission statement summarizes the what, how, and why oI an
organization`s work, a vision statement presents an image oI what success will
look like. For example, the mission statement oI the Support Centers oI America
is as Iollows:

%he mission of the Support Centers of America is to increase the effectiveness of
the nonprofit sector -y providing management consulting, training and research.
Our guiding principles are. promote client independence, expand cultural
proficiency, colla-orate with others, ensure our own competence, act as one
organi:ation.

We envision an ever increasing glo-al movement to restore and revitali:e the
quality of life in local communities. %he Support Centers of America will -e
recogni:ed contri-utor and leader in that movement.

With mission and vision statements in hand, an organization has taken an
important step towards creating a shared, coherent idea oI what it is strategically
planning Ior.

At the end oI Step Two, a draIt mission statement and a draIt vision statement is
developed.

Step Tree - Assessing te Sit:ati4n

Once an organization has committed to why it exists and what it does, it must take
a clear-eyed look at its current situation. Remember, that part oI strategic
planning, thinking and management is an awareness oI resources and an eye to the
Iuture environment, so that an organization can successIully respond to changes in
the environment. Situation assessment, thereIore, means obtaining current
inIormation about the organization`s strengths, weaknesses, and perIormance
inIormation that will highlight the critical issues that the organization Iaces and
that its strategic plan must address. These could include a variety oI primary
concerns, such as Iunding issues, new program opportunities, changing
regulations or changing needs in the client population, and so on. The point is to
choose the most important issues to address. The Planning Committee should
agree on no more than Iive to ten critical issues around which to organize the
strategic plan.

The products oI Step Three include: a data base oI quality inIormation that can be
used to make decision; and a list oI critical issues which demand a response Irom
the organization the most important issues the organization needs to deal with.

Step 4:r - Devel4ping Strategies, G4als, and bjectives

Once an organization`s mission has been aIIirmed and its critical issues
identiIied, it is time to Iigure out what to do about then: the broad approaches to
be taken (strategies), and the general and speciIic results to be sought (the goals
and objectives). Strategies, goals and objectives may come Irom individual
inspiration, group discussion, Iormal decision-making techniques, and so on but
the bottom line is that, in the end, the leadership agrees on how to address the
critical issues.

This can take considerable time and Ilexibility: discussions at this stage
Irequently will require additional inIormation or a reevaluation oI conclusions
reached during the situation assessment. It is even possible that new insights will
emerge which change the thrust oI the mission statement. It is important that
planners are not aIraid to go back to an earlier step in the process and take
advantage oI available inIormation to create the best possible plan. The product oI
Step Four is an outline oI the organization`s strategic directions the general
strategies, long-range goals, and speciIic objectives oI its response to critical
issues.

Step ive - 4mpleting te Written Plan

The missions has been articulated, the critical issues identiIied, and the goals and
strategies agreed upon. This step essentially involves putting all that down on
paper. Usually one member oI the Planning Committee, the executive director, or
even a planning consulatant wil draIt a Iinal planning document and submit it Ior
review to all key decision makers (usully the board and senior staII). This is alos
the time to consult with senior staII to determine whether the document can be
translated into operating plans (the subsequent detailed action plans Ior
accomplishing the goals proposed by the strategic plan) and to ensure that the
plan answer any questions about proposed by the directions in suIIicient detail to
sere as a guide. Revisions should not be dragged out Ior months, but action should
be taken to answer any important question that is raised at this step. It would
certainly be a mistake to bury conIlict at this step just to wrap up the process more
quickly, because the conIlict, iI serious, will inevitably undermine the potency oI
the strategic directions chosen by the planning committee.

225 Te acillan atrix f4r 4mpetitive Analysis 4f Pr4grams:

The MacMillan Matrix is an extraordinarily valuable tool that was speciIically
designed to help nonproIits assess their programs in that light. The matrix is based
on the assumption that duplication oI existing comparable services (unnecessary
competition) among nonproIit organization can Iragment the limited resources
available, leaving all providers too weak to increase the quality and cost-
eIIectiveness oI client services. The matrix also assumes that quality and cost-
eIIectiveness oI client services. The matrix also assumes that instead, to be all
things to all people can result in mediocre or low-quality service instead,
nonproIits should Iocus on delivering higher quality service in a tgerIgd Iocused
(and perhaps limited way. The matrix thereIore helps organization think about
some very pragmatic questions:

Are we the best organization to provide this service?
Is competition good Ior out clients
Are we spreading ourselves too thin, without the capacity to sustain
ourselves?
Should we work cooperatively with another organization to provide
services?

Using the MacMillan Matrix is a Iairly straightIorward process oI assessing each
current (or prospective) program according to Iour criteria, described below.

1 it

Fit is the degree to which a program 'belongs or Iits within an organization.
Criteria Ior 'good Iir include:

Congruence with the purpose and mission oI the organization;
Ability to draw on existing skills in the organization; and
Ability to share resources and coordinate activities with programs.

2 Pr4gram attractiveness

Program attractiveness is the degree to which a program is attractive to the
organization Irom an economic perspective, as an investment oI current and Iuture
resources (i.e., whether the program easily attracts resources). Any program that
does not have high congruence with the organization`s purpose should be
classiIied as unattractive. No program should be classiIied as highly attractive
unless it is ranked as attractive on a substantial majority oI the criteria below:

High appeal to groups capable oI providing current and Iuture support
Stable Iunding
Market demand Irom a large client base
Appeal to volunteers
Measurable, reportable program results
Focus on prevention, rather than cure.
Able to discontinue with relative ease, iI necessary (i.e., low exit barriers)
Low client resistance to program services
Intended to promote the selI-suIIiciency or selI-rehabilitation oI client
base.

3 Alternative 4verage
Alternative coverage is the extent to which similar services are provided. II there
are no other large, or very Iew small, comparable programs being provided in the
same regions, the program is classiIied as 'low coverage. Otherwise, the
coverage is 'high.

4 4mpetitive P4siti4n

Competitive position is the degree to which the organization has a stronger
capability and potential to deliver the program than other agencies combination
oI the organization`s eIIectiveness, quality, credibility, and market share oI
dominance. Probably no program can be classiIied as being in a strong
competitive position unless it has some clear basis Ior declaring superiority over
all competitors in that program category. Criteria Ior strong competitive position
include:

Good location and logistical delivery system;
Large reservoir oI client, community, or support group loyalty;
Past success securing Iunding;
Superior track record (or image) oI service delivery;
Large market share oI the target clientele currently served;
Gaining momentum or growing in relation to competitors;
Better quality service and/or service delivery than competitors;
Ability to raise Iunds, particularly Ior this type oI programs;
Superior skill at advocacy;
Superiority oI technical skills needed Ior the program;
Superior organization skills;
Superior local contacts;
Ability to conduct needed research into the program and/or properly
monitor program perIormance;
Superior ability to communicate to stakeholders; and
Most cost eIIective delivery oI service.

AIter each program is assessed in relation to the above Iour criteria, each is placed
in the MacMillan matrix, as Iollows. For example, a program that is a good Iit is
deemed attractive and strong competitively, but Ior which there is a high
alternative coverage would be assigned to Cell No. 1, Aggressive Competition.




















High
Program Attractiveness:
'Easy Program
Low Program
Attractiveness: 'DiIIicult
Program


Alternative
Coverage
High


Alternative
Coverage
Low

Alternative
Coverage
High

Alternative
Coverage
Low

GOOD
FIT
Strong
Competitive
Position
1.
Aggressive
Competition
2.
Aggressive
Growth
5.
Build up the
Best
Competitor

6
'Soul oI the
Agency
Weak
Competitive
Position
3.
Aggressive
Divestment
4.
Build
Strength or
Get out
7.
Orderly
Divestment
8.
'Foreign
Aid or
Joint
Venture


POOR
FIT


9. Aggressive Divestment

10. Orderly Divestment

Once all programs have been placed in the appropriate positions on the matrix, an
organization can review its mix oI programs, sometimes called a 'program
portIolio, and decide iI any adjustments need to be made. Ideally, an
organization would have only two types oI programs. The Iirst would be attractive
programs (perIorms that attract resources easily), in areas that the organization
perIorms well and can compete aggressively Ior a dominant position.

These attractive programs can be used to support the second program type: the
unattractive programs with low coverage. The unattractive program is considered
unattractive by Iounders, with low alternative coverage, but makes a special,
unique contribution and in which the organization is particularly well qualiIied.
These programs typically Iall under Cell No. 6, the should oI the agency. These
programs are known as the 'soul oI the agency because the organization is
committed to delivering the program even at the cost oI subsidizing it Irom other
programs. An organization cannot aIIord to Iund unlimited 'souls, and might
have to Iact some diIIicult decision about how to develop a mix oI programs that
ensure organizational viability as well as high-quality service to clients.

For example, Iive years ago there was little Iunding Ior case managers by AIDS
Services Organizations. Unwilling to let clients Iend Ior themselves in getting the
help they needed, many organizatins devoted staII time to this service. At the time
this was a 'soul oI the agency program. These days, this alternative coverage.
ThereIore, organizations in a strong position to serve the clients well, with
cultural competence and program expertise, should aggressively compete: those in
a weal competitive position should get out oI the business.

22 Standard 4rmat f4r a Strategic Plan:

A strategic plan is a simply a document that summarizes, in about ten pages oI
written text, why an organization exists, what it is trying to accomplist and how it
will go about doing so. Its 'audience is anyone who wants to know the
organization`s most important ideas, issues, and priorities: board member staII,
volunteers, clients, Iunders, peers at other organizations, the press, and the public.
It is a document that should oIIer ediIication and guidance so, the more concise
and ordered the document, the greater the likelihood that it will be useIul, that is
will be used, and that it will be helpIul in guiding the operations oI the
organization. Below is an example oI a common Iormat Ior strategic plans, as
well as brieI descriptions oI each component listed, which might help writers as
they begin trying to organize their thoughts and their material. This is just an
example, however, not the one and only way to go about this task. The point oI
the document is to allow the best possible explanation oI the organization`s plan
Ior the Iuture, and the Iormat should serve the message.

TALE NTENTS:

The Iinal document should include a table oI contents. These are the sections
commonly included in a strategic plan:

I. Introduction by the President oI the Board

A cover letter Irom the president oI the organization`s board oI directors
introduces the plan to readers. The letter gives a 'stamp oI approval to
the plan and demonstrates that the organization has achieved a critical
level oI internal agreement.

II. Executive Summary

In one to two pages, this section should summarize the strategic plan: it
should reIerence the mission and vision; highlight the long-range goals
(what the organization is seeking to accomplish); and perhaps not the
process Ior developing the plan, as well as thank participants involved in
the process. From this summary, readers should understand what is most
important about the organization.

III. Mission and Vision Statements

These statements can stand alone without any introductory text, because
essentially they introduce and deIine themselves.

IV. Organization ProIile and History

In one or two pages, the reader should learn the story oI the organization
(key events, triumphs, and changes over time) so that he or she can
understand its historical context (just as the planning committee needed to
at the beginning oI the planning process)

V. Critical Issues and Strategies

Sometimes organization omits this section, choosing instead to 'cut to the
chase and simply present goals and objectives. However, the advantage
oI including this section is that it makes explicit the strategic thinking
behind the plan. Board and staII leaders may reIer to this document to
check their assumptions, and external readers will better understand
organization`s point oI view. The section may be presented as a brieI
outline oI ideas or as a narrative that covers several pages

VI. Program Goals and Objectives

In many ways the program goals and objectives are the heart oI the
strategic plan. Mission and vision answer the big question about why the
organization exists and how it seeks to beneIit society, but the goals and
objectives are the plan oI actions what the organization intends to 'do
over the next Iew years. As such, this section should serve as a useIul
guide Ior operational planning and a reIerence Ior evaluation. For clarity
oI presentation, it makes sense to group the goals and objectives by
program unit iI the organization has only a Iew programs iI some
programs are organized into larger program groups (e.g., Case
Management Program in the Direct Services Program Group), the goals
and objectives will be delineated at both the group level and the individual
program level.

VII. Management Goals and Objectives

In this section the management Iunctions are separated Iro the program
Iunctions to emphasize the distinction between service goals and
organization development goals. This gives the reader a clearer
understanding both oI the diIIerence and the relationship between the two
sets oI objectives, and enhances the 'guiding Iunction oI the plan.

VIII. Appendices

The reason to include any appendices is to provide needed documentation
Ior interested readers. Perhaps no appendices are truly necessary (many
organizations opt Ior brevity). They should e included only iI they will
truly enhance readers understanding oI the plan, not just burden them with
more data or complication Iactors.


Q:esti4ns:

1. What are the key elements oI strategic planning?
2. What is short term planning?
3. Why long range planning is important Ior organizations?
4. Explain the steps in strategic planning.
Lesson 2.3 Formulation oI Strategy

231 Res4:rce f4r f4rm:lati4n strategy:


1. Companies 'go international Ior many reasons, including reactive ones,
such as international competition, trade barriers, trade barriers, and
customer demands. Proactive reasons include seeking economies oI scale,
new international markets, resources access, cost savings, and local
incentives.
2. International expansion and the resulting realized strategy oI a Iirm is the
result oI intentions Irom both rational planning and responding the
emergent opportunities.
3. The steps in the rational planning process Ior developing an international
corporate strategy comprise deIining the mission and objectives oI the
Iirm, scanning the environment Ior threats and opportunities, assessing the
internal strengths and weaknesses oI the Iirm, considering alternative
international entry strategies, and deciding on strategy. The strategic
management process is compelted by putting into place the operational
plans necessary to implement the strategy, and then setting up control and
evaluation procedures.
4. Competitive analysis is an assessment oI how a Iirm`s strengths and
weaknesses, vis-a-vis those oI its competitors, aIIect the opportunities and
threats in the international environments. Such assessment allows the Iirm
to determine where the company has distinctive competencies that with
give it strategic advantage, or where problem areas exist.
5. Corporate-level strategic approached to international competitiveness
include globalization and regionalization. Many MNCs have developed to
the point oI using an integrative global strategy. Entry and ownership
strategies are exporting, licensing, Iranchising, contract manuIacturing,
turnkey operations, management contracts, joint ventures, and Iully owned
subsidiaries. Critical environment and operational Iactors Ior
implementation must be taken into account.

232 S:ccess 4f Wal-art:

II one looked back at the hurable beginnings oI Wal-Mart stores, the question
would be answered with a resounding S. Wall-mart has grown Irom a small
town store to over 1600 stores and Mega Centers. The company has expanded its
operations unemotionally to Puerto Rico, Mexico, Canada, Brazil, Argentina,
China, and Indonesia. The chain reported net sales Ior the year ended January 31,
1997 as $104.4 billion. Sam`s Clubs reported earnings Ior the same period oI
$19.6 billion.

Sam Walton was Iocused and had a retail strategy that is unmatched by any U.S.
Corporation. Even the computer giant IBM could not reach the $100 billion mark
(and they have had more years experience, and operate in more countries that any
other Iirm in the world. In the retail industry, Wal-Mart surpassed K-Mart, Target,
and Scars stores to take the number one spot. The main strategy in consistently
low prices and high customer service. Wal-Mart is also a good corporate citizen
making sure that they sell environmentally saIe products, contribute to the
community, Iocus on training, control inventory, and locate in areas where they
receive high visibility and Iind the opportunity Ior growth.

A strategy is a comprehensive plan oI action that sets critical direction and guides
the allocation oI resources to achieve long-term organizational objectives. There
are give steps in the Strategic Planning Process, which include.

IdentiIy organizational purpose and objectives. Questions to ask here are
'what business are we in? and 'where do we want ot be in that Iuture.
Access current perIormance vis-a-vis purpose and objectives, making,
'how well are we currently doing?
Create strategic plans to accomplish purpose and objectives. Ask, 'How
can we get where we really want to be?
Implement the strategic plans, asking, 'Has everything that needs to be
done been done?
Evaluate resulting and renew the strategic planning process as necessary.
Questions ask here are, 'are things working out as planned, and what can
be improved?

When planned and implemented properly, strategic management can be used by
organizations to gain a signiIicant competitive advantage. For example: %arget
does not attempt to compete head to head with Wal-Mart. Instead, the company
attempts to gain a competitive advantage serving department store shoppers
through a emphasis on Iashion apparel bargains, while matching other discounters
on prices oI everyday household items. Although largely a top management
responsibility, managers at all levels in the organization must participate in, and
support the process.

Strategic Management is accomplished through a) Strategy Iormulation, and b)
Strategy implementation. In strategy Iormulation current situations are analyzed,
and strategies are selected that best Iit the organization`s needs. AIter strategies
are selected they are put into actions. A good example oI this would be a company
whose top management decides that they want to grow revenue by 20 per year
over the next then years. They will in turn set objectives based on the internal and
external environment. Planning sessions will be assigned what is considered a Iair
share oI the responsibility to achieve the organization`s objectives. AIter deciding
what resources are needed, the strategy is implemented. The plan is managed
through strategic management to ensure that strategies are well implemented and
are suIIicient to meet the organization`s long term organizational success.

BeIore an organization can Iocus on the strategic management oI its objectives,
there must be a mission. An organization`s mission is reIerred to as its reasons Ior
existence, and reIlects the organization`s basic purpose as a supplier oI goods
and/or services. There are oIIicial objectives which state the basic purpose oI the
organization as a supplier oI goods and/or services; and operating objectives
which state speciIied ends toward which organizational resources are actually
allocated, identiIying key results that are pursued in the organizations day to day
activities.

Several common operating objectives Ior managers are: proIitability, market
share, human talent, Iinancial health, cost eIIiciency, product quality, innovation,
and social responsibility. II you look at an annual report oI any organization, you
will see these items reIerenced in almost 100 percent oI them. Organizations want
to product a net proIit; they want to gain and hold the highest possible market
share; recruit the most highly talented workers; they are interested in earning
positive returns, while using resourced in way that lowers operating costs; product
high quality goods and services in order to remain competitive; they must Iind
innovative ways to product new products; and be a good corporate citizen by
making positive contributions to the community.

There are diIIerent levels oI strategies used by organizations. 4rp4rate Strategy
sets overall strategic directions and answers the question, ~Wat b:siness s4:ld
e be in? :siness strategy sets direction Ior a strategic b:siness :nit (SU)
and answers the question ~H4 d4 e c4mpete in tis partic:lar b:siness
area? :ncti4nal strategy guides activities within speciIic Iunctional area and
answers the question, ~H4 can e best apply f:ncti4nal expertise t4 serve te
needs 4f te b:siness :nit 4r 4rganizati4n?

The Iour Grand strategies use by organizations include: 1) Gr4t the pursuit
to increased organizational size through expanded operations. SpeciIic growth
strategies include concentration and diversification 2) Retrencment reduced
organizational size through operations cutbacks. Types oI retrenchment strategies
include %urnaround, Divestiture, and liquidation. 3) Stability Pursuit oI present
course oI actions. Also known as 'low risk.` 4) 4mbinati4n two or more
strategies at the same time. A company can have diIIerent strategies Ior diIIerent
divisions.

aj4r elements oI the strategic management process are, Analysis oI Mission
including the domain in which the organization intends to operate including its
customers, products, locations, and philosophy. Analysis 4f Val:es which
deIines the corporate culture, values, belieIs, and ethical guidelines. Analysis 4f
te rganizati4n - pointing out the organization`s strengths and weaknesses
through SWO1 Analysis, and Distinctive Competencies. Finally an Analysis 4f
Envir4nment - the second part oI the SWOT analysis, showing the opportunities
and threats to the organization. Varying environmental conditions have diIIerent
implications on strategic planning. When operating in a stable environment,
strategies are more stable. When the environment is dynamic, strategic become
more Ilexible; and when the environment is uncertain, organizations use
contingency strategy.

Keys to successIul/eIIective strategy implementation are: Management Systems
and !ractices - having the support oI the entire organization. This requires the
complete anagement pr4cess oI eIIective planning, organizing, leading, and
controlling; and Incrementalism incremental changes as managers learn were
accomplished.

In order to avoid some oI these pitIalls some basic questions should be asked in
an eIIort to double check a strategy.

1. Is the strategy consistent with the organizational mission & purpose?
2. Is the strategy Ieasible, given strengths and weaknesses?
3. Is the strategy responsive to opportunities and threats?
4. Does the strategy oIIer a sustainable competitive advantage?
5. Is the risk in the strategy a 'reasonable risk?
6. Does the strategy have an appropriate time horizon?
7. Is the strategy Ilexible enough?

In studying ntrepreneurship we Iind that it is someone who is willing to take the
risk that results in the creation oI new opportunities Ior individuals and/or
organizations. An entrepreneur is an individual who takes a risk and action to
pursue opportunities and situations that others may Iail to recognize. Most
entrepreneurs have the Iollowing characteristics: Internal Iocus oI control, high
need Ior achievement, tolerance Ior ambiguity, selI-conIidence and are action
oriented. Entrepreneurs play a very important role in the Iormation oI small
business. Small business oIIers two major economic advantages. They create job
opportunities, and are the sources oI many new goods and services. However,
small businesses have a high Iailure rate (50 to 60 pre cent within the Iirst Iive
years). It has been determined that small business without a business plan are the
most likely to Iail. Large organizations also depend on entrepreneurial managers
who are willing to assume risk.

Q:esti4ns:

1. What are the reasons Ior Iormulating strategy?
2. Why there is a need to evaluate the requirement oI strategy Iormulation?
3. What are the reasons Ior the success oI Wal-Mart?
LESSN 24 PRET LIE YLE

241 Intr4d:cti4n:

The uide to the !rofect Management Body of Knowledge (1996) deIines a
project as 'a temporary endeavor undertaken to create a unique product or
service and proceeds into a Iairly detailed explanation oI the terms 'temporary
and 'unique product or service. For details, peruse their we site at www.pmi.org
and Iollow the links Ior PMBOK (Project Management Body oI Knowledge). Our
textbook, Shrub, Bard, & Globerson (1994), p.l., provide a similar deIinition: 'a
project is an organized endeavor aimed at accomplishing speciIic non-routine or
low volume task. They cite, on p. 5, Archibald (1996) who deIined a project as
'the entire process required to product a new products, new plant, new system, or
other speciIied results, and General Electric (1977), 'a narrowly deIined activity
which is planned Ior a Iinite duration with a speciIic goal to be achieved.

Each oI these deIinitions and others than can be identiIied in the literature, have
strong and weak points. A project is deIined and carried out to IulIill the need oI a
user, a client. It implies a goal and actions to be carried out with given
resources. Any complex activity directed toward the productions oI goods or
services which will gather resources, the management oI which is without strong
link with the rest oI the organization.

Project LiIe Cycle (PLC) is the name given to the steady progression oI a project
Irom its beginning to its completion. The word 'cycle suggests a circular
movement, but the progression is sequential. Iteration is a distance series oI
activities designed to Iloat ideas or samples Ior review. It could be modules and
components Ior testing beIore solidiIying then into the Iinal working product. The
essence oI iteration is to repeat the sequence to yield results successively closer to
the required product. Projects can be classiIied on the basis oI risk, business
value, length, complexity and cost.

At its most basic, it is generally accepted that

A typical project liIe span consists oI two broad periods each oI two phases (i.e.
Iour in all)

The Iirst period involves conceptualizing, validating and planning.

The second period involves implementation, i.e. actual construction oI the product
Iollowed by its transIer to the intended customer.

Please phases are known by diIIerent names in diIIerent environment.

2.4.2 Attributes oI the phases oI PLC:

The U.S. Department oI DeIense directive 5000.2 (1993) includes a very speciIic
set oI phases to be used in deIense acquisition projects:

1. concept exploration and deIinition
2. demonstrate and validation
3. engineering and manuIacturing development
4. production and deployment
5. operations and support

Locking at the construction industry, (Morris (1981), identiIied Iour phases:

1. Ieasibility
2. planning and design
3. production
4. turnover and startup

Whitten and Bentely (1998) look at the liIe cycle oI inIormation systems
development and identiIy Iive stages or phases:

1. planning
2. analysis
3. design
4. implementation
5. support

Although not immediately apparent by scanning the bullet-points oI the phases
above, these liIe cycle models maintain some characteristic similarities.

Page n4 115 is cleared Pl type tis page.


Phase 2: Develop the idea into a practical plan (D)

Listening, analysis, alignment, planning, commuitment

Phase 3: Execute the plan (E)

Production work, coordination, cooperation, testing

Phase 4 : Finish the project (F)

TransIer oI product and inIormation, review, closure
Follow the sequence C-D-E-F
In general:
Requiring diIIerent levels oI management attention
And diIIerent skill sets
In addition
The transition between one phase and the next should represent a 'control
gate
That is, you don`t move to the next phase until you are satisIied with the
current one.
Depending on the size, complexity, risk, sensitivity and so on, these
typical phases may be broken down into sub-phases, and a variety oI
diIIerent stages or iterations depending on the project and its type.
These will be speciIic to the project, and
Will depend on the overall strategy Ior accomplishment.

243 Types 4f pr4jects:

Type A: expected to have a very high business value, high complexity
(some tasks require a technical solution not yet known)? High risk (ex:
some (R&D projects), duration several years, large or small group,
signiIicant investment Ior the organization
Type B: shorther in lengths, technologically challenging but no research,
still signiIicant investment Ior the organiaation, good expected business
value.
Type C: use only established technology (5 persons, about 6 months)


Some special Ieatures oI an internationals project

Participants do not have the same cultural background (various
nationalities, cultures, value system, constraints.)
Necessity to have coordinating language (international English in our
case)
Participants are geographically dispersed (distance, time lag.)

Persons involved in Project

Project member (managers engineers)
Future users oI results (client)
Experts
Subcontractors

Technical perIormances

One is looking perIormance oI quality level.
One is looking to IulIill precise speciIications
Desire to achieve a higher level oI perIormance than beIore.

Time constraint (deadline)

Fundamental characteristic oI the project
Any overshooting oI the deadline could be Iatal to the whole project.
Ex: in a soItware company to create a new soItware to run under Windows
In all European companies: to be ready Ior the new Euro currency

Cost objective

Budget must be respected:
4 The contract is Iix cost
4 The objective is to decrease production cost (new unit oI
production Ior microprocessors, electronic market place in a B to
B)

244 Typical Pr4ject anagement Life ycle:

A typical project liIe cycle consists oI the Iollowing steps:
Scope oI the project
State problem
IdentiIy problem
IdentiIy goal
IdentiIy success criteria

Develop plan
IdentiIy activities
Resources requirements
Construct /analyze network

Execute plan
Recruit project team
Establish rules
Execute tasks

Monitor / control

Progress reporting systems
Monitor progress

Close our project
Provide deliverables
Obtain client acceptance

Task oI project control
Motivate participants
Control realization oI tasks (budget, time, quality)
Project scheduling
Estimate consequences oI incidents (rescheduling.)

2.4.5. The Iour C`s project management:

Communicate
Coordinate
Cooperate
Control

Communicate and motivate
To generate a common desire to reach the objective
To transIorm the goal into reality
To provide a reward system coherent with project goals

Need to coordinate (organize)
To avoid the dispersion oI eIIorts (bad use oI resources)
To deIine the task oI each project participant
To have clear responsibility Ior the project and Ior each tasks right Irom
the beginning
To plan the necessary resources in terms oI manpower, competencies
equipment, Iinance.

How to coordinate
Answer the question:
Who does what?
When?
Where?
How?
Remark: to answer the above questions you must know which tasks have
to be carried out. This is a knowledge question not a management
question!

Styles oI Decision Process

Directive: project manager Ior the project and activity manager Ior the
activity makes the decision
Participative: everyone in the team contributes to the decision making
process.
Consultative: the person in authority make the decision, but only aIter
consulting all members oI project team.

2.4.6 Standard Project Problem:

Lack oI a particular competence, needed to achieve the goal, in the team
members
Lack oI an equipment or component
Technical solution not known
Individual tack oI motivation to achieve project goal (the productivity oI a
workgroup seems to depend on how the group members see their own
goals in relation to the goals oI the organization.)
Project member does not communicate his diIIiculties (hopcreep)
A task ever-run the task deadline(work but no progress)
ConIlicts between project members
Team member add Ieatures or Iunctions to the deliverables.

Reasons Ior IT project Iailure (based on 1000 IT managers, Standish Group 1995)

Incomplete requirements
Lack oI user involvement
Lack oI resources
Unrealistic expectations
Lack oI executed support
Changing requirement and speciIications
Lack oI planning
Elimination oI need Ior the project
Lack oI IT management
Technology illiteracy

Q:esti4n:

1. What are the C`s in project management
2. What are the stages in project liIe cycle? Give reasons
3. IdentiIy the reasons Ior the success and Iailure oI projects.
4. Explain the various types oI projects.

LESSN 25 PRTLI ANALYSIS


251 Intr4d:cti4n

PortIolio analysis plays a vital role in the analysis, planning implementation oI
various strategic business units oI the organization as a whole. PortIolio planning
is best advised Ior diversiIied companies than a more product coherent ones.
PortIolio planning hence recognizes that diversiIied companies are a collection oI
businesses, each oI which makes a distinct contribution to the overall corporate
perIormance and which should be managed accordingly. Such companies are
expected to redeIine businesses Ior strategic business units (SBU), which may or
may not diIIer Irom operating units. They then classiIy these SBUs on a portIolio
grid according to the competitive position and attractiveness oI a particular
product market. Based on these, they use that Iramework to assign each a
strategic mission` with respect to its growth and Iinancial objectives and allocate
resources accordingly. Companies can that theoretically assess the strategic
position oI each oI their enterprises and compare these portion using cash Ilow a s
the common variable. The Iour components oI strategy can be seen as inIluences
on the Iirm`s eIIectiveness and eIIiciency. The Iirm`s eIIectiveness is determined
y the combined inIluences oI scope, distinctive competence and competitive
advantages.

252 bjective 4f Res4:rces Devel4pment:

1 Implementing 4rp4rate Level Strategy

Resources development is very helpIul implement corporate level strategy.
Corporate level strategy is to determine what business to go into the relative
allocation oI resource and management oI synergies among them.

2. Direct Interaction with Scope and Resources Deployment

They should three Iore be considered at the corporate level should not be treated
as Iunctional area policy decisions to be decided at lower levels. Business level
strategy Iocuses on how to compete in a particular product market segment or
industry. Competitive advent ages and distinction competencies thus become
dominant strategic concerns at this level. At Iunctional level, the primary Iocus oI
strategy is eIIiciency.

2.5.3 Types oI portIolio planning:

Following are ht possibilities oI various types oI portIolio planning undertaken by
companies.

Table 9.1 Types oI portIolio planning

Types Explanations
Analytic planning PortIolio planning is only in the
stage oI planning tool and
traditional administrative tools are
used
Process planning PortIolio planning as a central part
oI the ongoing management process
and strategic mission is explicit in
activities.

254 enefits 4f p4rtf4li4 planning:

Since the road to portIolio planning is a long one, companies oIten get stack,
trying to implement it and cannot realize the Iull potential oI the approach. In
implementation portIolio planning, companies oIten write in biases the black its
useIulness, including the tendency to Iocus on capital investment rather than
resource allocation In spite oI such limitations, portIolio planning a oIIering the
Iollowing beneIits to companies is implemented properly.

1. It promotes substantial improvement in the quality oI strategies developed
at both the business and the corporate level.
2. It provides a guideline Ior adopting their overall management process to
the needs oI each business.
3. It provides selective resources allocation to the various SBUs.
4. It Iurnishes companies with a greatly improved capacity Ior strategic
cannot when portIolio planning is applied intelligently and with attention
to its limitations and problems.

255 Peter Dr:cker 4n p4rtf4li4 planning:

Peter Drucker suggests a mechanism oI portIolio analysis oI products within the
company. He suggests that all products can be classiIied into Iive groups as
Iollows:

%omorrows -readwinners.

These are either modiIication or improved versions oI what one company has got
as their major products or new products.

%odays -readwinners.

These may exist today but they really are the innovations oI yesterday.

esterdays -readwinners.

These are old hat hut eat up all that they earn.

'!ro-lem children`

DiIIicult to live with perhaps but better parental control should make the
diIIerence between a healthy child and a potential deviant child.

'Also-rains.`

These are otherwise known as 'me-too products in the market whose existence
itselI is a question mark.

25 4st4n 4ns:lting Gr4:p atrix

The business policy portIolio models are most popular useIul to understand the
Iirms strategic concerns and choices. They deIined the Iirm`s scope or domain by
highlight the inter-relatedness oI diverse Iactors such as

1. Market growth
2. Market share
3. Cash and Cash Ilow patterns
4. Capital intensity
5. Product maturity etc.





Table BCG Growth/Share Matrix

Relative market share
Market Growth High Low
High Star Question mark
Low Cash cow Dog

Star

Star are high growth High market share business which may or may not be selI
suIIicient in term Ilow. This cell corresponds closely to the growth phase or
product liIe cycle.

as c4s

As the term indicates, cash cows are business which generate large amounts oI
cash but their rate oI growth is show In terms oI PLC, these are generally mature
business which are reaping the beneIits oI experience curve. The cash generation
exceeds the reinvestment that could proIitably the made into cash cows.

Q:esti4n arks

Business with high industry growth but low market share Ior companies are
question marks or problem children. They required large amount oI cash to
maintain or gain market share. Question mark is usually new products or services,
which have a good commercial potential.

D4gs
Those businesses, which are related to slow growth industries and where a
company has a low relative market share, are termed as dogs`. They neither
generate nor require large amounts oI cash. In terms oI PLC, the dogs` are
usually products in the late maturity or declining stage.

The Iirm should hold its dominant market position by reducing prices and thus
keeping away the high cost competitors. Cash Ilows are likely to be negative
during the growth phase in a dominant market since the Iirm will have to keep in
investing to maintain its competitive edge. Dominant position generates positive
cash Ilows, during the mentioned stage oI liIe cycle.

The BCG matrix makes it very clear that a Iirm Ior its ultimate success needs a
balanced portIolio oI products or businesses. The individual businesses commit
the Iirm`s resource. PortIolio, which should act as a guide to commit the Iirm`s
resource. PortIolio should be balanced in terms oI proIit, cash Ilows, and overall
corporate risk.

25 GE Nine ell atrix:

Another corporate portIolio analysis technique is based on the pioneering eIIort oI
general electric (GE) company oI the united state supported by the consulting Iirm
oI Mckinsey & Company.

The vertical axis represents industry attractiveness, which is a weighted
composite rating based on eight diIIerent Iactors. These Iactors are-

1. Market size and growth rate
2. Industry proIit margins
3. Competitive intensity
4. Seasonably
5. Cyclically
6. Economics oI Scale
7. Technology and
8. Social, environmental, legal and human impacts.

The horizontal axis represents business strength competitive position, which is
again; a weighted composite rating based on seven Iactors. These Iactors are

1. Relative market share
2. ProIit margins
3. Ability to compete on price and quality
4. Knowledge oI customer & market
5. Competitive strength and weakness
6. Technological capability and
7. Caliber oI management


Table GE Nine Cell Matrix
Industry attractiveness



Business
Strengths
High Medium Low
High Investment
Growth
Selective
growth
Selectivity
Medium Selective
growth
Selectivity Harvest
Low Selectivity Harvest Harvest

The two composite values Ior industry attractiveness and business
strength/competitive position are plotted Ior each business in a company`s
portIolio. The PIE (Circles) denotes the proportional size oI the industry and the
dark segments represent the company`s market share.

The nine cells oI the GE matrix are grouped on the basis oI low to high industry
attractiveness and were to thrown business strength three zones oI three cells cash
are made denoting diIIerent conditions represented by green yellow and red colors
Ior this reason, the matrix is also known as the stoplight strategy matrix. Based
not the three zone, the signal is go ahead to grow and build indicating expansion
strategies business in the green zone attract major investment Ior the yellow zone,
the signal, 'Wait and See indicate hold and maintain type oI strategies aimed at
stability and consolidation Ior the red zone the signal is top indicate achievement
strategies oI divestment and liquidation or rebuilding approach Ior adopting
turnover strategies.

Advantages

1. It compared to the BCG matrix it oIIers intermediate classiIication oI
medium and average rating.
2. It incorporates a large variety oI strategies variables like market there &
industry size.

Dra ack

In only provides broad strategic prescriptions rather that the speciIic or business
strategy.

25 Directi4nal p4licy matrix (DP)

The DPM is a method oI business portIolio analysis Iormulated by Shell
International Chemical Company. It has nine cells in which business are located
depending upon their scores on each oI the two axes: Expected marker
proIitability and competitive positions. The horizontal axis, labeled 'business
actor prospects or 'prospects Ior market sector proIitability, is a measure
similar to industry attractiveness used in the GE planning grid.

A Iirm is rated on a scale Irom 'unattractive, through 'average, to 'attractive
depending upon an evaluation oI its industry`s market growth, market quality, and
environmental aspects. Similarly, its location on a scale that has Irom a 'weak,
through 'average, to 'strong competitive position is determined by answering
questions about as market shares position, production capabilities, and R&D
strongly.

The cell labels represent possible strategic activities or types oI resource
deployments most appropriate, Ior the Iirm, given its score on cach oI the two
axes. More speciIically these cell label`s have the Iollowing implications:

Disinvest (1.1): Likely already iosing money; net cash Ilow, negative over
time. Losses may be minimized by divestiture or even liquidation.
Phased Withdrawal (1,2) and (2,1) : Probably not generating suIIicient
cash to justiIy continuation; assets can be reconloyed.
Cash Generator (3,1): Equivalent to a 'cash cow in the GE planning grid.
A Iirm or product would occupy this cell in later stages oI the liIe cycle
that does not warrant heavy investment. But can be 'milked oI cash due
to its strong competitive position.
Proceed with Care (2,2): Similar to a 'question mark, Iirms Ialling in this
sector may require some investment support but heavy investment should
be extremely risky
Growth (upper-3.2) and (lower 2.2): Similar to a GE planning grid
'green light strategy. A Iirm, product, or SBU in these sectors would call
Iord investment support to allow growth with the market. It should
generate suIIicient cash on its own.
Double or Quit (1.3): Units is this sector should become 'high Iliers in
the not too distant Iuture. Consequently these in the upper rightmost
corner oI cell (1,3) should be singled out Ior Iull support. Others should be
abandoned.
Try Harder 2.3): External Iinancing may be justiIied to push a unit in this
sector to a leadership position. However, such a move will require
judicious application oI Iunds.
Leader (3.3) (lower 3.2): The strategy Ior this segment is to project this
position by external investment (Iunds beyond those generated by the unit
itselI occasionally), earnings should be quite strong and a major Iocus
may be maintaining suIIicient capacity to capitalize on strong demand.

Table Direct4rs` P4licy atrix

Insepects Ior sector proIitability


\Company`s
Competitive
Capabilities
Unattractive Average Attractive
Weak Disinvest Phased
Withdrawal
Double or
Quit
Average Phased
Withdrawal
Custodial
Growth
Try harder
Strong Cash
generation
Growth
Leader
Leader

The DF can thus be used to identiIy strategies Ior single business as well as Ior
plotting combinations oI units in multi business or multi products Iirms. Locating
competitors on the DPM can provide useIul insights into the nature oI corporate-
level strategic conIigurations. However, there is room Ior crror in the positioning
oI a Iirm or product on the two axes, and thus DPM location should be interpreted
with an upon mind and not in isolation. The Directional Policy Matrix (DPM)
developed by Shell Chemicals; U.K. uses the two parameters oI 'business sector
prospects and 'company`s competitive abilities.

A number oI Iactors such as marked growth, market quality, market supply, etc.
are used to rate the business sector prospects as unattractive, attractive or average.
A company`s competitive ubilities ar similarly judged weak, average, or strong
non the basis oI several Iactors. The 3 x 3 matrix when plotted Irom the bassi Ior
recommientind baseline strategies. One advantage on DPM it that one oI its
extension; 'risk matrix provides alternative way to analyze environmental risk.
In a risk matrix, environmental risk is taken as the third dimension and is divided
into Iour categories Irom categories Irom low risk to very high risk. Each risk
position is determined on the basis oI environmental threats and the probability oI
their occurrence.

25 :siness Pr4file matrix:

This matrix is more Ilexible than the growth/share matrix and uses competitive
position and industry maturity as the two dimensions. It uses twenty cells Ior
clearity oI resources allocation. Empirical determination oI the correlates oI the
two dimensions is superior to the growth/share matrix.

Table :siness Pr4file atrix

Stage oI Industry maturity
Competitive
Position
Embryonic Growth Maturity Aging
Dominant
Strong
Favourable
Tenable
Weak

2510 Designing a p4rtf4li4:

In order to design a portIolio, the Iollowing guidelines are suggested by Yoram
Wind and Vijay Mahajan:

Establishing the level and unit oI analysis and determining what links
connect them.
IdentiIying the relevant dimensions, including single-variable and
composite
Determining the relative importance oI the dimensions
To the extent that two or more dimensions are viewed as dominant,
constructing a matrix based on them.
Locating the products or businesses on the relevant portIolio dimensions
Projecting the likely position oI each product or business on the
dimensions iI (a) no changes are expected in environmental conditions,
competitive activities, or the company`s strategies and iI (b) changes are
expected.
Selecting the desired position Ior each existing and new product and
developing how resources might best be allocated among these products.

In order to establish a matrix our oI the available inIormation Irom both the
company and the market, the GE matrix can be constructed using the Iollowing
steps:

1. IdentiIy the Iactors making Ior an attractive market.
2. Establish the business position Iactors
3. Give agreement among managers to Iactors.
4. Make priority list and give each a weightage as in the Iollowing table 9.6.
5. Measure each Iactor by market research, internal discussion or external
inIormation.
6. Apply the weightage to the measurement and arrive at a total.
7. Apply the totals to the matrix and
8. Start a discussion on what the Iigures show.

Table arket attractiveness and b:siness p4siti4n meas:rement














Factors Weight() Measurement Value
Market attractiveness
Overall size .20 4.00 0.80
Annual growth .20 5.00 1.00
Competitive intensity .15 4.00 0.60
Technology
requirements
.15 2.00 0.30
InIlationary pressures .15 3.00 0.45
Energy need .05 2.00 0.10
Historical margins .10 1.00 0.10
Social/legal/Economic/
Political/Technological
impact
Must be
acceptable

1.00 3.35
Business Strengths
Market share 0.10 2.00 0.20
Share growth 0.15 4.00 0.60
Product quality 0.10 4.00 0.40
Brand reputation 0.10 5.00 0.50
Distribution strength 0.05 3.00 0.15
Promotional
eIIectiveness
0.05 2.00 0.10
Production capability 0.05 3.00 0.45
Unit costs 0.15 5.00 0.75
R&D strength 0.10 4.00 0.40
Management
eIIectiveness
0.05 4.00 0.60


Using the above, a, cash oI Digital theater system (dts) product to be sold in the
theatres oI Mumbai, the Iollowing done to done to Iind out about the investment
proposition:

Product Digital theatre system
market Recommended Ior investment Mumbai theatres
Attractiveness Iactors
scale
InIormation available importance
Market size Yes 1
Current coverage No 2
Competition Yes 3
Current systems Yes 4
Social aspects No 5
Legal aspects No 6

Business
strength Iactors
Five-point
measure
Witghtage Value
Market share 2 5 10
Product quality 4 15 60
Brand reputation 5 10 50
Distribution
network
5 15 75
Promotional
eIIectiveness
2 10 20
Costs 3 5 15
Managerial
personnel
2 10 20
70 250
Possible Total 350

Market
attractiveness
Iactors
Five-point
measure
Weightage Value
Market Size 5 15 75
Coverage 4 15 60
Competition 2 5 10
Current systems 4 10 40
Social aspects 2 5 10
Legal aspects 2 5 10
60 10
Possible Total 275







Table Investment matrix scales:
Industry attractiveness
0 300 200 100
350 High Medium Low
233 High
Business
Strengths
Medium
117 Low
0


The next stage was to use the matrix to compare the present markets with Mumbai
as a potential investment by using the same basis. Hence the in the matrix
clearly gives evidence Ior investment in the market concerned.

Q:esti4ns:

1. What are the constraints oI portIolio analysis?
2. Why SBU concept is used Ior portIolio analysis?
3. ClassiIy the various matrices and explain their signiIicance?
4. Trace the developing oI GE matrix.
LESSN 2 STRATEGI DEISIN AKING

21 Intr4d:cti4n:

Although the process oI creating strategy is oIten discussed as iI it were an
unconstrained design process, keep in mind that while strategists evaluate
strategy, the Iirm is operating. This evaluation involves assessing the extent to
which present strategy is meeting expectations. It may be the case that only a
small part oI, any, marketing strategy would have to be changed to correct a
corporate and business-level strategy, and also oI he Iirm`s Iunctional strategy
perIormance is les than satisIactory, the reason oIten is a Iunctional strategy
shortcoming. One might say that a 'good business-level strategy would have
been poorly implemented by part oI its Iunctional strategy set. For this simple
example, a change in marketing strategy could improve perIormance while other
levels oI strategy would remain unchanged.

Alternatively, a problem with nature oI a Iirm`s or SBU`s business brough about
by a major environmental opportunity or threat, a change in that level`s goals set,
or the development oI some internal capability or weakness could necessitate a
business-level strategy change. The new strategy would probably include vestiges
oI the old along with some unIamiliar elements. In most cases a whole new
Iunctional strategy set would likely have to be designed and put into eIIect to
implement the new business-level strategy.

More generally, one could conceivably change parts oI a Iirm`s Iunctional
strategy set without changing business-level strategy. However, rarely would one
expect to encounter the case in which a change in business-level strategy did not
trigger the necessity to alter Iunctional-level strategy in some way, at least not in a
successIully managed business.

There is a risk oI incorrectly identiIying the strategy level at which a problem
exists. A tendency exists in business to change Iunctional-level strategies or
organizational structure in a attempt to remedy any problem. OI course, iI the
problem existed within the Iirm`s corporate-or business-level strategy, Ior
example, changing Iunctional-level strategy would not correct it. In Iact, this
move would most akely agggaeitv the situation. The reason Ior this tendency is
probabley that Iunctions, strategy chages are potentially less disruptive then
changes in the other levels. They certainly would oIIedct Iewer people thatn
modiIications or the corporate or business levels.

The result oI trying to solve-business-level strategic problem with a Iunctional-
level solution is well inlnnn by the 'big Iour U.S. automobile companies. With
overseas competo`s exporting Iier-eIIective automobiles to the United States, and
with widely acknowledged shrankages oI Iossil Iuel suppliers,. they still
stubbornly tried to retrun their old business and corporate stratregies, well into the
1970s, by changing market stretety only. A set oI major environemntsal threats,
particualry at the

Xer4x n4t cleared 4f Page N4 13, 13

Strategies thinking is that which generates (1) creative, environmentally relevant
ideas and (2) concepts about how to turn them into systematically managed action
plans. It has the Iollowing prerequisites:

1. Input inIormation is based on Iacts and logical data.
2. Previously unquestioned assumptions are sought out and examined.
3. A burning desire Ior resource conservation, and
4. In direct, spontaneous, and unexpected thought processes which are hard
Ior competitors to predict.

These requirements oI strategic thinking set it apart Irom other kinds oI decision
making. First, strategic thinking required Iactual and logical input data because it
is competitively dangerous to base strategy Iormulation on erroneous inIormation.
The stakes are too high to 'hooI it. Second, long-held assumptions should be
identiIied and analyzed to make sure they still apply. This is especially true about
goals which are in Iorce, understandings about the environments and competitors,
market acceptance and image, etc. Third, the manager attempting to thing
strategically should be committed to conservation oI the organization`s resources,
rather than expecting that a good idea will precipitate a cornucopia oI Iunds,
people and support. It is easy to be creative while assuming that most resource
requirements can be taken care oI. A grater degree oI creativity is required when
one must conserve resources.

Finally, strategic thinking must be done without setting patterns which
competitors can identiIy and anticipate. The problems oI predicatable strategic
thinking are analogous to the Iootball coach scnding in plays to his quarterback
using hand signals that are understood by the opposing term`s coaches.

23 4mplexity 4f decisi4n making:

Many people still remain in the bondage oI selI-incurred tutelage. Tutelage is a
person`s inability to make his/her own decisions. SelI-incurred is this tutelage
when its cause lies not in lack oI reason but in lack oI resolution and courage to
use it without wishing to have been told what to do by something or some-ody
else. Sapere aude! 'Have courage to use your own reason!, was the motto oI the
Enlightenment era. During this period, Franciso oya created his well-known
'The sleep oI reason produces monsters masterpiece.

Through the nlightenment era`a struggle and much suIIering, 'the individual
Iinally appeared. Eventually human beings gained their natural Ireedom to think
Ior themselves. However, this has been a too heavy a responsibility Ior many
people to carry. There has been an excess oI Iailure. They easily give up their
natural Ireedom to any cults in exchange Ior an easy liIe. The diIIiculty in liIe is
the choice. They do not been have the courage to repeat the very phrases which
our Iounding Iathers used in the struggle Ior independence. What an ironic
phenomenon it is that you can get men to die Ior the liberty oI the world who will
not make the little sacriIice that it takes to Iree themselves Irom their own
individual bondage.

Good decision-making brings about a better liIe. It gives you some control over
your liIe. In Iact, many Irustrations with oneselI are caused by not being able to
use one`s own mind to understand the decision problem, and the courage to act
upon it. A bad decision may Iorce you to make another one, as Harry %ruman
said, 'Whenever I make a burn decision, I go out and make another one.

A good decision is never and accident; it is always the result oI high intention,
sincere eIIort, intelligent direction and skillIul execution; it represents the wise
choice oI many alternatives. One must appreciate the diIIerence between a
decision and an objective. A good decision is the process oI optimally achieving a
given objectives.

When deciding is too complex or the interests at stake are to important, quite
oIten we do not know or are not sure what to decide and, in many substances, we
resort to an inIormal decision support techniques such as tossing a johoiu, asking
an oracle, visiting an astrologer, etc. However Iormal decision support Irom an
expert has many advantages. This web site Iocuses on the Iormal model-driven
decision support techniques such as mathematical programs Ior optimization, and
decision tree analysis Ior risky decisions. Such techniques are now part oI our
everyday liIe. For example, when a bank must decide whether a given client will
obtain credit or not, a technique, called credit scoring, it oIten used.

Rational decisions are oIten made unwillingly, perhaps unconsciously, we may
start the process oI consideration. It is best to learn the decision making process
Ior complex, important and critical decisions. Critical decisions are those that
cannot and must not the wrong. Ask yourselI the objectives. What is the most
important thing that I am trying to achieve here?

The decision-maker`s style and characteristics can be classiIied as: The thinker,
the cowboy (snap and uncompromising), Machiavellian (ends justiIies the means)
the historical (how others did it), the cautious (even nervous), etc. For example,
political thinking consists in deciding upon the conclusion Iirst and then Iinding
good arguments Ior its.

The decision-making process is as Iollows:

1. What is the goal you wish to achieve? Select the goal that satisIies your
'values. Everyone (including organizations) has a system oI values by
which one lives one`s liIe. The values must be expressed on a numerical
and measurable scale. This is needed in order to Iind the ransks among
values. The question 'what do I want? can be unbearably diIIicult
(because oI the conIlicts among our desires) that we oIten can hardly bear
to ask it. Winning a big money lottery has leIt most people wishing they
had never brought the successIul ticket. The goals Iollow Irom the values,
and Irom our capacity (i.e., our personal abilities, and physical resources)
to achieve goals. On the other hand, iI there were no conIlict among our
desires, each desire would be unchecked and we would go careening
without limit Irom one direction to another. A-raham Maslow Iormalized
general human desires into a hierarchy oI wants, with the biological-
genetic needs at the bottom and 'selI-realization Ior creativity at the top.
2. Find out the set oI possible actions youi can take and then gather reliable
inIormation aoutr each one oI them. InIormation can be classiIied as
explicit and tacit Iorms. The explicit inIormation can be explained in
structured Iorm, while tacit inIormation is inconsistent and Iuzzy to
explain.

The explicit inIormation bout the course oI actions may also expand your set
oI alternatives. The more alternatives your develop the better decisions you
may make. Creativity in the decision-making process resides in the capacity
Ior evaluation oI uncertain, hazardous, and conIlicting inIormation. You must
become a creative person to expand your set oI alternatives. Creativity, arises
out oI thinking hard (i.e., becoming oI a thinker) rather than working hard (i.e.
becoming oI a workaholic). A bulldozer must work hard, a human being must
think hard.

A deep immersion in your decision-making process makes you more creative. The
roots oI creativity lie in consciousness incubation, and in the unconscious
aesthetic selection oI ideas that thereby pass into consciousness, by the usage oI
mental images, symbols, words, and logic. The blocks to creativity are Saturation
or too Narrow thinking, Inability to incubate (this, one must learn Irom cows), and
the Fear oI standing alone doing something new. Most people treat knowledge as
a liquid to be swallowed easily rather than as a solid to be chewed, and then
wonder why it provides so little nourishment. Aristotle noted, 'We call in others
to aid us in deliberation on important questions, distrusting ourselves as not being
equal deciding.

Be objectives about yourselI and your business. More than halI oI my students
semester aIter semester, raise their hands when I ask 'Is your judgment better than
that oI the average person? It is important to identiIy your weaknesses as well as
your strengths.

There is no such thing as a creative/non-creative persons. It is the creative process
which makes you more creative. !a-lo !icasso realized this Iact and said about
himselI: 'All human beings are born with the same creative potential. Most
people squander theirs away on million superIluous things. I expend mine on one
thing and one thing only: my art. Creative decision alternatives are original,
relevant, and practical.

3. Predict the outcome Ior each individual course oI action by looking into
the Iuture
4. Choose the best alternative with the least risk in achieving your goal.
5. Implement your decision. Your decision means nothing unless you put at
into action. A decision without an action plan is a daydream.

The logic oI worldly success rests on a Iallacy: the strange error that our
perIection depends on the thoughts and opinions and applause oI other men! A
weird liIe it is, to be living always in somebody else`s imagination, as iI that were
the only place in which one could a last become real!

On a daily basis a manager has to make many decisions. Some oI thee4 decision
are routine and inconsequential, while others have drastic impacts on the
operations oI the Iirm Ior which he/she works. Some oI these decision could
involve large sums oI money being gained or lost, or could involve whether or not
the Iirm accomplishes its mission and its goals. In our increasingly complex
world, the tasks oI decision-makes are becoming more challenging with each
passing day. The decision-maker (i.e., the responsible manager) must respond
quickly to events that seem to take place at an ever-increasing pace. In addition, a
decision-maker must incorporate a sometimes-bewildering array oI choices and
consequences in this or her decision. Routine decisions are oIten made quickly,
perhaps unconsciously without the need Ior a detailed process oI consideration.
However, Ior complex, critical or important managerial decisions it is necessary
to take time to decide systematically. Management means making critical
decisions that cannot and must not be wrong or Iail. One must trust one`s
judgment and accept responsibility. There is a tendency to look Ior scapegoats or
to shiIt responsibility.

Decisions are at the heart oI any organization. At times there are critical moments
when these decisions can be diIIicult, perplexing and nerve-wracking. Making
decisions can be hard Ior a variety oI structural, emotional, and organizational
reasons. Doubling the diIIiculties are Iactors such as uncertainties, having
multiple objectives, interactive complexity, and anxiety.

Strategic decisions are purposeIul actions. Making good strategic decisions is
learnable and teachable through and eIIective, eIIicient, and systematic process
known as the decision-making process. This structured and well-Iocused approach
to decision-making is achieved by the modeling process, which helps in reIlecting
in the decisions beIore taking any actions. Remember that: one must not only be
consisious oI his/her purposeIul decision, one must also Iind out the causes Ior
which they are made. There is no such thing as 'Iree will. Those who believe in
their Iree wills are in Iact ignorant to the causes that impel them to their decisions.
There is not such thing as arbitrary in any activity oI man, least oI all in his
decision-making, and just as be has learned to be guided by objectives criteria in
making his physical tools, so he is guided by unconscious objectives criteria in
Iorming his decision in most cases.

The simplest decisions model with only two alternatives, is known as
Manicheanism, which was adapted by Zarathustra and then taken by other
organi:ed religions. Manidheanism is the quality concept, which divides
everything in the world into discrete either/or and opposite polar, such as good
and evil, black and white, night and day, mind (or soul) and body, etc. This
duality concept was a suIIicient model oI reality Ior those old days in order to
make their world manageable and calculateable. However, nowdays we very well
know that everything is becoming and has a wide continuous spectrum. There are
not real opposites in nature. We have to see the world through our colorIul mind`s
eyes; otherwise we do not understand complex ideas well.

The Industrial Revolution oI the 19
th
century probably did more to shape liIe in
the modern industrialized world than any event in history. Large Iactories with
mass production created a need Ior managing them eIIectively and eIIiciently.
The Iield oI Decision Science (DS) also known as Management Science (MS),
Operations Research (OR) in a more general sense, started with the publication oI
%he !rinciples Scientific Management in 1911 by Frederick W. Taylor. His
approach relied on the measurement oI industrial productivity and on
time/movement studies in the Iactories. The goal oI his scientiIic management
was to determine the best method Ior perIorming tasks in the least amount oI
time, while unIortunately using the stopwatch in an inhumane manner.

A basic education in OR/MS/DS Ior managers is essential. They are responsible
Ior leading the business system and the lives in that system. The business system
is dynamic in nature and will respond as such to disturbances internally and
externally.

The OR/MS/DS approach to decision making includes the diagnosis oI current
dicision making and the speciIication oI changes in the decision process.
Diagnosis is the identiIication oI problems (or opportunities Ior improvement) in
current decision behavior; it involves determining how decisions are currently
made, speciIying how decision should be made, and understanding why decisions
are not made as they should be, SpeciIication oI changes in decision process
involves choosing what speciIic improvement in decision behavior are to be
achieved and thus deIining the objectives.

Nowadays, the OR/MS/DS approach has been providing assistance to managers
in developing the expertise and tools necessary to understand the decision
problems, put them in analytical terms and then solve them. The OR/MS/DS
analysis are, e.g., 'chieI oI staII Ior the president, 'advisors, 'R&D modelers
'systems analysis, etc. Applied Management Science is the science oI solving
business problems. The major reason that MS/OR has evolved are quickly as it
has is due to the evolution in computing power.

2.6.4 Foundations oI Good Decision-Making Process:

When one talks oI 'Ioundations, usually it includes historical, psychological, and
logical aspects oI the subject. The Ioundation oI OR/MS/DS is built on the
philosophy oI knowledge, science, logic, and above all creativity. In this web site
the decision 'problem, does not reIer to preIabricated exercises or puzzles with
which most educators continually conIront students, such as the problem oI
Iinding a solution to a system oI equations, without giving any motivation Ior its
need-to-know.

Science some decision problems are so complicated and so important, the
individuals who analyze the problem are nto the same as the individuals who are
responsible Ior making the Iinal decision. ThereIore, this site distinguishes
between a management scientist, someone who studies what decision to make and
a decision maker, someone responsible Ior making the decision.

When deciding to make good decisions there are possibilities to be conIronted
with decision problems. It means real problems, the eIIective handling oI which
can make a signiIicant diIIerence. Almost all decision problems have
environments with similar components as Iollows:

1. The decision-maker. The term decision-maker reIers to an individual, not
a group.
2. The analyst who model the problem in order to help the decision maker,
3. Controllable Iactors (including your personal abilities and physical
resources).
4. Uncontrollable Iactors,
5. The possible outcomes oI the decisions,
6. The environment/structural constraints,
7. Dynamic interactions among these components.

25 Deterministic vers:s Pr4babilistic 4dels:

All the decisions models can be classiIies as either deterministic or probabilistic
models. In deterministic models your good decisions bring about good outcomes.
You get that which you expect, thereIore the outcome is deterministic (i.e., risk-
Iree). However, in probabilistic decision models, that outcome is uncertain,
thereIore making good decisions may not product good outcome is uncertain,
thereIore making god decisions may not produce good outcomes. Unlike
deterministic models where good decisions are judged by the outcome alone, in
probablilistic models, the decision maker is concerned with both the outcome
value and the amount oI risk each decision carries. When the outcome oI your
decision is rather certain and all the important consequence occur within a single
period, then your decision problem is classiIied as a deterministic decision.
However, in many instances, these types oI models are encumbered with the two
most diIIicult Iactors uncertainty and delayed eIIects. Both diIIiculties can be
overcome by probabilistic modeling which includes the time discounting Iactor.
We will over both deterministic and probabilistic decision-making models.

AIter recognizing this no-nonsense classiIication oI decision-making components,
the OR/MS/DS analyst perIorms the Iollowing sequence with some possible
Ieedback loops between its steps:

1. Understanding the Problem: It is critical Ior a good decision maker to
clearly understand the problem, the objective, and the constraints
involved.
2. Constructing an Analysis Model: This step involves the 'translation oI
the problem into precise mathematical language in order to make
calculations and comparison oI the outcomes under diIIerent possible
scenarios.
3. Finding a good Solution: It is important here to choose the proper solving
technique, depending on the speciIic characteristics oI the model. AIter the
model is solved validatin oI the obtained results must be done in order to
avoid an unrealistic solution.
4. Communicating the Results with the Decision-Maker: The results obtained
by the OR/MS/DS analyst have to be properly communicated to the
decision-maker. This is the 'sale part. II the decision-maker does not buy
the OR/MS/DS analyst recommendations, he/she will not implement any
oI them.

Problem understanding encompasses a problem structure, and a diagnostic
process to assist us in problem Iormulation (i.e., giving a From to a complex
situation) and representation. This stage is the most important aspect oI the
decision-making process. Problem understanding is an interactive process
between the decision maker and the OR/MS/DS analyst. The decision maker may
be unIamiliar with the analyst details oI the problem Iormulation such as what
elements to include in the model, and how to include them as variables,
constraints, indexes, etc.

Since the strategic solution to any problem involves making certain assumptions,
it is necessary to determine the extent to which the strategic solution changes
when the assumptions change. You will learn this by perIorming the 'what-iI
scenarios and the necessary sensitivity analysis.

Gathering reliable inIormation at the right time is a component oI good decisions.
It is helpIul to understand the nature oI the problem by asking 'who?, 'what,
'why, 'when, 'where and 'how. Finally, break them into three input groups,
namely: Parameters Controllable, and Uncontrollable inputs. Uncontrollable
Iactors are the main components oI decision-making which must be dealt with,
by, e.g. Iorecasting. In making conscious decisions, we all make Iorecasts. We
may not think that we are Iorecasting, but our choices will be directed by our
anticipation oI results oI our actions or omissions.

One must evaluate the various courses oI actions within the controllable inputs,
consider various scenarios Ior uncontrollable inputs, and then decide the best
course oI action. As you know, the whole process oI managerial decision-making
is synonymous Iunctions. Planning, Ior example, involves the Iollowing
decisions: What should be done? How? Where? By whom? As shown in the
Iollowing diagram:

2 Str:ct:ral 4deling

The structured modeling process is at the heart oI OR/MS/DS activities. The main
question then becomes, 'How close is the model to the real world? Know that a
model is not reality, but it does contain some parts oI reality. The question is:
'Does it contain the important parts relevant to the decision problem?

Modeling is a structured process is consecutive Iocused strategic thinking Ior
understanding reality Ior utilitarian purposes. The connection between
partitioning a circle into 360 degrees and a year into a number oI days in an
interesting example. This desire Ior a mathematical model oI the universe and its
processing diIIiculties is apparent. Some analogous ones exited in music,
architecture, etc. these mathematical models to represent reality required Iitting
between small integer number (Ior ease oI representation ), and complex
phenomena whose numerical parameters did not exactly Iit in the integer based
scheme. It is credible that the 360-system and the 6-8-9-12 scheme in music were
the result oI this conIlict; these example are mathematically suitable models and
semantically justiIied. As bill Gates side, 'II you, re any good at math at all, you
understanding business. It`s not its own deep, deep subject.

With mathematics as a language we can explain the mysteries oI the universe or
the secrets oI DNA. We can understand the Iorces oI planetary motion, or
discover cures Ior catastrophic diseases. Mathematics is not just Ior calculus
majors. It`s Ior all oI us. And it`s not just about making good strategic decisions.


Mathematics is part oI human culture because it does not exist outside oI the
human mind. Symbolic reasoning and calculations with symbols are central to
analytical (i.e. mathematical) modeling. ThereIore, like any Ioreign language you
must develop an understading oI mathematics, which si the language oI all
sciences, including the OR/MS/DS modeling process aimed at assisting the
decision-maker. Here is an example oI the useIulness oI mathematical symbols.
Suppose you wish to buy a shirt Ior $50 (tax included), the tax is 5, what is to
original price oI your shirt? Let x and y be the amount oI the tax and the original
price respectively, thereIore, the mathematical modes is 50 x y, and x 0.05y.
This gives, 50 0.05y y 1.05y. ThereIore, the original price is 50/1.05
$47.62. How much is the tax? How do you generalize this result? You may ask,
what is this x, in mathematics? Well, whatever we do not know we call it x (or
any other latter Irom the end oI alphabet series). X also has a political signiIicance
as in Malcom X.

A mental model is a representation oI your thoughts about reality. ThereIore, it is
an objectiIication oI reality, which in turn means the subjective begetting oI the
reality. Mathematical models employ symbols and notations, including numbers.
Thus, there are three distance concepts: the reality, the mental model, and the
representation. In its many diIIerent Iorms, analytical modeling is a procedure that
recognized and verbalizes and problem and then quantiIies it by turning the words
into mathematical expressions. Modeling is a structured consecutive-Iocused-
strategic thinking Ior understanding the decision problems and actions.

In all high schools around the world mathematics is used to translate Word or
Story !ro-lems into symbolic representations (i.e., mathematical models). AIter
solving, the results are translated back into the original language in which the
problem was stated.

OR/MS/DS is a systematic approach to pro-lem solving in that it considers the
context oI the problem as important as the problem itselI. It utilizes, a team
approach by capitalizing on the talent oI an OR/MS/DS analyst to asses,
coordinate, and incorporate knowledge relevant to solving a certain decision
problem Irom experts in other Iields, (known also as think-tank approach). The
diIIiculties in clear communication among the team members in any OR/MS/DS
project can increase with the size oI the team. Span of management reIers to the
numbers oI employees supervised by a single person. The term itselI has nothing
to do with a desired size oI the span. In other words, whether the one supervise
two employees or one hundred, span oI management is the tern applied to the
number. In the three-person group (i.e., one supervisor and two employees), the
six possible relationships or interactions may exist.

By applying a scientiIic approach, managers are also able to make accurate
predictions Ior what is not under their control. OR/MS/DS modeling process is a
scientiIic approach in that it uses measurable and numerical scales to translate
observed phenomena. II God geometrizes` as Plato says, man certainly
arithmetizes. The world is qualitative. However, human can understand compare,
and manipulate numbers only. Qualitative inIormation may be characterized and
processed by assigning numbers. ThereIore, we use some measurable, numerical
scales to quantiIy the world. This enables us to understand the world by Iinding
any relationship, and using manipulation comparison, calculation, etc. Then we
use the same scale to qualiIy it back to the world. This is the essence oI the
'human understanding structured process.

Quantative analysis tends to rive out qualitative analysis, even in the Liberal Arts
areas oI study, such as organization science, sociometrics, and psychometrics. The
'Iuzzy set theory has even been developed to quantiIy qualitative terms that we
use to express out Ieelings. However, it is questionably whether the internal world
oI one`s experience can also be subjected to analytical modeling. Just like the
external world. The Iollowing is a paraphrase oI what Adam Smith said about the
main diIIiculty in representation oI Ieeling 'It is not an easy task to construct
analytical model Ior Ieeling, become our senses will never inIorm us oI what, e.g.
somebody is in suIIering as long as we ourselves are at our cases. 'However, in
the medical proIessions it is common to be questioned, 'on a scale oI one to ten,
one being the worst, how do you Ieel? This elicits subjective answers Irom the
patients.

Mathematical modeling can claim to be the most original creation oI mankind.
The originality oI modeling lies in the Iact that in model building connections
between things are exhibited which, apart Irom the agency oI human reason, are
extremely unobvious. This the ideas, now in the minds oI modeling lie very
remote Irom any notions that can be immediately derived by perceptive through
the senses; unless it is perception stimulated and guided by an antecedent
modeling process.

2 Advantages 4f :sing te m4deling appr4ac t4 pr4blem s4lving:

A question Ior you: 'When a management scientist goes to work, does he/she wait
Ior problem to be assigned or does he/she go Iind problems? Do not create
problems Ior yourselI and others. Wait Ior the problem to be assigned to you. The
problem owner(s) and the management scientist consultant are two diIIerent
parties.

A management scientist provides and and/or Iacts to the decision maker in order
to make a better decision. The management scientist should not attempt to make
these decisions or to inIluence the decisions. As such, the management scientist
and the decision maker should not be the same person. The management scientist,
thereIore, is to serve as an objective voice to interpret a managerial decision
problem that cannot be solved internally because oI proximity or bias.

A mathematical (i.e, analytical) model is the one whose relationships are
expressed in the rigorous language oI mathematics. In this way, a mathematical
model is abstract because one cannot visualize the system it is supposed to portray
by merely looking at it.

DeIining the system boundaries: OIten, in modeling process the analysts do not
model 'systems rather, they model speciIic problems that the decision makers
(i.e., the managers) wish to understand. It is important and necessary to clearly
deIine the boundaries oI the system`s decision problem under investigation. In
this context a system is the restricted portion oI the universe under consideration
and its boundaries are the limits that separate the system Irom the remainder oI
the universe. Boundaries isolate the system Irom its surrounding. OIten it may
turn out that the initial choice oI boundaries is too restrictive. ThereIore, to Iully
analyze a given system it may be necessary to expand the system boundaries to
include other substems that strongly aIIect the decision strategy. Suppose you are
to study and make a descriptive model oI an international airport, what are the
boundaries Ior such a large system?

4mp4nents 4f Analytical 4deling Pr4cess
ClassiIication oI
Knowledge
Knowledge about Objects, Events, Processes,
Relations
Types oI
Comprehension
Understand, Interpret, Relate, Select, Recall,
Compare
Types oI Analysis Relate, Compare, Interpolate, Extrapolate,
Generalize, SpeciIy
Results oI Model
Evaluations
Accept, Reject, Possible, Irrelevant

Know that analytical modeling is more than a collections oI concepts and skills to
be mastered; it includes methods oI investigation and reasoning, and the means oI
communications (i.e., making common what is individually experienced).
Depending on the audience oI the report, the mathematical model may or may not
be included. It is the task oI the management science team to write a report that is
understandable by all that will read it.


2 Analytical 4deling Pr4cess f4r Decisi4n - aking

A decision is a reasoned choice among alternatives. Makings a decision is part oI
the broader subject oI pro-lem solving. Although the management science
approach cn be used to construct a mathematical model, it is useless iI the result is
too complex to be communicated to the decision maker. Regarding the
importance oI communication in the OR/MS/DS modeling process, I have Iound
that people tend to overcomplicate and issue. The worst oIIense seems to be in
written reports. There is a general 'Iear oI appearing unsophisticated or even
unintelligent iI one writes in a a straightIorward, simplistic manners. The end
result is a product that is incomprehensible to the decision maker. To avoid such
an outcome, the analysis should be done in stages. You must ever come the
communication barriers. Depending on the audience oI the report, the
mathematical model may or may not be included. It is the task oI the management
sciences team to write a report that is understandable by all that will read it.

Decisions deserve appropriate time. As a decisions scientist, you want the
opportunity to see a decision unIold, revealing opportunities Ior study and
assessment. The general procedure that can be used in the process cycle oI
decision- making contains the Iollowing similar steps: (1) describe the problem,
(2) prescribe a solution, and (3) control the problem by assessing/ updating the
strategic solution continuously in the Iace oI changing business conditions.
Clearly, there are always Ieedback loops among these general steps.
The general steps in this process are analogous to the structured process oI
treating an illness. When a patient has a health problem, the patient goes to see the
doctor to solve the problem. In order to do so, the doctor, with the participation oI
the patient, describes the problem by taking a blood test or x-ray, to diagnose the
illness. Then the doctor prescribes medications (prescribing medicine). There are
also Iollow-up visits to make sure the prescription actions are eIIective in curing
the patient; otherwise the doctor changes the medications. That is possible why
what the doctors to they call it 'practice. Remember that, here there are two
distinct parties because iI patients wanted to talk diagnosis, they talk drugs. II
they wanted to talk symptoms, they talk drugs. They talk about solutions beIore
understanding the problem. In this analogy, the doctor is the management scientist
while the patient is the decision maker (the owner oI the problems.)

Descriptive modeling process is using OR/MS/DS techniques to describe how
people see their worlds. A god descriptive model comes Irom good observation
and representation that is validated and veriIied against evidence. This increases
conIidence in the descriptive model, and then could be used Ior prescriptive
purposes.

Description oI he Problem: As soon as you detect a problem, think about and
understand it in order to adequately describe the problem in writing. Develop a
mathematical model or Iramework to re-present reality in order to devise possible
solutions to the problem. The model must be validated beIore you oIIer a solution.
Clearly, one needs to be skilled at having many diIIerent perspective to get closer
to reality. When diIIerent models are combined using diIIerent perspective, we
get a better understanding oI reality. That`s why OR/MS/DS modeling process
utilizes a team approach by capitalizing on the talent oI individuals to assess,
coordinate, and incorporate knowledge relevant to solving a certain decision Irom
experts oI other Iields, (known also as thing-tank approach). Describing all
components oI a problem is also called inverse-engineering in the Iield oI
cognitive science.

The most important part oI decision-making is to understand the problem. An
excellent example is, 'name a Iormer president oI the United States who is not
buried in the USA. This is a wonderIul example oI the need to understand the
question beIore attempting to answer. Remember that the Iormulation oI the
problem is oIten more essential that its solution. In Iact, iI you understand the
problem, it usually tells you how to solve the problem. Here is another example
Ior problem understanding: give the number oI automobiles produced in America
during the year oI your choice.

Prescripti4n 4f a S4l:ti4n: This is an identiIication oI a strategic solution and its
implementation stage. Search Ior a strategic solution using OR/Ms/DS modeling
process solution techniques. Any given managerial decision problem has several
solutions. A satisIactory strategic solution, also called a 'good decision, is
desired. There is no such thing as the solution Ior real-liIe problems. Choose an
appropriate solution. One size does not Iit all. Solutions depend on budget, time,
and many other constraints and conditions. Think oI the design process as
involving Iirst the generation oI alternative and then the testing oI these
alternative against a whole array oI requirements and constraints. Here is a
question Ior you: does a good decision always result in the good outcome? Why
not? Give an example.

anagerial Interpretati4ns and 4mm:nicati4n: The decision problem is
oIten stated by the decision maker in non-technical terms. When you think over
the problem and Iind out what module oI the soItware to use, you will use the
soItware to get the solution. The strategic solution should also be presented to the
decision maker in the same style oI language which is understandable by the
decision maker. ThereIore, do not just giver her/him the computer printout. You
must also provide managerial interpretations oI the strategic solution in some non-
technical terms while preparing a business report or presentation.

Post-prescription: Change is the norm in most organizations. Business cycles and
management philosophies change, demographic Iactors shiIt, sales and proIits
increase or decrease, employees come and go, technology is introduced and
technology becomes obsolete, some changes occur quickly, whereas others are
almost imperceptible. The speed and duration oI change may vary considerabley,
but nevertheless change in continuous. ThereIore you must allow Ior revising the
model as necessary. This stage oI problem solving is practiced in the Iree-based
economy societies in contract to the programmed-based economy societies where
the model (i.e. the programs) is taken more seriously than reality itselI!

The model is in the service to reality, not the other way around. eorge Bernard
Shaw said 'The only man who behaved sensibly was my tailor; he took my
measurements a new every time he saw me, while all the rest went on with their
old measurements and expected them to Iit me.

4nit4ring Activities: These activities include updating the strategic solution in
order to control the problem. A dictionary tells as that 'to manage means 'to
control. On the other hand, 'everything changes except the Iact that 'everything
changes. Everything Ilows; nothing remains unchanged. In this ever-changing
world oI ours, it is crucial to periodically update solutions to any given problem.
Good decision-making process is a creative idea; it can only be eIIective in
changing Iorms oI creative ideas. Monitor that progress oI the implementation. A
model that heretoIore was valid may lose validity due to changing conditions.
Thus becoming and inaccurate representation oI reality and adversely aIIection,
the ability oI the decision-maker to make god decisions. The model you create
should be able to cope with changes. Unlike mathematical puzzles (e.g., solving
equation 2X 6 0 where there is one and only one correct solution), real liIe
problems do not have a single, correct solution. They cannot be 'solvent once and
Iorever. One must learn to live with dynamic nature, that is, to update he
solutions. ThereIore, in this sense, the OR/MS/DS modeling process to problem
solving is not an exact science such as Mathematics, but one where decisions
must ultimately be made by the decision maker.

Te Imp4rtance 4f eedback and 4ntr4ls: It is necessary to emphasize more
on the importance oI strategic thinking about the Ieedback and control aspects oI
a decision problem. It would be a mistake in discussing the context oI the
OR/MS/DS decision process to ignore the Iact that one can never expect to Iind a
never-changing, immutable solution to a business decision problem. The very
nature oI the environment in which decision-making takes place is change, and
thereIore Ieedback and control are an important part oI the context oI the
OR/MS/DS modeling process.

Q:esti4ns:

1. What is strategic decision making?

3. Explain the models used in strategic decision making.
UNIT 3

Less4n 31 Stability Strategy

311 Intr4d:cti4n

Strategy means 'the basic programmes oI actions chosen to reach these goals and
objectives and major patterns oI resource allocation used to relate the organization
to its environment. According to AlIred Chandler, the strategy means the
determinations oI the basic long-term goals and objectives oI enterprise and the
adoption oI courses oI action and the allocation oI resources necessary Ior
carrying out these goals.

Strategic decision making, at the corporate level, is related to the organization
wide policies and is most useIul in the case oI multidivisional companies having
wide range oI business. Corporate strategy means Iinancial policy decision
involving acquisition, diversiIication and structural redesigning oI the Iirms
assets. At the business levels, the decision makers are primarily concerned with
immediate product, market issues and the policies bearing on the integration oI
the Iunctional units. Among other things, strategic decision at this level include
policies regarding developing new product, marketing mix, research and
development, etc.

The Iollowing are the Ieatures oI strategy:

It is top level management decision
Allocation oI Resources.
Forecasting oI Iuture strategies.
Strategies are concerned with long range planning.
Strategic decisions will have implications Ior multiple Iunctions, product
divisions and operating units.
Strategic decision will have environmental Iactors.

The Corporate level generic strategic pertain to the question which businesses the
company shall be in? The generic strategies are concerned with the portIolio
strategy. (These generic strategies re also applicable to SBUs when they conIront
the question oI the businesses they shall be in)

A stable strategy arises out oI a basic recognition by management that the Iirm
should concentrate on using it`s present resources Ior developing it`s competitive
strengths in particular in particular market area. In simple words, stability strategy
reIers to the company`s policy oI continuing the same business and with the same
objectives.

312 Te need f4r Stability strategy:

As Jauch and Glueck observe, a stability strategy is a strategy that a Iirm pursues
when:

It continues to serve the customers in the same product or service, market
and Iunctional sectors as deIined in its business deIinition, or in very
similar sectors.
Its main strategic decisions Iocus on incremental improvement oI
Iunctional perIormance.
The Iocus is on maintaining and developing competitive advantages
consistent with the present resources and market requirements.

In an eIIective stability strategy, a company will utilize its resources Ior its
competitive advantages. A stability strategy may lead to deIensive movies such as
taking legal action or obtaining a patent to prevent unethical competition by
others. Stability usually involves keeping track oI new developments to make sure
the strategy continues to make sense. The stability approach is neither a do
nothing` approach nor does it mean that proIit growth are abandoned. The
stability strategy can be designed to increase proIits through such approaches as
improving eIIiciency in current operations.

Godrej, the umbrella brand Ior things ranging Irom steel to shaving creates its one
oI the top most brand in soaps is Old Cinthol and it is being the stable among the
most customers. The other soaps Irom the HLL, the major competitor Old Cinthol
plays a dominant role in the market and also the trusted brand.

G`axe Smithkline`s Horlicks is doing remarkable well in the market. Hurlicks is a
widely regarded 130 years old brand. It makes in to the top 10 brands in the
segment. Rural areas, housewives, young Iemales and lower income household
continue to back the brand strongly.

In order to understand how stability strategy works, here are the two examples to
illustrate how organization could aim at stability in each oI the two dimensions oI
customer groups, customer Iunctions respectively.

1. Coca Cola Company provides a separate service to its institutional buyers
apart Irom its consumer sales through market intermediaries to order to
encourage bulk buying and this improve its marketing eIIiciency
2. Hero Honda Company provides better aIter-sales service through their
dealers to its existing customers to improve its company, product image
and increase the sale oI accessories and consumables.
However, when a new motorcycle is brought Irom the Hero Honda, Iree 5
times service is provided by the company and also two year guarantee Ior the
motorcycle purchased.

Note that all the companies here do not go beyond what they are presently
doing, they serve the same market with the present products using the existing
technology. The strategies aim at stability by causing the companies to
marginally improve their perIormance, or at least letting them remain where
they are in case they Iace a volatile environment and a highly competitive
market. The essence oI stability strategies is, thereIore, not doing anything but
sustaining a moderate growth in line within the existing trends.

213 Advantages 4f Stability strategy:

The Iirm`s executives pursue the stability strategy: as there are more advantages.
They are:

O The Iirm is successIully run and the objectives are achieved and there is
satisIactory perIormance. ThereIore the management may want to
continue with the same activities.
O A stability strategy is less risky. Unless the conditions are really bad, a
Iirm need not take any additional risk.
O The management doesn`t Ioresee any change in the environment, or
opportunity in the market or any threat.
O When pursuing this strategy, there is no disruption in routine work.

By pursuing stability strategy, the executives normally aim at stable growth.
Stability strategy is thereIore called the stable growth strategy. Stability strategy is
adopted with diIIerent designs depending on the circumstances in which such a
strategy is preIerred.
The stability strategy is not a 'do nothing strategy. As indicated above, it may
involve incremental improvements. It also required adoption oI appropriate
competitive strategies to remain successIul in the business. It may also have to
make oIIensive and deIensive moves vis-a-vis the competitors.

Long term stability also requires reinvestment, R&D and innovation. However,
the business deIinition remains the same.

In short this 'do-the-same thing strategy endeavors to 'do-the-same thing
better.

314 Reas4ns f4r Stability Strategy:

The important reasons Ior pursuing stability strategy are the Iollowing:

The company is doing Iairly well and it is hopeIul oI the same in Iuture.
A Iamily dominated or private company may not like to expand its
business iI it amounts to diluting the control or iI eIIective supervision is
not possible by the Iamily members.
The Ieeling that sticking to the known business is always better and saIe.
The company may not have the resources and capabilities Ior expansion.

315 Examples:

In southern part oI Tamil Nadu, Kalimark Industries Ior SoIt drink playing a
major role in soIt drinks, particularly among the lower middle class people and
the company have a brand name Ior long time. For the company, the competitors
are Pepsi and Coca Cola and there are not capabilities Ior expansion.

The company may not want to take risks oI growth and expansion Tortoise, the
mosquito repellent manuIactures only mosquito coils and the company does and
expand his business with other repellent like mosquito mats and liquidators. The
company may not want to take risk oI growth and expansion.

The company which has core competence in the existing business does not want
to take the risk oI losing suIIicient attention to the current business by going Ior
the diversiIication. The management does not have the mind-set oI a strategist to
analyses the environmental opportunities and seize the opportunities.

31 Types f Stability Strategy

N-HANGE STRATEGY:

This stability strategy is a conscious decision to do nothing new, that is to
continue with the present business deIinition. Taking no decision is sometimes a
decision too.

When Iaced with the predictable and certain external environment a stable
organizational environment, a Iirm decides to continue with its present strategy.
Because,

The Iirm does not Iind it worthwhile to alter the present situation by
changing the strategy.
No signiIicant opportunities or threats operating in the environment.
No major new strengths and weaknesses within the organization.
No new competitors.
No obvious threat oI substitute products.

Taking into account the external and internal environmental situation, the Iirm
decides not to do anything new.

Several small and medium sized Iirms operating in a Iamiliar market more oIten
a niche market that is limited in scope and oIIering products or services through a
time-tested technology rely on the no-change strategy.

PRIT STRATEGY

This strategy is adopted in large Iirms. Firms would be generating cash Ilow as
primary concern Ior ensuring durable stability durable stability oI the
organization. Under the Iollowing circumstance, a proIit strategy may arise:

II there is a decline oI sales oI the product in the market.
Expansion became impossible due to heavy cost.
Contribution oI the unit to the total sales in less.
Exchange the market as and when possible.
To step out Irom the market where the product has lost its value.

A Irequent method to tide over temporary diIIiculties and to keep aIloat through a
proIit strategy is to sell oII assets such a prime land in a commercial locality and
move out to the suburbs. Others have hived oII some division in non-core
businesses to raise money, while Iew have resorted to provide services to other
organization which need outsourcing Iacilities.

PAUSE/PREED-WITH-AUTIN STRATEGY

Pause/proceed-with-caution strategy is such a tactic. It is employed by Iirms that
wish to test ground beIore moving ahead with a Iull-Iledged grand strategy. It is a
temporary strategy just like the proIit strategy. It deIers in the way oI objectives
are deIined. The Pause/proceed-with-caution strategy is a deliberate and
conscious attempt to adjourn major strategic changes to a more opportune time or
when the Iirm is ready to move on with rapid strides again.

Example:

In the Indian shoe market dominated by the Bata and Liberty, not many oI them
might be aware that Hindustan Levers, better known Ior FMCGs, produces
substantial quantities oI shoe uppers Ior the export markets. In late 2000, it started
selling a Iew thousand pairs in the cities unobtrusively to gauge market reaction.
This could possibly be a proceed-with-caution strategy beIore it goes Iull stream
into another FMCG sector that has a lot oI potential.

Q:esti4n:

1. Under what circumstances stability strategy is Iollowed?

2. Why stability strategy is Iound to be an important aspect?

3. Give examples oI stability strategy Iollowed in India.

4. Trace the various types oI stability strategy.

Less4n 32 Gr4t Strategy

321 Intr4d:cti4n:

Analysis oI company Iailures Irom the late 1980s is instructive in that it reveals
the signiIicant extent to which individual corporate Iailure is caused by
management rather then external Iactors. Commentators, depending on their
allegiances, place diIIerent weightings on the various Iactors which appear to
have caused corporate problems.

Factors blamed include:

Deregulation oI the banking system and the subsequent over-supply oI
available money Ior lending:
Widespread community expectations oI continuing inIlation in asset prices
encouraging speculation rather than productions;
The bias towards higher gearing ratios caused by the tax deductibility oI
interest and asset price speculation;
More Iavourable treatment oI capital gains as opposed to income by the
taxation system;
Poor bank-lending practices;
Bad management on the part oI borrowers;
Inadequate corporate regulation and poor corporate morality; and
Government management oI macro-economic policy

There is little doubt that each oI these Iactors contributed to an environment in
which we cold expect a higher-than-normal company Iailure rate. But they do not
explain why some companies Iail while others do not. The inability oI a particular
company to withstand major setbacks without becoming insolvent can usually be
traced back to the quality oI management. Most oI the high-proIile corporate
Iailure in the last two or three years have involved bad management, either in the
sense oI a Ilawed business strategy inappropriate speculation with borrowed Iunds
or a lack oI business morality in acting as custodian oI shareholders` interests.
Many oI them have involved a high-proIile, domineering chieI executive which
is itselI a warning signal oI potential management problems or a board where
there is a majority oI executive directors.

Some oI the corporate Iailure have had within their structure some very successIul
and well managed business.

232 Less4n f4r anagement

%he mportance of !lanning

From an individual company`s point oI view the Iirst basic lesson Irom the
Iailures oI the 1980s is in relation to the importance oI planning. Success
sometimes occurs in spite oI lack oI planning, but normally in any commercial
enterprise the only way to ensure success is to draw up plans based on achievable
assumptions about turnover, et cetera, and to work those plans through to make
sure that iI everything goes according to plan, the results will be satisIactory. This
does not mean that every business strategy should be proIitable in the short term.
It may be that a discounting period is a justiIied management decision, but beIore
making the decision, management should be aware oI the expected impact on
cash Ilow and proIit. Management can only be sure oI this by using Iinancial
budgeting. Plans or budgets should be produced by management (or consultants,
iI necessary) and then ratiIied by the board as being budgets with which, iI they
were achieved, the board (and, presumably, the shareholders) would be pleased.

The planning process also involves business risk assessment. All business are
subject to risks due to variables beyond their control, but many oI these risks can
actually be identiIied. For example, speculators in the property industry in the
1980s were subject to the risk that asset prices would level oII or actually decline.
It is up to speculators to decide whether to accept that risk in view oI their
assessment oI the potential Ior gain.

In a company`s case, the planning adopted by a board oI directors should not
expose the company to Iailure merely because a quite identiIiable risk moves
against the company. Directors need to ask themselves 'What iI questions
relevant to their particular business. Examples are 'What iI interest rates remain
high?, What iI exchange rates move against us?, 'What iI budgeted turnover is
not achieved?, 'What iI property prices Iall?, et cetera, and iI the answers are
that the business would not survive, the business plans need to be adjusted to
reduce the company`s exposure to the particular risk involved.




%he Need for a Strong Financial Function

The second lesson Irom the 1980s is in relation to the need Ior good Iinancial
reporting systems. There is a tendency Ior those oI us trained in Iinancial
management to assume that business managers have some basic understanding oI
Iinance and accounting skills, which we can presume without Iurther explanation.
We are wrong to make that assumption. There are a variety oI other skills
involved in running a business successIully, including selling skills, marketing
skills, administrative ability and personnel management. Good technical skills
(Ior example, actuarial) oIten result in promotion to senior management, but they
do not guarantee good management skills. Some successIul business people are
able to combine all oI their necessary skills and run a business personally. A more
common occurrence, however, is that successIul business people to not hold all
the necessary skills personally, but instead make judicious use oI their own skills
and the skills oI others (whether employees or outside consultants) as the need
arises.

The lack oI Iinance and accounting skills is obvious in many corporate Iailures.
Some oI our more Ilamboyant Australian directors apparently believed that it is
possible to run a business with scant regard to conventional Iinancial practice.
Typical examples are the total inability to distinguish between cash and proIit,
Iailure to use budgeting as a planning tool, and Iailure to use regular reporting oI
actual results to adjust business strategies. Even worse, and surprisingly common,
is the Iailure to keep proper books and records. How can directors expect to make
good planning decisions iI they are unable to determine their company`s current
position, or the eIIect that previous decisions have had? The lesson Ior directors is
that they must ensure that their company has a strong Iinancial Iunction capable
oI producing up-to-date Iinancial reports and Iorward budgets on a timely basis
and the directors must make use oI an analysis oI those reports to enable them to
monitor and assess the success oI the company various activities. Monthly
reporting is almost universally accepted as good business practice, and many
larger businesses in Iact now report more Irequently. Monthly reports allow
management to assess how their plans and budgets are in Iact working out, and to
take whatever remedial action asperse to be necessary beIore problems become
critical. OI course, in order Ior the monthly reports to be useIul, they must be
analyzed and compared with the expected results. Financial trends need to be
explained, particularly iI they are unIavorable. The only reason Ior taking no
action would then be because the unIavorable trend has been explained and
accepted as a temporary aberration. Some readers might thing this is all terribly
basic, but it is ignored surprisingly oIten. Insolvency practitioners oIten take
charge oI companies with turnover measured to millions, where the company
records show no sign oI monthly budgeting or cash Ilow planning, and where
Iinancial reports were only available to the board on an annual basis.

G4al-Setting f4r 4mpetitive Perf4rmance

Good planning and reporting systems are not only essential Ior survival, they are
also essential Ior competitive perIormance and growth.

Future survival depends on being able to match the competition,
Cost eIIiciency is a necessary but not suIIicient condition Ior
competitiveness. The aim must be to improve product quality, reliability,
service, customer awareness, innovation and technology.
Our standards oI quality and service are below the world average.
Management and employees must change their goals to aim at world-best
perIormance.

xpansion Strategies

The expansion grand strategy is Iollowed when an organization aims at high
growth by substantially broadening the scope oI one or more oI its businesses in
terms oI their respective customer groups, customer Iunctions, and alternative
technologies singly or jointly in order to improve its overall perIormance.

Because oI the many reasons Ior which they are adopted, expansion strategies are
quite popular. Given below are three examples to show how companies can aim at
expansion either in terms oI customer groups, customer Iunctions or alternative
technologies.

A chocolate manuIacturer expands its customer groups to include middle-
aged and old persons among its existing customer comprising oI children
and adolescents.
A stockbroker`s Iirm oIIers personalized Iinancial services to small
investors apart Irom its normal Iunctions oI dealing in shares and
debentures in order to increase the scope oI its business and spread its
risks.
A printing Iirm changes Irom the traditional latter-press printing to desk-
top publishing in order to increase its production and eIIiciency.

In each oI the above cases, the company moved in one or the other direction so as
to substantially alter its present business deIinition. Expansion strategies have a
proIound impact on a company`s internal conIiguration customer extensive
changes in almost all aspects oI internal Iunctioning. AS compared to stability,
expansion strategies are more risky.

xpansion Strategies

(a) Expansion through concentration
(b) Expansion through integration
(c) Expansion through diversiIication
(d) Expansion through cooperation
(e) Expansion through internationalization.

Expansi4n Strategies

Growth is a way oI liIe. Almost all organization s plans to expand. This is why
expansion strategies are the most popular corporate strategies Companies aim Ior
substantial growth. A growing economy, burgeoning markets, customers seeking
new ways oI need satisIaction and emerging technologies oIIer ample
opportunities Ior companies to seek expansion.

In this section, we will try to cover a lot oI ground by describing types oI
expansion strategies.

(a) Expansion through concentration
(b) Expansion through integration
(c) Expansion through diversiIication
(d) Expansion through cooperation
(e) Expansion through internationalization

(a) Expansi4n tr4:g c4ncentrati4n

Concentration is a simple, Iirst level type oI expansion grand strategy. It
involves converging resources in one or more oI a Iirm`s businesses in terms oI
their respective customer needs, customer Iunctions, or alternative technologies,
either singly or jointly, in such a manner that it results in expansion. In business
policy terminology concentration strategies are know variously as intensiIication,
Iocus or specialization strategies.

In practical terms, concentration strategies involve investment oI resources in a
product line Ior an identiIied market with the help oI proven technology. This
may be done by various means. A Iirm may attempt Iocusing intensely on existing
markets with its present products by using a market penetration type oI
concentration. Or it may try attracting new users Ior existing products resulting in
a market development type oI concentration. Alternatively it may introduce newer
products in existing markets by concentration on product development.

For expansion, concentration is oIten the Iirst preIerence strategy Ior a Iirm, Ior
the simple reason that it would like to do more oI what it is already doing. A Iirm
that is Iamiliar with an industry would naturally like to invest more in known
businesses rather than unknown ones. Each industry is unique in the sense that
there are established ways oI doing things. Firms that have been operating in an
industry Ior long are Iamiliar with these ways. So they preIer to concentrate on
these industries.

( b) Expansi4n tr4:g integrati4n

Recall that we reIerred to the horizontal and vertical dimensions oI grand
strategies in the Iirst section. These dimensions are used to deIine what are known
as integration strategies. The pivot around which integration strategies are
designed in the present set oI customer Iunctions and customer groups. In other
words a company attempts to widen the scope oI its business deIinition in such a
manner that it results in serving the same set oI customers. The alternative
technology dimension oI the business deIinition undergoes a change.

A value chain is a set oI interlinked activities perIormed by an organization right
Irom the procurement oI basis raw materials down to the marketing oI Iinished
products to the ultimate consumers. So a Iirm may move up to down the value
chain to concentrate more comprehensively on the customer groups and needs
than it is already serving. A Iirm that adopts integration as the expansion strategy
commits itselI to adjacent businesses.

Integration is an expansion strategy as its adoption results in a widening oI the
scope oI the business deIinition oI a Iirm. Integration is also a subset oI
diversiIication strategies as it involves doing something diIIerent Irom what the
Iirm has been doing previously. Several process-based industries, such as,
petrochemicals, steel, textiles or hydrocarbons, have integrated Iirms. These Iirms
deal with products with a value chain extending Irom the basic raw materials to
the ultimate consumer. Firms operating at one end oI the value chain attempt to
move up or down in the process while integrating activities adjacent to their
present activities.

(d) Expansi4n tr4:g 44perati4n

Much oI strategy literature assumes competition to be a natural state oI existence
Ior companies to operate in. Several strategy experts, notably Michael Porter,
have based their work on the assumption that companies compete in the market
Ior a limited market share. One company can beneIit at the cost oI others. It is a
win-lose situation where iI one wins then one or several others have to lose.

A contrary view has been expressed by thinkers such as James Moore, Ray
Noorda, Barry J. NalebuII and Adam M. Brandenburger that competition could
co-exist with cooperation. Corporate strategies could take into account the
possibility oI mutual cooperation with competitors while competing with them at
the same time, so that the market potential could expand. The term co-operation`
expresses the idea oI simultaneous competition and cooperation among rival Iirms
Ior mutual beneIit. The central point is oI complementarity among the interests oI
rival Iirms.

This sections deals with the strategic alternatives based on cooperation among
Iirms. As we will shortly see, such cooperation could take place in various ways.

Cooperative strategies could oI the Iollowing types:

1. Mergers
2. Takeovers (or acquisitions)
3. Joint Ventures
4. Strategic Alliances

Merger and takeover (or acquisition) strategies essentially involve the external
approach to expansion. Basically two, or occuasionally more than two, entities are
involved. There is not much diIIerence in the three used Ior such types oI
strategies and they are Irequently used synonymously. But a subtle distinction can
be made. While mergers take place when the objectives oI the buyers Iirm and the
seller Iirm are matched to a large extent, takeovers or acquisitions usually are
based on the strong motivation oI the buyer Iirm to acquire.

Takeover is a common way Ior acquisition and may be deIined as 'the attempt
(oIten sprung as a surprise) oI one Iirm ot acquire ownership oI control over
another Iirm against the wishes oI the latter`s management (and perhaps some oI
its stock-holders). But this deIinition need not be taken very seriously as in
practice, many takeovers may not have any element oI surprise, and may not
necessarily be against the wishes oI the acquired Iirm. In Iact, takeovers are
Irequently classiIies as hostile takeovers (which are against the wishes oI the
acquired Iirm), and Iriendly takeovers (by mutual consent in which case they
could also be described as mergers). Without being too Iastidious, one can use
these terms synonymously. Recall that strategic management is in an evolutionary
phase and such conIusion in terms has oIten to be taken in one`s stride.

Joint ventures occur when an independent Iirm is created by at least two other
Iirms. In an era oI globalization, joint ventures have proved to be an invaluable
strategy Ior companies looking Ior expansion opportunities globally.

Strategic alliances are partnerships between Iirms whereby their resources,
capabilities, and core competencies are combined to pursuer mutual interests to
develop, manuIacture, or distribute gods or services. Like joint ventures, strategic
alliances have become quite popular as strategic alternatives Ior Iirms looking Ior
cooperation among national as well as international partners.

BeIore we mover Iurther, another important point to point is that these strategies
are very oIten used as a means oI diversiIication. Recall, Ior instance, the example
in the previous section related to horizontal integration. Spartek took over Neycer
in order to integrate horizontally. Hi Beam Electronics merged with two other
units to Iorm Tristar Electronics, subsequently name as Solidaire India Ltd.
Merger, takeover, joint venture, and strategic alliance strategies are, thereIore,
also the means oI achieving diversiIication and integration.


(e) Expansi4n tr4:g Internati4nalizati4n

In this subsection, we Iirst have a look at the context international and national
in which Iirms adopt international strategies Ior expansion. Then we explain the
term international strategies`. A brieI description oI the types oI international
strategies is Iollowed by a reIerence to the international entry options available to
a Iirm.

Q:esti4ns:

1. Why expansion strategies are important Ior companies?

2. What is expansion through cooperation? Give examples.

3. When and why expansions through integration need to be Iollowed? Give
examples.

4. Give justiIication Ior strategic alliances.
LESSN 33 RETRENHENT STRATEGY

331 Intr4d:cti4n

Retrenchment can actually serve as a turnaround strategy, meaning the business
gains new strength by streamlining its operations and eliminating waste. II you
really want to know what a no-holds-barred lay-oII Ieels like, recall the Titanic
scenes. The ship doesn`t sink silently or swiItly into obscurity. Instead, in
agonizing detail you hear the scream oI tortured metal, the wrenching sounds oI
the hull breaking, the sickening churn that threatens to drown everything in sight,
and the last lingering groans as the ship Iinally sinks into its Iinal journey to the
bottom oI the ocean.

That`s the kind oI anguish that swirls around a corporate in the middle oI a
retrenchment. Now, this was no Ily-by-night operation: it was the India operations
oI a global dotcom brand, which has launched operation with much IanIare last
year. Interestingly, none oI the laid-oII employees expressed shock that they had
lost their jobs. All were outraged at the manner in which the message was relayed
to them: at noon, in walked a suit Irom the USA into the Mumbai head-oIIice. He
bluntly announced that the operations were being shut down Irom that moment
on, and on a note oI gallows humor concluded: 'Don`t come back aIter lunch.

Moreover, any management which believes that its soon-to-be-ex-employees
deserve no time and attention will soon see that strategy boomerang. The most
immediate impact is n employees who are still on the rolls: the harsher the
treatment to retrenched employees, the greater the insecurity in those leIt behind.
Instead oI being a highly-motivated lot who should be Iocusing on how to bring
the company out oI the doldrums into calmer waters, these employees not live
under constant Iear oI the sword. Instead oI pushing on productivity, they are not
Iocused on polishing resumes, scanning the classiIieds and hunting Ior a more
secure job in a more trustworthy company.

This isn`t just the worm`s eye view-smart companies know that they need to
minimize the damage control retrenchment bring by being open, sensitive and
values-led while planning a layoII. Scrolling down the Iedcompany.com
postings, I Iound a memo to Cisco employees in the Iirst weak oI April 2000,
which highlights how retrenchment need not be more painIul than it. Firmly
Iocused on the long-term health and reputation oI the company, the Cisco note
shows event in this diIIicult time the company is clinging to the 'core values oI
trust, open communication and integrity.

A Iormal transition support strategy has been worked out and shared with all
employees. Each aIIected employee is to receive two months` pay and beneIits
continuation to seek a new assignment or other employment outside oI Cisco.
Those who sign a severance agreement get an additional Iour months` pay and
beneIits continuation.

To ensure that inIormation is Ireely and Iully available and Transition Website
has been set up. Then, displace employees are being oIIered extensive
outplacement support: right Irom career counseling to resume writing. Finally,
Cisco partners and customer have been oIIered the chance to interview and hire
aIIected employees as a Iirst preIerence. Clearly, smart companies retrench with
brains and a heart.

332 Retrencment strategy in sc44ls:

Now that we`ve covered the potential market size, and have seen the opportunities
that await us.we must act. The Iollowing plan describes the general course oI
action and recommendations with a brieI discussion oI the organizational
strategies and the Iour P`s oI the marketing mix. It is also segmented by product
marketing, channel marketing, on-line marketing, public relations and advertising.

BeIore determining the appropriate product marketing mix we Iirst have to
consider whether we should attempt either a growth or a consolidation strategy Ior
each existing product (older discontinued products and eval releases are not
considered). Currently the company produces the Iollowing products:

Imagine the educational options that may be available Ior children in 2010.

Charter technology schools private, but publicly Iunded (could also be
Iunded by a soItware or Internet company).
Religious schools private, perhaps publicly Iunded Ior secular curricula.
Charter Cultural/ethnicity schoolspublicly or globally Iunded schools
Ior children whose parents want them to retain their heritage or learn about
another.
Home schoolsprivate, publicly Iunded, many selections Irom the
cable/Interned channel. Instructional sites could be anywhere in the world,
such as Sydney, Australia; Palo Alto, CaliI.; or Bali.
Public-university collaboration publicly Iunded Ior college-track 5-year-
olds.
Private-industry charter schoolspublic, designed to oIIset the shortage
oI electricians, carpenters, plumbers, and other craItspersons.
And, oI course, the local public schoolspublicly Iunded Ior the
remainder oI the school-age population.

With the rise oI charter schools, school choice, and wireless communication, the
reality oI such a list is closer than many may think. Add to these developments the
general concerns voiced by public oIIicals about the quality oI public schools, and
the reality becomes closer still. It is clear, then, that leaders oI public schools need
to create a competitive strategy to survive the intense rivalry Ior dollars inherent
in these diverse educational options.

Public schools no longer have a monopoly on public education, and to survive,
they must compete more eIIectively. They must choose their strategy and develop
congruent internal mechanisms to eIIectively implement that strategy.

Broadly speaking, schools may compete either on cost leadership or
through differentiation. The nettlesome question is, what would it take Ior this
generic competitive - strategy model popularized by the Harvard Business:
School`s Michael E. Porter to work Ior U.S. public schools.

A school competing on cost leadership premises to oIIer standard
education at a minimal cost. Characteristics oI this school would include basic
educational curricula (the there R`s), large class size, low administrative
component and other overhead costs, intensive screening oI budget requests, and
employee participation in cost-control eIIorts.

Public schools no longer have a monopoly on public education, and to
survive, they must compete more eIIectively.

EIIiciency is the primary Iocus in organizational decision making at this
kind oI school. Management`s role is to continuously standardize curricula and
pedagogy and to install volume 'resource procurement strategic to derive
economies-oI-scale beneIits. Management also will periodically re-engineer tasks
and activities Ior eIIiciency, and will creatively tighten the value-adding chain to
minimize waste. In public education, cost leadership may become the
retrenchment strategy Ior districts devastated by a deluge oI exiting students,
taking their 'voucher Iunds with them.

On the other hand, public schools may Iind success by imitating schools
oI choice and charter schools through differentiation strategies. DiIIerentiators
create value Ior their products by distinguishing them Irom rivals`. They meet or
exceed customer expectations Ior products and services oIIered. DiIIerentiators
may oIIer, besides the basics, specialized subjects such as Ioreign languages,
inIormational technology, business management, and global economics, all areas
that have singular value Ior some students.

Schools may compete either on cost leadership or through differentiation.

Tomorrow`s successIul schools will be build on the shiIting sands oI
competition. They will consciously elect to compete Ior student and staII
resources based on price or product diIIerentiation. Choosing a strategy will
require schools to analyze their internal resources, to identiIy and appropriate
competency, and to select a choice that is congruent with that competency.
Schools will systematically evaluate customer needs and like business, make
internal modiIication to meet those needs. Essential to the success oI
tomorrow`s schools will be administrators who understand and demonstrate
strategic leadership.

During the early and mid-1990s, schools allocated a large portion oI their
resources to embrace strategic planning. They wrote mission statements, belieI
statements, and organizational philosophies Ior their schools. They scanned their
external and internal environments using so-called SWOT analysis (Strengths,
Weaknesses, Opportunities, and Threats) to gain insight into their terrain.
Choosing a competitive strategy was not on the agenda. Now, with increasing
globalization and the emergence oI choice as a dominant theme in social and
economic matters, schools must take that next step in strategic planning. Public
school leaders must oIIer a choice to a public that demands it, and they must be
able to implement that choice more eIIectively than their competitors.

333 Retrencment strategy in service sect4r:

The role envisaged Ior the Employment Services within the new Skills
Development Strategy embraces a range oI Iunctions which include:

Broadening the vision oI employment to include development
programmes, service programmes and small business initiatives. Activities
would include directing individuals to job opportunities where they occur
in these initiatives and assisting other to begin such ventures on their own;
Assisting individuals and communities to put together project proposals to
the SETOs Ior learning programmes linked to local economic initiatives.
Advising people about the range oI support services available to them.
These may be welIare or insurance schemes such as UIF, assessment oI
existing capabilities which may have been inIormally acquired, as well as
inIormation regarding learning opportunities linked to career objectives
which people are assisted to develop.
Targeting those people Iacing retrenchment. Where large numbers oI
people are involved, the Employment Services agents would aim to assist
both employers and workers to plan how to achieve the best package oI
measures to relieve the hardship that unemployment could bring. This
would be an integral part oI what have become known as 'Social Plan
measures;
Assisting the most vulnerable groupings to acquire the basic capabilities
required to take advantage oI the support detailed above. This includes
laying Ioundation Ior personal development and social responsibility. OI
particular importance is assistance with learning which enable people to
interview skills, job search skills, time management, communication skills
and the like.

The Department oI Labour proposes oI oIIer an integrated set oI advice
services through Local Employment Services Centres. The Centres will oIIer
advice on the Iollowing services to individuals, trade unions or companies who
are involved in the process oI retrenchment:

Where skills assessment and accreditation may be accessed (including
recognition oI prior learning)
Counseling and carrer guidance (this service may be directly provided or
in the event oI large retrenchments, reIerral to other agencies may be
required.
Re-training programmes where they may be accessed and what public
Iinancial support is available.
Where possible, placement in other jobs and industries.

Somewhere along the road to prosperity the utility diversiIication
bandwagon overturned. Out oI the wreck tumbled a number oI smart and well
reached companies that had expected diversiIication to lead to better Iinancial
results. As the wreckage was being cleared a second bandwagon rolled up,
this one jammed with enthusiasts heading in the opposite direction, towards
retrenchment.

The road between diversiIication and retrenchment has been well traveled
traveledin both directionby US utilities Ior more than a decade. In the late
1980s Pinnacle West Capital Corp lost millions oI dollars when its savings and
loss unit Iailed. In 1994 PaciIic Enterprises paid $45-mil to ease shareholders ire
aIter the company embarked on what ultimately proved to be a Iailed venture in
discount drug and sports equipment retailing. In 1990 FPL Groups wrote oII
$689-mil Irom its unsuccessIul Iorays into cable TV, insurance and citrus Iruit.

More recently Connective Communication was sold by its parent utility
holding company at a loss oI $100-mil to $125-mil. Reliant Energy
Communications was put on the block aIter it made less than acceptable levels oI
revenue growth, and Touch America, which recently spun away Irom its parent
Montana Power, has since seen its stock value drop dramatically.

Researchers a decade ago looked at 20 utilities that diversiIied during the
1980s. OI the $6.5-bil invested in those ventures, the average return was 1.1.
The returns in general have not improved over the years. DiversiIication is almost
always a wealth destroyer, said R Charles Moyer, dean oI the Babcock School oI
Management at Wake Forest University, an expert in utility Iinance.

334 Retrencment in n4n-pr4fit 4rganizati4n:

This strategy may work Ior two reasons. First, the current scale oI
operations may be ineIIiciently large economists would say that diseconomies
oI scale can occur in some cases. For example, the unit cost oI production day
care may rise Ior groups above a certain size because oI variable costs that
increase with scale such as supervision or security. Cutting back, while
eliminating services Ior some children, could achieve savings, permitting the
organization to remain solvent under existing Iee schedules and rising costs oI
certain inputs. Second, the organization may have certain Iixed sources oI
revenue, such as grants or annual contributions, that would not change
substantially iI services are cut back. II these are revenue are stable, cutting back
could eliminate costs without commensurate losses in revenue, again permitting
the maintenance oI solvency.

Rising costs oI particular inputs are nothing new to the nonproIit sector. In
the 1980s, Ior example, many nonproIit had to curtail programs because oI rising
premiums Ior liability insurance. Following a retrenchment strategy, some
YMCAs and YWCAs closed their pools. Overall, however, nonproIit have a
number oI diIIerent ways to cope with the rising costs oI insurance, space,
talented staII or other speciIic inputs to their operations. A systematic
examination oI these options ensures that all possibilities will considered in thee
diIIicult situations now promoted by a booming economy.



Q:esti4ns:

1. Why retrenchment is adopted by companies?

2. How retrenchment is practiced in Indian companies?

3. Give justiIication Ior some oI the recent practices oI retrenchment.
LESSN 34 TURNARUND STRATEGY

341 Intr4d:cti4n:

A strategic turnarounds is a more serious Iorm oI external retrenchment
and leads to divestment or liquidation. Turnaround strategies derive their name
Irom the actions involved, that is, reversing a negative trend. There are certain
conditions or indicators which point out that a turnaround is needed iI the
organization has to survive. These danger signs are:

1. Persistent negative cash Ilow
2. Negative proIits
3. Declining market share
4. Deterioration in physical Iacilities
5. Overmanning in physical Iacilities
6. Overmanning, high turnover oI employees, and low morale
7. Uncompetitive products or services.
8. Mismanagement.

An organization which Iaces one or more oI these problems is oIten reIerred
to as a stick` company.

342 Te elements in a T:rnar4:nd Strategy:

Ten comparable Indian companies, in Iive groups oI two each, were
selected Ior study. In each group, one company seemed to have been more
successIul while the other less successIul in adopting the turnaround strategy.
Based on a set oI 10 elements that contribute to a turnaround, the case studiers
oI these 10 companies were analyzed.

First, it is important to not what these 10 elements are:

1. Changes in the top management

2. Initial credibility building actions

3. Neutralizing external pressures

4. Initial control

5. IdentiIying quick payoII activities
6. Quick cost reductions

7. Revenue Generation

8. Asset liquidation Ior generating cash

9. Mobilization oI the organizations

10. Better internal coordination

The comparative analysis oI the actins taken by more successIul
companies and less successIul companies revealed that no signiIicant
diIIerences was there as Iar as the Iirst three elements were considered. The
crucial diIIerence lies in the way the companies attempted a turnaround on the
basis oI initial control oI operation by the new management, quick cost
reductions through various means, mobilizing the organization Ior improving
motivation and morale, and better internal coordination.

343 Recent Ind:strial Sickness - T:rnar4:nd Strategies


The last Iive years in the Indian corporate world has been one oI the most
diIIicult times in this history. Industrial growth has decelerated. New jobs
are not being created. Small industry has suIIered to the point oI
extinction. Export growth Iell in 1998 and 1999. InIrastructural
bottlenecks perist. The environment oI political instability, coupled with
nuclear tests and sectarian violence, has not provided atmosphere
conductive to domestic and Ioreign investment. There has been real
recession in many sectors oI the industry and sickness as we understand
has been endemic across the industry.
The seeds oI the industrial sickness were sown around ten years ago by
processes beyond our control. The reasons are many and it is important to
understand some oI them beIore we attempt to chart out the turnaround
strategies.
This round oI sickness is not only about management or technology
Iailure. It has occurred due to the changing ways we do business, the
phenomena oI globaliasation, liberalization, the evolution oI e-Commerce,
the Telecommunication revolution, Lower TariII Regime, WTO are all
responsible Ior re-aligning our business needs. These have permanently
impacted value oI businesses in this country. There is an urgent need Ior
business restructuring in the changed environment and Iinancial
restructuring to match current valuation s oI business. Unless this is done
many businesses as we know may has to be closed in the next Iive years.
In the early 1990s, there was a dream which seemed to be tantalizing
within reach the dream oI becoming a new tiger, a Iast growing economy,
oI Iinding just one decade oI GDP growth at 8 per cent per year, so that
poverty can be wiped out. The dream continues to be elusive.
First a Iew numbers:

Te ackgr4:nd

A Iew Irequently asked questions on this round oI Industrial sickness have to
be answered beIore attempting to work out the turnaround strategies. The
Iollowing are the excerpts oI the interview with the Finance minister oI India
during 1998.

Is the Globalization and Liberalization responsible Ior the recessionary
trends in the Industry? Globalization and Liberalization are two
diIIerent phenomena.
Globalization reIers to the integration oI the world markets into a
seamless single market, without artiIicial barriers created by nations on
tariII, physical restrictions on movement on labour and services and
restrictions on investments in selected areas.
Liberalisaitn reIers to the domestic response to the globalization
process, where our nation responded to the pressures oI global Iorces.
DeIinitely, the path oI opening the economy is Iraught with diIIiculties
and the sickness can be attributed to the liberalization process.
How did we liberalize?
We have permitted Ioreign direct investment in many areas hitherto un
thought oI. We have reduced (rationalized) duty structures to permit
import oI many Iinished goods. We are opening up service sectors to
Ioreign competition. We have introduced regulatory bodies to match
international standards oI regulation and supervision.
Did we have to liberalize?
Communications are integrating global markets like never beIore and
it is important to note that this communications revolution is mostly
responsible Ior the phenomena we are witnessing. We do not have a
choice but to liberalise. There could be a debate on degrees and on the
pace but in the long run there is no place Ior insular economies.
Did the conditionality oI the loan Irom the IMF trigger the
recessionary process?
Every lender comes with his conditions. This is to be expected.
Political wisdom and expert negotiating skills are needed to soIten the
blows oI this borrowing. It must be understood that the Iirst tranche oI
loan came in when the Iorex reserves oI out country were at a low oI
$2 Billion, hardly enough to Iinance a month oI imports. We could not
have been at a commanding position to dictate terms to the creditor to
determine what we wanted. While most oI the conditions are relevant
in a globalised economy, what could have been delayed and
implemented in stages were hurried. The pains oI transition only
increased. We were not prepared enough.
Did the South East Asian crisis impact our economy? The collapse oI
the Asian economies plunged the area into an era oI high interest
rates, high inIlation; large scale drops in asset values, high
unemployment and high devaluation oI currencies. There is deIinitely
a domino eIIect on out country; through we were largely insulated
Irom the ills oI the collapse. The eIIect resulted in cheaper impost into
the country. The South Asian crises did impact Foreign Direct
Investment into this country. Our rupee did not devalue at the same
rate as the other currencies in this region. Even now, Iour years aIter
the collapse, exports Irom India in Textiles and Consumer Goods are
less competitive than Irom these economies.
While we undertook the painIul transition Irom a command economy
to a liberalized one in these years, it is unIortunate that the collapse
happened at the same time rubbing salt into the wounds. DeIinitely the
Iires oI the recession in the economy were Iuelled by the South Asian
collapse.
Is the loss oI protection a reason Ior recession? OI course, yes Ior two
reasons.
1. The domestic capital goods industry was ineIIicient.
a. The industry was not technologically contemporary to
enable eIIicient processes.
b. The costs were deIinitely higher than similar goods in the
west
c. The capacities in the capital goods industry were small in
comparison to global sizes making it that much
ineIIicient in production levels and costs.

The capital goods industry was unable to compete

The high tariIIs Ior imports in the earlier years clouded many oI the
ineIIicient processes oI the domestic industries. These cost were
passed on to the customers. On liberalization, these cost ineIIiciencies
were exposed. Better quality goods could be imported and were
available at lesser prices. The consumer was in no mood to pardon
sub-standard quality and also was willing to pay a higher price in
exchange oI quality or aesthetics. This Iundamental change happened
only because consumer was exposed to these products unlike never
beIore.
Did the collapse oI the capital market impact? The capital markets
were waiting to collapse. Valuations were high and unjustiIied and
unrelated to perIormance. Companies were accessing the markets
without adequate asset bases or without underlying business plans. The
conIidence oI the investor was shattered many times. This can largely
be attributed to poor appraisal skills, poor regulation and greed oI the
investor. The collapse took the primary market into a deep coma with
not signs oI revival except in the IT sector. There is a lesson here Ior
all oI us. Naturally, a vagrant economy depends hagiology on an active
capital market. With the Government slowly withdrawing Irom
supporting Financial Institutions and Investment introduces through
state Iunded agencies drying up it has become increasingly important
Ior an active primary capital market as the basis Ior revival.
Did the Banking Sector help? The high Non PerIorming Assets oI the
banking sector impacted credit growth in two ways.
(a) The higher, rather stricter provisioning norms
impacted proIits oI the banking sector.
(b) Bankers shiIted Irom cautious lending to Non-
lending to save their jobs. Risk taking which is the
core oI a lending exercise was given a go by.
(c) There are deIinitely a shiIt credit to investments
with most banks taking to 'saIe investments
resulting in low credit expansion.
(d) The slow response oI the bankers to the diIIicult
times, creating sickness in many industries which
otherwise could have been prevented.

Did the high borrowing to Iund Iiscal deIicit induce sickness? The
high revenue and Iiscal deIicits oI the government did not help the
situation either. The government extensive borrowing programme
largely involves borrowing to Iinance deIicits and interest payments.
This results in 'crowding out the investments. Money earlier
available to the Government to Iund Development Financial Institution
was going to meet revenue deIicits. This Iiscal proIligacy does not
help capital Iormulation. Stricter Iiscal discipline has to be conIormed
iI the government wants to at the IoreIront oI the restructuring process.
The resource building done by the government Ior decades has
deIinitely shrunk and impacted the recessionary process.

344 T:rnar4:nd Strategies:

The solution to these problems, however, lies within. Understanding the
impact oI the above phenomena is integral to any turnaround strategy.

Any turnaround strategy or restructuring exercise (and I am using these terms
in this paper interchangeably) involves

Organizational Restructuring
PortIolio Restructuring and
Financial Restructuring

3.4.4.1 Organizational restructuring:

The response Irom within companies have to redesign their operations Ior a
variety oI reasons. The text book prescription is to align company structure
with strategy. This includes redrawing oI divisional boundaries, Ilattening oI
hierarchic levels, spreading oI spans oI control, reducing product
diversiIication revising compensation streamlining process and reIorming
governance. Some oI the response will take years to achieve. The core oI
restructuring seems to be to hasteh decision making processes without
aIIecting quality.

Employee compensation does play an important role in the turnaround
strategy. It pays to unlock the entrepreneurial spirit oI the employees by
oIIering them stock options in exchange oI perIormance. Results could be
dramatic it the employees know that they could be pare owners oI the
company.

The new emphasis on improved corporate governance is not misplaced. The
rules oI running the company at an apex level must lend itselI to more
transparent processes iI lenders have to have conIidence in the way the
company rules itselI. This would include broad basing the Board with
independent directors, working Audit Committees, transparent compensation
packages etc.


3442 P4rtf4li4 Restr:ct:ring

The second part oI the turnaround strategy is the shedding oI unrelated assets,
identiIying slow and non moving stocks shiIting emphasis within the current
assets portIolio and maybe even outsourcing production iI it results in
reduction oI costs.

The restructuring need not be one way. II it makes sense to acquire
businesses, say, raw material production companies Ior eIIicient process, such
acquisition should be considered.

Is the era oI diversiIication as a strategy as a strategy over? DiversiIication as
a growth strategy was relevant in the permit raj. The diversiIied conglomerate
is seen as a relic oI the licence raj when strict MRTP controls Iorced
corporates to venture into new areas in order to grow. The Iirst Iour decades
saw the rise oI conglomerates like Century Textiles, JK Corp, Indian Rayon.
But what was a panacea Ior growth became brimstone in the neck under the
liberalized regime oI the nineties. Lacking in Iocus and saddled with un-
remunerative assets, the erstwhile giants were not equipped to combat the
emergence oI global sized competitors. Many a blue chip Iell by the wayside
in this decade. Recessionary pressures Iorced restructuring processes very
oIten cutting down and hiving out businesses which were not relevant to the
corporate growth strategy.

The classic case oI a diversiIied company unable to respond to the
liberalization processes will be Voltas. The company was the manuIacturer oI
Air Conditioners, reIrigerators, Turnkey projects engineering services,
washing machine, Iruits drinks the list goes on. The strategy oI diversiIication
worked till the advent oI liberalization. The lack oI Iocus, limited
accountability across dispersed Iacilities, high employee cost and high degree
oI inoperative assets required a surgical response.

The core oI the strategy oI turnaround in Voltas seems to be:

To identiIy the businesses in which the company has in built strengths
To hive oII non core businesses
To relocate excess labour due to the down sizing oI operations.
To Iund voluntary retirement schemes (VRS) to shiIt the excess labour

These are obviously painIul but he restructuring exercise is being geared to meet
the changing market competition. Voltas, really has no choice.
3253 inancial restr:ct:ring pr4cess:

This involves

a) IdentiIying value drivers in cash Ilows
b) Developing cost consciousness
c) Driving quality
d) Understanding impact oI inIormation technologies on the business process
e) Understanding tax structures and the direction tax structure would take
I) Understanding capital needs Ior Iinancial restructuring between debt and equity

345 Understanding Val:e as a t:rnar4:nd strategy:

Fundamental to Iinancial restructuring, is understanding valuation oI
businesses. There are many techniques oI valuation. But there is not superior
method to understanding the cash Ilow oI the business. In a scenario where there
is widespread crosion in business more due to global Iorces rather than die to
management Iailures it is important to understand Value and adjust capital
structures and cost to the changed value.

The early nineties witnessed a spate oI Aqua Culture companies dotting
the coast line. These companies were set up shiIting production Irom the coast
links oI Thailand, South Korea and Malaysia. Without understanding the
dynamics oI this shiIting, there was large scale investment in Iacilities. However,
stricter environment conditions imposed on these units rendered the units un-
viable. In Iact many oI them had to close down. What has been missed in this is
the act that small Iarms continue to thrive well. Capital costs did not take into
account the cost oI degradation oI land. Values were permanently aIIected by the
global trends in protection oI environment.

The case in Granite is slightly diIIerent. The late eighties saw a spate oI
industries being set up to convent the raw blocks into Iinished stones. However
the industry was over capitalized and poor management practices saw the death oI
the industry. Excess capacities were built up not related to the mining rights.
Capital costs were justiIied on Institutional interest not on real values. The crash
was bound to happen. The survivors are slowly building up markets a reduced
capital costs.
This would involve

a) Understanding cash Ilows oI the existing businesses
b) Estimating Iuture Iree cash Ilows in the changed scenario
c) Shedding surplus assets and hiving oII unrelated assets

Lee Iacocca, when he took over Chrysler noticed that the company was
bleeding cash made the remark that 'there is no expenditure which cannot go
down by 10.

The signiIicant development in the last Iive years on the perIormance oI
corporates has been in the area oI cost control. Earlier, in an era oI growth (during
the period 1980-1992) acquisition oI capital and growth in assets was driving
corporates. However, this was done independent oI costs oI such acquisition and
indiIIerent to whether the costs oI capital matched the returns on assets. The
slump in the stock market coupled with cost and time overruns in these project,
resulted in increasing dependence Ior debt Iunds to complete projects and a
consequent increase in interest costs. The changing demand patterns also leIt
companies with huge inventories and excess capacities. Interest cost rose
signiIicantly. Sickness was natural in such a scenario with costs Iar outstripping
revenues.

The past three years has changed all that. Cost consciousness has pervaded
every aspect oI the organization. It is signiIicant that the success oI many
turnaround stories in the country has centred around cost control. There should be
no expense which cannot be questioned. The good old Zero based budgeting
techniques should Iind a place in every turnaround strategy.

Another major turnaround response is the time tested Iire Iighting exercise
better working capital management. Managing working capital irrespective oI
the industry has been the Iocus Ior most Indian companies.

The lower credit expansion in the banking sector and also a study oI the
working capital rations indicate sharper working capital management practices.
The belt tightening has happened across industries including cement, FMCG
sector, industrial products and capital goods. Continuous re engineering oI
operations results in eIIective use oI working capital over the years. This includes
lowering raw material inventory holding levels. Hindustan Levers, Britannia
Industries, Cadbury, Bata have all achieved almost negative working capital
through right management oI inventory and receivables. This needs some
participation oI large industries in the supply chain management oI its vendors.

Current technology permits banking systems to transIer Iunds instantly at
costs which are lower than the interest costs due the delayed transit times.
Customers must be enthused to use bang technologies Ior quicker transIer oI
Iunds.
IdentiIying slow moving and non moving stores at the Iactory and shop
Iloor and disposing them is a must.

Some Ireight consolidation may help. It should be possible to save costs
on Ireight iI that local customers can be serviced locally by exchange oI
inIormation between companies across various states. Standardization oI products
and quality orientation permits this. With states very soon achieving
rationalization oI sales tax structures, Ireight saving provides a tremendous
opportunity in commodity products.

There can be no better response to a diIIicult situation than to make the
customer notice that ultimately you have a better product, and a product which
one can product with consistency over a period oI time. Quality is an attitude
which most oI the time costs little in material but more in behavioral costs. Every
employee must be able to Ieel Ior the quality oI work he is delivering to the
organization. Quality does net also merely mean that oI the product but also oI the
delivery system and relationship management oI the customer. Documentation,
service and quality oI warranty will deIinitely inIluence the customer to stick to
the product. Introduction oI Total Quality management, ISO 9000 must be
initiated even in small enterprises. The customer derives comIort iI the system oI
the vendor is driven to quality.

The IT sector and consequently e-Commerce will change the way oI
businesses are run in the next twenty years. The impact will be as signiIicant as
the use oI the electricity and the motor car in the beginning oI this millennium.
Business will be totally transIormed and no turn around strategy can be complete
without understanding the impact oI IT on the business processes.

The beneIits are well known. It is still worth recounting some obvious
ones.

Larger amount oI inIormation and analysis oI this inIormation as available
with the corporate Ior decision making processes.
Implementation oI ERP related systems lends the organization to respond
as a organic whole. This deIinitely makes the organization more eIIicient
and deIinitely pays back the investment.
Wider interaction with customers, vendors, users oI the corporate is
possible
Internal decision making processes can be more eIIicient and eIIective
Top quality management time can be devoted to organisatinal responses
and not merely to data validation.

A debt restructuring process will usually include one or more oI the Iollowing:

The deIerment oI payment oI interest to be repaid over a period oI time
The deIerment oI payment oI principal to be repaid over a period oI time
The lowering oI interest rates to match available cash Ilow. This is done
by reworking interest rates Irom the date oI declaration oI the unit as an
NPA. This is unrelated to the value oI the business but gives comIort to
the banker in decision banking.
Waiver oI penal interest and liquidated damages
The conversion oI interest or principal dues into risk bearing
equity/preIerence shares not a popular method, but an obvious one.
Settlement with trade creditors either at a reduced level oI payment over a
period oI time-maybe even exchanges it with equity.
One Time Settlement oI dues with the institutions and banks to result in
reduction oI debt burden oI the company.
Issue oI Iresh equity to rationalize the debt equity structure and the
Iunding capital requirements.
Issues oI Sales tax, Excise Duty concessions which are usually granted
through the BIFR.

Any deIerment oI interest or principal payments is only a manner oI readjusting
debt and adjusting the repayment ability on Iuture cash Ilows. It is not a solution
to reduction oI debt, which can happen through waivers.

A particular mention must be made oI One Time Settlement (OTS) oI dues
with the Iinancial institutions and banks. As understood, this reIers to the ability
to settle the dues oI the corporate at a discounted value to the outstanding. Usually
these payments are made over a period oI time between 3 36 months. The
discount will enable write backs in the balance sheet which will strengthen the
debt equity structure. The banks, though have to take a write oI on their books
but is makes sense to them to transIer risk to a new lender or a risk taker. The new
lender may decide to support the unit based on the rationalization oI the capital
structure. Banks are increasingly resorting to OTS as a method oI recovering bad
loans. However, the system is still not geared to Iund these OTS and there is still
reluctance amongst the nationalized banks to Iund the dues at a discounted values.
The scene is steadily changing. This however still a diIIicult decision to take as
the banker has to judge the amount oI write oII he is willing to take on his balance
sheet. This needs a through understanding oI the value oI the business and a Iair
understanding oI Iuture cash Ilows. Most banker s may not be endowed with the
knowledge oI valuation or with the courage to understand erosion and admit a
write oII. For instance, a modern textile mil oI 25000 spindles which would have
cost Rs 40 crores to establish is now available at halI the price within this country.
The mills are competing with similar capacities established in South and South
East Asia. These economies have experience a dramatic Iall in exchange rates.
The recession in the capital goods industry has also impacted the prices oI
machinery. This twin impact would mean that the capacities in these nations will
become more competitive Ior exports.

It is here that Trade Associations play an important role to sensitize the
institutions and lenders to the altered rules oI the game. The power oI negotiating
as a group is obviously must more and it is Important Ior the banker and
institutions to distinguish between management Iailures and Iailure due to the
changed economic situations. The Iormer should be punished. The latter should
have a response in restructuring.

34 T:rnar4:nd anagement Pr4cess:

5-Step Process

Below is Turnaround Central`s 5-step process to successIully get your
business back on track.

Assessment !hase weeks)

1. Evaluate the Iirm`s condition and Iuture viability, and develop next steps
2. Conduct the Alignment Meeting with the management and other
stakeholders to present assessment results, discuss the action plan and
determine who will lead the turnaround.

mplementation !hase -18 months)

3. Create a detailed Business Plant based on the short-term and long-term
considerations.
4. Stabilize the Business Take immediate steps to increase liquidity,
improve creditor relations, and reduce costs.
5. Restructure the business including recorganizing Iinance, executing the
business plan, improving employee morale, empowering the management
team, building consensus, and increasing communications throughout the
company. In addition, accountabity and control processes are put into
place including robust Iinancial reporting. Balanced scorecards, budgets
and monthly sales and expense reviews. II necessary identiIy strategic
investors, tenders and buyers to recapitalize or sell the Iirm.

Q:esti4ns:

1. What is turnaround management? Give examples.
2. Explain the process oI turnaround management.
3. Explain understanding value as a turnaround strategy
4. Write a note on portIolio restructuring

LESSN 35 DIVERSIIATIN

351 Intr4d:cti4n

In this corporate world, organizations strive very hard to reach top
positions. The organizations tend to Iollow various type oI strategies and get good
results out oI it. In the era oI heavy competitions organization think in diIIerent
ways and try to bring new innovative strategies. One among the strategies is the
diversiIication strategy which is widely implemented by major companies.
DiversiIication strategy oIIers high rewards iI steps are taken Ior their proper
implementation. In this section the various case studies oI diIIerent companies are
presented which shows how success has touched their doorsteps through
diversiIication strategy.

DiversiIication is a much-used and much-talked about set oI strategies.
These strategies involve all the dimensions oI strategic alternatives.
DiversiIication may involve internal or external, related or unrelated, horizontal or
vertical, and active or passive dimensions either singly or collectively.
Essentially, diversiIication involves a substantial change in the business deIinition
singly or jointly in terms oI customer Iunctions, customer groups, or
alternative technologies oI one or more oI a Iirm`s businesses.

352 Different types 4f diversificati4n strategies:

1) 4ncentric diversificati4n

When an organization takes up an activity in such a manner that is related
to the existing business deIinition oI one or more oI a Iirm`s businesses, either in
terms oI customer groups, customer Iunctions or alternative technologies, it is
called concentric diversiIication.

Concentric diversiIication may be oI three types:

1. Marketing related concentric diversiIication
2. Technology related concentric diversiIication
3. Market and technology related concentric diversiIication

2) Conglomerate diversiIication

When an organization adopts a strategy which requires taking up oI those
activities which are unrelated to the existing business deIiniti oI one or more oI its
businesses, either in terms oI their respective customer groups, customer Iunctions
or alternative technologies, it is called conglomerate diversiIication.

The idea whether diversiIication is an eIIective strategy has assumed
signiIicance in view oI the Iact that ideas oI core competence and Iocus (what we
call concentration here) have gained greater acceptability among companies,
investors. Consultants and academicians in the developed countries,
DiversiIications, specially unrelated ones, seem to be out oI Iavor. But there is a
divergent and interesting view oI which strategic could be better Ior companies in
developing countries like India.

The case study oI various companies are given below:

1 Te Essar Gr4:p:

All the major business newspaper headlines in India on 21 July 1999, were
screaming, 'ssar creates history, defaults on FRN $ million`. Essar
group has deIaulted on its loan repayment oI $250 million oI Iloating rate
notes iI international markets. It became the Iirst Indian Company to
deIault in International market raising Iears in Indian corporate sector
regarding Iuture Iund raising capabilities in the international market.

For last one year, it had been Irantically trying to avoid the unavoidable
and in the process, rolling itselI in many controversies. During 1998, steel
consumers has accused Government oI India in media oI creating import
barriers to Iavor and bail out Essar. This created a political controversy
and caused embarrassment to the government. Essar became untouchable
Ior government controlled Iinancial institutions. The Iinancial institutions
which had major exposure in Essar, backed oII and leIt Essar in the lurch
when it came to disburse sanctioned land Ior the ongoing projects oI
Essar. It was not only a Iinancially disastrous year Ior the group but its
public image also suIIered major setback.

Ruia brothers, Shashi, 55 and Ravi, 50 who had stunned Indian corporate
sector with their vision and daring entrepreneurship were today in a
quagmire oI their own making. While on diversiIication spree, entering
one business aIter another, they were obviously not aware that very soon
the group would become a case study at the management school.

Today Essar group is considering various options to consolidate, sell
companies that it had nurtured with heavy debt exposure in past Iew years.
Its major companies are in core inIrastructure areas with strict regulations,
controls and major companies are in core inIrastructure areas with strict
regulations, controls and major government role and interventions. Essar
is wondering what went wrong in its dreams and their executions. Was it
saIe, Pokharn nuclear tests in 1998, continuing recession in Indian and
world market, stock market depressions in India or was it structured to
doom.

7oup P7ofile

Nand Kishore Ruia, a marwari businessmen settled in Madras in 1956, Iounded
the Essar group. Essar started oII by exporting iron ore. In 1956, it acquired a
stevedoring contract Ior bringing iron Irom the mine heads and loading it onto
sheds. Sahsi (ESS) and Ravi (AR) diversiIied Irom Iamily business oI trading and
ventured into shipping in 1969. AIter shipping Essar moved into construction
activity and then into the supply critical support services Ior the oil and gas sector.
Their major breakthrough came in the Iorm oI a drilling contract awarded by
ONGC. From these successIul medium-sized business in marine and port
constructions, oil-drilling, and shipping, Essar Iirst took the opportunity provided
by the gas pipeline to start a very successIul sponge iron business.

It has been the entrepreneurial sprit and opportunism that has been driving the
group Irom a Rs. 150 core shipping company to a Rs. 4000 core conglomerate.
The group was slowly adding one business aIter another until late eighties.

In 1990`s Government oI India started economic liberalization programme
that promised growth and vision oI catching up with the late industrializing
economies oI Southeast. Capital markets were opened up and reaising Iinances
became much easier and it became a prime Iacilitator oI rapid growth. The
incredible rate oI growth oI Essar group during this period saw them in virtually
all the core sectors.


Ruia brothers had a resplendent vision oI creating a huge empire and they
exploited every opportunity that same their way and created many new
avenues to realize their vision. Mr, Shashi Ruia engineered Essar`s
conquests and they were well capitalized by his younger brother Ravi.
Essar restructured itselI in 1994 to include senior proIessional managers
Irom leading public sector undertakings to manager their growing,
diversiIied businesses. These proIessionals were given Iree had Ior
running independent units. Mr. Sashi Ruia kept the group`s external
environment & business development activities with himselI. Ravi Ruia
ws given charge oI the operations & overseas businesses. The second
generation also started making their way in Iamily business. Today
Prashant Ruia is the director-in-charge oI Essar`s Power, Oil & Steel
businesses along with communications and personnel. Anshuman Ruia
looks aIter Shipping.

Essar group entered in global business by commissioning a $90
million cold rolled steel plant, Essar Dhananjaya (ED), in Indonesia in
1994 oI 150,000 tonnes capacity Ied by HRC Irom Essar Gujarat Limited
in a joining venture with the Garama group oI Indonesia. ED was to
import hot rolled coils Irom Essar Gujarat`s Steel plant in India. During
that period Ruias had been working up on setting more such ventures in
Bangladesh, Saudi Arabia or Pakistan. The Iocus Ior such expansions was
to beat possible downturs in domestic demand. Essar also acquired a three-
year-old textile mill Woventex Ltd. in Mauritius. Through this they
wanted to move in AIrica which they belieed would soon see and
economic upsurge.

On Essar new business strategy Sashi Ruia commented, 'We will get into
any new business that will make us more money.

Ravi Ruia commented on Essar`s global strategy in 1994, 'We will get
into any new business that will make us more money.

Ravi Ruia commented on Essar`s global strategy in 1994, 'We are looking
at impact oI globalization on existing businesses in country. Next we are looking
Ior opportunities opening up overseas. Not just those with synergies with our
existing operations, but also those that have potential Ior us. Commenting on
new opportunities he said, 'Today the canvas is wide open. We must have an
open mind. We should have basic synergies with what we do, but we must not
miss a major opportunity just because it does not Iit in with our basic operations.


According to Prashant Ruia, Chairman oI ESSMCO Ior reasons oI Iast
acquisition by Essar shipping limited is '. -uying ships has -ecome easier now.
it takes less time and the access to funds us easier`.

This philosophy became their prime motivator Ior a rapid expansion and
acquisition. Their strategy hinged on a simple premise one project will nurture
another project & co on. In mid 90`s the joke at the corporate headquarters oI
Essar group at Essar House, Mumbai used to be that which new company has the
group opened today.


Essar group wanted increase its assets to Rs. 31,300 crore, income to
Rs.19,400 crore and gross proIit to Rs.7,500 crore by the year 2001-02. In this
process they went on an expansion spree even at high cost debt to reap beneIits
Irom the post liberalization growth in India. However the economy growth which
they envisaged didn`t last long. Their steel project was delayed. It was plague and
then Iloods in Sturat, Gujarat (their plant location) that took their tool on project.
But major Iactors ere their planning and project management skills. They had
changed the project plan and basic technology number oI times. Because oI this
they could not exploit the price boom in steel sector and could not repay the loans
to the Iinancial institutions. When they came on stream with steel plant, Indian
economy started cooling oII, Southeast Asian crises happened, overcapacity in
steel sector led to a global glut and price recession in steel, all working against
their risky debt strategy.

Today, it has assets worth Rs. 14,530 crore, income oI Rs. 4,030 crore and
gross proIit oI Rs. 1,150 crore. Essar is one oI India`s leading business groups and
has phenomenal presence in Steel, Shipping, Oil & Gas, Power Telecom and Iew
Iinancial services companies besides other small businesses. Steel accounts Ior
70.30 percent oI the group`s turnover, while shipping accounts Ior 17.30 percent.
The portIolio is rather diverse with very little synergy amongst them, except that
all big companies core industries.


Tamilnad: ercantile ank

Essar group had mastered the art oI diverting Iunds, and did not limit itselI
to the manuIacturing or trading activities. They had a long association with Tamil
Nadu and had been eyeing acquisition oI Tamil Nadu Mercantile Bank, a
Tuticorin-based leading bank. During 1994, Essar group acquired 71 percent stake
controlling stake in TNMB, at a cost oI Rs. 70 crore. TMB is bank run by Nadar
community oI Tamil Nadu. The Nadar`s held 80 percent oI the bank`s Rs.1044.04
crore deposits.

The takeover however entered into controversy when Nadar community
protested against the transIer. There was an 18-months long tussle to gain control
Law Board approved it. The Nadar community, which promoted the Bank, tried
to ensure that the control oI the bank did not pass out oI its hands. The community
Iloated the Nadar Mahajan Bank Share Investros Forum and tried to buy back
Essar`s stake through its Share Retrieval Trust. The Iight starting Irom RBI, CLB
Iinally went o Supreme Court oI India. Essar demanded Rs. 90 crore Irom Nadar
community Ior buyback oI shares in an out oI court settlement. The Esar group by
then had given up its hopes to acquire the Tamilnadu Mercantile Bank Ltd.
(TNMB). Nadar community could not muster the much needed Iunds to buyback
the shares. Essar then sold its stake Ior Rs. 130 crore to Mr. C Sivasankaran, and
NRI businessman. The group achieved good returns on its investments oI Rs. 70
crore made in TNMB to acquire majority stake two years ago.
Besides all these companies Essar holding included two Iinancaial
companies and investments oI $50 million in AIro-Asian Satellite Company.
There are numerous companies and ventures where Essar holds equity shares and
Iuture participation strategy. Essar group is having a strong step in diversiIication
strategy, it is sure to reach success.

2 ritannia Ind:stries

Repositioning oI Britannia Industries looks at the issues relating ot
Britannia`s repositioning and diversiIication exercise. Britannia kicked oII its
repositioning exercise in 1997 when it changed its logo and corporate slogan to
transIorm itselI Irom a bakery business to a Iood business. Subsequently as a part
oI its diversiIication plans it entered the dairy business. But, it has not got so
much name in this Iield, and it is not able to compete with Amul.

3 airness Wars

Fairness Wars Iocuses on the Iierce competition among the major players
in the Iairness products segment oI the personal care market. The case deals with
HLL`s Fair & Lovely, Cavin Kare`s Fairever, and Godrej`s Fair Glow. The case
also talks about how the Iairness Iormula was not more restricted to creams, but
was also extended to soaps and talcum powders. It has Iollowed concentric
diversiIication strategy and it is striving to achieve victory in the Iairness wars.

4 Tanisq`s S:ccess

Tanishq`s Success Story talks about Tanishq`s initial Iailure, the recovery
process and the eventual success. The branded jewelry line Irom Titan Industries
was not very successIul when it was Iirst launched in 1995. The company
Iollowed a concentric diversiIication strategy which was a Iailure in the starting
and then it has started to pick up.

Am:l: Spreading Wide tr4:g diversificati4n

The Gujarat Co-operative Milk Marketing Federation (GCMMF) is India`s
largest Iood marketing body and is the apex body oI milk co-operatives in
Gujarate. Amul, promoted by GCMMF entered into the areas oI ice creams, curd,
panner, cheese and condensed milk in 1996, based n the recommendations oI
IMRB, which conducted a consumer survey to identiIy the products that
customers wanted Irom Amul. In 1999, Amul launched its branded 'yoghurt and
entered the instant coIIee market in 2001 through a tie-up with Tata coIIee.
Many multinational Iood corporations backed by liberalization and
economic reIorms in the country, Ilooded the Indian market with a variety oI Iood
products, thereby Iorcing a change in the liIestyles and Iood tastes oI the people in
India. Amul took advantage oI this by introducing its branded 'pizzas into the
market, thereby diversiIying its portIolio. In 2001, Amul launches pizzas in the
Indian market in the Rs. 20-25 price range. This price was signiIicantly lower
than those oI the Pizza Hut and Domino`s.

The case study Iocuses on the entry oI Amul into the Iast Iood segment
and provides an insight into Amul`s diversiIication strategy behind introducing
the pizzas into the market.

4eing`s diversificati4n strategy

Since moving its corporate headquarters to Chicago in September, Boeing
has weathered one diIIiculty aIter another. A downturn in the aviation industry
took a turn Ior the worse with September`s terrorist attacks. The company
announced its plans to lay oII 30,000 commercial jet workers; the company`s
2001 delivery projection oI 538 aircraIt Ior Boeing Commercial Airplanes was
reduced to 500 and 2002 could see deliveries in the low 400s. In mid-November,
Boeing Co. CEO Phil Condit estimated it would take 28 to 42 months Ior airline
traIIic to recover Irom 9/11, a span in which Boeing should lose production oI
more than 1,000 airplanes.

The hard luck didn`t end there, though. The company cut its 2002 sales
Iorecast by $1 billion aIter the Pentagon awarded the largest military contract in
history, $200 billion.

Shriram Group is an organization with a strong corporate personality. A
multi-locational, multi-dimensional Rs. 2.7 billion concern serving 2.7 million
customers, Shriram today has acquired a signiIicant national presence in the Iield
oI Iinancial services, with a leadership position in many segments. Our Policy is
to achieve service exclusivity; corporate identity and customer care quality
through our vast Network Structure, Collection Centres and Network
Management.

We have also successIully diversiIied into transport and property
development. It`s hard to imagine that we started oII as a single operation in a
single town. With a vibrant and young management team heading each activity,
the group is always on the lookout Ior associations and opportunities, both
internationally and in India.

Despite all our enthusiasm oI progress, however our management has
never Iorgotten that they have a special responsibility towards the service
provided.

V4ltas, a Tata group company, has embarked, upon an exercise to chare out a
long-tern strategy Ior the various businesses in its Iold. This has been christented
as Project Eagle.

Ishaat Hussain, chairman, Voltal said in a statement distributed at he 48
th

annual general meeting. 'The title is apt; the panoramic and all encompassing
Iield oI vision oI that sharp-eyed bird reIlects the long range perspective, which
we have also attempted. The exercise seeks to ascertain what could be the
eventual Iuture oI each line oI business in year to come. In all oI these, the broad
trend is to move towards being a total solutions provider`.

This role promises a better utilization oI Voltas` technological capabilities
and its global alliances and agencies as well as better prospects oI sustained
relationships and interactions with our clientele, Hussain said.

The company has decided to strengthen and establish its core businesses.
Some businesses include electrical and mechanical business, central air
conditioning and reIrigeration, mining and construction equipment, textile
machinery, cooling appliances among others.

Over the past Iew years, the company has been divesting its interests in
non-core subsidiaries, while certain subsidiaries such as Voltas International have
been merged with the parent.

Hussain said these measures have been taken to maximize the potential oI
our chosen businesses, to sharpen our edge and increase our competitiveness.

The company had undertaken a Iinancial restructuring which has bought
down the debt-equity ration to 0.52 : 1. The company is targeting a turnover oI
over Rs. 1,000 crore in the current Iiscal.

The company`s electrical and mechanical projects and services is
expanding its business by establishing marketing oIIices in Qatar, Singapore and
Egypt.

Also, with the company entering into a joint venture Ior participating in
the queen mary II project, will provide an entry an entry into more such marine
businesses in Europe.

The company is also planning to bid Ior large inIrastructure projects in
India. The central air conditioning and reIrigeration will pursue its growth
strategy by oIIering total customized cooling solutions. The company is also
planning to expand into mining services related to operations and maintenance
contracts Ior mining equipment with large mining companies in coal and other
minerals such as iron ore. Voltas corporate strategy includes manuIacturing
world-class products, whereby it can penetrate and new overseas regions Ior many
oI its diverse businesses. Especially in areas such as IorkliIt trucks, room air
conditioners, water coolers, pumps and water puriIication and sewage equipment.


Q:esti4ns:

1. Write a note on the types oI diversiIication
2. 'DiversiIication is the order oI the day Discuss.
3. 'DiversiIication is done Ior short term gains Evaluate the statement.
4. Explain how Voltas undertook diversiIication strategy.

UNIT 4

LESSN 41 ERGERS & AQUISITIN STRATEGY

411 Intr4d:cti4n:

The single larges impact globalization has made on our economy is on
size. Gone are the days when it was possible to serve domestic markets with local
sized capacities. Capacity creation in the country was also concentrated on
serving domestic markets (this was not small). But the globalized export driven
economies demanded size and eIIiciencies, which these capacities could not
match. The disadvantages oI serving markets in Iragmented capacities created
ineIIiciencies that were waiting to be corrected. Corporates must seriously look
into developing size as a strategy. The cement industry has been a spate oI
mergers in the past one year. Pharmaceutical industry is in the business oI
consolidating. Textiles should not be Iar behind and only consolidation will make
this industry strong in the wake oI global competition. Banking Sector mergers
have just begun.

What does this mean Ior the small company? Can an SSI merge as
eIIiciently as a large corporate? Isn`t this strategy irrelevant Ior the thousands oI
sick small companies?

The diIIiculty in Iinding 'associated entities in the SSI sector is
appreciated.

Mergers impact perIormance in the many ways

Marketing becomes eIIicient with the company able to oIIer a wider range
oI products under one rooI. Customers are beneIited Irom not having to go
to diIIerent producers Ior their needs.
Purchasing is deIinitely more eIIicient. Increase in size oI purchases will
imply more discounts and hence lesser costs.
Administrative and marketing expenses will come down on a per unit oI
cost basis.
Interest costs also will come down iI the lenders view the growth as an
eIIicient process giving more leverage to the borrower to bargain on
interest rates.
Implementation oI quality standards is easier across a wider range oI
production. Once again, the costs oI implementing the demanding
standards oI quality especially in the wake oI international competition are
high. To survive in such an environment, it is important to be able to
implement these standards
These are only some oI the beneIits oI larger sizes

412 Dangers 4f & A:

Control: The possible loss oI control consequent to a merger process
would be the single largest stumbling block in going ahead with this
strategy. There are issues related to sentiment, Iamily ownership,
leadership status in the limited area oI operations, control over resources
and Iinally control over the decision making processes.
Competition: Mergers with the competitors as a strategy may also imply
that suddenly one day we Iind discussing strategy with our biggest
competitor. ConIidential inIormation oI the control oI which give status in
the company may now have to share with competition whose interests is
not clear.
Employment: Inherent in a merger process is downsizing employment.
More oIten than not, there is wide scale retrenchment as there is a deIinite
economy oI labour achieved due to scale and duplication oI eIIort. The
moral hazard oI instigating retrenchment is an issue.
Culture: More mergers come to naught on cultural diIIerences. These
would typically cover work styles, inIormation Ilow patterns levels oI
transparency, diIIerences in compensation packages etc.

413 Examples 4f &A in India:

Tata Teleservices and Hughes Tele.com have signed a memorandum oI
understanding (MoU) to merge their basic telephony operations in a deal valued at
more than $1 billion. The Tat as will be the single largest shareholder in the
merged entity that covers the Andhra Pradesh and Maharashtra circles with a
subscriber base oI over 160,000. The other equity partners in the venture will be
Hughes, Networks, the Mittals oI the Ispat group and Tlltel Corporation. The
enterprise value has been arrived at on the basis oI the two Iirms` business
earnings and total investments. The merger with Hughes Tele.com in aimed at
enhancing the Tat as` presence in the key Maharashtra and Mumbai circles. By
merging their basic operations, the two plan to eliminate competition and save
costs.

HLL` grew rapidly through its acquisitions oI Lakme and Brooke Bond. In 1999
alone, $2.3 trillion worth or mergers and acquisitions were announced.

414 Gr4t based 4n &A:

At Kearney has recently looked at 24,000 companies across 53 countries
in 24 diIIerent industries. These companies account Ior 98 per cent oI the words
market capitalization. And we looked at them over a 12-year period, Irom 1988-
2000. We were asking the question: Are these companies creating shareholder
value? We Iound that 44 per cent oI them were under-perIormers, adding to
neither their top line nor their shareholder wealth. Only one out oI Iive companies
was a value grower, adding to both their top line (by about 20 per cent) as well as
the shareholder wealth (by about 22 per cent). In these companies, 60 per ent oI
the growth year-on-year was driven by internal growth. The balance growth came
Irom M & As.

Most companies Iail to execute M&As. In Iact, seen out oI 10 companies
emerge Iailures. They don`t create any shareholder value above the industry
average. And we have studied companies Ior long periods, starting three months
prior to acquisition and up to two years aIter, to judge success. The reason Ior
Iailure is not lack oI strategy. The Iault lies with distinguish their vast majority
Irom the minority oI successes. Lack oI speed in implementation is one.

Similarly, successIul mergers exhibit a number oI characteristics or best
practices mostly around rigorous execution.

In Iact, Ior an M & A to succeed issues like size oI the deal and the
relative size oI the acquiring company, mostly perceived to be the key, do not
count. Nor are successes or Iailure industry-speciIic. For an M&A activity Iollows
an S` curve that takes approximately 20 years, going Irom a stage oI
deconcentration on to accumulation and Iocus and then closing with alliances.
M&A is at its peak in the accumulation state. The study AT Kearney did with
24,000 companies showed the top three players held about 30 percent market
share in the Iirst stage. This is the time when government deregulation and
technical innovation may happen. The next stage shows a Ilurry oI activity in
M&A. Companies build scale, achieve core competence, build economies oI scale
and avoid hostile takeover. Following that is the Iocus stage where the top three
players have up to 60 percent market share. Here too, there is ample M&A
activity. However, companies not slow down, pick and choose careIully and
strengthen their true core competence. In the Iinal alliance stage, M&A drop
down. The top three companies have 70 percent market share now. Mega mergers
become unlikely as the government steps in or the anti-trust laws come in. In Iact,
AT Kearney will soon be releasing this study.

The integration process has to be planned and executed careIully. For an a
acquisition to be a success, the post-merger scenario requires that the acquiring
company dose not behave like a conqueror. Where economies oI scare are
involved, layoIIs are inevitable and they have to be handled as humanely as
possible. On cross border acquisition extra care is required in the due diligence
process with regard to tax laws, political stability, repatriation oI dividends,
company law, cultural Iit, post merger management structure among other things.
Cross border acquisitions like some done recently in India are used to gain entry
into a market.

415 Size and & A

Size is said to lead a virtuous cycle, Larger projects, higher billing rates,
greater value addition all help grow a company./ Foreign customers are also
reported to have become scale-sensitive, preIerring to work with big players.

Size is thought to be a Iactor behind the relatively superior perIormance oI
Irontline players vis-a-vis. Tier-II players in the IT services industry. Against this
backdrop, Tier-II players have unveiled strategies to readdress the handicap. It is
also being suggested that venture capital companies have also been Iorcing the
management oI Tier-II players to become bigger to survive.
The traditional approach in addressing the issue oI size has been to merge
or acquire. A Iew Indian companies have done this route. In Iact, in the heyday oI
2000, when the larger soItware players were only talking about acquisitions, Tier-
II players had already put through a Iew acquisitions. The acquisitions oI
companies operating abroad made by erstwhile BFL. SoItware, Trigyn
Technologies, Silver line Technologies, DSQ SoItware, SSI and Aptech are some
examples.

However, the mergers, put through in 2000 and 2001, did little to enhance
these companies` prospects. The mergers may have even acted as a setback to
their Iortunes. Only Ior BFL SoItware the acquisition appears to have made sense.
In its case, the merger with Emphasis may even have been godsend. Nevertheless,
the cost paid Ior the acquisition has Ior long pegged back the stock`s valuation.
The deal was valued at a price to sales multiple oI around / times compared to
acquisitions that are made now at a price to sales multiple oI less than 2.

In Silver line Technologies` case, the acquisitions oI companies only
increased the head count with little to show in terms oI increased sales growth.
Similarly, Ior SSI, the highly-publicized acquisition did not bring in the expected
beneIits as the transIer oI projects Irom onsite to oIIshore was slower than
anticipated. The second wave oI acquisitions activity in this segment evolved the
merger oI group companies operating Irom India. Aptech decoupled its soItware
business Irom its training business and merged its with another service company
Irom the same group Hexaware.

PSI Data systems, which was acquired by Indian Rayon oI Birla group,
was merged with Birla Technologies, a wholly-owned subsidiary oI Greasim
Industries, CMC`s acquisition by the Tata`s may set oII a wave oI re-organisaion
within the Tata group aIter the listing oI Tata Consultancy Services. A third wave
involving mergers oI unrelated. Tier-II players may happen. However,
possibilities Ior that seem limited given the objectives oI the various promoter
groups that are apparently incompatible. However, over the medium-term, it may
boil down to merging to survive.

Another distinct possibility appears to be the acquisition oI Tier-II players
by overseas services companies. There is increasing demand Ior India-based
services Irom end-customers abroad.

The values proposition oIIered by India development centres is now well
accepted. Against this backdrop, overseas services companies may be on the look
out Ior acquiring Indian companies.

Some among the Tier-II players are also adopting the route oI alliances
address the size handicap. Alliances cannot strictly be seen as an alternative to
mergers and acquisitions. In Iact, some companies such as Mastek are adopting
two-pronged approach involving alliances and acquisitions.

For the Indian companies, these alliances are in the nature oI sub-
contracting oI work. Since the Indian companies lack the resources to address the
customer directly, they have to work as a sub-contracting partner with larger
player.

Understandably, this kind oI partnership has implications Ior the
companies` operating margins. In the normal course, the margins are unlikely to
be high given that the volumes are guaranteed.

Such combinations look set to be in vogue at least in the medium-term.
How the combinations will evolve over the long-term remains clouded.

These partnerships quickly develop trouble over the incompatible
objectives oI the two partners. Many such ventures have collapsed in the past and
the Iuture is unlikely to be any diIIerent. Now withstanding such risks, some have
already adopted the alliances route. These include Mastek, Hex aware, Aztec, and
Zensar. For example, Mastek has a joint venture with Deloitte Consulting aimed
at oIIering India-based services to the elements oI Deloitte Consulting. According
to Aztec, it is also allying with a consulting Iirm. In Haxaware`s case, a
partnership ahs been struck with Valtech with the setting up oI oIIshore
development centers that will service the customers oI Valtech and its
subsidiaries. For its part, Zensar has started a venture with Han Consulting oI
China to address the Chinese market. INDIA Cements, one oI the prime players in
the market Ior acquisitions has done a backtracking oI sorts by pulling out oI a
company it acquired in 1999-2000. The sale oI Sri Vishnu Cements by India
Cements is driven mainly by the need to generate cash Ilows and but the
company`s debt burden. The deal highlights the need Ior a beer Ilow oI
inIormation to shareholders and would-be investors on the Iinancial implications
oI acquisitions big oI small. In the last three-and-halI years, India Cements has
been one oI the most aggressive buyers oI cement units. A spate oI deals Raasi
Cement, Sri Vishnu Cements and units oI the Cement Corporation oI India
added to its capacity and made it one oI the Iive major layers with a capacity oI
around 10.5 million tones. But this came at a stiII price as the company took on a
debt burden oI Rs. 1,800 crore.


Q:esti4ns:

1. What re the circumstances under which M&A takes place?

2. What are the beneIits oI M&A?

3. What are the dangers oI M&A?

LESSN 42 AALGAATIN STRATEGY

421 Intr4d:cti4n

An amalgamation reIers to the merger oI two or existing companies into a
single new company. It indicates either merger oI one or more Companies with
another Company or the merger oI two or more Companies to Iorm one company.
According to section 2(1B) oI the Income-tax Act, 1961 (hereinaIter reIerred to as
the Act), amalgamation in relation to companies means the merger oI one or more
companies with another company or the merger oI two or more companies to
Iorm one company (the company or companies which so merge being reIerred to
as the amalgamating company or companies and the company with which they
merge or which is Iormed as a result oI the merger, as the amalgamated company)
in such a manner that:

1. All the property oI the amalgamating company or companies immediately
beIore the amalgamation becomes the property oI the amalgamated
company by virtue oI amalgamation.
2. All the liabilities oI the amalgamating company or companies immediately
beIore the amalgamation become the liabilities oI the amalgamated
company by virtue oI amalgamation,
3. Shareholders holding not less than 3/4
th
in value oI the shares in
amalgamating company or companies (other than shares held therein
immediately beIore the amalgamation or by a nominee Ior the
amalgamated company or this subsidiary) become shareholders oI the
amalgamated company by virtue oI the amalgamation otherwise than as a
result oI the acquisition oI the property oI one company by another
company pursuant to the purchase oI such property by the other company
or as a result oI distribution oI such property to the other company aIter
the winding up oI Iirst mentioned company.

422 Tax 4ncessi4n:

II any amalgamation takes place within the meaning oI section 2(1B) oI
the Act, the Iollowing tax concession shall be available.

1. Tax concession to amalgamating company
2. Tax concession to shareholders oI the amalgamating company
3. Tax concession to amalgamated company

(i) Tax 4ncessi4n t4 Amalgamating c4mpany: Capital gains
tax not attracted: According to section 47(vi) where there is a
transIer oI any capital asset in the scheme oI amalgamation, by
an amalgamating company to the amalgamated company, such
transIer will not be regarded as a transIer Ior the purpose oI
capital gain provided the amalgamated company, to whom
such assets have been transIerred, is an Indian company.
(ii) Tax concessions to the shareholders oI an amalgamating
company section 47(vii) : where as shareholder oI an
amalgamating company transIers his shares, in a scheme or
amalgamation, such transaction will not be regards as a transIer
Ior capital gain purposes, iI Iollowing conditions are satisIied.

The transIer oI shares is made in consideration oI the
allotments to him oI any share or shares in the
amalgamated company and
The amalgamated company is an Indian company.

Cost oI acquisition such shares oI the amalgamated company are later on
transIerred.

The cost oI acquisition oI such shares oI the amalgamated company shall be the
cost or acquisition oI the shares in the amalgamating company. Further, Ior
computing the period oI holding oI such shares, the period Ior which such share
were held in the amalgamating company shall also be includes.

(iii) Tax concessions to the amalgamated company: The
amalgamated company shall be eligible Ior tax concession only
iI the Iollowing two condition are satisIied.

The amalgamation satisIies all the three conditions laid down in sections
2(1B) and
The amalgamation company is an Indian company

II the above conditions are satisIied the amalgamated company shall be eligible
Ior Iollowing tax concessions.

(a) Expendit:re 4n Scientific Researc Secti4n 35(5): Where an amalgamation
company transIer any asset represented by capital expenditure on the scientiIic
research to the amalgamated Indian company in a schedule oI amalgamation, the
provisions oI section 35 which were applicable to the amalgamating company
shall become applicable to the amalgamated company consequently.

Unabsorbed capital expenditure on scientiIic research oI the amalgamating
company will be allowed to be carried Iorward and set oII in the hands oI
the amalgamated company.
II such asset ceases to be used in a previous year Ior scientiIic research
related to the business oI amalgamated company and is sold by the
amalgamated company without having being used Ior other purposes, the
sales prices, in the extent oI the cost oI the asset shall be treated as
business income other amalgamated company. The excess oI the sale price
over the cost oI the asset shall be subject to the provisions oI the capital
gains.

(b) Expendit:re 4n acq:isiti4n 4f patent rigts 4r c4py rigts 4r c4py rigts
Secti4n 35A() : Where the patent or copyrights acquired by the amalgamating
company is transIerred to any amalgamated Indian company, the provisions oI
section 35A which were applicable to the amalgamating company shall become
applicable in the same manner to the amalgamated company consequently.

The expenditure on patents copyrights not yet written oII shall be allowed
to the amalgamated company in the same number or balance installments.
Where such rights are later on sold by the amalgamated company, the
treatment oI the deIiciency/surplus will be same as would have been in the
case oI the amalgamating company.

However, iI such expenditure is incurred by the amalgamating company aIter 31-
3-1998, deduction under section 35A is not allowed, as such expenditure will be
eligible Ior depreciation as intangible asset to this case, provisions oI depreciation
shall apply.

(c) Expendit:re 4f kn4-4 Secti4n 35A(3): With eIIect Irom assessment
year 2000-01, where there is a transIer oI an undertaking under a scheme oI
amalgamation, the amalgamated company shall be entitled to claim deduction
under section 36AB in respect oI such undertaking to the same extent and in
respect oI he residual period as it would have bee allowable to the amalgamating
company, had amalgamation not taken place.

However, iI such expenditure is incurred by the amalgamating company
aIter 31-3-1998, deduction under section 35AB is not allowed, as such
expenditure will be eligible Ior depreciation as intangible asset. In case provisions
oI depreciation shall apply.

(d) Treatment 4f preliminary expenses Secti4n 35D(5): Where an
amalgamating company merges in a scheme oI amalgamation with the
amalgamated company, the amount oI preliminary expenses oI the amalgamating
company, which are not yet written oII, shall be allowed as deduction to the
amalgamated company in the same matter as would have been allowed to the
amalgamating company.

(e) am4rtizati4n 4f expendit:re in case 4f amalgamating Secti4n 35DD:
Where an assessee, being an Indian company, incurs any expenditure, on or aIter
the 1
st
day oI April, 1999, wholly and exclusively Ior the purposes oI
amalgamation or demerger oI an undertaking, the assessee shall be allowed a
deduction oI an amount equal to one-IiIth oI such expenditure Ior each oI the Iive
successive previous year beginning with the previous year in which the
amalgamation or demerger or takes place.

(f) Treatment 4f capital expendit:re 4n family planning Secti4n 35(1))(ix):
Where the asset representing the capital expenditure on Iamily planning is
transIerred by the amalgamating company to the Indian amalgamated company, in
a scheme oI amalgamation, the provisions oI section 36(a)(ix) to the
amalgamating company shall become applicable in the same manner, the
amalgamated company. Consequently

Such transIer shall not be regarded as transIer by the amalgamating
company.
The capital expenditure on Iamily planning not yet written oII shall be
allowable to the amalgamated company in the same number oI balance
installments.
Where such assets are sold by amalgamated company, the treatment oI the
deIiciency/surplus will be same as would have been in the case oI
amalgamating company.

(g) Treatment 4f bad debts Secti4n 3(1)(vii): Where due to amalgamation, the
debts oI amalgamating company have been taken over by the amalgamated
company and subsequently such debt or part oI the debt becomes bad, such bad
debt will be allowed a deduction to the amalgamated company.

() Ded:cti4n available :nder secti4n 01A t4 01: Where an undertaking
which is entitled to deduction under section 801A/801B is transIerred in the
scheme oI amalgamation beIore the expiry oI the period oI deduction under
section 80-1A or 801B.

No-deduction under section 80-1A or 80-1B shall be available to the
amalgamating company Ior the precious year in which amalgamation take
place and
The provisions oI section 80-1A or 80-1B shall apply to the amalgamated
company in such manner in which they would have applied to the
amalgamating company.

(i) arry f4rard and set 4ff 4f b:siness l4sses and :nabs4rbed depreciati4n
4f te amalgamating c4mpany: Under the new provision oI Section 72A oI the
Act, the amalgamated company is entitled to carry Iorward the unabsorbed
depreciation and brought Iorward loss oI the amalgamating company provided the
Iollowing conditions are IulIilled.

The amalgamation should be oI a company owing an industrial
undertaking or ship
The amalgamated company holds at least 3/4the oI the book value oI Iixed
assets oI the amalgamating company Ior a continuous period oI 5 years
Irom the date oI amalgamation.
The amalgamated company continuous the business oI the amalgamating
company or to ensure that the amalgamation is Ior genuine business
purposes.

It may be noted that in case oI amalgamation, the amalgamated company gets a
Iresh lease oI 8 years to carry Iorward and set oII the brought Iorward loss and
unabsorbed depreciation Ior the amalgamating company.

423 Areas 4f c4ncern f4r Amalgamati4ns:

`The new Act allows two or more companies to be amalgamated. When
this is done these companies become Iused or consolidated as a single corporate
entity. This Iused entity is entitled to all oI the properties, rights, beneIits and
assets Io all oI the Iormer companies. It is also subject to all oI the liabilities and
obligations oI the Iormer companies. These provisions are among the most
practical and useIul Ieatures oI the new Act. Key Ieatures oI amalgamation are
that: it avoids the necessity and expense oI transIerring assets to a single entity;
and pre-existing contracts remain in place and do not need to be assigned.
Amalgamation in thereIore a very desirable mechanism to eIIect the
reconstruction oI conglomerates or to create a union oI companies Ior operational
reasons. In some situations it can also Iacilitate eIIective tax planning.

The Iirst step in carrying out an amalgamation is to draw up an agreement
incorporating the terms and means oI eIIecting the amalgamation including the
Iorm oI the proposed by-laws and means oI eIIecting the amalgamation including
the Iorm oI the proposed by-laws. It is desirable that the by-law oI one oI the
amalgamation companies by adopted as the by-laws oI the amalgamated entity.
AIter the amalgamation agreement has been drawn up, it must be approved by the
Boards oI Directors oI the amalgamating companies and must be submitted to the
shareholders oI each oI the amalgamating companies Ior approval. II the
shareholders approve oI the amalgamation, then Articles oI Amalgamation in the
prescribed Iorm must be Iiled with the Registry accompanied by a declaration oI
solvency; particulars oI directors and the registered oIIice.

A holding company which seeks to amalgamate with one or more oI its wholly-
owned subsidiaries is not required to prepare and submit an amalgamation
agreement Ior the approval oI shareholders iI:

The directors oI each company approve the amalgamation; and
The resolutions oI each Board provide that:
4 The shares oI each amalgamating subsidiary will be cancelled
without repayment oI capital;
4 The articles oI amalgamation will be the same as the articles oI
incorporation oI the bolding company; and
4 No shares or debentures will be issued by the amalgamated
company in connection with the amalgamation.
A Iairly similar short-Iorm mechanism is available to enable two or more wholly-
owned subsidiaries oI a common parent body to amalgamate. A directors oI
oIIicer oI each amalgamating company is required to make a statutory declaration
establishing to the satisIaction oI the Register that:

Each amalgamating company is and the amalgamated company will be
able to pay its liabilities as they become due;
The realizable value oI the amalgamated company`s assets will not be less
than the aggregate oI its liabilities and stated capital oI all classes; and
Either that no creditor will be prejudiced by the amalgamation or that
adequate notice has been given to all known creditors and no creditor
objects except on grounds that are Irivolous or vexatious.

424 Pr4ced:ral Aspects 4f amalgamati4n:

Mergers and acquisitions have become a symbol oI the new economic world.
Almost every day one reads oI a new merger or acquisition doing the rounds oI
the corporate circles. It also brings with it complex issues relating to laws and
regulations impacting such M & A decisions.

In today`s business scenario all companies are possible targets Ior
acquisitions or mergers. As a result a knowledge oI the laws relating to them is
extremely useIul. At the same time they are critical to the health oI the businesses
and thereby the shareholders.

Hence this subject is assuring greater importance in today`s business
world. The author has attempted to bring out the Iundamental issues under the
companies Act, 1956 and the implications under the Income tax Act, 1961.

425 Reas4ns f4r amalgamati4n:

There is not one single reason Ior a amalgamation but a multitude oI reasons,
namely

There is not one single reason Ior a amalgamation but a multitude oI reasons,
namely

(i) Synergy in operating economies: When two or more
undertakings combine their resources and eIIorts they may
with combined eIIorts produce better resuls than two separate
undertakings because oI the savings in operating costs viz.
Combined sales oIIices, staII, staII Iacilities, plant management
etc. Synergy is also possible in areas oI production, Iinance,
technology etc.
(ii) Taxation advantages: Mergers take place to have beneIits oI
tax laws and company having accumulated losses may merge
with proIit earning company that will shield the income Irom
taxation. Section 72A oI the Income Tax Act provides this
incentive.
(iii) Other advantages:
Growth
DiversiIication
Production capacity reduction
Operating eIIiciencies
Procurement oI supplies
Financial Strengths (because oI larger size oI merged
assets)

One signiIicant cost disadvantage could be the implication oI Stamp Duty which
is applicable on transIer oI assets Irom one owner to another. In some states the
rate oI duty is signiIicant and hence may to some extent neutralize the cost
advantages oI savings in tax.

One signiIicant cost disadvantage could be the implication oI Stamp Duty which
is applicable on transIer oI assets Irom one owner to another. In some states the
rate oI duty is signiIicant and hence may to some extent neutralize the cost
advantage oI savings to tax.

42 Amalgamati4n Ev4l:ti4n in India:

Compelled by the present economic scenario and market trends, corporate
restructuring through mergers, amalgamations, takeovers and acquisitions, has
emerged as the best Iorm oI survival and growth. The opening up oI the Indian
economy and the government`s decision to disinvest, has made corporate
restructuring more relevant today.

To the last Iew years, India has Iollowed the worldwide trends in consolidation
amongst companies through mergers and acquisitions. Companies are being taken
over, units are being hives oII, joint ventures tantamount to acquisition in the last
Iew years must be more than the corresponding quantum in the Iour and a halI
decades post independence.

Supreme Court oI India in the landmark judgment oI HLL-TOMCO merger has
said that 'in this era oI hypercompetitive capitalism and technological change,
industrialists have realized that mergers/acquisitions are perhaps the best route to
reach a size comparable to global companies so as to eIIectively compete with
them. The harsh reality oI globalization has dawned that companies which cannot
compete globally must sell out as an inevitable alternative:.

42 Example 4f Amalgamati4n:

Broke bond India ltd. which did its operations separately in their business. Same
like Lipton India Ltd. also in the market, they were in a same business holding
major share in their market. Later due to heavy competition by many players they
planned to joined together to strengthen their business.

In the year 1994 they merger together and the new amalgamated company
is called by Broke Bond Lipton India Ltd.

Now they pay a vital role in their market. It shows positive results Ior
amalgamation. And it helps in many aspects.

Q:esti4ns:

1. What are the requisites Ior amalgamation in India?
2. What are the legal constraints oI amalgamation?
3. IdentiIy the diIIiculties Iaced in amalgamation.
4. Bring out with some examples oI amalgamation.






LESSN 43 INT VENTURE STRATEGY

431 Intr4d:cti4n

AIter World War II, many countries adopted the socialistic goal oI state
ownership oI productive activities in their economies. This led to a conIrontation
between the multinationals and developing countries, particularly in extractive
industries, and many expropriations. As a result, new contractual Iorms dealing
with mineral-based participation with Ioreign Iirms. In case oI the manuIacturing
sector multinationals Ielt that it was not necessary to have 100 cent ownership to
exercise control.

A joint venture is an enterprise which is jointly owned and managed by a
local entrepreneur and a Ioreign entrepreneur. In some cases, there are more than
two parties involved. For example, Pepsi`s Indian Joint Venture involves Voltas
and Punjab Agro Industries Corporation.

A j4int vent:re may be br4:gt ab4:t by:

(i) Both the Ioreign and local entrepreneurs jointly setting up a new Iirm

Foreign Iirm buying an interest in a local Iirm
A local Iirm acquiring shares in an existing Ioreign Iirm.

It is also a common practice to split the local share holding between a
partner and various public participation (including public sector Iirm or
industrial development organization). By them term joint venture what is
generally reIerred to is the Indian Joint Venture Abroad.

432 Types 4f 4int Vent:res:

Joint Venture are common within industries and in various countries. But
they are specially useIul Ior entering international markets. From the point oI
view oI Indian organization, the Iollowing types oI joint ventures are possible.

Between two Iirms in one industry
Between two Iirms across diIIerent industries.
Between an Indian Iirm and a Ioreign company in India.
Between an Indian Iirm and a Ioreign company in that Ioreign country.
Between an Indian Iirm and a Ioreign company in a third country.

433 Indian j4int Vent:re`s Abr4ad:

At the beginning oI 1977, there were 189 joint ventures with a total equity
oI Rs.209 crores in operation and 520 with total investment oI Rs. 1917 crores
under implementation. The largest numbers oI the Indian joint ventures are in
Asia, mostly in South-East Asia. Europe and America have a good number. There
is also a signiIicant number in AIrica. The Indian joint ventures are mostly in
engineering industries, construction, consultancy, shipping, trading, textiles,
electrical and chemicals. The total beneIit accrued to the country Irom the joint
ventures till the end oI 1991 was only Rs. 451.73 crores. This included dividend
oI Rs. 42.45 crores; other repatriations oI Rs. 72.3 crores and Rs. 337.98 crores
Irom additional investments. The new economic policy oI India is expected to
encourage Ioreign investment by Indian companies. The curbs on growth, even by
mergers and acquisitions, have been removed, Iinancing restrictions have been
eased, areas oI business opened to the private sector companies have been
substantially enlarged and Ioreign tie up policies have been liberalized. Further,
domestic market is becoming increasing competitive. All these Iactors should
encourage the Indian companies to invest in other countries and take advantage
oI he economic liberalization in many Ioreign countries.

Indications are that several Indian companies are drawing up plans Ior
establishing subsidiaries or joint ventures abroad. The 1990s was a decade oI real
test Ior Indian companies in this respect.

The Iollowing are the some joint venture companies in India.

1. L&T InIo city Ltd., the Rs. 71 crores joint venture between L&T and
Andhra Pradesh Industrial InIrastructure Corporation Ltd., (APIIC).
2. HDFC Standard LiIe Insurance Co., Ltd., the 74:26 joint Venture between
HDFC Ltd. and Europe`s leading mutual liIe company, Standard LiIe
Assurance Company.
3. Birla Sun LiIe Insurance Company Ltd. (BSLICL) is an joint venture
between the Aditya group and the Canada based Sun LiIe Financial.
4. Lusas-TVS is a joint venture between TVS and sons, India and Lucas plc.
UK.
5. Commins Engine Company and Tata Engineering and Locomotive
Company Iormed a joint venture to manuIacture Talco engines
6. Tata Industrial and Bell Canada, Ashok Leyland and Singapore Telecom
are some oI the joint venture companies.


434 Advantage

Strategic advantages are important Ior joint ventures to be set up and sustained.
The important reasons or advantages oI joint venture are the Iollowing:

1. In countries where Iully Ioreign owner Iirms are not allowed or Iavored
joint venture is the alternative iI the international marketer is interested in
establishing an enterprise in the Ioreign market. Many Ioreign companies
entered the communist, socialist and other developing countries by joint
venturing.
2. One important advantage oI joint venturing is that it permits a Iirm with
limited resources to enter more Ioreign markets than might be possible
under a policy oI Iorming wholly owner subsidiaries.
3. In some cases, it is also possible to swap know-how (such as patent rights
Ior equity) in Iorming joint venture as a means oI securing ownership in
Ioreign operations.
4. Partnership with local Iirms has certain speciIic advantages. The local
partner would be in a better position to deals with the government and the
publics.

Further, there would not be much public hostility when there is a local partner;
it would be much less when there is equity holding by the government sector and
the public.

Other beneIits are
4 Minimizing risk
4 Reducing an individual company`s investment
4 Having access to Ioreign technology
4 Broad-based equity participation
4 Access to governmental and political support
4 Higher proIitability
4 Opprotunities Ior regular technology up gradation
4 Entering new Iields oI business and synergistic Advantages.

A right local partner Ior a joint venture can have major impact on Iirm`s
competitiveness because such a partner can serve as a cultural bridge between the
company and the market.

435 Disadvantages:

1. India was not able to make much progress in investing abroad due to
various reasons like government control, lack oI competition in the
domestic market etc.
2. There is no goal convergence between the shareholders oI the Indian
companies.
3. MRTP and IRDA are some acts restrict the Ioreign companies to enter into
joint venture strategy. So, Ioreign companies not like to enter joint venture
in India.
4. Example, IRDA guidelines speciIy a maximum stake oI 26 percent Ior the
Ioreign joint venture partners.
5. Some companies aIter creating the joint venture, they Ielt individual
beneIit. So they want to call oII venture.
6. Example Prolease, a process solutions provider in the US, entered into a
tie-up with KGISL in October 2001 to cover the entire gamut oI IT service
including soItware development, testing, systems integration, application
development and R&D service. But Porlease had not invested any sum in
KGISL, so Ior, and with the partners deciding to call oII the venture,
Prolease`s investment decision would not hold good any more.
7. Other disadvantages are,
i. Problems in equity participation
ii. Foreign exchange regulations
iii. Lack oI proper coordination among participating Iirms
iv. Cultural and behavioral diIIerences

43 4tivati4n f4r 4int Vent:re 4rmati4n:

There are basically three perspective to explain the motivations Ior
Iorming joint ventures:

Transaction costs
Strategic behaviour, and
Organizational learning

Transactions costs theory views joint ventures as an eIIicient method to
reduce both transactions costs and the hazards oI economic transaction. In
the strategic behaviour, joint ventures represent a Iorm oI deIensive
investment by which Iirms hedge against uncertainty, deter entry through
preemptive patenting, and enhance competitive power in the context oI
competitive rivals and collusive agreement. In the organizational learning
view point, a joint venture is used to transIer organizationally embedded
knowledge that cannot easily be blueprinted or packed through licensing
or market transactions. Joint ventures are used as a vehicle to exchange an
imitate knowledge, though controlling and delimiting the process oI
exchange to limit the dissipation oI Iirm-speciIic advantages can itselI be a
cause oI instability.


LESSN 44 RGANISATINAL STRUTURE AND RPRATE
DEVELPENT

441 Intr4d:cti4n:

Corporate culture reIers to a company`s values, beneIits, business
principles, traditions, ways oI operating, and internal works environment. An
organization`s culture is bred Irom a complex combination oI sociological Iorces
operating within its boundaries. An organization`s culture is either an important
contributor or an obstacle to successIul strategy execution. Strong cultures
promote good strategy execution when there`s Iir and hurt execution when there`s
little Iit. A deeply rooted culture well matched to strategy is a powerIul lever Ior
successIul strategy execution. In a strong-culture company, values and behavioral
norms are like crabgrass: deeply rooted and diIIicult to weed out. A strong culture
is a valuable asset when it matches strategy and a dreaded liability when it
doesn`t. Adaptive cultures are a valuable competitive asset-sometimes a
necessity-in Iast-changing environments.

Today`s dot-com companies are classic examples oI adaptive cultures.
Once a culture is established, it is diIIicult to change. A wards ceremonies, role
models, and symbols are a Iundamental part oI culture-shaping and reshaping
eIIorts. An ethical corporate culture has a positive impact on a company`s long-
term strategic success; an unethical culture can undermine, it. Values and ethical
standards must not only be explicitly stated but must also be ingrained into the
corporate culture. A results-oriented culture that inspires people to do their best is
conducive to superior strategy execution. MBWA is one oI the techniques
eIIective leaders use to stay inIormed on how well strategy implementation and
execution are proceeding. It`s a task that can`t be delegated to others. What
organizational leaders say and do plants the seeds oI cultural change. Only top
management has the power and organizational inIluence to bring about major
change in a company`s culture. The Iaster a company`s business environment
changes, the more attention managers must pay to keeping the organization
innovative and responsive. IdentiIying and empowering champions helps promote
an environment oI innovation and experimentation. It`s a constant organization-
building challenge to broaden, deepen, or modiIy organization capabilities and
resource strengths in response to ongoing customer-market changes. High ethical
standards cannot be enIorced without the open and unequivocal commitment oI
the chieI executive. Managers are an organization`s ethics teachers-what they do
and say sends signals and what they don`t do and don`t say sends signals.
Corrective adjustments in the company`s approach to executing strategy are
normal and have to be made as needed.

442 Devel4ping c4rp4rate c:lt:re:

Building a strategy-supportive corporate culture is important to successIul
strategy execution because it produces a work climate and organizational esprit de
corps that thrive on meeting perIormance targets and being part oI a winning
eIIort. An organization`s culture emerges Irom why and how it does things the
way it does, the values and belieIs that senior managers espouse, the ethical
standards expected oI organization members, the tone and philosophy underlying
key policies, and the traditions the organization maintains. Culture thus concerns
the atmosphere and Ieeling a company has and the style in which it gets things
done. Very oIten, the elements oI company culture originate with a Iounder or
other early inIluential leaders who articulate the values, belieIs, and principles to
which the company should adhere, and that then get incorporated into company
policies, a creed oI values statement, strategies, and operating practices. Over
time, these values and practices become shared by company employees and
managers. Cultures are perpetuated as new leaders act to reinIorce them, as new
employees are encouraged to adopt and Iollow them, as stories oI people and
events illustrating core values and practices are told and retold, and organization
members are honored and rewarded Ior displaying cultural norms.

Company cultures vary widely in strengths and in makeup. Some cultures
are strongly embedded, while others are weak and Iragmented. Some cultures are
unhealthy; these are oIten dominated by selI-serving politics, resistance to change,
and inward Iocus. Such cultural taints are oIten precursors to declining company
perIormance. In Iast-changing business environments, adaptive cultures are best
because people tend to accept and support company eIIorts to adapt to
environmental change; the work climate in adaptive-culture companies is
receptive to new ideas, experimentation, innovation, new strategies, and new
operating practices provided such change are compatible with core values and
belieIs. One signiIicant deIining trait oI adaptive cultures is that top management
genuinely cares about the well-being oII all key constituencies-customers,
employees, stockholders, major suppliers, and the communities where it operates-
and tries to satisIy all their legitimate interests simultaneously.

The philosophy, goals, and practices implicit or explicit in a new strategy
may or may not be compatible with a Iirm`s culture. A close strategy-culture
alignment promotes implementation and good execution; a mismatch poses real
obstacles. Changing a company`s culture, especially a strong one with traits that
don`t Iit a new strategy`s requirements, is one oI the toughest management
challenges. Changing a culture requires competent leadership at the top. It
requires symbolic actions and substantive actions that unmistakably indicate
serious commitment on the part oI top management. The stronger the Iit between
culture and strategy, the less managers have to depend on policies, rules,
procedures, and supervision to enIorce what people should and should not do
rather, cultural norms are so well observed that they automatically guide behavior.

Because each instance oI executing strategy occurs under diIIerent
organizational circumstances, a strategy implementer`s actions agenda always
need to be situation-speciIic-there`s no neat generic procedure to Iollow. And, as
we said at the beginning, executing strategy is an action-oriented, make-the-right-
things-happen task that challenges a manager`s ability to lead and direct
organizational change, create or reinvent business processes, manage and
motivate people, and achieve perIormance targets.

Healthy corporate culture are also grounded in ethical business principles,
moral values, and socially responsible decision making. Such standards connote
integrity, 'doing the right thing, and genuine concern Ior stakeholders and Ior
how the company does business. To be eIIective, corporate ethics and values
programs have to become a way oI liIe through training, strict compliance and
enIorcement procedures, and reiterated management endorsements. Moreover, top
managers must practice what they preach, serving as role models Ior ethical
behavior, values-driven decision making, and a social conscience.

SuccessIul managers do a number oI things to exercise stratregy-executing
leadership. They keep a Iinger on the organization`s pulse by spending
considerable time outside their oIIices, listening and talking to organization
members, coaching, cheerleading, and picking up important inIormation. They
take pains to reinIorce the corporate culture through the things they say and do.
They encourage people to be creative and innovative in order to keep the
organization responsive to changing conditions. Alert to new opportunities and
anxious to pursue Iresh initiatives. They support champions oI new approaches or
ideas who are willing to stick their necks out and try something innovative. They
work hard at building consensus on how to proceed, what to change, and what not
to change. They enIorce high ethical standards and insist on socially responsible
corporate decision making. And they actively push corrective actions to improve
strategy execution and overall strategic perIormance.

443 Adapting t4 canging envir4nment:

The major Iocus oI corporate strategy is to present a method by which any
business can adapt to a changing envoronemnt. The Iocus oI corporate strategy is
to enable a business to improve it`s competitive advantage.

Corporate strategy theory presents us with the Iollowing questions:

Where are we now?
Where do we want to be?
How do we get there?

4rp4rate Self Analysis

Corporate selI analysis is about answering the Iirst question, where are we now?

The logic is to examine the current status oI the business. Areas to look at within
corporate selI analysis include:

Is the business aware oI who it`s stakeholders are?
Does your business have a mission statement?
What are the long term objectives oI your business?
What are your current business strategies? Are they simple to understand
and communicate to the workIorce?, or Are they diIIicult to understand
and communicate?
What is the state oI the marketplace? Is it in growth/decline?, Who are
your biggest competitors?
Review your business internally, look at your business Does it support
growth and adaptability to change? How eIIective are your production
processes? How well do Sales/Personnel/Marketing/Finance perIorm?
How well does the business control its internal reasons?

4rm:lating Strategy

When devising any business strategy, you need to consider:

The reasoning behind the strategy, what are your objectives? Achieve x
amount oI growth/cost reduction?
What are all your options? does it have to be done in a certain manner?
Examine all options, when strategy is going to the most Ieasible in terms
oI acceptance?

When evaluating the diIIerent strategic direction a business can take there are
several routes a business can explore:

D NTHING - In this scenario, the business does little in terms oI
reaching to changes in the marketplace.
DEVELPENT - Spend vast amounts oI money on research, the
developing new product ranges.
INTEGRATIN - Integrate in a -ackward manner by going back and
buying up your business suppliers to achieve growth by getting lower
priced raw materials. Integrate in a Iorward manner by buying your
product distributors, sell your product direct to the consumers, thereby
generating increased proIits. Integrate in a horizontal manner, by buying
your competitors to gain increased market shares.
STRATEGI ALLIANES- join Iorces with one oI your competitors to
develop a stronger position in your marketplace.
NEW ARKETS- the business decides to embark on positioning itselI
into new markets.

The overriding logic oI Iormulating strategy is that any strategy must be in line
with business objectives, ensuring stakeholders needs are maintained and that
needs oI the surrounding environment are adhered to.

AIter developing several potential strategies, the next step in the process is to look
at the diIIerent strategies to see which one the most suitable:

What is the cost oI each potential strategy likely to be?
Does the business have the correct current machining capabilities(iI
applicable?)

In terms oI evaluating any potential strategy, two key elements need to be
observed, the Iirst in the Iinancial viability oI the strategy, how soon will the costs
be recouped?, and will the beneIits to the business be long-term?. The second
element must be the eIIect oI a strategy on the current Iacilities and resources,
does the business require additional employees to both implement the strategy and
maintain it?


Implementing Strategy

There is no clear cut advice that can be given on how to implement a
strategy. The only advice we can give is to keep it simple, clear, precise. But
above all make sure everyone understands what is expected oI them.

Studies oI how to implement a strategy by Nutt showed that the success rate Ior
strategies was greater when the strategic managers sent more time looking at how
implementation issues, as opposed to merely Iorcing a strategy, questions raised
by Nutt on implementing a strategy include:

Does implementation exceed the manager`s authority to set?
Does a technically sound plan exist?
Can the manager shape the plan so it Ialls under his/her control?
Does the plan deal with a recurring problem?
Can plan acceptance be negotiated with the aIIected parties?
Should consultants be used?
Do time constraints exist?

When looking at the implementing strategy it is advisable that you keep the
aim and text oI the strategy as simple as possible.

From the outline oI the strategy, the next step is to deIine the processes
and tasks which are needed to implement the strategy. From identiIying the
tasks Ior implementation the next phase will be identiIy who will be
responsible to carry out the implementation stages, and Iinally to ensure the
review oI the strategy:

1. Break the aim oI the strategy into clear implementation tasks
2. Decide who will be responsible Ior implementing the strategy
3. Ensure regular review and adjustments to the targets set within the
strategy as and when necessary.

II a business is to remain competitive in an ever changing environment, then
strategic reviews need to take place Irom the management oI the business to
assess the business in relation to it`s environments, accordingly adjusting the
strategic Iocus oI the business.

Q:esti4ns:

1. What are the requirements oI joint venture?
2. Under what circumstances joint venture in useIul?
3. Mention the diIIiculties Iaced by joint nature players in India.
4. Give some examples oI joint venture in India under diIIerent categories.



LESSN 45 LINE AND STA UNTINS

451 Intr4d:cti4n:

Business enterprise at their inception are primarily economic entities but
as they grow the emphasis shiIts towards a more social character. Its actions
are to be justiIiable in terms oI spirit in which society allows it to Iunction.
Organizations are also cradled oI power games and political behavior hence
cannot be totally divorce Irom political governance. Unless the political
culture oI organization changes, responsible corporate governance will come
about. Corporate governance is not blind adherence to externally imposed
norms and codes only but a commitment to the spirit oI internally developed
management ethos. Management is not a mere discipline but a culture with its
own values, belieIs, tools. In today`s complex environment a manager can
hardly thrive on native brilliance and intuitive understanding oI the situation
he conIronts. Management is interdisciplinary by nature: an engineer manager
knowing only engineering is not enough; he has to have understanding oI the
social, political, legal and economic environment within which he has to
operate. He is also required to know behavioral science, inIormation
technology, the way Iinances is managed, the way the structures and systems
operate within the Iirm, the strategic implication oI his actions and inactions
and so on and so Iorth. To groom managers to be Iit to survive is necessary.

The impact oI technology is actually more diIIicult to predict than most
other Iactors. Economic and social prophets have the dismal record ad
predicators to technology and its impact. ThereIore, once the technology
become eIIective careIul monitoring oI the actual impact (both beneIicial and
detrimental) is essential. Monitoring is a managerial responsibility and
requires to be exercised.

452 Devel4pments in Line-Staff f:ncti4ns:

1. To be multi-Iunctional
2. To be multi-disciplinary
3. To be multi-sector think-tank
4. To be disperse rapidly new knowledge
5. To be disperse rapidly new capabilities
6. To have distilled knowledge reservoir about place and people

To the coming age oI the new technology worker, work cannot be
organized iI planning is divorce Iorm doing. The more planning a worker does
and the more responsibilities he takes Ior what he does, the more productive
be can be. A worker who does only as instructed can do only harm. One needs
a management structure which magniIies and indeed respects the roots oI a
person and yet a true team with diversities is made. Binding between
employer and worker can be achieved either through liIe-time employment (as
in Japan) or through partnership in time oI proIit and loss.

Predictability oI behavior and action is required Rules and laws help make
behavior predictable but total adherence is not a good way to assure success.
Framing oI rules must include organizational culture. Redundancy may be in
the skills oI workmen and also in the total learning available with managers. II
redundancy is present the CEO is to leave his cocoon oI 'Deciding &
Directing to 'Managing Organizational Learning. Top team must examine
and improve its own ability to learn. People today don`t want to be 'used by
the organization as 'Victims or 'Pawn. Rather they want.

'Melting pot` assimilation oI culture is out; 'Salad bowl, concept is in.
Culturally diverse workers want to be 'themselves and retain their cultural
identities, they resist conIorming to the 'one size Iits all organizational
culture. Empowerment involves trust and demands true leadership. EIIective
delegation no longer means delegation only but release oI authority as well as
giving oI responsibility. Hierarchies are replaced by selI-managing structures
like networks multidisciplinary teams etc., iI not done to do it in order to
match with development. The time has come to choose between capacity and
transparency. Opacity means a plethora oI complex rules,
compartmentalization, and inIormation limited to very Iew. Transparency
means established simple norms, massive Ilow oI inIormation across the
interIaces. Transparency returns good dividends.

Broadly speaking, the overall proIile oI the business scenario is as Iollows:

1. In Iamily enterprise top post in inherited
2. In private sector, it is centralized control and closed system based on
divide-&-rule policy.
3. In public sector top heavy administration; limited tenure oI chieI
executives and a multilevel and slow decision making process.
4. In multinationals a highly specialized management; stiII competition,
deadline and Irequent mergers, trimming oII staII etc.

453 Strategic f4r different levels:

Core Level
1. Be proactive instead oI reactive
2. Integral Management approach contrary to Iire Iighting
3. To grow core areas.

Structural Level

1. De-staIIing, staIIing and re-staIIing wherever required only Ior
business strategy point oI view.
2. Matrix oI Responsibility, Authority and Accountablity
3. Team oI selI-propelled managers (not those look busy`, pensioner`,
type)
4. ScientiIic Monitoring

Implementation Level

1. To change mind-set
2. Awareness oI objective and compare data at all levels
3. Clarity oI customers, what they want Ior others
4. Ensuring shop-Ilow employees capable oI implementing top decision

Q:esti4ns:

1. What re the developments in line and stag Iunctions?
2. What are the various levels at which Iunctions are decided?
LESSN 4 ANAGEENT HANGE

41 Intr4d:cti4n:

Change is the Law oI Nature. It is necessary way oI liIe in most
organization Ior their survival and growth through there many may be some
discontentment, during the early days oI the change, persons learn to meet the
change and adopt themselves to the changing situation here resistance to change
would be short term phenomenon.

Man has to mould himselI continuously to meet new demand and Iace new
situations. Despite the Iact that change is persistent phenomenon, it is a common
experience that people resist change, whether in the context oI their pattern oI liIe
or in the context oI their work situation in an organization.

Change could be both reactive and proactive. A Proactive change has
necessarily to be planned to attempt to prepare Ior anticipated Iuture challenges.
A reactive change may be an automatic response or a planned response to change
taking place in the environment conditions change in Managerial personnel.
DeIiciency in existing organizational pattern, Technological and Psychological
reasons, Government policy, size oI the organization.

Types 4f ange

Changes can be broadly divided into

Work change
Organisational change

Work change includes change in Machinery, working hours, Method oI
work, job enlargement and enrichment, job redesign or re-engineering.
Change may working hours and shiIt change.

a. Radical change
b. Fundamental change
c. Factors to be considered Ior the change management are:
i. Triggers Ior change
ii. Type oI change needed
iii. Extent oI resistance encountered
iv. Extent oI Urgency created
v. Reasons Ior choice oI change strategies
vi. Reason Ior resistance
vii. Factors which helped most in over coming resistance
viii. Factors given most consideration during change
ix. Methods used most to activate people
x. Methods used most to support people during change
xi. Most important implementation actions taken.

While a research was undertaken to get additional inIormation apart Irom the
closed ended responses in the questionnaires, it revealed the Iollowing:

Triggers f4r ange

Triggers Number oI respondents Opting
Increased competition 4
Financial Loss None
Drop in proIit None
An opportunity (or) Event Ioreseen 1
Improper utilization oI staII None

Additional InIormation

Other triggers were,

RBI guidelines (Ior banking organizations)

Over size.

InIerences

We Iind that the most important, trigger as perceived by majority oI the
respondents is, Increased competition

Type 4f ange Needed

Triggers
types oI
Change

Major
ModiIication
Minor
ModiIication
Immediate
Change
Minor
TransIormation
Major
TransIormation
No. oI
Respondents
- 3 2 - -
Additional InIormation

The others type oI change needed was,

Structural change

InIerence

Most oI the respondents have preIerred a minor modiIication` Iollowed
by an immediate change`.

Amount oI resistance Encountered

xtent of Resistance Num-er of Respondents !referring
High 1
Low 2
Medium 2
InIerence

Most oI the respondents have encountered either medium (or) moderate
resistance, or low resistance. In Iact one among the respondents, did not encounter
nay resistance, as the change was needed.

Amount oI Urgency
Extent oI Urgency High Low
No. oI respondents 3 2
InIerences

3 oI the respondent have perceived that the change in their organization
was very urgently needed.

Majority have taken the changes in their organization to be very urgent.

Reasons Ior choosing a speciIic change strategy

Reasons Employees
Participation
Employee
Motivation
ConIident
ability
Cultural
Fit
Post
change
motivation
No. oI
Respondents
- 2 1 - 1

Additional InIormation

For educational institutions it was necessary to provide a strong base to students
Ior a best career.

InIerences

2 unit oI the 5 respondents have considered employee motivation`, while
1 respondents each have considered conIidentiality` and Post change
motivational`.
One among the 5 respondents did not give his opinion in this aspect.

Reasons Ior Resistance
Reasons Fear oI
change
Personal
compact
Resentment
oI change
Lack oI
Iaith
Emotional
hang-up
No. oI
respondents
2 - 1 - 1
InIerences

Majority have considered Iear oI change` as a main reason Ior resistances,
Iollowed by resentment oI change` and emotional hang up`.

Factors which helped to overcome resistance
Factor Employee
Participation
Communication Training Motivation Education
No. oI
Respondents
1 3 2 3 1
Additional InIormation

The trade unions decision to uphold the organization premier position.

InIerences

Majority oI respondents consider motivating employees` and Communication oI
change philosophy` to be more important, Iollowed by Training`, Education`
and Employee participation`.







Factor Most considered in change
Factor Reward
System
Organization
culture
Organisation
Structure
People in
the
Organisation
Intended
Result
No. oI
Respondents
Choosing
the Iactor
1 1 2 1 2

InIerence

The major Iactors considered by most oI the respondents are organisation
structure` and intended result` Iollowed by reward system`, culture oI the
organization and people in the organization.

Method used most to activate people
Method Training Public
relations
Personal
contact
Workshop
and
conIerence
Communicating
with employees
No. oI
Respondents
3 - 3 2 1

InIerences

Most oI the respondents have used Training` and Personal contact`
mainly to activate people. This is Iollowed by workshop & conIerences` and
Communicating with Employees`.

Additional InIormation

One oI the respondents opined that the employee must be made to realize that he
can assist the organization realize it position it`s a premier.
Most used support method
Support
Method
Expression
ConIidence
Providing
Coaching
Empowering
Key people
Having
Empathy
Using
Rewards
No oI
respondents
3 2 1 2 1

Additional InIormation

The Irictionless assignment oI work would prevent egoism among employees.

InIerences

The most used support method as per the majority oI respondents`
opinion is expressing conIidence working with employee`, which is Iollowed by
providing coaching`, having empathy with people`, empowering key people`
and using rewards`.

Most Important Implementation Action
Action Project
Management
Short
term
Plans
Budgets
Strategies
to
Implement
vision
Monitoring
change
Controlling
changes
No. oI
Respondents
- 2 2 2 2

Additional InIormation

Devising new systematic procedure through R & D.

Procedures to improve customer service through computerization

Plans to achieve set goals are to be implemented slowly and steadily.
InIerences

There is a equal consideration given Ior the action, 'Project Ma Short
Term Plans & Budgeting, 'Strategies to implement vision, 'Monitoring
change and 'Controlling change.

Findings

Normally, it is thought that all changes will have to encounter a resistance.
But in certain situations similar to the one as described by one oI the respondents,
there was no resistance to the change process. In Iact, the change was expected by
the organization.

The changes needed in response to increases competition, are to be very
urgently done,

Fear oI Change` as normally perceived is the major cause Ior resistance.

Employee Motivation` and EIIective Communication oI ideas oI change` are
more important to overcome resistance.

Organistion Structure` and Intended Result` are the most important Iactors
considered while brining about the change.

Training` and Personal contact` are most used to activate people.

Expressing ConIidence with employees` is the most used support activity

Budgets, short terms plans, Strategies, Monitoring and controlling change process
are considered equally in importance.

The trade unions, employees should be convinced oI vitality oI their role in the
organization prosperity.



42 Pases and level 4f 4rganizati4nal cange:

Stages oI Organisational Change:

Denying Dodging Doing Sustaining



1 2 3 4


irst Stage : Denying :

Theme This does not aIIect India

It starts with a presentation oI he date supporting a change into an
organization. It centres on processing inIormation its value, relevance or
timeliness.

The change agent may be any where in the organization and will meet the
denial Irom above and below:

Sec4nd Stage :D4dging:

Theme Ignore this. Don`t get involved

It begins when the accumulated evidence shows that the change process is likely
to take place. It is agreed that a small amount oI change is needed, but what is
questioned is whether it is critical to change or not.

As the change is coming Irom outside, dodging is the equivalent oI organizational
anger. This anger is expressed in a passive aggressive non-participation.

A sub-ordinate can conIuse the issue by pretenting the weakness oI the approach
to the change.

Another method to subvert is to change the Iorm, iI the discussion is on work
Ilow change, change it to personnel. II it is on personnel, change it to bulk capital
budget Iunding or to the expense budget.

In Iact, quiet behaviour, sometimes indicating agreement, is read at this phase as
disagreement and insubordination. The need Ior the team to adapt the process and
approach is essential in this stage to make in their own.

Tird Stage : D4ing :

Theme This is very important. We have got to do it now.

This stage occurs quickly and sometimes startles the observes in its contrast. It is
earmarked by energy used in going Ior the change. As the speciIic change is
worked on, things are uncovered that require change. Minor moves, such as
budgeting, restructuring, hiring, emerge.

For the manager, the general tendency is to let the momentum take over. The
diIIicult part oI gaining consent and involvement is over to sit back and let it
happen

This is dangerous Ior two reasons.

a) II the team labour is not divided well between teams and
individuals this can were the relationships and destroy the
whole change process.
b) The dangers oI overloading the change process with trying too
may things.

At this stage the Iocus phones Irom change generators` to the
change implementers`. There needs to be bargaining as to what
can or cannot be put into the change.

There are two outcomes to the issues oI this stage

(i) One is death, where the whole thing collapses under its
own weight.
(ii) The other is a Iocusing oI energy.

What required is an accurate drawing oI the Iorce Iields oI the change to that the
critical elements in the change are pinpointed and appropriate goals are set.

4:rt Stage : S:staining :

Theme We have a way oI proceeding

This stage is less well deIined but is a key stage oI any change but is a key stage
oI any change process. It is the Iocusing oI energy to Iollow through an
programmes and projects. This is the reIreezing stage and the change adopters`
come into prominence. The successIul come completion oI this stage is the
integration oI the change into the habitual patterns oI behaviour and structure.

Q:esti4ns:

1. What is resistance to change?
2. Why change management is important in the present context?
3. What are the diIIiculties in management iI change?
4. What is the process oI management oI change?

UNIT 5

LESSN 51 IPLEENTATIN STRATEGY

511 Intr4d:cti4n:

The Strategy will be implemented through the concerted actions oI all
staII working within a partnership Iramework. The Board will set
objectives and parameters, Ior the implementation oI the strategy, and will
review progress in achieving objectives. Management will tae ownership,
give leadership and agree with staII clearly deIined roles and
responsibilities in achieving targets and milestones. It is also recognized
that resources issues may aIIect the Iull implementation oI the strategy.
The Iollowing actions have been identiIied which will help to achieve the
eight Priority Goals, outlined above, and which will drive and complement
business planning activities.

512 Te Strategy Implementati4n Pr4cess:

It is done through:

Action Plans
Timelines, Critical paths
Resouces requirements
Linkages to budget

'The Strategy Implementation Process provides a comprehensive, manageable
approach to organizational alignment.

Pase I - Data 4llecti4n and Analysis

Workshops on Strategic Alignment and interviews with selected executive and
employees provide the key to uncovering hidden obstacles standing in the way oI
implementation:

Perceptions oI management, the business, and the polities or the
organization
ConIlicting programs, goals, directives and policies.
Unsupported dimensions oI he organization`s strategy

Pase 2 - acilitati4n

The management teams derives clear, consistent, compatible objectives:

Future state oI the organization required Ior strategic success
Congruent, Iocused organizational goals whose achievement will
implement the strategy

Pase 3 - Implementati4n

Strategic Alignment is accomplished by deploying constructive progress and
policies:

Communication oI the organization`s purpose and strategy
Training oI missing skills and knowledge
Collection oI essential measurements
Setting oI customer-derived unit goals
Creating oI strategy-driven incentive pay

514 Internal Implementati4n

1. To assist management in carrying out its role in delivering the strategy and
whatever may evolve in the Iuture, and integrated management
development programme, with a particular Iocus on business planning and
perIormance management, will a particular Iocus on business planning and
perIormance management, will be provided. In addition, project groups
will be established to bring Iorward detailed proposals in respect oI issues
arising Irom the eight Priority Goals.
2. It is anticipated that other issues will emerge as the process evolves. The
project groups will comprise oI management and staII, at all levels, who
have expressed an interest, and who have some expectise/knowledge, in
the topic areas.
3. A Steering Group will be established, through the Partnership Framework,
to set terms oI reIerence, to agree resources and deadlines, to monitor and
support progress and to ensure the integration oI project group activity and
outputs into progressing the organization`s strategy.
4. At Unit, Regional and Divisional level, annual business plans will be
developed and these will also draw on the work oI the project groups.
These plans will be directly related to the Priority Goals and overall
organizational strategy.

The job oI strategy execution is to convert strategies plans into actions and good
results. The rest oI successIul strategy execution is whether actual organization
perIormance matches or exceeds the targets spelled out in the strategic plan.
ShortIalls in perIormance signal weak strategy, weak execution, or both.

In deciding how to implement a new or revised strategy, managers have to
determine what internal conditions are needed to execute the strategic plan
successIully, Then they must create these conditions as rapidly as practical. The
process oI implementing and executing strategy involves:

Building an organization with the competencies,. Capabilities, and
resource strengths to carry out the strategy successIully.
Developing budgets to steel ample resources into those value chain
activities critical to strategic success.
Establishing strategy supportive policies and procedures.
Instituting best practices and pushing Ior continuous improvement in how
value chain activities are perIormed.
Installing support systems that enable company personnel to carry out
their strategies roles successIully day in and day our.
Tying rewards and incentives to die achievement oI perIormance
objectives and good strategy execution.
Reating a strategy-supportive work environment and corporate culture.
Exerting the internal leadership needed to drive implementation Iorward
and to keep improving on how the strategy is being executed.
Exerting the internal leadership needed to drive implementation Iorward
and to keep improving on how the strategy is being executed.

The challenge is to create a series oI right Iits (1) between strategy and the
organization`s competencies, capabilities, and structure; (2) between strategy and
budgetary allocations; (3) between strategy and policy; (4) between strategy and
internal support systems; (5) between strategy and the reward structure; and (6)
between strategy and the corporate culture. The tighter the Iits, the more powerIul
strategy execution becomes and the more likely targeted perIormance can actually
be achieves.

Implementing strategy is not just a top-management Iunction; it is a job
Ior the whole management team. All managers function as strategy implementers
in their respective areas oI authority and responsibility. All managers have to
consider what actions to take in their areas to achieve the intended results-they
each need an action agenda.

The three major organization-building actions are (1) Iilling key positions
with able people, (2) building the core competencies and organizational
capabilities need to perIorm value chain activities proIiciently, and (3) structuring
the internal work eIIort and melding it with the collaborative eIIorts oI strategic
allies. Selecting able people Ior key position tends to be one oI the earliest
strategy implementation steps because it takes a Iull complement oI capable
managers and employees to get changes in place and Iunctioning smoothly.

Building strategy critical core competencies and competitive capabilities
not easily imitated by rivals is one oI the best ways to gain a competitive
advantage. Core competencies emerge Irom skills and activities perIormed at
diIIerent points in the value chain that, when linked, create unique organizational
capability. The key to leveraging a company`s core competencies into long-term
competitive advantage is to concentrate more eIIort and more talent than revivals
competitive advantage is to concentrate more eIIorts and more talent than revivals
oI on strengthening and deepening organizational competencies and capabilities.

The multiskill, multiactivity character oI core competencies and
capabilities makes achieving dominating depth an exercise in (1) managing
human skills, knowledge bases, and intellect, and (2) coordinating and networking
the eIIorts oI diIIerent work groups, departments, and collaborative allies. It is a
task that senior management must lead and be deeply involved in chieIly because
senior managers who are in the best position to guide and enIorce the necessary
networking and cooperation among individuals, groups departments, and external
allies.

Building organizational capabilities means more than just strengthening
what a company already does. There are times when management has to be
proactive in developing new competencies to complement the company`s existing
resource base and promote more proIicient strategy execution. It is useIul hare to
think oI companies as a bundle oI evolving competencies and capabilities, with
the organization-building challenge being one oI developing new capabilities and
strengthening existing ones in a Iashion calculated to achieve competitive
advantage through superior strategy execution. One capability-building issue is
whether to develop the desired competencies and capabilities internally or
whether is makes more sense to outsource them by partnering with key suppliers
or Iorming strategic alliances. Decisions about whether to outsource or develop
in-house capability oIten turn on the issues oI (1) what can be saIely delegated to
outside suppliers versus what internal capabilities are key to the company`s long-
term success and (2) whether noncritical activities an be outsourced more
eIIectively or eIIiciently than they can be perIormed internally. Either way,
though, calls, Ior action. Outsourcing means launching initiative relationships.
Developing the capabilities in-house means hiring new personnel withs skills and
experience relevant to he desired organizational competence/capability, then
linking the individual skills/know-how to Iorm organizational capability.

Matching structure to strategy centers around making strategy-critical
activities the main organizational building blocks, Iinding eIIective ways to
bridge organizational lines oI authority and coordinate the related eIIorts oI
separate internal units and individuals, and eIIectively networking the eIIorts oI
internal units and external collaborative partners. Other big consideration includes
what decisions to centralize and what decisions to decentralize.

All organization structures have strategic advantages and disadvantages;
there is no one -est way to organi:e. Functionally specialized organization
structures have traditionally been the most popular way to organize single-
business companies. Functional organization works well where strategy-critical
activities dlosely match discipline-speciIic activities and minimal
interdepartmental cooperation is needed. But it has signiIicant drawbacks:
Iunctional myopia, empire building, interdepartmental rivalries, excessive process
Iragmentation, and vertically layered management hierarchies. In recent years,
-usiness process reengineering has been used to circumvent may oI the
disadvantages oI Iunctional organization.

Whatever basic structure is chosen, it usually has to be supplemented with
interdisciplinary task Iorces, incentive compensation schemes tied to measures oI
joint perIormance, empowerment oI cross-Iunctional and/or selI-directed work
teams to perIorm and unity Iragmented process and strategy-critical activities,
special project teams, relationship managers, and special top management eIIorts
to knit the work oI diIIerent individuals and groups into valuable competitive
capabilities. Building core competencies and competitive capabilities emerges
Irom establishing and nurturing collaborative working relationships between
individuals and groups in diIIerent departments and between a company and its
external allies, not Irom how the boxes are arranged on an organization chart.

New strategic priorities like short design-to-market cycles, multiversion
production, personalized customer service, aggressive pursuit oI e-commerce
opportunities, and winning the race Ior positions oI leadership in global markets
and/or industries oI the Iuture have prompted increasing numbers oI companies to
create lean, Ilat, horizontal structures that are responsive and innovative. Such
designs Ior matching structure to strategy involve Iewer layers oI management
authority, managers and workers empowered to act on their own judgment,
reengineered work processes to reduce cross-department Iragmentation,
collaborative partnerships with outsiders (suppliers, distributors/dealers,
companies with complementary products/services and even select competitors),
increased outsourcing oI selected value chain activities, leaner staIIing oI internal
support Iunctions, and rapidly growing use oI e-commerce technologies and
business practices.

A change in strategy nearly always calls Ior budget reallocations.
Reworking the budget to make it more strategy-supportive is a crucial part oI the
implementation process because every organization unit needs to have the people,
equipment, Iacilities and other resources to carry out its part oI the strategic plan
(but no more than what it really needs). Implementing a new strategy oIten entails
shiIting resources Irom one area to another-downsizing units that are overstaIIed
and overIunded, upsizing those more critical to strategic success, and killing
projects and activities that are no longer justiIied.

Anytime a company alter its strategy, managers are well advised to review
existing policies and operating procedures, deleting or revising those that are out
oI sync and deciding iI additional ones are needed. Prescribing new or Ireshly
revised policies and operating procedures aids the task oI implementation (1) by
providing top-down guidance to operating managers supervisory personnel, and
employees regarding how certain things need to be done; (2) by putting
boundaries on independent actions and decisions; (3) by promoting consistency in
how particular strategy-critical activities are perIormed in geographically
scattered operating units; and (4) by helping to create a strategy supportive work
climate and corporate culture. Thick policy manuals are usually unnecessary.
Indeed, when individual creativity and initiative are more essential to good
execution than standardization and conIormity, it is better to give people the
Ireedom to do things however they see Iit and hold them accountable Ior good
results rather tan try to control their behavior with policies and guidelines Ior
every situation? Hence, creating a supportive Iit between strategy and policy can
mean many policies, Iew policies, or diIIerent policies.

Competent strategy execution entails visible, unyielding managerial
commitment ot best practices and continuous improvements. Bendhmarking, the
discovery and adoption oI best practices, reengineering core business processes,
and total quality management programs all aim to improved eIIiciency, lower
costs, better products quality, and greater customer satisIaction. All these
techniques are important tools for learning how to execute a strategy more
proficiently. Benchmarkign provides ad realistic basis Ior setting perIormance
targets. Instituting 'best-in-industry or 'best-in-world operating practices in
most or all value chain activities provide a means Ior taking stratregy execution to
a higher plateau oI competence and nurturing a high-perIormance work
environment. Reengineering is a way to make quantum progress toward becoming
a world-class organization, while TQM unstills a commitment to continuous
improvement. EIIective use oI TQM and contimuous improvement techniques is a
valusable competitive asset in a company`s resource portIolio-one than can
product important competitie capabilities (in reducing costs, speeding new
products to market, or improving product quality, service, or customer
satisIaction) and be a source oI competitive advantage.

Company strategies can`t be implemented or executed will without a
number oI support systems to carry on business operations. Well-conceived state-
oI-the-art support systems not only Iacilitate better strategy exaction is to make
strategically relevant measures oI perIormance the dominating -asis Ior designing
incentives, evaluating individual and group eIIort, and handing out rewords.
Positive motivation practice generally work better than negative ones, but there is
a place Ior booth. There`s also a place both monetary and no monetary incentives.
For an incentive compensation system to work well (1) the monetary
payoII should be a major percentage oI the compensation package,(2) the use oI
incentives should extend to all managers and workers,(3) the system should be
administered with care and Iairness, (4) the incentives should be linked to
perIormance target spelled out in the strategic plan, (5) each individual`s
perIormance targets should involve outcomes the person can personally eIIect,(6)
rewards should promptly Iollow the determination oI good perIormance.(7)
monetary rewards should be supplemented with liberal use oI no monetary
rewards, and (8) skirting the system to reward non-perIormers should be
scrupulously avoided.

Q:esti4ns:

1. What are the phases oI strategy implementation process?
2. What is benchmarking?
3. What are the techniques Ior eIIective implementation oI strategy?

LESSN 52 ELEENTS STRATEGY

521 Intr4d:cti4n:

Examples oI strategy elements include:
Customer Iocus
Customization capability
The highest Iunctionality products and/or service
The most robust product or service
The bets process
Fastest time to market
Value-adding Engineering
Lowest-cost competitor
Re-use
The widest range oI products and services
Automation
Standardization
Flexibility
Reduce to core Engineering activities
Minimize Engineering costs
Partnering
Skilled workIorce/UL

522 H4 elements are :sed f4r c4rp4rate strategies?

Corporate level strategies are basically about the choice oI direction that
a Iirm adopts in order to achieve its objectives. There could be a small business
Iirm involved in a single business, or a large, complex and diversiIies
conglomerate with several diIIerent businesses. The corporate strategy in both
these cases in about the basic direction oI the Iirm as a whole. In the case oI the
small Iirm it could mean the adoption oI courses oI action that would yield a
better proIit Ior the Iirm. In the case oI the large Iirm the corporate level
strategy is also about managing the various businesses to maximize their
contribution to the overall corporate objectives.

Corporate-level strategies are basically about decisions related to
allocating resources among the diIIerent business oI a Iirm, transIerring resources
Irom one set oI business to others, and managing and nurturing a portIolio
businesses in such a way that the overall corporate objectives are achieved. An
analysis based on business deIinition provides a set oI strategic alternative that an
organization can consider.

'Strategic alternative revolve around the question or whether to continue
or change the business the enterprise is currently in or improve the eIIiciency and
eIIectiveness with which the Iirm achieves its corporate objectives in its chosen
business sector. According to Glueck, there are Iour grant strategic alternatives:
stability, expansion, retrenchment, and any combination oI these three. These
strategic alternatives are termed as grand strategies. Other authors reIer to them as
basic strategies or generic strategies. We will shortly see what each oI these grand
strategies mean and why they are called as such.


Expansi4n Strategies

The expansion grand strategy is Iollowed when an organization aims at
high growth by substantially broadening the scope oI one or more oI its
businesses in terms oI their respective customer groups, customer Iunctions, and
alternative technologies singly or jointly in order to improve its overall
perIormance.

Because oI the many reasons Ior which they are adopted, expansion
strategies are quite popular. Given below are three examples to show how
companies can aim at expansion either in terms oI customer groups, customer
Iunctions or alternative technologies.

A chocolate manuIacturer expands its customer groups to include
middle-aged and old persons among its existing customers
comprising oI children and adolescents.
A stockbroker`s Iirm oIIers personalized Iinancial services to small
investors apart Irom its normal Iunctions oI dealing in shares and
debentures in order to increase the scope oI its business and spread
its risks.
A printing Iirm changes Irom the traditional letter-press printing to
desk-top publishing in order to increase its production and
eIIiciency.

In each oI the above cases, the company moved in one or the other
directions so as to substantially later its present business deIinition.
Expansion strategies have a proIound impact on a company`s internal
conIiguration causing extensive changes in almost all aspects oI internal
Iunctioning. As compared to stability, expansion strategies are more risky.

Sometimes strategies, like army commanders, do think it better to
retreat that to advance. It is in such situations that retrenchment is a
Ieasible strategic alternative.

Expansi4n Strategies

Growth is a way oI liIe. Almost all organizations plan to expand. This is
why expansion strategies are the most popular corporate strategies.
Companies aim Ior substantial growth. A growing economy, burgeoning
markets customers seeking new ways oI need satisIaction, and emerging
technologies oIIer ample opportunities Ior companies to seek expansion.

In this section, we will try to cover a lot oI ground by describing Iive types
oI expansion strategies.

a) Expansion through concentration
b) Expansion through integration
c) Expansion through diversiIication
d) Expansion through cooperation
e) Expansion through internationalization


a) Expansi4n tr4:g 4ncentrati4n

Concentration is a simple, Iirst level type oI expansion grand strategy. It
involves converging resources in one or ore oI a Iirm`s businesses in terms oI
their respective customer needs, customer Iunctions, or alternative technologies,
either singly or jointly, in such a manner that it results in expansion. In business
policy terminology concentration strategies are known variously as
intensiIication, Iocus or specialization strategies.

In practical terms concentration strategies involve investment oI resources
in a product line Ior an identiIied market with the help oI proven technology. This
may be done by various means. A Iirm may attempt Iocusing intensely on existing
markets with its present products by using market penetration types oI
concentration. Or it may try attracting new users Ior existing products resulting in
a market development type oI concentration. Alternatively it may introduce newer
products in existing markets by concentration on product developments.

For expansion, concentration is oIten the Iirst preIerence strategy Ior a
Iirm, Ior the simple reason that it would like to do more oI what it is already
doing. A Iirm that is Iamiliar with an industry would naturally like to invest more
in known businesses rather than unknown ones. Each industry is unique in the
sense that there are established ways oI doing things. Firms that have been
operation in an industry Ior long are Iamiliar with these ways. So they preIer to
concentrate on these industries.

ASHK LEYLAND

ey Facto7s fo7 an O7anisation

One oI the most successIul 'invasions in the post-Second World War era
has been that oI Japanese companies in the American market. They had two
strong motive impulses: a national mission to redeem the pride suIIered at the
World War and a very limited domestic market. These organization reIlected
values. The organizations had the selI-conIidence not to abandon their
management and manuIacturing systems, which made their products good value
propositions. The products were diIIerent and answered latent needs oI Ioreign
markets. In Iact, they transIormed the market.

The success Iormula stays the same in the current low tariII regime:
Iirstly, there should be a strong urge both need and mission to succeed. This
should be backed by global competencies in technology, manuIacture,
management and customer servicing, with distinct competitive advantage in at
least one oI these.

The robust Iorays made by Indian IT companies in Ioreign markets validate this
premise. Attracted by ready and remunerative Ioreign markets, these companies
young, conIident and ambitious entered into Ioreign markets. All oI them have a
huge competitive advantage in one quintessential Iactor, namely, high caliber and
low cost human resource.

te7nal and Inte7nal envi7onment to build wo7ld class competitiveness

A clear distinction has to be drawn between knowledge-based industries and
others. The traditional industries operate in an environment with greater
dependence on various external Iactors. In knowledge industries, the essential
Iactors oI competitiveness are more company-dependent. The capabilities that
make up the competencies are individual rather than collective. Within this major
diIIerence, the external Iactors range Irom government policies, cost oI Iinance,
availability oI inIrastructure, competition and the state oI the domestic market.
How mature the domestic market is will determine the ability and readiness oI the
organization to service a Ioreign market. In industry segments barring a Iew
exceptions like automobiles, the dominant domestic market segments are not in
the same stage oI evolution as most global markets.

Irrespective oI the industry segment, export orientation would presuppose
organizational leadership that has the vision to look beyond national boundaries
and set up recci missions even as they Iight battles in the domestic market. An
organizational culture oI learning and daring is an equally important precondition.

Comment on the steps taken by Ashok Leylond to b7in in Wo7ld Class
Competitiveness.

We have always invested in evolving technology appropriate to the market, in
order to oIIer better value to the customer and thereby create and retain a
competitive advantage. The industry`s subsequent acceptance oI these new
technologies as norms and the ongoing gains in our market share are only
conIirmative corollaries oI this strategy.

In the early 90s, in anticipation oI economic reIorms, we set global benchmarks oI
products and process technologies and quality standards. Accordingly, we have
secured technology tie-ups with global technology leaders and put the
organization and the systems through assessments Ior a series oI international
quality norms. Our make or buy decisions have been guided by maximization oI
value addition. We chose Ior ourselves the route oI technology driven growth.
During the slowdown oI the mid-90s, we concentrated on enhancing our internal
eIIiciencies. Our initial Iocus area was materials, which constitute close to 70 or
out product cots. The processes covering he entire supply chain have since been
rationalized, aided by IT connectivity covering vendors, manuIacturing units,
sales and marketing oIIice, warehouses and dealerships.

We have always been a learning organization given the complexities oI
technology. The learning culture has been Iurther intensiIied. Simultaneously, the
HR systems have been strengthened to Iacilitate perIormance management along
with quite Iew people intensive processes, which have heightened employee
participation in the eIIiciency improvement programmes.


Company MD Jiew on how ndian companies can enhance their competitiveness
to match other successful MNCs.

Most Indian companies have a long distance to go beIore they level up on
product quality, productivity and internal eIIiciencies. In process industries where
productivity and quality are build into the equipment, we have intrinsic
advantage, but the caveat is that they re capital intensive. In mass production
through assembly operations, we are comparatively weaker due to poor shop Iloor
managerial material and make the carrot and stick combination work at the shop
Iloor.

India`s best chance in the manuIacturing sector lies in leveraging its
natural resources. Industries based on minerals and agri-products will have a
competitive advantage.

Restructuring, size rationalization and technological selI-suIIiciency apart,
there are at least three areas where Indian companies can learn Irom the success oI
MNCs. One reason Ior the success oI MNCs is that they are market driven. The
second distinguishing Ieature is that they are long term players. The third Iactor is
one oI size. Whether we like it or not and more than egos will be hurt
consolidation is the key. Consolidation within the domestic industry and in some
cases transnational alliances.

(b) Expansi4n tr4:g Integrati4n

Recall that we reIerred to the horizontal and vertical dimensions oI grand
strategies in the Iirst section. These dimensions are used to deIine what are known
as integration strategies. The pivot around which integration strategies are
designed is the present set oI customer Iunctions and customer groups to other
words a company attempts to widen the scope oI its business deIinition in such a
manner that it results in serving the same set oI customers. The alternative
technology dimension oI the business deIinition undergoes a change.

A value chain is a set oI interlinked activities perIormed by an organization right
Irom the procurement oI basic oI raw materials down to the marketing oI Iinished
products to the ultimate consumers. So a Iirm may movie up or down the value
chain to concentrate more comprehensively on the customer group and needs than
it is already serving. A Iirm that adopts integration as the expansion strategy
commits itselI to adjacent businesses.

Integration is an expansion strategy as its adoption results in a widening oI
the scope oI the business deIinition oI a Iirm. Integration is also a subset oI
diversiIication strategies as it involved doing something diIIerent Irom what the
Iirm has been doing previously. Several process-based industries, such as,
petrochemicals, steel, textiles or hydrocarbons, have integrated Iirms. These Iirms
deal with products with a value chain extending Irom the basic raw materials to
the ultimate consumer. Firms operating at one end oI the value chain attempt to
more up or down in the process while integrating activities adjacent to their
present activities.


(d) Expansi4n tr4:g 44perati4n

Much oI strategy literature assumes competition to be a natural state oI
existence Ior companies to operate in. Several strategy experts, notably Michael
Porter, have based their work on the assumption that companies compete in the
market Ior a limited market share. One company can beneIit at the cost oI others.
It is a win-lose situation where iI one wins then one or several others have to lose.

A contrary view has been expressed by thinkers such as James Moore,
Ray Noorda, Barry J. NalebuII and Adam M. Brandenburger that competition
could co-exist with cooperation. Corporate strategies could take into account the
possibly oI mutual cooperation with competitors while competing with them at
the same time, so that the market potential could expand. The term co-operation`
expresses the idea oI simultaneous competition and co-operation among rival
Iirms Ior mutual beneIit. The central point is oI complementarily among the
interests oI rival Iirms.

Cooperative strategies could oI the Iollowing types:

1. Mergers and Takeovers (or acquisitions)
2. Joint Ventures
3. Strategic Alliances

Merger and takeover (or acquisition) strategies essentially involve the
external approach to expansion. Basically two, or occasionally more than two,
entities are involved. There is not much diIIerence in the three terms used Ior such
types oI strategies and they are Irequently used synonymously. But a subtle
distinction can be made. While mergers take place when the objectives oI the
buyer Iirm and the seller Iirm are matched to a large extent, takeovers or
acquisition usually are based on the strong motivation oI the buyer Iirm to
acquire.

Takeover is a common way Ior acquisitioj and may be deIined as 'the
attempt (oIten sprung as a surprise) oI one Iirm to adquire ownership oI control
over another Iirm against the wishes oI the latter`s management (and perhaps
some oI its stock-holders). But this deIinition need not be taken very seriously as
in practice, many takeovers may not have any element oI surprise, and may not
necessarily be against the wishes oI the acquired Iirm. In Iact, takeovers are
Irequently classiIies as hostile takeover (which are against the wishes oI the
acquired Iirm), and Iriendly takeovers (by mutual consent in which case they
could also be described as mergers). Without being too Iastidious, one can use
these terms synonymously. Recall that strategic management is in an evolutionary
phase and such conIusion in terms has oIten to be taken in one`s stride.

Joint ventures occur when an independent Iirm is created by at least two
other Iirms. In an era oI globalization, joint ventures have provided to be an
invaluable strategy Ior companies looking Ior expansion opportunities globally.
Strategic alliances are partnerships between Iirms whereby their resources,
capabilities, and core competencies are combined to pursue mutual interest to
develop, manuIacture, or distribute goods or services. Like joint ventures,
strategic alliances have become quite popular as strategic alternative Ior Iirms
looking Ior cooperation among national as well as international partners.

Spartek took over Neyeer in order to integrate horizontally. Hi Beam
Electronics merged with two other units to Iorm Tristar Electronics, subsequently
named as Solidaire India Ltd., Merger, takeover, joint venture, and strategic
alliance strategies are, thereIore, also the means oI achieving diversiIication and
integration.

(e) Expansi4n tr4:g Internati4nalizati4n

In this subsection, we Iirst have a look at the context international and
national in which Iirms adopt international strategies Ior expansion. Then we
eddgdg the terms international strategy`. A brieI description oI the types oI
international strategies is Iollowed by a reIerence to the international entry
options available to a Iirm.

Context for nternational Strategies

International economic dynamics, accompanied by geopolitical changes, over the
past several years, particularly since the oil crisis oI 1973, have changed the
paradigms oI international business. Globalisatin has emerged as a potent Iorce
owing to global integration the intensiIication oI economic linkages among
nations and the internationalization oI markets, trade, Iinance, technology
labour, communication, transportation and the economic institutions. In the
context oI a changing international environment, nations need to identiIy the
industries and business that their Iirms need to Iirms need to Iocus upon to gain a
competitive edge

Porter, in %he Competitive Advantage of Nations, has extended his idea oI the
competitive advantage oI Iirms to the analysis oI competitive advantage oI
nations. In his opinion, Iour national characteristics create an environment that is
conducive to creating globally competitive Iirms in particular industries.

1. Factor conditions: The special Iactors or inputs oI production such as
natural resources, new materials, labour, and so on that a nation is
specially endowed with.
2. Demand condition: The nature and size oI the buyer`s needs in the
domestic market.
3. Related and supporting industries: The existence oI related and supporting
industries to the ones in which a nation excels.
4. Firm strategy structure and rivalry: The conditions in the nation
determining how Iirms are created, organized, and managed and the nature
oI domestic competition.

On the basis oI an analysis oI these Iour sets oI Iactors, a country can determine
the industry or industry niche in which a cluster oI companies that are globally
competitive can be developed. But doing so is a task that requires concerted and
coordinated action on the part oI the national government and the business Iirms.

Q:esti4ns:

1. What are the elements oI strategy? Give examples.
2. Under what context expansion strategies are planned?
3. What are cooperative strategies? How to plan them?
4. What circumstances Iorce an organization to plan international strategies?

LESSN 53 LEADERSHIP AND RGANIZATINAL LIATE

531 Intr4d:cti4n:

A person may be both a manager and a leader. On the job, a Iormal leaders is one
who is appointed, but an inIormal leader emerges Iro the work group. Abraham
Zeleznik oI the Harvard business school argues that leaders and managers are
very diIIerent kinds oI people. They diIIer in motivation, personal history and
how they think and act.

John Koller, a colleague oI Zaleznile at Harvard, also argues that leadership is
diIIerent Irom management but Ior other reasons. Management he proposes, in
about coping with complexity good management brings about order and
constituency by drawing up Iormal plans, designing rigid structures and
monitoring results against the plans. Leadership in contrast, in about coping with
change. Leader establish direction by developing a vision oI the Iuture, then they
align people by communicating this vision and inspiring them to overcome
huddles.

He claims use need to Iorces more on developing leadership in organization
because the people in charge today are too concerned with keeping things on time
and on budget and with doing what has done yesterday, only doing it 5 percent
better. Leadership may be deIined as both a process and a property. As a process,
leadership is the use oI non coercive inIluence to shape to direct the activities oI a
group towards group goals. As a property, leadership is the set oI characteristics
attributed to those individuals who are perceived to use that inIluence
successIully. In other words, leaders are those who have the ability to inIluence
the behavior oI other without the use oI Iorce.

532 Te4ries 4f Leadersip

Trait Te4ries:

This theory sought the personality, social, physical or intellectual traits that
diIIerentiated leaders Irom non leaders. The Iirst leadership researches sought a
unique set oI traits that distinguished leaders like Gandhi and Lincoln Irom their
peers. Gary yoki (1981) summarized the research by identiIying the Iollowing
traits and skills that are Iound to be.

aracteristics 4f s:ccessf:l leaders:

Traits characteristics oI successIul leaders.

Adaptable to situations
Alert to the social envie
Ambitions and achievement oriented
Assertive
Co-operative
Dependable
Decisive
Dominant (the desire to inIluence others)
Energetic (high activity level)
Persistent
SelI-conIident
Jolyant oI stress
Willing to assume responsibility

Skills 4f caracteristics 4f s:ccessf:l leaders:

Cleuer (intelligent)
Conceptually skilled
Creative
Diplomatic and tactIul
Fluent in speaking
Knowledge abut the group task
Organized (administrative ability)
Persuasive
Socially skilled

In the early 1980s kotter (1982) conducted in depth studies oI successIul
general managers and Iound cutain characteristics more helpIul than others. He
devised the helpIul personality characteristics into Iour categories.

Needs / 4tive 4f S:ccessf:l leaders:

Linked power
Linked achievement
Ambitions

4gnitive 4rientati4n 4f S:ccessf:l leader:

Above average intelligence
Moderately strong analycally
Ambitions

Temperament 4f S:ccessf:l Leaders:

Emotional stable and even
Optimistic

Interpers4nal:
Personable good at developing relationship with people
Unusual set oI intervals that allowed them to relate easily to a broad set oI
business specialists.

Kn4ledge 4f s:ccessf:l leaders:
Knowledge about their business
Knowledge about their organizations

eavi4:ral Te4ries:

The behavioral approach was designed to determine those behavior that were
associated with successIul leadership. The leadership was associated with three
Iundamental leadership behavior.

Task perIormance
Group maintenance
Employee participation in decision making

Task perIormance

Task Perf4rmance
II leadership is to be successIul the leader must get the job done. The
necessary task perIormance behavior reIers to the things the leader does to
ensure that the group reaches its objectives. The most common task
perIormance Iactor i) Iast work speed ii) good quality / high accuracy iii) high
quality iv) observation at the rules.

Gr4:p maintenance:

Maintenance oriented behavior are those taken by the leader to ensure the
social stability oI the group to develop and maintain harmonious work
relationships and to maximize the satisIaction oI group member i) Ieeling
ii) comIort iii) stress reduction iv) appreciation.

Participati4n:

The successIul leader knows that employees ward to art in making
decisions that will have an impact on their work environment. Thus the
decision participation dimension oI leadership behavior can range Irom
autocratic to democratic. Autocratic leaders make the decisions by
themselves and then communicate them to group members or even turn
the decision making role over to the group.

icigan Leadersip St:dies:

The Michigan leadership studies were conducted at the University oI
Michigan under the direction Rens`s likert to determine the pattern oI behavior.
Two basic Iorms oI leader behavior were identiIied.





a) Jo- Centered Leader Behavior.

It includes paying dose attention to the work oI subordinates
explaining work procedures and being concerned about perIormance.


-) mployee Centered Leader Behavior.

It includes developing a cohesive work group and ensuring that
subordinated are Iundamentally satisIied with their job.

i4 State St:dies:

The Ohio State University leadership studies conducted in the late 1940s
and early 1950s also identiIied to major types oI leadership behavior.

a) Initiatin St7uctu7e:

The extent to which a leader is likely to deIine and structure his or
her role and those oI subordinates in the search Ior goal attainment.

b) Conside7ation:

The extent to which a leader is likely to have job relationship
characterized by mutual trust, respect Ior subordinates ideas and regards Ior their
Ieelings.

In conclusion the Ohio State Studies suggested that the high-high` style
generally resulted in positive outcomes but enough exceptions were Iound to
indicate that situational Iactors needed to be integrated into the theory.

anagerial Grid:

The leadership style was developed by Blake and Mouton. They proposed
a managerial grid based on the styles oI 'concern Ior people and 'concern Ior
production which essentially represent the Ohio state dirhensions oI
considerations and initiating structure or the Michigan dimensions oI employee
oriented and production oriented.

Based on the Iindings oI Blake and Mouton managers were Iound to
perIorm best under 9.9, style. Since there is little substantine and evidence to
support the conclusion that a 9.9, style is most eIIective in all situations.

iii) 4ntingency Te4ries:

a) Fiedle7 Model:

The theory that eIIective groups depend upon a proper upon a proper
match between a leaders style oI interacting with subordinated and the degree to
which the situation gives control and inIluence to the leader.

Fiedler developed an instrument which he called the least preIerred co-
work questionnaire that purports to measure whether a person is task or
relationship oriented.

Task Vs Relati4nsip 4tivati4n:

The task motivation is similar to the job-centered and initiating structure
behavior.

Relationship motivation is similar to the employee centered and
considering behavior.

One major diIIerence in Iielders approach is that task versus relationship
motivation is seen as a trait that remains Iairly constant.

b) Pat G4al Te4ry:

The path-goal theory oI leadership as developed by evans and house is a
direct extension oI the expectancy theory oI motivation. The path goal theory oI
leadership is a contingency approach arguing that the principal Iunction oI a
leader is to make valuable organizational awards available in the work place and
to clariIy Ior the subordinate the kinds oI behavior that will lead to goal
accomplishment and valued awards.

It stipulates Iour kind oI leader behavior i) directive ii) supportive iii)
participative and achievement oriented.
























i) Di7ective Leade7ship:

InIormal subordinates as to what is expected
OIIering directive on what to do and how
Establishing schedules Ior the work to be done
Maintaining speciIic standards oI perIormance
Situational Factors:
* locus oI control
* perceived ability
Characteristics
Leader behavior
* Directive
* Supportive
* Participative
* Achievement
oriented
Subordinate`s
motivation to
perIorm
Situational Iactors:
Environment characteristics
* Task structure
* Authority system
* Work group
ClariIying the leaders role in the group


ii) S:pp4rtive Leadersip:

Making the work and the work environment more pleasant
Treating group members as equals
Being Iriendly and approachable
Demonstrating concern Ior the status, well being and needs oI
subordinates.

iii) Pa7ticipative Leade7ship:

Getting subordinates involved in decision making
Consulting with subordinates
Asking subordinates Ior suggestion
Considering those suggestions seriously beIore making decision.

iv) Achievement O7iented Leade7ship:

Establishing challenging goals
Expecting subordinate to perIorm these high levels
Demonstrating conIidence that continued improvement in perIormance
Stressing excellence and continued improvement in perIormance

Path goal theory makes the assumption that the same leader may display any
or all oI these leadership styles depending on the situation.

The theory suggests that there are two basic types oI situational Iactor
inIluencing how a leader related to subordinate satisIaction.

Locus oI Control
Perceived Ability



c) Te Ur44m-Yett4n ag4 4del:

This model oI leadership describes a leadership style Ior a given salutation
and it assumes that a manager is capable oI various leadership styles. It deals with
the aspect oI leadership behavior-subordinate participation in decision making. It
is a decision Iree approach which allows the leader to assess the situation in terms
oI a variety oI variables and based on these variables to Iollow the path through
the decision-Iree to a recommended course oI action.

This model contains the Iollowing Iive decision styles:

The manager makes the decision alone.
The manager asks subordinates Ior inIormation but makes the decision
alone
The manager shares the situation with subordinates asking Ior their
inIormation and evaluation. Subordinates to not meet as a group. The
manager takes the decision alone.
The manager and the subordinate meet as a group, discuss the situation
but manager makes the decision
The manager and subordinates meets as a group, discuss the situation and
the group makes the decision.

The attribution theory model show that in order to select the proper course oI
action, the leader most their deal with three types oI inIormation.

the consistency oI the employees perIormance
the dist inclutienses oI the task
Whether there is high or low coarseness among subordinates relate to the
task

arismatic Leadersip:

Charismatic leadership assumes as the trait theories, that charisma is an
individual characteristic oI the leader. Charisma is an individual characteristic oI
the leader. Charisma is a mysterious human quality that is hard to describe but
inspires Iollows to grant almost unquestioned allegiance to the leader possessing
it.

House (1977) developed a theory oI charismatic leadership that attributed
charisma to the Iollowing characteristics:

Iollowers trust the correctness oI leader`s belieIs
Iollowers belieIs are similar to the leader`s belieI
Iollowers accept the leader unquestioningly
Iollowers Ieel aIIection Ior the leader
Iollowers obey the leader willingly
Iollowers have heightened perIormance goals

Cha7acte7istics:

SelI conIidence
A vision
Ability to ultimate the vision
Behavior that in our oI ordinary
Perceived as being oI change agent
Environment sensitivity

(iii) Transacti4nal Leader`s Vs Transf4rmati4nal Leader:

17ansactional Leade7:

Leaders who guide or motive their Iollowers in the direction oI established goals
by classiIying role and taste requirements.

Cha7acte7istics:

Contingent Reward:

Contracts exchange oI rewards Ior eIIort, promises rewards Ior good
perIormance, recognizes accomplishments.

Management by Exception (active):

Watches & searches Ior deviations Irom rules and standards, takes
collective action.


Management by Exception (passive)

Intervenes only oI standards are not met

Ldissy- Iaire:

Abdicates responsibilities, avoid making decisions.

iv) Life ycle Te4ry:

The Hussy and Blanchard liIe cycle theory oI leadership contents that the
most eIIective leadership style depends on the maturity oI subordinates. The
theory deIines maturity, not as age or emotional stability, but as a desire Ior
achievement a willingness to accept responsibility and task-related experience and
ability. The appropriate leadership style is described by a prescriptive curve that
Iollows the association between superior and subordinates through a liIe cycle` at
Iour phases:

a) Telling
b) Selling
c) Participating
d) Delegating

a) 1ellin:

In the initial phase oI the liIe cycle, when subordinates Iirst enter the work
group, the manager uses a telling leadership style, as subordinates must be
instructed in their tasks and working environment. During this
introductory stage, the manager must assume responsibility Ior
subordinates, because workers at this level cannot take responsibility and
have not matured enough emotionally to want responsibility.

b) Sellin:

At the second level oI workers, maturity managers tend to use selling
leadership, style oI support, by direction in an eIIort to get workers to buy
into` the desired perIormance level. OIten subordinates at this level oI
maturity are willing but unable to assure responsibility Ior their own work
behavior.

c) Pa7ticipatin:

The leader and Iollower share in decision making with the main role oI the
leader being Iacilitating and communicating.

d) Deleatin:

The leader provides little direction or support.

533 Te 4st Recent Appr4aces t4 Leadersip

There are an attribution theory oI leadership. Charismatic leadership,
transactional versus transIormational leadership and visionary leadership.

Transf4rmati4nal Leaders:

Leaders who provide individualized consideration and intellectual
stimulation and who posses Charisma.

Characteristics:

Charisma
Inspiration
Intellectual Stimulation
Individualized Consideration


iv) Visi4nary Leadersip

The ability to create and articulate a realistic, credible, attractive vision oI
the Iuture Ior an organization or organizational unit that grows our oI improves
upon the present. This vision oI property selected and implemented in so
energizing that it 'in eIIecting starts the Iuture by calling Iorth the skills talents,
and resources to make it happen.

Leadersip pr4file f4r te next cent:ry:

1. First and Ioremost oI the next century need to radically change their
mindset because the leadership traits and qualities which were very
important till now may not stand the test oI time in the years to come. In
keeping with changing times it is improvement that leaders develop their
adaptive capabilities.
2. For a leader to be successIul, integrity oI character the most important
attribute. As a Iormer head oI New York Stock Exchange once said 'The
public may be wiling to Iorgive us Ior the mistake in judgment, but it will
not Iorgive us Ior the mistakes in motive. According to Joseph Badaracco
& Richard Ellsworth (1989) 'Leadership in a world oI dilemmas is not
Iundamentally, a matter oI style, charisma or proIessional management
techniques. In is s diIIicult daily quest Ior integrity Commitment to
leadership through integrity can help managers through the inevitable
periods oI anxiety, doubt, and trial, and give them a sense oI priorities to
guide them through an uncertain world.
3. Leaders should have a clear vision` oI how things should be. They should
also be able to communicate the vision becomes a shared vision and
everybody willingly contributes towards IulIilling the vision.
4. A leader`s credibility should be based on the six criteria, also known as the
six C`s Conviction, Character, Care, Courage, Composure and
Competence (Bornstein & Smith, 1997)
5. To be able to deal eIIectively with the complexities oI change in a more
Ilexible manner, leaders oI the Iuture should posses cross-Iunctional rather
than narrow Iunctional knowledge and expertise. In other words you must
continue to gain expertise, but avoid thinking like an expert. Acquisition
oI knowledge should be viewed as a liIelong experience do not a
collection oI Iacts or skills. Not ling ago what you learned in school and
college was largely enough Ior the rest oI your liIe. With knowledge
expanding exponentially this is no longer true.
6. Some oI the key words a leader oI the Iuture is required to put into action
are: options not plans, the possible rather than the preIect, involvement
instead oI obedience (Handy, 1997).
7. Leaders need to realize that while setting the vision, values, mission and
major goals the pyramid should be upright where the boss is responsible
and the subordinates are responsive. But when it comes to implementation
the pyramid needs to be turned upside down so that the roles are reversed
the people become responsible and the management responsive to them
(Blanchard, 1997).
8. As Benjamin Disraeli once stated that, 'In a progressive country, change
is constant. Change is inevitable. The same is true Ior eIIective
organization. Change will remain a core consideration Ior 21
st
century
leaders. The process oI change starts with selI-change. You cannot expect
your people to change without you your-selI being willing to change. With
accelerated pace oI change in the economic, political and socio-cultural
environment leaders not only need to acquire new knowledge and skills
but they also need to unlearn many oI the things that have outgrown their
purpose.
9. Leaders need to realize what motivates the knowledge workIorce. Their
needs are oI a higher order than just physiological and saIety needs.
Leaders could possibly motivate people by Iollowing the PRIDE System
(smith, 1997) which stands Ior: P. Provide Ior a positive working
environment R-Recognise everyone`s eIIorts l-Involve everyone D-
Develop skills and potential E-Evaluate and measure continuously.
10. The leader oI the next century would to well to view responsibility Iorm a
diIIerent perspective. As Stephen Covey (1989) deIines responsibility in
his own way: Response ability i.e., the ability to choose your response.
Higher proactive people recognize their responsibility and do not blame
circumstances, conditions or conditioning Ior their behavior. Their
behavior is a product on values, rather than a product oI their conditions,
based on Ieelings.
11. Leaders need to have a deep insight into the realitites oI the world and be
receptive to the changes taking place and opportunities that these changes
oIIer.
12. Leaders need to have high level oI commitment to the organizational goal
and the perseverance to achiever the goal in spite oI all the impediments.
13. As the tasks become to complex and inIormation too widely distributed,
leaders need to involve others and elicit their participation in problem
solving and decision making.
14. in large organization the leader should be willing to share power and
control so that leadership is encourages at various levels.
15. Leaders should test the assumptions and be prepared to change them but at
the same time they should stick to their conventions.
16. Some oI the implements on the road to excellence which leaders need to
overcome are Iollowing the path oI mediocrity and relying on
conventional wisdom.
17. SuccessIul leaders set their own standards and compete with themselves,
and not with others.
18. Leaders should learn to depend on them selves and not on other people,
material rewards, prestigious position etc. Ior their selI-worth as this is not
long-lasting. SelI-respect which comes Irom within cannot be taken away
by anyone.
19. Innovation is the need oI the hour. Only when a leader is innovative can
be Iind opportunity in every crisis. Innovation is also to do with Iinding
new application Ior old ideas that cannot be discarded. Innovativeness will
help the leaders to view the world not Ior what it is, but Ior what it could
be.
20. Leaders should be capable oI taking calculated risks as maintaining status
quoleads to complacency and mediocrity. As he old proverb goes 'You
must learn Irom your past mistakes, but not lean on your past successes,
It has been Iound that low and high achievers behave quite diIIerently
when taking risks (McClelland, 1961). Low achievers do one oI the two
things: either they minimize risk as much as possible or they take wile.
Irrational risks. High achievers, by contrast, typically take moderate risks
but the nub oI it is that they calculate risks against circumstances and their
own abilities.
21. To encourage teamwork within organizations mechanism have to be
created to broaden the concept oI individual competence to include
working with others and building trusting relationship by breaking brriers
oI communication across bound arises and encouraging collaborative
rather than competitive behavior.
22. The corporate environment had become increasingly unstable and
unpredictable and vulnerable to outside Iorces and pressures. Managers
must learn to cop with non-linear Iorces (ToIIler, 1985). These
observations have become every more relevant in the present day. Ross
Nisbett (1991) puts it this way: 'tinkering, testing piloting, experimenting
these are the strategic tools oI the leaders oI the twenty-Iirst century.
You cannot control the Iuture, you can`t really predict it, put you can
experiment; you can Ilex the business; you can rearrange management
teams. Remember, leaving things as they are can be just as predictable as
changing everything. You lose (or win) both ways.

534 rganizati4n c:lt:re:


Organization culture could be deIined as the set oI philosophies
ideologies, values, assumption, belieIs etc that joins together are organization and
are shared by its employees.

The Characteristics which help to understand the nature oI culture better
are:

Individual Initiative : The degree oI responsibility Ireedom and
independence that individuals have.

Risk Tolerance : The degree oI which employees are encouraged to
be aggressive, innovative and risk seeking.

Direction : The degree to which the organization creates clear
objectives and perIormance expectations.

Integration : The degree to which units within the organization
are encouraged to operate in a coordinated
manners

Control : The number oI rules and regulation, and the
amount oI direct supervision that is used to
oversees and control employee behavior.

Selectivity : The degree to which members identiIy with the
organization as a whole rather then with their
particular work group or Iield oI proIessional
expertise.

Reward System : This degree to which reward allocations all based
on employees perIormance criteria in contract to
seniority, Iavoritism, and so on.

ConIlict Tolerance. : The degree to which employees are encouraged o
air conIlicts and criticism openly.

Communication Pattern : The degree to which organizational
communications are restricted to the Iormal
hierarch oI authority.


H4 :lt:re is f4rmed:

In order to understand how culture is Iormed, lets take up an examples:

Imagine a company beginning its operations Ior the Iirst time. So, each
day people come in to work and product are needs and sold. The company
operates in the traditional business manner. Since the company is started Ior the
Iirst time, there is no existing tradition, history or culture. All these are to created.

And within days oI starting, quite district behavioral norms begin it
develop. People called each other by their names, as district Iorm having a Mr. or
Mrs. The people cane to and leIt on time, punctuality was valued, Mea breakers
however, were rarely adhered to and workers routinely absented themselves Iro
the shops Iloor without consulting supervisors. From the outset, production was
uneven, there was month end syndrome, as people struggled to catch upon their
output targets.

These behavioral norms oI Iormality, punctuality, discipline and output
were accompanied by similar norms relating to almost every other types oI
behavior.

The development oI expectation through over behavior one thinks about
the consequent result and will expect certain things to happen.

Now suppose a couple oI years have passed, and people have gone
through the 'Expectation loop quite number oI times, and later we will Iind that
a new Iactor has emerged called as attitude.

Expectation arise quickly where as, attitude take much more longer time to
Iorm. And one is aware about expectation, but much less about the attitude. And
with the attitude are will take things Ior granted.

Now that the company has been working Ior a couple oI years, and people
have been through the two loops, will Iind another element emerging called
'Culture.

Attitudes arose over months / a year, and are dimly aware oI it, where as culture
arrived over many years, and we would be entirely unaware oI culture.

H4 :lt:re is S:stained

Once a culture is created, there were practices within the organization that help
keep it alive. Three each practices are selection process, actions oI top
management, and socialization methods.

Selecti4n

The main purpose oI selections process is to have right people Ior right jobs.
When, Ior a given job, two or more candidate, with identical skills and abilities,
are available, Iinal selection is inIluenced by how well the candidate Iits into the
organization. By identiIying candidate who can culturally match the
organizational culture.

T4p anagement

The actions oI top management have a major impact on the organization`s culture.
Through what they say and how they behave, senior executive establish norms
that Iilter down through the organization as to whether risk taking is desirable;
how much Ireedom managers should give their subordinates etc.

S4cializati4n

No matter how good job the organization does in hiring people, new employees
are not Iully indoctrinated in the organizations culture. This way be because they
re not Iamiliar with the culture. ThereIore the organization has to help new
employees adapt to its culture.

Impact 4f :lt:re 4n rganisati4ns`s Effectiveness:

Impact oI culture on organization`s eIIectiveness could be both Iunctional as well
as dysIunctional culture makes are organization a class.

Among culture could put considerable pressure on employees to conIirm. But
modern organization is known Ior diversity oI workIorce. WorkIorce diversity is
being accepted, and even encouraged.

Culture acts as a barrier to mergers and acquisitions. II there is a mismatch
acquisitions are likely to Iail.

On the positive side, culture has an impact on control, normative, order, and
employee perIormance and satisIaction.

Effective 4ntr4l

Organisaion culture serves as a control mechanism in directing behavior. As the
culture is diIIused through out the organization. People understand what they ar
supposed to do and what they should not do, when individuals are not in
accordance with the belieI and values oI the culture, managers and co-workers
will step in and insists on corrective action. A strong culture is characterized by
shared belieI and expectations to which all must adhere.

N4rmative rder

Closely linked to eIIective control is the use oI norms to guide behaviors. These
expectations regarding appropriate and inappropriate behavior are greatly
inIluenced by culture, and strong culture have both consensus and intensity
regarding these norms. In weak cultures, consensus may be present but intensity is
no.

Perf4rmance and Satisfacti4n

Organizational culture has its impact on perIormance and satisIaction oI
organizational members, but not in equal proportions. There is relatively strong
relationship between cultures and satisIaction, but this is moderated by individual
needs and culture satisIaction will be the highest when there is congruence
between the individual needs and the culture.

II the culture is inIormal, creative and supports risk taking and conIlict,
perIormance will be higher iI the technology is non-routine. The more Iormally
structured organizations that are risk averse, that seek to eliminate conIlict, and
that are prove to more task oriented leadership will achieve higher perIormance
when routine technology is utilized.

H4 :lt:re is Analysed

The culture could be analyzed by a method developed by Harry C. Miller,
proIessor oI the Dept. oI Educational leadership at Southern Illinious University.
It is a three-step process known as:

Trade Winds : The organization`s purpose people are brought together
and actions co-ordinated to achieve some purpose.

Temperature : The hotness or coldness oI morale relative to each
person`s perception or work 'hot individuals Ieel good
about what is happening in the organization, and cold`
individuals don`t Ieel okay about their work.

Ceiling Level : The level oI desire, commitment and energy Ior
organizational goals. This depends on the organization`s
history, traditions and norms.


This measure indicates the Iit between the prevailing culture and the
individual values and needs. II the employees adopt the values oI the prevailing
culture, the climate is said to be 'good; iI it is 'poor and morale, motivation and
productivity are expected to drop.

Te reati4n and ange 4f rganizati4n c:lt:re:

One would say that people working in Iactories and oIIices in an area would being
to the same industrial culture. They would all be the member oI the came
organizational society. Their work and liIe experience would be qualitatively
diIIerent Irom those oI individuals living in more traditional societies.
Organizations are mini-societies that have their over distinction pattern oI culture
and sub culture. DiIIerent organizational cultures Iorm around varying corporate
purposes, Iounder styles, industry norms oI behavior and environmental
contingencies.

:lt:re: A s4cial learning pr4cess

Culture is Iormed out oI a serial learning process. A Iounder creates a culture
Irom a pre-conceived cultural paradigm: and the organization, there leaves about
this paradigm. This learning could be based on both positive reinIorcement
(repeating what works) and avoidance learning (avoiding painIul experiences). In
the cultural learning, the organization might Iace the problems oI not having a
common language or a common set oI rules Ior relating to the environment and to
each other.

Once people in the organization learn set oI assumptions, belieIs and
values that work the handle internal and external contingencies, the uncertainly
and the stimular overload would be reduced. This is why cultures resist change. A
stable culture producers a Ieeling oI saIety.

anging te :lt:re

As an organization changes and grows through its liIe cycle, its culture
needs to change as well, to meet new realities. Even a positive culture can
become dysIunctional iI ignored.

The culture should be changed iI its guiding belieIs are inadequate to
meet present and Iuture competitive needs. That is iI an organisation`s initial
belieIs and values are no longer assets to it, a cultural change is indicated.

H4 :lt:re can be canged

The true change must begin at the top, because leadership initially creates
cultural norms and boundaries. With top management commitment, several
strategies can be used to create more eIIective cultures.

Mergers oIten provide the space Ior a change. Facing potential conIlict
between the diIIerent cultures oI two companies, a merged organization can create
a new joint culture. To create this new 'partnership these steps could be taken
up:-

Create a new, single culture that is appropriate Ior all the entities that have
become part oI the merged organization. DeIine its purpose, what it stands
Ior, why it exists.
DeIine norms, rituals etc that will enhance unity oI spirit, result
orientation.

xample.

XEROX has gone thrugh three diIIerent types oI cultures during its liIe.
The Iirst wars created under Joseph Wilson, an entrepreneur who has CEO oI
Xerox Irom 1961 to 1968. Under Wilson, Xerox and a typical entrepreneurial
environment, with an inIormal, Rick-taking culture. Virtually everyone knew
everyone else, and this made Ior a highly motivated workIorce.

C. Peter Mc Collough took over as CEO in 1968, and began the era oI
proIessional management. Growth led to bureaucratic controls, and culture
became Iormal. This culture oI risk aversion and bureaupathic behavior hindered
new product development.

In 1982 David Kearns took over as CEO. Kerans trimmed Xerox down, stressed
quality and delegated power downward in the organization. Rules and policies
became less important, and the innovative spirit returned.

A culture that prevents a company Irom addressing competitive pressures or
adapting to changing economic contingencies can lead to stagnation and demise.

xample.

Pepsico had Iaced the above problem. Pepsi`s cultural emphasis had changed
Irom passivity to aggressiveness; once the company was content to be Number 2`
oIIering Pepsi as a cheaper alternative to coke. But today as a new Pepsico
employee learns, beating Coke is the path to success. Pepsi marketing now takes
on Coke directly. In recent year`s consumer have been asked to compare the tastes
oI the two colas.

This direct conIrontation is reIlected inside the company as well managers are
pitted against each other Ior market share to work harder, and to bring more proIit
out oI their business. Because winning is a key value a Pepsico, losing has its
penalties. Employees Ieel the pressure oI this culture.

Q:esti4ns:
1. It the leader born or made? JustiIy
2. What are the various leadership theories?
3. How organization culture plays a vital role in shaping an organization?
4. How organization culture is changed and maintained?
5. Bring out the culture aspects oI Xerox.

LESSN 54 PLANNING AND NTRL IPLEENTATIN

541 Intr4d:cti4n:

In the old days in science, the universe was Iairly simple, Nearly every
science museum had a huge, old model oI the solar system win which all the
movements oI the planets were controlled with clockwork gears, Then we
realized that reality was much more complex. Al motion was relative.

Business has also entered an age oI new realities, it is essential to
understand and take advantage oI the dynamic motion and Ilux oI out global
markets and technological breakthroughs. Moreover, a Iundamental shiIt in
thinking is necessary Ior coping with these changes, while companies have
struggled to try to sustain their advantages, in Iact, no organization can build a
competitive advantage that is sustainable. Every advantage erodes. So in this
hypercompetitive environment, companies must actively work to disrupt their
own advantages and the advantages oI competitors. To cope with this new reality,
managers must employ a new 7S`s Iramework that can be used to analyze
industries and competitors and to identiIy one`s own strengths and weaknesses in
meeting the challengers oI hypercompetition.

We have seen giants oI American industry, such as General Motors and IBM,
shaken to their cores. Their competitive advantages, once considered unassailable,
have been ripped and torn in the Iierce winds oI competition. Technological
wonders appear overnight. Aggressive global competitors arrive on the scene.
Organizations are restructured. Markets appear and Iade. The weathered rule
books and generic strategic once used to plot our strategies no longer work as well
in this environment.

The traditional sources oI advantages no longer provide long-term security. Both
GM and IBM still have economies oI scale, massive advertising budgets, the best
distribution systems in their industries, cutting-edge R&D, deep pockets, and
many other Ieatures that give them power over buyers are suppliers and that raise
barriers to entry that seem impregnable. But these are not enough any more.
Leadership in price and quality is also not enough to assure success. Being Iirst is
not always the same as being best. Entry barriers are trampled down or
circumvented. Goliaths are brought down by clever Davids with slingshots.

542 Hyperc4mpetiti4n

Hypercompetition results Irom the dynamics oI strategic maneuvering among
global and innovative combatants. It is a condition oI rapidly escalating
competition based on price-quality positioning, competition to create new know-
how and establish Iirst-mover advantage, competition to protect or invade
established product or geographic markets, and competition based on deep
pockets and the creating oI even deeper pockets dalliances. In hyupercompetitions
the Irequency, boldness, and aggressiveness oI dynamic movement by the players
accelerates to create a condition oI constant disequilibrium and change. Market
stability is threatened by short product liIe cycles, short product design cycles,
new technologies, Irequent entry by unexpected outsiders, repositioning by
incumbents, and radical redeIinitions oI market boundaries as diverse industries
merge. In other words, environments escalate toward higher and higher levels oI
uncertainty, dynamism, heterogeneity oI the players, and hostility.

It is not just Iast-moving, high-tech industries, such as computers, or
industries shaken by deregulation, such as the airlines, that are Iacing this
aggressive competition. There is evidence that competition is heating up across
the board, even in what once seemed the most sedate industries. From soItware to
soIt drinks, Irom microchips to corn chips, Irom package delivery services, there
are Iew industries that have escaped hypercompetition. As Jack Welch, CEO oI
General Electric, commented, 'It`s going to be brutal. When I said a while back
that the 1980s were going to be a white-knuckle decade and the 1990s would be
even tougher, I may have understated how hard it`s going to get. (4)

There are Iew industries and companies that have escaped this shiIt in
competitiveness. Even such seemingly comatose industries as hot sauces oI such
commodity strongholds as U.S. grain production have been jolted awake by the
icy waters oI hyperdompetition.

Competition American corporations have traditionally sought established
markets wherein sustainable proIits were attainable. They have done so by
looking Ior low or moderate levels oI competition. Low and moderate-intensity
competition occurs iI a company has a monopoly (or quasi monopoly protected by
entry barriers) or iI competitors implicitly or explicitly collude, allowing each
other to 'sustain an advantage in one or more industries or market segments.
Collusions or cooperation, while it can be useIul in limiting aggressiveness, is
limited because there in incentive to cheat on the collusive agreement and gain
advantage. Entry and mobility barriers are destroyed by Iirms seeking the proIit
potential oI industries or segments with low or moderate levels oI competition.
Gentlemanly agreements to stay out oI each othre`s turI Iall apart as Iirms learn
how to break the barriers inexpensively. As competition shiIts toward higher
intensity, companies begin to develop new advantages rapidly and attempt to
destroy competitors` advantages. This leads to a Iurther escalation oI competitions
into hypercompetition, at which stage companies actively work t string together a
series oI temporary movers that undermine competitors in an endless cycle oI
jockeying Ior position. Just one hypercompetitive player (oIten Irom abroad) is
enough to trigger this cycle.

At each point Iirms press Iorward to gain new advantages or tear down
those oI their rivals. This movement, however, takes the industry to Iaster and
more intense levels oI competition. The most interesting aspect oI this movement
is that, as Iirms maneuver and outmaneuver each other, they are constantly
pushing toward perIect competition, where no one has an advantage. However,
while Iirms push toward perIect competition, they must attempt to avoid it
because abnormal proIits are not at all possible in perIectly competitive markets.
In hypercompetitive markets it is possible to make temporary proIits. Thus, even
though perIect competition is treated as the 'equilibrium state in static economic
models, it is neither a desired nor a sustainable state Irom the perspective I
corporations seeking proIits. They would preIer low and moderate levels oI
competition but oIten settle Ior hypercompetitive markers because the presence oI
a small number oI aggressive Ioreign corporations won`t cooperate enough to
allow the old, more genteel levels oI competition that existed in the past.





543 Te ne S`s :

Paraphrasing George Bernard Shaw, while reasonable people adapt to the
world, the unreasonable ones persist in trying to adapt the world to themselves.
This, all progress depends upon the unreasonable person. In hypercompetition the
reasonable strategic that Iocus on sustaining advantages do not lead to progress. It
is not enough to merely adapt to the environment. Companies make progress in
hypercompetition by the unreasonable approach oI actively disrupting advantages
oI other to adapt the world to themselves. These strategies are embodied in the
New 7S`s.

Unlike the old 7S Iramework, originally developed by McKinsey and
Company, the new Iramework in based on a strategy oI Iinding and building
temporary advantages through market disruption rather than sustaining advantage
and perpetuating an equilibrium. It is designed to sustain the momentum through
a series oI initiatives rather than structure the Iirm to achieve internal Iit or Iit
with today`s external environment as iI today`s external condition will persist Ior
a long period oI time.

The New 7S`s are:

O superior stakeholder satisIaction
O strategic soothsaying
O positioning Ior speed
O positioning Ior surprise
O shiIting the rules oI the game
O signaling strategic intent
O simultaneous and sequential strategic thrusts.

Because oI the nature oI the hyper competitive environment, the New 7S`s are
not presented as a series oI generic strategies or a recipe oI success. Instead,
these are key approaches that can be sued to carry the Iirm in many diIIerent
directions. They are Iocused on disrupting the status quo through a series oI
temporary advantages rather than maintaing equilibrium by sustaining
advantages. The exact strategic actions Iormulated under this system will
depend on many variables wihtihn the industry and the Iirm. Many types oI
strategic initiatives can be carried out using the New 7S`s, and there are many
variations.

SuccessIul Iirms learn how to disrupt the status quo. A key to their choice
oI a disruption is the realization that not all disruptions are good. The
disruptions that work are those that involve the Iirst S-the creating oI a
temporary ability to serve the customer better than competitors can.

BeIore the Pentium chip, Intel rarely asked customers what they wanted,
but now they have instituted a process oI concurrent engineering to get customers
(and internal manuIacturing) involved as early as possible. Now, when designing
new chips, Intel designers visit every major customer and major soItware housed
to ask them what they want in a chip. Intel has also provided early soItware
simulations oI its new chips to computer makers, allowing them to get a jump on
designing their new machines, and has produced soItware compliers to help
soItware companies use the new chip.

CEO Andrew Grove holds regular meeting with employees Irom all parts
oI the organization to brainstorm about the Iuture, competitive challenges, and
customer needs. Employees are motivated and empowered to serve customers`
priorities above their own. Employees have a right to demand AR'action
required oI any executive. Over the years Intel has also worked to avoid
layoIIs through asking staII to put in overtime or cut back on hours, so employees
remain motivated to serve customers.


Disruptions that satisIy current customer needs are not enough. Constantly
improving customer satisIaction is now so standard that Iirms that once led the
pack on customer satisIaction now Iind themselves without nay lead at all. Thus,
the key to achieving real advantage Irom customer satisIaction is to :

O identiIy customer needs that even the customer cannot articulate Ior
him/herselI
O Iind new, previously unserved customer s to serve.
O Create customer needs that never existed beIore
O Predict changes in customer needs beIore they happen.

To do this, Iirms are now engaging in the second S, strategic soothsaying.
This allows Iirms to see and create Iuture needs that they can serve better
than any competitor does, even iI only temporarily. The ability to see and
create these Iuture need depends upon the Iirm`s ability to predict Iuture
trends, to control the development oI key technologies and other know-
how that will shape the Iuture, and to create selI-IulIilling prophecies.

Intel CEO Grove has quipped that the company bets millions on science
Iictions. (5) As pressure builds Irom clone makers and rival systems, engineers
are brought together to consider the emerging technological capabilities nd the
perIormance needed to keep ahead oI competitors. Intel has also expanded into
other areas such as supercomputers, Ilash memories, video chips, and networking
boards. Its sales in these areas are climbing at an average rate oI 68 percent per
year. (6) It has gained 85 percent oI the emerging market Ior Ilash memory chips
and practically owns one third oI the market Ior massively parallel computers.
This experience provides knowledge that Intel can then apply to standard chips,
adding Ieatures such as video.

The second S, strategic soothsaying, is concerned with understanding the
Iuture evolution oI markets and technology that will proactively create new
opportunities to serve existing or new customers. This also contributes to the
Iirm`s vision oI where the next advantage will be discovered and where the
company should Iocus its disruption.

To act on this vision, companies need two key capabilities: speed and
surprise. As in Iencing, speed and surprise are key Iactors in gaining an advantage
beIore competitors are able to do so and in delaying competitor reactions to the
new advantages.

II two companies recognize the opportunity to create a new advantage at
the same time, the company that can create the advantage Iaster will win. Because
success depends on the creation oI a series oI temporary advantages, a company`s
ability to move quickly Irom one advantage t the next is crucial. Speed allows
companies to maneuver to disrupt the status quo, erode the advantage oI
competitors, and create new advantages beIore competitors are able to preempt
these moves.

Intel used to bring out one or two new chips each year and a new
microprocessor Iamily every three or Iour years. In 1992 it drove out nearly thirty
new variations on its 486 chip and introduced the next generation oI chip, the
Pentium. To stay ahead oI clonemakers, Intel plans to create new Iamilies oI
chips every year r two throughout the 1990s.(7) Instead oI waiting until the
current generation oI chip is rolled out beIore working on the next one, Intel now
develos several generations oI chips at one. It is already working on making its
chips obsolete beIore they have even hit the market. Intel has created design-
automation soItware that allows it to add two or three times the transistors to each
new chip design with no increase in development time. It also has achieved a
breakthrough in modeling systems that promises to cut the Iour-year product
development cycle by six months. The new Quick turn system will allow Intel to
perIorm engineering tests up to thirty thousand times Iaster.

II a competitor is unaware oI the opportunity to create a new advantage
surprise can maintain that lack oI awareness. While this is not a source oI
sustainable advantage (once the competitor recognizes the advantage, it can
usually move quickly to duplicate it), surprise allows the company to create the
advantage and to extend the period in which the advantage in unique. Surprise
also allows companies to act to undermine competitor advantages beIore the
competitors can take deIensive actions.

Intel`s multiple capabilities with strengths in microprocessors, other
chips, Ilash memories, personal computers, and supercomputers-keep competitors
guessing about its next move. Since its early days, it has oIten pursued a strategy
oI simultaneously pursuing alternative technology, and it currently has its own
versions oI the competing RISC-based chip (Reduced Instruction-Set Computing)
although it continues to deIend its stronghold oI CISE (Complex Instruction-Set
Computing), which oIIers more soItware. Not wanting to compete with its
customers, Intel hasn`t entered the personal computer market under its own name,
but it has developed the capabilities to do so as the only supplier to computer
manuIacturers with a brand nameso competitors never know when it might
decide to enter the PC market.

Intel has used advance in modeling and design oI new chips to surprise
competitors. Its new modeling system gave it a strategic victory over a competing
RISC based chip. At a technology Iorum in 1991, An Intel executive
demonstrated a working model oI he Pentium chips, using a link to the model,
beIore and actual chip was ready. In what may have been a response to Intel`s
signal, six months later Compaq Computer corporation canceled plans to launch a
RISC-based personal computer(8) And it is still unclear whether new research
eIIorts in RISC chips will surprise Intel.

Intel also maintains a Ilexible workIorce, shiIting employees to diIIerent
projects and keeping operations lean. Despite its continued growth in revenues,
the number oI Intel employees declined between 1984 and 1992 to maintain
Ilexibility.

Capabilities Ior speed and surprise are thereIore key elements Ior
successIully disrupting the status quo and creating temporary advantages. These
capabilities are Ilexible in that they can be deployed across a wide range oI
speciIic actions.

Tactics f4r Disr:pti4n: Te Last Tree S`s

The Iinal three S`s-shiIting the rules oI he game, signaling and
simultaneous and sequential strategic thrusts-are concerned with the tactics used
in delivering a company`s disruption, especially tactics that inIluence the Ilow oI
Iuture dynamic strategic interaction among competitors. These three S`s Iollow
the visions developed by the Iirst two S`s and use the potential Ior speed and
surprise Irom the third and Iourth S`s.

In contrast to strategic approaches to strategy, these Iinal three S`s are
concerned with a dynamic process oI creations and interactions. Most planning is
concerned with the company`s next more to gain advantage. It usually analyzes
potential competitive responses but doesn`t shape those responses to its
advantage.

The view presented here is a set oI tactics designed to disrupt the status
quo and create temporary advantage. Tactics such as actions that shiIt the rules oI
competition create a sudden and discontinuous move in the industry, reshaping
the competitive playing Iield and conIusing the opponent.

Intel`s move into new areas such as supercomputers, interactive digital
video, and Ilash memory has helped shiIt the rules oI competition. Flash memory
provides an alternatives to the standard memory market, where Intel lost out to
Japanese competitors. Intel is adding ancillary products, such as networking
circuit boards and graphic chips that make it easier Ior computer makers to add
these Ieatures. It has also designed a personal computer with workstation power,
the Panther, which it is licensing to computer makers. This shiIts the rules by
creating a machine that Intel is not marketing itselI. The purpose oI the design is
to take Iull advantage oI Intel`s Pentium chip.

Signaling can delay or dampen the competitor`s actions to create
advantage, throw the competitor oII balance, or create surprise. Grove has
signaled Intel`s intent to Ilight the clonemakers 'with everything we`ve got.(9) It
has also stated a vision oI making the company the center oI al computing, Irom
palmtops to supercomputers. Its precise strategy Ior doing this is less visible.
Although it has clearly revealed that it has 686 and 786 chips in the works, what
these chips will be able to do is still open to speculation. As discussed, Intel used
signaling to shiIt the rules oI competition by transIorming computer chips Irom a
hidden commodity to a marketing asset through its Intel Inside campaign. By
making the chip visible and using branding in marketing PCs, it made major gains
in its battle against the clones. But the brand is only as powerIul at the computer
chip behind it.

Competitive thrusts in this environments are rapid-either a sequence oI
moves or a set oI simultaneous actions-to upset the equilibrium oI the industry,
disrupt the status quo, and open opportunities Ior new advantaged. As an example
oI a set oI simultaneous thrust, a company might Ieint a mover in one direction
and then move IorceIully in another direction, creating surprise and temporary
advantage Irom the misdirection oI the opponent. One can think oI sequential
thrust as being akin to the sequence oI plays used in a Iootball game. One team
ay run the ball several times until the deIense is conditioned to expect a run play.
Then the oIIense switches to the long bomb at a time that should call Ior a run.
The sequence oI actions create surprise and temporary advantage, since once the
play is used, the deIense will watch out Ior the long bomb in Iuture plays.

Intel has used a variety oI simultaneous and sequential strategic thrusts to
seize the initiative. In the late 1970s, struggling with its 8086 microprocessor
chips, Intel launched an all-out assault-code-named. Operation Crush-against
Motorola and other competitors, Intel set up war roomed to work toward making
the 8086 the industry standard. It was this eIIort to simultaneously attack several
segments oI the market that helped lead to IBM`s decision to adapt the 8088 as
the center oI its personal computer. (10) Intel rode the wave oI the PC`s growth to
dominance in the microprocessor industry.

Intel also participated in both the memory and microprocessor markets at
various points in time. In a way, Intel`s retreat Irom the memory chip market and
return with Ilash memory might be seen as a sequential set oI moves skin to a
strategic retreat Iollowed by regrouping and counterattack. It has used multiple
exploratory attacks to develop a variety oI know-how and technology capabilities
and gauge competitor and customer reactions (Ior example, its simultaneous
development oI RISC and CISC technology). It has also explored promising
markets (such as video and massively parallel computing) and moved into those
with the highest potential Ior growth. It has built its businesses by using a
sequential strategy, moving Irom memory chips to microprocessors, to boards, to
building personal computers (although not marketing them).

These three tactics reIlect the increasing speed and intensity oI hypes
competitions. Although these actions sometimes push companies into the gray
areas oI antitrust because the behaviors could be construed as exclusionary or
anticompetitive actions, companies are increasingly seeing them as necessary Ior
competitive survival.

As suggested earlier, while the traditional 7S`s are concerned with
capitalizing on creating a static strategic Iir among internal aspects oI he
organization, the New 7S`s are concerned with Iour key goals that are based on
understanding dynamic strategic interactions over long periods oI time.

1. Disrupting the status quo. Competitors disrupt the status quo by
identiIying new opportunities to serve the customer, signaling, shiIting the
rules, and attacking through sequential band simultaneous thrusts. These
moves end the old pattern oI competitive interaction between rivals. This
requires speed and surprise; otherwise, me company`s competitors simply
change at the same rate.
2. Creating temporary advantage. Disruption creates temporary advantages.
These advantages are based on better knowledge oI customers,
technology, and the Iuture. They are derived Irom customer orientation
and employee empowerment throughout the entire organization. These
advantages are short-lived, eroded by Iierce competition.
3. Seizing the initiative. By moving aggressively in each arena, acting to
create a new advantage or undermine a competitor`s old advantage, the
company seizes the initiative. This throws the opponent oII balance and
puts it at a disadvantage oI Ior a while. The opponent s Iorced to play
catch-up; reacting rather than shaping the Iuture with its own actions to
seize the initiative. The initiator is proactive, while competitors are Iorced
to be reactive.
4. Sustaining the momentum. Several actions in a row to seize the initiative
create momentum. The company continues to develop new advantages and
doesn`t wait Ior competitors to undermine them beIore launching the next
initiative. For example, while U.S. manuIacturers are dong remedial work
in quality improvement, Japanese manuIacturers are now building key
advantages in Ilexibility. This successions oI action sustains the
momentum. This is the only source oI sustainable competitive advantage
in hypercompetitive environments.

In hyper competition it is not enough to build a static set oI competencies. Good
resources are not enough. They must be used eIIectively. This is precisely why
successIul Iirms pay attention to tactics as well as capabilities and vision in an
environment oI traditional competition and to competencies in an environment oI
hypercompetition. In slower and less aggressive competitive environments,
companies could concentrate primarily on making great swords. In
hypercompetition, they have been Iorced to concentrate much more on the skills
oI Iencing. It is these dynamic skills that re the most signiIicant competencies oI
the Iirm. Thus, a company`s success depends equally upon its swords and its
Iencing skills, and the New 7S`s are intended to guide Iirms towards making the
right swords, learning how to Ience, and pointing them in the right direction.

S4me Trade4ffs

One Iinal analysis can be done using the New 7S`s. In choosing which to
concentrate on, companies are Iorced to make tradeoIIs among them. This makes
it diIIicult Ior companies to do all seven equally well. Companies choose among
the seven to conIront diIIerent challenges and opportunities that present
themselves.

Thus, it is possible to analyze a competitor (or one`s own company) to see what
types oI tradeoIIs have been made. Once these are identiIied, the weakness oI the
competitor (or one`s own company) is apparent. Furthermore the tradeoII means
that the competitor can`t plug the weakness without giving up something else.
Thus, it is possible to identiIy weakness, which, iI attacked, Iorces the
competition to be slow to respond or to give up some other strength in order to
respond. Either way the competitor loses.

Among the tradeoIIs implied by the New 7S`s are the Iollowing:

TradeoIIs at the expense oI stakeholder satisIaction (S-1) can be
undermined by speed (S-3), as companies may sacriIice product or service
quality to gain speed or push employees to work harder and Iaster.
Speeding products to market with little testing could also reduce customer
satisIaction. Similarly surprise (S-4), shiIting the rules (S-5), signaling (S-
6), and simultaneous and sequential strategic thrusts (S-7) also have the
potential to conIuse customers, employees and shareholders as well as
competitors.
TradeoIIs at the expense oI Iuture orientation/soothsaying, Strategic
soothsaying (S-2) can be hurt by speed (S-3), which oIten eaves little time
Ior reIlecting on what lies ahead, and surprise (S-4), which is sudden and
unpredictable enough to make prognosticating irrelevant or impossible.
ShiIting the rules (S-5) oIten reshapes competition in a way that
unpredictably changes Iuture opportunities so that soothsaying becomes
diIIicult. To the extent that competitor reactions are not anticipated,.
Simultaneous and sequential strategic thrusts (S-7) sometime make
soothsaying more diIIicult.
TradeoIIs at the expense oI speed. Speed (S-3) can be eroded through the
slowness oI decision making in an organization such as the ones used to
increase stakeholders satisIaction (S-1). Also, strategic alliances used to
shiIt the rules (S-5) sometimes reduces speed because oI negotiations.
ShiIting the rules oI competitions (S-5) may require a tradeoII with speed.
It can temporarily reduce sped (S-3), Ior example, because oI the
conIusion and time it takes to regroup and retool to create the new rules.
Simultaneous and sequential strategic thrusts (S-7) can reduce speed (S-3)
because they require more eIIort than single thrusts.
TradeoIIs at the expense oI surprise. The Ilexibility and stealth oI surprise
(S-4) can be eroded by strategies to increase capabilities Ior speed. For
example, just in time system could decrease the company`s Ilexibility
while increasing speed. Alliances to shiIt the rules sometimes also
decrease surprise because the alliances are usually public. Signaling can
also reduce the element oI surprise because it oIten involves revealing the
strategic intent oI the company. Sequential thrusts can reduce surprise (S-
4) by committing the company to a clear set oI actions.

These tradeoIIs mean that Iirms can`t always do all oI the New 7S`s equally well
even iI they are above a reasonable threshold on each one oI them. Thus, a
competitor can do a tradeoII analysis to identiIy the maneuvers it can do through
use oI the S`s that the opponent can`t do well because the opponent can`t respond
without depleting its strengths in one oI the other S`s. Other Iirms will creatively
switch among the New 7S`s to shiIt the rules oI competition. Sometimes Iocusing
on the opponent`s weaker S`s sometimes using several in concert.

Moreover, Iirms have limited resources, so they can`t acquire all seen oI he New
S`s at once. They must prioritize them and make tradeoIIs. Thus, it will be rare
that a Iirm is equally good at all oI the New 7S`s. This will create opportunities
Ior a new type oI hypercompetitive behavior whereby Iirms use the resource
investment tradeoIIs made by a competitor to determine which oI he New 7S`s
should be invested in Iirst. Finally, truly hypercompetitive Iirms, like Intel, will
Iind ways to eliminate the tradeoIIs. TradeoIIs exist only iI Iirms believe that
tradeoIIs re necessities and stop looking Ior ways to do both alternatives. AIter
all, it was once said that Iirms could not achieve low cost and high quality at the
same time. Now it is not just a reality but a necessity Ior survival in many
industries.

Like all know-how, knowledge oI how to use the New 7S`s might eventually be
expected to erode as it becomes widely assimilated. As knowledge using them-
this is already taking place-one might expect that any advantage would be
neutralized. In particular, this erosions my be seen in the temporary advantages oI
a customer Iocus. As customer by the total quality movement and other Iorces, it
has become less oI an advantage and more oI a requisite to succeed in business.

While the impact oI the New 7S`s may be diminished somewhat by their
widespread adoption, there are several Iactors that promise to continue to make
them a source advantage event aIter they are widely used. First, the New 7S`s
have some inherent Ilexibility so that diIIerent companies using the new 7S`s can
take very diIIerent strategies. The use oI simultaneous and sequential strategic
thrusts (S-7) present a wide range oI options and variation. There are many other
trusts that can be designed Ior speciIic opportunities, making it diIIicult Ior Iirms
to exactly replicate a competitor`s use oI New 7S`s

Second, the New 7S`s are dynamic. Companies use them in diIIerent ways
over time. Stakeholder satisIaction changes, competitive opportunities change,
sourced oI temporary advantage change. The New 7S`s and their goals oI creating
disruption and seizing the initiative remain constant, but the methods companies
use to achieve these goals constantly change. In this way, even iI all competitors
in an industry are using the New 7S`s, their moves will continue to be
unpredictable.

Third, companies usually cannot use all oI the New 7S`s at once because
oI inherent. TradeoIIs among the 7S`s. Companies perIorm a balancing act in
weighing these tradeoIIs. This adds to the unpredictability oI competitive movers,
because companies can use any oI the New 7S`s in developing their next strategic
move, and the tradeoIIs may make in diIIicult to respond.

XERX NT LEARED IN NLY NE PARA

The one certain impact is that as the New 7S`s become more widespread,
competition will become more aggressive. Instead oI having one or two
competitors seeking to disrupt the status quo, every competitors will be looking
Ior the next source oI temporary advantage. With this Iather intensiIication oI
hyper competition, one might expect and increased interest in alliances and other
Iorms oI cooperation to dampen the intensely oI competition (as has already been
seen.) Ultimately, however, the only way our or this dilemma is Ior companies to
become more aggressive in seizing the initiative. Cooperative attempts to end this
cycle oI aggression will be seen as either illegal (collusive antitrust violations), or
Iutile, since it is like shoveling sand against the tide. Leading Iirs will be wary oI
cooperative eIIorts that ask them to be less aggressive and give up their temporary
advantage. Lagging Iirms with the Iire in their bellies to be number one will not
be satisIied with their permanent status as second-class citizens. So the New 7S`s
will be used more aggressively and more Irequently in the Iuture world oI
hypercompetition.

While the New 7S`s will continue to be important, especially with the
intensiIying competitions oI the Iuture, there may be even newer 7S`s that
emerge as key so competitive success. Hypercompetitive companies will continue
to monitor and deIine these new strategic approached in new attempts to provide
temporary advantages and sustain momentum with a series oI successIul short-
term advantages.

The recommendations oI this new Iramework Ior increasing speed and
targeting disruption make sense to those oI us who have played diIIerent roles
during major organizational upheavals and change. Given the choice oI
participating in the group that planned the change versus being in the group on
which the bomb is to be dropped, most oI us chose the Iormer. Despite our lack oI
skills, we preIerred positioning ourselves 'behind the wheel.

D`Aveni`s examples also hit close to home. He could have used Motorola
just as easily as Intel Ior the article. While positioned as the dominant U.S. player
in two-way radios and systems in the 1970s and 1980s, Motorola chose not to try
and shield itselI Irom emerging technologies, but rather quickly moved to develop
these into paging and cellular communications products-products that were in
direct competition with those in its core businesses. When Japanese electronic
Iirms showed signs oI capturing the growing cellular phone market with better
quality, smaller products, Motorola launched its Six Sigma quality program,
driving itselI toward unheard oI quality goals on a timetable accelerated beyond
what is considered rapid by most industry standards. Motorola`s worldwide
success today clearly supports D`Aveni`s position.

There are some question to be raised, however. The Iact that Motorola`s
experience Iits so well causes me to wonder iI the new 7S`s Iramework is
appropriate Ior organizations operating in more slowly changing markets. Like a
cash cow, might it not be better to milk a moderately competitive situation as long
as possible while building organizational capability to launce into the new 7S`s
model at the Iirst sign oI hypercompetition?

Another issue that concerns me involves the notion oI this new Iramework
as a replacement Ior the original one. When reading the article, I saw many oI the
new 'S`s as an expansion oI the strategy 'S in the McKinsey model. It would
be easy to make the argument that in order to eIIectively implement D`Aveni`s
recommendations, you should evaluate your organization in light oI the other
6 S`s. Does your company have the systems, style, staII, shared values, skills and
structure needed to pull oII the new 7S`s? Back to the brakeless car metaphor
given that slowing down is not an option, wouldn`t you want to make sure the rest
oI the car was ready Ior higher speeds? The power and handling characteristics oI
a Ferrari would no doubt be preIerred over a heavily loaded 65 Volkswagen bus
with bald tires. It also won`t hurt to have taken emergency driver`s training and
have a passenger on board who was a master map reader. This means you want to
have a change management strategy and dome proIessional internal or external
expertise to guide the change process. As a Iinal recommendation Ior driving
accelerated change, I`d advocate telling our passengers (our employees what, we
have in mind beIore we slam down that accelerator; their screaming and grabbing
at the wheel could be downright distracting.

Hypercompetition is reality in many markets. The Iailure to Iully address
the original 7S`s may make the new Iramework diIIicult iI not impossible to
execute, especially Ior larger Iirms with technically complex product lines
requiring lengthy developmental cycles. This is not to imply that the new 7S`s are
less valuable; the new Iramework provides substances Iood Ior thought Ior
business leaders trying to maintain their company`s competitive edge in
hypercompetitive environments. On the other hand, organizational leaders may e
deluding themselves iI they attempt to utilize the new 7S`s theory beIore they
have Iully attended to those in the original one.

It may be useIul to reIlect on the likelihood iI a general with a eleve
strategy achieving victory in a battle in light oI the Iact that his troops are poorly
trained, have inadequate logistical support, or don`t know why they are Iighting.
As the old saying goes, 'Ior want oI a nail the battle was lost. Even the most
brilliantly conceived strategies will be oI little consequence iI a company Iails to
correct Iundamental problems stemming Iorm marginal alignment.


Q:esti4ns:

1. What are the impediment oI strategy implementation?
2. What is the new 7s Iramework?
3. What are the characteristics oI hyper competition? Give example.

UNIT
Less4n 1 ERP

11 Intr4d:cti4n

Enterprise resource planning soItware, or ERP attempts to integrate all
departments and Iunctions across a company onto a single computer system that
can serve all those diIIerent departments` particular needs. That is a tall order,
building a single soItware program that serves the needs oI people in Iinance as
well as it does the people in human resources and in the warehouse. Each oI those
departments typically has its own computer system optimized Ior he particular
ways that the department does its work. But ERP combines them all together into
a single, integrated soItware program that runs oII a single database so that he
various departments can more easily share inIormation and communicate with
each other. That integrated approach can have a tremendous payback iI companies
install the soItware correctly. Take a customer order, Ior example. Typically,
when a customer places and order, that order begins a mostly paper-based journey
Iorm in basket to in-basket around the company, oIten being keyed and rekeyed
into diIIerent departments` computer systems along the way. Al that lounging
around in in-baskets causes delays and lost orders, and all the keying into
diIIerent computer systems invites errors. Meanwhile, no one in the company
truly knows what the status oI the order is at any given point because there is no
way Ior the Iinance department, Ior example, to get into the warehouse`s
computes system to see whether the item has been shipped. ERP vanquishes the
old standalone computer systems in Iinance, HR, manuIacturing and the
warehouse, and replaces them with a single uniIied soItware program divided into
soItware modules that roughly approximate the old standalone systems. Finance,
manuIacturing and the warehouse all still get their own soItware, except not the
soItware in linked together so that someone in Iinance can look into the
warehouse soItware to see iI an order has been shipped. Most vendors` ERP
soItware is Ilexile enough that you can install some modules without buying the
whole package. Many companies, Ior example, will just install an ERP Iinance or
HR module and leave the rest oI the Iunctions Ior another day.



12 enefits 4f ERP:

ERP`s best hope Ior demonstrating value is as a sort oI battering ram Ior
improving the way your company takes a customer order and processes it into an
invoice and revenue otherwise known as the order IulIillment process. That is
why ERP is oIten reIerred to as back-oIIice soItware. It doesn`t handle the up-
Iront selling process (although most ERP vendors have recently developed CRM
soItware to do this); rather, ERP takes a customer order and provides a soItware
road map Ior automating the diIIerent steps along the path to IulIilling it.

When a customer service representative enters a customer order into an
ERP system, he has all the inIormation necessary to complete the order (the
customer`s credit rating and order history Irom the Iinance module, the
company`s inventory levels Irom the warehouse module and the shipping dock`s
trucking schedule Iro the logistics module, Ior example). People in these diIIerent
departments al see the same inIormant and can update it. When one debarment
Iinished with the order it is automatically routed via the ERP system to the next
department. To Iind out where the order is at any point, you need only log in to
the ERP system and track it down. With luck, the order process moves like a bolt
oI lightning through the organization, and customers get their orders Iaster and
with Iewer errors than beIore. ERP can apply that same magic to the other major
business processes, such as employee beneIits or Iinancial reporting.

With ERP, the customer service representatives are no longer just typists
entering someone`s name into a computer and hitting the return key. The ERP
screen makes tem businesspeople. It Ilickers with the customer`s credit rating
Irom the Iinance department and the product inventory levels Irom the warehouse.
Will the customer pay on time? Will we be able to shi the order on time? These
are decisions that customer service representatives have never had to make beIore,
and the answers aIIect the customer and every other department in the company.
But it`s not just the customer service representatives have to wake up. People in
the warehouse who used to keep inventory in their heads or on scraps oI paper
now need to put that inIormation online. II they don`t customer service reps will
see low inventory levels on their scrcens and tell customers that their requested
item is not in stock. Accountability, responsibility and communication have never
been tested like this beIore.
To do ERP right, the ways you do business will need to change and the
ways people do their jobs will need to change too. And that kind oI change
doesn`t come without pain. Unless, oI course, your ways oI doing business are
working extremely well (orders all shipped on time, productivity higher than all
your competitors, customer s completely satisIied), in which case there is no
reason to even consider ERP.

The important thing is not to Iocus on how long it will takereal
transIormational ERP eIIorts usually run between one and three years, on average
--- but rather to understand why you need it and how you will use it to improve
your business.


13 Reas4ns f4r ERP implementati4n:

There are Iive major reasons may companies undertake ERP. Integrate
Iinancial inIormation As the CEO tries to understand the company`s overall
perIormance, he may Iind many diIIerent versions oI the truth. Finance has its
own set oI revenue numbers, sales has another version, and the diIIerent business
units may each have their own version oI how much they contributed to revenues.
ERP creates a single version oI the truth that cannot be questioned because
everyone is using the same system.

Integrate c:st4mer 4rder inf4rmati4n - ERP systems can become the place
where the customer order lives Irom the time a customer service representative
receives it until the loading dock ships the merchandise and Iinance sends an
invoice. By having this inIormation in one soItware system, rather than scattered
among many diIIerent systems that can`t communicate with one another,
companies can keep track oI orders more easily, and coordinate manuIacturing,
inventory and shipping among many diIIerent locations at the same time.

Standardize and speed :p man:fact:ring pr4cess - ManuIacturing companies
especially those with an appetite Ior mergers and acquisition-oIten Iind that
multiple business units across the company make the same widget using diIIerent
methods and computer systems. ERP systems come with standard methods Ior
automating some oI the steps oI a manuIacturing process. Standardizing those
processes and using a single integrated computer systems can save time, increase
productivity and reduce head count.

Red:ce invent4ry - ERP helps the manuIacturing process Ilow more smoothly,
and it improves visibility oI the order IulIillment process inside the company.
That can lead to reduced inventories oI the stuII used to make products (work-in-
progress inventory), and it can help users better plan deliveries to customers
reducing the Iinished good inventory at the warehouses and shipping docks. To
really improve Ilow oI your supply chain, you need supply chain soItware but
ERP helps too.

Standardize HR inf4rmati4n - Especially in companies with multiple business
units, HR may not have a uniIied, simple method Ior tracking employees` time
and communicating with them about beneIits and services. ERP can Iix that. In
the race to Iix these problems, companies oIten lose sight oI the Iact that ERP
packages are nothing more than generics representations oI the ways a typical
company does business. While most packages are exhaustively comprehensive,
each industry has its quirks that make it unique. Most ERP system were designed
to be used by discrete manuIacturing companies (that make physical things that
can be counted), which immediately leIt all the process manuIacturers (oil,
chemical and utility companies that measure their products by Ilow rather than
individual units) out in the cold. Each oI these industries has struggled with the
diIIerent ERP vendors to modiIy core ERP programs to their needs.

14 Te c4st 4f ERP:

Meta Group recently did a study looking at the total cost oI ownership (TCO) oI
ERP, including hardware, soItware, proIessional services and internal staII costs.
The TCO numbers include getting the soItware installed and the two years
aIterward, which is when the real costs oI maintaining, upgrading and optimizing
the system Ior your business are Ielt. Among the 63 companies surveyed
including small, medium and large companies in a range oI industries the
average TCO was $15 million (the highest was $300 million and lowest was
$400,000). While it`s hard to draw a solid number Iro that kind oI range oI
companies and ERP eIIorts, Meta come up with one statistic that process that ERP
is expensive no matter what kind oI company is using it. The TCO Ior a 'heads-
down user over that period was a staggering $53,320. Meta Group study oI 63
companies Iound that it tool eight months aIter the new system was in (31
months total) to see any beneIits. But the medium annual savings Irom the new
ERP system were $1.6 million.

Although diIIerent companies will Iind diIIerent land mines in the budgeting
process, those who have implemented ERP packages agree that certain costs are
more commonly overlooked or underestimated than others. Armed with insights
Irom across the business, ERP pros vote the Iollowing areas as most likely to
result in budget overrun.

1 Training

Training is the near-unanimous choice oI experienced ERP
implements as the most underestimated budget item. Training
expenses are high because workers almost invariably have to learn a
new set oI processes, not just a new soItware interIace. Worse, outside
training companies may not be able to help you. They are Iocused on
telling people how to use soItware, not on educating people about the
particular ways you do business. Prepare to develop a curriculum
yourselI that identiIies and explains the diIIerent processes that will be
aIIected by the ERP system.

One enterprising CIO hired staII Irom a local business school to help
him develop and teach the ERP business-training course to employee.
Remember that with ERP, Iinance people will be using the same
soItware as warehouse people and they will both entering inIormation
that aIIects the other. To do this accurately, they have a much broader
understanding oI how others in the company do their jobs than they
did beIore ERP came along. Ultimately, it will be up to your IT and
businesspeople to provide that training. So take whatever you have
budgeted Ior ERP training and double or triple it up Iront. It will be the
best ERP investment you ever make.



2 Integrati4n and testing

Testing the links between ERP packages and other corporate soItware
links that have to be built n a case-by-case basis is another oIten-
underestimated cost. A typical manuIacturing company may have add-
on applications Iorm the major e-commerce and supply chain to
the minor sales tax computation and bar coding. All require
integration links to ERP. II you can buy add-ons Irom the ERP
vendors that are pre-integrated, you`re better oII. II you need to build
the links yourselI, expect things to get ugly. As with training, testing
ERP integrating has to be done Irom a process-oriented perspective.
Veterans recommend that instead oI plugging in dummy data and
moving it Irom one application to the next, run a real purchase order
through the system, Iorm order entry through shipping and receipt oI
paymentthe whole order-to-cash banana-preIerably with the
participation oI the employees who will eventually do those jobs.


3 :st4mizati4n

Add-ons are only the beginning oI the integration costs or ERP. Much
more costly, and something to be avoided iI at all possible, is actual
customization oI the core ERP soItware itselI. This happens when the
ERP soItware can`t handle one oI your business processes and you
decide to mess with the soItware to make it do what you want. You`re
playing with Iirs. The customizations can aIIect every linked together.
Upgrading the ERP package-no walk in the park under the best oI
circumstances-becomes a nightmare because you`ll have to do the
customization all over again in the new version. Maybe it will work,
maybe to won`t. No matter what, the vendor will not be there to
support you. You will have to hire extra staIIers to do the
customization work, and keep them on Ior good to maintain it.

4 Data c4nversi4n

It costs money to move corporate inIormation, such as customer and
supplier records, product design data and the like, Irom old system to new
ERP homes. Although Iew CIOs will admit it, most data in most legacy
systems is oI little use. Companies oIten deny their data is dirty until they
actually have to move it to the new client/server setups that popular ERP
packages require. Consequently, those companies are more likely to
underestimate the cost oI the move. But even clean data may demand
some overhaul to match process modiIications necessitated or inspired
by the ERP implementation.

5 Data analysis

OIten, the data Irom the ERP system must be combined with data Irom
external systems Ior analysis purposes. Users with heavy analysis needs
should include the cost oI a data warehouse in the ERP budget-and they
should expect to do quite a bit oI work to make it run smoothly. Users are
in a pickle here: ReIreshing al the ERP data every day in a big corporate
data warehouse is diIIicult, and ERP systems do a poor job oI indicating
which inIormation has changed Irom day to day, making selective
warehouse updates tough. One expensive solution is custom programming.
The upshot is that the wise will check all their data analysis need beIore
signing oII on the budget.

4ns:ltants and infinit:m

When users Iail to plan Ior disengagement, consulting Iees run wild. To
avoid this, companies should identiIy objectives Ior which its consulting
partners must aim when training internal staII. Include metrics in the
consultants contract; Ior example, a number oI the user company`s staII
should be able to pass a project-management leadership test-similar to
what Big Five consultants have to pass to lead an ERP engagement.

Replacing y4:r best and brigtest

It is accepted wisdom that ERP success depends on staIIing the project
with the best and brightest Irom the business and IS divisions. The
soItware it too complex and the business changes too dramatic to trust he
project to just anyone. The bad news is a company must be prepared to
replace many oI those people when the project is over. Though the ERP
market is not as hot as it once was, consultancies and other companies that
have lost their best people will be hounding your HR policies permit.
Huddle with Hr early on to develop a retention bonus program and create
new salary strata Ior ERP veterans. II you let them go, you`ll wind up
hiring them-or someone like them-back as consultants Ior twice what you
paid tem in salaries.


Implementati4n teams can never st4p

Most companies intend to treat their ERP implementation as they would
any other soItware project. Once the soItware is installed, they Iigure the
team will be scuttled and everyone will go back to his or her day job. But
aIter ERP, you can`t go home again. The implementers are to valuable.
Because they have worked intimately with ERP, they know more about
the sales process than the salespeople and more about the manuIacturing
process tan the manuIacturing people. Companies can`t aIIord to send
their project people back into the business because there`s so must to do
aIter the ERP soItware is installed. Just writing reports to pull inIormation
out oI the new ERP soItware is installed. Just writing reports to pull
inIormation out oI the new ERP system will keep the project team busy
Ior a year at least. Ant it is in analysis and, one hopes, insight-that
companies make their money back on an ERP implementation.
UnIortunately, Iew IS departments plan Ior the Irenzy oI post-ERP
instillation activity, and Iewer still build it into their budgets when they
start their ERP projects. Many are Iorced to beg Ior money and staII
immediately aIter the go-live date, long beIore the ERP project has
demonstrated any beneIit.

Waiting f4r RI

One oI the most misleading legacies oI traditional soItware project
management is that the company expects to gain value Irom the
application as soon as it is installed, while the project team expects a break
and maybe a pat on the back. Neither expectation applies to ERP. Most oI
the systems don`t reveal their value until aIter companies have had them
running Ior some time and can concentrate on making improvements in
the business process that are aIIected by the system. And the project team
is not going to be rewarded until their eIIorts pay oII.

10 P4st-ERP depressi4n

ERP systems oIten weak cause have in the companies that install them. In
a recent Deloitte Consulting survey oI 64 Fortune 500 companies, one in
your admitted that they suIIered a drop in perIormance when their ERP
system went live. The true percentage is undoubtedly much higher. The
most common reason Ior the perIormance problems is that everything look
and works diIIerently Irom the way it did beIore. When people can`t do
their jobs in the Iamiliar way and haven`t yet mastered the new way, they
panic, and the business goes into spasms.

15 Reas4ns f4r p4ssible fail:re 4f ERP:

At its simplest level, ERP is a set best practices Ior perIorming diIIerent
duties in your company, including Iinance, manuIacturing and the
warehouse. To get the best most Irom the soItware, you have to get people
inside in the diIIerent departments that will use ERP don`t agree that the
work methods embedded in the soItware are better than the one they
currently use, they will resist using the soItware or will want IT to change
the soItware to match the ways they currently do things. This is where
ERP projects break down. Political Iights break out over how-or-even
whether-the soItware will be installed. IT gets bogged down in long,
expensive customization eIIorts to modiIy the ERP soItware to Iit with
powerIul business barons` wishes. Customizations make the soItware
more unstable and harder to maintain when it Iinally does come to liIe.
The horror stories you hear in the press about ERP an usually be traced to
the changes the company made in the core ERP soItware to Iit its own
work methods. Because ERP covers so much oI what a business does, a
Iailure in the soItware can bring a company to a halt, literally.
But IT can Iix the bugs pretty quickly in most cases, and besides, Iew big
companies can avoid customizing ERP in some Iashion every business is
diIIerent and is bound to have unique work methods that a vendor cannot
account Ior when developing its soItware. The mistake companies make
is assuming that changing people`s habits will be easier than customizing
the soItware. It`s not. Getting people inside, your company to use the
soItware to improve the ways they do their jobs is by Iar the harder
challenge. II your company is resistant to change, then your ERP project is
ore likely to Iail.

1 rganizing ERP pr4jects:

There are three commonly used ways oI installing ERP

Te ig ang - In this, the most ambitious and diIIicult oI approaches to
ERP implementation, companies cast oII all their legacy system at once
and install a single ERP system across the entire company. Though this
method dominated early ERP implementations, Iew companies dare to
attempt it anymore because it calls Ior the entire company to mobilize and
change at once. Most oI the ERP implementation horror stories Irom the
late 90`s warn us about companies that used this strategy. Getting
everyone to cooperate and accept a new soItware system at the same time
is a tremendous eIIort, largely because the new system will not have any
advocates. No one within the company has any experience using it, so no
one is sure whether its will work. Also, ERP inevitably involves
compromises. Many departments have computer systems that have been
honed to match the ways they work. In most cases, ERP oIIers neither the
range oI Iunctionality not the comIort oI Iamiliarity that a custom legacy
system can oIIer. In many cases, the speed oI the new system may suIIer
because it is serving the entire company rather than a single department.
ERP implementation requires a direct mandate Irom the CEO.

rancising strategy - This approach suits large or diverse companies
that do not share many common processes across business units.
Independent ERP systems are installed in each unit, while linking
common processes, such as Iinancial bookkeeping, across the enterprise.
This has emerged as the most common way oI implementing ERP. In most
cases, the business units each have their own 'instances oI ERP-that is, a
separate system and database. The systems link together only to share the
inIormation necessary Ior the corporation to get a perIormance big picture
across al the business units (business unit revenues, Ior example), or Ior
processes that don`t vary much Irom business unit to business unit
(perhaps HR beneIits).Usually, these implementations begin with a
demonstration or pilot installation in a particularly open-minded and
patient business unit where the core business oI the corporation will not
be disrupted iI something goes wrong. Once the project team gets the
system up and running and works out all the bugs, the team begins selling
other units on ERP, using the Iirst implementation as a kind oI in-house
customer reIerence. Plan Ior this strategy to take a long time.

Slam dunk ERP dictates the process design in this method, where the
Iocus is on just a Iew key processes, such as those contained in an ERP
system`s Iinancial module. The slam dunk is generally Ior smaller
companies expecting to grow in ERP. The goal here is to get ERP up and
running quickly and to ditch the Iancy reengineering in Iavor oI the ERP
system`s 'canned processes. Few companies that have approached ERP
this way can claim much payback Irom the new system. Most use it as an
inIrastructure to support more diligent instillation eIIorts down the road.
Yet many discover that a slammed-in ERP system is little better than a
legacy system because it doesn`t Iorce employees to change any oI their
old habits. In Iact, doing the hard work oI process reengineering aIter he
system is in can be more challenging than iI there had been no system at
all because at that point Iew people in the company will have Ielt much
beneIit.

1 itting ERP it e-c4mmerce:

ERP vendors were not prepared Ior the onslaught oI e-commerce. ERP is
complex and not intended Ior public consumption. It assumes that the only
people handling order inIormation will be your employees, who are highly
trained and comIortable with the tech jargon embedded in the soItware.
But now customers and suppliers are demanding access to the same
inIormation your employees get through the ERP system. things like
order status, inventory leaves and invoice reconciliation except they
want to get all this inIormation simply, without all the ERP soItware
jargon, through your website.

E-commerce means IT departments need to build two new channels oI
access in to ERP systems-one Ior customers (otherwise know as business-
business consumer) and one Ior suppliers and partners (business-to-
business). These two audiences want two diIIerent types oI inIormation
Irom your ERP system. Consumers want order status and billing
inIormation, and suppliers and partners want just about everything else.
Traditional ERP vendors are having a hard time building the m\links
between the Web ant their soItware, though they certainly all realize that
they must do it and have been hard at work at it Ior years. The bottom line,
however, is that companies with e-commerce ambitions Iact a lot oI hard
integration work to make their ERP systems available over the Web. For
those companies that were smart-or lucky-enough to have bought their
ERP systems Irom a vendor experienced in developing e-commerce wares,
adding easily integrated applications Irom that same vendor can be a
money-saving option. For those companies whose ERP systems came Ior
vendors that are less experienced with e-commerce development, the best-
and possibly only-option might be to have a combination oI internal staII
and consultants back through a custom integration. But no matter what the
details are solving the diIIicult problem oI integrating ERP and e-
commerce requires careIul planning which is key to getting integration oII
on the right track.

One oI the most diIIicult aspects oI ERP and e-commerce integration is
that the Internet never stops. ERP applications are big and complex and
require maintenance. The choice is stark iI ERP is linked directly to the
Web-take down your ERP system Ior maintenance and you take down
your website. Most e-commerce veterans will build Ilexibility into the
ERP and e-commerce links so that they can keep the new e-commerce
applications running on the Web while they shut down ERP Ior upgrades
and Iixes. The diIIiculty oI getting ERP and e-commerce applications to
work together-not to mention the other application together not to
mention the other applications that demand ERP inIormation such as
supply chain and CRM soItware-has led companies to consider soItware
knows alternatively as middleware and EAI soItware. These applications
act as soItware translators that take inIormation Irom ERP and convent it
into a Iormat that e-commerce and other applications can understand.
Middleware has improved dramatically in recent years, and though it is
diIIicult to sell and prove ROI on the soItware with businesses leaders-it is
invisible to computer users-it can help solve many oI the biggest
integration woes that plague IT these days.

Q:esti4ns:

1. Write a not on the evolution oI ERP.
2. What are the beneIits oI ERP?
3. What are the soItware oI ERP?
4. What are implementation diIIiculties oI ERP?
5. How ERP can be Iitted with e-commerce?
2 ERP PAKAGE : AAN

21 Intr4d:cti4n:

Baan was Iounded in 1978 in the Netherlands. Since then, Baan has built
on its early expertise in soItware Ior the manuIacturing industry to become a
leading enterprise application provider. Today it supplies innovative, increasingly
integrated soItware solutions and services Ior every major are a oI business. The
salient Ieatures oI the company are:

O Worldwide headquarters in the Netherlands
O Part oI the Production Management division oI Invensys plc.
O More than 15,000 customer sites worldwide
O Domain expertise in target industry environments

More than 200 alliances including MicrosoIt, IBM etc.

Baan helps industrial operations optimize their enterprise perIormance strategic
and compete in the knowledge-driven networked economy, with us ever-
increasing demands Ior inIormation, integration, and collaboration. Through its
open and powerIul iBaan suite oI Internet-enabled solutions,. Baan is ideally
placed to support organizations in the manuIacturing, logistics, services and
engineering industries. Baan can help them as they move towards tighter
integration oI their complex processes, closer collaboration throughout their value
chain, and greater accessibility oI cross-enterprise transactional and analytical
inIormation.

22 iaan:

The relationship between companies and their customers is changing. The
customer is moving closer to every player in the value chain`, and the Internet is
central to that change. iBaan is the only internet-enabled Iamily oI solutions based
on a comprehensive Iramework oI open, Ilexible, easy-to-conIigure components
that address manuIactures` growing demands Ior tighter integration and Iull
visibility throughout the supply chain. These solutions address every phase oI an
enterprise: Iorm the Iactory, to the warehouse, to the service center, to the online
business presence. iBaan can help bring companies, partners, suppliers and end-
users together into a virtual, collaborative working environment that brings down
costs and reduces waste, without having to abandon existing IT investments. With
a synchronized enterprise everything can be more eIIicient, more agile and more
proIitable.

23 aan 4ns:lting:

Baan Consulting helps customers get measurable business results Irom
Baan solution. By helping you realize capabilities and add value to your business,
the Baan Consulting approach is designed to help you improve your business
agility.

O It`s collaborative, with a strong emphasis on knowledge transIer Irom our
consultants to your people on the Iront line.
O We provide a single point oI contact and responsibility Ior all issues
relating to your implementation.
O Most oI all, our industry and technology consultants have been there` so
you get the beneIit oI our experience as well as our knowledge oI Baan
business tools.

24 Services and res4:rces:

Baan Consulting services span the Iull range oI Baan Solutions iBaan
CRM, iBaan Planning, iBaan Services, iBaan ManuIacturing, iBaan
Distribution, iBaan Finance, and iBaan Procurement- as well as the Baan
architecture and common components Ior collaboration and e-commerce;
inIormation; iBaan Business Intelligence; and integration; iBaan Open
World.

Baan 4ns:lting :st4mers: Some oI our better-known clients include
Boeing, Andersen Windows, Snecma, Elcoteq, Nortel, Flextronics,
Hermann Miller, Dana, Solar Turbines, Siemens and B&O.

Baan consultants have the longest and most in-depth exposure to the Baan
products through involvement in beta testing, product release programs
and implementations at customer sites. This experience, combined with
the knowledge oI Baan processes and a deep involvement in the Baan
network, enables Baan consultants to provide authoritative process and
technical recommendations. They will assist your project team in
resolving process-related issues, having dealt with the same or related
scenarios in the past.

O As a rule, Baan Iunctional consultants are hired with extensive industry
background
O Most have 10 to 15 years oI experience working in Iunctional positons in
Iinance, manuIacturing, distribution and service
O Most have experience implementing soItware systems while in those
positions

Baan`s technical consultants are most Iamiliar with Baan`s technical architectures.
When it comes to diIIicult decisions about conIiguration oI a multi-dimensional
environment, Baan consultants play a central role in establishing soItware
requirements and managing set-up and use.

O This knowledge is available not only through the consultants themselves
and their colleagues, but also through Baan development and the support
organizations. Baan Consulting draws upon a wealth oI experience,
leveraging past involvement in numerous complex implementations.
O Their Iamiliarity with Baan`s business object interIace (BOI) development
and Data Access Layer (DAL) technologies allows Ior unique insight and
quicker turn-around time Ior interIaces, data migration, customizations,
soItware architecture design another technical problem solving.
O The unique to leverage DCS (Development Consulting Services) resources
in situations involving complex technical issues compliments the strength
oI our technical teams.

Baan Consulting Solution Packs are craIted to address multiple business needs,
may be tailored to your speciIic situation, and will vary according to your needs
so you get the results you want, as quickly as possible. Just some oI the Ieatures
and beneIits include.

O Reduced risk, on-time, low budget implementations
O Cost-eIIective solution and services bundling
O Access to experienced Baan consultants
O Single point oI contact and responsibility
O Access to a huge network oI Baan resources
O Targeted implementation with measurable goals and milestones.

Baan Consulting Solution Packs embrace a broad range oI iBaan solutions. We
encourage the use oI solution packs to help improve your company`s eIIiciency,
and open up new possible in the way you use Baan soItware.

Baan Consuldng`s project and program management methodology Iocuses on
Goal Directed Project Management, or GDPM, and is supervised by the Baan
Project Management OIIice.

25 enefit 4f aan:

O Support Ior any project

Our Resource Management OIIice has access sot experienced people and
resources across the globe to provide you with local support.

O Helps reduce risk

Experience in Baan back-oIIice applications, industry knowledge, strong
project management capabilities and the Iact that we are the soItware
developer helps reduce the risks inherent in any soItware
implementation project. Program and project reviews complement our
implementation services to help Iurther reduce risks.

O Single point oI contact and responsibility

We provide customers with a single point oI contract and responsibility
Ior business, soItware, integration, implementation, and measurement
issues related to your stated business goals.

O Baan network

Baan consultants have unique access to a global network oI resources
within Baan consulting service lines, documentation database/libraries,
development, Internet Knowledge Bases, sandbox environments and
personal networks so beneIit Irom our knowledge oI application
development and migration, and gain a way to inIluence Iuture releases.

2 Applicati4n management

Application Management oIIerings help customers with the control and
management oI Baan-related production systems. Ban is able to oIIer a
range oI diIIerent services, Irom purely technically oriented to
conceptually or Iunctionally oriented.

System 4ntr4l

System Control helps customers reduce the complexity and eIIort
associated with the maintenance oI their business system. This service
oIIers and extended systems review and periodic analysis oI the system
environment, including technical Iunctional and user aspects. In addition,
a dedicated Support Account Executive will take responsibility Ior
planning, as well as coordination and management oI a system-control
plan Ior the customer. This plan will include the installation oI updates
and service packs on the customer`s system. To do this, Baan will set up
and organize a customer-speciIic test, involving both customer users and
Baan experts who will apply Baan`s automated test tools. The control plan
includes data archiving.

System Help

System help is a contract-based service that`s intended to take over some
or all oI the customer`s daily system and application management tasks. It
includes activities such as report changes, user deIinitions and back-ups.
System help is designed to support customers in addressing the signiIicant
knowledge management problems that can arise Irom the increasing
number oI technologies being introduced in the industry. It brings Iirst-
line support activity to a customer`s internal organization and manages
communications with second-or even third party support organizations. As
a result, System Help can help customers solve these knowledge
management problems while simultaneously reducing costs.

:st4mizati4n are

Customization care is intended to take over the care, support,
maintenance, and release management oI customized soItware
applications. System Control is mandatory Ior this services.

In addition to Support & Application Management, Baan can provide a
number oI Optimization Services to customers upon request.
Optimization Services deliver ad-hoc services that Iall outside the scope oI
the Support & Application Management agreements. Optimization
Services are based on years oI experience with diIIerent versions oI Baan
applications, which are already applied to various types oI customers all
over the world. The staII deployed has access to all necessary resources.
This ranges Irom Baan Development, Porting, PerIormance and
Benchmarking, to competence centers Irom our strategic alliances It`s all
geared to help customers get to the point` to solving a particular issue or
problem.

Q:esti4ns:

1. What is Baan?
2. What are the beneIits oI Baan?

LESSN 3 ERP PAKAGE : ARSHALL

31 Intr4d:cti4n:

In an age when Iocus is all the range the Rs 200 crore Ramco Industries is
an oddball, a little like Wipro. It consists really oI two disparate
companies bundled into one. One makes asbestos building materials. The
other, known as Ramco System and currently a division oI the parent, is
well known Ior its enterprise resource planning (ERP) soItware that was
launched and endorsed by MicrosoIt chairman Bill Gates in 1997. The
ERP product, originally called Ramc4 arsall and now renamed
Ramc4 eApplicati4ns, is considered by many to be India`s only truly
world-class soItware product. In 1998-99 Ramco Systems` sales were
about Rs. 71 crore. The Iigure is expected to grow to about Rs 100 crore
this year. This average market capitalization oI good soItware companies
in India is nto less than eight times the sales Iigure. By this reckoning,
Ramco Systems` value is about Rs. 800 crore. A total oI 2,200 man years
has been invested in developing Ramco Marshall. In the international ERP
market the cost per year is into less than $70,000. At this rate, Marshall
can be valued at about $164 million or over Rs. 650 crore. Unlike most
Indian soItware Iirms, it is not active in soItware services, having placed
most oI its eggs in the ERP basket. A second diIIerence is that being a
soItware product. Marshall cost a lot oI money to develop and nto yielded
much proIit; last year the soItware division probably lost money. But its
development costs are mostly in the past whereas revenues lie in the
Iuture. An accurate valuation will have to wait until December when the
hive-oII -Iormulated by KPMG is completed. Ramco Systems will
then be listed as separate company by allotting. Ramco Systems shares to
Ramco industries shareholders in the ratio oI 1:1.Some analysts say
Ramco`s intellectual property, technological competence and human
resources all intangibles should be valued at close to Rs 1000 crore The
ERP arena is dominated by big Ioreign players like SAP, BaaN, People
soIt and initially no one gave Ramco any chance. But Ramco has survived
with Marshall and now promises a lot with its latest upgrade,
e.Applications. The prooI oI the pudding is that many are cating it.
Ramco`s ERP product today has 120 customers, including Hyundai,
Migros and NEC. It is working to ensure that e.Applications is Net-
enabled and is already part oI the way there. The next version oI
e.Applications, which will be a completely web-based product is due Ior
release 12-18 months Irom 2002.

Another major development is that Ramco Systems recently added two
new lines oI business e-commerce and rapid application development
thereby product based business model. It has an advantage in rapid
application development because it is in the IoreIront oI a revolution in
soItware development; component-based architecture. Here, a customized
application is developed merely by assembling components. This reduces
the cost oI and time taken to develop soItware and gives the user the
Ilexibility to change anything he wants. These two added revenue streams
Irom high-end e-commerce and other services and customized non-
product based soItware development projects will help Ramco System
soItware development costs and let it have the best oI both words:
soItware services and products. Ramco Systems provides complete
enterprise solutions (ERP, RAM & HR) Iorm development to
implementation and support.

32 e-Applicati4ns:

Ramco`s ERP, EAM & HR suite Ramco e.ApplicationTM provides
business solutions to over 15 industries in Iour broad areas ERP or
manuIacturing and service industries, EAM (enterprise asset management) Ior
asset intensive industries, Human Resources Management, and E-commerce
solutions.

Ramco ERP, EAM & HR solutions are built up Iorm over 35 applictions.
Added to this are seven Web products that get you Internet ready and running. A
number oI Iunctions and industry speciIic complementary solutions held integrate
the ERP solution to solutes-partner solutions. Development practices are ISO
9001 and Y2K certiIied. Ramco does the ERP, EAM & HR implemntatins Ior
most customers. Ramco does the ERP, EAM & HR implementations Ior most
customer demonstrating our commitment to make the solution work Ior you. Our
global help desk is available Ior round-the-clock support.
The organization like Sunkist Growers, Intel, ICICI and Columtia Helicopters
accepted eIIective enterprise solutions (ERP, EAM & HR) On budget, within
schedule. Ramco e.Applications comprise over 35 crore business applicatiosn.
These applications can be combined with Iunctions and industry speciIic add-ons
to deliver either generic enterprise solutions or Iocused industry and organization
speciIic solutions. The Ramco e-application applications are enabled Ior the
Internet, ecommerce and EDI.

34 Enterprise Intelligence:

Enterprise intelligence more than data or inIormation is an organization`s
most important resource. Organizations today operate in a highly competitive
environment characterized by a state oI Ilux accurate business inIormation is
critical Ior success. Ramc4 Enterprise Intelligence (REI) uses the capability oI
OLAP tools which are built into relations database systems to provide you a user-
Iriendly data warehousing solution that integrates with existing business process
and enterprise applications. REI enables you to Ilexibly analyze a number oI
dimensions, measures, and the levels oI dimensions oI business, through a simple
dread and drop interIace. The inIormation required Ior decision making a usually
available within an organization enterprise applications system or online
transaction processing (OLTP) system. However, the inIormation may not be
available in the required Iorm, may be inaccessible in the required level oI detail,
or may be analyzed diIIerently by diIIerent Iunctional departments in the
enterprise.

Conventionally, inIormation Ior decision making is retrieved through an OLTP
system. However, this method has i\limitations considering the hierarchy oI
inIormation needs Ior eIIective decision making. OLTP typically supports lower
level inIormation reporting it helps generate operational and statutory reports
and provides a basic level oI data drill down. But in addition to this, managers
need to analyze multi-dimensions and to splice and dice data Ior better
consolidation. In a typical enterprise application, only two-dimension analysis
can be carried data subsets cannot be spliced and diced. Further, the
perIormance oI the operating system deteriorates under pressure Irom the volume
oI data involved and the complex joins required across tables in databases. REI
solution used online analytical processing to provide you the Ilexibility to use
various combinations oI dimensions to analyze the data quickly and more
eIIiciently than having a large number oI reports.

ain feat:res

1. Calculations and modeling applied across multi-dimensions through
hierarchies and/or across members
2. Trend analysis over sequential time periods
3. Slicing and dicing subsets Ior on-screen viewing
4. Drill-down to deeper levels oI consolidation
5. Proven tools Ior building and delivering customized analytical application
6. Architecture that enables eIIective exploration using SQL query
7. Allows access oI data vis the Internet or intranet
8. Rigorous security
9. Access rights can be deIined Ior users at diIIerent levels
10. Easy and quick administration
11. Integrated models with conIormed dimensions provide consistent
'snapshot oI inIormation across multiple Iunctions oI organizations
12. Integrated inIrastructures built on multi-tier architecture to Iacilitate
eIIicient sharing and distribution oI inIormation
13. Data loaded Irom any source or system, including third party and legacy
applications.

REI is a complete solutions that gathers data Irom disparate sources, and
combines and delivers it in the Irom oI cube. This provides the ideal platIorm to
retrieve and analyze organization perIormance metrics. You can choose various
dimensions depending on your inIormation or analysis needs. Consider
proIitability analysis, Ior example. Business organization need to analyze
proIitability to determine pricing, promotional activities, allocation oI resources
or product development. ProIitability, thereIore, can be considered Irom various
perspectives a region, a product, a product category, a customer or a customer
segment. REI delivers an integrated solution that helps you to measure and
analyze proIitability Irom all these diIIerent perspectives and by combinations oI
them across time periods.


35 Enterprise Asset anagement S4l:ti4ns:

The business environment Ior asset intensive enterprises is very
challenging today the regulatory environment is changing, new capacity
addition is expensive output demand is Iluctuating, and customers expect service
at Internet speed. This is where Ramco Enterprise Asset (EAM) Management
solutions help. Ramco EAM solutions part oI the Ramco e-Applications TM
Iamily oI enterprise solutions are designed on the basis oI two critical
principles:

The enterprise solution needs oI maintenance intensive industries are
distinct and diIIerent Irom the enterprise solution needs oI manuIacturing centric
industries. In today`s Internet economy organizations must use IS solutions to
transit Irom conventional brick and mortar business models to inIormation age
business models that will enable them to stay agile and respond eIIectively to
higher customer expectations. Ramco EAM solutions comprehensively cover
operations, maintenance, logistics, HR and Iinancials to mobile computing and e-
commerce capabilities.

Q:esti4ns:

1. What is the applications oI Marshall?
2. Why e-Applications are diIIerent Irom Marshall?
3. Mention the EAM oI Ramco Systems
4. Mention the main Ieatures oI e-applications.

LESSN 4 ERP PAKAGE : SAP

41 Intr4d:cti4n

SAP the company was Iounded in Germany in 1972 by Iive ex-IBM
engineers. In case you`re ever asked, SAP stands Ior Susteme, Andwendugen,
!roduckte in her Datenverar-eitung which translated to English means
systems, Applications, !roducts in Data !rocessing. So now you know! Being
incorporated in Germany the Iull name oI the parent company is SAP AG. It is
located in WAlldorI, Germany which is close to the beautiIul tows oI Heidelberg.
SAP has subsidiaries in over 50 countries around the world Irom Argentina to
Venezuela (and pretty much everything in between). SAP America (with
responsibility Ior North Amerca, South America and Australia go Iigure!) is
located just outside Philadephia, PA. the original Iive Iounders have been so
successIul that they have multiplied many ties over such that SAP AG is now the
third largest soItware maker in world, with over 17,500 customers (including
more than halI oI the world`s 500 top countries). SAP employs over 27,000
people worldwide today, and had revenues oI $7.34 billion and Net Income oI
$581 millions in FY01. SAP is listed in Germany (where it is one oI the 30 stocks
which make up the DAX) and on the NYSE (ticker-SAP). There are now 44,500
installatins oI SAP, in 120 countries, with more then 10 million users. Badk in
1979 SAP released SAP R//2 was the Iirst integrated, entrrprise wide package and
was an immediated success. For years SAP stayed within the German borders
until it had panetreated practically every large German Company. Looking Ior
more growth, SAP expanded into the remainder or Europe during the 80`s.
Towards the end oI the 80`s, client-server architecture became popular and SAP
responded with the release oI SAP R/3 (in 1992). This turned out to be a killer
app Ior SAP, especially in the American region into which SAP expanded in
1988.

The success oI SAP R/3 in North America has been nothing short oI
stunning. Within a 5 year period, the North American market went Irom virtually
zero to 44 oI total SAP worldwide sales. SAP America alone employs more
than 3,000 people and has added the names oI many oI the Fortune 500 to it`s
customer list (8 oI the top 10 semiconductor companies, 7 oI the top 10
pharmaceutical companies etc). SAP today is available in 46 country-speciIic

Page N4 33 - Xer4x n4t cleared

OI course that there is someone around who understands how they work!).
Sweeping them away and replacing them with an integrated system such as SAP
can save much money in support. OI course, iI you have a burning platIorm as
well the question becomes even easier.

2. Enabling business process change From the start, SAP was built in a
Ioundation oI process best practices. Although it sounds absurd, it is
probably easier (and less expensive) to change your companies
processes to adopt to SAP than the other way around. Many companies
have reported good success Irom combining a SAP implementation
with a BPR project.
3. Competitive advantage The CFO types around have heard this old
saying Iorm the CIO types Ior many years now. The question still has
to be asked . can you gain competitive advantage Irom implementing
SAP? The answer, oI course, depends on the company. It seems to us
however, that:

O being able to accurately provide delivery promise dated Ior manuIacturing
products (and meet them) doesn`t hurt . and
O being able to consolidate purchase decisions Irom around the globe and
use that leverage when negotiating with vendors has gotta help . and
O being able to place kiosks in stores where individual customers can enter
their product speciIications and them Ieed this data directly into it`s
production planning process is pretty neat, etc.

43 Te c4st 4f SAP:

Implementing SAP is expensive. But the potential rewards can dwarI the
costs (and have Ior many existing customers already). One customer reportedly
made enough savings on the procurement oI a single raw material to pay Ior the
entire enterprise-wide SAP implementation! OI course these are hard to
substantiate, but visit SAP`s website and take a look at the customer testimonials.
SAP sells it`s R/3 product on a price per user basis`. The actual price is
negotiated between SAP and the customer and thereIore depends on numerous
Iactors which include number oI users and modules (and other Iactors which are
present in any negotiation). You should check with SAP, but Ior a ballpark
planning number your could do worse than starting with $4000 per user. There is
also an annual support cost oI about 10 which includes periodic upgrades.
Again, check with SAP.

Then there is the implementation cost. It is about now that you need to get the
business case out again and remind yourselI why you need to do this. The major
drivers oI he total implementation cost are the TimeIrame, Resource
Requirements and Hardware.

1. TimeIrame- The absolute quickest implementation we have ever heard oI
is 45 days . but this was Ior a tiny company with very users and no
changes to the delivered SAP processes. At the other end oI the scale you
get the multi- national who are implementing SAP over 5 to 10 years.
These are not necessarily Iailures .. Many oI them are planned as
successive global deployments (which seem to roll around the globe
Iorever ). OI course the really expensive ones are those we don`t beat
about! For the most part, you should be able to get your (single instance)
project completed in a 9 to 18 months period.
2. People The smallest oI SAP implementations can get done on a part-
time basis without outside help. The largest swallow up hundreds oI
people (sometimes over a thousand) and include whole armies oI
consultants. This adds up Iast. Again, get that business case out. The types
oI people you will need rung the range Irom heavy duty techies to project
managers.
3. Hardware The smallest oI SAP implementations probably use only three
instances (boxes) . one Ior the production system, one Ior test, and one
Ior development. The largest implementations have well over 100
instances, especially iI they involve multiple parallel projects (otherwise
known as a program)



44 Te S4ftare:

Xer4x n4t cleared in tis Para

Companies both large and small traditionally utilized multiple soItware-
applications Irom various vendors or developed their own applications in-house to
process their critical business transactions Prior to the proliIeration oI SAP, most
companies supported a Iull staII oI program developers who wrote their necessary
business applications Irom scratch or developers who wrote their necessary
business applications Irom scratch or developed highly complicated interIaces to
allow pre-packaged applications Irom several vendors to pass data back and Iorth
as necessary to complete any Iull cycle business transactions. This process was
extremely costly, time-consuming, and error prone. It also made it very diIIicult
Ior business managers and executive to get a timely, comprehensive view oI how
their business managers and executives to get a timely, comprehensive view oI
how their business was doing at any given time. SAP was the Iirst and, to date,
the most successIul company to integrate nearly all business processes into one
soItware solution Ior use in any business in any country in the world. Not only did
SAP`s applications reduce the need Ior complex and redundant in-house
development, but it also created new business eIIiciencies by automating many
tasks across a corporation and incorporating business` best practices into each
updated version oI its soItware.

Using SAP`s products, companies can now integrate their accounting, sales,
distribution, manuIacturing, planning, purchasing, human resources, analysis and
other transactions into one application. SAP applications thus provide an
environment where 'transactions are synchronized throughout the entire systems,
meaning a sales-order entry triggers action`s within each application that related
and is relevant to the transaction.

Although SAP is recognized as the ERP market leader, several competitors have
Iound their Iooting in this arena. Oracle, perhaps SAP`s most signiIicant
competitor, has set its sites on SAP`s prestigious ERP leadership position. Other
competitors include People SoIt, JD Edwards, and a range oI mid-market ERP
vendors who all provide similar packaged ERP application.

Q:esti4ns:

1. Trace the evolution SAP.
2. Explain how SAP is diIIerent Irom other soItware
3. IdentiIy the purpose oI SAP
4. How SAP is diIIerent on account oI the cost?
1. Arthur sharphin, Strategy management, FiIth edition-1985.
2. Cherunilam. 'Business Policy, Himalaya publishing .
3. Chandrasekar , 'product management-text and cases, Himalaya
publishing .
4. Bruce Hendersn , 'perspective on the product portIolio, Boston
consulting Group. 1970
5. Dan Schendel and Richard patton, 'A simultaneous equations model oI
corporate strategy, Management, Science, November 1978, p.1611.
6. Derek Channon, 'Commentary on strategy Formulation, in Dan Schendel
and Charles HolIer, eds. Stategic Management, Boston: Little Brown,
1979.
7. George .S. Day, 'Diagnosing the product portIolio Journal oI Marketing
April 1977, p.29.
8. Lan Wilson, 'Retorming the Strategic planning process: integration oI
social and business needs, Long Range PlanningOctober 1974,p.3.

9. Michel Allen, 'Diagramming GE`s planning Ior what`s WATT 'in Rober
Allio and Malcolm Penningron, cditors, 'carposaand planning techniques
and applications`, New ark, 1979

10. Philippe Haspeslagh, 'PortIolio planning : uses and limits, Harvard
Business Review, January-Fe-ruary 198, pp. 1-

11. Rechard Cardo:o and oram Wind, '!ortfilio analysis for strategic
product-market planning`, Wharton School working paper, 198.

12. Robert Wright, 'a system Ior managing diversity in Start Henderson and
Harper Boyd Jr., editors, 'Marketing Management and administrative
action`, McGraw Hill, 1978.

13. Sidney SchoeIIler, Robert Buzz ell and Donald Heany, 'Impact oI
Strategic planning and proIit perIormance , Harvard Business Review,
March-April 1974, p. 137.

14. Stanley Hoch, 'Strategic management in General Electric, February
1980.

15. Yoram Wind and Henry Claycamp, 'planning product line strategy : A
matrix approach`, Journal of marketing, January 1976, p. 20.

16. Yoram wind and Vijay Mahajan, 'Designing product and business
portIolios`, Harvard Business Review, January-February, 1981, pp. 156-
164.




17. Clevland, D. and King, W. (ed.) (1988). !rofect management Hand-ook,

nd
edition. Van-Nostrand Reinhold, 115 FiIth Avenue, New York, NY
100003
18. Project Management Institute Stndards Committee, Duncan, W (ed).
(1966). A uide to the !rofect Maanagement Body of Knowledge. Project
Management Institute, Upper Darby, PA.
19. Shtub, A., Bard, J.F., & Gloverson, S. (1994). !rofect management.
ngineering %echnology and mplementation. Prentice-Hall, Englewood
20. Whitten, J. and Bentley, L. (1988). Systems analysis and design methods,
4
th
edition. rwin Mcraw Hill, Boston, MA.
21. Allison, G. 1871. Essence oI decision. New York: Little, Brown & Co.
22. Arrow, K.J. 1974: The limits oI organization. New York: W.W. Norton.
23. Barnard, C.I. 1938. The Iunctions oI the executive. Cambridge, M.A. :
Harvard University Press
24. Bower, J. 1970. Managing the resource allocation process. Homewood,
IL: Irwin
.Chandler, A.D. 1962. Strategy and Structure. Cambridge, M.A.: MIT
Press.
26. Coleman, J.S. 1990. Foundations oI Social Theory, Cambridge, M.A:

27. Cyert, R.M. & March, J.G. 1963 A bechavioral theory oI the Iirm.
Englewood CliIIs, NJ: Prentice-
28. Hall.
29. Knight, F.H. 1965. Risk, uncertainty and proIit (c. 1921). New York :
Harper & Row
30. Miles, R.E. and Snow, C.C. 1978. Organizational strategy, structure, and
process. New York:
31. Mc.Graw-Hill.
32. Nelson, R.R. & Winter, S.G. 1982. An evolutionary theory oI economic
change. Cambridge.
33. M.A. : Belknap Press
34. Penrose, E.T. 1959. The theory oI the growth oI the Iirm. New York :
Wiley.
35. Porter, M.E. 1980. Competitive strategy. New York: Free Press
36. Porter, M.E. 1985. Competitive advantage. New York: Free Press
37. Regers, E. 1995. The diIIusion oI innovations (4
th
edition). Free Press,
New York
38. Rumelt, R.P. 1974. Strategy, Structure, and economic perIormance.
Harvard Business School
39. Press, Bostom, MA.
40. Rumelt, R.P., Schendel, D.E. & Teece, D.J. 1994. Fundamental Issues in
Strategy. Cambridge
41. Schelling, T.C. 1960. The strategy oI conIlict. Cambridge, MA: Harvard
University Press.
42. schendel, D.E & HoIer, C.W. 1979. management: A new view oI Business
Policy
43. and planning. Little, Brown, MA.
44. Scherer, F.M.& Ross, D. 1990. industrial market structure and economic
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45. MiIIlin Co: Boston. MA.
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4del Q:esti4n Paper
Paper 32 : Strategic anagement

Time : 3 hours Maximum Marks : 100

PART - A (5 X 8 40)

Anser any ive q:esti4ns

1. DeIine Mission and give examples
2. What constituted core competency?
3. What do your mean by turnaround? Give examples
4. How the diversiIication strategies are undertaken by companies?
5. Illustrate with examples the need Ior corporate strategy.
6. What is management oI change?
7. What are the leadership qualities needed Ior corporate success?
8. Write a note BaaN

PART - (4 X 15 60)

Anser any 4:r q:esti4ns
"uestion No. 1 is Compulsory

9. Evaluate the role played by business policy in organizational success.
10. Critically evaluate the growth strategies adopted by Indian organizations.
11. Mention the oI importance Ior organization to succeed in new areas oI
operations.
12. Describe the various portIolio models and illustrate their limitations
13. Discuss the various elements oI corporate strategy.
14. Elucidate the 7`s Iramework with its uses to Indian companies.
15. Read the Iollowing case careIully and answer the questions at the end oI
the case.




All the major business newspaper headlines in India on 21
st
July 1999 were
screaming ,ssar creates history, defeats on FRN $ million`. Essar group
had deIault on its loan repayments oI $250 million oI Iloating rate notes in
international markets. It became the Iirst Indian Company to deIault in
International market raising Iears in Indian corporate sector regarding Iuture Iund
raising capabilities in the international market.

For last on year it had been Irantically trying to avoid the unavoidable, and in the
process, rolling itselI in many controversies. During 1998, steel consumers had
accused Government oI India in media oI creating import barriers to Iavour and
bail our Essar. This created a political controversy and caused embarrassment to
the government. Essar became an untouchable Ior government controlled
Iinancial institutions. The Iinancial institutions, which had major exposure in
Essar, backed oII the leIt Essar in the lurch when it came to disastrous year Ior the
group but its public image also suIIered a major setback.

Ruia brothers, Sashi, 55 and Ravi, 50 who had stunned Indian corporate sector
with their vision and daring entrepreneurship were today in a quagmire oI their
own making. While on diversiIication spree. Entering one business aIter another,
they were obviously not are that very soon the group would become a case study
at the management school.

Today Essar group is considering various options to consolidate, sell companied
that it had nurtured with heavy debt exposure in past Iew years. Its major
companies are in core inIrastructure areas with strict regulations, controls and
major government role intervention. Essar is wondering what went wrong in its
dreams and their executions. Was it Iate, Pokhran nuclear tests in 1998,
continuing recessions in Indian and world market, stock market depression in
India or was it structured to doom.

7oup P7ofile

Nand Kishore Ruia, a marwari businessmen settled in Madras in 1956, Iounded
the Essar group. Essar started oII by exporting iron ore. In 1956, it acquired a
stevedoring contract Ior bringing iron Irom the mine heads and loading it onto
sheds. Sahsi (ESS) and Ravi (AR) diversiIied Irom Iamily business oI trading and
ventured into shipping in 1969. AIter shipping Essar moved into construction
activity and then into the supply critical support services Ior the oil and gas sector.
Their major breakthrough came in the Iorm oI a drilling contract awarded by
ONGC. From these successIul medium-sized business in marine and port
constructions, oil-drilling, and shipping, Essar Iirst took the opportunity provided
by the gas pipeline to start a very successIul sponge iron business.

It has been the entrepreneurial sprit and opportunism that has been driving the
group Irom a Rs. 150 core shipping company to a Rs. 4000 core conglomerate.
The group was slowly adding one business aIter another until late eighties.

In 1990`s Government oI India started economic liberalization programme
that promised growth and vision oI catching up with the late industrializing
economies oI Southeast. Capital markets were opened up and raising Iinances
became much easier and it became a prime Iacilitator oI rapid growth. The
incredible rate oI growth oI Essar group during this period saw them in virtually
all the core sectors.

Ruia brothers had a resplendent vision oI creating a huge empire and they
exploited every opportunity that came their way and created many new avenues to
realize their vision. Mr. Sashi Ruia engineered Essar`s conquests and they were
well capitalized by his younger brother Ravi, Essar restructured itselI in 1994 to
include senior proIessional managers Irom leading public sector undertakings to
manage their growing, diversiIied businesses. These proIessionals were given Iree
hand Ior running independent units. Mr. Sashi Ruia kept the group`s external
environment & business development activities with himselI. Ravi Ruia was
given charge oI the operations & overseas businesses. The second generation also
started making their way in Iamily business. Today Prashant Ruia is the director-
in-charge oI Essar`s Power, Oil & Steel business along with communications and
personnel. Anshuman Ruia looks aIter shipping.

Essar group entered in global business by commissioning a $90
million cold rolled steel plant, Essar Dhananjaya (ED), in Indonesia in
1994 oI 150,000 tonnes capacity Ied by HRC Irom Essar Gujarat Limited
in a joining venture with the Garama group oI Indonesia. ED was to
import hot rolled coils Irom Essar Gujarat`s Steel plant in India. During
that period Ruias had been working up on setting more such ventures in
Bangladesh, Saudi Arabia or Pakistan. The Iocus Ior such expansions was
to beat possible downturns in domestic demand. Essar also acquired a
three-year-old textile mill Woventex Ltd. in Mauritius. Through this they
wanted to move in AIrica which they believed would soon see and
economic upsurge.

On Essar new business strategy Sashi Ruia commented, 'We will get into
any new business that will make us more money.

Ravi Ruia commented on Essar`s global strategy in 1994, 'We will get
into any new business that will make us more money.

Ravi Ruia commented on Essar`s global strategy in 1994, 'We are looking
at impact oI globalization on existing businesses in country. Next we are looking
Ior opportunities opening up overseas. Not just those with synergies with our
existing operations, but also those that have potential Ior us. Commenting on
new opportunities he said, 'Today the canvas is wide open. We must have an
open mind. We should have basic synergies with what we do, but we must not
miss a major opportunity just because it does not Iit in with our basic operations.


According to Prashant Ruia, Chairman oI ESSMCO Ior reasons oI Iast
acquisition by Essar shipping limited is '. -uying ships has -ecome easier now.
it takes less time and the access to funds us easier`.

This philosophy became their prime motivator Ior a rapid expansion and
acquisition. Their strategy hinged on a simple premise one project will nurture
another project & co on. In mid 90`s the joke at the corporate headquarters oI
Essar group at Essar House, Mumbai used to be that which new company has the
group opened today.


Essar group wanted increase its assets to Rs. 31,300 crore, income to
Rs.19,400 crore and gross proIit to Rs.7,500 crore by the year 2001-02. In this
process they went on an expansion spree even at high cost debt to reap beneIits
Irom the post liberalization growth in India. However the economy growth which
they envisaged didn`t last long. Their steel project was delayed. It was plague and
then Iloods in Sturat, Gujarat (their plant location) that took their tool on project.
But major Iactors ere their planning and project management skills. They had
changed the project plan and basic technology number oI times. Because oI this
they could not exploit the price boom in steel sector and could not repay the loans
to the Iinancial institutions. When they came on stream with steel plant, Indian
economy started cooling oII, Southeast Asian crises happened, overcapacity in
steel sector led to a global glut and price recession in steel, all working against
their risky debt strategy.

Today, it has assets worth Rs. 14,530 crore, income oI Rs. 4,030 crore and
gross proIit oI Rs. 1,150 crore. Essar is one oI India`s leading business groups and
has phenomenal presence in Steel, Shipping, Oil & Gas, Power Telecom and Iew
Iinancial services companies besides other small businesses. Steel accounts Ior
70.30 percent oI the group`s turnover, while shipping accounts Ior 17.30 percent.
The portIolio is rather diverse with very little synergy amongst them, except that
all big companies core industries.



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