Business Policy and Strategy - For Exam

UPES
CENTRE FOR CONTINUING EDUCATION
MBCG743D
BUSINESS POLICY AND
STRATEGY
www.cce.upes.ac.in
Course Design
Advisory Council
Chairman
Mr. Sharad Mehra
Members
Dr. S J Chopra Dr. Sunil Rai Dr. Veena Dutta
Chancellor Vice Chancellor Registrar
Dr. Kamal Bansal Ms. Deepa Verma Mr. Ashok Sahu

Dean-Academics Sr. Director-IA Head Online Business
SLM Development Team

Dr. Raju Ganesh Sunder Dr. Rajesh Gupta
Professor & Head-Academic Unit Sr. Associate Professor
Mr. Tarun Batra Mr. Rahul Sharma Mr. Shantanu Trivedi

Asst. Director-Product Development Lecturer Lecturer
Author
Dr. Raju Ganesh Sunder, Dr. Rajesh Gupta, Mr. Shantanu Trivedi
Course Code: MBCG743D

Course Name: Business Policy and Strategy
Version: July 2019

Contents
Unit 1 Business Policy – An Overview ........................................................................ 03
Unit 2 Strategy and Strategic Management ............................................................... 15

Unit 3 Basic Models of Strategic Management ........................................................... 37
Unit 4 Strategic Intent – Vision, Mission and Objectives ......................................... 53
Unit 5 Case Study .......................................................................................................... 73
Unit 6 Formulating Business Strategy ........................................................................ 77
Unit 7 Formulating Corporate Strategy ....................................................................... 93
Unit 8 SWOT and Value Chain Analysis .................................................................. 105
Unit 9 Portfolio Analysis and Strategic Alliance ...................................................... 121
Unit 10 Case Study ........................................................................................................ 141
Unit 11 Strategic Management Process ....................................................................... 151
Unit 12 Strategic Choice and Implementation ............................................................ 159
Unit 13 Strategies for Global Environment ................................................................. 167
Unit 14 Strategies for Retrenchment ........................................................................... 187
Unit 15 Case Study ........................................................................................................ 207
Unit 16 Strategic Organisational Design ..................................................................... 211
Unit 17 Modern Organisational Structure ................................................................... 223
Unit 18 Learning and Organisational Strategy .......................................................... 241
Unit 19 Behavioural Strategic Implementation .......................................................... 255
Unit 20 Case Study ........................................................................................................ 273
Unit 21 Strategies at Functional and Operational Level .......................................... 277
Unit 22 Strategic Control and Evaluation ................................................................... 291
Unit 23 Corporate Goals and Strategic Gap ............................................................... 305
Unit 24 Life Cycle Approach to Strategic Planning ................................................... 319
Unit 25 Case Study ........................................................................................................ 329
Block–I
Detailed Contents
UNIT-1: BUSINESS POLICY – AN OVERVIEW
UNIT-2: STRATEGY AND STRATEGIC MANAGEMENT
UNIT-3: BASIC MODELS OF STRATEGIC MANAGEMENT
UNIT-4: STRATEGIC INTENT – VISION, MISSION AND OBJECTIVES
UNIT-5: CASE STUDY

3
Unit 1 Notes
Business PPolicy
olicy – An Overview ___________________
___________________
___________________
Learning Objectives: ___________________

After completion of this unit, the students will be able to explain:
___________________
\ Concept of Policy
___________________
\ Concept of Strategy
\ Policy vs Strategy ___________________
\ Business Policy ___________________

\ Scope of Business Policy
___________________
___________________
Introduction
The world economy has witnessed an amazing succession of major
developments during the last few decades, particularly after the
second world war. The profile of business enterprises has undergone
phenomenal changes. These changes are reflected in terms of
developments in technology such as electric lights, power
distribution, telephone, refrigeration, radio, television video,
computer etc., expanding scale of business operations, ever increasing
competition, mounting internationalization of business, growing state
interference, changing socio-economic and political environment and
the emergence of new human values. These developments served to
complicate business problems and even passed a threat to the
survival of existing enterprises. To cope with these remarkable
developments in the business environment and to surmount the
grave problems encountered by the chief executives for the survival
and growth of their enterprises, new techniques and principles of
management have been evolved from time to time.
Concept of Policy
Policies have been defined as statements, either expressed or implied
of those principles and rules that are set up by executive leadership
as guides and constraints for the organisation’s thought and action.
They are a kind of standing answers to recurring questions. Thus,
it may be the policy of the enterprise to employ any local people to
charge fixed prices for its products, to sell only against cash. Policies
may relate to production, sales, personnel, finance and so, on. Policies
are general in nature emphasizing a fairly definite course of action
and change infrequently.
Business Policy and Strategy
4
“Policies are general statements or undertakings (members of the
Notes
group), which makes the action of each member of the group in the
given set of circumstances more predictable to other members.”
___________________
—J.L. Massie
___________________
“Policies are general statements or undertakings, which guide or
___________________ channel thinking in decision making of subordinates.”
___________________ Policies are typically promulgated through official written
___________________ documents. Policy documents often come with the endorsement or
signature of the executive powers within an organization to
___________________ legitimize the policy and demonstrate that it is considered in force.
Such documents often have standard formats that are particular to
___________________
the organization issuing the policy. While such formats differ in
___________________ form, policy documents usually contain certain standard components
including:
___________________
• A purpose statement, outlining why the organization is
___________________
issuing the policy, and what its desired effect or outcome of the
policy should be.
• An applicability and scope statement, describing who the
policy affects and which actions are impacted by the policy.
The applicability and scope may expressly exclude certain
people, organizations or actions from the policy requirements.
Applicability and scope are used to focus the policy on only the
desired targets and avoid unintended consequences where
possible.
• An effective date that indicates when the policy comes into
force. Retroactive policies are rare but can be found.
• A responsibilities section, indicating which parties and
organizations are responsible for carrying out individual policy
statements. Many policies may require the establishment of
some ongoing function or action. For example, a purchasing
policy might specify that a purchasing office be created to
process purchase requests, and that this office would be
responsible for ongoing actions. Responsibilities often include
identification of any relevant oversight and/or governance
structures.
• Policy statements indicating the specific regulations,
requirements or modifications to organizational behaviour that
the policy is creating. Policy statements are extremely diverse
depending on the organization and intent, and may take almost
any form.
Some policies may contain additional sections, including:
• Background, indicating any reasons, history, and intent that
led to the creation of the policy, which may be listed as
Unit 1: Business Policy – An Overview
5
motivating factors. This information is often quite valuable
Notes
when policies must be evaluated or used in ambiguous
situations, just as the intent of a law can be useful to a court
___________________
when deciding a case that involves that law.
___________________
• Definitions, providing clear and unambiguous definitions for
terms and concepts found in the policy document. ___________________
___________________
Check your Progress
Fill in the blanks: ___________________
1. ...................... are statements either expressed or implied of those ___________________

principles and rules that are set up by executive leadership as guides
and constraints for the organisation’s thought and action. ___________________
2. Policies are general statements or undertakings that guide or channel ___________________

thinking in decision making of ................... .
___________________
Concept of Strategy ___________________
A strategy is gamesmanship or administrative course of action

designed to achieve success in the fact of the difficulties. It is the
design or the overall plan, which a company chooses in order to
move or reach the objectives it seeks to provide the optimum match
between the firm and its environment.
“Strategy is the complex plan for bringing the organization from a
given posture to a desired position in a future period of time.”
“Strategy refers to the determination of purpose and the long-term
objectives of the enterprise and the adoption of course of action and
allocation of resources necessary to achieve these aims.”
—Harold Koontz
Nature and Characteristics of Strategy

The nature and characteristics of strategy are:
• It is the right combination of different factors.
• It relates the business organization to its environment.
• It is an action to meet a particular challenge to solve particular
problems or attain objectives.
• Strategy may need contradictory actions. For example, today a
manager may adopt a particular course of action but tomorrow
he may end the same due to changes in situations.
• Strategy is forwards looking.
• It is a means to an end and not an end in itself.
6
• It is a means of coping with or managing the events and changes
Notes
in the external environment.
___________________ • It is formulated at the top management level.
___________________ • It is generally long range in nature but short-range moves are
also specified in it.
___________________
• It is flexible and dynamic.
___________________
• It involves assumption of certain calculated risks.
___________________
• It is action oriented and more specific than objective.
___________________
• It is generally meant to cope with a competitive setting in
___________________ which the bahaviour of competitors and other adversaries of
the enterprise affects its own functioning and performance.
___________________
___________________ Check your Progress

True or FFalse:
alse:
___________________
1. Strategy is a design or the overall plan, which a company chooses in
order to move or reach the objectives.
2. Strategy may not need contradictory actions.
Policy vs Strategy
A policy is a guide to thinking and action for those responsible for
making decisions. On the other hand, a strategy deals with the
allocation and development of physical and human resources so as
to achieve the desired goals in the face of environmental pressures.
A strategy may exist without a policy; strategy and policy may in
some cases be co-extensive. A strategy deals primarily with
environmental constraints and opportunities whereas a policy is
concerned mainly with internal management.
A policy is a contingent decisions and lays down the response to be
made whenever the specified contingency arises. But a strategy is
designed to deal with situations about which all facts are not known
and, therefore, alternatives can not be evaluated in advance. The
implementation of policy can be delegated but the execution of
strategy can not be delegated because it requires last-minutes
executive decisions. However, both policy and strategy are designed
to achieve organizational objectives.
The process of their formulation is similar. In strategic decisions,
the identification and analysis of the factors bearing on the problem
are more difficult than in case of policy decisions.
Thus it can be said that a major distinction between policy and
strategy is that former is a guide to the thinking and action of those
who make decisions, while strategy concerns the direction in which
7
human and physical resources will be deployed and applied in order
Notes
to maximise the chance of achieving a selected objective in the face
of difficulties.
___________________
Policy is contingent decision, whereas strategy is a rule for making
___________________
decision. A contingent even is recognised because it is repetitive,
but the time of its specific occurrence cannot be specified. It is not ___________________
worthwhile to require a new decision on what should be done each
time when a contingency arises. It is better to prescribe, in advance, ___________________
the response to be made whenever a specified contingency occurs. ___________________
This is done through policy formulations. Specification of strategy ___________________
is forced under conditions of partial ignorance when alternatives
cannot be arranged and analysed in advance. The strategy decision ___________________
is taken under the conditions where all the facts are not known,
___________________
which may not be lasting because of the further knowledge of the
facts. ___________________
The distinction between policy and strategy is made in the context ___________________
of delegation or implementation. The implementation of policy can
be delegated downward in the organisation, while the strategy
cannot, since it requires a last-minute executive decision. The term
“policy” should not be considered as synonymous to the term
“strategy”. The differences between policy and strategy can be
summarized as follows:
• Policy is a blueprint of the organizational activities, which are
repetitive/routine in nature. Strategy is concerned with those
organizational decisions that have not been dealt/faced before
in the same form.
• Policy formulation is responsibility of top-level management.
Strategy formulation is done by middle-level management.
• Policy deals with routine/daily activities essential for effective
and efficient running of an organization. Strategy deals with
strategic decisions.
• Policy is concerned with both thought and actions. Strategy is
concerned mostly with action.
• Policy is - what is done, or what is not done. Strategy is the
methodology used to achieve a target as prescribed by a policy
Check Your Progress

Fill in the blanks:
1. .................... deals with the allocation and development of physical
and human resources so as to achieve the desired goals in the face
of environmental pressures.
2. Policy is contingent decision, whereas strategy is a .............. for making
decision.
8
Notes
Business Policy
Business policy refers to decision about the future of an ongoing
___________________
enterprise. These are the decisions that only the top management
___________________ of an organization can take. Top management takes these decisions
after thoroughly investigating market opportunities taking into
___________________ consideration resources available in internal and external
___________________ environment and by appraising the destructive competence. These
are vital & strategic decisions in as much as they determine the
___________________ relationship between the enterprise and its environment what it is
___________________
supposed to be doing in the coming years, and how it should position
itself to take advantage of the future market opportunities.
___________________
“A management policy is a predetermined selected course established
___________________ as a guide towards accepted goals and objectives. Policies establish
the framework of guiding principles that facilitate delegation to lower
___________________
levels and permit individual managers to select appropriate tactics
___________________ or programmes.” —Yoder and Dale
“A business policy is nothing more than a well-developed statement
of directions and goals. Goals involve definitions of precisely what
the business is or should be and the particular kind of company it
should be. Direction guides the action of the firm to accomplish
these goals.” —Edmond and Gray
“A policy is a statement or a commonly accepted understanding of
decision-making criteria or formulate prepared or evolved to achieve
economy in operations by making decision, relatively routine or
frequently occurring problems and consequently facilitating the
delegation of such decision to lower managerial levels.”
—Miller and Earnest
Characteristics of Business Policy

The characteristics of business policy are:
• When policies are clearly framed and exclaimed, the help the
executive to know how others will act and this will help them
to have better co-ordination in achieving the well-planned
objectives.
• Policies will be effective and fruitful only when they are properly
implemented by properly trained personnel, as per time
schedule.
• Business policies are never static and are subject to alteration
or modification depending upon the business environment.
• Policies act as guidelines to business executives to resolve
recurring problems so as to attain pre-determined objectives.
9
• Policies cover the wide field of product mix and market mix,
Notes
guiding the enterprise as to how much and what type of product
to be manufactured and its channels of distribution.
___________________
• Policies are not a set of rigid rules and regulations instead
___________________
they are living precepts guiding an enterprise to continue within
the set pattern of behaviour. ___________________
• They are overall guides determining the direction of managerial ___________________

action subject to policy restrictions.
___________________
• Consistency in the work performance by different members of
firm is maintained because of clear cut policies chalked out at ___________________
executive level.
___________________
• Policies cover the study of the nature and process of choice
___________________
about the future of a business enterprise and are to be handled
by responsible executives. ___________________
• Policies are general statement of principles for achieving ___________________
predetermined goals by guiding action by executives at different
levels.
• They are meant for subordinates and are framed to suit a
specific situation.
• They are of multipurpose nature embracing:
❖ Avoiding confusion.
❖ Providing guidelines at all levels.
❖ Enabling the enterprise to run smoothly without any
hindrance.
❖ Helping management to achieve the maximum utilization
of human and material resources.
• Decision making, planning and co-ordination of any business
organization are exclusively governed and controlled by business
policies.
• Policies dominate over all other factors of management since
they act in the form of a formal agreement to be strictly followed
at all levels in the organization before taking any decision.
• Policies help the management to delegate duties to subordinates
with full confidence that these duties will be carried out strictly
as per the policy decisions.
Objectives of Business Policy

Objectives of business policy are as follows:
• Development of skills: The attainment of knowledge should
lead to the development of skills so as to apply what is learnt.
10
Such application takes place by an analysis of case studies and
Notes
their interpretation and by an analysis of the business events
taking place around us.
___________________
• Determination of objectives, mission etc.: Information about
___________________
the environment helps in the determination of the mission,
___________________ objectives and strategies of a firm. The learner appreciates the
manner in which strategy is formulated.
___________________
• Developing a creative attitude: An important attitude is to
___________________ go beyond and think when faced with a problematic situation.
___________________
Developing a creative and innovative attitude is the hallmark
of a general manager who refuses to be bound by precedents
___________________ & stereotyped decisions.
___________________ • Environmental analysis and knowledge: Knowledge about
the environment-external and internal and how it effects the
___________________
functioning of an organisation is vital in understanding business
___________________ policy. Through the tools of analysis and diagnosis, a learner
can understand the environment in which a firm operates.
• Generalisation approach: The problems in real life business
are unique and so far, their solutions are an enlightening
experience for the managers at all levels. The knowledge
component of such an experience stresses the generalisation of
approach to be adopted in problem solving and decision making.
With a generalised approach, it is possible to deal with a wide
variety of situations.
• Implementation of strategy: Implementation of strategy is a
complex issue and is invariably the most difficult part of
strategic management. Through the knowledge gained in
business policy, the learner is able to visualize how the
implementation of strategies can take place.
Advantages of Business Policy

The advantages of business policy are:
• An understanding of business policy enables the executives to
avail of opportunity and other way round to equip the executive
for avoiding a risk with regard to career planning and
development.
• Setting up of policies can speed up decision making since they
provide a framework within which the decisions can be made.
Policies give a practical shape to the objectives by elaborating
and directing the way in which predetermined goals are to be
achieved.
• Policies help in securing co-ordination of efforts and activities
in the organisations. Though managers try to co-ordinate the
11
efforts of their subordinates they, by prescribing how a
Notes
subordinate is expected to behave in a particular context, secure
better co-ordination in a subordinate’s efforts and actions. ___________________
• A clearly defined business policy may lead to an improvement
___________________
in job performance. As a middle-level manager, a person is
helped to understand the linkages between different subunits ___________________
of an organisation and how a particular subunit fits into the
___________________
overall picture.
___________________
• Policies help both superior and subordinates to work for a
better performance. When the policies are formulated carefully ___________________
the managers are not required to devote time on same or similar
___________________
assignments. The subordinates have not to consult their
superiors frequently. So, by this way, everybody can stick to ___________________
one’s task instead of wasting time here & there.
___________________
• Business policy diverts the management towards more
meaningful position, as one can look business decision making ___________________
in its proper perspective. For example, in the context of business

policy, a short-term gain for a department is knowingly
sacrificed in the interest of the long term benefit that may
accrue to the organisation as a whole.
Disadvantages of Business Policy

The disadvantages of business policy are:
• No problem can be solved very quickly on the basis of policies,

because policies don’t give enough room to managers to decide.
Policies force managers to remain in boundary.
• Policies are not very fruitful in these days of rapidly changing
of business environment. Even this is possible that the time at
which policies were set up was quite different as compared to
present scenario, because of changes in political, social, economic
and technological aspects. So, in these types of situations,
policies don’t provide much help.
• Policies do not cover each and every sort of problem. At times,
such type of situation arise which never predicted earlier. So,
in these sorts of circumstances, policies are meaningless.
• In these days of dynamism, there is no space for anything
static. Policies once setup, they will go for a longer period.
Managers have to take their decision by taking into
consideration policies.
12
Notes Check Your Progress
Fill in the blanks:
___________________
1. ............... refers to decision about the future of an ongoing enterprise.
___________________ 2. A ................... is a pre-determined selected course established as a
guide towards accepted goals and objectives.
___________________
___________________ Scope of Business Policy

___________________ No business organisation can either survive or grow without definite
___________________ objectives, which can only be accomplished by applying different
policies from time to time, depending upon the working
___________________ organisational thinking, behaviour and action. Policies as such are
___________________
formulated pertaining to different aspects of business organisations
and therefore, they enjoy a very wide scope in day-to-day life of any
___________________ business unit. Persons concerned with any type of activity either
commercial or otherwise, will have to think of clear-cut policies
___________________
right from the formation stage to the winding up of the proposed
business project. It should, however, be noticed that though the
scope of business policy is wide in general, it varies in degree
depending upon the size and nature of business undertaking.
Classification of Business Policy

Policies are of several types according to the nature. These are:
• Organisational and functional policies: Policies for the
enterprise as a whole are known as organisational policies,
e.g., promotion policy. Such policies are formulated by the top
management. On the other hand, policies relating to particular
function or department of business are called functional or
operating policies, e.g., production policy, price policy, personal
policy, etc. Functional or departmental policies are formulated
by departmental managers.
• Written and implied policies: Policies explicitly stated in
writing are written policies. They form a part of the organisation
manual or records. Implied policies are not in print but are
understood from the functioning of the management.
• Originated, appealed and imposed policies: Originated
policies are those laid down by the top management to guide
lower level executives. They originate at the higher echelons of
management. Policies that are formulated on the appeal or
request of subordinate managers are called appealed policies.
Subordinates request for the formulation of policies to meet
exceptional problems not covered by prevailing policies.
Originated and appealed policies are two types of internal
policies. Imposed policies or external policies are those trust
13
upon the enterprise by outside forces, such as government trade
Notes
unions, competitors trade associations, etc. Such policies tend
to restrict the freedom of management.
___________________
Check Your Progress ___________________

1. Policies for the enterprise as a whole are known as ............... policies.
___________________
2. Policies explicitly stated in writing are ................. policies.
___________________
Summary ___________________
___________________
Policy and strategy represent two significant subsets of the total
field of management about which there is less than common ___________________
agreement regarding definition or relationship. In some instances,
___________________
policy is viewed as a static framework within which the more
dynamic construct of strategy is shaped and tempered. In other ___________________
instances, strategy is said to give rise to policy in a logical form
from the mission to the mainstream of the organization. In still
other instances, policy and strategy are conceived in a kind of
transitory juxtaposition in which one may affect the other directly,
indirectly, or not at all.
Questions for Discussion

1. What is Business Policy? Explain the scope of policy.
2. Briefly explain the nature and characteristics of business policy.
3. Distinguish between Strategy and Policy.
15
Unit 2 Notes
Strategy and Strategic Management ___________________
___________________
___________________

___________________
\ Strategy and Strategic Management
___________________
\ Need for Strategies and Strategic Management
\ Strategies and their role in Strategic Management ___________________
\ Dimensions of Strategic Management ___________________

\ Strategic Decision-making
___________________
\ Industry Analysis
___________________
Introduction
Strategic Management is the process by which organizations
translate their vision into programs and actions to deliver ‘outcomes’.
It is recognized today that changing the ‘outcomes’ in the real world
is a necessary requirement for survival of the business organization,
and it is essential that the ‘outcomes’ result in the desired changes.
Controlling market forces and shaping the competitive environment,
was at one time considered to be outside the capability of business
organizations.
Economic thought till the beginning of the twentieth century was
dominated by the concept of the ‘invisible hand’. This concept meant
that firms do not have the ability to impact the external
environment. The development of strategic management as an area
of study began when there was a realization that it was possible for
the organization to impact changes on the macro-economic
environment. It is, therefore, not surprising that the study of
strategic management is a relatively recent phenomenon.
Before understanding the definition of strategy, it is important to
understand the difference between two terms that are often used
interchangeably – ‘strategy’ and ‘tactics’. Strategy and tactics are
both concerned with formulating and then carrying out courses of
action intended to attain particular objectives. The language of
strategic manoeuvre is also largely the language of tactics. ‘Tactics’
follow and facilitate strategy and are defined as techniques or a
science of dispensing and manoeuvring forces to accomplish a limited
objective or an immediate end.
16
Strategy and tactics are distinct in terms of their dimensions.
Notes
Strategy, for the most part, is concerned with deploying resources
and tactics is concerned with employing them. Strategy deals with
___________________
wide spaces, long periods of time, and large movements of forces,
___________________ tactics deal with the opposite. Strategy is the prelude to action, and
tactics the action itself. Table 2.1 summarises the differences
___________________
between the two, as there often is confusion about the distinction
___________________ between strategy and tactics.
___________________ Despite distinctions in theory, strategy and tactics can not always
be separated in practice. Strategy gives tactics its mission and
___________________
resources and seeks to reap the results. Tactics, then become
___________________ important conditioning factors of strategy, and as the tactics change,
so does strategy. Strategy triggers a movement; a movement begets
___________________ an action; and the action results in new movement. This
___________________ interconnectedness between the movement and the action often
merges one into the other.
___________________
Table 2.1: Strategy Versus Tactics
Aspects Strategy Tactics
Scale of the Objective Grand Limited
Scope of the Action Broad and General Narrowly Focused
Guidance Provided General and Ongoing Specific and

Situational
Degree of Flexibility Adaptable, but not Fluid, quick to adjust

hastily changed and adapt in minor
or major ways
Timing in Relation to Before Action During Action

Action
Focus of Resource Deployment Employment

Utilization
There is a unique relationship between strategy and tactics. Every

tactic can be a significant strategic opportunity. It is necessary to
understand the difference between strategy and tactics as this can
be a strategic edge to the organization. It gives us the ability to
have the ultimate position of the organization and the particular
strategy in mind while executing any tactic. This competency can
enhance the organization’s effectiveness without any investment.
For example, assume the strategic position of the company is to
aspire: “To be the best known, most trusted and respected company
in the target market.” If that is our overall goal, then we have to
ask what our tactics do to achieve this important goal. If our
salesperson is simply trying to make a sale, then he is operating
only tactically.
Unit 2: Strategy and Strategic Management
17
If he can think strategically, he must ask “what should I do to sell
Notes
the product and make the customer believe my company is the best
in the market.” If he can accomplish this objective in his sale, he
___________________
is improving the effectiveness of the organization at no cost to the
organization. If not, he is just chasing the sale of the day, and not ___________________
building anything sustainable for the organization. This is difficult
___________________
as most business executives, even from the biggest firms in the
world, are so tactical that they often find it difficult to differentiate ___________________
between strategy and tactics.
___________________

1. ................. are concerned with formulating and then carrying out
courses of action intended to attain particular objectives. ___________________
2. ................. are techniques or a science of dispensing and manoeuvring ___________________

forces to accomplish a limited objective or an immediate end.
___________________
Definition of Strategic Management

To get an understanding of what goes on in strategic management,
it is useful to begin with definitions of strategic management.
The concepts in strategic management have been developed by a
number of authors like Alfred Chandler, Kenneth Andrews, Igor
Ansoff, William Glueck, Henry Mintzberg, Michael E. Porter, Peter
Drucker and a host of others. There are, therefore, several definitions
of strategic management. Some of the important definitions are:
“Strategic management is concerned with the determination of the
basic long-term goals and the objectives of an enterprise and the
adoption of courses of action and allocation of resources necessary
for carrying out these goals”. —Alfred Chandler, 1962
“Strategic management is a stream of decisions and actions which
lead to the development of an effective strategy or strategies to help
achieve corporate objectives”. —Glueck and Jauch, 1984
“Strategic management is a process of formulating, implementing
and evaluating cross-functional decisions that enable an organization
to achieve its objective”. —Fed R David, 1997
“Strategic management is the set of decisions and actions resulting
in the formulation and implementation of plans designed to achieve
a company’s objectives.” —Pearce and Robinson, 1988
“Strategic management includes understanding the strategic position
of an organization, making strategic choices for the future and
turning strategy into action.” —Johnson and Scholes, 2002
18
“Strategic management consists of the analysis, decisions, and actions
Notes
organization undertakes in order to create and sustain competitive
advantages.” —Dess, Lumpkin & Taylor, 2005
___________________
We observe from the above definitions that different authors have
___________________
defined strategic management in different ways. Note that the
___________________ definition of Chandler that has been quoted above is from the early
1960s, the period when strategic management was being recognized
___________________
as a separate discipline. This definition consists of three basic
___________________ elements:
___________________ • Determination of long-term goals.
___________________ • Adoption of courses of action.
___________________ • Allocation of resources to achieve those goals.
___________________ Though, this definition is simple, it does not consist of all the
elements and does not capture the essence of strategic management.
___________________
The definitions of Fred R. David, Pearce and Robinson, Johnson
and Scholes and Dell, Lumpkin and Taylor are some of the
definitions of recent origin. Taken together, these definitions capture
three main elements that go to the heart of strategic management.
The three on-going processes are strategic analysis, strategic
formulation and strategic implementation. These three components
parallel the processes of analysis, decisions and actions. That is,
strategic management is basically concerned with:
• Analysis of strategic goals (vision, mission and objectives) along
with the analysis of the external and internal environment of
the organization.
• Decisions about two basic questions:
❖ What businesses should we compete in?
❖ How should we compete in those businesses to implement
strategies?
• Actions to implement strategies. This requires leaders to
allocate the necessary resources and to design the organization
to bring the intended strategies to reality. This also involves
evaluation and control to ensure that the strategies are
effectively implemented.
The real strategic challenge to managers is to decide on strategies
that provide competitive advantage which can be sustained over
time. This is the essence of strategic management, and Dess,
Lumpkin and Taylor have rightly captured this element in their
definition.
19
Nature of Strategic Management Notes
Strategic management can be defined as the art and science of
___________________
formulating, implementing and evaluating, cross-functional decisions
that enable an organization to achieve its objectives. Strategic ___________________
management is different in nature from other aspects of
management. An individual manager is most often required to deal ___________________
with problems of operational nature. He generally focuses on day- ___________________

to-day problems such as the efficient production of goods, the
management of a sales force, the monitoring of financial performance ___________________
or the design of some new system that will improve the level of ___________________
customer service.
___________________
These are all very important tasks. But they are essentially
concerned with effectively managing resources already deployed, ___________________
within the context of an existing strategy. In other words, operational
___________________
control is what managers are involved in most of their time. It is
vital to the effective implementation of strategy, but it is not the ___________________
same as strategic management.
Strategic management involves elements geared toward a firm’s
long-term survival and achievement of management goals. The
components of the content of a strategy making process include a
desirable future, resource allocation, management of the firm-
environment and a competitive business ethics. However, some
conflicts may result in defining the content of strategy such as
differences in interaction patterns among associates, inadequacy of
available resources and conflicts between the firm’s objectives and
its environment.
Check Your Progress

Fill in the blanks:
1. ................ requires leaders to allocate the necessary resources and to
design the organization to bring the intended strategies to reality.
2. The real strategic challenge to managers is to decide on strategies that
provide ................... , which can be sustained over time.
Levels at Which Strategy Operates

Strategies surface at different tiers in the organization hierarchy
depending on the architecture of the organization. Business strategy
can be formulated and implemented at three different levels:
• Corporate level
• Business unit level
• Functional or departmental level
20
The three levels are shown in Figure 2.1.
Notes
___________________ Corporate or Grand Strategy

• Vision
___________________ • Corporate goals
• Philosophy and culture
___________________
Business Unit Strategy
___________________
• Mission
• Business goals
___________________ • Competencies
Functional Strategies
___________________
___________________
Information Research and
Manufacturing
Systems Development
___________________
___________________ Finance Marketing Human Resources
___________________
Figure 2.1: Structure of Strategies
Corporate Level or Grand Strategy

Corporate strategy is the highest, in the sense that it is the broadest,
applying to all parts of the organization. The corporate level
strategies or Grand strategies are the general plan by which the
organization intends to achieve its purpose and long-term objectives.
Grand strategies are concerned with the type of business the
organization is in, it overall competitive position and how the
resources of the organization have to be deployed. They set the
overall direction the organization will follow.
At the corporate level, the firm faces several strategic questions:
What businesses should we compete in, given our strengths and
weakness? Which new product markets should we enter? Which
should we exit? This is the “domain choice” question. It delineates
the product-market domain of the firm and describes the firm’s
scope of operations.
Business Unit Level or Competitive Strategy

Many companies are composed of a number of Strategic Business
Units (SBUs). An SBU is an operating unit that groups a distinct
set of products or services. These products or services are sold to a
uniform set of customers, facing a well-defined set of competitors.
It is this external (market) dimension of a business that identifies
an SBU. At the business unit level, the SBU should have a set of
strategies that allow it to align and coordinate it activities with
other operating units on strategic issues.
21
In addition, business unit level or competitive strategy is also about
Notes
developing and sustaining a competitive advantage for the products
and services that are produced. Developing a competitive strategy
___________________
is developing a broad framework for the business:
___________________
• How are we going to compete?
___________________
• What are our objectives?
___________________
• What policies will be needed to carry out our objectives?
___________________
The competitive strategy is a combination of ‘ends’ for which an
organization is striving and, means by which it is seeking to get ___________________
there. Competitive advantage is created when resources and
capabilities owned exclusively by the organization can generate ___________________
unique abilities or core competencies in the business. Therefore, in ___________________
determining functional Strategy the management has to identify
business unit’s core competencies and ensure that competencies are ___________________
continually strengthened. It must manage competencies so that
___________________
competitive advantage is preserved. It must meet three tests:
• Customer value
• Competitor unique
• Extendibility
The advantage that results from identifying and using core
competencies can be sustained due to the lack of substitution and
imitation capacities by the organization’s competitors. As the core
competencies are unique, the benefits derived from these advantages
are retained inside the organization: they are not appropriated by
others.
Functional-level Strategy
The approach a functional area takes to achieve corporate and
business unit objectives by maximizing resource productivity in its
different operating divisions and departments is the functional level
strategy. The strategic issues at the functional level are related to
functional business processes and value chain. Functional-level
strategies in R&D, operations, manufacturing, marketing, finance
and human resources involve the development and coordination of
resources through which business unit level strategies can be
executed effectively and efficiently.
The functional strategy is dictated by the business unit’s strategy.
For example, a business unit that tries to differentiate its products
to gain competitive advantage will require functional strategies in
manufacturing that emphasize on quality, quality assurance
processes; a human resource functional strategy that emphasizes
the hiring and training of a highly skilled workforce; and a marketing
22
functional strategy that emphasizes distribution channel “pull” using
Notes
advertising to increase consumer demand over “push” using
promotional allowances to retailers. If a business unit were to follow
___________________
a strategy of competing on cost, a different set of functional strategies
___________________ would be needed to support the business strategy.
___________________ Therefore, at the highest level, strategic intent and corporate goals
are developed. These strategies form the basis of the strategies at
___________________
the business unit level. Functional units are involved in translating
___________________ the higher-level strategies into discrete action plans that each
department or division must accomplish for the strategies to succeed.
___________________
At each stage, there is a reverse flow of information on customer
___________________ feedback, market, resources and capabilities etc. on which the higher-
level strategies can be based in the future.
___________________
___________________ Check Your Progress

Fill in the blanks:
___________________
1. ................... are the general plan by which the organization intends
to achieve its purpose and long- term objectives.
2. The strategic issues at the functional level are related to ............... .
Need for Strategies and Strategic Management

Need for Strategy
Those in favour of setting strategies argue that strategies are needed
to give companies direction. Without strategies, incorporating
objectives, companies would be adrift. If companies do not decide
where they want to go, any direction and any activity is fine. People
in companies would not know what they were working towards and,
therefore, would not be able to judge what constitutes effective
managerial behaviour. However, those not in favour argue that
direction-setting strategies can also block out peripheral vision,
keeping companies sharply, yet myopically, focused on one course
of action. Thus, strategies may limit the company’s ability to open
to new opportunities and threats as these unfold and to deviate
from a set course as the company interacts with its environment
and learns.
Strategists hit back arguing that early commitment to a course of
action is highly beneficial. By setting objectives and drawing up a
strategy to accomplish these, companies can invest resources, train
people, build up production capacity and take a dear position within
their environment. Strategies allow companies to mobilize
themselves and to dare to take actions that are difficult to reverse
and have a long payback period. Commitment has a flip side,
inflexibility, especially when mechanisms to change course midway
are not in place.
23
The absence of strategies does give the company flexibility to easily
Notes
change course. Strategic plan also has the benefit of coordinating
all strategic initiatives within a company into a single cohesive
___________________
pattern. A company-wide master strategy can ensure that differences
of opinion are ironed out and one consistent course of action is ___________________
followed throughout the entire company, avoiding overlapping,
___________________
conflicting and contradictory behaviour. But the flip side is that
developing a master strategy may lead to the squashing of initiative, ___________________
either purposely or inadvertently. Strategists also point out that
___________________
strategies also facilitate optimal resource allocation.
___________________
Drawing up a strategy disciplines strategists to explicitly consider
all available information and consciously evaluate all available ___________________
options before committing to a course of action. Documented
strategies also permit corporate-level strategists to compare the ___________________
courses of action proposed by their various business units and to ___________________
allocate scarce resources to the most promising initiatives. However,
strategies sometimes place a disproportionate emphasis on thinking ___________________
over action. Enormous amount of time and effort are put into
analyses, paperwork, meetings and presentations, trying to arrive
at the optimal strategy. Often the result is that producing a strategy
becomes an end in itself. Action is seen merely as operationalising
the strategy, instead of as the primary input into further strategy
formation. The absence of explicit strategies, therefore, gives
strategists the opportunity to merge thinking and acting, and to
form strategies through learning. Last, but not least, strategies are
a means for programming all organizational activities in advance.
Having detailed strategies allows companies to be run with the
clockwork precision, reliability and efficiency of a machine. Activities
that might otherwise be plagued by poor company, inconsistencies,
redundant routines, random behaviour, helter-skelter firefighting
and chaos, can be programmed and controlled if strategies are drawn
up. However, using strategies to pre-program all activities within
a company grossly overestimates the extent to which a company
can be run like a machine. For adaptation, experimentation and
learning to take place and for new ideas to emerge from within the
company, a certain measure of chaos might actually be beneficial.
The absence of detailed top-down strategies encourages employees
to be responsible, entrepreneurial and combine thinking and action.
In this way, new strategic initiatives are not organized and controlled
top-down but emerge spontaneously through bottom-up processes
of self-company.
What clearly comes out of these conflicting views is that strategies
are required but should not be walled ironclad into the one fixed
seat and not be changed, for that is the major objection against the
requirement of strategies. They should be adaptable as the
24
circumstances warrant and under the light of new developments as
Notes
they keep on happening in the dynamic and hyper competitive world
of business today.
___________________

___________________ State true or false:
1. Without strategies, incorporating objectives, companies would be adrift.
___________________
2. A company-wide master strategy can ensure that differences of opinion
___________________ are ironed out and one consistent course of action is followed throughout
the entire company.
___________________
___________________
Strategies and their Role in Strategic Management
___________________
The nature of Strategic Management is different from other aspects
___________________ of management as it demands attention to the “big picture” and a
rational assessment of the future options. Strategic Management
___________________ demands a clear analysis of the situation facing the organization,
which has to have:
• A strategic direction endorsed by the team and stakeholders.
• A clear business strategy and vision for the future.
• A mechanism for accountability.
• A framework for governance at the various levels that provide
the course of action even when there are competing priorities
and different goals.
• The ability to exploit opportunities and respond to external
change by taking ongoing strategic decisions.
• A coherent framework for managing risk – whether it is
balancing the risks and rewards of a business direction, coping
with the uncertainties of project risk or ensuring business
continuity.
The complexity and iterative nature of the process has been shown
in the Strategic Management model in Figure 2.2. The decisions
taken have serious impacts in all or some of areas of the working
of the organization. The firm has to continuously interact with the
market, the business and technological environments and keep re-
evaluating its options in terms of the prevalent or changing
conditions.
25
Notes
Central Focus of Corporate Strategy
The Firm ___________________
Corporate Internal Scrutiny Corporate Environmental Scan ___________________

• Mission of the Firm • Economic outlook
• Business Segmentation • Analysis of critical geographical
___________________
• Horizontal Strategy locations and industrial sectors
• Vertical Integration • Technological human resources,
• Corporate Philosophy political, social and legal trends ___________________
Definition of Strength & Weaknesses Identification of Opportunities
and Threats ___________________
___________________
Strategic Posture of the Firm
• Strategic Thrusts ___________________
• Corporate Performance Objectives
___________________
Resource Allocation ___________________
Portfolio Management
___________________
Managerial Infrastructure
Organizational Structure and
Administrative Systems
Human Resources
Management of Key Personnel
Figure 2.2: Role of Strategies in Strategic Management
Environmental Scan at the Corporate Level

This refers to assessing the external forces impacting the firm. The
environmental scan formalizes the process of understanding the
external forces that are impacting the firm. There are three different
types of analyses to support this process—economic overview,
primary industrial sectors, and basic external factors.
The Mission of the Firm

Choosing competitive domains and the way to compete. The mission
of a firm is a statement of the current and future expected product
scope, market scope, and geographic scope. It also identifies the
unique competencies the firm has developed to achieve a long-term
sustainable advantage.
Business Segmentation
Selecting planning and organizational focuses. A business unit can
be defined as an operating unit or a planning focus that sells a
distinct set of products or services to an identified group of customers
with a well-defined set of competitors. The business unit is the
26
level of analysis where most of the strategic planning effort is
Notes
centred.
___________________
Horizontal Strategy
___________________
Pursuing synergistic linkages across business units. Horizontal
___________________ strategy is a coordinated goals and policies across distinct but
interrelated business units. Defining horizontal strategy requires
___________________ searching for and exploiting potential interrelationships among the
___________________
various business units of the firm.
___________________
Horizontal strategy is required at the group, sector or corporate
levels of a diversified firm. Through horizontal strategy, a diversified
___________________ firm enhances the competitive advantage of its business units.
___________________ Vertical Integration
___________________ Vertical integration involves the following set of decisions:
___________________ • Defining the boundaries, a firm should establish the firm’s
generic activities on the value chain (the question of make
versus buy or integrate versus contract).
• Establishing the relationship of the firm with its constituencies
outside its boundaries, primarily its suppliers, distributors, and
customers.
• Identifying the circumstances under which these boundaries
and relationships should be changed to enhance and protect
the firm’s competitive advantage.
Corporate Philosophy
Defining the relationship between the firm and its stakeholders.
Corporate philosophy is a rather permanent statement articulated
by the Chief Executive of the firm, addressing the following issues:
• The relationship between the firm and its primary stakeholders
– employees, customers, shareholders, suppliers, and the
communities in which the firm operates.
• A broad statement of objectives of the firm’s expected
performance primarily expressed in terms of growth and
profitability.
Strategic Posture of the Firm

Identifying strategic thrusts and planning challenges and
establishing corporate performance objectives in corporate, business
and functional key result areas.
Strategic posture is a pragmatic and concrete set of guidelines which
serves as immediate challenges for the development of strategic
proposal at the business and major functional levels of the firm.
27
It is primarily expressed by:
Notes
• Corporate Strategic thrusts,
___________________
• Corporate, business and functional planning challenges, and
___________________
• Corporate performance objectives.
___________________
Portfolio Management
___________________
Assigning priorities for resource allocation and identifying
opportunities for diversification and divestment. ___________________
___________________
Organizational and Managerial Infrastructure
___________________
Adjusting the organizational structures, managerial processes and
systems, in consonance with the culture of the firm, to facilitate the ___________________
implementation of strategy.
___________________
Human Resource Management of Key Personnel
___________________
Selection, development, appraisal reward and promotion.
Check Your Progress

Fill in the blanks:
1. The nature of Strategic Management is different from other aspects of
management as it demands attention to the ................... .
2. ................ is an operating unit or a planning focus that sells a distinct
set of products or services to an identified group of customers with a
well-defined set of competitors.
Dimensions of Strategic Management

The characteristics of strategic management are as follows:
• Top management involvement: Strategic management
relates to several areas of a firm’s operations. So, it requires
top management’s involvement. Generally, only the top
management has the perspective needed to understand the
broad implications of its decisions and the power to authorize
the necessary resource allocations.
• Requirement of large amounts of resources: Strategic
management requires commitment of the firm to actions over
an extended period. So, they require substantial resources, such
as, physical assets, money, manpower etc. Example: Decisions
to expand geographically would have significant financial
implications in terms of the need to build and support a new
customer base.
28
• Affect the firm’s long-term prosperity: Once a firm has
Notes
committed itself to a particular strategy, its image and
competitive advantage are tied to that strategy; its prosperity
___________________
is dependent upon such a strategy for a long time.
___________________
• Future-oriented: Strategic management encompasses
___________________ forecasts, what is anticipated by the managers. In such
decisions, emphasis is placed on the development of projections
___________________
that will enable the firm to select the most promising strategic
___________________ options. In the turbulent environment, a firm will succeed only
if it takes a proactive stance towards change.
___________________
• Multi-functional or multi-business consequences: Strategic
___________________ management has complex implications for most areas of the
firm. They impact various strategic business units especially
___________________
in areas relating to customer-mix, competitive focus,
___________________ organizational structure etc. All these areas will be affected by
allocations or reallocations of responsibilities and resources
___________________
that result from these decisions.
• Non-self-generative decisions: While strategic management
may involve making decisions relatively infrequently, the
organization must have the preparedness to make strategic
decisions at any point of time. That is why Ansoff calls them
“non-self-generative decisions.”
Check Your Progress

State true or false:
1. Strategic management relates to several areas of a firm’s operations.
2. Strategic management has complex implications for most areas of the
firm.
Strategic Decision-making
In the present business environment of rapid changes, heightened
risk and uncertainty, developing effective strategies is crucial for
achieving the organization’s objectives. This is not an easy task as
it requires good decision-making skills. Good decision-making is
crucial to good management and successful strategic management.
The excellence of an organization can be judged by its success in
putting diverse components together. Excellent organizations develop
effective strategies that are sustainable and at the same time:
• Permit it to deliver greater value, or
• Create a similar value at a lower cost, or
• Deliver greater value at a lower cost, for the customer.
29
Strategic Decision-making Process
Notes
For the past few decades, researchers have attempted to model the
strategic decision process. There is a large amount of consensus on ___________________
the major elements of the decision-making process. There are three ___________________
major phases with subphases within each as described below:
___________________
• The Identification Phase
___________________
❖ Decision Recognition: Opportunities, problems, and crises
are recognized and evoke decisional activity. ___________________
❖ Diagnosis: Information relevant to opportunities, problems, ___________________

and crises is collected and problems are more clearly
identified. ___________________
• The Development Phase ___________________
❖ Search: Organizational decision makers go through a number ___________________

of activities to generate alternative solutions to problems.
___________________
❖ Design: Readymade solutions that have been identified are
modified to fit the particular problem or new solutions are
designed.
• The Selection Phase
❖ Screen: When the search identifies more alternatives than
can evaluate in detail, alternatives are scanned and the
most obviously infeasible are eliminated.
❖ Evaluation-Choice: An alternative is chosen either through
a process of analysis and judgment or a process of bargaining
among decisionmakers.
❖ Authorization: When the individual making the decision does
not have the authority to commit the organization to a course
of action, the decision must move up the organizational
hierarchy until it reaches a level at which the necessary
authority resides.
• At any of the stages of decision-making if new information is
available, decision makers may return to earlier phases as
necessary.
There are five basic types of processes of decision making;
❖ Command mode: In this mode, strategy is driven by the
organization’s leader or by a small top management team,
❖ Symbolic mode: In this mode, strategy is driven by the
organization’s mission and vision of the future,
❖ Rational mode: Strategy is driven by formal structure and
planning systems,
30
❖ Transactive mode: Strategy formulation is driven by internal
Notes
processes and mutual adjustment, and
___________________ ❖ Generative mode: Strategy is most strongly influenced by
the initiative of organizational actors.
___________________
The process of decision-making starts at the vision for the
___________________
organization and then works backwards by focusing on how the
___________________ business will be able to reach this vision. In doing so, it improves
the ability of the organization to make its business vision a reality.
___________________
‘Vision’ is a long-term perspective of what is the destination of the
___________________
organization. Vision is what keeps the organization moving forward.
___________________ Vision is the motivator in an organization. It needs to be meaningful
with a long-term perspective so that it can motivate people even
___________________ when the organization is facing discouraging odds.
___________________ These are times of change and paradigm shift, where management
___________________ no longer has the luxury of resting upon past successes or ways of
doing business. The future is unknown and the world is continually
changing, all business plans and strategies eventually become
obsolete and the assumptions on which they are based must be re-
examined and updated. Therefore, it is not surprising that a focused
approach to strategic decision making has become a critical
requirement of the business process and is a necessary requirement
for the modern organization.
Phenomena Draft plan of Implementation by

actions line managers
Grouping Concrete form to

conclusions
Emergence of
Decision-making Process
Abstraction
conclusion
Validation of
Determination rebuttal of
of approach hypothetical
solutions by
indepth analysis
Provisional
formulation of
hypothetical
solution
Figure 2.3: Strategic Decision-making Process

31
In strategic decision-making, we first seek a clear understanding of
Notes
the particular character of each element of a situation. Then we
make the fullest possible use of the basic types of processes used by
___________________
the organization for decision making to restructure the elements in
the most advantageous way. For example, if the processes are based ___________________
on a command mode; the organization’s leader or the small top
___________________
management team will sit together to restructure the elements.
___________________
Phenomena and events in the real world do not always fit a linear
model. Hence the most reliable means to analyze a situation is to ___________________
break it up into its constituent parts and reassemble the constituent
___________________
parts in the desired pattern. Though the decision-making process
has been shown as a step by step methodology, very often the decision ___________________
is based on the ultimate nonlinear thinking tool, the human brain.
Strategic decision-making, therefore, often contrasts sharply with ___________________
the conventional mechanical systems approach based on linear ___________________
thinking. However, it should reach its conclusions with a real
breakdown or analysis. Strategic decision-making process is shown ___________________
schematically in Figure 2.3.
Strategic decisions demand an integrated approach to the
management of the organization. Unlike functional problems, there
is no one area of expertise, or one perspective that can define or
resolve the decision making. The management has to cut across
functional and operational boundaries to make strategic decisions.
Very often, there is a conflict of interest, and perhaps priorities,
between management involved in different functional or operational
areas.
Strategic decisions may also involve major changes in organization
as well as in relation with the task environment. These are difficult
decisions, both in terms of planning as well as in implementation.
Especially so, as most ‘going businesses’ develop their own style of
operating, which is not necessarily in line with future strategy.
Therefore, strategic decisions may require major changes including
a change in the operational style of the organization.
Check Your Progress

1. There is a large amount of consensus on the major elements of the
decision-making process.
2. ‘Vision’ is a short-term perspective of what is the destination of the
organization.
Industry Analysis
Each business operates among a group of firms that produce
competing products or services known as an “industry”. An industry
32
is thus a group of firms producing similar products or services. By
Notes
similar products we mean products that customers perceive to be
substitutes for one another.
___________________
Example: Firms that produce and sell textiles such as Reliance
___________________
Textiles, Raymond, S. Kumars, etc. belong to the textile industry.
___________________
Similarly, firms that produce PCs, such as Apple, Compaq, AT&T,
___________________ IBM, etc. belong to the microcomputer industry.
___________________ Although there are usually some differences among competitors,
each industry has its own set of “rules of combat” governing such
___________________
issues as product quality, pricing and distribution. This is especially
___________________ true in industries that contain a large number of firms offering
standardized products and services. As such, it is important for
___________________
strategic managers to understand the structure of the industry in
___________________ which their firms operate before deciding how to compete
successfully. Industry analysis is therefore a critical step in the
___________________ strategic analysis of a firm.
In a perfect world, each firm would operate in one clearly defined
industry. However, many firms compete in multiple industries, and
strategic managers in similar firms often differ in their
conceptualization of the industry environment. In addition, the
advent of Internet has completely changed the way business is done.
As a result, the process of industry definition and analysis can be
specially challenging when internet competition is considered.
The basic purpose of industry analysis is to assess the strengths
and weaknesses of a firm relative to its competitors in the industry.
It tries to highlight the structural realities of particular industry
and the extent of competition within that industry. Through industry
analysis, an organisation can find whether the chosen field is
attractive or not and assess its own position within the industry.
Framework for Industry Analysis

Industry analysis covers two important components:
• Industry environment
• Competitive environment
The following are the aspects to be covered in the above analysis:
Industry Analysis
• Industry features
• Industry boundaries
• Industry environment
33
• Industry structure
Notes
• Industry performance
• Industry practices ___________________
• Industry attractiveness ___________________
• Industry prospects for future ___________________
Competitive Analysis ___________________
Competitive analysis basically addresses two questions: ___________________
• Which firms are our competitors? ___________________
• What factors shape competition in industry? ___________________
Industry Analysis ___________________
Industry Features: Industries differ significantly. So, analyzing a ___________________

company’s industry begins with identifying the industry’s dominant
___________________
economic features and forming a picture of the industry landscape.
An industry’s dominant economic features include such factors as:
• Overall size
• Market growth rate
• Geographic boundaries of the market
• Number and sizes of competitors
• Pace of technological change
• Product innovations etc.
Getting a hand on industry features promotes understanding of the
kinds of strategic moves that managers should employ. For example,
in industries characterized by one product advance after another, a
strategy of continuous product innovation becomes a condition for
survival.
Example: Video games, computers and pharmaceuticals.
Industry Boundaries: All the firms in the industry are not similar
to one another. Firms within the same industry could differ across
various parameters such as:
• Breadth of market
• Product/service quality
• Geographic distribution
• Level of vertical integration
• Profit motives
Industry Environment: Based on their environment, industries
are basically of two types:
34
• Fragmented Industries: A fragmented industry consists of a
Notes
large number of small- or medium-sized companies, none of
which is in a position to determine industry price. Many
___________________
fragmented industries are characterized by low entry barriers
___________________ and commodity type products that are hard to differentiate.
___________________ • Consolidated Industries: A consolidated industry is
dominated by a small number of large companies (an oligopoly)
___________________ or in extreme cases, by just one company (a monopoly). These
___________________ companies are in a position to determine industry prices. In
consolidated industries, one company’s competitive actions or
___________________ moves directly affect the market share of its rivals, and thus
their profitability. When one company cuts prices, the
___________________
competitors also cut prices. Rivalry increases as companies
___________________ attempt to undercut each other’s prices or offer customers more
value in their products, pushing industry profits down in the
___________________
process. The consequence is a dangerous competitive spiral.
___________________
According to Michael Porter, industries can be categorized into:
• Emerging industries: Are those in the introductory and
growth phases of their life cycle.
• Mature industries: Are those who reached the maturity stage
of their life cycle.
• Declining industries: Are those in the transition stage from
maturity to decline.
• Global industries: Are those with manufacturing bases and
marketing operations in several countries.
Industry Structure: Defining an industry’s boundaries is
incomplete without an understanding of its structural attributes.
Structural attributes are the enduring characteristics that give an
industry its distinctive character. Industry structure consists of four
elements:
• Concentration: It means the extent to which industry sales
are dominated by only a few firms. In a highly concentrated
industry (i.e., an industry whose sales are dominated by a
handful of firms); the intensity of competition declines over
time. High concentration serves as a barrier to entry into an
industry, because it enables the firms to hold large market
shares to achieve significant economies of scale.
• Economies of scale: This is an important determinant of
competition in an industry. Firms that enjoy economies of scale
can charge lower prices than their competitors, because of their
savings in per unit cost of production. They also can create
barriers to entry by reducing their prices temporarily or
permanently to deter new firms from entering the industry.
35
• Product differentiation: Real perceived differentiation often
intensifies competition among existing firms. Notes
• Barriers to entry: Barriers to entry are the obstacles that a ___________________

firm must overcome to enter an industry, and the competition
from new entrants depends mostly on entry barriers. ___________________
Industry attractiveness: Industry attractiveness is dependent on ___________________

the following factors: ___________________
• Profit potential ___________________
• Growth prospects
___________________
• Competition
___________________
• Industry barriers etc.
___________________
As a general proposition, if an industry’s profit prospects are above
average, the industry can be considered attractive; if its profit ___________________
prospects are below average, it is considered unattractive. If the
___________________
industry and competitive situation is assessed as attractive, firms
employ strategies to expand sales and invest in additional facilities
as needed to strengthen their long-term competitive position in
business. If the industry is judged as unattractive, firms may choose
to invest cautiously, look for ways to protect their profitability.
Strong companies may consider diversification into more attractive
businesses. Weak companies may consider merging with a rival to
bolster market share and profitability.
Industry performance: This requires an examination of data
relating to:
• Production
• Sales
• Profitability
• Technological advancements etc.
Industry practices: Industry practices refer to what a majority of
players in the industry do with respect to products, pricing,
promotion, distribution etc. This aspect involves issues relating to:
• Product policy
• Pricing policy
• Promotion policy
• Distribution policy
• R&D policy
• Competitive tactics.
Industry’s future prospects: The future outlook of an industry
can be anticipated based on such factors as:
36
• Innovation in products and services
Notes
• Trends in consumer preferences
___________________ • Emerging changes in regulatory mechanisms
___________________ • Product life cycle of the industry
___________________
• Rate of growth etc.

___________________ Fill in the blanks:
1. Each business operates among a group of firms that produce competing
___________________ products or services known as an .................. .
___________________ 2. The basic purpose of industry analysis is to assess the strengths and
weaknesses of a firm relative to its .............. in the industry.
___________________
___________________ Summary
___________________ Strategic or institutional management is the conduct of drafting,
implementing and evaluating cross-functional decisions that will
enable an organization to achieve its long-term objectives.
It is a level of managerial activity under setting goals and over
tactics.
It is the process of specifying the organization’s mission, vision and
objectives, developing policies and plans, often in terms of projects
and programs, which are designed to achieve these objectives and
then allocating resources to implement the policies, and plans,
projects and programs.
Strategic management provides overall direction to the enterprise
and is closely related to the field of Organization Studies.
Although a sense of direction is important, it can also stifle creativity,
especially if it is rigidly enforced. In an uncertain and ambiguous
world, fluidity can be more important than a finely tuned strategic
compass.

1. Examine the significance of strategic management.
2. “Strategic management process is the way in which strategists
determine objectives and strategic decisions”. Discuss.
3. Bring out the distinguishing features of strategic management.
4. Can the process of strategic management really be depicted in
a given model or is it a prompt and dynamic process? Give
reasons.
5. What is strategy? What are the differences between strategy
and tactics?
6. ‘Strategy can be formulated and implemented at three different
levels in business organizations.’ What are these levels and
why are they treated as such?
37
Unit 3 Notes
Basic Models of Strategic Management ___________________
___________________
___________________

After completion of this unit, the students will be able to explain: ___________________
\ Henry Mintzberg Model of Strategic Management
___________________
\ Ansoff Model of Strategic Management
___________________
\ Michael Porter Model of Strategic Management
___________________
___________________
Introduction
___________________
The term ‘strategy’ proliferates in discussions of business. Scholars
and consultants have provided myriad models and frameworks for
analysing strategic choice. Today, there are a variety of firms and
organizations having different nature and environment of work but
everyone has the same objective that is to raise the sale of the firm.
For doing so, it needs to tailor its strategy of working in such a way
that it can get its target or objective in the specified time with the
minimum possible wastage of resources. This unit discusses a few
such strategic models designed by various eminent management
professionals in their long course of experience and expertise.
Henry Mintzberg Model of Strategic Management

The word “strategy” has been used implicitly in different ways even
if it has traditionally been defined in only one. Explicit recognition
of multiple definitions can help people to manoeuvre through this
difficult field. Mintzberg provides five definitions of strategy:
• Plan
• Ploy
• Pattern
• Position
• Perspective
Plan
Strategy is a plan – some sort of consciously intended course of
action, a guideline (or set of guidelines) to deal with a situation. By
38
this definition, strategies have two essential characteristics: they
Notes
are made in advance of the actions to which they apply, and they
are developed consciously and purposefully.
___________________
___________________ Ploy
___________________ As plan, a strategy can be a ploy too; just a specific manoeuvre

intended to outwit an opponent or competitor.
___________________
Pattern
___________________
If strategies can be intended (whether as general plans or specific
___________________
ploys) they can be realised. In other words, defining strategy as
___________________ plan is not sufficient; we also need a definition that encompasses
the resulting behaviour: Strategy is a pattern, specifically, a pattern
___________________ in a stream of actions. Strategy is consistency in behaviour, whether
___________________ or not intended. The definitions of strategy as plan and pattern can
be quite independent of one another – plans may go unrealised,
___________________ while patterns may appear without preconception.
Plans are intended strategy, whereas patterns are realised strategy.
From this, deliberate strategies and pattern strategies can be
distinguished. Deliberate strategies – where intentions that existed
previously were realised and emergent strategies – where patterns
developed in the absence of intentions, or despite them.
Position
Strategy is a position, specifically a means of locating an organisation
in an “environment”. By this definition, strategy becomes the
mediating force, or “match”, between organisation and environment,
that is, between the internal and the external context.
Perspective
Strategy is a perspective – its content consisting not just of a chosen
position, but of an ingrained way of perceiving the world. Strategy
in this respect is to the organisation what personality is to the
individual. What is of key importance is that strategy is a perspective
shared by members of an organisation, through their intentions
and/or by their actions. In effect, when we talk of strategy in this
context, we are entering the realm of the collective mind –
individuals united by common thinking and/or behaviour.
Mintzberg Views on Strategic Planning

Mintzberg says “Strategic planning is not strategic thinking.
Strategic planning often spoils strategic thinking, causing managers
to confuse real vision with the manipulation of numbers. This
confusion lies at the heart of the issue: the most successful strategies
are visions, not plans.”
Unit 3: Basic Models of Strategic Management
39
Strategic planning, as it has been practiced, has really been strategic
Notes
programming, the articulation and elaboration of strategies or visions
that already exist. When companies understand the difference
___________________
between planning and strategic thinking, they can get back to what
the strategy-making process should be; capturing what the manager ___________________
learns from all sources and then synthesising that learning into a
___________________
vision of the direction that the business should pursue.
___________________
Planners should make efforts around the strategy-making process
rather than inside it. They should supply the formal analyses or ___________________
hard data that is needed in strategic thinking, broadening the
___________________
consideration of issues rather than trying to discover the one right
answer. They should act as catalysts who support strategy-making ___________________
by encouraging managers to think strategically.
___________________
Planning is about analysis, breaking down a goal or set of intentions
into steps, formalising those steps so that they can be implemented ___________________
almost automatically and articulating the anticipated consequences ___________________
or results of each step. Strategic thinking, on the other hand, is
about synthesis. It comprises intuition and creativity. The result of
strategic thinking is an integrated perspective of the enterprise, a
not-too-precisely articulated vision of direction. Such strategies often
can not be developed on schedule and immaculately conceived. They
must be free to appear at any time and at any place in the
organisation, typically through messy processes of informal learning
that must necessarily be carried out by people at various levels who
are deeply involved with the specific issues at hand. Formal planning
has always been dependent on the preservation and rearrangement
of established categories. But real strategic change requires not
merely rearranging the established categories but inventing new
ones. Strategy needs to function beyond the boxes, to encourage the
informal learning that produces new perspectives and new
combinations.
Check Your Progress

Fill in the blanks:
1. Strategy is a position specifically a means of locating an organisation
in an .................... .
2. Strategy is a ...................... some sort of consciously intended course
of action, a guideline to deal with a situation.
The grand fallacy of strategic planning is the belief that due to the
fact that analysis encompasses synthesis, strategic planning is
strategy making. This fallacy itself rests on three fallacious
assumptions: that prediction is possible; that strategists can be
detached from the subjects of their strategies; and that the strategy-
making process can be formalised. There are two types of planner,
40
the analytical thinker and the creative thinker. Many organisations
Notes
need both types and it is top management’s job to ensure it has
them in appropriate proportions.
___________________
___________________ Ansoff Model of Strategic Management

___________________ Until the publication of corporate strategy, companies had little
guidance on how to plan for, or make decisions about, the future.
___________________
Traditional methods of planning were based on an extended
___________________ budgeting system, which used the annual budget, projecting it a
few years into the future. By its nature, this system paid little or
___________________
no attention to strategic issues.
___________________
With the advent of greater competition, higher interest in
___________________ acquisitions, mergers and diversification, and greater turbulence in
the business environment, however, strategic issues could no longer
___________________ be ignored. Ansoff felt that, in developing strategy, it was essential
___________________
to systematically anticipate future environmental challenges to an
organisation and draw up appropriate strategic plans for responding
to these challenges. In corporate strategy, Igor Ansoff explored these
issues, and built up a systematic approach to strategy formulation
and strategic decision-making through a framework of theories,
techniques and models.
Strategy Decisions
Ansoff identified four standard types of organisational decisions as
related to strategy, policy, programmes, and standard operating
procedures. The last three of these, he argued, are designed to
resolve recurring problems or issues and, once formulated, do not
require an original decision each time. This means that the decision
process can easily be delegated. Strategy decisions are different,
however, because they always apply to new situations and so need
to be made anew every time.
Ansoff developed a new classification of decision-making, partially
based on Alfred Chandler’s work, Strategy and Structure. This
distinguished decisions as either strategic (focused on the areas of
products and markets); administrative (organisational and resource
allocating) or operating (budgeting and directly managing). Ansoff’s
decision classification became known as Strategy-Structure-Systems,
or the 3S model.
Components of Strategy
Ansoff argued that within a company’s activities there should be an
element of core capability, an idea later adopted and expanded by
Hamel and Prahalad. To establish a link between past and future
corporate activities (the first time such an approach was
undertaken), Ansoff identified four key strategy components:
41
• Product-market scope: A clear idea of what business or
Notes
products a company was responsible for (predating the
exhortations of Peters and Waterman to “stick to the knitting”)
___________________
• Growth vector: As explained in the section below on the Ansoff
___________________
matrix, this offers a way of exploring how growth may be
attempted. ___________________
• Competitive advantage: Those advantages an organisation ___________________

possesses that will enable it to compete effectively. A concept
later championed by Michael Porter. ___________________
• Synergy: Ansoff explained synergy as “2 + 2 = 5”, or how the ___________________

whole is greater than the mere sum of the parts, and it requires
___________________
an examination of how opportunities fit the core capabilities of
the organisation. ___________________
Ansoff Matrix ___________________
Variously known as the “product-mission matrix” or the “2 × 2 ___________________

growth vector component matrix”, the Ansoff Matrix remains a
popular tool for organisations that wish to understand the risk
component of various growth strategies, including product versus
market development and diversification.
The matrix was first published in a 1957 article called ‘Strategies
for diversification’ and the example below illustrates what such a
matrix may look like the matrix shown in Figure 3.1.
Existing Products New Products

Existing Markets
Market Product
Penetration Development
New Markets
Market
Development Diversification
Figure 3.1: Ansoff’s Matrix Model
The Ansoff Growth matrix is a tool that helps businesses decide

their product and market growth strategy. Ansoff’s product/market
growth matrix suggests that a business’ attempts to grow depend
on whether it markets new or existing products in new or existing
markets.
42
The output from the Ansoff product/market matrix is a series of
Notes
suggested growth strategies that set the direction for the business
strategy. These are described below:
___________________
___________________ Market penetration
___________________ Market penetration is the name given to a growth strategy where

the business focuses on selling existing products into existing
___________________ markets. Market penetration seeks to achieve four main objectives:
___________________ • Maintain or increase the market share of current products –
this can be achieved by a combination of competitive pricing
___________________
strategies, advertising, sales promotion and perhaps more
___________________ resources dedicated to personal selling.
___________________ • Secure dominance of growth markets.
___________________
• Restructure a mature market by driving out competitors; this
would require a much more aggressive promotional campaign,
___________________ supported by a pricing strategy designed to make the market
unattractive for competitors.
• Increase usage by existing customers – for example by
introducing loyalty schemes.
A market penetration marketing strategy is very much about
“business as usual”. The business is focusing on markets and
products it knows well. It is likely to have good information on
competitors and on customer needs. It is unlikely, therefore, that
this strategy will require much investment in new market research.
Market Development
Market development is the name given to a growth strategy where
the business seeks to sell its existing products into new markets.
There are many possible ways of approaching this strategy,
including:
• New geographical markets, for example, exporting the product
to a new country.
• New product dimensions or packaging, for example, new
distribution channels.
• Different pricing policies to attract different customers or create
new market segments.
Product Development
Product development is the name given to a growth strategy where
a business aims to introduce new products into existing markets.
This strategy may require the development of new competencies
and requires the business to develop modified products which can
appeal to existing markets.
43
Diversification
Notes
Diversification is the name given to the growth strategy where a
___________________
business markets new product/s in new markets. This is an
inherently more risk strategy because the business is moving into ___________________
markets in which it has little or no experience. For a business to ___________________
adopt a diversification strategy, therefore, it must have a clear idea
about what it expects to gain from the strategy and an honest ___________________
assessment of the risks. ___________________
Of the four strategies given in the matrix, market penetration ___________________

requires increasing existing product market share in existing
___________________
markets; market expansion requires the identification of new
customers for existing products; product expansion requires ___________________
developing new products for existing customers; and diversification ___________________

requires new products to be produced for new markets.
___________________
Check Your Progress

1. Ansoff identified two standard types of organisational decisions.
2. The matrix was first published in a 1967 article called Strategies for
diversification.
Michael Porter Model of Strategic Management

If the primary determinant of a firm’s profitability is the
attractiveness of the industry in which it operates, an important
secondary determinant is its position within that industry. Even
though an industry may have below-average profitability, a firm
that is optimally positioned can generate superior returns.
A firm positions itself by leveraging its strengths. Michael Porter

has argued that a firm’s strengths ultimately fall into one of two
headings: cost advantage and differentiation. By applying these
strengths in either a broad or narrow scope, three generic strategies
result cost leadership, differentiation and focus. These strategies
are applied at the business unit level. They are called generic
strategies because they are not firm or industry dependent. The
Table 3.1 illustrates Porter’s generic strategies:
44
Table 3.1: Porter’s Generic Strategies
Notes
Advantage
___________________ Target Scope
Low Cost Product Uniqueness
___________________
Broad (Industry Wide) Cost Leadership Differentiation
___________________ strategy Strategy
___________________ Narrow Focus Strategy Focus Strategy

(Market Segment) (low cost) (differentiation)
___________________
___________________ Cost Leadership Strategy

___________________
This generic strategy calls for being the low-cost producer in an
___________________ industry for a given level of quality. The firm sells its products
either at average industry prices to earn a profit higher than that
___________________ of rivals, or below the average industry prices to gain market share.
___________________ In the event of a price war, the firm can maintain some profitability
while the competition suffers losses. Even without a price war, as
the industry matures and prices decline, the firms that can produce
more cheaply will remain profitable for a longer period of time. The
cost leadership strategy usually targets a broad market.
Some of the ways that firms acquire cost advantages are by
improving process efficiencies, gaining unique access to a large source
of lower cost materials, making optimal outsourcing and vertical
integration decisions, or avoiding some costs altogether. If competing
firms are unable to lower their costs by a similar amount, the firm
may be able to sustain a competitive advantage based on cost
leadership.
Firms that succeed in cost leadership often have the following
internal strengths:
• Access to the capital required to make a significant investment
in production assets; this investment represents a barrier to
entry that many firms may not overcome.
• Skill in designing products for efficient manufacturing, for
example, having a small component count to shorten the
assembly process.
• High level of expertise in manufacturing process engineering.
• Efficient distribution channels.
Each generic strategy has its risks, including the low-cost strategy.
For example, other firms may be able to lower their costs as well.
As technology improves, the competition may be able to leapfrog
the production capabilities, thus eliminating the competitive
advantage. Additionally, several firms following a focus strategy
45
and targeting various narrow markets may be able to achieve an
Notes
even lower cost within their segments and as a group gain significant
market share. ___________________
Differentiation Strategy ___________________
A differentiation strategy calls for the development of a product or ___________________

service that offers unique attributes that are valued by customers
___________________
and that customers perceive to be better than or different from the
products of the competition. The value added by the uniqueness of ___________________
the product may allow the firm to charge a premium price for it.
___________________
The firm hopes that the higher price will more than cover the extra
costs incurred in offering the unique product. Because of the ___________________
product’s unique attributes, if suppliers increase their prices, the
___________________
firm may be able to pass along the costs to its customers who
cannot find substitute products easily. ___________________
Firms that succeed in a differentiation strategy often have the ___________________

following internal strengths:
• Access to leading scientific research.

• Highly skilled and creative product development team.
• Strong sales team with the ability to successfully communicate
the perceived strengths of the product.
• Corporate reputation for quality and innovation.
The risks associated with a differentiation strategy include imitation

by competitors and changes in customer tastes. Additionally, various
firms pursuing focus strategies may be able to achieve even greater
differentiation in their market segments.
Focus Strategy
The focus strategy concentrates on a narrow segment and within
that segment attempts to achieve either a cost advantage or
differentiation. The premise is that the needs of the group can be
better serviced by focusing entirely on it. A firm using a focus
strategy often enjoys a high degree of customer loyalty, and this
entrenched loyalty discourages other firms from competing directly.
Because of their narrow market focus, firms pursuing a focus

strategy have lower volumes and therefore less bargaining power
with their suppliers. However, firms pursuing a differentiation-
focused strategy may be able to pass higher costs on to customers
since close substitute products do not exist.
Firms that succeed in a focus strategy are able to tailor a broad

range of product development strengths to a relatively narrow
46
market segment that they know very well. Some risks of focus
Notes
strategies include imitation and changes in the target segments.
___________________
Furthermore, it may be easy for a broad-market cost leader to adapt
its product in order to compete directly. Finally, other focusers
___________________ may be able to carve out sub-segments that they can serve even
___________________
better.
___________________ A Combination of Generic Strategies – Stuck in

___________________ the Middle
___________________ These generic strategies are not necessarily compatible with one
another. If a firm attempts to achieve an advantage on all fronts,
___________________
in this attempt it may achieve no advantage at all. For example, if
___________________ a firm differentiates itself by supplying very high-quality products,
it risks undermining that quality if it seeks to become a cost leader.
___________________
Even if the quality did not suffer, the firm would risk projecting a
___________________ confusing image. For this reason, Michael Porter argued that to be
successful over the long-term, a firm must select only one of these
three generic strategies. Otherwise, with more than one single
generic strategy the firm will be “stuck in the middle” and will not
achieve a competitive advantage.
Porter argued that firms that are able to succeed at multiple

strategies often do so by creating separate business units for each
strategy. By separating the strategies into different units having
different policies and even different cultures, a corporation is less
likely to become “stuck in the middle.”
However, there exists a viewpoint that a single generic strategy is

not always best because within the same product customers often
seek multi-dimensional satisfactions such as a combination of
quality, style, convenience and price. There have been cases in which
high quality producers faithfully followed a single strategy and then
suffered greatly when another firm entered the market with a lower-
quality product that better met the overall needs of the customers.
Generic Strategies and Industry Forces

These generic strategies each have attributes that can serve to
defend against competitive forces. The Table 3.2 compares some
characteristics of the generic strategies in the context of the Porter’s
five forces.
47
Table 3.2: Generic Strategies and Industry Forces
Notes
Industry Generic Strategies
Force ___________________
Cost Leadership Differentiation Focus
___________________
Entry Ability to cut price Customer loyalty Focusing develops
Barriers in retaliation can discourage core competencies ___________________
deters potential potential entrants. that can act as an
___________________
entrants. entry barrier.
___________________
Buyer Power Ability to offer Large buyers Large buyers have
lower price to have less power less power to ___________________
powerful buyers. to negotiate negotiate because
because of few of few alternatives. ___________________
close alternatives.
___________________
Supplier Better insulated Better able to Suppliers have
Power from powerful pass on supplier power because of ___________________
suppliers. price increases to low volumes, but a
differentiation- ___________________
customers.
focused firm is
better able to pass
on supplier price
increases.
Threat of Can use low price Customer’s Specialized

Substitutes to defend against become attached products & core
substitutes. to diffe-rentiating competency
attributes, protect against
reducing threat of substitutes.
substitutes.
Rivalry Better able to Brand loyalty to Rivals cannot meet

compete on price. keep customers d i f f e r e n t i a t i o n -
from rivals. focused customer
needs.
Check Your Progress

Fill in the blanks:
1. The ................... leadership strategy usually targets a broad market.
2. The .................. strategy concentrates on a narrow segment and within
that segment attempts to achieve either a cost advantage or
differentiation.
BCG Matrix
Boston Consulting Group (BCG) Matrix is a four-celled matrix
(a 2 * 2 matrix) developed by BCG, USA. It is the most renowned
corporate portfolio analysis tool. It provides a graphic representation
for an organization to examine different businesses in its portfolio
on the basis of their related market share and industry growth
48
rates. It is a two-dimensional analysis on management of Strategic
Notes
Business Units (SBU’s). In other words, it is a comparative analysis
of business potential and the evaluation of environment.
___________________
According to this matrix, business could be classified as high or low
___________________
according to their industry growth rate and relative market share.
___________________
Relative Market Share = SBU sales this year leading competitors’
___________________ sales this year
___________________ Market Growth Rate = Industry sales this year − Industry sales
last year
___________________
The analysis requires that both measures be calculated for each
___________________
SBU. The dimension of business strength, relative market share,
___________________ will measure comparative advantage indicated by market dominance.
The key theory underlying this is existence of an experience curve
___________________
and that market share is achieved due to overall cost leadership.
___________________
BCG matrix has four cells, with the horizontal axis representing
relative market share and the vertical axis denoting market growth
rate. The mid-point of relative market share is set at 1.0. if all the
SBU’s are in same industry, the average growth rate of the industry
is used. While, if all the SBU’s are located in different industries,
then the mid-point is set at the growth rate for the economy.
Resources are allocated to the business units according to their
situation on the grid. The four cells of this matrix have been called
as stars, cash cows, question marks and dogs. Each of these cells
represents a particular type of business.
Relative Market Share

(Cash Generation)
High Low
Stars Question Marks

Low
Market Growth Rate
(Cash Usage)
$
High
Cash Cows Dogs

QuickMBA.com
Source: http://www.quickmba.com/strategy/matrix/bcg/
Figure 3.2: BCG Matrix

49
Stars: Stars represent business units having large market share in
Notes
a fast-growing industry. They may generate cash but because of
fast growing market, stars require huge investments to maintain
___________________
their lead. Net cash flow is usually modest. SBU’s located in this
cell are attractive as they are located in a robust industry and ___________________
these business units are highly competitive in the industry. If
___________________
successful, a star will become a cash cow when the industry matures.
___________________
Cash Cows: Cash Cows represents business units having a large
market share in a mature, slow growing industry. Cash cows require ___________________
little investment and generate cash that can be utilized for
___________________
investment in other business units. These SBU’s are the corporation’s
key source of cash and are specifically the core business. They are ___________________
the base of an organization. These businesses usually follow stability
strategies. When cash cows lose their appeal and move towards ___________________
deterioration, then a retrenchment policy may be pursued. ___________________
Question Marks: Question marks represent business units having ___________________
low relative market share and located in a high growth industry.
They require huge amount of cash to maintain or gain market
share. They require attention to determine if the venture can be
viable. Question marks are generally new goods and services which
have a good commercial prospective. There is no specific strategy
which can be adopted. If the firm thinks it has dominant market
share, then it can adopt expansion strategy, else retrenchment
strategy can be adopted. Most businesses start as question marks
as the company tries to enter a high growth market in which there
is already a market-share. If ignored, then question marks may
become dogs, while if huge investment is made, then they have
potential of becoming stars.
Dogs: Dogs represent businesses having weak market shares in
low-growth markets. They neither generate cash nor require huge
amount of cash. Due to low market share, these business units face
cost disadvantages. Generally, retrenchment strategies are adopted
because these firms can gain market share only at the expense of
competitor’s/rival firms. These business firms have weak market
share because of high costs, poor quality, ineffective marketing, etc.
Unless a dog has some other strategic aim, it should be liquidated
if there is fewer prospects for it to gain market share. Number of
dogs should be avoided and minimized in an organization.
Limitations of BCG Matrix

The BCG Matrix produces a framework for allocating resources
among different business units and makes it possible to compare
many business units at a glance. But BCG Matrix is not free from
limitations, such as:
50
• BCG matrix classifies businesses as low and high, but generally
Notes
businesses can be medium also. Thus, the true nature of
___________________ business may not be reflected.
___________________ • Market is not clearly defined in this model.
___________________ • High market share does not always lead to high profits. There
are high costs also involved with high market share.
___________________
• Growth rate and relative market share are not the only
___________________
indicators of profitability. This model ignores and overlooks
___________________ other indicators of profitability.
___________________ • At times, dogs may help other businesses in gaining competitive
advantage. They can earn even more than cash cows sometimes.
___________________
• This four-celled approach is considered as to be too simplistic.
___________________

Fill in the blanks:
1. ................ represents business units having a large market share in a
mature, slow growing industry.
2. ................ represent businesses having weak market shares in low-
growth markets.
Porter’s Five Forces Model

The Porter’s Five Forces tool is a simple but powerful tool for
understanding where power lies in a business situation. This is
useful, because it helps you understand both the strength of your
current competitive position, and the strength of a position you’re
considering moving into.
With a clear understanding of where power lies, you can take fair
advantage of a situation of strength, improve a situation of weakness,
and avoid taking wrong steps. This makes it an important part of
your planning toolkit.
Conventionally, the tool is used to identify whether new products,

services or businesses have the potential to be profitable. However,
it can be very illuminating when used to understand the balance of
power in other situations.
51
Threat of New Entry: Competitive Rivalry: Notes
– Time and cost of entry Threat of – Number of competitors
– Specialist knowledge – Quality differences
– Economies of scale
New – Other differences ___________________
– Cost advantages Entry – Switching costs
– Technology protection – Customer loyalty ___________________
– Barriers to entry – Costs of leaving market
– etc.
___________________
___________________
___________________
Supplier Competitive Buyer
___________________
Power Rivalry Power
___________________
Supplier Power: ___________________

– Number of suppliers
Buyer Power:
– Size of suppliers
– Number of customers
___________________
– Uniqueness of service – Size of each order
– Your ability to substitute ___________________
– Differences between
– Cost of changing
competitors
– Price sensitivity
Threat of Substitution: Threat of – Ability to substitute
– Substitute performance Substitution – Cost of changing
– Cost of change
Source: http://www.mindtools.com/pages/article/newTMC_08.htm
Figure 3.3: Porter’s Five Forces
Five Forces Analysis assumes that there are five important forces
that determine competitive power in a business situation. These
are:
• Supplier Power: Here, you assess how easy it is for suppliers
to drive up prices. This is driven by the number of suppliers
of each key input, the uniqueness of their product or service,
their strength and control over you, the cost of switching from
one to another, and so on. The fewer the supplier choices you
have, and the more you need suppliers’ help, the more powerful
your suppliers are.
• Buyer Power: Here, you ask yourself how easy it is for buyers
to drive prices down. Again, this is driven by the number of
buyers, the importance of each individual buyer to your
business, the cost to them of switching from your products and
services to those of someone else, and so on. If you deal with
few, powerful buyers, then they are often able to dictate terms
to you.
• Competitive Rivalry: What is important here is the number
and capability of your competitors. If you have many
competitors, and they offer equally attractive products and
services, then you’ll most likely have little power in the
situation, because suppliers and buyers will go elsewhere if
they don’t get a good deal from you. On the other hand, if no-
52
one else can do what you do, then you can often have
Notes tremendous strength.
___________________ • Threat of Substitution: This is affected by the ability of your
customers to find a different way of doing what you do – for
___________________ example, if you supply a unique software product that
___________________ automates an important process, people may substitute by doing
the process manually or by outsourcing it. If substitution is
___________________ easy and substitution is viable, then this weakens your power.
___________________ • Threat of New Entry: Power is also affected by the ability of
people to enter your market. If it costs little in time or money
___________________ to enter your market and compete effectively, if there are few
___________________ economies of scale in place, or if you have little protection for
your key technologies, then new competitors can quickly enter
___________________ your market and weaken your position. If you have strong and
durable barriers to entry, then you can preserve a favourable
___________________
position and take fair advantage of it.
___________________
Check Your Progress
1. The Porter’s Five Forces tool is a simple but powerful tool for
understanding where power lies in a business situation.
2. Power is not affected by the ability of people to enter your market.
Summary
There is no one perfect strategic management model for each
organization. Each organization ends up developing its own nature
and model of strategic planning, often by selecting a model and
modifying it as they go along in developing their own planning
process. The models discussed in this unit provide a range of
alternatives from which organizations might select an approach
and begin to develop their own strategic planning process. It should
be noted that an organization might choose to integrate the models,
e.g., using a scenario model to creatively identify strategic issues
and goals, and then an issues-based model to carefully strategize to
address the issues and reach the goals.

1. What is the significance of five P’s in the strategic planning
model of Mintzberg?
2. What is the significance of generic strategy model of Porter?
3. What are the Ansoff key strategy components?
4. Discuss Ansoff’s Matrix Model.
5. Write a brief note on BCG Matrix.
53
Unit 4 Notes
Strategic Intent – Vision, Mission and ___________________
___________________
Objectives ___________________
___________________
___________________
\ Hierarchy of Strategic Intent
___________________
\ Vision Statement
\ Mission Statement ___________________
\ Value Statement ___________________
\ Business and the Nature of its Objectives
___________________
\ Organization’s Objectives
Introduction
When you begin the process of strategic planning, visioning comes
first. A vision statement answers the question, “Who are we? Where
we’re headed? How we want to go about it? Where are we headed?
What is our preferred future? What will success look like?” The
process is developed through visioning. The outcome of visioning is
to develop an effective basis for business strategy. The organization
tries to fit its strengths with the market demand, to make the
organization highly competitive with growth and profits as the
rewards.
Successful organizations have a vision that is executable. Their
vision statement identifies activities the organization intends to
pursue, sets forth long-term direction and provides a big perspective.
The vision statement becomes a basis for performance, reflects core
values of the organization and is the way to communicate to bring
the workforce together and galvanize people to act. It is this quality
of vision that makes organizations excel.
Vision is the critical focal point and beginning to high performance.
Even the most exciting vision will remain only a dream unless it is
followed up with striving, building, and improving, it requires a
statement of purpose and function. The mission statement is a
statement of purpose and function.
54
Notes
Hierarchy of Strategic Intent
Strategic Intent is the basis on which organizations provide products
___________________
and services for consumers, profits for investors, jobs for employees,
___________________ taxes for governments, and economic stability for communities.
Strategic intent also identifies the commitment of the organization
___________________ to contribute to the welfare of society by setting standards on being
___________________ economically productive and socially responsible. The goals identified
through the strategic intent of the organization represent a synthesis
___________________ of goals and demands placed on the organization by its stakeholders.
___________________
These choices, collectively, sets apart one organization from another.
___________________
Formulating the strategic intent, the organization’s vision, mission,
and value statements, is one of the first tasks of Strategic
___________________ Management. The strategic intent should be articulated at the outset
of an organization’s life, if possible and at the first opportunity if
___________________
the organization is already underway.
___________________
The vision, mission and value statements have the greatest impact
on the identity and the future of the organization as they reflect
what the organization intends to be in the long run. They offer
unique insights into way in which organizations work and think,
and the aspirations of the organization.
Vision, mission and values have their distinct characteristics and
play distinct roles in the development of the organization. Short
definitions given below explain these distinct characteristics:
• Vision is what keeps the organization moving forward. Vision
provides the long-term perspective of the organization so that
it can motivate people even when the organization is facing
discouraging odds.
• Mission is the founders’ intentions at the outset of the
organization – what they wanted to achieve.
• Values manifest in what the organization does as a group and
how it operates.
The vision of an organization consists of two major components, the
ideology and the envisioned future of the organization. The core
ideology characterizes the enduring nature of an organization and
remains unchangeable over a long period of time. The envisaged
future provides a description of goals.
The idea that an organization might be guided by its vision, mission,
and values is a key part of strategic thinking. Peter Drucker has,
time and again, emphasized that a failure to give adequate thought
to business purpose and mission was perhaps the most important
factor in both managerial frustration and business failure.
Unit 4: Strategic Intent – Vision, Mission and Objectives
55
A vision and sense of mission can be a powerful force in shaping
Notes
and guiding an organization. It is the entrepreneur’s vision that
gives the organization a real strategic direction and focus. However,
___________________
the most important function of building a vision is to provide a
dream to the organization to live for – a basic motivation. ___________________
The vision statement should be such that each person in the ___________________
organization should see his or her job as part of building a cathedral.
___________________
It is this type of vision that provides a sense of purpose and common
cause to people in the organization. Articulated as a formal mission ___________________
statement it can be used to bring together desperate stakeholder
___________________
groups within the organization. It also communicates what the
venture has to offer customers, suppliers, and potential employees. ___________________
A clear mission can also help in attracting investment. It catches
the attention of potential investors and suggests professionalism in ___________________
management approach. ___________________
The mission statement has a different perspective from the vision ___________________
statement. The mission statement lists out a set of tasks that the
organization has to carry out in order to fulfil the vision of the
organization. It sets out priorities of how the purpose of the
organization can be fulfilled and identifies the need of society the
organization will satisfy.
This need of society, for example, could be the need for personal
transportation. This need could be satisfied equally by a
manufacturer of motorcycles and scooters, as it would by a bicycle
manufacturer, or a manufacturer of automobiles. Though they all
meet the same need of society, they will necessarily have different
objectives.
However, if it is to be effective, the mission must be right for the
venture, developed with sympathy to the organization and be
communicated effectively. A clear mission can aid the performance
of an entrepreneurial venture – if it is developed in an appropriate
way.
Just the vision and the mission are not sufficient to create a sense
of purpose in the organization. To create purpose, it is equally
important to embed the vision and mission of the organization with
a set of shared values and beliefs – a description of types of
behaviours and actions required for the organization to be what it
wants to be. To quote Azim Premji, “Beliefs and values give a
common cause and a sense of purpose across the businesses making
Wipro in essence one company. They define the spirit of Wipro…”
Vision, values and mission are the three components of focus and
context of the organization. They form a hierarchy.
56
Notes
___________________ Vision
___________________
Mission and Values
___________________
Objectives
___________________
___________________
Figure 4.1: Hierarchy of Vision, Mission and Objectives
___________________
The vision of the organization leads to its Mission and its values.
___________________
The Mission in turn leads to the Objectives of the firm, which is
___________________ shown in Figure 4.1.
___________________
Check Your Progress
1. Strategic ................. also identifies the commitment of the organization
to contribute to the welfare of society.
2. The ................ of the organization leads to its Mission and its values.
Vision Statement
The first task in the process of strategic management is to formulate
the organisation’s vision and mission statements. These statements
define the organisational purpose of a firm. Together with objectives,
they form a “hierarchy of goals.”
When you begin the process of strategic planning, visioning comes
first. Martin Luther King, Jr. said, “I have a dream,” and what
followed was a vision that changed a nation. That famous speech is
a dramatic example of the power that can be generated by a
compelling vision of the future. A vision is a guide to implementing
strategy. Visions are about feelings, beliefs, emotions, and pictures.
A vision statement answers the question, “What will success look
like?” The pursuit of this image of success is what motivates people
to work together. It is an important requirement for building a
strong foundation. When all the employees are committed to the
firm’s visions and goals, optimum choices on business decisions are
more likely.
A clear vision helps in developing a mission statement, which in
turn facilitates setting of objectives of the firm after analyzing
external and internal environment. Though vision, mission and
objectives together reflect the “strategic intent” of the firm, they
have their distinctive characteristics and play important roles in
strategic management.
57
Vision can be defined as “a mental image of a possible and desirable
Notes
future state of the organisation”. It is “a vividly descriptive image
of what a company wants to become in future”. Vision represents
___________________
top management’s aspirations about the company’s direction and
focus. Every organisation needs to develop a vision of the future. A ___________________
clearly-articulated vision moulds organisational identity, stimulates
___________________
managers in a positive way and prepares the company for the future.
___________________
“The critical point is that a vision articulates a view of a realistic,
credible, attractive future for the organisation, a condition that is ___________________
better in some important ways than what now exists.”
___________________
Vision, therefore, not only serves as a backdrop for the development
___________________
of the purpose and strategy of a firm, but also motivates the firm’s
employees to achieve it. ___________________
According to Collins and Porras, a well-conceived vision consists of ___________________

two major components:
___________________
• Core ideology
• Envisioned future
Core ideology is based on the enduring values of the organisation
(“what we stand for and why we exist”), which remain unaffected
by environmental changes. Envisioned future consists of a long-
term goal (what we aspire to become, to achieve, to create”) which
demands significant change and progress.
When visioning the change, ask yourself, “what is our preferred
future?” Your vision must be encompassed by your beliefs:
• Your beliefs must meet your organizational goals as well as
community goals.
• Your beliefs are a statement of your values.
• Your beliefs are a public/visible declaration of your expected
outcomes.
• Your beliefs must be precise and practical.
• Your beliefs will guide the actions of all involved.
• Your beliefs reflect the knowledge, philosophy, and actions of
all.
• Your beliefs are a key component of strategic planning.
The process and outcomes of visioning is to develop an effective
basis for business strategy. The foresight of the organization is to
fit the strengths of the organization with the market demands, to
make the organization highly competitive with growth and profits
as the rewards. The long-term benefits are substantial, because
visioning facilitates the following:
58
• Breaks you out of boundary thinking.
Notes
• Provides continuity and avoids the stutter effect of planning
___________________ fits and starts.
___________________ • Identifies direction and purpose.
___________________ • Alerts stakeholders to needed change.
___________________
• Promotes interest and commitment.
• Promotes laser-like focus.
___________________
• Encourages openness to unique and creative solutions.
___________________
• Encourages and builds confidence.
___________________
• Builds loyalty through involvement (ownership).
___________________
• Results in efficiency and productivity.
___________________
Whatever, the eventual architecture of the organization, the vision
___________________ statement encompasses the organization in all its forms. The vision
statement identifies activities the organization intends to pursue,
sets forth long term direction and provides a big perspective of:
• Who are we?
• What we’re trying to do?
• How we want to go about it?
• Where we’re headed?
Nature of Vision
Successful organizations have a vision that is executable – not a
pie-in-the-sky blanket statement but a realistic goal, according to
Sunil Alagh, former Managing Director and CEO of Britannia
Industries. “It’s all about how you define the market, or how you
redefine it for yourself? We can always raise the bar, but the vision
stays with the company.” A vision represents an animating dream
about the future of the firm. By its nature, it is hazy and vague.
That is why Collins describes it as a “Big Hairy Audacious Goal”
(BHAG). Yet it is a powerful motivator to action. It captures both
the minds and hearts of people. It articulates a view of a realistic,
credible, attractive future for the organisation, which is better than
what now exists. Developing and implementing a vision is one of
the leader’s central roles. He should not only have a “strong sense
of vision”, but also a “plan” to implement it.
Example:
• Henry Ford’s vision of a “car in every garage” had power. It
captured the imagination of others and aided internal efforts
to mobilize resources and make it a reality. A good vision always
needs to be a bit beyond a company’s reach, but progress
59
towards the vision is what unifies the efforts of company
Notes
personnel.
• One of the most famous examples of a vision is that of ___________________
Disneyland “To be the happiest place on earth”.
___________________
Characteristics of Vision Statements ___________________
As may be seen from the above definitions, many of the ___________________
characteristics of vision given by these authors are common such as
being clear, desirable, challenging, feasible and easy to communicate. ___________________
Nutt and Backoff have identified four-generic features of visions
___________________
that are likely to enhance organisational performance:
___________________
• Possibility means the vision should entail innovative
possibilities for dramatic organisational improvements. ___________________
• Desirability means the extent to which it draws upon shared ___________________

organisational norms and values about the way things should
be done. ___________________
• Actionability means the ability of people to see in the vision,

actions that they can take that are relevant to them.
• Articulation means that the vision has imagery that is
powerful enough to communicate clearly a picture of where the
organisation is headed.
Importance of Vision
Having a strategic vision is linked to competitive advantage,
enhancing organisational performance, and achieving sustained
organisational growth. A clear vision enables firms to determine
how well organisational leaders are performing and to identify gaps
between the vision and current practices. Organisations preparing
for transformational change regularly undertake “envisioning”
exercises to help guide them into the future. The visioning process
itself can enhance the self-esteem of the people who participate in
it because they can see the potential fruits of their labours.
Conversely, a “lack of vision” is associated with organisational decline
and failure. As Beaver argues “Unless companies have clear vision
about how they are going to be distinctly different and unique in
adding and satisfying their customers, they are likely to be the
corporate failure statistics of tomorrow”. Lacking vision is used to
explain why companies fail to build their core competencies despite
having access to adequate resources to do so. Business strategies
that lack visionary content may fail to identify when change is
needed. Lack of an adequate process for translating shared vision
into collective action is associated with the failure to produce
transformational organisational change.
60
Thus, vision statements serve as:
Notes
• A basis for performance: A vision creates a mental picture
___________________ of an organisation’s path and direction in the minds of people
in the organisation and motivates them for high performance.
___________________
• Reflects core values: A vision is generally built around core
___________________ values of an organisation, and channelises the group’s energies
___________________ towards such values and serves as a guide to action.
___________________
• Way to communicate: A vision statement is an exercise in
communication. A well-communicated vision statement will
___________________ bring the employees together and galvanize them into action.
___________________ • A desirable challenge: A vision provides a desirable challenge
for both senior and junior managers.
___________________

1. ....................... represents top management’s aspirations about the
company’s direction and focus.
2. The process and outcomes of visioning is to develop an effective basis
for ........................... .
Mission Statement
Vision is the critical focal point and beginning to high performance.
But obviously a vision alone won’t make it happen. Even the most
exciting vision will remain only a dream unless it is followed up
with striving, building, and improving.
Why does the organization exist? What is its value addition? What’s
its function? How does it want to be positioned in the market and
minds of customers? What business is it in? These are all questions
of purpose. They deal with the deeper motivations and assumptions
underlying the values and purpose that form the context and focus
of the organization. Your mission statement is a statement of purpose
and function.
• Your mission statement draws on your belief statements.
• Your mission statement must be future oriented and portray
your organization as it will be, as if it already exists.
• Your mission statement must focus on one common purpose.
• Your mission statement must be specific to the organization,
not generic.
The mission statements set the organization apart from others.
They give meaning to the reason for being, value-add, and define
61
the business of the organization. As with vision and values, the
Notes
mission should have clear answers to questions about the future of
the organization.
___________________
A mission statement can be defined as follows:
___________________
A statement of the current and future expected product scope,
___________________
market scope, and geographical scope, as well as the unique
competencies of the business must develop to achieve its desired ___________________
competitive positioning.
___________________
The worksheet shown in Table 4.1 looks at these issues and analyses
___________________
the direction that the organization should move towards. It is a
statement of the current and future expected product scope, market ___________________
scope, and geographic scope.
___________________
Table 4.1: The Mission Worksheet
___________________
Now Future
___________________
Product Scope
Market Scope
Geographical Scope
Unique Competencies
The mission statement, should in addition, identify the unique

competencies the firm has developed to achieve a long-term
sustainable advantage. It also should reflect on some of the major
characteristics which are given in the paragraphs that follow.
Aspirations
The mission statement should arouse a strong sense of organizational
identity and business purpose. What the firm aims to achieve with
this strategy: its aspirations.
Aspirations can be defined in many ways. However, in the mission
statement it must be defined in a way which relates the firm to the
competitive situation in its market. Some of the typical aspirations
can include being the “leader” in a market or the “leading” firm.
However, care is required with such definitions. Though some of
these questions often seem deceptively simple, they are not so simple.
We need to answer them to prepare a mission statement. For
example, this is ambiguous, ‘leading’ can be understood to mean
being the largest firm in the market (volume sales, market share?)
Or, could it refer to some other criteria, such as being the technical
leader, or the firm offering highest quality? Be specific.
62
It is best to be definite, but you must remember aspirations of a
Notes
firm cannot be absolute. They must be defined relative to
competitors. Though an aspiration is not like an objective, it should
___________________
be capable of being used to guide the objective setting, performance
___________________ evaluation and benchmarking systems of the company. It must
preferably identify why the firm finds the niche it is aspiring to fill
___________________
profitable and how it can defend it.
___________________
Business Horizon
___________________
Many industries have faded away because of the lack of vision in
___________________ identifying their business horizon in the mission statement. A
___________________
railway company can be in the ‘business of running railways’ or ‘it
can be in the business of moving people and goods.’ Similarly, a
___________________ cosmetics company can be in the business of ‘making cosmetics’ or
in the business of ‘enhancing beauty.’ An oil company can ‘supply
___________________
oil products’ or it can be in the ‘energy business.’ For example,
___________________ Helen Curtis says that is in the ‘enriching beauty business’. Oil &
Natural Gas Commission (ONGC) presents its mission statement
as, “To stimulate, continue and accelerate efforts to develop and
maximize the contribution of the energy sector to the economy of
the country.”
Many companies define their business too narrowly. That means
they often miss new market opportunities. Or they don’t provide a
broader level of service support to their basic products or services.
So, customers start looking elsewhere. At the other extreme, some
companies define their business too broadly. That often takes them
beyond their core competencies into businesses they don’t
understand. The results are often very expensive and sometimes
fatal learning experiences.
The perception of what business you are in will, to a large extent,
determine strategy. It will determine who you consider your
competition is, and this focus can very often be the basis for the
survival of the firm. Management philosophers believe that if the
carriage makers of yesterday had realized that they were in the
business of ‘providing personal transportation to people’ and not in
the ‘carriage making business’, many of them would have survived
the introduction of the motorcar. Similarly, gas light manufacturers
would have survived the electric bulb. An inadequate vision of the
business horizon is often called, ‘organizational myopia.’
Range of Offerings
A Mission statement identifies the range of products and services
that the firm will offer the market. The target market needs to be
defined very carefully. To do this successfully, both products and
market have to be analyzed so that supply structure and the
63
dimensions along which segmentation occurs are fully understood.
Notes
There are established techniques to carry out this type of market
analysis exercise.
___________________
The product/service scope must be specified in terms of the features
___________________
which characterize it. If the target market is composed of consumer
groups then it may be specified in geographic, socio- graphic or ___________________
psychographic terms. In a business sector, it can be identified in
___________________
geographic, industry sector, product use or buying decision process
terms. The range should lie between two extremes; it must be greater ___________________
than the current scope of the firm but be smaller than the “total”
___________________
market in which the firm competes.
___________________
The range of offerings also has direct implications on the
diversification strategy of the organization. It provides directions ___________________
on the strategic choice in diversification strategies. The implications
of making a definitive identification means that the organization ___________________
has put boundaries around to give guidance to the strategic direction ___________________
in which it will move. For example, if the areas are to be related it
puts limits on the options.
The diversification options may be related in number of different
ways; the new products and services may have similar technologies,
or may be serving similar markets, or may have similar
competencies.
Signal to Management’s Intents

Specifically speaking of Mission statements, a well-crafted mission
statement must be narrow enough to specify the real area of interest;
and it should serve as a signal on where the top management intends
to take the firm. Overly broad mission statements provide no
guidance in strategy-making. However, diversified companies will
have a broader mission definition than single business enterprises.
In either case, the statement should lead to the direction the
organization plans to take.
Ranbaxy Laboratories Ltd. – Mission Statement

Our mission is to become a research-based international
pharmaceutical company.
McDonald’s – Mission Statement

To offer the fast food customer food prepared in the same high
quality worldwide, tasty and reasonably priced, delivered in a
consistent low-key décor and friendly manner.
In the examples given above the mission statement of Ranbaxy’s
gives a clear signal of the management’s intent. As a matter of fact,
Ranbaxy rejected a lucrative offer to expand by setting up business
64
in the USSR. It was the management’s view that this would deter
Notes
it from its mission to become an international pharmaceutical
company. Similarly, McDonald’s mission statement, which is given
___________________
above, gives a clear signal of its managements intent. It indicates
___________________ that it will look at domestic and international markets, and it intends
to remain in the reasonably priced, high quality fast food industry.
___________________
Some examples of the mission statements are given below. These
___________________
are the mission statements of Ford Foundation, and Otis Elevators:
___________________
Ford Foundation - Mission Statement
___________________
Our dream is a world free of poverty.
___________________
To fight poverty with passion and professionalism for lasting results.
___________________
To help people help themselves and their environment by providing
___________________ resources, sharing knowledge, building capacity, and forging
___________________
partnerships in the public and private sectors.
To be an excellent institution able to attract, excite, and nurture
diverse and committed staff with exceptional skills who know how
to listen and learn.
Our Principles:
Client centered, working in partnership, accountable for quality
results, dedicated to financial integrity and cost-effectiveness,
inspired and innovative.
Check Your Progress

1. Vision is the critical focal point and beginning to high performance.
2. The product/service scope must not be specified in terms of the features
which characterize it.
Value Statement
The potential of a mission statement does not end with strategy. It
can also include the values that the organization aspires to hold.
Corporate values can be defined, in a classical sense, as beliefs that
help companies make choices among available means and ends and
the behaviours they inculcate.
Technically values reflect the weight which corporate decision
makers attach to alternative goals when making their decisions.
Alternative goals could be accounting profitability, stock returns,
customer value, market share, company growth, employee
satisfaction, supplier surplus or measures of corporate social
65
performance (like image, or environmental impact). They could be
Notes
present or future values of these variables to capture a trade-off
between the short and the long run.
___________________
At the end of it all, value statements give a common cause and a
___________________
common sense of purpose across the organization. Just like the
mission statement, it provides the direction to the strategy of the ___________________
organization. It provides an explicit depiction of values to guide the
organization in choosing among competing priorities, thereby setting ___________________
the organization apart from others. ___________________
Organizational Values can set the direction of the business ___________________
organization by identifying the contribution the organization plans
to make to the key market, and the ‘distinctive competencies’ or ___________________
‘value’ the organization will provide in its focus on to serve the key
___________________
market. The statements should speak loudly and clearly for
themselves, elicit personal effort and dedication and generate ___________________
enthusiasm for the firm’s future – the strategy of the organization.
___________________
All organizations have some values. There are three broad reasons
why the organization might wish to codify those values in the mission
statement:
1. To impress values on internal stakeholders.
2. To express values to external stakeholders.
3. A testament to managerial values.
Values are already part of the attitudes and culture of the
organization. But the value statement may incorporate some
principle or ethical standard on which the organization holds to be
important. Sometimes, the company may use a particular stance on
some ethically, or politically, contentious issue in order to achieve
differentiate itself from competitors and give itself a unique
positioning in the minds of external stakeholders. However, both
the impression of values on internal stakeholders and the expression
of values to external stakeholders are, in the final instance, directed
towards enhancing the performance of the firm.
Corporate values should aim to predict what goal variables will be
influential in a given company and what emphasis the decision
makers will place on each goal. Company behaviour can be modelled
as a balance struck between these alternative behaviours. This
means that a firm should maximize the expected value of a corporate
value function which can be defined on the range of potential goal
variables. In a practical sense, what matters is whether and how
much potential goal variables influence the behaviour of the
company.
The value statement, therefore, basically translates the vision and
mission of the organization in the manner or behaviour of the officers
of the firm. Some of the attributes that the firm can identify are
66
shown in Figure 4.2. This diagram is based on a field interview
Notes
with employees of a telecom company.
___________________ The value statement of the Ford Foundation provides guidelines to
the moral conduct of the organization in the achieving its mission
___________________
and objectives. The statements reflect that the Ford Foundation do
___________________ not believe in a ‘no holds barred’ strategy. The strategies that it
will adopt will be limited by the ethical values of the organization.
___________________
The value statements are given below, as an example:
___________________
Ford Foundation – Our Values
___________________
Personal honesty, integrity, commitment; working together in teams
___________________ - with openness and trust; empowering others and respecting
differences; encouraging risk-taking and responsibility; enjoying our
___________________
work and our families. Behaviours that form part of the firm’s
___________________ values are shown in Figure 4.2:
___________________
Cost-effective
Excellent Perfo
Philosophy
Bureaucratic
Flexibility
Responsiveness
Training
R&D
Long-term
Fulfilment
Risk-taking
Responsibility
Competition
Expertise
Stability
Adaptability
Trust
Control
Innovation
Profit
Quality
Improvement
Communication
Teamwork
Results
Env. awareness
Customer Satisfaction
Alliances
Superiorpond
Org. growth
Market focus
0 1 2 3 4 5 6
Figure 4.2: Behaviours that Form Part of the Firm’s Values

67
As with vision and its mission, the organizational values provided
Notes
should be clear to provide answers to what strategic options are
acceptable to the organization. It should add to the sense of
___________________
organizational identity and business purpose and identify the areas
of value-addition of the organization in its business. The Values of ___________________
an organization are often built with associations. You create a simple
___________________
and consistent message of who you are, what you’re looking for, and
your uniqueness as differentiated from others. ___________________
For example, what does Pillsbury mean? Pillsbury perhaps means ___________________
a lot because it is identified with high quality dough products. The
___________________
two of the biggest names that have emerged in the past decade are
Amazon and Starbucks. Does Starbucks mean coffee? Absolutely ___________________
not. But we get to know a company and that starts to create an
image. It is linked in customers’ minds with attributes or benefits. ___________________
Identity, is the answer to the question, “Who are we?” The Tatas ___________________
have been advertising, “Tata, a century of trust”. This corporate ___________________
identity reflects the personalities and values of the founders and its
management. It envelops the whole group of industries operating
in different areas of business and the economy.
Check Your Progress

1. All organizations have no values.
2. Values are already part of the attitudes and culture of the organization.
Business and the Nature of its Objectives

A business (also called firm or an enterprise) is a legally recognized
organizational entity. The classical economic theory of profit
maximization implies that a business has a single objective, that is,
to make profit. In other words, the owners and operators of a
business have as one of their main objectives the receipt or
generation of a financial returns in exchange for work and acceptance
of risk. But organizations that exist only to produce profit don’t last
long. And organizations that don’t pay attention to profits can not
exist to fulfil their long-term purpose.
While pursuing the objective of earning profit, business units cannot
ignore the interests of its employees, customers, the community, as
well as the interests of society as a whole. Many values studies
have shown that profits follow from fulfilling the purpose or strategic
intent of the organization. Profits are a reward depending on the
value of the service the firm gives to others.
68
Based on the argument above, the nature of business objectives can
Notes
vary significantly. The nature depends on the perspective the firm
takes, from an economic to a global perspective.
___________________
Based on their nature and content, objectives may be described to
___________________
be any of the following:
___________________
• Economic Objectives
___________________ • Social Objectives
___________________ • Human Objectives
___________________ • Global Objectives
___________________ Economic Objectives
___________________
Economic objectives refer to earning profit and other objectives
___________________ necessary to achieve the profit objective. Profits must be earned to
ensure the survival of business, its growth and expansion over time.
___________________ In order to achieve this primary objective, the firm also has to
include the following:
• Customers: A business unit cannot survive unless there are
customers to buy the products and services. Profits are earned
when a firm provides quality goods and services at a reasonable
price. Survival depends on maintaining a satisfied customer
base.
• Innovations: Innovation means improvement in products,
process of production and distribution of goods. Business units,
through innovation, are able to reduce cost by adopting better
methods of production and also increase their sales by
attracting more customers because of improved products.
• Resources: Business activities require various resources like
men, materials, money and machines. For example, capital is
required to buy machinery, raw materials, employ men and
have cash to meet day-to-day expenses. The availability of
these resources is usually limited, and companies have to make
the best possible use of these resources.
Economic objectives, therefore, need to include all these aspects
which ensure the wellbeing of the firm in the long run.
Social Objectives
Social objectives are those objectives, which benefit society. Since
business operates in a society by utilizing its scarce resources, the
society expects something in return for its welfare. These
expectations are reflected in the social objectives of the business
which may include:
69
• Production and supply of quality goods and services,
Notes
• Adoption of fair-trade practices,
___________________
• Ensuring a minimal ecological footprint, and
___________________
• Contribution to the general welfare of society.
___________________
Human Objectives
___________________
Human objectives refer to the objectives aimed at the economic
well-being as well as fulfilment of expectations of employees and ___________________
the community. Employees must be provided with fair remuneration ___________________
and incentives for performance. Their social and psychological
satisfaction must be ensured. Employees as human beings want to ___________________
grow. Their growth requires proper training as well as development. ___________________
Business can prosper if the people employed can improve their
skills and develop their abilities and competencies in course of time. ___________________
Thus, it is important that business should arrange training and ___________________
development programs for its employees.
Global Objectives
Today, the entire world has become one big market. Goods produced
in one country are readily available in other countries. Global
objectives are those objectives that make it possible for a business
to survive in the globalised marketplace. To face from global players,
businesses have to reflect this phenomenon in their objectives. These
may range from making available globally competitive goods and
services to competing in global markets with their competitors. Very
often, these objectives may reflect important national objectives,
e.g., create opportunities for gainful employment of people;
investment in national priority areas, raising the general standard
of living, export substitution, etc.
Most businesses must accomplish similar functions regardless of

size, legal structure or industry. These functions are often organized
into departments. The role of business objectives is to ensure the
viability of the organization moving right through the organization
up to the level of the individual and department.
Check Your Progress

Fill in the blanks:
1. A business is a legally recognized .................... entity.
2. .................... objectives refer to earning profit and other objectives
necessary to achieve the profit objective.
70
Notes
Organization’s Objectives
The strategic intent provides an insight into way in which
___________________
organizations is supposed to work. The role that objectives play in
___________________ realizing this is important. The mission statement lists out a
particular set of tasks that the organization has to carry out in
___________________ order to fulfil the vision of the organization. It sets out priorities of
___________________ how the purpose of the organization can be fulfilled and identifies
the particular need of society the organization will satisfy.
___________________
Objectives define the organization’s relationship with the
___________________ environment and help the organization to pursue its mission. They
___________________
also provide the standards by which the performance of the
organization can be judged. But most important, as strategies consist
___________________ of a set of objectives, the objectives determine the strategies of the
organization.
___________________
Firms choose their objectives to reflect the demands of their many
___________________
stakeholders.
Strategic Corporate
Strategic
Mission
Business 56 Us’ Business

Process Critical Processes Process
Individual Departments KRAs & Individual

Objectives Individual Managers Performance
Performance
Rewards & Consequence
Figure 4.3: Objectives at Different Levels
Objectives of an organization form a hierarchy on a similar basis as

that for strategic choice, discussed earlier. This is shown in Figure
4.3. The hierarchy ranges from the broad aim to specific individual
objectives. The long-term intentions of the organization provide a
focus for setting the objectives. They are expressed qualitatively in
the form of a mission statement. The zenith of the hierarchy is the
mission of the organization. This produces the Strategic Objectives
or Corporate Goals.
At the second level are the operations of the Strategic Business
Units (SBUs) in a diversified organization, or critical processes in
a single unit organization. For example, in a single unit organization
manufacturing commercial vehicles, these could be Marketing,
71
Manufacturing, or Quality Control. In a diversified organization,
Notes
this would imply each major commercially oriented activity of the
firm, or each of its units. These are the Business Process Objectives.
___________________
At a lower level that reflects the operations of a department the
___________________
objectives are more specific. These are generally the Key Result
Areas (KRAs). The objectives are translated further down the line ___________________
to the individual managers and down to the lowest level of the
___________________
organization. It may be necessary to sub-divide objectives into
functional work-tasks so accountability can be assigned to a single ___________________
individual.
___________________
Much of management literature talks of long-run and short-run
___________________
objectives. Long-run objectives focus on long-term performance and
short-run objectives focus on short term performance. Generally, ___________________
the span of a short-run objective is 1-2 years, while the span of a
long-run objective is 3-5 years. Some planners try to emphasise ___________________
that a difference exists between goals and objectives – in that case ___________________
you should clearly define the difference. But for the majority of the
managers, there is very little difference between the terms.
Corporate Goals or Strategic Objectives are normally long-term
objectives, but often incorporate short-run objectives. Short-run
objectives play a significant part in assessing and determining
whether the speed and level of performance being aimed for is
being achieved. They also provide a steppingstone towards attaining
the long-term performance.
Check Your Progress

1. The strategic intent provides an insight into way in which organizations
is supposed to work.
2. Firms do not choose their objectives to reflect the demands of their
many stakeholders.
Summary
Strategies surface at different tiers in the organization hierarchy
depending on the architecture of the organization. The first task of
Strategic Management is formulating the organization’s vision,
mission, and value statements. Strategic intent is the choices the
firm makes and is reflected in the vision, mission and value
statements. These statements define the choices - what to do and
what not to do. They establish the basis for identifying acceptable
strategic alternatives. The idea that an organization might be guided
by its vision, mission, and values is a key part of strategic thinking.
Whatever, the eventual architecture of the organization, the vision
72
statement encompasses the organization in all its forms. The vision
Notes
of the organization leads to its Mission and its values. The vision
of an organization consists of two major components, the ideology
___________________
and the envisioned future of the organization. Corporate values can
___________________ be defined, in a classical sense, as beliefs that help companies make
choices among available means and ends and the behaviours they
___________________
inculcate. Technically values reflect the weight which corporate
___________________ decision-makers attach to alternative goals when making their
decisions. It provides an explicit depiction of values to guide the
___________________
organization in choosing among competing priorities, thereby setting
___________________ the organization apart from others. Objectives should be balanced.
They should incorporate requirements that will involve all members
___________________ of the organization. The SMART Formula is a useful method of
___________________ examining objectives. Objectives should be specific, measurable,
achievable, realistic and timely.
___________________
___________________
1. “Employees have a greater role to play in formulating strategy”.
Comment.
2. When is a good time to formulate strategy? Explain with
reasons according to your understanding.
3. What is strategic intent and how does it determine the survival
of the organization?
4. What are the major characteristics of Vision Statements?
5. Describe the essential characteristics of a mission statement.
How are mission statements generally formulated?
6. What are the major elements in the hierarchy of objectives
and how are they interrelated to each other?
73
Unit 5 Notes
Case Study ___________________
___________________
___________________

After analyzing this case, the student will have an appreciation of the
___________________
concept of topics studied in this Block.
___________________
___________________
Case Study: Formulating a Strategy – Following
Apple Turnaround
Turnaround ___________________
___________________
The firm’s most important resources and capabilities are those which
are durable, difficult to identify and understand, imperfect transferable, ___________________
not easily replicated, and in which the firm possesses clear ownership.
These are the company’s ‘most important assets’ and need to be
protected; and they play a pivotal role in the competitive strategy
which the company pursues. The essence of strategy formulation,
then, is to design a strategy that makes the most effective use of
these core resources and capabilities. Consider, for example, the
remarkable turnaround of Apple, the computer company behind the
Macintosh computers, between 2000 to date. Fundamental was Steve
Job’s recognition that the company’s sole durable, non- transferable,
irreplaceable asset was Apple image and the loyalty that accompanied
that image. In virtually every other area of competitive performance
– production cost, quality, product and process technology, and global
market scope – Apple was greatly inferior to its other rivals, such as
IBM.
Apple’s only opportunity for survival was to pursue a strategy founded

upon Apple’s image advantage, while simultaneously minimising Apple’
disadvantages in other capabilities. Apple’ new marketing strategy
involved extending the appeal of the Apple image of individuality
from its traditional customer group (tech savvy, graphic designers) to
more a general, young professional types. Protection of the Apple
name by means of tougher controls over dealers was matched by
wider exploitation of the Apple name through entry in other industries
such as the portable music business. Apple’s share of the computer
market went from 15% in 1985 to 4% in 2005 and lost around $700
million in only three months in 1997. However, thanks to the iPod
and to the Apple’s Tunes music stores, its shares grew 90% between
2001 up until today, i.e., from a mere $7/share. Apple is today the
premier provider of MP3 players.
Designing strategy around the most critically important resources

and capabilities may imply that the firm limits its strategic scope to
Contd...
74
Notes those activities where it possesses a clear competitive advantage. The
principal capabilities of Apple are in design and new products
___________________ development; it lacked both the manufacturing capabilities to compete
effectively in the world’s computer market. Apple’s turnaround from
___________________ year 2000 followed it decision to specialise upon design and new
product development. The ability of a firm’s resources and capabilities
___________________ to support a sustainable competitive advantage is essential to the
time frame of a firm’s strategic planning process. If a company’s
___________________
resources and capabilities lack durability or are easily transferred or
___________________ replicated, then the company must either adopt a strategy of short-
term harvesting or it must invest in developing new sources of
___________________ competitive advantage. These considerations are critical for small
technological start-ups where the speed of technological change may
___________________
mean that innovations offer only temporary competitive advantage.
___________________ The company must seek either to exploit its initial innovation before
___________________
it is challenged by stronger, established rivals or other start-ups, or
it must establish the technological capability for a continuing stream
___________________ of innovations. The main issue for Apple is to make sure that it takes
advantage of this window of opportunity. Because there are tougher
competitors down the road and the more money it makes, the more
companies will enter the market making harder for Apple to sustain
this new found competitive advantage. In industries where competitive
advantages based upon differentiation and innovation can be imitated
(such as financial services, retailing, fashion clothing, toys), firms
have a brief window of opportunity during which to exploit their
advantage before imitators erode it away. Under such circumstances
firms must be concerned not with sustaining the existing advantages,
but with creating the flexibility and responsiveness that permits them
to create new advantages at a faster rate than the old advantages are
being eroded by competition.
Question:
Critically analyse the above case.
Source: http://www.bestcxo.com/strategicmanagement/formulating-a-
strategy-following-appleturnaround/
Block–II
Detailed Contents
UNIT-6: FORMULATING BUSINESS STRATEGY
UNIT-7: FORMULATING CORPORATE STRATEGY
UNIT-8: SWOT AND VALUE CHAIN ANALYSIS
UNIT-9: PORTFOLIO ANALYSIS AND STRATEGIC ALLIANCE
UNIT-10: CASE STUDY

77
Unit 6 Notes
Formulating Business Strategy ___________________
___________________
___________________

___________________
\ Business Level Strategy
___________________
\ Concept of Competitive Advantage
\ Key Success Factors ___________________
___________________
Introduction ___________________
In a tidy logical world, any process of choice could be rational. ___________________

Identifying and choosing options would be done purely analytically.
This is not necessarily true. Identifying and evaluating options and
then exercising it for strategy formation is a complex process.
Actually, it may be difficult to identify all possible options with
equal clarity at the same time. The future may evolve differently
from any of the options. Unexpected events can create new
opportunities, destroy foreseen opportunities, or alter the balance
of advantage between opportunities. The results may eventually
depend as much on chance and opportunity as on the deliberate
choice. Good fortune and inspiration play a large role in organization
success and failure, too. No one yet knows enough about effective
strategic management to model it fully, making it more art than
science.
Business Level Strategy

Business strategies are basically competitive strategies. The
objectives of these strategies are about how to compete successfully
in particular markets, and how can the business units acquire
competitive advantage. This is an area of principle concern to
managers. It provides the framework that guides competitive
positioning decisions. It examines the way in which an organization
can compete more effectively to strengthen its market position.
The purpose of the competitive strategy of a business is to build a
sustainable competitive advantage over the organization’s rivals.
This means the ability to anticipate correctly how businesses respond
strategically to competitive threats and opportunities. Michael Porter
in his book, ‘Competitive Strategy has provided the framework for
business strategies. This is the framework of ‘Generic Strategies’.
78
Generic Strategies
Notes
There are two basic types of competitive advantage a firm can
___________________ possess – low cost or differentiation. The two basic types of
___________________
competitive advantage combined with the scope of activities for
which a firm seeks to achieve them, lead to three internally
___________________ consistent generic competitive strategies. These strategies are:
___________________ • Cost Leadership,
___________________ • Differentiation, and
___________________ • Focus Strategies.
___________________ These strategies can be used by the organization to outperform

competition and defend its position in the industry. The Generic
___________________
Competitive Strategies are shown in Figure 6.1. These strategies
___________________ need to be examined in conjunction with the ‘competitive capabilities’
of the organization and the external environment. Effectively
___________________ implementing any of the generic competitive strategies requires
total commitment and determined organizational support. There
needs to be compatibility between corporate level strategy and the
strategy at the operational level.
Competitive Advantage
Lower Cost Differentiation
Competitive Scope
Broad
1. Cost Leadership 2. Differentiation
Target
Narrow 3b. Differentiation

3a. Cost Focus
Target Focus
Figure 6.1: Generic Competitive Strategies
Cost Leadership Strategy

A firm pursuing a cost-leadership strategy attempts to gain a
competitive advantage primarily by reducing its economic costs below
its competitors. This policy once achieved provides high margins
and a superior return on investments.
The skills and resources required to be successful in this strategy
are sustained capital investment and access to capital; superior
process engineering skills; good supervision and motivation of its
labour force; product designed for ease in manufacturing; low-cost
distribution system. The organization attempts to exploit economies
of scale by aggressive construction of efficient economies of scale
through:
Unit 6: Formulating Business Strategy
79
• Volume of production and specialized machines.
Notes
• Volume of production and cost of plant and equipment.
___________________
• Volume of production and employees’ specialization.
• volume of production and overhead costs. ___________________
This strategy requires tight cost control. This is often done by using ___________________
a full costing method or activity-based costing with frequent and ___________________

detailed control reports. The structure of the organization should
be clear-cut, and responsibilities clearly laid out. Organizations often ___________________
provide incentives based on meeting strict quantitative targets, etc. ___________________
In order to remain a cost leader, the firm attempts to avoid those ___________________
factors that can cause the economies of scale to be affected. It has
to work within the physical limits to efficient size; worker motivation; ___________________
and focus on markets and suppliers, sometimes, in restricted
___________________
geographical areas. Firms that are known to have successfully used
this strategy in a number of their businesses include Black and ___________________
Decker, Texas Instruments, and Du Pont.
The low-cost producer strategy works best when buyers are large
and have significant bargaining power; price competition among
rival sellers is a dominant competitive force; the industry’s product
is a standard item readily available from a variety of sellers; there
are not many ways to achieve product differentiation that have
value to the buyer; buyers incur low switching costs in changing
from one seller to another and are prone to shop for the best price.
A low-cost leader is in the strongest position to set the floor on
market price and this strategy provides attractive defences against
competitive forces. Its cost position gives it a defence from
competitors because its lower costs mean that it can still earn returns
after its competitors have competed away their profits through
rivalry. It is protected from powerful buyers because buyers can
exert power only to lower prices, and this will be possible only with
next most efficient competitor. Lower cost provides protection against
suppliers because there is more flexibility in the organization to
cope with input cost increases. Any new entrant will find it difficult
to overcome entry barriers because of scales of economy and as the
activities taken to achieve low costs are both rare and costly to
imitate.
Finally, it places the organization in a favourable position when
pitted against substitutes compared to competitors in the industry.
Cost leadership is valuable if:
• Buyers do not value differentiation very much
• Buyers are price-sensitive
80
• Competitors will not immediately match lower prices
Notes
• There are no changes in:
___________________
❖ Consumer tastes
___________________ ❖ Technology
___________________ ❖ Exogenous prices/costs
___________________ There are a number of risks in using this strategy. These risks
___________________
relate to the fast-changing business environment. The most
important risk to cost leadership is technological change that
___________________ nullifies past investment or learning of the organization. Sometimes
the inability of the management to see or anticipate the changes
___________________
required in the product or market change, is a risk. The
___________________ organization’s advantage can also be neutralized if there is low cost
learning by industry newcomers or inflation in costs of supplies or
___________________
processes that provide the organization a competitive advantage.
___________________
Differentiation Strategy
In a differentiation strategy a firm seeks to be unique in its industry
along some dimensions that are widely valued by buyers. It selects
one or more attributes that many buyers in an industry perceive as
important, and uniquely positions it to meet those needs.
Differentiation will cause buyers to prefer the company’s product/
service over brands of rivals. An organization pursuing such a
strategy can expect higher revenues/margins and enhanced economic
performance.
The challenge is finding ways to differentiate that create value for
buyers and that are not easily copied or matched by rivals. Anything
a company can do to create value for buyers represents a potential
basis for differentiation. Ways to differentiate products/services
include:
• Product features
• Linkage between functions
• Timing
• Location / convenience
• Product mix
• Links with other firms
• Customization
• Product complexity / sophistication
• Marketing (image, etc.)
• Service and support
81
Successful differentiation creates lines of defence against the five
Notes
competitive forces. It provides insulation against competitive rivalry
because of brand loyalty of customers and hence lower sensitivity
___________________
to price. The customer loyalty also provides a disincentive for new
entrants who will have to overcome the uniqueness of the product ___________________
or service. Competitors are not likely to follow a similar approach
___________________
if Buyers value the differentiated products and services. If they do,
this will lead to a lose-lose situation for them. ___________________
The higher returns of the strategy provide a higher margin to deal ___________________
with supplier power. Buyer power is mitigated as there are no
___________________
comparable alternatives. Finally, a company that has differentiated
itself to achieve customer loyalty should be better placed to compete ___________________
with substitutes than its competitors. Some successful examples of
this strategy are Mercedes in Automobiles, Bose in Audio Systems, ___________________
and Caterpillar in construction equipment. ___________________
Competitive advantage through differentiation is sustainable if the ___________________
activities taken to achieve differentiation are rare and costly to
imitate. The most appealing types of differentiation strategies are
those least subject to quick or inexpensive imitation. Differentiation
is most likely to produce an attractive, long-lasting competitive
edge when it is based on technical superiority, quality, giving
customers more support services, and on the core competencies of
the organization.
Differentiation requires the organization to have some of these skills
and resources:
• Strong marketing abilities
• Good product engineering
• Creative flair
• Corporate reputation for quality or technological leadership
• Strong cooperation from channels
• Strong coordination among functions
• Amenities to attract highly skilled labour, scientists, or creative
people.
Differentiation strategy works best when there are many ways to
differentiate the product/service and these differences are perceived
by buyers to have value or when buyer needs and uses of the item
are diverse. The strategy is more effective when not many rivals
are following a similar type of differentiation approach. There are
risks in this strategy when the cost of differentiation becomes too
great or when buyers become more sophisticated and need for
differentiation falls.
82
Focus and Niche Strategies
Notes
The generic strategy of focus rests on the choice of a narrow
___________________ competitive scope within an industry. The focuser selects a segment
___________________
or group of segments in the industry, or buyer groups, or a
geographical market and tailors its strategy to serving them to the
___________________ exclusion of others. The attention of the organization is concentrated
on a narrow section of the total market with an objective to do
___________________
service buyers in the target niche market. The idea is that they will
___________________ do a better job than the rivals, who service the entire market. Each
functional policy of the organization is built with this in mind.
___________________
There are two aspects to this strategy, the cost focus and the
___________________
differentiation focus. In cost focus a firm seeks a cost advantage in
___________________ its target market. The objective is to achieve lower costs than
competitors in serving the market – this is a low-cost producer
___________________
strategy focused on the target market only. This requires the
___________________ organization to identify buyer segments with needs/preferences that
are less costly to satisfy as compared to the rest of the market.
Differentiation focus offers niche buyers something different from
other competitors. The firm seeks product differentiation in its target
market.
Both variants of the focus strategy rest on differences between a
focuser’s target market and other markets in the industry. The
target markets must either have buyers with unusual needs or else
the production and delivery system that best serves the target
market must differ from that of other industry segments.
Cost focus exploits differences in cost behaviour in some markets,
while differentiation focus exploits the special needs of buyers in
certain markets. A focuser may do both to earn a sustainable
competitive advantage though this is difficult. Examples of focus
strategies are Rolls Royce in luxury automobiles; Apple Computer
in Desktop Publishing.
Focus strategy is successful if the organization can choose a market
niche where buyers have distinctive preferences, special
requirements, or unique needs and then developing a unique ability
to serve the needs of the target buyer segment. Even though the
focus strategy does not achieve low cost or differentiation from the
perspective of the market as a whole, it does achieve this in its
narrow target. However, the market segment has to be big enough
to be profitable and it has growth potential.
The organization has to identify a buyer group or segment of a
product line that demands unique product attributes. Alternatively,
it has to identify a geographical region where it can make such
offerings.
83
Focusing organizations develop the skills and resources to serve the
Notes
market effectively. They defend themselves against challengers via
the customer goodwill they have built up and their superior ability ___________________
to serve buyers in the market. The competitive power of a focus
strategy is greatest when the industry has fast-growing segments ___________________
that are big enough to be profitable but small enough to be of ___________________
secondary interest to large competitors and no other rivals are
concentrating on the segment. Their position is strengthened as the ___________________
buyers in the segment require specialized expertise or customized
___________________
product attributes.
___________________
A focuser’s specialized ability to serve the target market niche builds
a defence against competitive forces. Its focus means that either ___________________
the organization has a low-cost position with its strategic target, ___________________
high differentiation or both. The logic that has been laid out earlier
for cost leadership and differentiation also is applicable here. ___________________
Some of the situations and conditions where a focus strategy works ___________________
best are:
• When it is costly or difficult for multi-segment rivals to serve

the specialized needs of the target market niche;
• When no other rivals are concentrating on the same target
segment;
• When a firm’s resources do not permit it to go after a wider
portion of the market;
• When the industry has many different segments, creating more
focusing opportunities and allowing a focuser to pick out an
attractive segment suited to its strengths and capabilities.
A focus strategist must beware of events that could impact the

target market. This can happen when broad-line, multi-segment
competitors may find effective ways to match the focused firm in
serving the narrow target market or the segment may become so
appealing that it is soon crowded with eager, aggressive rivals,
causing segment profits to be split.
Often the niche buyer’s preferences and needs drift more and more
towards the product attributes desired by the market as a whole,
this could be threatening. The focus strategy always implies some
limitation on the overall market share achievable. The strategy
involves a trade-off between profitability and sales volume.
84
Fill in the blanks:
___________________
1. ...................... strategies are basically competitive strategies.
___________________ 2. In order to remain a ................. leader, the firm attempts to avoid
those factors that can cause the economies of scale to be affected.
___________________
___________________
Concept of Competitive Advantage
___________________
Every business has a competitive strategy. However, many strategies
___________________ are implicit, having evolved over time, rather than explicitly
formulated from thinking and planning process. Implicit strategies
___________________
lack focus; produce inconsistent decisions; and unknowingly become
___________________ obsolete. Without a well-defined strategy, organizations will be
driven by current operational issues rather than by a planned future
___________________ vision. Porter’s model provides a process to make your competitive
___________________ strategy explicit so it can be examined for focus, consistency, and
comprehensiveness.
Developing a competitive strategy is developing a broad framework
for the business – how is it going to compete; what are its objectives;
and what policies will be needed to carry out its objectives. The
competitive strategy is a combination of ‘ends’ for which an
organization is striving and ‘means’ by which it is seeking to get
there. It gives the firm a competitive advantage.
Competitive advantage is a position a firm occupies against its
competitors, allowing it to earn revenues higher than costs, including
cost of capital. A firm possesses a sustainable competitive advantage
when its value-creating processes and position cannot be duplicated
or imitated by other firms. As mentioned earlier in the last section,
competitive advantages are cost advantage and differentiation
advantage. They are collectively known as positional advantages
because they denote the firm’s position in its industry as a leader
in either superior services or cost.
Company Industry
Strengths & opportunities &
Weaknesses threats
Factors Factors
Competitive
Internal External to
Strategy
to the the
Combany Company
Personal values Societal

of Key Expectations
implementers
Figure 6.2: Competitive Advantage Framework

85
Creating competitive advantage involves the consideration of four
Notes
key factors. These are shown in figure 6.2. These factors determine
what a company can successfully accomplish. The factors that are
___________________
internal to the organization are its strengths and weaknesses and
the values of its key personnel; the factors that are external to the ___________________
organization are the industry opportunities and threats and societal
___________________
expectations. These factors combine to provide the basis and limits
to the competitive strategy a company can successfully adopt. The ___________________
appropriateness of the competitive strategy can be determined by
___________________
testing the proposed objectives and policies for consistency.
___________________
A business must adopt a strategy that enables it to secure the
resources needed to effectively remain at the cutting edge of ___________________
operational and technological advances in the pursuit of creating
and retaining the customers the firm wants. This is the first ___________________
requirement. History is rife with firms that failed to see new ___________________
technologies coming. Christensen uses the example of the diesel
locomotive to illustrate how disruptive technologies “sneak up” until ___________________
it is too late for the previously dominant firms to respond. When
the diesel locomotive was introduced, it did not match the
performance of the steam locomotive. Baldwin, the leading
locomotive manufacturer, scoffed at this upstart and proclaimed,
“They will never replace the steam locomotive!” This was true for
some time, but little by little, diesel locomotives improved and before
Baldwin knew it, by 1950 diesels had the lion’s share of the market.
By then, it was too late for Baldwin to respond.
Second, ‘competitive advantage’ is also created when resources and
capabilities owned exclusively by the organization can generate
unique core competencies. This advantage is sustainable due to the
lack of substitution and imitation capacities by the organization’s
competitors. As the core competencies are unique, the benefits
derived from these advantages are retained inside the organization;
they are not appropriated by others.
Finally, competitive advantage can come from a strong and
supportive value chain. The members of the chain look at the benefits
that accrue to the entire value chain. Such cooperation is possible
and often seen in such value chains, e.g., increasing productivity,
reducing stocks at different levels, or process improvements etc.,
are undertaken by members of the value chain and the advantages
that accrue benefit all members of the value chain. In addition, it
is able to provide greater value to the customer.
These broad considerations in an effective competitive strategy, to
gain sustainable competitive advantage, can be extended into a
generalized approach to the formulation of strategy. In order to do
the organization must be in a position to answer the following
questions:
86
• What is the current strategy, implicit or explicit?
Notes
• What assumptions have to hold for the current strategy to be
___________________ viable?
___________________ • What is happening in the industry, with our competitors, and
in general?
___________________
• What are our growth, size, and profitability goals?
___________________
• What products and services will we offer?
___________________
• To what customers or users?
___________________
• How will the selling/buying decisions be made?
___________________ • How will we distribute our products and services?
___________________ • What technologies will we employ?
___________________ • What capabilities and capacities will we require?
___________________ • Which ones are core?
• What will we make, what will we buy, and what will we acquire
through alliance?
• What are our options?
• On what basis will we compete?
Although the process may seem intuitively clear, answering these
questions involves a great deal of penetrating analysis. It is in
answering these questions that the organization finds the
competitive strategy most suited to it.
Sustainable competitive advantage is built upon corporate
capabilities and must constantly be reinvented. Distinctive
capabilities are the basis of competitive advantage. Organizations
have found many offensive and defensive actions to defend their
position in the industry and cope with competitive forces.
Check Your Progress

1. Not every business has a competitive strategy.
2. Creating competitive advantage involves the consideration of four key
factors.
Key Success Factors

A Key Success Factor (KSF) is a performance area of critical
importance in achieving consistently high productivity. There are
at least two broad categories of key success factors that are common
to virtually all organizations: business processes and human
87
processes. Both are crucial to building great companies. If your
Notes
company is especially good in those processes and just mediocre at
everything else, your company will be successful.
___________________
Focus has to be on a few activities – on those most important
___________________
activities – on those two or three (no more) key success factors. For
example, in the computer software market, the key success factors ___________________
are establishing efficient channels of distribution and providing after-
___________________
sales support. Too much concern about writing “efficient code” may
be a technical nicety, but from a competitive point of view, it’s a ___________________
waste of resources. Similarly, in the strategy consulting business,
___________________
the key success factors are communicating with executive decision
makers and helping managers think more deeply about their ___________________
enterprise than they ever have before. Time spent on controlling
expenses is not critical. ___________________
Key Success Factors are defined by the market and by the customer, ___________________
not by the company. They revolve around skills, processes and ___________________
systems. There are many ways to identify the company’s KSFs. One
of the methods is through brainstorming. Ask your planning team
to provide two or three answers (but no more) to the question, “For
our organization to be successful, we must be especially good at the
following activities ...”
Ask everyone in the room to first spend a few moments thinking
about the question and writing their individual answers. Then have
each person read their own answers aloud. Next discuss any
differences of opinion, and finally arrive at a consensus. Record
your team’s final answers. You’ve developed a short list of “activities
at which we’ve got to be especially good.”
And when itemizing your internal strengths and internal
weaknesses, you’ll want to keep your lists short and well-focused.
You’ll want to include only those strengths and weaknesses which
relate to your key success factors. Thus, your key success factors
will serve as a guide in determining which potential strengths, and
which potential weaknesses you actually include in your lists.
These are normally two or three activities which are the primary
determinants of success.
You can transfer your results to the matrix shown as Figure 6.3.
Sorting these results based on the probability of occurrence and the
probable impact on the company, you can prune the list to 3 or 4
KSFs. Items that fall in the first column of the chart are most
probably Key Success Factors (KSFs). The items that fall in the
first two rows are factors on which the company needs to focus on.
Identifying KSFs is a good cornerstone of a firm’s strategy. Winning
competitive advantage often hinges on being distinctively better
than rivals at one or more of the KSFs.
88
Notes Probable Impact on Corporation
___________________ High Medium Low
___________________
Probability of Occurrence
High
High High Medium
___________________ Priority Priority Priority
___________________
Medium
High Medium Low
Priority Priority Priority
___________________
___________________ Low Low Low
Low
Priority Priority Priority
___________________
___________________ Figure 6.3: Key Success Factors
___________________ To generate an industry matrix, identify 4 to 5 factors that appear

___________________
to determine current and expected success in the industry. Once
the KSFs have been identified, these can be used to analyze the
position of the firm within the industry.
• Give yourself a score on each KSF and, also, give a score to
competition on a scale of ten (ten is outstanding). Each rating
is a judgment regarding how well that company is currently
dealing with each key success factor.
• Assign a weight to each factor from 1 to 0. The higher the
value, the more important is the factor. The total of the weights
for all the factors must add up to 1.
• In the table shown below, multiply the weight in Column 2 for
each factor times its rating in Column 3 to obtain that factor’s
weighted score for our company. Similarly, Company A and
Company B can be rated.
• Finally, add the weighted scores for all the factors determine
the total weighted scores. This score indicates how well each
company is responding to current and expected key success
factors in the industry’s environment. Compare your score
against competitors (highest score is probably doing the right
things better)
An industry matrix, shown as in Table 6.1, summarizes the key

success factors within a particular industry.
89
Table 6.1: Industry Matrix
Notes
Key Weight Our Company Company Weighted
Success Company B B Score ___________________
Factors Rating Rating Rating
___________________
Us A B
___________________
___________________
___________________
Total 1.00 ___________________
___________________
The matrix is used to specify the position of the primary competitors
in the industry on each of the factors. The industry matrix can be ___________________
expanded to include all the major competitors within an industry
___________________
simply by adding two additional columns for each additional
competitor. Use score as benchmark in the future to improve your ___________________
performance and success over time. What are our differentiators
and what sustainable competitive advantage can we develop? What
are our areas of weakness, and potential quick wins to improve on
our success?
Key success factors are indicators or milestones that measure your
business achievements and help determine how well you are
progressing towards your goals and objectives. The challenge is to
improve in these areas. The success of the initiatives, in both areas
of business processes and human processes, and their incorporation
within the line organization, ultimately determines the success of
the firm. Key success factors are different from strategic factors.
Key success factors deal with an entire industry; whereas, strategic
factors deal with a particular company.
Check Your Progress

Fill in the blanks:
1. A .................. is a performance area of critical importance in achieving
consistently high productivity.
2. Key success factors deal with an entire industry; whereas, factors deal
with a particular company.
Summary
Successful organizations create value in many different ways.
Competitive advantage stems from the provider’s ability to create
experiences that are regarded as valuable by the consumer.
Management has to increasingly look at its job as providing
meaningful experiences, as value creation progressively bases itself
90
on intangibles, so that ‘value creation logic’ can be translated into
Notes
a coherent growth path. There are two basic types of competitive
___________________ advantage a firm can possess: low cost or differentiation. The two
basic types of competitive advantage combined with the scope of
___________________ activities for which a firm seeks to achieve them, lead to three
___________________ internally consistent generic competitive strategies. In a
differentiation strategy a firm seeks to be unique in its industry
___________________ along some dimensions that are widely valued by buyers. It selects
___________________ one or more attributes that many buyers in an industry perceive as
important, and uniquely positions it to meet those needs.
___________________
Differentiation will cause buyers to prefer the company’s product/
___________________ service over brands of rivals. Differentiation is most likely to produce
an attractive, long-lasting competitive edge when it is based on
___________________
technical superiority, quality, giving customers more support
___________________ services, and on the core competencies of the organization. Strategy
of focus rests on the choice of a narrow competitive scope within an
___________________
industry. The focuser selects a segment or group of segments in the
industry, or buyer groups, or a geographical market and tailors its
strategy to serving them to the exclusion of others. There are two
aspects to this strategy, the cost focus and the differentiation focus.
In cost focus a firm seeks a cost advantage in its target market.
Creating competitive advantage involves the consideration of four

key factors. The factors that are internal to the organization are its
strengths and weaknesses and the values of its key personnel; the
factors that are external to the organization are the industry
opportunities and threats and societal expectations. These factors
combine to provide the basis and limits to the competitive strategy
a company can successfully adopt. A business must adopt a strategy
that enables it to secure the resources needed to effectively remain
at the cutting edge of technological advances in the pursuit of
creating and retaining the customers the firm wants. The three
generic strategies are based on competing differently in the
marketplace. They construct different types of defences against
competitive forces to provide the firm a competitive advantage.
Cost leadership imposes severe burden on the organization to keep

up its position. It means the organization has to reinvest in modern
equipment so as to keep reaping all economies of scale. In addition,
it must keep honing its process engineering core capability. Similarly,
differentiation requires investments in a strong R&D on a continuous
basis and the ability to attract the right type of people into the
company. A Key Success Factor (KSF) is a performance area of
critical importance in achieving consistently high productivity.
91
Questions for Discussion Notes
1. Discuss the significance of Cost Leadership Strategy.
___________________
2. Write a brief note on Differentiation strategy.
___________________
3. Highlight some of the situations and conditions where a focus
strategy works best. ___________________
4. Explain KSFs with reference to Industry Matrix. ___________________
5. What are the three generic strategies with which operations ___________________
strategy must be consonant?
___________________
5. How do these generic strategies differ and provide ‘competitive
advantage’? ___________________
___________________
___________________
___________________
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Unit 7 Notes
Formulating Corporate Strategy ___________________
___________________
___________________
___________________
\ Corporate Strategy
___________________
\ Single Business Units (SBUs)
\ Diversification ___________________
___________________
Introduction ___________________
In this unit, we deal with corporate strategy. The corporate level ___________________
strategies or grand strategies can be defined as the general plan by
which the organization intends to achieve its purpose and long
term objectives. Growth is the primary objective of most
organizations. If the firm stops growing, it will ultimately be replaced
by others in the marketplace. Growth is often a requirement for
survival. Managements, also opt for growth strategies in the belief
that ‘bigger is better’. Profitable growth generates cash, which allows
an organization to fund further growth without taking on excessive
debt or diluting equity too much. This provides the organization the
advantages of retaining its strategic freedom as well as enhancing
its investment potential.
Corporate Strategy
Corporate strategy is dominated by the “domain choice” question. It
defines the product-market domain of the firm and describes the
firm’s scope of operations. At the corporate level, the firm faces
several strategic questions:
• What businesses should we compete in, given our strengths
and weakness?
• Which new product markets should we enter?
• Which should we exit?
All these activities are related to the grand strategy of the
organization. The specific tasks from that list that fall under the
domain of corporate strategy include:
• The mission of the firm;
94
• Business segmentation i.e., selecting planning and
Notes
organizational focuses;
___________________ • Horizontal strategy i.e., pursuing synergistic linkages across
business units and searching for and exploiting potential
___________________
interrelationships among the various business units of the firm;
___________________ • Vertical integration i.e., defining the boundaries of the firm;
___________________ and
___________________
• The strategic posture of the firm i.e. identifying strategic thrusts
and planning challenges and establishing corporate performance
___________________ objectives in corporate, business and functional key result areas.
___________________ Corporate Strategy binds the organization together. It sets the guides
and principles for the rest of the functions to follow. It is concerned
___________________
with the type of business the organization is in, it overall competitive
___________________ position and how the resources of the organization have to be
deployed. They set the overall direction the organization will follow.
___________________
Figure 7.1 graphically represents the structure of strategies in a
firm.
Corporate Strategy
• Vision
• Corporate
• Philosophy and Culture
Business Unit Strategy

• Mission
• Business goals
• Competencies
Information Research and

Manufacturing
Systems Development
Finance Marketing Human Resources
Figure 7.1: Structure of Strategies
The strategic intent, or the mission of the firm, gives a broad

direction to strategic choice. Depending on the nature and purpose
of the organization, within this broad direction, there are a number
of specific options concerning the direction of developing the
organization’s strategies. However, these options are defined by three
major approaches. The appropriate approach depends upon the state
of the organization and the internal and external environment of
the firm. The organization can adopt any of the approaches described
below or it can combine the approaches in the options it exercises:
Unit 7: Formulating Corporate Strategy
95
Growth Strategies: Long Term Strategies
Notes
Stabilization or Restructuring Strategies: Medium Term Strategies
___________________
Corporate Revival or Turnaround: Short Term Strategies
___________________
We will start by looking at growth strategies. Growth is the primary
objective of most organizations. If the firm stops growing, it will ___________________
ultimately be replaced by others in the marketplace. Growth is ___________________
often a requirement for survival.
___________________
Managements, also opt for growth strategies in the belief that ‘bigger
is better’. They keep attempting to increase the level of the ___________________
organization’s operations. In the bargain, these strategies provide
___________________
career growth for them and employees of the organization. In a
nutshell, there is a perception in many management’s wherein they: ___________________
• Equate growth with success, ___________________
• Potential of greater rewards, and ___________________

• View a strategy of stability as long run failure.
Profitable growth generates cash, which allows an organization to
fund further growth without taking on excessive debt or diluting
equity too much. This provides the organization the advantages of
retaining its strategic freedom as well as enhancing its investment
potential. Reliance Industries, Bajaj Auto are examples of this type
of growth.
The growth strategy can be based on external options as in the case
of acquisitions and divestitures. Growth can also be through direct
expansion that is internally focused and does not involve other
firms: new product development; quality improvement; increasing
company size, revenues, operations, or workforce; and from creating
businesses within the organization.
Growth strategies are usually healthy, but can be misleading
indicators of the organizations general health and cash flow.
Unprofitable growth is not desirable. There are numerous examples
of this type of growth amongst Indian companies. Some of the
examples are Kulwant Rai Group of Companies, Southern
Petrochemical Industries Ltd., Nagarjuna Fertilizers. All these
companies have been traded at very high stock prices and today are
not traded or the stock prices have fallen below the face value.
Very often, the organization has to pause before it goes ahead, if it
has issues exemplified in the Essar case above. This is when
stabilization strategies become necessary. In the case of Essar, the
company needed to stabilize to focus on factors such as organizational
weaknesses or lack of competitiveness. An organization will opt for
stabilization strategies when it needs to have breathing space to
96
reorganize its activities so that it can grow more vigorously in the
Notes
long term. These strategies are also called ‘restructuring’ strategies.
___________________ Some of the factors that may lead an organization to decide to
restructure are changing technologies, the rise of competition,
___________________
management adjustments, deregulation, fluctuating exchange rates,
___________________ and changes in tax policy, etc.
___________________ If any of these factors becomes critical, it results in unprofitable
growth. Unprofitable growth allows debts to grow, increases interest
___________________
costs, and the overall cost of capital. Gradually, the company loses
___________________ its ability to pursue growth opportunities because of depressed stock
prices and dwindling cash flows.
___________________
Hindustan Lever devised Project Millennium, a comprehensive
___________________
transformation strategy, to restructure itself and also to manage
___________________ the resultant changes. This envisaged a transition from being a
large, diversified conglomerate company to becoming a configuration
___________________ of empowered businesses, each business acting like a virtual
company built around a single category of products. These strategies
were medium-term and were meant to ensure long-term growth.
Corporate sickness is widespread in India and in many other market
economies and is on the increase because of “hypercompetition” as
a result of globalization. Sometimes, the firm has reached a stage
when sales and profits are down and market share is slipping. A
strategy must be found in time to stop the decline if the organization
is to continue to succeed. Strategies of renewal will stop the
organization’s decline and put it back on a successful path.
Such strategies are called Corporate Revival or Turnaround
strategies. Renewal strategies are a similar to restructuring
strategies. While restructuring can be applied to healthy
organizations, with a view to make the business more efficient and
therefore more profitable, renewal or turnaround strategies address
great weaknesses or flaws in the business.
For example, with the removal of controls and restrictions, in 1991,
individual entrepreneurs had the freedoms to explore their
opportunities in a more meaningful way than was possible before.
While some groups like the Tata Group and Hindustan Lever etc.
gained from these changes, some who had become complacent in
their monopolistic positions did not.
Some of these companies, in the later group, had centralized their
operations so much that they became unmanageable with in the
new environment. The situation was further complicated by poor
financial management and interfamily and intra-family disputes.
Instead of taking up the opportunity to restructure, they continued
in their old ways. The result was that many of them started losing
97
their pre-eminence and some started cracking up. Those who lost
Notes
their positions in top business groups included the Scindias, the
Sarabhais and the Bhiwandiwalas. Some declined like Bangurs and
___________________
the Walchand Hirachands.
___________________
The three strategy configurations show three different ways to create
value for the customer and for the company. One of the ___________________
configurations will probably explain the logic better than the two
___________________
others for the company in mind. Competitive advantage can be
created through unique resources and/or combining the activities in ___________________
a unique way. The three configurations show three different ways
___________________
to establish competitive advantage focusing on the activities and
the unique drivers behind the activities. ___________________
These configurations are also tools to establish a common ___________________

communication platform. If management is the only ones that
understand how value is created in the company they will have ___________________
problems in implementing their strategies. The middle management ___________________
and employees will simply not understand the logic behind decisions.
This reduces the probability of the success of the strategy employed.
Starting with a single business firm, we will discuss diversification
strategies. Then we will discuss the portfolio method of analysis.
We will also look at mergers and acquisitions that have made waves
in the recent past. Another topic that has been in the forefront of
discussions on strategy is strategic alliances. We will discuss this.
Finally, we will look at the concept of value creation through
corporate strategy.
Check Your Progress

Fill in the blanks:
1. Managements, also opt for growth strategies in the belief that
.................. .
2. The ............... strategy can be based on external options as in the
case of acquisitions and divestitures.
Single Business Units (SBUs)

The primary goal of any firm or organization is achieving higher
levels of performance, where performance is a comprehensive term
that includes profitability, efficiency and effectiveness. The core of
strategy is to set the direction. The corporate strategy sets the
overall strategic direction. Strategy creates opportunities. As
opportunities increase, the organization is driven into more and
more neighbouring areas of opportunity, and is further propelled in
this direction by greater and greater success. Strategies become a
means towards more sales revenues, more employees, or more
98
market share and an important option to help improve odds against
Notes
greater uncertainty.
___________________ How that strategy is implemented and managed, depends to a large
degree on whether an organization is engaged in one or several
___________________
businesses. A single-business firm is technically not diversified
___________________ because it gets 95 percent or more of its total revenues from one
business. A dominant-business firm is different in that it has moved
___________________
beyond a complete focus on one business by obtaining revenues
___________________ from other businesses. However, as the definition indicates that it
is still largely dependent upon one industry. The simplest corporate
___________________
strategic model of a firm that has a single business or a dominant
___________________ business can be represented by a 2 × 2 matrix shown as in Figure
7.2. The Product-Market matrix (sometimes called the Corporate
___________________ Strategy matrix) defines the options that are open to the firm. The
___________________ Product-Market matrix, also known as Ansoff’s matrix, explores
two key dimensions.
___________________
The first is ‘product’ around which the business is built. Most
offerings are limited in at least two ways: time, in that their
relevance diminishes and redesign or renewal is usually required,
and transferability, in that they tend to work best under certain
market conditions. Modifying the core offering to improve the value
offering is a key strategic choice.
The second is market, generally applied as market options. This
dimension distinguishes between customer markets that are well
established and known to the firm versus all the rest that are not.
New
Product
Development Diversification
Product
Market Market
Penetration Development
Current
Current New
Market
Figure 7.2: Product-Market Matrix
According to Ansoff, each of the four quadrants defines the core

strategic options to different sets of internal and external conditions.
Careful assessment leads to better understanding and decision-
making:
99
• Upper left–Product Development: Positive customer
Notes
relationship and the goodwill allows a company to make new
product offers more effectively and inexpensively to existing
___________________
customers than to new ones. The advantages of this have to be
weighed against the possible damage resulting from negative ___________________
spill over from the new to the existing product experience. Any
___________________
new offering needs to enhance customer relationship and the
goodwill. ___________________
• Lower left–Market Penetration: This strategy says, change ___________________

nothing and sell more of the same to existing customers. When
a business does not consciously select a growth or diversification ___________________
strategy, it is doing this, capacity expansion. This is the ___________________
preferred strategy when a company’s product is performing
well and there is room to increase market share. However, the ___________________
risk involved is in overcapacity in the industry.
___________________
• Lower right–Market Development: A well-developed product
___________________
can be introduced into new markets to extend its value. This
is ideal when little modification is required and room for growth
in the original market is restricted. Many products offered by
multinationals, as diverse as food, pharmaceuticals, and
automobiles, etc. fall in this category.
• Upper right–Diversification: Diversification represents a
near total strategic overhaul, simultaneously trading in both
Product and Market. It is the most challenging, costly, and
risky of the options. New skills and relationships need to be
developed. Companies need to chart a gradual migratory path
leading from the known to the unknown.
Check Your Progress

1. The core of strategy is to set the direction.
2. The first is market around which the business is built.
In a multi-business firm corporate strategy takes a broad overview

role that is more encompassing than crafting strategy for a single
business. Major tasks include devising actions to improve long- term
performance of a corporation’s portfolio of businesses; capturing
strategic fit benefits existing within and between business units;
and evaluating profit prospects of each business unit and steering
corporate resources into the most attractive strategic opportunities.
Diversification
Diversification entails entry into new markets with new products.
There is an underlying struggle for supremacy between the
100
management capabilities of the organization and the discipline of
Notes
market forces. Market forces try to divide organizations into smaller
entities so as to achieve the economist’s ideal of a perfect market
___________________
with a large number of small operators defenceless against the
___________________ forces of competition. In contrast, corporate managements try to
grow and diversify fighting market forces so as to achieve high
___________________
profits and be able to control their own destinies. This conflict is
___________________ the basis for the theory of diversification.
___________________ Diversification, as a strategy, has had a roller coaster relationship

with business. In the 1970’s, diversification was the essence of
___________________
strategy. Organizations tried to diversify in order to minimize risks
___________________ in their product portfolios and enhance their capability for unlimited
growth. Problems in many organizations that followed this dogma,
___________________ created a new concept of strategy – core competence. Organizations
___________________ that adhered to this dogma missed the opportunities that were
opening up around the globe as markets and technologies converged
___________________ to create huge new businesses. Since the late nineties, this has
brought in a renewed interest in diversification.
When does one diversify and to what extent? Perhaps the answers
lie both in the market and the organization. When the organization
has a high level of organizational capability, it can bring the market
into submission and thereby diversify and earn sustained high
profits. As the markets become stronger and more efficient, when
competition is high, capital markets are efficient, and labour markets
are more flexible, organizations require higher levels of management
capability to protect their diversity. Diversification is an exciting
option for those who have the management capability.
Diversification may be related or unrelated to the existing operations
of the organization. Related diversification is called concentric
diversification and unrelated diversification is called conglomerate
diversification.
Concentric Diversification
The acquisition or internal development of a business outside of,
but in some way related to a company’s existing scope of operations.
Related diversification again divides into backward, forward, and
horizontal integration:
• Backward integration is a move towards suppliers and raw
materials in the same overall business. An example of this
would be a brewer acquiring malting facilities or growing hops.
• Forward integration is a move towards the market place or
customers in the same overall business. An example of this
would be a manufacturer acquiring retail outlets or a hop
grower beginning to brew his own beer.
101
• Horizontal integration is a lateral move into a closely related
Notes
business such as selling by-products.
Related diversification can happen in two ways: (a) Related- ___________________
constrained – when all the businesses in which a firm operates
___________________
share a significant number of inputs, production technologies,
distribution channels, similar customers, etc., and (b) Related- linked ___________________
– when the different businesses that a single firm pursues are
___________________
linked on only a couple of dimensions, or if different sets of
businesses are linked along very different dimensions. ___________________
For example, BIC produces products such as disposable razors, ___________________

cigarette lighters, and pens. This is a related-constrained
___________________
diversification strategy because all the products share significant
commonalities in the areas of plastic injection moulding, retail ___________________
distribution, and brand name.
___________________
Larsen & Toubro Limited (L&T) is a good example of a related-
linked firm. L&T is India’s largest engineering and construction ___________________
conglomerate. The company sells its strengths in basic and detailed

engineering, process technology, project management, procurement,
fabrication and erection, construction and commissioning, to offer
single point responsibility in project execution and management.
The rationale behind the conglomerate diversification decision is
that there is a minimum common denominator and some degree of
synergy with the original business, even if the diversification is
unrelated. Examples of synergy are the ability to share facilities—
a sales force, for instance—or reducing the risk profile of the
organization by creating a balance in the timing of cash flow, etc.
More generally, diversified businesses grow faster and growth tends
to be greatest if the diversification is unrelated. However, related
diversifications tend to be more profitable.
Conglomerate Diversification
Conglomerate Diversification is where a firm diversifies into
unrelated areas. It is the acquisition or internal development of a
business outside of, and in no way related to a company’s existing
scope of operations. Conglomerate diversification requires strong
analysis of fit between the unrelated industries. It is often an
excellent option for organizations whose assets are undervalued;
who are financially distressed; or organizations with bright growth
prospects but which are short on investment capital. Another reason
for conglomerate diversification is when there is some sort of barrier
to expansion in/or related areas of the existing business.
For example: Gujarat Flourocarbons Ltd, a manufacturer of
refrigerant gases, has gone into building and operating multiplexes.
This was an enforced choice due to the Montreal Protocol, of which
102
India is a signatory, which restricted its growth in its traditional
Notes
businesses.
___________________ Many organizations either have no option but to diversify into
unrelated areas or find it prudent to do so, anticipating unfavourable
___________________
regulatory changes in the near future.
___________________
For example, many tobacco companies, due to stringent laws being
___________________ enacted against their products, have diversified into unrelated
products. ITC Ltd. has entered the food industry and hotel industry,
___________________
etc.
___________________
Conglomerate diversification has a number of advantages. Business
___________________ risk is scattered over many industries and capital can be invested
in whatever seems to offer the best profit prospects. Profitability is
___________________
more stable because hard times in one industry may be partially
___________________ offset by good times in another. If corporate managers are good at
spotting bargain-priced firms with big upside profit potential,
___________________ shareholder wealth can be enhanced.
On the negative side, diversification does nothing to enhance the
competitive strength of individual business units; each business
remains on its own; and corporate synergy can be achieved only if
the organization has the ability to build and manage the units
through an integrated network, that exhibits three key features:
(a) strong entrepreneurial units; (b) rich, horizontal flow of
knowledge, best practices across units; and (c) a corporate ambition,
set of values and identity.
This approach to creating strong, diversified organizations with
integrated networks raises questions about the quality of
management. Some of the issues raised are given below:
• Top management competence
❖ Can top management tell a good acquisition from a bad
one?
❖ Can they select good managers to run each business?
❖ Do they know what to do if a business unit stumbles?
• Are the firm’s profits more stable?
❖ How much diversity can the firm manage successfully?
❖ How broad should the organization’s portfolio be?
❖ Do the “up & down” cycles cancel out?
There are questions about the ability of organizations with
conglomerate diversification to mask poor performance of some units
with the good performance of other units. This has raised a number
103
of questions on the desirability of extensive conglomerate
Notes
diversification. Financial analysts and institutional investors have
been found to prefer investing in narrow product category companies
___________________
rather than in organizations that are highly diversified. The result
is that the attractiveness of conglomerate diversification is on the ___________________
wane.
___________________

1. ................ entails entry into new markets with new products.
___________________
2. In the ................., diversification was the essence of strategy.
___________________
Summary ___________________
___________________
The specific tasks that fall under the domain of corporate strategy
include: The mission of the firm; Business segmentation; Horizontal ___________________
strategy; Vertical integration; and the strategic posture of the firm.
Within this broad direction, there are a number of specific options
concerning the direction of developing the organization’s strategies.
However, these options are defined by three major approaches:
Growth Strategies (Long Term Strategies); Stabilization or
Restructuring Strategies (Medium Term Strategies) and Corporate
Revival or Turnaround Strategies (Short Term Strategies).
Diversification, as a strategy, depends upon both in the market and
the organization. Organizations require higher levels of management
capability to protect their diversity. Diversification may be related
or unrelated to the existing operations of the organization. Related
diversification is called concentric diversification and unrelated
diversification is called conglomerate diversification.

1. What is corporate level strategy?
2. How does corporate level strategy differ from other types of
strategy?
3. “Corporate Strategy binds the organization together.” Do you
agree with this statement? If yes, give reasons.
4. Highlight the importance of restructuring strategies.
5. Critically analyse Product-Market Matrix.
6. What is Concentric Diversification?
7. Discuss Conglomerate Diversification.
105
Unit 8 Notes
SWOT and V
SWOT alue Chain Analysis
Value ___________________
___________________
___________________

___________________
\ SWOT Analysis: An Introduction
___________________
\ The SWOT Matrix
\ Value Chain: An Introduction ___________________
\ Value Chain Analysis ___________________
___________________
Introduction ___________________
The SWOT analysis provides information that is helpful in matching

the firm’s resources and capabilities to the competitive environment
in which it operates. Successful businesses build on their strengths,
correct their weaknesses and protect against internal vulnerabilities
and external threats. Value chain analysis describes the activities
the organization performs and links them to the organization’s
competitive position. In looking at the strategic capability of an
organisation, it is not sufficient to look inside the organisation.
Much of the value creation occurs in the supply and distribution
chain. Therefore, it evaluates which value each particular activity
adds to the organizations products or services.
SWOT Analysis: An Introduction

In the early 1950s, two professors of business policy at Harvard,
George Albert Smith Jr. and C. Roland Christensen, taught students
to question whether a firm’s strategy matched its competitive
environment. In reading stories of companies, students were
instructed to ask: Do a company’s policies “fit together into a program
that effectively meets the requirements of the competitive situation?”
Students were told to address this problem by asking: “How is the
whole industry doing? Is it growing and expanding? Or is it static;
or declining?” Then, having “sized up” the competitive environment,
the student was to ask: “On what basis must any one company
compete with the others in this particular industry? At what kinds
of things does it have to be especially competent, in order to
compete?”
By the 1960s, classroom discussions in the business policy course
focused on matching a company’s “strengths” and “weaknesses” –
106
its distinctive competence – with the “opportunities” and “threats”
Notes
(or risks) it faced in the marketplace. This framework, which came
to be referred to by the acronym SWOT, was a major step forward
___________________
in bringing explicitly competitive thinking to bear on questions of
___________________ business policy.
___________________ Kenneth Andrews put these elements together in a way that became
particularly well known. In 1963, a business policy conference was
___________________
held at Harvard that helped diffuse the SWOT concept in academia
___________________ and in management practice.
___________________ The acronym “SWOT” represents “Strengths”, “Weaknesses”,

“Opportunities”, and “Threats”. The environmental factors internal
___________________
to the firm usually can be classified as strengths (S) or weaknesses
___________________ (W), and those external to the firm can be classified as opportunities
(O) or threats (T). The process diagram for a SWOT analysis is
___________________ shown in Figure 8.1.
___________________
Environmental Scan
Internal Analysis External Analysis
Strengths Weaknesses Opportunities Threats
Figure 8.1: SWOT Analysis Framework
The SWOT analysis provides information that is helpful in matching

the firm’s resources and capabilities to the competitive environment
in which it operates. As such, it is instrumental in strategy
formulation and selection. Successful businesses build on their
strengths, correct their weaknesses and protect against internal
vulnerabilities and external threats. They also keep an eye on their
overall business environment and spot and exploit new opportunities
faster than competitors. The technique is simple and effective. It
requires an analytical frame of mind. Due to its simplicity, all firms
have the capacity to use this tool to advantage.
Check Your Progress

Fill in the blanks:
1. SWOT stands for .................... .
2. The SWOT analysis provides information that is helpful in matching the
firm’s ................. and capabilities to the ............ in which it operates.
Analysis of the Firm against Competition

The first step is to identify competition. Every business has
competitors. Competitors are those who could provide our customers
Unit 8: SWOT and Value Chain Analysis
107
a product or service that fills the same need as the business does.
Notes
Even if the product or service is truly innovative, we need to look
at what else customers would purchase to accomplish this task.
___________________
Begin by looking at primary competitors. These are the market
___________________
leaders, the companies who currently dominate the market. Next,
look for secondary competitors. These are the businesses who may ___________________
not go head-to-head with the firm but who are targeting the same
___________________
general market. Finally, look at potential competitors. These are
companies who might be moving into the market and who the firm ___________________
needs to prepare to compete against.
___________________
The second step is to analyze strengths and weaknesses of
___________________
competitors. Determine their strengths and find out what their
vulnerabilities are. Why do customers buy from them? Is it price? ___________________
Value? Service? Convenience? Reputation? Focus as much on
“perceived” strengths and weaknesses as on actual ones. This is ___________________
because customer perception may actually be more important than ___________________
reality. The strengths/weaknesses analysis is more easily done in
table form. Write down the names of each of the competitors. Then
set up columns listing every important category for the line of
business. It may be price, value, service, location, reputation,
expertise, convenience, personnel, or advertising/marketing. Rate
the competitors on each of the identified parameters, and put in
comments as to why you have given them that rating.
The third step is to look at opportunities and threats. Strengths
and weaknesses are often factors that are under a company’s control.
But when we’re looking at our competition, we also need to examine
how well prepared we are to deal with factors outside our control.
Opportunities and threats fall into a wide range of categories. It
might be technological developments, regulatory or legal action,
economic factors, or even a possible new competitor. An effective
way to do this is to create a table listing competitors and the outside
factors that will impact the industry. We will then be able to tell
how we can deal with opportunities and threats.
The fourth is to determine the position of the firm. Once we figure
out what the competitors’ strengths and weaknesses are, we need
to determine where to position the company with respect to
competition. Rank the company in the same categories that you
ranked competitors. This will give a clear picture of where the
business fits in the competitive environment. It will also help
determine what areas the firm needs to improve, and what
characteristics of business the firm should take advantage of to
gain more customers.
108
___________________
1. The second step is to look at opportunities and threats.
___________________ 2. The fourth is to determine the position of the firm.
___________________
___________________ The SWOT Matrix

___________________ The relationships in a SWOT analysis are generally represented by
a 2 × 2 matrix. The “Strengths” and “Opportunities” are both positive
___________________
considerations. “Weaknesses” and “Threats” are both negative
___________________ considerations. The final results of an analysis could be listed in
the matrix given in Table 8.1. The matrix identifies the Strengths,
___________________ Weaknesses, Opportunities and Threats of a firm.
___________________ This information can be used by the company in many ways in
___________________ evolving its options for the future. In general, the company should
attempt:
• To build its strengths;
• To reverse its weaknesses;
• To maximize its response to opportunities; and
• To overcome its threats.
Table 8.1: The SWOT Matrix
Strengths (Internal) Weaknesses (Internal)
Many product lines? Obsolete, narrow product lines?
Broad market coverage? Rising manufacturing costs?
Manufacturing competence? Decline in R&D innovations?
Good marketing skills? Poor marketing plan?
Good materials management Poor material management

systems? systems?
R&D skills and leadership? Loss of customer goodwill?
Information system competencies? Inadequate human resources?
Human resource competencies? Inadequate information systems?
Brand name reputation? Loss of brand name capital?
Portfolio management skills? Growth without direction?
Cost of differentiation advantage? Bad portfolio management?
New-venture management Loss of corporate direction?

expertise?
109
Appropriate management style? Infighting among divisions? Notes
Appropriate organizational Loss of corporate control?

___________________
structure?
___________________
Appropriate control systems? Inappropriate organizational
structure and control systems? ___________________
Ability to manage strategic High conflict and politics? ___________________

change?
___________________
Well-developed corporate strategy? Poor financial management?
___________________
Good financial management? Others?
___________________
Others?
___________________
Opportunities (External) Threats(External)
___________________
Expand core business(es)? Attacks on core business(es)?
___________________
Exploit new market segments? Increases in domestic competition?
Widen product range? Increase in foreign competition?
Extend cost or differentiation Change in consumer tastes?

advantage?
Diversify into new growth Fall in barriers to entry?

businesses?
Expand into foreign markets? Rise in new or substitute products?
Apply R&D skills in new areas? Increase in industry rivalry?
Enter new related businesses? New forms of industry competition?
Vertically integrate forward? Potential for takeover?
Vertically integrate backward? Existence of corporate raiders?
Enlarge corporate portfolio? Increase in regional competition?
Overcome barriers to entry? Changes in demographic factors?
Reduce rivalry among competitors? Changes in economic factors?
Make profitable new acquisitions? Downturn in economy?
Apply brand name capital in new Rising labour costs?

areas?
Seek fast market growth? Slower market growth?
Others? Others?
110
A firm should develop a competitive advantage by identifying a fit
Notes
between the firm’s strengths and upcoming opportunities. In some
cases, the firm can overcome a weakness in order to prepare itself
___________________
to pursue a compelling opportunity. SWOT analysis is often used to
___________________ develop strategies. The strategy matrix is known as the TOWS
matrix.
___________________
___________________
INTERNAL Strengths (S) Weaknesses (W)
FACTORS List 5 - 10 internal List 5 - 10 internal
___________________ (IFAS) strengths here weaknesses here
EXTERNAL
___________________ FACTORS
(EFAS)
___________________
Opportunities (O) WO Strategies
SO Strategies
List 5 - 10 internal Generate strategies here
___________________ Generate strategies here
that take advantage of
opportunities here
that use strengths to take
opportunities by
___________________ advantage of opportunities
overcoming weaknesses
___________________ Threats (T)

ST Strategies WT Strategies
List 5 - 10 internal
Generate strategies here Generate strategies here
opportunities here
that use strengths to that minimize weaknesses
avoid threats and avoid threats
Figure 8.2: TOWS Matrix
The TOWs matrix as shown in Figure 8.2 depicts the approach to

develop competitive advantage in the circumstances that exist. The
different quadrants can be interpreted as follows:
• S-O strategies pursue opportunities that are a good fit to the
company’s strengths.
• W-O strategies overcome weaknesses to pursue opportunities.
• S-T strategies identify ways that the firm can use its strengths
to reduce its vulnerability to external threats.
• W-T strategies establish a defensive plan to prevent the firm’s
weaknesses from making it highly susceptible to external
threats.
The SWOT analysis is a powerful tool, but involves a large subjective
component. Therefore, it is best when used as a guide and not a
prescription. Used in conjunction with other established strategic
management tools, for example the PEST or PESTLE analysis, the
SWOT Analysis can provide information that is helpful to the firm
in strategy formulation and selection.
111
Check Your Progress Notes
Fill in the blanks:
___________________
1. The relationships in a SWOT analysis are generally represented by a
............... matrix. ___________________
2. The strategy matrix is known as the ................... matrix.
___________________
___________________
Value Chain: An Introduction
___________________
Porter his book “Competitive Advantage: Creating and Sustaining
superior Performance” used the concepts of separate activities and ___________________
value added and linked them for analysing the organisation’s ___________________
competitive advantage. In Porter’s analysis, he considered ‘strategic
fit’, as the way various components of a strategy interlink, and this ___________________
could be facilitated by, “creating a value chain that is as strong as
___________________
its strongest link, and is a more potent, and central, strategic
concept.” ___________________
According to Porter, the processes and linkages between activities

can be better examined and understood through a Value Chain
Analysis. The value chain analysis describes the activities the
organization performs and links them to the organization’s
competitive position. Therefore, it evaluates which value each
particular activity adds to the organizations products or services.
This idea of the value chain recognises that organisations are much
more than a random compilation of machinery, equipment, people
and money. If these assets are deployed into activities or are
arranged into systems effectively so as to maximize the benefits to
the organisation, it will become possible to produce something of
value for which customers are willing to pay a price. In other words,
it is the ability to perform particular activities efficiently and the
ability to manage the linkages between these activities which are
the source of competitive advantage.
Primary Activities
Porter distinguishes between primary activities and support
activities. Primary activities are directly concerned with the creation
or delivery of a product or service. They can be grouped into five
main areas:
• Inbound logistics: These are inputs required and disseminated
by the organisation in order to produce the gods and services
that it offers. These could be activities concerned with receiving
goods, stores functions, inventory control etc.
• Operations: These are the primary activities involved in
converting the inputs into outputs. For example in an
112
automotive company these could be foundry operations, forging
Notes
operations, machining, assembly, painting etc.
___________________ • Outbound logistics: Once the output reaches its final form,
the activities that are involved in taking the service or product
___________________
to the end user or bring the end user to the product of service.
___________________ For example in the case of tangible products it could mean
warehousing, transportation, material handling etc.
___________________
• Marketing and Sales: These are activities linked to bring
___________________ the product to the attention of the consumer and induce them
___________________
to consume the product or service. It also includes those
activities that would enable and facilitate purchase of the
___________________ product or service. This would include sales administration,
marketing services, advertising and promotion, etc.
___________________
• Service: These are activities designed to enhance or maintain
___________________
a product or service’s value. Examples are installation of the
___________________ product, spare parts support, warranty administration,
maintenance etc.
• Each of these primary activities is linked to support activities
which help to improve their effectiveness or efficiency. There
are four main areas of support activities:
• Procurement: This refers to the activities involved in acquiring
the various resource inputs needed to produce the product or
the service. This could be procurement of capital goods,
consumables, production parts, raw materials etc. Procurement
occurs in many parts of the organisation.
• Technology Development: All ‘value’ activities have a
technology, even if it is certain rules and procedures. The key
technology may be directly concerned with the product or service
e.g., Research & Development, Design, etc. or with the process,
for example design of dies and fixtures, or methods to improve
productivity etc. or with a particular resource, e.g. raw material
improvements etc.
• Human Resource Management: This is concerned with all
activities involved in recruiting, training, developing and
rewarding people in the organisation. This is a particularly
important function as it is the basis for creating, rewarding
and enhancing those competencies that are related to the people
in the organisation.
• Infrastructure: The systems for planning, finance, legal,
quality, information management etc. are included under this
head. These activities are crucially important in the
organisation’s performance of its primary activities. Through
its infrastructure the organisation tries to effectively and
consistently identify external opportunities and threats, identify
113
resources and capabilities, and support core competencies.
Notes
Infrastructure also includes the structures and routines of the
organisation that sustain its culture.
___________________
In Figure 8.3, the primary activities as well as the support activities
___________________
are bordered with a ‘margin’. The term, ‘margin’ implies that
organizations realize a profit margin that depends on their ability ___________________
to manage the linkages between all activities in the value chain. In
___________________
other words, the objective of the organization is to deliver a product
/ service for which the customer is willing to pay more than the sum ___________________
of the costs of all activities in the value chain.
___________________
___________________
Infrastructure
___________________
Human Resource Management
Technology Development ___________________
Procurement ___________________
Service
Primary Activities
Figure 8.3: The Value Chain
The linkages shown in the model are crucial for corporate success.
The linkages are flows of information, goods and services, as well
as systems and processes for regulating activities. In the result, the
linkages are about seamless cooperation and information flow
between the value chain activities. Their importance is illustrated
with a simple example:
In an organisation producing a tangible product, the Marketing &
Sales function is supposed to deliver the sales forecasts for the next
period to all other departments in time and in reliable accuracy.
Based on this forecast, procurement will be able to order the
necessary material for the correct date. And if the materials and
inputs are properly provided by procurement and it forwards order
information to inbound logistics, only than operations will be able
to schedule production in a way that guarantees the delivery of
products in a timely and effective manner – as pre-determined by
marketing.
One of the key features of modern industrial system is that
organisations use specialist services, incorporate proprietary items
into products, and develop ancillaries to support their product and
114
services. Very rarely does a single company perform all activities
Notes
from product design, production of components, and final assembly
to delivery to the final user by itself. Therefore, all the organizations
___________________
connected with delivering the product or services to the final
___________________ consumer are elements of a value system or supply chain. There is
usually specialization of role and a number of organisations are
___________________
involved in the creation of the final product.
___________________
In looking at the strategic capability of an organisation, it is not
___________________ sufficient to look inside the organisation. We must look into the
interconnections. Much of the value creation will occur in the supply
___________________
and distribution chain. Any analysis of the strategic capability has
___________________ to be viewed fro a holistic view that includes the entire value chain.
For example, an analysis into the value chain may show that some
___________________ of these interconnections will be critical to the competitive advantage
___________________ of the organisation; some can perhaps have substitutes; others can
be eliminated. Hence, value chain analysis should cover the whole
___________________ value system in which the organization operates. This concept is
illustrated in Figure 8.4.
Supplier Channel Customer

Value Chains Value Chains Value Chains
Organizations
Value Chain
Figure 8.4: The Value System
Within the whole value system, there is only a certain value of

profit margin available. This is the difference of the final price the
customer pays and the sum of all costs incurred with the production
and delivery of the product/service (e.g., raw material, energy etc.).
The structure of the value system will determine, to a large extent,
how this margin is distributed between the various elements of the
value system, e.g., suppliers, producers, distributors, customers, and
others.
Each member of the value chain will use its standing in the value
chain, market position and negotiating power to get a higher
proportion of this margin. A successful value chain is developed
when each member of the value chain believes that it obtains value
115
from the relationship. The ability of an organization to influence
Notes
the performance of other organizations in the value chain is often
a core capability and a source of competitive advantage. Many
___________________
organizations have special functions that are involved in ancillary
development, dealer and distributor training, etc. ___________________
A value chain is one of the most common sources of increasing the ___________________
technological competence of organisations. Knowledge is spread
___________________
between members in the value chain through the process of diffusion.
This results in adding competencies both to the provider and receiver ___________________
of the knowledge. The traditional structure of the Japanese industry
is illustrative of this. Units attached to the mother unit cooperated ___________________
with each other to improve their efficiency, teach each other and ___________________
learn from each other new and better ways of accomplishing their
tasks, and help each other to reduce their costs. In doing so, they ___________________
are able to achieve a higher total margin to the benefit of all of the
___________________
members in the system.
___________________
A strong and supportive value chain works like the traditional
Japanese system, where members of the chain look at the benefits
that accrue to the entire value chain. Such cooperation is possible
and often seen in such value chains, e.g., increasing productivity,
reducing stocks at different levels, or process improvements etc.,
are undertaken by members of the value chain and the advantages
that accrue benefit all members of the value chain.
Value chain analysis is not a very difficult exercise conceptually.
However, depending on the nature of the product, the linkages, the
primary processes involved, etc. it is often an exercise that can be
quite complex and requires a large amount of information and data
processing capacity for the analysis. However, many of the concepts
of breaking up functions into activities and attributing costs to
them are now a standard cost accounting practice which makes the
process easier. Once the basic information has been collected and
the linkages established, it becomes a routine exercise. A typical
value chain analysis can be performed in the following steps:
• Analysis of own value chain – identify the primary and support
activities. Each of these activity categories needs to be broken
up into its basic components and costs are allocated to every
single activity component.
• Analysis of customers value chains – examine how does our
product fit into the value chain of the customer.
• Identify activities that differentiate the firm and the potential
cost advantages in comparison with competitors.
• Identify potential value added for the customer – how can our
product add value to the customers value chain (e.g., lower
costs or higher performance) – where does the customer see
such potential?
116
• The final step is to identify those activities that provide a
Notes
differential advantage compared to competitors. These are the
competencies or the core competencies of the organization.
___________________

1. The value chain analysis describes the activities the organization performs
___________________
and links them to the organization’s competitive position.
___________________ 2. Secondary activities are directly concerned with the creation or delivery
of a product or service.
___________________
___________________
Value Chain Analysis
___________________
The value chain is useful in defining the areas where it can benefit
___________________ from: (a) cost reduction, and/or (b) product differentiation.
___________________
Cost Reduction
Rahul Bajaj, in the face of competition and limited by the capacity
to grow due to Government restrictions, focused on standardizing
and refining the operational processes of Bajaj Auto. He was able
to bring Bajaj Auto to the position where it became the lowest cost
two-wheeler producer in the world. The idea was on giving customers
‘the best value for money’. Historically, about 60 percent of the
value of the Bajaj vehicle was outsourced. Outsourcing was increased,
and the value chain was rationalized. Costs were tightly controlled
on costs and developing a highly efficient value chain for supply,
production and distribution system. As a result the labour time to
manufacture a scooter came down from 1.9 man days to 1.3 man
days. Bajaj Auto successfully regained it position as the market
leader in the two-wheeler industry based on cost leadership.
A strategy based on seeking cost leadership requires reduction in
the costs associated with the value chain activities, or reduction in
the total amount of resources used. The basic approach of value
chain analysis is to look at the value and cost of each activity and
determine whether it is delivering value for money. The priority
between various activities is determined by a Value Index:
Value Index (VI) = Value/Cost = Utility/Cost = Function/Cost
If the Value index is less than 1, it is not worth the cost incurred;
if Value index is greater than 1, it provides value to the organization.
The organization has to identify those activities that add value and
those where the value added does not justify their cost. The value
is generally based upon a comparison with a similar activity within
the organization or on the basis of benchmarking the activity with
the best practices in the industry.
117
Cost reduction can be either by reducing individual value chain
Notes
activities or by reconfiguring the value chain. Reconfiguring the
value chain involves structural changes such as new production
___________________
processes, new distribution channels, new sources of supply etc. In
general, Porter has identified 10 drivers for cost reduction: ___________________
• Economies of Scale, ___________________

• Learning, ___________________
• Capacity utilization,
___________________
• Linkages between activities,
___________________
• Interrelationships with suppliers and buyers,
___________________
• Degree of Vertical Integration,
___________________
• Timing of market entry,
• Generic Strategy, ___________________
• Geographical location, and ___________________
• Institutional factors.
Value chain activities are often linked. For example, if a product is
redesigned to reduce cost, it is possible that the cost of servicing the
product may go up. Inversely, it may result in a concomitant
reduction in service costs due to an improvement in reliability. In
the first case the value benefit would be less than was anticipated.
On the other hand, in the second case, the value benefit would be
greater and has a potential to become a source of competitive
advantage.
Product Differentiation
Jet Airways started with 4 aircraft in 1993. Since May 1993 the
airline has flown close to 33 million passengers. Its fleet of 31
Boeing B737s and 8 ATR aircraft operate daily over 245 flights to
41 destinations in India. Jet Airways differentiated itself from its
main rival, Indian Airlines, by its focus from the very beginning -
to emerge as the “Businessman’s Preferred Airline”. It did this by
providing high standards of service and reliability of operations. It
earned a reputation for punctuality, quality of catering, in-flight
service and the attention paid to security. Today, Jet Airways
accounts for a domestic market share of around 45 per cent.
Differentiation stems from uniqueness. This uniqueness can be
achieved either by changing the value chain activities to provide
uniqueness to the product, or by reconfiguring the value chain.
Porter has identified several drivers for uniqueness:
• Policies and decisions,
• Linkages between activities,
118
• Timing,
Notes
• Location,
___________________
• Interrelationships,
___________________
• Learning,
___________________ • Integration,
___________________ • Scale, and
___________________ • Institutional factors.
___________________ Once identified, we have to decide how we can enhance these
___________________
competencies that have a Value index greater than 1, to provide us
with greater differentiation and competitive advantage. For example,
___________________ a business which wishes to outperform its competitors through
___________________
differentiating itself, through higher quality, will have to perform
its value chain activities related to quality better than the opposition.
___________________ Changes in technology can also be a factor in reconfiguring the
value chain or changing the activities, to provide competitive
advantage.
However, there will be activities that add value to the business

though they may not directly justify their costs. These are activities
that have to be accepted as apart of doing business and cannot be
eliminated. It should be recognized that Value Chain Analysis has
its origins in accounting practices. Its effectiveness is based on the
ability of the organization to identify costs and associating it to
each activity and attributing a value to each activity.
Since the value chain is composed of the set of activities performed

by the business unit, it provides a very effective way to analyze the
position of the business against its major competitors. The way in
which the value system of the organization is configured, the linkages
between value activities and the competence in separate activities,
provide the key to sustainable success. This type of analysis has
already been shown in the last section. The manner in which the
value chain will improve the competitive position has also been
shown in the use of the Life Cycle – Portfolio matrix.
Another way to use the value chain is to determine the degree to

which the strategy provides synergy. This will show how much
extra benefit can be created by reconfiguring the value chain.
119
Table 8.2: The Value Chain and synergy
Notes
Degree of Synergy Weight Strategy Strategy Strategy
with present Activities age 1 2 3 ___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
___________________
Table 8.2 is an analytical tool designed to show the relationship
between synergy and the value chain. The first column should ___________________
identify all the activities in the organization that are impacted by
the strategic options. The second column represents the importance
of the activity in the scheme of the organization. The total of the
weight age in the second column should add up to 100. The third
column onwards represents the different strategies.
The objective is to identify the impact of each strategy on the
identified activity. The degree of synergy can be scored on a scale
of 1 to 5. The degree of synergy should be multiplied with the
weight age factor of the activity and the total put in column for the
particular strategy. Then each column is added. The total of the
column represents the level of synergy of the strategy.
Synergy can arise through many different types of links or
interrelationships. For example, in marketing it could arise from
exploiting the brand name, sharing distribution channels, advertising
and promotion etc. Synergy is often used as a justification in many
areas of the company’s strategy that includes new products, new
markets and diversification. Many decisions on mergers and
acquisitions are based on the synergy the organization derives from
such a strategy.
Check Your Progress

Fill in the blanks:
1. ....................... can arise through many different types of links or
interrelationships.
2. It should be recognized that Value Chain Analysis has its origins in
..................... practices.
120
Notes
Summary
The SWOT strategy matrix, better known as the TOWS matrix,
___________________
enables a different strategic perspective from which to examine
___________________ problems or situations based on corresponding identified
opportunities/threats, opportunities/weaknesses, etc. The basic
___________________ approach of value chain analysis is to look at the value and cost of
___________________ each activity and determine whether it is delivering value for money.
The priority between various activities is determined by a Value
___________________ Index. If the Value index is less than 1, it is not worth the cost
___________________
incurred; if Value index is greater than 1, it provides value to the
organization.
___________________
___________________
1. Discuss how you would construct a SWOT matrix.
___________________
2. What is the relationship between the SWOT and TOWS
___________________
analysis?
3. What points would you keep in mind to enhance the quality
of the material while devising a SWOT Analysis?
4. Identify the factors that could either create opportunities or
threats for Indian software companies in the near future.
5. Explain the value chain approach for diagnosing a firm’s key
strengths and weaknesses.
121
Unit 9 Notes
Portfolio Analysis and Strategic ___________________
___________________
Alliance ___________________
___________________

___________________
\ Portfolio Analysis
___________________
\ Strategic Alliances
___________________
\ Value through Corporate Strategy
___________________
Introduction ___________________
A number of techniques have been developed for displaying a

diversified organization’s operations as a portfolio of businesses.
The techniques provide simple frameworks for reviewing the
performance of multiple Strategic Business Units (SBUs) collectively.
A SBU is a business that can be planned separately from others,
has its own set of Competitors, and is managed as a Profit Centre.
Techniques of portfolio analysis have their greatest applicability in
developing strategy at the corporate level. It charts and characterizes
the different businesses in the organization’s portfolio and helps in
determining the implications for resource allocation.
Portfolio Analysis
Besides other portfolio methods are some of the important
instruments of the strategic planning. By using these methods
strategic business units of an enterprise can be analyzed and
strategies can be built to strengthen the strategic business units. It
is pointless to focus on only one single business unit, rather than
it is important to have several business units and build up a
combination out of them to get an achievement of objectives and of
adequate results in different future environments. Portfolio-models
are instruments to co-ordinate the several strategic business units
of an enterprise. Enterprises use them, to analyze whether there is
an opportune or an optimal combination of several business units
in their own enterprise. If not, the enterprise has to adjust its
strategy, create new business units or to enlarge respective to close
existing business units, to get an optimal combination. Another
coordinating task of the strategic planning is to get and to co-
ordinate substitutes to reach the target-portfolio. This instrument
122
exists to lookup the substitutes and basic conditions in a global
Notes
way. The planning period has a look at the future, but the models
are not quantitative models. They are for the use of qualitative
___________________
analyzes of the combinations of the business units and to have an
___________________ effect on them.
___________________ A business portfolio is the collection of Strategic Business Units
(SBUs) that makes up a corporation. The optimal business portfolio
___________________
is one that fits perfectly to the company’s strengths and helps to
___________________ exploit the most attractive industries or markets. A SBU can either
be an entire mid-size company or a division of a large corporation.
___________________
It normally formulates its own business level strategy and often
___________________ has separate objectives from the parent company.
___________________ The aim of a portfolio analysis is:
___________________ • Analyze its current business portfolio and decide which SBUs
should receive more or less investment,
___________________
• Develop growth strategies for adding new products and
businesses to the portfolio, and
• Decide which businesses or products should no longer be
retained.
The basis for many of these matrix analyses grew out of work carried
out in the 1960s by the Boston Consulting Group (BCG). BCG
observed in many of their studies that producers tend to become
increasingly efficient as they gain experience in making their product
and costs usually declined with cumulative production. They came
up with a hypothesis to explain how an organization with the highest
market share in the industry generally will have the greatest
accumulated volume of production and therefore the lowest cost
relative to other producers in the market.
The breakthrough came while working for a major manufacturer of
semiconductors. They were able to collect the evidence on which to
build the experience curve concept. The wide variety of
semiconductors, that were a part of the study, offered them a chance
to compare differing growth rates and price decline rates in a similar
environment. Price data supplied by the Electronic Industries
Association was compared with accumulated industry volume.
Two distinct patterns emerged:
• In one pattern, prices, in current dollars, remained constant
for long periods and then began a relatively steep and long
continued decline in constant dollars.
• In the other pattern, prices, in constant dollars, declined
steadily at a constant rate of about 25 percent each time
accumulated experience doubled.
Unit 9: Portfolio Analysis and Strategic Alliance
123
This pattern seemed to have applicability across the board. In a
Notes
study on the cost of television components BCG found striking
differences in the rate of cost improvement between monochrome
___________________
parts and colour parts. This was difficult to explain since the same
factory, the same labour; the same processes were involved at the ___________________
same time. This was explained by the experience curve; monochrome
___________________
parts had progressed down a cost curve to a larger degree than the
colour parts, as the accumulated experience in monochrome parts ___________________
was much greater than in colour parts.
___________________
Systematic cost differences arise between competitors because some
___________________
develop more knowledge about production than others. This concept
has important implications: if a company can accelerate its ___________________
production experience by increasing its market share, it could gain
a cost advantage in its industry that would be difficult to match. ___________________
Substantial investment in pursuing market share today could pay ___________________
off even more substantially tomorrow.
___________________
COST
1.00
.80
.64
.50
10 20 40 60
TOTAL EXPERIENCE
Figure 9.1: The Experience Curve
This linear relationship between costs and cumulative production

became known as the Experience Curve. The Experience Curve
which is showm in Figure 9.1 has had profound implications for
business thinking and practice. As a strategic concept, it is based
on strong relationships between market share and accumulated
production. It shows that it is possible to deliberately acquire and
manage competitive advantage.
According to the experience curve concept, costs of value added
decline approximately 20 to 30 percent in real terms each time
accumulated experience is doubled. If the growth rate is constant,
the cost decline continues indefinitely as long as the growth rate
continues. If the growth stops, costs continue to decline, but the
rate of decline is cut in half each time the accumulated experience
doubles. Extensive substitution of cost elements and exchange of
labour for capital is characteristic of progress down a cost experience
curve.
124
Application of the experience curve to problem solving and policy
Notes
determination requires managerial inputs. There are many technical
questions that need to be addressed. Some of these have been
___________________
identified below:
___________________
• How do you define cost elements?
___________________
• How do you define the measuring unit of experience?
___________________ • What is an appropriate unit of experience where the product
___________________ itself changes too?
• What is the relationship between experience effects on similar
___________________
but different products?
___________________
• How are technological changes integrated into experience
___________________ effects?
___________________
• What effect does capital investment intensity have?
• Does the same effect appear in overhead and marketing
___________________
functions?
The cost declines identified by the experience curve do not occur
automatically. It is assumed that there is added investment in an
amount commensurate with the marginal cost of capital. Study of
the experience curve shows, if high return on investment thresholds
is used to limit capital investment, then costs do not decline as
expected.
The experience curve and the learning curve are related. The
learning curve is a somewhat limited application, of the experience
curve. It is only applied to direct labour. The experience curve deals
with the entire realm of possibilities of job element management
with volume changes. Its business effects are summarized below:
• Market Share: Costs are inversely proportional to market
share. A high market share will produce low cost.
• Growth: Relative costs should improve if growth rate is faster
than that of competitors.
• Debt Capacity: Relative debt capacity will increase with no
loss of safety if market share increases.
• Shared Experience: Cost should decline proportionately faster
or slower when cost elements are shared between more than
one product.
• Cost Control: As cost declines are predictable, it should
therefore be the basis for cost control and management
evaluation.
• Product Design: Choice of design element alternatives can be
determined by whether initial experience is high or low
compared to future volume expected.
125
• Make or Buy: The relative experience between your experience
Notes
and supplier experience differential if you make the part should
determine the choice of make or buy.
___________________
• Procurement Negotiation: The value to the supplier of large
___________________
scale procurement can be calculated. Also the rate of normal
cost change for the supplier can be calculated. ___________________
• Market Potential: By comparing market elasticity with cost ___________________

decline, the market potential can be approximated.
___________________
• Product Line Breadth: The total economic effect of product
line extension can be evaluated by interaction of the experience ___________________
and volume of combined cost elements.
___________________
As can be seen, the experience curve has significant effects on
___________________
business decisions. However, the basic mechanism that produces
the experience curve effect is still to be adequately explained. The ___________________
effect itself is beyond question and is so universal that its absence
___________________
is almost a warning of mismanagement or misunderstanding.
BCG Matrix
The Boston Consulting Group Matrix (BCG Matrix) is the best-
known portfolio planning framework. The BCG growth share matrix
is directly derived from the experience curve. The experience curve
essentially provides a pattern of cash flow.
The experience curve is used as the means of measuring probable
competitive cost differentials. The average cost is by definition the
total expenditure divided by the total output. The unit cost is the
rate of change in that ratio. Projection of this relationship is
frequently both simpler and more accurate for cost forecasting.
The use of cash is proportional to the rate of growth of any product.
The generation of cash is a function of market share because of the
experience curve effect. A difference in market share of 2 to 1 should
produce about 20 percent or more differential in cost on value added.
The growth share matrix is a diagram of the normal relationship of
cash use and cash generation.
All of the products of a company can be shown on a single growth
share matrix as a product portfolio. Each product can be plotted on
its own growth and share coordinates. The size of the product can
be indicated by a circle in proportional scale. Great care must be
taken in product-market segmentation before drawing such charts.
It is quite possible for a company to be the largest in the industry
and be a leader in no single segment.
126
Notes The BCG Matrix
___________________
High Select Remainder
___________________ a few divested
___________________ Business Invest

growth
___________________ rate
Liquidate
___________________ Low
$
___________________
High Low
___________________
Relative position (Market share)
___________________
Figure 9.2: The BCG Matrix
___________________
The matrix reflects the contribution of the products offered by the
___________________
firm to its cash flow. Based on this analysis, products are classified
as ‘stars’, ‘cash cows’, ‘question marks’ and ‘dogs’ as shown in
Figure 9.2.
• Stars (high growth, high market share): Stars are in the
upper left quadrant of the matrix.
❖ They grow rapidly.
❖ They use large amounts of cash.
❖ Are leaders in the business so they should also generate
large amounts of cash.
❖ There is generally a balance on net cash flow.
Over time all growth slows. Therefore, stars eventually become cash
cows if they hold their market share. If they fail to hold market
share, they become dogs.
• Cash Cows (low growth, high market share): Cash cows
are in the lower left quadrant of the matrix.
❖ Such products are profitable and cash generation is high.
❖ Because of the low growth, investments needed should be
low.
❖ Keep profits high.
❖ They form the foundation of an organization.
Cash cows pay the dividends, pay the interest on debt and cover the
corporate overhead.
• Dogs (low growth, low market share): Dogs are in the lower
right quadrant.
127
❖ These products need to be avoided. You should try to
Notes
minimize the number of dogs in a company.
❖ Beware of expensive ‘turn around plans’. ___________________
❖ As soon as they stop delivering cash, they should be phased ___________________

out or otherwise liquidated.
___________________
They are essentially worthless and are generally cash traps.
___________________
• Question Marks (high growth, low market share): They are in
the upper right quadrant. ___________________
❖ These products have the worst cash characteristics of all, ___________________

because high demands and low returns due to low market
___________________
share.
___________________
❖ If nothing is done to change the market share, question
marks will simply absorb great amounts of cash and later, ___________________
as the growth stops, turn into dogs.
___________________
❖ Either invest heavily or sell off; or invest nothing and
generate whatever cash it can. Either you should increase
market share or deliver cash.
Question marks are the real gambles. Their cash needs are great
because of their growth. Yet, their cash generation is very low
because their market share is low.
The strategic implications of this categorization appear obvious.
The cash cows become the financiers of the other developing
businesses of the organization. One funds the ‘stars’, decides what
to do with the ‘question marks’ and gets rid of the dogs.
However, the importance of this analysis is that it highlights the
need for management to look into the products and analyze their
performance based on the fact that the life of products is finite. As
it has been put by a leading management thinker, “Perhaps the
most important task of management is to balance the needs of
existing lines against the needs of potential lines.”
The degree of applicability of the portfolio model depends on a
number of conditions; some of them are given below:
• It is essential that the market is defined properly to account
for the important interdependencies with other markets
• In many industries, the relative market share is not a good
proxy for competitive position and relative costs
• Market growth is a good proxy for required cash investments.
Yet profits and cash flow depend on a number of other factors.
128
The growth – share matrix is by itself not very useful in determining
Notes
strategy for a particular business. However, it provides analysis in
determining the competitive position and this can then be translated
___________________
into strategy. For example, a business being harvested could be
___________________ vulnerable to attacks on its market share. The comparison of
competitor’s portfolio over time could provide information on shifts
___________________
in competitor’s unit relative to other and provide an insight into the
___________________ strategic mandate of the competitor.
___________________
GE/McKinsey Matrix
___________________
GE’s Business screen is a more complex version of the BCG; however,
___________________ it is derived from the same principles as the BCG Matrix. This
model is an example of highly centralized planning specialists. This
___________________
matrix is a model to perform a business portfolio analysis on the
___________________ Strategic Business Units of a corporation. Strategic Business Units
(SBUs) are portrayed as a circle plotted in the Matrix. Here the
___________________ sizes of the circles represent the Market Size; the size of the pies
represent the Market Share of the SBUs’, and arrows represent the
direction and the movement of the SBUs in the future. This is
shown in Figure 9.3.
GE/McKinsy Matrix
Competitive Strength
Low Medium High

Market Attractiveness
High
Medium
Low
Figure 9.3: GE/McKinsey Matrix
The GE/McKinsey Matrix is a later and more advanced form of the

BCG Matrix in three aspects, which are discussed below:
In this model, market growth is replaced by market (Industry)
attractiveness as the dimension of industry attractiveness. Porter
identified market growth as just one of the parameters of market
attractiveness. Market Attractiveness includes a broader range of
factors other than just the market growth rate that can determine
the attractiveness of an industry/market. Depending on the product
characteristics, different parameters can be selected to measure
‘market attractiveness’.
129
Typical factors that affect ‘Market Attractiveness’ are called ‘drivers’
Notes
and can be:
• Market size ___________________
• Market growth rate ___________________

• Market profitability ___________________
• Pricing trends
___________________
• Competitive intensity / rivalry
___________________
• Overall risk of returns in the industry
___________________
• Opportunity to differentiate products and services
___________________
• Demand variability
___________________
• Segmentation
• Distribution structure ___________________
Market share in the BCG Matrix is replaced by competitive strength. ___________________

This is the dimension by which the competitive position of each
SBU is assessed. Competitive strength likewise includes a broader
range of factors other than just the market share that can determine
the competitive strength of a Strategic Business Unit. Typical drivers
of Competitive Strength of a Strategic Business Unit:
• Strength of assets and competencies
• Relative brand strength
• Market share
• Market share growth
• Customer loyalty
• Relative cost position (cost structure compared with
competitors)
• Relative profit margins (compared to competitors)
• Distribution strength and production capacity
• Record of technological or other innovation
• Access to financial and other investment resources
Finally it works with a 3×3 grid, while the BCG Matrix has only
2×2. This also allows for more sophistication.
Using the GE / McKinsey Matrix involves a six-step approach. The
different stages to implement the portfolio analysis include the
following:
• The drivers for each dimension are to be specified. The
organization must carefully determine those factors that are
important to its overall strategy.
130
• You must assign relative importance by giving weights to the
Notes
drivers.
___________________ • Score the SBUs’ on each driver and multiply weights times
scores for each SBU to determine the value of each dimension.
___________________
• Repeat the exercise for each dimension.
___________________
• View resulting graph and interpret it.
___________________
• Perform a review/sensitivity analysis using adjusted weights
___________________ and scores.
___________________ Though this matrix analysis is more sophisticated that many other
similar tools, there are some important limitations. It has most of
___________________
the advantages and limitations of the BCG matrix analysis. However,
___________________ it has some specific characteristics that need to be understood:
___________________ • The company position/ industry attractiveness screen is less
precisely quantifiable than the growth/ share matrix.
___________________
• This technique requires subjective criteria about where a
particular business unit should be plotted.
• The screening technique reflects the assumption that each
business unit is different and requires its own analysis of
competitive position and industry attractiveness. Therefore, it
is more vulnerable to manipulation.
Check Your Progress

Fill in the blanks:
1. ..................... are in the upper left quadrant of the matrix.
2. ..................... cows are in the lower left quadrant of the matrix.
Strategic Alliances
Lando Zeppei, managing partner of Booz, Allen and Hamilton,
defines strategic alliance as a cooperative arrangement between
two or more companies where:
• A common strategy is developed in unison and a win-win
attitude is adopted by all parties.
• The relationship is reciprocal, with each partner prepared to
share specific strengths with each other, thus lending power to
the enterprise.
• A pooling of resource, investments, and risks occurs for mutual
(rather than individual) gain.
Strategic alliances and partnerships have become popular recently.
Strategic alliance is an intention to cooperate at a strategic level,
131
to share information, and to work together in a way that goes beyond
Notes
a clear contractual arrangement. In a rapidly changing world,
strategic alliances are an effective way in which the necessary speed
___________________
of response and global spread can be achieved. In a strategic alliance,
two or more organizations share resources, capabilities, or distinctive ___________________
competencies to pursue some business purpose.
___________________
Strategic alliances often transcend the narrower focus and shorter
___________________
duration of joint ventures. These alliances may be aimed at world
market dominance within a product category. However, it must be ___________________
kept in mind that the companies in strategic partnerships are normal
___________________
competitors. Therefore, the types of projects that are conducive to
this instrument are normally limited. Strategic partnerships are ___________________
becoming relatively common with large companies in electronics/
computers, automobiles, oil and mining, while they are still rare in ___________________
small and medium companies. ___________________
The incentive for such relationships is to gain competitive or strategic ___________________
advantage. This would include: gaining access to new markets and
new supply sources; access to the latest technology; or improve the
utilization of resources. In the developing counties and the
underdeveloped countries, organizations rely on strategic alliances
for technology and know-how acquisition, on a large scale. Apart
from these reasons, strategic alliances are also used to accelerate
product introduction and overcome legal and trade barriers.
Sometimes, speed and timing are of essence in implementing
strategies, alliances may help the organization attain these.
There are many examples of strategic alliances in India also. Some
of the alliances that have been successful are alliances such as
TVS-Suzuki and Mahindra-Ford, BPL-Sanyo, and Videocon- Sansui.
To realize its mission of becoming a research-base international
pharmaceutical company, Ranbaxy entered into a strategic alliance
with Eli Lilly of the US. Taj Hotels and British Airways are a good
example of synergistic benefits arising out of a strategic alliance;
both have gained through complementarities of airline and hotel
services.
Several typologies of strategic alliances are available in business
literature. One such classification is by Yoshino and Rangan. This
is a two dimensional model with the two dimensions being, the
extent of organizational interaction and conflict potential between
alliance partners. The classification is shown in Figure 9.4.
132
Notes Low Conflict High
High
___________________ Non-competitive Competitive
___________________
Interaction
___________________
___________________
Pro-competitive Pre-competitive
___________________
___________________
Low
___________________
___________________ Figure 9.4: Typology of Strategic Alliances
___________________ • Pro-competitive Alliances: These are generally alliances

within the industry exemplified by vertical value-chain
___________________
relationships between manufacturers and their suppliers and
distributors. Such relationships are advantageous to both
parties as they do not invest resources for the activities carried
out by the other. Supplier and buyer organizations entering
upon long-term contracts constitute pro-competitive alliances.
• Non-competitive Alliances: These are partnerships within
the industry. Such alliances are entered upon by organizations
that operate in the same industry yet do not perceive each
others as rivals. This can be because their areas of activity do
not coincide and/or their products and services are sufficiently
dissimilar to prevent competition. Organizations that have
carved out distinct areas in the industry-geographically or
otherwise, adopt the non-competitive alliances. There has been
a growing trend in this direction in R&D Research.
• A number of strategic alliances have been formed where a
group of companies with a common need collectively contract
research development through an established institution or
through an independent facility. This allows the companies to
share the risk and cost. It also creates a situation where they
can learn from each other as well as from the experts conducting
the research. For example, a number of automotive
manufacturers in Europe have entered into a strategic alliance
for engine development.
• Competitive Alliances: These are relationships that bring
rival organizations in a cooperative arrangement. These
alliances may be intra-or inter-industry. Many foreign
companies, operating independently in India, have sought this
route to enter into a cooperative arrangement with local rival
companies for specific purposes. For example, Coca Cola entered
133
into an agreement with Parle Products, the manufacturers of
Notes
Thums Up, their main competitors in western India.
• Pre-competitive Alliances: These partnerships bring two ___________________
organizations from different, often unrelated industries to work
___________________
on well-defined activities. This is often seen in activities such
as, mass awareness campaigns or environmental and social ___________________
issues. Sometimes inter industry and inter disciplinary
___________________
cooperation is necessary for development. For example, Intel
has pre-competitive alliances with software, hardware and other ___________________
manufacturers.
___________________
Contractual Arrangements
___________________
Contractual arrangements come in many different forms. Long- term
___________________
contracts are agreements between two firms without actual exchange
of ownership. One form is Consortia. These are groups of companies ___________________
that form a joint entity for a specific purpose—such as building the
___________________
channel tunnel. When the project is finished, the consortium breaks
up.
Franchising is another form of contractual arrangement and is
commonest in retailing. Some of the well known franchises in India
are McDonalds, Pizza Hut, DPS Schools, and NIIT etc. The
franchisee pays the franchiser a fee for services and royalties,
typically for use of the company name, business approaches, and
advertising. The franchisee risk is determined by the success of the
brand name and by the support and advice provided by the
franchiser.
There are other types of contractual arrangements used for
technology acquisition. It is also possible to develop combinations of
these sources of technology for best results. Many companies
purchase technology by the route of purchasing only the drawing
and technical specifications of the process or product or both. In
such cases, it is quite common to hire the services of experts from
the seller to operate the system till such time that the buyer is able
to absorb the technology. Recent developments include strategic
partnerships in Research & Development and personnel secondment.
Collaborative Development
The internal R&D work with an external agency to jointly develop
a technology. This enhances the ability of the firm to enter into
technology areas, where it might not be able to do so singly.
Collaborative development has the same advantages and
disadvantages as internal R&D. The basic difference is that the
results are jointly owned, and an effective mechanism to coordinate
the efforts of the teams are necessary. This approach actually
improves the company’s external acquisition capabilities. This often
134
uncovers technology options that might not be considered by the
Notes
firm from its internal R&D.
___________________ Joint Ventures
___________________ In a joint venture, two or more organizations form a separate legal
___________________ undertaking, which is an independent organization for strategic
purposes. The partnership is usually focused on a specific market
___________________ objective. They may last from a few months to a few years, and
___________________
often involve a cross-border relationship. One organization may
purchase a percentage of the stock in the other partner, but not a
___________________ controlling share. Entering into a joint venture agreement with a
technology provider is another form of external acquisition that can
___________________
be very effective. This form is extremely advantageous when it is
___________________ contracted between a company with technology and a company with
market access. It normally takes the form of a new company with
___________________
each of the partners owning shares in the company. For example,
___________________ General Motors came into India in a joint venture with Hindustan
Motors and set-up it manufacturing facilities at Halol, in Gujarat.
Licensing
Licensing is a third form of contractual arrangement. Licensing
existing technology is a popular and effective form of technology
acquisition. It enables the firm to move directly into the
implementation of the project. Its major advantage is the reduction
in time to market the product, relative to forms of technology
acquisition that require development. If the payment is in the form
of royalty, the provider of the technology shares the risks of financial
performance.
It has the appearance of being low risk or almost risk free. This is
true if the company’s application is identical to the one for which
the technology was developed. However, there is implementation
risks involved, in such cases.
When the application is not similar or the variables change
significantly, the risks can be serious. Some of the variables that
one should consider include scale of operations, climate, and legal
requirements to reduce import content, quality of local inputs, skill
level of acquiring organization, and level of codification of the
technology.
Though this is often the lowest cost option to the firm, the major
risk in the technology transfer mechanism is the inability of the
firm to develop the internal technical strength to absorb the
technology. Alternatively, the reluctance of the technology supplier
to create this competence in the firm can result in higher risks and
often failure of the project.
135
The major limitation of licensing is that the licensee will seldom be
Notes
able to compete with the licensor. This is because of the inherent
impact on the price of the product or service. The price is constituted
___________________
of a number of components, manpower, materials, money, capital
investments, and taxes. It will be an unusual circumstance if the ___________________
sum total of these factors comes out to be the same in different
___________________
economies and under business conditions.
___________________
This means that imported technology generally has limitations in
that it is the sub-optimal when implanted across international ___________________
borders where costs of resources and taxes, scales of operation and
___________________
productivity parameters undergo change. The greater the change,
the less suitable is the technology. This is a very important ___________________
consideration when considering how technology is to be managed.
How do we minimize the impact of these factors when selecting ___________________
technological options? What do we need to do within the firm to ___________________
improve the competitiveness of such technologies?
___________________
This route has been used by a number of corporations to establish
their products or brands in India. Daimler Benz had a licensing
agreement with Telco, GE and Siemens had a number of licensing
agreements with BHEL. There are may such examples. This can
allow quick growth by avoiding the need to build manufacturing or
distribution capability. At the same time, the intellectual property
rights for the invention are retained. Licensing is probably most
frequent in high technology businesses particularly in foreign
countries or specialized markets where volumes of business may be
too low to justify a permanent presence. Such contracts normally
have a defined duration. Difficulties with this mode include conflicts
of interest when the same agent acts for competing principals,
develops competitive products or is simply inert.
Contracted Out R&D

Companies choose to contract out R&D for a variety of reasons. It
is an ideal option for those who do not have the necessary facilities
and expertise to carry out the work and yet would like to maintain
control and own the results exclusively. It allows short-term access
to world-class personnel and facilities that would normally be beyond
the company’s means. With the selection of the right team for the
work required, it should be able to assemble a more capable team
than it could assemble internally.
Contracting R&D reduces the company’s hands-on experience with
the technology. This can be quite risky if the application of the
technology is in areas with no in-house expertise. The risk of breach
of confidentiality may be high in some cases. The ownership of the
technology and what constitutes the technology needs to be carefully
defined in the documentation.
136
Consulting Engineering Firms are often a source of technology.
Notes
Obtaining technology from consulting engineering firms is another
form of contracted out R&D. This is generally used in the case of
___________________
process design, and seldom for product design. It has the problems
___________________ associated with contracted out R&D as well as its advantages.
___________________ Personnel Secondment
___________________ Firms to fill gaps in their perceived technological requirements are
___________________
increasingly using Personnel secondment. A number of firms offer
Operation and Maintenance contracts for running complex industrial
___________________ plants. This method is increasingly being used where the promoters
have high level of financial and organizational skills but lack
___________________
technical skills.
___________________
Another form of personnel secondment is called “body shopping”.
___________________ This is quite common in the software industry. The firm buys the
services of trained personnel for limited period of time, based either
___________________
on specific project requirements or on a ‘time’ basis. In this case,
the seconded personnel are generally specialists, who the firm may
find uneconomical to recruit on a long-term basis.
An example is the early business model of Infosys Technologies. It
was set-up in 1981 as a body shopping operation. The customers
were mostly located in the United States. Infosys would send its
officers to the customer site and plan, prepare, develop, implement
the software system and train organization members on-site. On
project completion the manpower resources were re-located to the
next project. The client was able to leverage low cost manpower to
create a quality product with extremely low risks as the functions
of the ‘seconded personnel’ were defined and the credentials tailored
to the requirements.
The costs are low, because in all these cases the transfer of
technology is facilitated either through an individual or group of
individuals or through an off-shore entity with the core competency
to create value through price differentials. The contracting
organization is able to develop its technological objectives during
the period of secondment.
Managing Strategic Alliances

Managing strategic alliances is difficult. Yet, like most things
difficult to manage, the ultimate rewards well worth the effort. A
good strategic alliance should be consistent with the corporate
strategies of the partners; the operational responsibility of each
partner has clarity; there is trust and commitment on both sides;
and there is a continuing and consistent commitment to shared
goals. Walters, Peters & Dess suggested four basic principles to
manage alliances successfully.
137
• Clearly define the strategy and assign responsibilities.
Notes
• Phase in the relationship between the partners.
___________________
• Blend the cultures of the partners.
• Provide for an exit strategy. ___________________
Phasing in the relationship means giving adequate time and ___________________
opportunity to the partners to know each other well. Once two ___________________
firms have worked in a partnership successfully it is easier for
them to work in subsequent projects. It is also important to blend ___________________
cultures. There must be an understanding and appreciation of the ___________________
differences. It is the understanding between people that makes any
alliance work. In addition, an exit clause is essential to cover the ___________________
eventuality that the alliance does not work or the objectives are not
___________________
being achieved. Contracting and communication issues need to be
clearly understood for successful partnerships. ___________________
There are dangers in strategic alliances in that the objectives of the ___________________
two parties may drift apart over time and the arrangement is hard
to terminate neatly because of the lack of organization contracts.
The Rover–Honda alliance is an example of an arrangement that
seemed to work well for a time but ended messily when Rover was
acquired by BMW. Strategic alliance is a demanding strategy in
terms of the leadership and human relations skills of the managers
involved.
Check Your Progress

1. There has been a diminishing trend in this direction in R&D Research.
2. Contractual arrangements come in only in one forms.
Value through Corporate Strategy

The key strategic issue for stakeholders is how best to seek out the
most effective ways to maximize the different forms of value created
through utilization of capital. Recent years have brought new ways
of looking at the spectrum of value creation, expanding business
perception to effective action on a broad civil society agenda.
The issue is: what is the value created by an organization through

corporate strategy? Is it limited to the business model of the firm
or does it have to be measured on dimensions over and above the
simple concept of profit and growth? Value is what gets created
when investors invest and organizations act to pursue their mission.
Traditionally, we have thought of value as being either economic
(created by for-profit companies) or social (and created by non-
138
profit or nongovernmental organizations). All organizations, whether
Notes
for-profit or not, create value that consists of economic, social and
___________________
environmental value components.
___________________ This measure of value, which is being increasingly used, has helped
drive and shape the fields of corporate strategy and is called the
___________________ triple bottom line (TBL) concept. The TBL concept
___________________ focuses on value created – or destroyed – in relation to (a) the
___________________ economy, (b) society, and (c) the environment. Successful corporations
must evolve new ways of monitoring, measuring, and managing
___________________ their impacts (both positive and negative) in these three areas.
___________________ Acceptance of this concept has resulted in firms adding to their
___________________ agenda improvements in areas such as public relations or
stakeholder engagement, rather than just the company’s business
___________________ model. The TBL concept has been built into the strategies of many
___________________ companies. While some believe this to be a trade-off across the
various dimensions, the general perception is that TBL is a positive
sum game.
Many companies are using a model that combines the multiple

dimensions of value creation and tailors them to the specific needs
and tastes for its stakeholders. An example is Toyota Motors. Toyota
in its new offering of Prius hybrid cars spotlights the environmental
credentials in Europe (presenting them as “green” cars), but
emphasizes technology, fuel efficiency, and torque (i.e., they are
positioned as “muscle” cars) in the United States. The growing
complexity of the parameters of judging business success means
that successful enterprises need to know how to operate across the
full spectrum of value—and value perception.
Efforts are on to develop standard methodologies for assessing

progress against the triple bottom line and the social return on
investment model or other concepts linked to multi-dimensional
value creation. Among recent experiments, one of the most
interesting is ITC Ltd. who has prepared circulated full-fledged set
of TBL accounts for the company. This is also being practiced by
Tata Steel Ltd.
Triple Bottom Line (TBL) is assessed using Input-Output Analysis

(IOA). Input-output analysis is a top-down economic technique, which
uses sectoral monetary transactions data to account for the complex
interdependencies of industries in modern economies.
139
Table 9.1: Some Macro TBL Indicators
Notes
Macro Indicator Brief description
(and unit) ___________________
Primary energy (MJ) Combustion of all non-renewable fossil ___________________

fuels
___________________
Greehouse gas emissions Carbon dioxide equivalent impact of all
(kg CO2–e) gases affected climate ___________________
Water use (L) Consumption of all mains and self- ___________________

extracted surface water
___________________
Land disturbance Land use, weighted by intensity of impact
(hectares – ha) ___________________
Imports (m$) Value of all goods and services purchased ___________________

from foreign residents
___________________
Exports (m$) Australian production destined for
consumption outside Australia ___________________
Surplus (m$) Operating profits and expenditure on fixed

capital
Government revenue (m$) All taxes less subsidies
Employment (hours) Full time equivalent employment
Income (m$) Total compensation for employees
Some macro TBL indicators have been shown in Table 9.1. Thus
economic indicators of surplus, exports and imports can be reported
as “dollars of surplus per dollar of final demand”. Social indicators
such as employment, wages and government revenue can be
described as “the minutes of employment generated per dollar of
final demand”. Environmental indicators such as greenhouse gas
emissions, water requirement and land disturbance can be described
as “kilograms of carbon dioxide equivalent emissions per dollar of
final demand” or the like.
It is important to note that understanding value as a composite of
three components does not mean value is in any way “blurred” or
that each component loses its definition. Rather, firms and capital
should seek to maximize the contribution of each component to
ensure that both performance and returns are greater than the
sum of their parts. That understanding is what is now driving
companies such as ITC Ltd. or Tata Steel.
140
Notes
Check Your Progress
Fill in the blanks:
___________________
1. The .................... concept focuses on value created or destroyed.
___________________ 2. ................. analysis is a top-down economic technique.
___________________
___________________
Summary
___________________ Portfolio analysis is an analytical tool which views a corporation as
a basket or portfolio of products or business units to be managed for
___________________ the best possible returns, and help a corporate to build a multi-
___________________
business strategy. Though the portfolio approaches have limitations,
but all these limitations can be overcome through effective strategy
___________________ development and meticulous planning. A SBU can either be an
entire mid-size company or a division of a large corporation. The
___________________
basis for many of these matrix analyses grew out of work carried
___________________ out in the 1960s by the Boston Consulting Group (BCG). The matrix
reflects the contribution of the products offered by the firm to its
cash flow. Based on this analysis, products are classified as ‘stars’,
‘cash cows’, ‘question marks’ and ‘dogs’. The key strategic issue for
stakeholders is how best to seek out the most effective ways to
maximize the different forms of value created through utilization of
capital.

1. Why portfolio analysis is a good option for multi-product
organisations?
2. Compare and contrast the General Electric Grid and the BCG
Matrix?
3. Do you think BCG Matrix has limited application? Justify
your answer.
4. On the basis of GE Matrix, make an analysis of banking
company of your choice.
5. Compare the BCG matrix with the GE model and relate the
two to the experience curve.
141
Unit 10 Notes
Case Study ___________________
___________________
___________________

___________________
___________________
___________________
Case Study: Ryanair Case Study Analysis
___________________
Ryanair started in year 1985 with only 57 staff members and with
___________________
one 15 seater turboprop plane from the south of east of Ireland to
London-Gatwick which carried 5000 passengers on one route. In 1986, ___________________
inspired from the story of David and Goliath the company sought to
go after the big guys for a slice of the action and ended up smashing
the British Airways high fare cartel on the Dublin- London route. The
staff increased from mere 57 to 120 staff members and the plane
carried for about 82,000 passengers on two routes. In 1989, the
company employed 350 staff and their average maximum passengers
increased to 600,000. In 1990-1991, the company has 700,000
passengers.
However, despite of the increase of passengers, the company is not so

good in managing cost that the company has lose its money. A new
management team is brought in to sort it out and re-launch as a “low
fares or no frills” airline, closely modelling the Southwest Airlines
model in the U.S. And in 1994, Ryanair bought its first Boeing 737
aircraft which carried over 1.5 million passengers. In 1995, Ryanair
is the biggest passenger carrier on Dublin-London route, the largest
Irish airline on every route being operate and carried 2.25 million
passengers in the year 2002.
In 1997, the EU air transport deregulation allowed the airline for the
first time to open up new routes to Continental Europe with over 3
million passengers on 18 routes carried. Ryanair launched services to
Stockholm, Oslo, Paris and Brussels and took time out to float Ryanair
plc on Dublin and NASDAQ Stock exchanges. The company was
awarded as Airline of the Year in 1999 by the Irish Air Transport
Users Committee. In 2000, they announced the launch of 10 new
European routes for the summer 2000 after much deliberation and
watching others burning money. The company has also jump onto the
internet with the launch of their new online booking site and in just
3 months the site is taking over 50,000 bookings a week. By 2001
there are more than 1500 employees working for Ryanair and more
than 10 million passengers are carried to 56 cities in 13 European
Contd...
142
Notes countries. The company has opened Frankfurt-Hahn in 2002 as their
second continental European base and announce a long term
___________________ partnership with Boeing which will see the company acquiring up to
150 new Boeing 737-800 series aircraft over an eight year period from
___________________ 2002-2010.
___________________ The booking in their web accounts have increased to 94% which has
probably has something to do with opening another 26 routes.
___________________
In year 2003, the company is characterised by rapid expansion and
___________________ the start the year by announcing that the company has ordered an
additional 100 new Boeing 737-800 series aircraft to facilitate the
___________________
rapid European growth plans. They acquired Buss from KLM in April
___________________ and re-launched 13 buss routes in May. In February they opened
their first base in Italy at Milan-Bergamo and launched their
___________________ Stockholm base in Sweden with six new European routes. In all 60
new routes are added throughout 2003 to bring the company a total
___________________ of 127 routes. By 2004, the company is named as the most popular
airline on the web by Google and they launched their 10th and 11th
___________________
bases in Rome Ciampino and Barcelona Girona and continue to add
more routes to their already extensive network. The company has
also passed out British Airways to become the UK’s favourite airline
in United Kingdom and throughout Europe.
Critical Success Factors

Although the company had encountered different problems, specifically
in line with its cost structures, the company had been able to survive
and grow in the marketplace. Ryanair implement different marketing
strategy to make the company survive in the competition and to be
able to gain competitive position in the airline market. It is said that
the company was regarded recently as the most punctual airline
between Dublin and London. And because of the strategy of the
industry, Ryanair is now recognised as the second largest airline in
United Kingdom and Europe’s largest low-fares airline having a
network of over 57 routes in 11 countries and served by a fleet of 31
Boeing 737-200 and -800 aircraft with over 1,400 staffs and personnel.
In order to position itself in the marketplace the company continuously

concentrates on driving own its costs to offer the lowest fares possible
and remain profitable. In addition, Ryanair offer minimum standards
of service and very low prices for point- to-point, short haul flights.
The goal of Ryanair is to meet the needs of travelling at the lowest
price. The Critical Success Factors (CSFs) are as follows in airline
industry: the strategic focus of having the lowest prices, being reliable
within the marketplace, comfort and service and frequency.
It is noted that low-cost companies concentrate on this first critical

success factor by trying to offer the lowest prices. Although Ryanair
has eliminated extras such as in-flight meals, advanced seat
assignment, free drinks and other services, it still prioritises features
which remain important to its target market. Such features include
Contd...
Unit 10: Case Study
143
frequent departures, advance reservations, baggage handling and Notes
consistent on-time services.
___________________
Cost Reduction Strategy
___________________
To achieve its goal of having a competitive position in the airline
market, Ryanair uses a cost reduction strategy. Such cost reduction ___________________
strategy relies on five main aspects like fleet commonality, contracting
out services, airport charges and route policies, managed staff costs ___________________
and productivity and managed marketing costs. In terms of fleet
commonality, the company used only one kind of plane which limits ___________________
the cost for staff training, maintenance services and facility of obtaining
___________________
spares, facility in scheduling aircraft and crew assignment. With
their purchase of aircraft Boeing 737, Ryanair has been able to gain ___________________
capacity and reduces the average age of fleet which means savings on
maintenance costs and avoiding the fit of European Union- conform ___________________
equipment on old feet.
___________________
The next factor under the cost reduction strategy of Ryanair is
contracting out services. In this manner, aircraft handling, ticketing, ___________________
handling and other functions are contracted out by Ryanair to third
parties. In addition, in order to limit their expenses engine and heavy
maintenance are also contracted out whereas the staff of Ryanair
carries out routine maintenance.
Another factor for the cost reduction strategy of the company is in

terms of airport charges and route policies. Herein, Ryanair has made
judicious choice of dealing with secondary and regional airports, where
the traffic is not jammed and fees incomparably lower. Since Ryanair,
is a true windfall for such airports, the airline company has a
bargaining power which enables it getting favourable access fees.
In addition, Ryanair provides only a point-to-point service, thus, it
has no cost concerning connecting passengers. Moreover, the company
pays special focus to on-time departures because it means maximising
aircraft utilisation.
Managing staff costs and productivity is another factor used for

reducing the cost for Ryanair. In this manner, the company pays its
staff on modest salary but has set up a performance related pay
structure which urges employees to maximise the number of sectors
flown daily. This way, Ryanair both controls productivity and keeps
staff costs down. Lastly, managing marketing costs is another factor
that makes the company reduces it costs. Ryanair advertises mainly
on it website with its logo “Ryanair.com, the Low-Fare Airline”. In
addition, it is also advertised in national and regional Irish and UK
newspaper, on radio and on television.
Porter’s Generic Strategy

Aside from it cost-reduction strategy, Ryan has also been able to use
Porter’s generic strategies to position itself in the marketplace.
Accordingly, a company positions itself by leveraging its strengths.
Contd...
144
Notes Today, more and more people and organization are striving to be
recognized in the business arena. With this objective, these
___________________ organizations had been able to competently and effectively adapt to
the situation in the market place by using generic strategies that
___________________ enhanced their competitiveness. There are five different generic
strategies that a business can choose.
___________________
These include cost leadership, differentiation, focused cost leadership
___________________ and integrated cost leadership/differentiation. Each generic strategy
helps the company to establish and exploit a competitive advantage
___________________
within a particular competitive scope (2003). By applying these
___________________ strengths, three generic strategies are resulted: cost leadership,
differentiation and focus (1997). The strategies used by the company
___________________ include cost leadership, differentiation strategy and focused
differentiation.
___________________
Cost leadership strategy is based upon a business organising and
___________________ managing its value-adding activities so as to be the lowest cost
producer of a product within an industry (2002). Cost advantage may
___________________
achieve in terms of how product or services is designed or in terms
of its quality. Differentiation strategy is based upon persuading
customers that a product is superior to that offered by competitors
(2002). The value added by the uniqueness of the product or services
may allow the company to charge a premium price for it. However,
the danger associated with differentiation may include imitation by
competitors and changes in customer tastes.
Focus-differentiation strategy is aimed at a segment of the market

fro a product rather than at the whole market or many markets
(2002). The successful way using focus strategy is to tailor a broad of
product or service development strengths to a relatively narrow market
segment that they know very well. The risk may include imitation
and changes in the target segments. In the case of Ryanair, these
three generic strategies had been utilised. First, the company offers
the lowest cost of fare than its competitors in the airline. On the
other hand, Ryanair has also become a focuser because it concentrated
on a narrow customer segment which include Irish and UK business
people or travellers who could not afro to fly major airlines.
The main goal of the company is to provide a no frills service with low
fares designed to stimulate demand. At the time, it did not aim to
offer the lowest fare on the market. However, the company expanded
to continental Europe and had to focus on critical success factors to
survive. Nowadays, it can be said that Ryanair has shifted generic
strategies to become more of a cost-leader not only in terms of
passenger volumes but being the lowest cost operator in the airline
industry.
Ryanair has restyled itself and shifted from a full service conventional
airline to the first European low fares, no frills carrier. In 1985, it
provided scheduled passenger airline services between Ireland and
the UK. By the end of 1990 and despite a growth in passenger volume,
Contd...
Unit 10: Case Study
145
the company had experienced some trouble and had to dispose of five Notes
chief executives, recording losses of IR 20 million. Ryanair had to
fight to survive and the new management team, headed by Michael ___________________
O’Leary, decides to restyle the company on the model of successful
American Southwest Airlines. ___________________
Indeed, when one considers Porter’s original framework, Ryanair’s ___________________

generic strategy used to be unclear: it situated itself somewhere
between a cost leader and a focuser, although we can consider it was ___________________
closer to a focuser. The problem with such niche strategies is that
___________________
they involve a number of risks, the most obvious being that the niche
can get saturated and competitors invade the segment. As long as ___________________
Ryanair was the only European no frills airline, it did not have to
distinctly define its strategic position. It used to try and mix focus ___________________
and cost leadership and was muzzy about which one it wanted. But
as soon as competitors started blooming, it had to decide which strategy ___________________
it would stick to. He decided to ruthlessly pursue cost leadership.
___________________
This strategy was a success and by 1997, Ryanair was floated on the
Dublin Stock Exchange and on NASDAQ. ___________________
Expansion strategy is another factor that enables Ryanair to position

itself in the marketplace. The company has been known to be an
airline which launches new routes since its operation begins. In
addition, under the expansion strategy, company acquires Buzz in
February 26, 2003. Such acquisition enables Ryanair to gain immediate
access to 11 new French regional airports and makes the company
the largest airline operating at London Stansted Airport. In addition,
the company continues to expand by opening two new Continental
European bases with low-fare flights from Milan Bergamo and
Stockholm. In the year, 2003, the company has been able to launch
73 new routes and carry over 2 million passengers in one month
(July). In addition, the company website has been able to make the
company position itself in the global market.
Strategic Option
The case study has provided the problems and issues encountered by
the Ryanair, in spite of its strategies. One of the problems is in terms
of handling customers or target market. In addition, another problem
is assuring quality service. In this manner, the strategic option that
can be used by the company for satisfying both internal and external
customers and marketing environment is the use of total quality
management. The industrial competitions in airline industry worldwide
are at brisk, making companies in this field across the globe search
for extensive strategic management procedures that would keep them
in on the business world. The tasks of crafting, implementing, and
executing company strategies are the heart and soul of managing
business enterprise. A company’s strategy serves as the game plan
management and is use to stake out a market position, conduct its
operations, attract and please customers, compete successfully, and
achieve organizational objectives. Thus, TQM as a strategy is certainly
appropriate for such situation.
Contd...
146
Notes Total Quality Management is a philosophy of management that is
driven by the constant attainment of customer satisfaction through
___________________ the continuous improvement of all organizational processes (1998). It
is a management philosophy that seeks to integrate all organizational
___________________ functions such as marketing, finance, design, engineering, production,
customer service, and others to focus on meeting customer needs and
___________________
organizational objectives (2000).
___________________ It is known that every organization’s primary purpose is to stay in
business, so that it can promote the stability of the community,
___________________
generate products and services that are useful to customers, and
___________________ provide setting for the satisfaction and growth of organization
members. From this perspective, it can be said that TQM strategy
___________________ for achieving its normative outcomes is rooted in four interlocked
assumptions: quality, people, organizations, and the role of the senior
___________________
management (1995).
___________________
Total Quality Management is a planned procedure for satisfying
___________________ internal and external customers and suppliers by integrating the
business environment, continuous improvement, and come through
with advancement, growth, and safeguarding the cycles while changing
organisational culture. Furthermore, TQM is an array of management
system throughout the organisation, geared to ensure that the
organisation to continuously attain or surpass customer requirements.
TQM places strong focus on process measurement and controls as
means of continuous improvement. Moreover, Total Quality
Management is infinitely variable and adaptable. Although originally
applied to manufacturing operations, and over the years only used in
that area, TQM is now being recognised as a standard management
instrument, just as applicable in service and public sector organisations
like the airlines industries (2004).
The Total Quality Management (TQM) philosophy of management is

customer-oriented. Hence, the airline operations must be developed
in order to steadily deal with the improvement of their operation
through the ongoing participation of all employees in problem solving
efforts across functional and hierarchical boundaries. TQM incorporates
the concepts of service quality, process management, quality assertion,
and quality perfection. Consequently, the airline company must be
able to control all transformation processes with regards to their
operations and services to better satisfy customer needs in the most
economical way.
In order to apply the TQM to Ryanair especially to be used in its

airline operations and services, the management of the airline company
must be able to accept the whole concept of the improvement, which
means that all the people of the airline company must agree that
there is a need for a total transformation especially for the quality of
operations and services that the industry will be offered. Furthermore,
the management should be willing to participate to all the
improvement, value each and every ones opinion in order to achieve
Contd...
Unit 10: Case Study
147
total quality management and provide a total quality operations and Notes
services to satisfy their customers. Managers and experts disagree
about how to effectively implement Total Quality Management to ___________________
their organisations. Eventually, customer satisfaction has always been
regarded as the driving force behind quality improvement; others ___________________
suggest quality management is achieved by internal productivity or
cost improvement programs. In other applications, Total Quality ___________________
Management is regarded as a technique to introduce the context of
___________________
participative type of management (1998). Thus, the management
should be more straightforward to provide the potential role of applying ___________________
the Total Quality Management to their operations and services.
___________________
In addition, since Total quality management is based on internal or
self-control, which is embedded in every element of the work system ___________________
(technology and people), the employees or the people behind the
___________________
operation and services being offered to the passengers and customers
of the airline must be able to determine the problems beforehand, to ___________________
anticipate its occurrences.
___________________
Pushing problem solving and decision-making down in the Ryanair
especially to their operations and services may allow people who do
the work to both assess and take remedial action in order to deliver
an operation or service that meets the needs of their customer. In
applying total quality management to airline operations, they must
be able to combine it with the core strategy of the industries; this
does not mean that such airline companies must have total changes.
It is important that in application of the Total Quality Management
to the Ryanair operations and services they must also consider that
an appropriate strategy should be used in order to employ a total
quality operations and services that would satisfy all clients and
customers.
Question:
1. Critically analyse the above case.
Source: http://ivythesis.typepad.com/term_paper_topics/2009/04/case-study-
analysis-ryanair.html
Block–III
Detailed Contents
UNIT-11: STRATEGIC MANAGEMENT PROCESS
UNIT-12: STRATEGIC CHOICE AND IMPLEMENTATION
UNIT-13: STRATEGIES FOR GLOBAL ENVIRONMENT
UNIT-14: STRATEGIES FOR RETRENCHMENT
UNIT-15: CASE STUDY

151
Unit 11 Notes
Strategic Management PProcess

rocess ___________________
___________________
___________________

___________________
\ Purposes of Strategic Management Process
___________________
\ Steps involved in the Strategic Management Process
\ Strategic Management Process ___________________
___________________
Introduction ___________________
___________________
A strategy is developed within a firm. The final product will
necessarily be shaped by the background of that firm, the processes
it has in place for arriving at basic business decisions and the
interests and perspectives of its senior managers. Typically, these
factors come together in a formal strategy process through which
strategy is defined and evaluated by the firm’s managers. The
strategic management process is a continuous process. “As
performance results or outcomes are realized – at any level of the
organization – organizational members assess the implications and
adjust the strategies as needed.” In addition, as the company grows
and changes, so will the various strategies. Existing strategies will
change and new strategies will be developed. This is all part of the
continuous process of improving the business in an effort to succeed
and reach company goals.
Purposes of Strategic Management Process

Strategic management basically aims at formulating and
implementing effective strategies. Effective strategies, of course,
are those that help a superior ‘fit’ between the organisation and its
environment and the achievement of strategic goals (Andrews).
Strategies necessarily change over time to suit environmental
changes but, to remain competitive, organisations develop strategies
that focus on core competence, develop synergy and create value for
customers.
Core Competence
An organisation’s core competence is something it does exceptionally
well in comparison to its competitors. It reflects a distinct competitive
advantage (like superior research and development, mastery of a
152
technology, distribution channel, manufacturing efficiency or
Notes
customer service) that provides the firm (a) access to variety of
___________________
products/markets (b) contributes greatly to customer benefits in the
end products and (c) is an exclusive and inimitable preserve of the
___________________ firm that is long-lasting and cannot be easily copied by competitors.
___________________
Synergy
___________________
When organisational parts interact to produce a joint effort that is
___________________ greater than the sum of the parts acting alone, synergy occurs.
Some call this the 1 + 1 = 3 effect. In strategic management,
___________________
managers are urged to achieve as much market, cost, technology
___________________ and management synergy as possible when arriving at strategic
decisions (such as mergers, acquisitions, new products, new
___________________
technology etc.). When one product or service strengthens the sales
___________________ of one or more other products or services, market synergy occurs.
Wal-Mart’s new Supercentres and Super K marts that put a discount
___________________
store and a grocery store under one huge roof (Crossroads, Mumbai;
Spencer’s in Chennai) are a good example of market synergy in
action. Cost synergy can occur in almost every dimension of organised
effort. When two or more products can be designed by the same
engineers, produced in the same facilities, distributed through the
same channels, or sold by the same sales persons, overall costs will
be lower than if each product received separate treatment. In Europe,
today, banks and insurance companies are linking up in an effort
to market a wide array of financial products that each would have
trouble selling on its own. Technology synergy involves transferring
technology from one application to another, thus opening up new
markets. In management synergy also a similar kind of technology
transfer is needed. Management synergy would be achieved, for
example, if a software product company with weak roots in training
and education line hires a new CEO with strong academic and
training credentials. Ideally the new CEO would transfer his
technical skills to good effect.
Value Creation
Exploiting core competencies and achieving synergy help
organisations create value for their customers. Value is the sum
total of benefits received and costs paid by the customer in a given
situation. Ideally, the purpose of a strategy should be to create a
lasting value that is greater than the cost of resources that are
used to create the same.
Unit 11: Strategic Management Process
153
Fill in the blanks:
___________________
1. An organisation’s core .................. is something it does exceptionally
well in comparison to its competitors. ___________________
2. ................. is the sum total of benefits received and costs paid by the
___________________
customer in a given situation.
___________________
Steps involved in the Strategic Management ___________________

Process ___________________
Dynamic in nature, the strategic management process is the full ___________________
set of commitments, decisions and actions needed for a firm to
achieve strategic competitiveness and earn above average returns. ___________________
Strategic competitiveness is achieved when a firm successfully ___________________
formulates and implements a value creating strategy. When a firm
implements such a strategy that other firms are unable to duplicate ___________________
or find too costly to imitate, this firm has a sustainable competitive
advantage. By achieving strategic competitiveness and successfully
exploiting its competitive advantage, the firm is able to achieve
above average returns which are returns in excess of what an
investor expects to earn from other investments with a similar
amount of risk. ‘Risk’ here refers to an investor’s uncertainty about
the economic gains or losses that will result from a particular
investment.
Strategic Inputs Strategic Actions Strategic Outcomes
Identify Strategic Strategic Strategic

External Intent Formulation
Opportunities Implementation
Analysis
Threats and Control
• Vision • Corporate
• Mission • Business • Structural
Evaluate
• Objectives • Functional • Leadership
current
• Goals • International • Behavioural
• Vision SWOT
• Mission • Evaluationl
• Goals
• Strategies
Identify
Internal
Strengths
Analysis
Weaknesses
Feedback
Information Process Strategic Direction Decision Process
Figure 11.1: Strategic Management Process
Relevant strategic inputs from analyses of the internal and external

environments are needed for effective strategy formulation,
implementation and evaluation. In turn, effective strategic actions
154
are essential to achieve desired outcomes in the form of strategic
Notes
competitiveness and above average returns (as explained in the
previous example). The various steps involved in the strategic
___________________
management process may be stated thus:
___________________
Vision, Mission and Objectives
___________________
In the organisational context, vision is a picture of the organisation:
___________________ the core values for which an organisation stands and a clear
___________________ description of what the organisation wishes to become in the years
ahead. A mission statement, on the other hand, specifies what an
___________________ organisation is and why it exists. The strategic management process
___________________
begins with an evaluation of the organisation’s current vision,
mission, objectives and strategy. The principal value of a mission
___________________ statement lies in its specification of a firm’s ultimate aims. It offers
a sense of shared expectations among all levels and generations of
___________________
employees. It consolidates values over time and across individuals
___________________ and interest groups. It projects a glorified sense of worth and intent
that can be identified and assimilated by external groups too. It
also exhibits a firm’s commitment to responsible action in line with
the firm’s internal (survival, growth, profitability) as well as external
(ethics, corporate governance, social responsibility) objectives.
External Analysis
The firm’s external environment is challenging and complex. Because
of the impact the external environment has on performance, the
firm must develop requisite skills to identify opportunities and
threats existing in that environment. The external environment
has three important parts:
• General environment (elements in the broader society that
affect industries and their firms)
• Industry environment (factors that influence a firm, its
competitive actions and responses, and the industry’s profit
potential) and
• Competitive environment (in which the firm examines each
major rival’s future objectives, current strategies, assumptions
and capabilities).
Internal Analysis
In order to exploit environmental opportunities to its advantage, a
firm must have internal resources and capabilities. A systematic
internal appraisal helps a firm find
• Where it stands in terms of its strengths and weaknesses
• Pick up opportunities that are in tune with its resource base
155
• Take steps to bridge any resource gaps and
Notes
• Select appropriate areas that help consolidate its position in
the industry. ___________________
A major task of strategists, while carrying out internal analysis, is ___________________

to match the conditions of the external environment with the firm’s
___________________
internal strengths and weaknesses. If a firm can perform an activity
better than its rivals, it then possesses a distinctive (or core) ___________________
competence that helps the firm to build its own source of competitive
___________________
advantage. In the final analysis, the choice of which strategy to
pursue should be based on using and exploiting the firm’s competitive ___________________
advantage.
___________________
After the external and internal analysis, the firm tries to formulate
explicit strategic plans at three levels; corporate, business and ___________________
functional. These are then put into action using leadership, ___________________
structural designs, information systems and human resources to
good advantage. ___________________
Check Your Progress

1. Strategic competitiveness is achieved when a firm successfully formulates
and implements a value creating strategy.
2. A vision statement specifies what an organisation is and why it exists.
Strategic Management Process

The strategic management process is made up of four elements:
situation analysis, strategy formulation, strategy implementation
and strategy evaluation. These elements are steps that are
performed, in order, when developing a new strategic management
plan. Existing businesses that have already developed a strategic
management plan will revisit these steps as the need arises, in
order to make necessary changes and improvements.
Situation Analysis
Situation analysis is the first step in the strategic management
process. The situation analysis provides the information necessary
to create a company mission statement. Situation analysis involves
“scanning and evaluating the organizational context, the external
environment, and the organizational environment.” This analysis
can be performed using several techniques. Observation and
communication are two very effective methods.
To begin this process, organizations should observe the internal
company environment. This includes employee interaction with other
156
employees, employee interaction with management, manager
Notes
interaction with other managers, and management interaction with
shareholders. In addition, discussions, interviews, and surveys can
___________________
be used to analyze the internal environment.
___________________
Organizations also need to analyze the external environment. This
___________________ would include customers, suppliers, creditors, and competitors.
Several questions can be asked which may help analyze the external
___________________
environment. What is the relationship between the company and
___________________ its customers? What is the relationship between the company and
its suppliers? Does the company have a good rapport with its
___________________
creditors? Is the company actively trying to increase the value of
___________________ the business for its shareholders? Who is the competition? What
advantages do competitors have over the company?
___________________
Strategy Formulation
___________________
Strategy formulation involves designing and developing the company
___________________
strategies. Determining company strengths aids in the formulation
of strategies. Strategy formulation is generally broken down into
three organizational levels: operational, competitive and corporate.
• Operational strategies are short-term and are associated with
the various operational departments of the company, such as
human resources, finance, marketing, and production. These
strategies are department specific. For example, human
resource strategies would be concerned with the act of hiring
and training employees with the goal of increasing human
capital.
• Competitive strategies are those associated with methods of
competing in a certain business or industry. Knowledge of
competitors is required in order to formulate a competitive
strategy. The company must learn who its competitors are and
how they operate, as well as identify the strengths and
weaknesses of the competition. With this information, the
company can develop a strategy to gain a competitive advantage
over these competitors.
• Corporate strategies are long-term and are associated with
“deciding the optimal mix of businesses and the overall direction
of the organization”. Operating as a sole business or operating
as a business with several divisions are both part of the
corporate strategy.
Strategy Implementation
Strategy implementation involves putting the strategy into practice.
This includes developing steps, methods, and procedures to execute
the strategy. It also includes determining which strategies should
157
be implemented first. The strategies should be prioritized based on
Notes
the seriousness of underlying issues. The company should first focus
on the worst problems, then move onto the other problems once
___________________
those have been addressed.
___________________
“The approaches to implementing the various strategies should be
considered as the strategies are formulated.” The company should ___________________
consider how the strategies will be put into effect at the same time
___________________
that they are being created. For example, while developing the
human resources strategy involving employee training, things that ___________________
must be considered include how the training will be delivered, when
___________________
the training will take place, and how the cost of training will be
covered. ___________________
Strategy Evaluation ___________________
Strategy evaluation involves “examining how the strategy has been ___________________
implemented as well as the outcomes of the strategy.” This includes
___________________
determining whether deadlines have been met, whether the
implementation steps and processes are working correctly, and
whether the expected results have been achieved. If it is determined
that deadlines are not being met, processes are not working, or
results are not in line with the actual goal, then the strategy can
and should be modified or reformulated.
Both management and employees are involved in strategy
evaluation, because each is able to view the implemented strategy
from different perspectives. An employee may recognize a problem
in a specific implementation step that management would not be
able to identify.
Check Your Progress

Fill in the blanks:
1. The strategic management process is made up of ............. elements.
2. .............. analysis is the first step in the strategic management process.
The strategy evaluation should include challenging metrics and

timetables that are achievable. If it is impossible to achieve the
metrics and timetables, then the expectations are unrealistic and
the strategy is certain to fail.
Summary
The term ‘Strategic Management Process’ refers to the steps by
which management converts a firm’s mission, objectives and goals
into a workable strategy. In a dynamic environment each firm needs
to tailor its strategic management process in ways that best suit its
158
own capabilities and situational requirements. Viewed broadly, the
Notes
strategic management process has two parts: an information process
and a decision process. The information process involves collecting
___________________
and analysing information about the external and internal
___________________ environments. External factors are taken into account to find major
opportunities and threats that now or will confront the organisation.
___________________
To survive and grow, every organisation, invariably, must find how
___________________ the situational factors have affected its past and current
performance. This must be followed by an internal analysis to
___________________
determine the organisation’s strategic direction. Strategists carry
___________________ out internal analysis to have a ‘feel’ of where their organisation has
been and where it now is, particularly with regard to internal
___________________ strengths and weaknesses. Information about the organisation’s
___________________ strengths and weaknesses, when combined with information about
external opportunities and threats, offers a stronger foundation for
___________________ informed decisions about strategic direction. The decision process
covers four important steps: development of alternatives, choice,
___________________
implementation and assessment. Based on the external and internal
analysis, strategists first identify possible strategic alternatives and
pick up those that help the organisation reach its mission and
objectives. In the next step, the planners decide how and when to
translate strategic choices into action, followed by an evaluation of
the effectiveness and efficiency of the strategic direction the
organisation has followed.

1. Outline the major components of the strategic management
process.
2. Explain why engaging in strategic management is likely to be
beneficial for an organisation.
3. Write brief note on Synergy.
4. What are the three important parts of external environment?
5. Compare and contrast external environment.
6. Discuss the categories of Strategy Formulation.
159
Unit 12 Notes
Strategic Choice and Implementation ___________________
___________________
___________________
___________________
\ Constraints and Strategic Choice
___________________
\ Strategy Implementation
\ Strategic Control and Assessment ___________________
___________________
Introduction ___________________
In general management strategic choice refers to the view that, ___________________

because of the power relationships in various organizational contexts,
people in roles with managerial accountability are not simply
restricted by obvious contextual factors such as technology available
or environmental factors such as market demand, but they exercise
sometimes considerable discretion. Strategic choice is a systemic
theory of strategy. This theory is built on a notion of interaction in
which organizations adapt to their environment in a self-regulating,
negative-feedback manner so as to achieve their goals. The dynamics,
or pattern of movement over time, are those of movement to states
of stable equilibrium. Prediction is not seen as problematic. The
analysis is primarily at the macro level of the organization in which
cause and effect are related to each other in a linear manner. Micro-
diversity receives little attention and interaction is assumed to be
uniform and harmonious. Strategic implementation put simply is
the process that puts plans and strategies into action to reach goals.
A strategic plan is a written document that lays out the plans of
the business to reach goals, but will sit forgotten without strategic
implementation. The implementation makes the company’s plans
happen.
Constraints and Strategic Choice

Strategic choices involve the options for strategy in terms of both
the directions in which strategy might move and the methods by
which strategy might be pursued. For instance, an organisation
might have a range of strategic directions open to it: the organisation
could diversify into new products; it could enter new international
markets; or it could transform its existing products and markets
through radical innovation. These various directions could be
160
pursued by different methods: the organisation could acquire a
Notes
business already active in the product or market area; it could form
alliances with relevant organisations that might help its new
___________________
strategy; or it could try to pursue its strategies on its own.
___________________
There are strategic choices in terms of how the organisation seeks
___________________ to compete at the individual business level. Typically these choices
involve strategies based on cost (for example, economies of scale) or
___________________
differentiation (for example, superior quality). Crucial is deciding
___________________ how to win against competitors (for this reason, business strategy
is sometimes called ‘competitive strategy’). Viewed collectively, the
___________________ R&D strategy should encourage innovation; marketing should stress
brand loyalty and reliable distribution channels; production should
___________________
maintain long production runs, cost reduction and routinisation;
___________________ finance should focus on cash flows and positive returns and HR
department should develop strategies for retaining and developing
___________________
a stable workforce. Of course, organisations do come across
___________________ constraints while formulating functional level strategies in several
forms; how to finance the proposals, what kind of risk to be taken,
how to combine strong production skills of the company with its
own weak marketing skills, how to keep suppliers and channel
partners happy, how to encounter competitive retaliation etc. In
any case while selecting appropriate strategies at corporate, business
and functional level, the following criteria should be kept in mind.
• They are responsive to the external environment.
• They offer a sustainable competitive advantage.
• They are consistent with other strategies in the organisation.
• They provide adequate flexibility for the business and the
organisation.
• They conform to the organisation’s mission and long-term
objectives.
• They are organisationally feasible.
Check Your Progress

Fill in the blanks:
1. ................ involve the options for strategy in terms of both the directions
in which strategy might move and the methods by which strategy might
be pursued.
2. There are strategic choices in terms of how the organisation seeks to
compete at the .................. business level.
Strategy Implementation
Strategy implementation is the process of translation of strategies
and policies into action through the development of programmes,
Unit 12: Strategic Choice and Implementation
161
budgets and procedures. It is typically conducted by the middle and
Notes
lower level management but is reviewed by the top management.
However, programmes and procedures are simply more detailed
___________________
plans for the eventual implementation of strategy. Unless the
corporation is appropriately organised, programmes are adequately ___________________
staffed and activities are properly directed, these operational plans
___________________
fail to deliver the goods. To be effective, a strategy must be
implemented through the right organisation structure and ___________________
appropriate management practices. In addition, management must
___________________
also ensure that there is progress towards objectives according to
plan by instituting a rigorous process of control over important ___________________
activities.
___________________
Organising
___________________
In a classic study of large American Corporations (Du Pont, General
___________________
Motors, Sears Roebuck, Standard Oil), Chandler concluded that
structure follows strategy. Changes in corporate strategy have ___________________
invariably led to changes in corporate structure. Chandler found
that most corporations begin with a centralised organisation
structure. As they add new product lines and create independent
distribution networks, the centralised structure is discarded by the
organisations in favour of a decentralised structure which permits
the creation of semi-autonomous product divisions. Burns and
Stalker also found that mechanistic structures (centralised decision
making and bureaucratic rules) seem to be appropriate to
organisations operating in stable environments. However, organic
structures, in contrast (decentralisation and flexible procedures),
seem to be appropriate to organisations operating in a constantly
changing environment. The research conducted later on also supports
Chandler’s proposal that an appropriate organisation structure is
necessary to meet changes in corporate strategy. The firm should,
therefore, work to make its structure congruent with its strategy.
Staffing
Effective strategy implementation calls for utilisation of human
resources fully. For implementing growth strategies, new people
should be recruited and given requisite training. Retrenchment
strategies call for a sound basis for firing people, i.e., seniority,
performance, absenteeism, etc. In order to translate the strategy
into action, the services of capable and committed people are
necessary. To this end, management should institute proper
performance appraisal systems which permit people to compare
their performance with others and find out where they are. These
systems also help the management to identify ‘star’ performers easily
and reward them adequately. Perspiration does not go far without
a little bit of inspiration.
162
Directing
Notes
People should be motivated to implement a new strategy in desired
___________________ ways. It is not sufficient merely to have people who can do the job;
it is also necessary to have people who want to do the job the way
___________________
you need it done. In addition to traditional motivational techniques,
___________________ managers should also make use of modern techniques in order to
inspire people to peak performance.
___________________
___________________
Motivational Techniques
___________________
The traditional motivational techniques are based on a reward-
punishment psychology and involve the use of performance
___________________ appraisals and performance-based incentive programmes. These
approaches, including MBO, indicate that specific results are best
___________________
achieved by clearly outlining realistic goals and then suitably
___________________ rewarding those managers who achieve them. They are overly reliant
on money as the primary motivator, while overlooking other factors
___________________ that might be truly motivating to many managers. According to
Morse and Martin, motivating the organisation to implement
strategy requires:
Supportive Culture
The successful implementation of strategy must take into account
the history of an organisation and dominant values or culture which
exists. The corporate culture is a system of shared beliefs and values
that the people within the corporation hold. Some of the critical
dimensions of culture are:
• Clarity of direction: How well the company’s goal and plans
for achieving them are known, understood and found to be
motivating throughout the organization.
• Decision making structure and processes: Whether the
culture is decision-oriented or decision-avoidant and whether
decisions are made on the basis of sound information or ‘seat
of the pants’ intuition.
• Management style: Whether too little or too much
participation in making decisions exists at each level of the
company.
• Integration of effort: Whether teamwork, sharing and smooth
meshing of activities – or the opposite – accurately describes
the culture.
• Performance orientation: Whether managers feel accountable
for end results and whether rewards are related to performance
or not.
• Compensation: Whether it is equitably fairly administered
and motivational, or not.
163
Ÿ Human resource development: How much this characterises
Notes
the culture.
• Organisational vitality: That drive to perform – that sense ___________________
of urgency and desire to be a winner – which some organisations
___________________
have and others do not.
• Risk taking: Whether it is encouraged or punished, and ___________________
• Competitive image: Whether company views itself as faster, ___________________

sharper and better than the competitor, or vice versa.
___________________
Every company should try to measure these dimensions of culture
___________________
and determine what kind of culture and what kind of subcultures
will best support the company’s strategy. Senior executives should ___________________
determine the desired culture taking the short-term requirements
___________________
of the company.
___________________
Short-term Motivational Environment
___________________
Whereas a company’s culture affects strategy implementation over
the long haul, the short-term motivational environment affects
strategy implementation today. The short-term environment reflects
the immediate mood of the company’s employees and contributes to
the way they face immediate problems. Building such an
environment involves actions very similar to public relations
activities:
• Communication programmes
• Morale-building conferences
• Visibility of charismatic leaders
• Use of awards, language, symbols, gestures etc.
Performance Management
The traditional motivators (MBO, performance appraisal, etc.) should
be logically and firmly linked to what is called an integrated
performance management process. To this end detailed budgets
and programmes should be drawn. Individuals should also know
exactly what piece of the organisation structure they are accountable
for and what goals and objectives they must attain this year to stay
on plan. Performance management ensures that rewards and
sanctions result from measures of good or poor performance. It
links human resources planning with the firm’s strategy formulation
and performance appraisal processes so as to guide the future efforts
of the company.
Individual Motivators
In addition to the traditional motivating techniques, the organisation
should also provide for individual motivators for achieving results
164
competently. Over-reliance on bonuses and incentives may not fully
Notes
motivate individual managers in today’s world. Top management
should, therefore, fully understand the individual differences and
___________________
devise an appropriate motivational strategy. Though it is difficult
___________________ to categorise individual motivators, some of the important ones
may be stated thus:
___________________
• Mastery: The act of mastering a new skill or gain control over
___________________
a challenging problem is most motivating to many individuals.
___________________ • Approval: Lack of approval can hamper and constrict the
___________________
performance of talented and bright managers.
• Risk and Adventure: High visibility positions having risk
___________________
and adventure are mostly preferred by managers possessing
___________________ entrepreneurial talents.
___________________ • Security: In order to perform effectively and efficiently,
managers need to feel that there is little at risk with respect
___________________ to their careers.
• Power and Influence: Organisational positions that enable
managers to gain power and control over human as well as
non-human resources are highly motivating.
Check Your Progress

1. Strategy implementation is the process of translation of strategies and
policies into action.
2. Ineffective strategy implementation calls for utilisation of human
resources fully.
Strategic Control and Assessment

Strategic control, the last step of the strategic management process,
is monitoring and evaluating the strategy management process as
a whole in order to make sure that it is operating properly. The
focus is clearly on activities involved in environmental analysis,
organisational direction, strategy formulation, strategy
implementation – ensuring that all steps of the strategy management
process are appropriate, compatible and functioning properly. There
are three basic steps to the strategic control process.
Measure Performance
Strategic audits are used to find what is actually happening in the
organisation. Both qualitative and quantitative tools are employed
for this purpose. According to S Tilles, the qualitative measurement
looks into five questions:
165
• Is the strategy internally consistent?
Notes
• Is it consistent with its environment?
___________________
• Is it appropriate given organisational resources?
• Is it too risky? ___________________
• Is the time horizon of the strategy appropriate? ___________________
Quantitative tools like return on investment (the relationship ___________________

between the amount of income generated and the amount of assets ___________________
required to operate the organisation); z score (an analysis that
numerically weighs and sums five measures – working capital\total ___________________
assets; retained earnings\total assets; earning before interest and
___________________
taxes\total assets; market value of equity\book value of total
liabilities and sales\total assets – to find whether the company in ___________________
question is likely to go sick and become bankrupt) and shareholders’
___________________
audit etc. are used to measure organizational performance.
___________________
Compare Performance to Goals and Standards
Here management builds a case for concluding whether the
performance is according to the predetermined standards in respect
of certain key areas. At General Electric, the following eight types
of standards are set for comparing performance at a later stage;
profitability, market position, productivity, product leadership,
personnel growth, employee attitude, social responsibility and
standards reflecting balance between short- range and long-range
goals.
Corrective Action
If the actual performance is not in line with predetermined standards
set for the purpose, corrective action is necessary. In such a case,
every attempt is made to modify the enterprise’s strategies and
their implementation so that the organisations’ ability to accomplish
its goals will be improved.
Check Your Progress

Fill in the blanks:
1. Strategic .................. are used to find what is actually happening in
the organisation.
2. If the ..................... performance is not in line with predetermined
standards set for the purpose, corrective action is necessary.
Summary
There are strategic choices in terms of how the organisation seeks
to compete at the individual business level. Strategy implementation
166
is the process of translation of strategies and policies into action
Notes
through the development of programmes, budgets and procedures.
Effective strategy implementation calls for utilisation of human
___________________
resources fully. People should be motivated to implement a new
___________________ strategy in desired ways. The traditional motivational techniques
are based on a reward-punishment psychology and involve the use
___________________
of performance appraisals and performance-based incentive
___________________ programmes. The successful implementation of strategy must take
into account the history of an organisation and dominant values or
___________________
culture which exists. Whereas a company’s culture affects strategy
___________________ implementation over the long haul, the short-term motivational
environment affects strategy implementation today. Strategic
___________________ control, the last step of the strategic management process, is
___________________ monitoring and evaluating the strategy management process as a
whole in order to make sure that it is operating properly.
___________________
___________________
1. Discuss the criteria involved in the selection of strategies at
corporate, business and functional level.
2. Highlight the critical dimensions of culture.
3. Write brief note on Performance Management.
4. What are the individual motivators?
5. Do you think that strategic audits are used to find what is
actually happening in the organisation?
167
Unit 13 Notes
Strategies for Global Environment ___________________
___________________
___________________

___________________
\ Major Drivers of Globalization
___________________
\ Impact On National Conditions
\ Strategies in Geographic Expansion ___________________
\ Competing Internationally ___________________
___________________
Introduction ___________________
The spread and power of globalization, or the shrinking of the planet

as it is today, has as its foundations in four major drivers. These
drivers provide an insight into the opportunities and challenges
that nations and corporations face in the future. The spread and
power of globalization, or the shrinking of the planet as it is today,
has as its foundations in four major drivers—(a) Technology, (b)
Finance, (c) Information, and (d) Decision- making and information
flows. Globalization thrives in a world where the cost and ease of
global transport and communications are ever improving, the cost
and ease of moving money are negligible and where companies
around the world use common operating standards. These are the
right conditions for businesses to replicate what they do at home in
countries.
Major Drivers of Globalization

In the present-day world, the economies of different countries are
also connected through factors such as migration and the diffusion
of technology internationally. Technological innovation and trade
liberalization have contributed to globalization by supplying the
infrastructure for international and intra-national connections,
making the world more interdependent and interconnected. All these
factors bind each country into one world economy. A large chunk of
modern business depends on distant capital markets, distant
consumer markets and distant systems of law enforcement.
• Technology is enabling more and more people to reach and
communicate with more and more people. We are able to reach
farther and farther into more and more countries, than it has
ever been possible before. Using faster and cheaper means, we
168
can access others even from our homes using computers,
Notes
modems, cellular phones, cable systems and Internet
connections.
___________________
• Finance is witnessed by the change in how we invest. We
___________________
have gone from a world where a few bankers held the sovereign
___________________ debts of many of the countries to a world where many
individuals acting through various types of financial
___________________ instruments hold the sovereign debts of many countries. We
___________________ depend on these individuals for the growth of our economies.
Individuals can, at short notice, rain billions and billions of
___________________ dollars on the country’s stock and bond markets, as well as
directly into plants and factories. They can also transform or
___________________
create havoc in the markets and affect the way nations run.
___________________ They can determine whether to help governments to survive or
take steps leading to their collapse.
___________________
• Information has made it possible for us to see through, look
___________________
through or hear through almost every conceivable wall. The
result is that never before have so many people been able to
know of, and be informed about, the lives of so many others
scattered across the globe. The ideas of so many people in so
many countries, the products of so many people in so many
countries, and produced by so many firms can circulate faster
than was ever possible before.
• Recognition of the enormous value of such relationships is
creating sweeping changes in international trade. The growth
of trade has been accelerated by the expansion of the new
areas of expertise and linkages that are being created –
corporate account management, strategic alliances, relationship
marketing and supplier partnerships. All these features are
manifestations of the growing influence of the democratization
of information.
• Decision-making and information flows have been made
possible by the coming together of a number of innovations.
These innovations involve computerization, telecommunications,
miniaturization, compression technology and digitization. Over
the years, advances in telecommunications have steadily
brought down the cost of phone calls and data transfers, while
increasing the speed, distance and amounts of information that
can be transmitted. Digitization has made it possible to turn
voices, sounds, movies, television signals, music, colours,
pictures, words, documents, or any other form of data one can
think of, into computer bits and transfer them by telephone
lines, satellites and fibre optic cables around the world.
Let us take up the success story of Wal-Mart which doesn’t make
anything. It unique strength is drawn from the second convergence.
Unit 13: Strategies for Global Environment
169
Its remarkable innovation is that it draws products from all over
Notes
the world and gets them into stores at incredibly low prices. Wal-
Mart can do so because of the new technologies available and the
___________________
new ways to use them. It has created a global supply chain that has
been designed down to the last atom of efficiency. If you take an ___________________
item off the shelf in a small town in Alaska, another of that item
___________________
will immediately be made in a remote town in China. Perfect
knowledge, effective inventory control and transparency exist ___________________
throughout that supply chain.
___________________
Over half the world had accepted the idea of free-market capitalism,
___________________
including China and India. This is creating a momentum for
globalization that will not be easy to stop. This is reflected in the ___________________
way today’s global economy operates: firms increasingly organize
their activities on a global scale, forming production chains, including ___________________
services inputs, which cross many countries. Being part of the free ___________________
market economy helps nations to greatly increase global flows of
trade and investment. ___________________
Take the personal computer on your desk. It may have been designed
in Taiwan and assembled in Mexico, with memory chips from South
Korea, a motherboard from China and a hard drive from Thailand.
This is an example of a collaboration of free-market capitalism and
the centrally planned economies.
Globalization thrives in a world where the cost and ease of global
transport and communications are ever improving, the cost and
ease of moving money are negligible and where companies around
the world use common operating standards. These are the right
conditions for businesses to replicate what they do at home in
countries where labour is inexpensive, using their advantage of
relatively cheap capital to leverage their operations.
These characteristics of globalization have resulted in dramatic price
reductions, made possible by globalizing production. For example it
has changed the market for mobile phones in India.
Just five years ago, there were almost no mobile phones in India.
Since then, prices have declined by roughly 70 per cent in real
terms, and 60 per cent of Indian households now have at least one
mobile phone. Mobile phones have been transformed from luxury
items into nearly disposable goods that most of the population
considers a necessity.
These developments have created a paradigm change. On the
economic front, this change has fostered more growth and led to
higher average incomes. The factors responsible are higher volumes
of trade, more foreign investment, increasing privatization and more
efficient use of resources due to the pressure of global competition.
170
The world’s future – the big picture – is more likely to be determined
Notes
by the winners of this era, where individuals and corporations,
rather than governments, act as agents of change. Increasingly,
___________________
innovative individuals at the helm of large corporations tend to
___________________ shape the new world.
___________________ Empowered by e-mail, the Internet, new computer software,
teleconferencing and production networks, more and more people
___________________
around the world are being drawn into competition and cooperation
___________________ on an equal footing. We now live in a globalized era in which states
matter far less and a level playing field for international trade
___________________
serves as the principal engine of change. Tax laws, labour legislation
___________________ and environmental codes have to be modified to encourage global
investment. To enforce and encourage the adoption of these rules,
___________________ in 1994, a new, powerful international body, the World Trade
___________________ Organization (WTO), was established. There was also an increase
in the number of trade agreements signed by WTOs member
___________________ countries. WTOs most important contribution has been to facilitate
the transformation of international trade from bilateral trade to
multilateral trade.
This has also resulted in a rapid and huge growth in the imports
of low-cost manufactured items from the developing and less
developed countries. Such a growth has benefited these countries
and has resulted in changes in trade patterns. For example, exports
from the Asia–Pacific region, which accounted for over 13 per cent
of world trade in 1992, has almost doubled since 1980. There has
also been an expansion in regional trade. The membership of the
European Union (EU) has increased. The countries of the EU have
adopted a common currency, the Euro. Moreover, economic
cooperation treaties have created the North American Free Trade
Agreement (NAFTA), in the North American continent, and, closer
home, the Association of Southeast Asian Nations (ASEAN).
These trade agreements have been so successful that many other
countries are also considering forming regional associations to
strengthen economic cooperation. India is also looking at the
possibility of creating such an economic bloc in South Asia with a
common currency. The model is based on that of the European
Union.
Yet, it is true that globalization today is not truly global. We are
still a long way from achieving that objective. Nations still protect
their own interests notwithstanding the needs of the rest of the
world. People, mainly those belonging to the affluent strata of society,
still maintain their lavish lifestyles, notwithstanding the deprivation
and destitution faced by a large section of humanity. However,
globalization is global in the sense that almost everybody can feel
the pressures and the constraints of this interconnected world –
171
directly or indirectly. All of us can also constructively utilize the
Notes
opportunities thrown up by globalization.
___________________
Check Your Progress
___________________
Fill in the blanks:
1. ................ is enabling more and more people to reach and ___________________
communicate with more and more people.
___________________
2. ................. of the enormous value of such relationships is creating
sweeping changes in international trade. ___________________
___________________
Impact on National Conditions ___________________
Traditional theories of international trade propose that comparative ___________________

advantage of country lies in the natural endowments it is fortunate
enough to inherit, like skilled labour, natural resources, knowledge ___________________
resources, capital resources, infrastructure, etc., which are relevant ___________________
for competition in particular industries. They also include factors
like quality of research on universities, deregulation of labour
markets, or liquidity of national stock markets. These national
factors often provide initial advantages, which are subsequently
built upon. Each country has its own particular set of factor
conditions; hence, in each country will develop those industries for
which the particular set of factor conditions is optimal. This explains
the existence of so-called low-cost-countries (low costs of labour),
agricultural countries (large countries with fertile soil), or the start-
up culture in the United States (well developed venture capital
market).
Michael Porter’s ‘Dynamic Diamond’ Theory

Based on a four-year study of ten countries, Michael Porter came
up with the “dynamic diamond” theory. This suggests that a country’s
global competitive advantage is not just related to factor conditions,
but other conditions as well. According to Porter competitive
advantage is related to four elements:
• Factor conditions;
• Domestic demand conditions;
• Related and support industries; and
• Company strategy, structure, and rivalry.
These elements are shown in Figure 13.1. Each element is necessary
for success in domestic and global markets, and the presence of
competition in domestic markets motivates individual firms to
identify productive marketing, manufacturing, and logistics
strategies.
172
Factor Conditions: Porter’s theory is called the ‘Dynamic Diamond’
Notes
theory because the different elements required for success are not
necessarily nature-made or inherited. These elements may develop
___________________
and change. Political initiatives, technological progress or socio-
___________________ cultural changes, for example, may shape national factor conditions.
___________________
Factor Conditions
___________________
___________________
Related and Supporting
___________________ Demand Conditions
Industries
___________________
Strategy, Structure
___________________ and Rivalry
___________________
Figure 13.1: Porter’s Dynamic (National) Diamond
___________________
This is exemplified by the case of Switzerland. Switzerland is a
land-locked nation with high-cost labour, strict environmental laws,
and few natural resources-least of all cocoa. Yet it is a world leader
in chocolate, not to mention pharmaceuticals, banking, and
specialized machinery. The story of modern industrial history is not
exploiting abundance but creating it, not enjoying advantage but
coping with disadvantage.
Let us now look at some of the elements in Porter’s National
Diamond theory, other than factor conditions, which have already
been explained above:
Domestic Demand Conditions: This reflects the domestic demand
for products and services produced in a country. Domestic demand
conditions impact the pace and direction of innovation and product
development. Domestic demand is determined by three major
characteristics:
• The mixture (the mix of customers needs and wants),
• The scope and growth rate of the products, and
• The mechanisms that transmit domestic preferences to foreign
markets.
Porter states that a country can achieve national advantages in an
industry or market segment, if the domestic demand in that country
provides domestic suppliers a clearer picture of demand trends and
earlier than to foreign competitors. Normally, domestic markets
provide a greater insight to organization’s in their ability to recognize
customers’ needs than foreign markets do.
173
Related and Supporting Industries: These are industries that
Notes
can use and coordinate particular activities in the value chain
together like supplying industries, or that are concerned with
___________________
complementary products (e.g., hardware and software). The existence
or non-existence of internationally competitive supplying industries ___________________
and supporting industries has a high influence on initial advantages
___________________
in that industry. One internationally successful industry may lead
to advantages in other related or supporting industries. Related ___________________
and supporting industries will reinforce innovation and
___________________
internationalization in industries at later stages in the value system.
___________________
A typical example is the shoe and leather industry in Italy. The
Italian shoe industry is prodded by sophisticated consumer demand ___________________
that encourages entry by many firms, lots of them family owned,
that compete jealously. The shoemakers bring out new models ___________________
continually and must keep improving efficiency to stay competitive ___________________
within Italy’s high-cost infrastructure. They develop stringent raw-
material and machinery requirements, giving rise to an equally ___________________
sophisticated supplier industry. Italy is not only successful with
shoes and leather, but with related products and services such as
leather working machinery, design, etc.
Company Strategy, Structure, and Rivalry: In different nations,
factors like management structures, working morale, or interactions
between companies are shaped differently, with culture playing an
important role. Patterns of commitment among workforce are of
special importance. These patterns are heavily influenced by
structures of ownership and control. Family-business based
industries that are dominated by owner-managers will behave
differently than publicly quoted companies.
These will provide advantages and disadvantages for particular
industries. The conditions in a country determine how companies
are established, organized and managed. These determine the
characteristics of domestic competition.
Porter argues that domestic rivalry and the search for competitive
advantage within a nation are important in translating into global
markets. They can help provide organizations with bases for
achieving competitive advantage on a more global scale.
Porter’s Diamond Applications

Chance and government, both can have an important effect on global
competitiveness. Major shifts in input costs or exchange rates, for
example, create selective factor disadvantages that catalyze periods
of significant innovation.
Chance developments outside the control of companies, such as
wars or embargoes, can reshape industry structure in a country’s
174
favour or against it. For example, the apparel industry developed
Notes
in Singapore after Western nations placed quotas on apparel imports
from Hong Kong and Japan.
___________________
Governments can consider the policies that they should follow to
___________________
establish national advantages, which enable industries in their
___________________ country to develop a strong competitive position globally.
Governments can influence the comparative trade advantage of a
___________________
nation if it can ensure domestic firms to gain first mover advantage
___________________ vis-a-vis foreign firms.
___________________ They can foster such advantages by ensuring high expectations of

product performance, safety or environmental standards, or
___________________
encouraging vertical co-operation between suppliers and buyers on
___________________ a domestic level. Vigorous enforcement of antitrust laws encourages
competition and stimulates innovation. Innovation reflects a nation’s
___________________ ability to upgrade its existing advantages to the next level of
___________________ technology and productivity. This is often the key to international
(global) success.
Organizations can use the model to identify the extent to which
they can build on home-based advantages to create competitive
advantage in relation to others on a global front. A good example
is his view is Japan. Japan, which has had broad success in
sophisticated industries, began the postwar period in shambles. How
was this abundance and sophistication created? The harsh domestic
rivalry among Japanese companies – not government, not cheap
labour, not exports – has been the key to that nation’s success.
The Dynamic Diamond Theory is a tool for analyzing the
organizations task environment. It highlights that strategic choices
should not only be a function of industry structure and a firms
resources, it should also be a function of the constraints of the
institutional framework. Goals are also vital. Porter also believes
that government can influence each of the four attributes of his
diamond. He recognizes that government’s role can be both positive
and negative. Countries and industries can achieve long-term
advantage if they are committed to it.
Porter’s theory is an institutional analysis and such analyses become
increasingly important as firms enter new operating environments
and operate within new institutional frameworks.
Check Your Progress

1. Michael Porter came up with the dynamic diamond theory.
2. Porter states that a country can achieve national disadvantages in an
industry or market segment.
175
Strategies in Geographic Expansion Notes
The level of trade liberalization and the growth of transnational
___________________
and multinational companies have given a big boost to
internationalizing business. By tradition, multinational firms were ___________________
from the economically developed countries. Now many developing
nations have their own multinational corporations. Global markets ___________________
offer prospects of increased profits through higher sales volumes. ___________________

In addition, larger production runs to feed global markets promise
enhanced profits due to economies of scale. ___________________
An organization may have to look beyond the borders for expansion ___________________
opportunities. Expansion through internationalization is certainly ___________________
not an easy option. There are exacting benchmarks of price, quality,
and timely delivery that are necessary to be achieved. ___________________
Ways to Go International ___________________
___________________
High Direct
Investment
Average Franchising
Level
of
Risk
Low
Licensing
Exporting
Minimal
Minimal Low Average High
Amount of Foreign Control
Figure 13.2: Ways to Go International
There are several methods for going international. Each of them

involve a trade-off between level of risk and the amount of foreign
control the organization’s managers are willing to allow. Figure
13.2 shows the most common ways to expand internationally.
Organizations often try to minimize their exposure to the market
risks in a new market by starting their exposure to the market
with exporting. As the market grows, and they require servicing
their products, they progress to licensing, then to franchising. The
final stage is direct investment.
As the organization achieves success at each level, it moves to the
next. If it experiences problems at any of these levels, it may cease
to progress further. If extreme problems occur or profitability does
not result within a reasonable time, the organization may withdraw
from the foreign market.
176
Export entry modes: The firm produces in the home country and
Notes
markets it in overseas markets. Direct exports do not involve home
country intermediaries and marketing is done either through direct
___________________
agent/distributor or through direct branch/subsidiary in the overseas
___________________ markets. Indirect exports involve intermediaries in the home country
and who are responsible for exporting the firm’s products.
___________________
Contractual entry modes: These are non-equity associations
___________________
between an international company and a company in the overseas
___________________ markets. Licensing is an arrangement where the international
company transfers knowledge, know-how, technology, rights to
___________________
patents, etc. for a fixed period of time to an overseas entity in
___________________ return for some form of payment, usually a royalty payment. Other
forms of contractual arrangements are technical agreements, service
___________________ contracts, contract manufacturing, production sharing, turnkey
___________________ operations, and Build-Operate-Transfer (BOT) arrangements etc.
___________________ Franchising: Franchising involves the right to use the business

format, usually a brand name, in an overseas market in return for
the franchiser receiving some form of payment.
Investment entry modes: This involves ownership of production
units in the overseas market based on some form of equity
investment or direct foreign investment. Joint venture and strategic
alliances involve a cooperative partnership between two or more
firms with financial interests as the basis of cooperation.
One of the forms is “Worldwide sourcing.” This has become a
foundation of the new world economy. Instead of simply operating
plants abroad, multinationals integrate those plants that
manufacture their components as subdivisions of a globally organized
production process. This is the new paradigm.
Independent ventures or wholly-owned subsidiaries are modes in
which the parent international company holds 100 per cent equity
and is in full control. Such facilities may be created either through
a new venture known as a Greenfield venture or acquired through
takeover strategies.
International Strategies
International trade is heavily focused on the activities of
Multinational Corporations (MNCs). Dun and Stopford found that
500 MNCs account for 80 percent of the world’s foreign direct
investment and 25 percent of the world’s capital. Of these 414 are
from European Commission, United States and Japan, also called
the triad.
China, India, Brazil, and, gradually, South Africa are becoming
new engines of global economic growth. They are positioned as
177
candidates to provide entrants into the field of international
Notes
business. In India’s case, four Indian companies - Indian Oil, Bharat
Petroleum, Hindustan Petroleum and Reliance Industries have
___________________
already made it to the list of 500 top companies worldwide compiled
by prestigious ‘Fortune’ magazine. ___________________
In the old world of national economies, companies had relatively ___________________

little freedom in where and how to compete. Size was achieved
___________________
through diversification or integrated business systems. Within each
national market, the rules of the game were relatively stable. ___________________
Established businesses enjoyed massive advantages over new
___________________
entrants. This is true any longer, changes in the cost of transactions,
the ability to communicate, and the lowering of barriers have ___________________
changed the picture significantly.
___________________
International business is no longer limited to giant multinational
enterprises. Many small and medium sized businesses also go ___________________
international. Many of these are from outside the triad. There are ___________________
inherent risks in the global market and competitive disadvantage
for the smaller less experienced business organizations located
outside the triad, but there are examples that show that while it is
a difficult and challenging task, it is not impossible for small business
organizations from developing countries to succeed in tough global
markets. For example, Ranbaxy, Tata Tea, Tata Steel, Sundram
Fastners, Infosys, Wipro and Tata Consultancy Services, etc. have
demonstrated their ability to succeed in these markets, though they
may not yet be ‘global’, they have established a viable and
sustainable path for getting there. Acer grew from a small electronics
consulting firm in Taiwan to become the world’s number two
personal computer manufacturer.
Business organizations go international for two types of opportunity:
• The first derives from the specialization and scale effects that
can be exploited by an organization, e.g. service industries,
like software development, package delivery, personal
computers, or jet engines.
• The second originates in the variations in factor cost
productivity and patterns of demand that exist in national
markets. Cross border participants exploit these country
differences in skill sets and productivity, and to arbitrage labour
price differentials, taxes, and so on.
From a strategic point of view this reflects in a number of strategic
initiatives. Some of them are given below:
• Protect themselves from the risk and uncertainty of domestic
business cycles;
• Tap the growing market for goods and services;
178
• Protect world market shares in response to increased foreign
Notes
competition;
___________________ • Reduce costs;
___________________ • Overcome tariff walls by serving a foreign market from within;
and
___________________
• Take advantage of technological expertise by manufacturing
___________________ goods directly.
___________________ Though organizations can “go international” by crossing domestic
___________________
borders, the changes in the world economy and the strategic
initiatives that become possible will encourage a significant number
___________________ of business organizations to use international expansion as a
favoured mode of growth.
___________________
___________________ High Low

Local Responsiveness
___________________ High
Global Strategy Transnational
Strategy
Cost Pressure
International Multidomestic
Strategy Strategy
Low
Figure 13.3: International Strategies
While going international, there are four major strategic choices

the company as to make. The company can go Global;
Transnational; Multi-domestic; or International. These choices
depend mainly on two factors, (a) Cost pressure, and (b) Local
responsiveness. These factors can be either low or high. Based on
this we can create a decision matrix that will provide guidance to
the appropriate strategic choice. This matrix is shown in Figure 13.3.
Global: The organization offers standardized products and uses
integrated operations. Example: Coca Cola and Pepsi are marketing
Coke and Pepsi for all world markets— these drinks can be produced
and sold in any nation. The basic formula is either manufactured
by them locally or imported and sold to bottler who has to maintain
the standards laid out internally for their products. The white goods
industry, FMCG industry and Fast foods and Beverage industries
have established global brands in a large number countries and
this seems to be a new global trend.
179
McDonalds in India has used this strategy in India with a twist. It
Notes
recognized the cultural bias in the taste of its consumers and has
special offerings in India suiting the palate of its audience though
___________________
it maintains and offers its standardized products and processes to
its customers and franchisees. Its business that was once in the ___________________
doldrums is picking up again.
___________________
Transnational: The organization seeks the best of both the multi-
___________________
domestic and global strategies by globally integrating operations
while tailoring products and services to the local market. Flexible ___________________
manufacturing enables organizations to produce multiple versions
___________________
of products from the same assembly line, tailoring them to different
markets. This gives more choice in locating facilities to take ___________________
advantage of cheaper labour or to get the best of other factors of
production. ___________________
Multi-domestic: Multi-domestic strategy is adopted when an ___________________

organization can achieve a high level of local responsiveness by ___________________
matching products and services to the national conditions prevalent
in the countries they operate in. The organization attempts to
extensively customize their products and services according to the
local conditions. This may lead to a high-cost structure as research
and development, production, and marketing have to be duplicated.
However, the advantages that accrues; especially when cultural,
social, climatic and economic differences exist; can be substantial.
For years, U.S. auto manufacturers maintained decentralized
overseas units that produced cars tailored to different countries
and regions. General Motors produced the Opel in Germany and
Opel in India. Though the two cars are branded similarly, the Indian
Opel has been tailored to
Indian conditions. Ford Motors offers a range of products in India
that it does not produce elsewhere in the world.
The problem with this strategy often is that the local products may
not be regularly upgraded to match technological changes taking
place. If that happens, the organization could be at a disadvantage.
Phillips used this strategy in India to its disadvantage. It provided
top of the rung technology to customers in the developed nations.
In India its manufacturing base was for low technology components
and the offerings were based on these components. As the Indian
economy opened up and was liberalized; Sony, Akai along with a
number of Korean companies like Samsung, LG etc.; came into the
country offering products that were concurrent to world standards.
Phillips India lost a large part of its market share and had to
totally revamp its strategy to rebuild the company.
International: Firms that have products or technologies which
are proprietary or protected against replication can create value by
180
transferring products and services to foreign markets where these
Notes
products and services are not available. This is called an
international strategy.
___________________
The international organization maintains a tight control over its
___________________
overseas operations, offers standardized products and services in
___________________ different countries with little or no differentiation. Most international
companies, such as, Coca Cola, IBM, Kellogg, Proctor and Gamble,
___________________
Microsoft, and several others adopt this strategy for the different
___________________ countries they operate in. Indian organizations in software
development have also adopted this strategy. They combine this
___________________
strategy with a cost leadership strategy taking advantage of the
___________________ large base of low-cost scientific and technological manpower. Other
industries where India could find a niche are the service industry,
___________________ knowledge-based industries, pharmaceuticals and entertainment.
___________________ Some Indian companies who have either adopted international
___________________ strategies or become the beneficiaries of the expansion strategies of
international companies. For example, the AV Birla group took the
route of international strategies quite early. They have set-up
manufacturing facilities in many countries, including Egypt,
Thailand, Indonesia, Malaysia, and Philippines. They also supply
to wide a spread of export markets, both from India and their
subsidiaries overseas.
Another example is Sun Pharmaceuticals, one of India’s top
pharmaceutical companies. The company has adopted the acquisition
route for its expansion strategies. It has acquired six companies,
one of which is in the US.
The disadvantages of international strategies lie in factors, such as,
the risks related to uncertainty in economic and political
environments in host countries, difficulty managing cultural
diversity, cost of coordination, communication and distribution, and
barriers to expansion and growth.
International strategies provide opportunities for economies of scale
and learning. It offers a promise of above-average returns.
Globalization, trade liberalization, the regulatory framework,
emergence of regional trade blocs, emergence of the internet as a
communication platform, higher levels of cultural diffusion, and the
establishment of bilateral and multilateral institutions such as the
WTO to regulate and manage trade relations are some of the
significant factors that indicate the likelihood of growth of
International business at an accelerated pace.
This is demonstrated by Indian companies like Infosys, Tata
Consulting Services, Wipro, Tata Tea, Tata Steel, Ranbaxy, Dr.
Reddy’s Labs, Sundram Fasteners, Reliance, Larson & Toubro and
181
many other business organizations have gained a foothold in the
Notes
international market. Indian industry already has the essential
competencies and competitiveness to compete internationally in
___________________
pharmaceuticals, textiles, software services, biotechnology, steel, and
engineering. It is developing competencies and competitiveness in ___________________
other areas also.
___________________

1. The level of trade liberalization and the growth of transnational and
___________________
multinational companies have given a big boost to ............. business.
2. ............... through internationalization is certainly not an easy option. ___________________
___________________
Competing Internationally ___________________
India’s growth into an economic powerhouse is based on recognizing ___________________

the importance of strategy as means to the goal. According to
management guru, C. K. Prahalad, to create 15 million jobs and
reach its objective of external economic dominance, India needs a
strategy that will help it to achieve the following:
Ÿ Grow at around 15%.
Ÿ Create modern manufacturing and global supply chain
management like those of General Motors or General Electric
using our sophistication in IT.
Ÿ Deal with scale.
Ÿ Balance between domestic and export dependence for growth,
and finally,
Ÿ Commit itself to low cost, high quality talent.
The challenge is daunting, but even so, the face of India is changing.
Businesses have been courageously facing the present environment
of dynamic change. Many businesses are trying to meet and match
international practices. There are already world class organizations
in the country, in spite of the prejudice against the predominance
of family managed businesses.
In order to make an effective entry in the international market, a
number of factors need to be kept in mind. Indian companies have
to work hard at overcoming the prejudices that exist today where
goods from emerging markets are considered to be inferior. Some
day, the label ‘made in India’, will be a symbol of high quality and
value. But for that to happen, business organizations need to identify
strategies that fit the processes under way, instead of conflicting
with them. They must shape opportunities by concentrating on pieces
182
of the business in which they have world-class skills and proprietary
Notes
intangible assets. They should translate diversity into strength.
They have to move up on the value chain and reach a position
___________________
where their products can compete with products from the triad on
___________________ an equal footing.
___________________ Price/Performance Equation
___________________ Consumers in international markets expect global standards, but
___________________ they often are unwilling to pay global prices for products from India.
An Indian product or an Indian company is associated with low cost
___________________ and low price. This may be despite the fact that it is providing
___________________
comparable quality and value. Unless Indian business organizations
can overcome this liability, they will continue to operate at the low
___________________ end of the value curve.
___________________ Brand Management and Packaging
___________________
Downstream capabilities reflect strengths in brand marketing. Most
Indian companies lack this capability. Without the advantage of
powerful, established brands, Indian multinationals are often
restricted to be part of the supply chain or are in commodities.
They need to move up the ladder to branded products, and eventually
to a strong brand image. Indian companies should not underestimate
the value of using a consistent approach to brand management in
the new markets so as to climb the value chain.
Packaging, not only is a requirement to meet the environmental
conditions, e.g., cold and heat, storage and transportation, etc., the
function of packaging also is different. It is also an important
marketing tool that needs to meet the perceptions and aesthetics of
the market. The distribution infrastructure in developed markets
places special emphasis on packaging.
Ranbaxy and Dr. Reddy’s Labs, when they first entered the global
market were selling bulk drugs and intermediaries, placed at the
bottom of the pharmaceuticals value curve. Over the years they
have got into branded generics and now are in the branded product
markets. Initially, both the companies were not able to justify the
negative impact on their return on capital employed. This is not the
case now. Both these companies are aspiring to become ‘research
based’ companies to produce new drugs for the international market,
where margins of 100 percent or more are possible.
Market Building
Another downstream competence is distribution. Entering western
markets with Indian products means introducing a new product or
service category. This requires the organization to build new
customer relationships and strong distribution channels. They may
183
discover that it requires a large investment if they are to grow their
Notes
market sufficiently. In addition, it requires an enormous amount of
managerial vision, courage and grit. In the long run, such
___________________
investments pay off.
___________________
Infosys is developing downstream capabilities by creating a set of
Proximity Development Centres (PDCs) in key cities around the ___________________
world. It has realized the importance of building networks of business
___________________
activities in local markets. Infosys PDCs will be staffed
predominantly by local people to provide the image of a local ___________________
company. It will look after the installation, sign-off, training etc.
___________________
required for software in addition to its primary objective to build
customer relationships. This is a slow process, but necessary to ___________________
succeed globally.
___________________
Studds Accessories was in a hurry. It was a low cost producer capable
___________________
of manufacturing to international standards. Studds was confident
that it had the leverage to compete in international markets, but it ___________________
faced two main disadvantages: it did not have an advertising budget
to build an international brand, nor it did have the distribution
channels for its ambitions. Building distribution channels required
extensive investments, so, it entered into a joint venture with, Nolan,
an Italian firm and one of the world’s top ten helmet manufacturers.
Nolan had its own objectives for entering into the joint venture,
which were quite different from Studds. In a very short time, the
joint venture failed and so did the dreams of Studds.
Product Design
Upstream competencies include technology development and product
design. Providing consumers with a new product that requires no
re-education may be a much easier way to enter a new market with
a new product. Even when consumers in developed markets appear
to want the same products as are sold in emerging economies, some
redesign is often necessary to reflect differences in use, distribution,
regulations and standards.
For example, Thermax has developed a high fluid velocity shell

type boiler. This reduces the size of a boiler by a third for the same
capacity. For the Indian market, the boiler has to be designed to
the Indian Boiler Regulation (IBR) Standards, but for global markets
the boiler has to meet British Standards or the US Standards
(ASME) – both these differ from IBR standards.
However, moving upstream in technology development and new

designs is very challenging, more challenging than creating
downstream capabilities. It requires investing in R&D consistently
over a long period of time and looking at the end of the rainbow for
184
the payback. It requires the management to have a vision of the
Notes
world as their market and provide strong support.
___________________
Capital and Resources
___________________
Companies will require using more capital and human resources in
___________________ Western markets well ahead of demand. In spite of the efficient
distribution systems, good banking facilities, and excellent logistics,
___________________
the challenges that have to be overcome need long-term investments.
___________________ They Indian companies are not willing to commit fully. They make
relatively junior managers, with little influence in the corporate
___________________
decision-making processes responsible for international strategy.
___________________ Pull out as soon as they see difficulties. This is the wrong way.
___________________ Human resources can be best exploited if organizational structure

supports the new competitive capabilities that that are drivers for
___________________
success in the business. Business organizations moving up the
___________________ international value curve often find themselves constrained by their
traditional organizational structure. The organization has to move
on and this means generating an organizational structure that allows
each business to be managed on an integrated worldwide basis.
There will be difficulties to integrate the new structures into the
business model. Business organization, however, have little choice
but to learn to meet these challenges.
Ranbaxy, when it decided to go international, chose a Geographical

structure. It divided its operations into four regions, of which India
was one. All four regional managers were treated as equals even
though the Indian operations were four times larger than the
business of all the regions put together. Each region had
representation in key decision making committees. The result was
that international operations were integrated into the business
model, and the regional heads could continuously influence resource
allocation decisions. Infosys uses the SBU concept; Acer created a
matrix structure.
Building Leverages
The objective of globalization should be to identify and command
assets that can be leveraged for the particular market. Globalization
does not erase the differences between countries or render local
knowledge, local talent, and local relationships obsolete. There needs
to be an understanding that regional tastes vary, and language
barriers can create difficulties, irrespective of which market you
want to serve. Privileged access to country-specific intangible assets
is critical to success. However, it is vital to understand what differs
and what remains the same from one country to another.
185
Often business organizations do not have the means or the need to
Notes
build competencies internally, yet they lack the capability to move
up the value chain. Alliances and partnerships can provide the
___________________
means to leverage their resources and core competencies and at the
same time capturing the complementary capabilities of the partners. ___________________
Indian companies have not been very successful in this area in the
___________________
past, as the Studds example demonstrates. Perhaps, the cultural
mindset and a lack of understanding of behavioural differences due ___________________
to different cultural and social values is the reason. If it is, it needs
___________________
to be overcome so that we have the capability to work horizontally,
in a partnership. The ability to form, sustain and learn from alliances ___________________
is a core competence that MNCs from India will have to acquire
and develop. ___________________
An ‘Economic Times’ headline of recent origin, tells a telling tale. ___________________

The headline reads, ‘A Foreign Dealing India Inc. Never Asked ___________________
For’. Indian companies are currently involved in at least 100
international arbitration proceedings. Interestingly, the majority of ___________________
cases involve claims on Indian parties by foreign companies. Many
of these cases refer to dishonouring contractual obligations. We
need to examine whether this is another aspect of our mindset
where we show a lack of understanding of different cultural, legal
and societal values. An ability to understand and appreciate the
tenor of international relationships is perhaps, another core
competence that all Indian business organizations dealing
internationally will have to acquire and develop.
Some Indian MNCs have tried to acquire expertise through the
acquisition route. Tata Tea’s acquisition of Tetley, Tata Steel’s
acquisition of National Steel, and perhaps Ranbaxy’s acquisition of
Ohm Labs, reflects this strategy. If the organization has the core
competence to integrate such acquisitions into the company and
leverage its competencies, this is the simplest route to obtaining
leverage.
However, Indian business organizations should not be so seduced
by the opportunities they see in the international market that they
ignore or even destroy their foundation to build a new structure.
The existing assets should provide the resources to build higher
levels of business capabilities to succeed internationally. The
challenge is to protect historical assets and resources, even while
expanding overseas.
Check Your Progress

1. Consumers in international markets do not expect global standards.
2. Upstream capabilities reflect strengths in brand marketing.
186
Notes
Summary
In a globalized era a level playing field for international trade serves
___________________
as the principal engine of change. To join the league of globalized
___________________ nations, countries must either adopt, or be seen as moving towards
the rules of the free market economy. To survive in this new world
___________________ and to attract investments from the international community,
___________________ countries have to abide by the neo- liberal economic model. Some of
the rules of the neo-liberal economic model are: (a) Make the private
___________________ sector the primary engine of their economic growth; (b) Maintain a
___________________
low rate of inflation and price stability; (c) Shrink the size of their
state bureaucracies and eliminating government corruption,
___________________ subsidies and kickbacks as much as possible; (d) Balance budget to
the extent possible; and (e) Eliminate or lower tariffs on imported
___________________
goods, remove restrictions on foreign investment, get rid of quotas
___________________ and domestic monopolies. However, globalization has to work within
the framework of the nation state and each state makes decisions
___________________
based on its national economics. National governments must still
endorse international agreements. The power of national
governments may become more circumscribed in the future but the
nation state is far from dead, and sovereignty is still cherished. It
remains the sole arbiter in determining the nature, scope, pace and
sequencing of economic policy reform.

1. What is globalization?
2. What are the opportunities and threats that globalization
throws up? Describe these with examples.
3. What is the impact of globalization on national governments?
4. How do governments facilitate internationalization of trade?
5. Internationalization of trade is an opportunity for improving
the competitiveness of local businesses'. Discuss this statement
critically.
187
Unit 14 Notes
Strategies for Retrenchment

Retrenchment ___________________
___________________
___________________

___________________
\ What is Retrenchment Strategy?
___________________
\ Corporate Restructuring Strategy
___________________
\ Category of Corporate Restructuring
\ Methods of Corporate Restructuring ___________________
\ Turnaround Strategies ___________________
___________________
Introduction
Retrenchment calls for a radical surgery to cut the ‘extra fat’ – say,
laying off employees, dropping items from a production line,
eliminating low-margin customer groups, avoiding elaborate
promotional efforts etc. Apart from the above cost reductions,
retrenchment calls for drastic steps to improve cash flows through
sale of assets.
What is Retrenchment Strategy?

Retrenchment strategy is a corporate level, defensive strategy
followed by a firm when its performance is disappointing or when
its survival is at stake for a variety of reasons. Economic recessions,
production inefficiencies, and innovative breakthroughs by
competitors are only three causes. Managers choose retrenchment
when they think that the firm is neither competitive enough to
succeed through a counter attack (on market forces affecting its
sales negatively) nor nimble enough (effecting fast changes) to be a
fast follower. However, retrenchment does not mean death knell for
every business under attack. Many healthy companies have faced
life-threatening competitive situations in the past, successfully
addressed their weaknesses and restored themselves.
Retrenchment strategy, as such, is adopted out of necessity, not by
deliberate choice. In actual practice, retrenchment may take one of
the following forms:
• Outright sale to another company,
• Leveraged Buyout (LBO), and
• Spin-off.
188
A leveraged buy out occurs when a company’s shareholders are
Notes
bought out (hence buyout) by the company’s management and other
private investors using borrowed funds (hence leveraged). In the
___________________
last case, the parent company creates a new company, then
___________________ distributes its shares to shareholders of the parent.
___________________ Reasons for Divestment
___________________ Following are the reasons for Disinvestment:
___________________ • Strong Focus: Spinning off unviable units may help a firm
focus on its core business more closely and regain the lost
___________________
ground quickly.
___________________
• Unlock Critical Funds: The firm can sell those assets whose
___________________ values have plateaued or declined as a result of ignorance or
neglect.
___________________
• Invest in Emerging Technologies: Firms can use the cash
___________________ generated through spin offs in emerging or future technologies
that better leverage or revitalize their core competencies.
• A Maker of Policy: Sometimes the firm may spin off units in
fields where it has no dominance. If the firm wants to be in the
top slot, it must naturally get out of all those ventures where
it is only a marginal player (like what K. M. Birla did in paper,
sugar and steel – all peripheral businesses in Birla’s kitty).
• From Red to Black: Assets bought at inflated prices might
drain out cash flows, especially if they are funded through
debt capital. Spinning off such assets would help a firm
liquidate debts, improve the cash flow position and recharge
its operations in areas where it has immense strength.
• Unviable Projects: If the business becomes unviable due to
stiff competition or change in government policy it is better to
get out quickly.
Check Your Progress

Fill in the blanks:
1. A ............... buy out occurs when a company’s shareholders are
bought out by the company’s management and other private investors
using borrowed funds.
2. ................ unviable units may help a firm focus on its core business
more closely and regain the lost ground quickly.
Corporate Restructuring Strategy

Corporate restructuring is one of the most complex and fundamental
phenomena that management confronts. Each company has two
Unit 14: Strategies for Retrenchment
189
opposite strategies from which to choose: to diversify or to refocus
Notes
on its core business. While diversifying represents the expansion of
corporate activities, refocus characterizes a concentration on its core
___________________
business. From this perspective, corporate restructuring is reduction
in diversification. ___________________
Corporate restructuring is an episodic exercise, not related to ___________________

investments in new plant and machinery which involve a significant
___________________
change in one or more of the following:
___________________
• Pattern of ownership and control
___________________
• Composition of liability
• Asset mix of the firm. ___________________
It is a comprehensive process by which a company can consolidate ___________________

its business operations and strengthen its position for achieving the ___________________
desired objectives:
___________________
• Synergetic
• Competitive
• Successful
It involves significant re-orientation, re-organization or realignment
of assets and liabilities of the organization through conscious
management action to improve future cash flow stream and to make
more profitable and efficient.
Meaning and Need for Corporate Restructuring

Corporate restructuring is the process of redesigning one or more
aspects of a company. The process of reorganizing a company may
be implemented due to a number of different factors, such as
positioning the company to be more competitive, survive a currently
adverse economic climate, or poise the corporation to move in an
entirely new direction. Here are some examples of why corporate
restructuring may take place and what it can mean for the company.
Restructuring a corporate entity is often a necessity when the
company has grown to the point that the original structure can no
longer efficiently manage the output and general interests of the
company. For example, a corporate restructuring may call for
spinning off some departments into subsidiaries as a means of
creating a more effective management model as well as taking
advantage of tax breaks that would allow the corporation to divert
more revenue to the production process. In this scenario, the
restructuring is seen as a positive sign of growth of the company
and is often welcome by those who wish to see the corporation gain
a larger market share.
190
Corporate restructuring may also take place as a result of the
Notes
acquisition of the company by new owners. The acquisition may be
in the form of a leveraged buyout, a hostile takeover, or a merger
___________________
of some type that keeps the company intact as a subsidiary of the
___________________ controlling corporation. When the restructuring is due to a hostile
takeover, corporate raiders often implement a dismantling of the
___________________
company, selling off properties and other assets in order to make a
___________________ profit from the buyout. What remains after this restructuring may
be a smaller entity that can continue to function, albeit not at the
___________________
level possible before the takeover took place.
___________________
In general, the idea of corporate restructuring is to allow the
___________________ company to continue functioning in some manner. Even when
corporate raiders break up the company and leave behind a shell of
___________________ the original structure, there is still usually a hope, what remains
___________________ can function well enough for a new buyer to purchase the diminished
corporation and return it to profitability.
___________________
Purpose of Corporate Restructuring
To enhance the shareholder value, the company should continuously
evaluate its:
• Portfolio of businesses.
• Capital mix, Ownership & Asset arrangements to find
opportunities to increase the shareholder’s value.
• To focus on asset utilization and profitable investment
opportunities.
• To reorganize or divest less profitable or loss making businesses/
products.
• The company can also enhance value through capital
restructuring, it can innovate securities that help to reduce
cost of capital.
Characteristics of Corporate Restructuring

Following are the basic characteristics of corporate restructuring:
• To improve the company’s Balance sheet, (by selling
unprofitable division from its core business).
• To accomplish staff reduction (by selling/closing of unprofitable
portion).
• Changes in corporate management.
• Sale of underutilized assets, such as patents/brands.
• Outsourcing of operations such as payroll and technical support
to a more efficient third party.
191
• Moving of operations such as manufacturing to lower-cost
Notes
locations.
• Reorganization of functions such as sales, marketing, & ___________________
distribution.
___________________
• Renegotiation of labour contracts to reduce overhead.
___________________
• Refinancing of corporate debt to reduce interest payments.
___________________
• A major public relations campaign to reposition the co., with
consumers. ___________________
___________________
Check Your Progress
___________________
1. Corporate restructuring is one of the most simple and fundamental ___________________
phenomena that management confronts.
___________________
2. Corporate restructuring is an episodic exercise.
___________________
Category of Corporate Restructuring

Corporate restructuring entails a range of activities including
financial restructuring and organization restructuring.
Financial Restructuring
Financial restructuring is the reorganization of the financial assets
and liabilities of a corporation in order to create the most beneficial
financial environment for the company. The process of financial
restructuring is often associated with corporate restructuring, in
that restructuring the general function and composition of the
company is likely to impact the financial health of the corporation.
When completed, this reordering of corporate assets and liabilities
can help the company to remain competitive, even in a depressed
economy.
Just about every business goes through a phase of financial
restructuring at one time or another. In some cases, the process of
restructuring takes place as a means of allocating resources for a
new marketing campaign or the launch of a new product line. When
this happens, the restructure is often viewed as a sign that the
company is financially stable and has set goals for future growth
and expansion.
Need for Financial Restructuring

The process of financial restructuring may be undertaken as a means
of eliminating waste from the operations of the company. For
example, the restructuring effort may find that two divisions or
departments of the company perform related functions and in some
192
cases duplicate efforts. Rather than continue to use financial
Notes
resources to fund the operation of both departments, their efforts
are combined. This helps to reduce costs without impairing the
___________________
ability of the company to still achieve the same ends in a timely
___________________ manner.
___________________ In some cases, financial restructuring is a strategy that must take
place in order for the company to continue operations. This is
___________________
especially true when sales decline and the corporation no longer
___________________ generates a consistent net profit. A financial restructuring may
include a review of the costs associated with each sector of the
___________________
business and identify ways to cut costs and increase the net profit.
___________________ The restructuring may also call for the reduction or suspension of
production facilities that are obsolete or currently produce goods
___________________ that are not selling well and are scheduled to be phased out.
___________________ Financial restructuring also take place in response to a drop in
___________________ sales, due to a sluggish economy or temporary concerns about the
economy in general. When this happens, the corporation may need
to reorder finances as a means of keeping the company operational
through this rough time. Costs may be cut by combining divisions
or departments, reassigning responsibilities and eliminating
personnel, or scaling back production at various facilities owned by
the company. With this type of corporate restructuring, the focus is
on survival in a difficult market rather than on expanding the
company to meet growing consumer demand.
All businesses must pay attention to matters of finance in order to
remain operational and to also hopefully grow over time. From this
perspective, financial restructuring can be seen as a tool that can
ensure the corporation is making the most efficient use of available
resources and thus generating the highest amount of net profit
possible within the current set economic environment.
Organizational Restructuring
In organizational restructuring, the focus is on management and
internal corporate governance structures. Organizational
restructuring has become a very common practice amongst the firms
in order to match the growing competition of the market. This
makes the firms to change the organizational structure of the
company for the betterment of the business.
Need for Organization Restructuring

• New skills and capabilities are needed to meet current or
expected operational requirements.
• Accountability for results are not clearly communicated and
measurable resulting in subjective and biased performance
appraisals.
193
• Parts of the organization are significantly over or under staffed.
Notes
• Organizational communications are inconsistent, fragmented,
and inefficient. ___________________
• Technology and/or innovation are creating changes in workflow ___________________

and production processes.
___________________
• Significant staffing increases or decreases are contemplated.
___________________
• Personnel retention and turnover is a significant problem.
___________________
• Workforce productivity is stagnant or deteriorating.
___________________
• Morale is deteriorating.
___________________
The perspective of organizational restructuring may be different for
the employees. When a company goes for the organizational ___________________
restructuring, it often leads to reducing the manpower and hence
meaning that people are losing their jobs. This may decrease the ___________________
morale of employee in a large manner. Hence many firms provide ___________________
strategies on career transitioning and outplacement support to their
existing employees for an easy transition to their next job.
Leveraged Buyout, Hostile Takeover & Merger

Corporate restructuring may take place as a result of the acquisition
of the company by new owners. The acquisition may be in the form
of a leveraged buyout, a hostile takeover, or a merger of some type
that keeps the company intact as a subsidiary of the controlling
corporation.
Hostile Takeover
A hostile takeover is a type of corporate takeover which is carried
out against the wishes of the board of the target company. This
unique type of acquisition does not occur nearly as frequently as
friendly takeovers, in which the two companies work together
because the takeover is perceived as beneficial. Hostile takeovers
can be traumatic for the target company, and they can also be
risky for the other side, as the acquiring company may not be able
to obtain certain relevant information about the target company.
Companies are bought and sold on a daily basis. There are two
types of sale agreements. In the first, a merger, two companies
come together, blending their assets, staff, facilities, and so forth.
After a merger, the original companies cease to exist, and a new
company arises instead. In a takeover, a company is purchased by
another company. The purchasing company owns all of the target
company’s assets including company patents, trademarks, and so
forth. The original company may be entirely swallowed up, or may
operate semi-independently under the umbrella of the acquiring
company.
194
Typically, a company which wishes to acquire another company
Notes
approaches the target company’s board with an offer. The board
members consider the offer, and then choose to accept or reject it.
___________________
The offer will be accepted if the board believes that it will promote
___________________ the long term welfare of the company, and it will be rejected if the
board dislike the terms or it feels that a takeover would not be
___________________
beneficial. When a company pursues takeover after rejection by a
___________________ board, it is a hostile takeover. If a company bypasses the board
entirely, it is also termed a hostile takeover.
___________________
Publicly traded companies are at risk of hostile takeover because
___________________
opposing companies can purchase large amounts of their stock to
___________________ gain a controlling share. In this instance, the company does not
have to respect the feelings of the board because it already essentially
___________________ owns and controls the firm. A hostile takeover may also involve
___________________ tactics like trying to sweeten the deal for individual board members
to get them to agree.
___________________
An acquiring firm takes a risk by attempting a hostile takeover.
Because the target firm is not cooperating, the acquiring firm may
unwittingly take on debts or serious problems, since it does not
have access to all of the information about the company. Many
firms also have trouble getting financing for hostile takeovers, since
some banks are reluctant to lend in these situations.
Merger
A merger occurs when two companies combine to form a single
company. A merger is very similar to an acquisition or takeover,
except that in the case of a merger existing stockholders of both
companies involved retain a shared interest in the new corporation.
By contrast, in an acquisition one company purchases a bulk of a
second company’s stock, creating an uneven balance of ownership
in the new combined company.
The entire merger process is usually kept secret from the general
public, and often from the majority of the employees at the involved
companies. Since the majority of merger attempts do not succeed,
and most are kept secret, it is difficult to estimate how many
potential mergers occur in a given year. It is likely that the number
is very high, however, given the amount of successful mergers and
the desirability of mergers for many companies.
A merger may be sought for a number of reasons, some of which are
beneficial to the shareholders, some of which are not. One use of
the merger, for example, is to combine a very profitable company
with a losing company in order to use the losses as a tax write-off
to offset the profits, while expanding the corporation as a whole.
195
Increasing one’s market share is another major use of the merger,
Notes
particularly amongst large corporations. By merging with major
competitors, a company can come to dominate the market they
___________________
compete in, giving them a freer hand with regard to pricing and
buyer incentives. This form of merger may cause problems when ___________________
two dominating companies merge, as it may trigger litigation
___________________
regarding monopoly laws.
___________________
Another type of popular merger brings together two companies that
make different, but complementary, products. This may also involve ___________________
purchasing a company which controls an asset your company utilizes
___________________
somewhere in its supply chain. Major manufacturers buying out a
warehousing chain in order to save on warehousing costs, as well ___________________
as making a profit directly from the purchased business, is a good
example of this. PayPal’s merger with eBay is another good example, ___________________
as it allowed eBay to avoid fees they had been paying, while tying ___________________
two complementary products together.
___________________
A merger is usually handled by an investment banker, who aids in
transferring ownership of the company through the strategic
issuance and sale of stock. Some have alleged that this relationship
causes some problems, as it provides an incentive for investment
banks to push existing clients towards a merger even in cases where
it may not be beneficial for the stockholders.
Mergers and acquisitions are means by which corporations combine
with each other. Mergers occur when two or more corporations
become one. To protect shareholders, state law provides procedures
for the merger. A vote of the board of directors and then a vote of
the shareholders of both corporations is usually required. Following
a merger, the two corporations cease to exist as separate entities.
In the classic merger, the assets and liabilities of one corporation
are automatically transferred to the other. Shareholders of the
disappearing company become shareholders in the surviving
company or receive compensation for their shares.
Benefits of Mergers and Acquisitions
Merger refers to the process of combination of two companies,
whereby a new company is formed. An acquisition refers to the
process whereby a company simply purchases another company. In
this case there is no new company being formed. Benefits of mergers
and acquisitions are quite a handful.
Mergers and acquisitions generally succeed in generating cost
efficiency through the implementation of economies of scale. It may
also lead to tax gains and can even lead to a revenue enhancement
through market share gain. The principal benefits from mergers
and acquisitions can be listed as increased value generation, increase
in cost efficiency and increase in market share.
196
Mergers and acquisitions often lead to an increased value generation
Notes
for the company. It is expected that the shareholder value of a firm
after mergers or acquisitions would be greater than the sum of the
___________________
shareholder values of the parent companies. An increase in cost
___________________ efficiency is affected through the procedure of mergers and
acquisitions. This is because mergers and acquisitions lead to
___________________
economies of scale. This in turn promotes cost efficiency. As the
___________________ parent firms amalgamate to form a bigger new firm the scale of
operations of the new firm increases. As output production rises
___________________
there are chances that the cost per unit of production will come
___________________ down.
___________________ Demerger
___________________ Demergers are situations in which divisions or subsidiaries of parent
companies are split off into their own independent corporations.
___________________
The process for a demerger can vary slightly, depending on the
___________________ reasons behind the implementation of the split. Generally, the parent
company maintains some degree of financial interest in the newly
formed corporation, although that interest may not be enough to
maintain control of the functionality of the new corporate entity.
A demerger results in the transfer by a company of one or more of
its undertakings to another company. The company whose
undertaking is transferred is called the demerged company and the
company (or the companies) to which the undertaking is transferred
is referred to as the resulting company.
Check Your Progress

Fill in the blanks:
1. ............ restructuring is the reorganization of the financial assets and
liabilities of a corporation in order to create the most beneficial financial
environment for the company.
2. In ................ restructuring, the focus is on management and internal
corporate governance structures.
Methods of Corporate Restructuring

Following are the methods of Corporate Restructuring:
Joint Venture
Joint ventures are new enterprises owned by two or more
participants. They are typically formed for special purposes for a
limited duration. It is a combination of subsets of assets contributed
by two (or more) business entities for a specific business purpose
and a limited duration. Each of the venture partners continues to
exist as a separate firm, and the joint venture represents a new
197
business enterprise. It is a contract to work together for a period of
Notes
time each participant expects to gain from the activity but also
must make a contribution.
___________________
For example, GM-Toyota JV: GM hoped to gain new experience in
___________________
the management techniques of the Japanese in building high-
quality, low-cost compact & subcompact cars. Whereas, Toyota was ___________________
seeking to learn from the management traditions that had made
___________________
GE the no. 1 auto producer in the world and In addition to learn
how to operate an auto company in the environment under the ___________________
conditions in the US, dealing with contractors, suppliers, and
___________________
workers. DCM group and Daewoo motors entered in to JV to form
DCM DAEWOO Ltd. to manufacture automobiles in India. ___________________
Reasons for Forming a Joint Venture ___________________
• Build on company’s strengths. ___________________
• Spreading costs and risks. ___________________

• Improving access to financial resources.
• Economies of scale and advantages of size.
• Access to new technologies and customers.
• Access to innovative managerial practices.
Rational for Joint Ventures

• To augment insufficient financial or technical ability to enter
a particular line or business.
• To share technology and generic management skills in
organization, planning and control.
• To diversify risk.
• To obtain distribution channels or raw materials supply.
• To achieve economies of scale.
• To extend activities with smaller investment than if done
independently.
• To take advantage of favourable tax treatment or political
incentives (particularly in foreign ventures).
Spin-off
Spin-offs are a way to get rid of underperforming or non-core
business divisions that can drag down profits.
Process of Spin-off
• The company decides to spin off a business division.
198
• The parent company files the necessary paperwork with the
Notes
Securities and Exchange Board of India (SERI).
___________________ • The spin-off becomes a company of its own and must also file
paperwork with the SEBI.
___________________
• Shares in the new company are distributed to parent company
___________________ shareholders.
___________________ • The spin-off company goes public.
___________________ Notice that the spin-off shares are distributed to the parent company
___________________
shareholders. There are two reasons why this creates value:
• Parent company shareholders rarely want anything to do with
___________________
the new spin-off. After all, it’s an underperforming division
___________________ that was cut off to improve the bottom line. As a result, many
new shareholders sell immediately after the new company goes
___________________
public.
___________________ • Large institutions are often forbidden to hold shares in spin-
offs due to the smaller market capitalization, increased risk, or
poor financials of the new company. Therefore, many large
institutions automatically sell their shares immediately after
the new company goes public.
Simple supply and demand logic tells us that such large number of
shares on the market will naturally decrease the price, even if it is
not fundamentally justified. It is this temporary mispricing that
gives the enterprising investor an opportunity for profit. There is
no money transaction in spin-off. The transaction is treated as stock
dividend & tax free exchange.
Split-off & Split-up

Split-off: It is a transaction in which some, but not all, parent
company shareholders receive shares in a subsidiary, in return for
relinquishing their parent company’s share. In other words some
parent company shareholders receive the subsidiary’s shares in
return for which they must give up their parent company shares.
Features: A portion of existing shareholders receives stock in a
subsidiary in exchange for parent company stock.
Split-up: It is a transaction in which a company spins off all of its
subsidiaries to its shareholders & ceases to exist.
• The entire firm is broken up in a series of spin-offs.
• The parent no longer exists and
• Only the new offspring survive.
199
In a split-up, a company is split up into two or more independent
Notes
companies. As a sequel, the parent company disappears as a
corporate entity and in its place two or more separate companies
___________________
emerge.
___________________
Squeeze-out: The elimination of minority shareholders by
controlling shareholders. ___________________
Sell-off ___________________
Selling a part or all of the firm by any one of means: sale, liquidation, ___________________
spin-off & so on or General term for divestiture of part/all of a firm ___________________
by any one of a no. of means: sale, liquidation, spin-off and so on.
___________________
Partial Sell-off
___________________
• A partial sell-off/slump sale, involves the sale of a business
unit or plant of one firm to another. ___________________
• It is the mirror image of a purchase of a business unit or plant. ___________________
• From the seller’s perspective, it is a form of contraction; from

the buyer’s point of view it is a form of expansion.
For example, When Coromandel Fertilizers Limited sold its cement
division to India Cement Limited, the size of Coromandel Fertilizers
contracted whereas the size of India Cements Limited expanded.
Divestitures
Divesture is a transaction through which a firm sells a portion of
its assets or a division to another company. It involves selling some
of the assets or division for cash or securities to a third party which
is an outsider.
Divestiture is a form of contraction for the selling company means
of expansion for the purchasing company. It represents the sale of
a segment of a company (assets, a product line, a subsidiary) to a
third party for cash and or securities.
Mergers, assets purchase and takeovers lead to expansion in some
way or the other. They are based on the principle of synergy which
says 2 + 2 = 5; divestiture on the other hand is based on the principle
of “anergy” which says 5 – 3 = 3.
Among the various methods of divestiture, the most important ones
are partial sell-off; demerger (spin-off & split off) and equity carve
out. Some scholars define divestiture rather narrowly as partial
sell off and some scholars define divestiture more broadly to include
partial sell offs, demergers and so on.
200
Motives for Divestitures
Notes
• Change of focus or corporate strategy
___________________
• Unit unprofitable can mistake
___________________
• Sale to pay off leveraged finance
___________________ • Antitrust
___________________ • Need cash
___________________ • Defend against takeover
___________________ • Good price.
___________________ Equity carve out

___________________ A transaction in which a parent firm offers some of a subsidiaries
___________________
common stock to the general public, to bring in a cash infusion to
the parent without loss of control. In other words equity carve outs
___________________ are those in which some of a subsidiaries shares are offered for a
sale to the general public, bringing an infusion of cash to the parent
firm without loss of control. Equity carve out is also a means of
reducing their exposure to a riskier line of business and to boost
shareholders value.
Features of Equity Carve Out

• It is the sale of a minority or majority voting control in a
subsidiary by its parents to outsider investors. These are also
referred to as “split-off IPO’s”.
• A new legal entity is created.
• The equity holders in the new entity need not be the same as
the equity holders in the original seller.
• A new control group is immediately created. Difference between
Spin-off and Equity carve outs:
• In a spin off, distribution is made pro rata to shareholders of
the parent company as a dividend, a form of non cash payment
to shareholders. In equity carve out; stock of subsidiary is sold
to the public for cash which is received by parent company
• In a spin off, parent firm no longer has control over subsidiary
assets. In equity carve out, parent sells only a minority interest
in subsidiary and retains control.
Leveraged Buyout
A buyout is a transaction in which a person, group of people, or
organization buys a company or a controlling share in the stock of
a company. Buyouts great and small occur all over the world on a
daily basis. Buyouts can also be negotiated with people or companies
201
on the outside. For example, a large candy company might buy out
Notes
smaller candy companies with the goal of cornering the market
more effectively and purchasing new brands which it can use to
___________________
increase its customer base. Likewise, a company which makes
widgets might decide to buy a company which makes thingamabobs ___________________
in order to expand its operations, using an establishing company as
___________________
a base rather than trying to start from scratch.
___________________
In a leveraged buyout, the company is purchased primarily with
borrowed funds. In fact, as much of 90% of the purchase price can ___________________
be borrowed. This can be a risky decision, as the assets of the
___________________
company are usually used as collateral, and if the company fails to
perform, it can go bankrupt because the people involved in the ___________________
buyout will not be able to service their debt. Leveraged buyouts
wax and wane in popularity depending on economic trends. ___________________
The buyers in the buyout gain control of the company’s assets, and ___________________
also have the right to use trademarks, service marks, and other ___________________
registered copyrights of the company. They can use the company’s
name and reputation, and may opt to retain several key employees
who can make the transition as smooth as possible. However, people
in senior management may find that they are not able to keep their
jobs because the purchasing company does not want redundant
personnel, and it wants to get its personnel into key positions to
manage the company in accordance with their business practices.
A leveraged buyout involves transfer of ownership consummated
mainly with debt. While some leveraged buyouts involve a company
in its entirety, most involve a business unit of a company. Often the
business unit is bought out by its management and such a
transaction is called management buyout (MBO). After the buyout,
the company (or the business unit) invariably becomes a private
company.
Management buyout
In this case, management of the company buys the company, and
they may be joined by employees in the venture. This practice is
sometimes questioned because management can have unfair
advantages in negotiations, and could potentially manipulate the
value of the company in order to bring down the purchase price for
themselves. On the other hand, for employees and management,
the possibility of being able to buy out their employers in the future
may serve as an incentive to make the company strong. It occurs
when a company’s managers buy or acquire a large part of the
company. The goal of an MBO may be to strengthen the managers’
interest in the success of the company.
202
Purpose of MBO
Notes
From management point of view may be:
___________________
• To save their jobs, either if the business has been scheduled
___________________ for closure or if an outside purchaser would bring in its own
management team.
___________________
• To maximize the financial benefits they receive from the success
___________________ they bring to the company by taking the profits for themselves.
___________________ • To ward off aggressive buyers.
___________________ The goal of an MBO may be to strengthen the manager’s interest
in the success of the company. Key considerations in MBO are
___________________
fairness to shareholders price, the future business plan, and legal
___________________ and tax issues.
___________________ Benefits of MBO

___________________ • It provides an excellent opportunity for management of
undervalued companies to realize the intrinsic value of the
company.
• Lower agency cost: Cost associated with conflict of interest
between owners and managers.
• Source of tax savings: Since interest payments are tax
deductible, pushing up gearing rations to fund a management
buyout can provide large tax covers.
Master Limited Partnership

Master Limited Partnership’s are a type of limited partnership in
which the shares are publicly traded. The limited partnership
interests are divided into units which are traded as shares of common
stock. Shares of ownership are referred to as units. MLPs generally
operate in the natural resource (petroleum and natural gas
extraction and transportation), financial services, and real estate
industries.
The advantage of a Master Limited Partnership is it combines the
tax benefits of a limited partnership (the partnership does not pay
taxes from the profit - the money is only taxed when unit holders
receive distributions) with the liquidity of a publicly traded company.
There are two types of partners in this type of partnership:
• The limited partner is the person or group that provides the
capital to the MLP and receives periodic income distributions
from the Master Limited Partnership’s cash flow.
• The general partner is the party responsible for managing the
Master Limited Partnership’s affairs and receives compensation
that is linked to the performance of the venture.
203
Employees Stock Option Plan (ESOP)
Notes
An Employee Stock Option is a type of defined contribution benefit
plan that buys and holds stock. ESOP is a qualified, defined ___________________
contribution, employee benefit plan designed to invest primarily in ___________________
the stock of the sponsoring employer. Employee Stock Options are
“qualified” in the sense that the ESOP’s sponsoring company, the ___________________
selling shareholder and participants receive various tax benefits.
___________________
With an ESOP, employees never buy or hold the stock directly.
___________________
Features ___________________
• Employee Stock Ownership Plan (ESOP) is an employee benefit ___________________
plan.
___________________
• The scheme provides employees the ownership of stocks in the
company. ___________________
• It is one of the profit sharing plans. ___________________

• Employers have the benefit to use the ESOP’s as a tool to fetch
loans from a financial institute.
• It also provides for tax benefits to the employers.
Benefits for the Company

Increased cash flow, tax savings, and increased productivity from
highly motivated workers. The benefit for the employees: is the
ability to share in the company’s success.
Check Your Progress

1. Divestures are new enterprises owned by two or more participants.
2. Buyouts great and small occur all over the world on a daily basis.
Turnaround Strategies
A turnaround is designed to reverse a negative trend and bring the
organisation back to normal health and profitability. The basic
purpose of a turnaround is to transform the corporation into a
leaner and more efficient firm. It usually involves getting rid of
unprofitable products, trimming the workforce, pruning distribution
outlets, and finding other useful ways of making the organisation
more efficient. If the turnaround is successful, the organisation
may then focus on growth strategy.
204
Conditions for Turnaround Strategies
Notes
Firms often lose their grip over markets due to various internal
___________________ and external factors. If they have to survive and flourish in a
___________________
competitive environment, they have to identify the danger signals
quite early and undertake rectificational steps immediately. Such
___________________ negative trends are not difficult to trace.
___________________ • Continuous cash flow problems
___________________ • Declining profits; lower profit margins.
___________________ • Dwindling market share.
___________________
• High employee turnover.
• Low morale of employees.
___________________
• Underutilization of capacity.
___________________
• Raw material supply problems.
___________________
• Rising input prices.
• Strikes and lockouts.
• Increased competition, uncompetitive products or services.
• Recession
• Mismanagement etc.
Action Plans for Turnaround

The action plans for achieving a turnaround aim at yielding
immediate results focusing attention on certain key areas like quality
improvement, cost reduction, new product development, rejuvenated
marketing effort etc. Such short-term action plans usually tackle
the following issues:
• Change the leader.
• Change the prices – depending on the elasticity of demand.
• Focus attention on specific customer and specific products.
• Extend the product’s life through product improvements.
• Replace existing products with new ones.
• Focus on ‘power brands’ that are valued, visible and bring in
most of the revenues of the firm; in short, rationalizing the
products line.
• Liquidating assets for generating cash.
• Better internal coordination.
• Emphasis on selling, advertising etc.
205
Fill in the blanks:
___________________
1. A .............. is designed to reverse a negative trend and bring the
organisation back to normal health and profitability. ___________________
2. Firms often lose their .................. over markets due to various internal
___________________
and external factors.
___________________
Summary ___________________
Retrenchment strategy is a corporate level, defensive strategy ___________________

followed by a firm when its performance is disappointing or when
___________________
its survival is at stake for a variety of reasons. Corporate
restructuring is one of the most complex and fundamental ___________________
phenomena that management confronts. Corporate restructuring
___________________
is the process of redesigning one or more aspects of a company.
Restructuring a corporate entity is often a necessity when the ___________________
company has grown to the point that the original structure can no
longer efficiently manage the output and general interests of the
company. Financial restructuring is the reorganization of the
financial assets and liabilities of a corporation in order to create
the most beneficial financial environment for the company. In
organizational restructuring, the focus is on management and
internal corporate governance structures. Joint ventures are new
enterprises owned by two or more participants. Spin-offs are a way
to get rid of underperforming or non-core business divisions that
can drag down profits.

1. Define Retrenchment strategy.
2. Discuss the various reasons for Divestment.
3. When the need for corporate restructuring arises?
4. Highlight the purpose of corporate restructuring.
5. Discuss the basic characteristics of corporate restructuring.
6. Write brief note on Organizational Restructuring.
7. What do you understand by Hostile Takeover?
8. What are the benefits of Mergers and Acquisitions?
9. Explain the nature and objectives of a turnaround strategy?
10. What kind of steps should be undertaken to implement the
same?
207
Unit 15 Notes
Case Study ___________________
___________________
___________________
After analyzing this case, the student will have an appreciation of the ___________________
___________________
___________________
Case Study: ITC’s Diversification Strategy Pays Off ___________________
ITC, often called the elephant that can dance, has once again pleased ___________________
its investors with better-than-expected results for the quarter ended ___________________
September 30, 2010. The company has managed to log a double-digit
growth in its net sales and, unlike other FMCG companies, has been
able to improve its operating margins on a year-on-year as well as
quarter-on-quarter basis. ITC currently focuses on four-business groups
- FMCG (cigarette and non- cigarette), hotels, paper & packaging,
and agribusiness. Predominantly still a tobacco company, ITC is
steadily gaining success in increasing its earnings from its non-
cigarette diversified businesses. Though cigarettes continue to
contribute more than 70% of total net revenues, the operating profit
earned from this business has sequentially dropped from 83% of the
total profit in the quarter ended June 2010 to 77.5% in the September
quarter this fiscal. The cigarette business contributed 62% of revenues
and 88% of the operating profits. In the latest September quarter, the
y-on-y growth in net sales stood at 16.3% with all the businesses
giving a handsome growth while the net profit grew by 23.5%. Logging
a growth of 22%, the non-cigarette FMCG business has been the
fastest growing business revenue wise. This was closely followed by
the agribusiness that grew by 21.5%. Comparison of earnings across
segments showed that paper & packaging business had achieved the
highest growth of 32% followed by the hotel business. Operating
margins have also improved across all its businesses. The hotel
business, which had been dented due to recessionary pressures, is
now on its path of steady recovery. The only loss making business in
ITC’s portfolio continues to be the non-cigarette FMCG business. It
includes packaged foods, garments, stationary products and personal
care products. The earnings still remain negative because of the high
costs involved in the business development, brand building and
gestation costs of other packaged foods and personal care products.
However, the good news for investors is that this fast-growing segment
has been steadily reporting declining losses quarter after quarter.
Contd...
208
Notes Though ITC continues to invest and grow in its traditional business
of cigarettes, it is well-equipped to beat the intense competition in the
___________________ non-cigarette consumer and agri space due to its large distribution
network and the vast experience in handling cigarette brands.
___________________ Investors shall continue to benefit as the company’s strategy of
de-risking its portfolio is executed successfully.
___________________
___________________ Question:
1. Critically analyse the above case.
___________________
Source: The Economic Times, November, 2010
___________________
___________________
___________________
___________________
___________________
Block–IV
Detailed Contents
UNIT-16: STRATEGIC ORGANISATIONAL DESIGN
UNIT-17: MODERN ORGANISATIONAL STRUCTURE
UNIT-18: LEARNING AND ORGANISATIONAL STRATEGY
UNIT-19: BEHAVIOURAL STRATEGIC IMPLEMENTATION
UNIT-20: CASE STUDY

211
Unit 16 Notes
Strategic Organisational Design ___________________
___________________
___________________
\ Organizational Structure: An Introduction
___________________
\ Organizational Design
___________________
\ Classical Structure Configurations
___________________
___________________
Introduction
___________________
Organizations are social entities that are goal directed, with
deliberately structured activity systems, and with a link to the
external environment. They create value for owners, customers,
and employees by their activities. They bring together resources to
accomplish specific goals, whether those goals are to put a man on
the moon, sell lottery tickets, produce goods and services, or provide
value to its customers. They organize the activities of the people to
meet organizational objectives. The term organization has been
defined in several ways. Katz and Kahn define the organization as
a system incorporating a set of sub-systems. These sub-systems are
related group of activities which are performed to meet the objectives
of the organization.
Organizational Structure: An Overview

Organizational structure refers to the institutional arrangements
and mechanisms for mobilizing human, physical, financial and
information resources at all levels of the system. Organizational
structure and design is, therefore, an important factor in
organization’s performance. It not only affects strategy, it affects
other factors too – environmental stability, workflow, technology,
size and life cycle, and corporate culture.
Therefore, it is not surprising that there is an overriding important
given to the ‘structure’ in the implementation of strategy. With a
structural framework in place, people working within a firm know
how to interrelate their actions with the actions of others to support
and execute the organization’s strategy. Organizational structure
provides guidelines on:
212
• Division of work into activities;
Notes
• Linkage between different functions;
___________________
• Hierarchy;
___________________ • Authority structure;
___________________ • Authority relationships; and
___________________ • Coordination with the environment.
___________________ In other words, the structure of an organization is the manner in
which various sub-units are arranged and inter-related. The
___________________
structure provides guidelines on hierarchy, authority structure,
___________________ relationships, linkage between different functions, and coordination
with environment. However, it is not necessary that the
___________________
organizational structure within the entire organization remains the
___________________ same; it may differ within the same organization according to its
particular requirements.
___________________
Organizational Chart
The organizational chart is the visual representation of underlying
activities and processes being undertaken by the organization. They
have their origin in medieval times. Diagrams outlining church
hierarchy can be found as far back as medieval churches in Spain.
The key components pertaining to organizing the activities of the
people in the organization and their relationships with each other
are reflected in the organizational chart:
• Designation of formal reporting relationships including number
of levels in the hierarchy and span of control of managers and
supervisors; and
• Grouping of individuals into departments and of departments
into the total organization.
The organization is represented by both the vertical and horizontal
aspects of the organization chart. Complexity is reflected in the
degree to which activities within the organization are differentiated.
Such differentiations may be horizontal, vertical or spatial. The
chain of command, an unbroken line of authority, is represented by
vertical lines on an organization flow chart. A simple organizational
or company chart is shown as Figure 16.1.
The principle underlying the organization chart is that vertical
linkages primarily show control, while horizontal linkages indicate
coordination and collaboration. Vertical control is best associated
with goals of efficiency and stability, while horizontal coordination
is associated with learning, innovation, and flexibility.
Unit 16: Strategic Organisational Design
213
Notes
Company Organizational Chart
___________________
President
[Name]
___________________
___________________
VP-Sales VP-Production VP-Marketing ___________________

[Name] [Name] [Name]
___________________
Manager Manager Manager ___________________

[Department] [Department] [Department]
[Phone/E-mail] [Phone/E-mail]
___________________
[Phone/E-mail]

[Phone/E-mail] [Phone/E-mail] [Phone/E-mail] ___________________

[Phone/E-mail] [Phone/E-mail] [Phone/E-mail]
Manager Manager Manager

[Phone/E-mail] [Phone/E-mail] [Phone/E-mail]
Manager
[Department]
[Name]
[Phone/E-mail]
Source:http://www.vertex42.com/ExcelTemplates/organizational-chart.html
Figure 16.1: A Company Chart
Check Your Progress

Fill in the blanks:
1. Organizational structure and design is an important factor in
organization’s ................... .
2. The organizational ................... is the visual representation of underlying
activities and processes being undertaken by the organization.
Organizational Design
In designing an organization due consideration has to be given to
ensure clarity, understanding, de-centralization, stability and
adaptability. The basic principles are:
• Specialization,
• Coordination,
• Centralization, and
• Formalization.
214
Specialization: Specialization is division of work into components
Notes
or units in which people specialize. It can be vertical (kinds of work
at different levels in the organization) or horizontal (division into
___________________
departments).
___________________
Coordination: Coordination is integration of activities of specialized
___________________ units towards the common objective. This involves placement of
different units in the organization together or separately and
___________________
deciding on patterns of relationship and communication.
___________________
Coordination is achieved through hierarchy of authority. This
___________________ involves important principles of organization. Unity of command is
being responsible to and receiving orders from only one superior.
___________________
The scalar principle ensures a chain of command in a straight line
___________________ from top to bottom. Since this is not always desirable or possible,
in modern organizational structures employees may relate with each
___________________ other on both on the vertical and horizontal levels.
___________________ The responsibility and authority principle establishes the need for
authority along with responsibility for accomplishing tasks. Span of
control refers to the number of specialized units of persons under
one manager. Departmentalization is the process of grouping
different types of functions and activities of the organization.
Departmentalization may be functional, by product, or by users,
territory, process, equipment, etc.
Centralization: Another important principle of organizational
structuring is whether decision making is delegated to lower levels
(de-centralized) or concentrated at the top (centralized). Design of
systems is required to ensure effective communication, coordination,
and integration across departments depending on the decision
making criteria. Organizations have different blends of centralization
and de-centralization as will be apparent as we study the different
types of organizational structures.
Formalization: Formalization refers to the extent to which rules
and regulations permeate the organization. It defines the formal
relations in the organization. The line authority is used to classify
the superior-subordinate relationship through a hierarchy of policies,
rules and regulations. Line employees are directly responsible for
achieving organizational goals.
Departments are created to perform strategically important tasks.
Finding the right balance between vertical control and horizontal
coordination is an important design decision. Departmental grouping
can be a functional, divisional, multi-focused, or horizontal grouping.
Each type of structure is used in different situations to meet different
needs.
215
Organizational structure has become important because of the size,
Notes
global spread, and complexity of the modern business firm.
Expanding markets, new competitors, a proliferation of products,
___________________
instant communications, and a fierce focus on asset values have
made the old industrial corporation obsolete in many instances. ___________________
Even in the case of a midsize company, management can’t oversee
___________________
every employee. Authority and accountability must be distributed,
systems of control and inspection implemented with incentives to ___________________
encourage desired behaviour.
___________________
There is no particular type of organizational structure that is best
___________________
suited for all enterprises. The main issues in designing organization
structure are how to group tasks, functions, and divisions; how to ___________________
allocate authority and responsibility; and how to use integrating
mechanisms to improve coordination between functions. ___________________
Goold and Campbell in their study, ‘Strategies and Styles,’ came to ___________________
the conclusion that the organizational architecture and ___________________
organizational structure determine the role of the corporate centre
and the various parts of the organization. Therefore, the structure
and the model of strategic planning used by the organization form
the basis on which the organization exercises strategic control.
Above all, the design of the organization’s structure must infuse
with meaning, the corporation’s work, for thousands of its employees.
The most important resource of an organization is its people. It is
people who implement strategy. The relationship between people,
who work with the organization either internally or externally, is
determined by the design of the organizational structure.
Check Your Progress

1. Specialization is division of work into components or units in which
people specialize.
2. Centralisation is integration of activities of specialized units towards
the common objective.
Classical Structure Configurations

There are a number of classical (traditional) organizational
structures that are generally seen in many business organizations.
Classical structures are the most common organizational designs
used by business and include:
• Simple Structures,
• Functional Structures,
• Divisional Structures, and
• Geographic Structures.
216
A brief description of these classical organizational structures is
Notes
given in this section.
___________________
Simple Structure
___________________
This type of structure is generally seen in small businesses. A single
___________________ product or owner driven organization generally starts with a simple
structure or with no structure at all. There is little separation of
___________________
management responsibility and generally no clear definition of
___________________ functional divisions of labour. The owner or a representative of the
owner undertakes most of the responsibilities of management. The
___________________
emphasis here is on direct control and communication for increasing
___________________ volumes.
___________________ It can operate effectively up to a certain size, beyond which it

becomes too cumbersome for an individual to control the
___________________
organization. The threshold size will depend on a number of factors
___________________ including the nature of the business, type of competencies required
to run the business, etc. For example, a lawyer in our apex courts
may handle a very large turnover efficiently, whereas a
manufacturing organization with a similar turnover may require a
clear division of functional responsibilities.
Functional Designs
The functional design is a natural evolution of the simple structure
as the organization grows and direct control becomes difficult or
inefficient. Functional designs are structured around a chief
executive officer and limited corporate staff. Activities are grouped
together by common functions with functional line managers in
important organizational areas such as production, accounting,
marketing, R&D, engineering, and human resources etc. Each
functional unit has a different set of duties and responsibilities.
Jobs become differentiated around areas of specialty as shown in
Figure 16.2 below.
Functional structure consolidates human knowledge and skills with

respect to specific activities in order to provide depth of expertise.
This structure can be effective if there is low need for horizontal
coordination between functional departments. Functional design
provides functional clarity. Everybody understands his own task.
As each departmental manager is concerned with only one kind of
work, specialization is built into the organization structure. This
can be a competitive advantage for the organization.
217
Notes
CEO
___________________
___________________
Materials Research and ___________________

Departments Marketing Finance Management Development
___________________
Functional ___________________
Managers
___________________
Support Staff Support Staff Support Staff Support Staff
___________________
Figure 16.2: Organizational Chart – Functional Structure
___________________
Functional organization is a useful approach and one in which ___________________
corporate managers add value, if they are able to have an in-depth
detailed working knowledge of each ‘core business’. This type of ___________________
structure promotes skill development of employees. They are exposed
to a limited range of activities within their departments allowing
them to build on their skills. This promotes economies of scale in
functional departments and makes it best suited for a cost leadership
strategy. It also suits small to medium sized organizations producing
a limited line of products, where the dominant competitive issues
are cost, efficiency and quality.
The disadvantage is that the functional-area managers tend to
develop a narrow dimension of the organization. The focus is on
local issues instead of the overall company strategic issues. Vertical
communication may be difficult, thereby, causing duplication or
rivalry between departments. As functional organizations grow,
boundaries are erected between departments. Coordination and
delegating responsibility among departments becomes increasingly
difficult, at the expense of performance. Also, functional
specialization may lead to routine, narrow, and repetitive jobs
leading to poor productivity. This disadvantage can be surmounted
by focusing on job enrichment in the work environment.
The traditional form of this organizational structure has a weakness
that it is slow to respond to environmental changes. In order to
overcome this limitation, a method used by management is to design
functional organizational structures with horizontal linkages. This
trend of redesigning the functional organization is partly because of
an increasingly uncertain environment and partly in order to
improve response time. The functional organizational structure with
horizontal linkages reflects a shift towards flatter and more
horizontal structures. Horizontal coordination can be improved with
information systems, direct contact between departments, full-time
integrators or project management task forces, or teams.
218
The major limitation of this type of organizational structure is the
Notes
emphasis on functional skills. This focus often limits the perspective
on the organization’s activities and limits attention to strategic
___________________
issues. When it does so, it does not prepare people in the organization
___________________ for the future.
___________________ Divisional Structure
___________________ As the organization grows laterally, and the product offerings
___________________ increase, the functional organization becomes unwieldy as functional
units have to be assigned to different products and product groups,
___________________ reporting to the function heads. Coordination becomes difficult and
___________________
decisions are often delayed. The divisional structure was considered
as a solution. As a company grows and diversifies, it adopts a
___________________ multidivisional structure. Although this structure costs more to
operate than a functional or product structure, it economizes on the
___________________
bureaucratic costs associated with operating through a functional
___________________ structure and gives a company the capability to handle its value
creation activities more effectively. In this type of structure,
departments are grouped together based on organizational outputs,
each such structure being called a ‘division’.
The innovation of the divisional organizational structure is attributed
to Alfred Sloan, Jr. He was responsible for reorganizing General
Motors into separate divisions. Each division was a distinct self-
contained business with its own functional hierarchy. The functional
hierarchy instead of reporting to the functional head reported to
the divisional head making operations more efficient. Sloan’s new
structure delegated day-to-day operating responsibilities to division
managers. A small corporate office was responsible for determining
the organization’s long-term strategic direction and for exercising
overall financial control. Each division made its own business-level
strategic decisions within the overall corporate strategy. Sloan’s
structural innovation had three important aspects:
• It enabled more accurate monitoring of the performance of
each business,
• It facilitated comparisons between divisions, and an improved
resource allocation process,
• It motivated managers of poorly performing divisions to look
for ways to improve performance.
The divisional structure centres on the use of separate businesses,
cost or profit centres. It is particularly adaptable to the large and
complex modern organization. This structure is used by many
organizations competing at the global level. Composed of operating
divisions where each division represents a separate business or
profit centre and the top corporate officer assigns responsibility for
219
day-to-day operations and business-unit strategy to division
Notes
managers. The organizational structure is shown in Figure 16.3.
___________________
CEO
___________________
Corporate Headquarters Staff ___________________
Senior VP Senior VP
Corporate Senior VP Senior VP ___________________
Materials Research and
Managers Marketing Finance Management Development
___________________
___________________
Divisional ___________________
Managers Division A Division B Division C Division D
___________________
___________________
Functional
Managers
___________________
Support functions Support functions Support functions Support functions
Figure 16.3: Divisional Structure with Functional Departments
The resources of a division are deployed on the product and all

activities for a single project or purpose are brought under one
manager. This makes it is easy to fix accountability, and procedures,
and systems can be standardized, leading to better integration across
different specialties. The different units like marketing, sales,
engineering, finance and personnel, are dedicated to the interests
of one or a few related products, increasing emphasis on product,
market development and growth.
The divisional structure strengths are that the design is suited to

fast change in an unstable environment, enhanced corporate
financial control, enhanced strategic control, growth and a stronger
pursuit of internal efficiency. It prepares managers for the tomorrow
to come, creating high quality managers possessing specialized skills.
However, it makes high human demands of self discipline, mutual
toleration, and subordinating one’s self interest to that of the
organization.
However, the divisional structure has some disadvantages also.

Problems in implementing a multidivisional structure include
establishing the divisional-corporate authority relationship;
distortion of information; and short-term R&D focus. This structure
tends to create functional departments in each division leading to
duplication of effort. The economies of scale in functional
departments are reduced. There is little incentive to promote
cooperation among divisions. The rivalry and territorial
220
protectionism by the individual divisions can make coordination by
Notes
headquarters extremely difficult. Inter divisional trading becomes
___________________
complex and often misleading, especially where there is extensive
transfers between the divisions. It can lead to reduced transparency
___________________ in the operations of the organization.
___________________ Conflicts are created as divisions and headquarters argue about
___________________
allocation of resources and support services. Managerial energy is
often wasted on adjudicating disputes between divisions with
___________________ reference to scarce inputs, etc. The focus often turns to the division
___________________
even in matters where the organization should have primacy.
___________________ Geographical Structure

___________________ In a world where organizations are working towards becoming
transnational entities, the relevance of the organization with a
___________________
geographical structure is becoming increasingly important. This is
___________________ especially so because the markets, legal framework, culture and
state of the economy often determine the strategy required in the
particular geographical region.
The geographical structure is based on the concept of market

segmentation. The organization’s users or customers are grouped
together by geographical area. As the operations in a particular
area grow, the geographical areas are often redefined. Geographical
structure is a form of the multi divisional organizational structure.
It has strengths and weaknesses that are similar to the divisional
structure.
Regional operations
Regional operations
Regional operations
Central operations
CEO
Regional operations
Figure 16.4: Geographical Organizational Structure
The geographical structure provides the option of flexibility in

strategic direction without compromising its strategy in dissimilar
221
geographical areas. This is an additional advantage of this
Notes
organizational structure. Figure 16.4 illustrates the geographical
structure. ___________________
For example, Hanover Insurance, which is one of the world’s leaders ___________________
in their field, has become a trendsetter. It has localized regionally,
with each region operating as a free-standing unit with its own ___________________
internal board of directors. The people on the boards overlap, and ___________________
this creates shared knowledge.
___________________
However, to make such a system work the skills and capabilities of
board members with respect to dealing with complex, highly ___________________
conflictual issues are important. These include both conceptual and ___________________
analytic skills and interpersonal skills, all of which are needed to
confront difficult problems where important decisions need to be ___________________
made, and yet where those decisions need to be understood and ___________________
arrived at by groups of people who may have conflicting interests.
___________________
Check Your Progress

Fill in the blanks:
1. ................ structure can operate effectively up to a certain size, beyond
which it becomes too cumbersome for an individual to control the
organization.
2. ................ designs are structured around a chief executive officer and
limited corporate staff.
Summary
The strategy implementation process is a bridge between the classic
economist’s view and the view of the resource school. Critical areas
related to the implementation of strategy are organizational
structure, the culture of the organization, and the strategic change
process. The structure of the organization determines three key
components pertaining to organizing the activities of the people in
the organization. The organization chart is the visual representation
of underlying activities and processes being undertaken by the
organization. The principle underlying the organization chart is
that vertical linkages primarily show control, while horizontal
linkages indicate coordination and collaboration. Business
Organizations can have a classical or a modern structure. Classical
organizational structures include the Simple Structure, the
Functional Structure, the Divisional Structure and the Geographical
Structure.
222
Notes
1. What is organizational structure and why is it important?
___________________
2. What does the organizational structure reflect? Describe these
___________________ with examples.
___________________ 3. Describe different types of classical organizational structures
and their appropriateness in different circumstances.
___________________
4. Discuss the Functional Designs.
___________________
5. What are the three important aspects of Sloan's structural
___________________ innovation?
___________________ 6. What is Formalization?
___________________
___________________
___________________
223
Unit 17 Notes
Modern Organisational Structure ___________________
___________________
___________________

\ Matrix Structure
___________________
\ Strategy and Structure
___________________
\ Types of Strategies
___________________
Introduction ___________________
___________________
Modern organizational structures are based on providing a high
level of autonomy to the operating units. It is basically a hands-off
organizational strategy with control systems to monitor and evaluate
the performance of the business unit. This architecture is found in
the matrix structure, the horizontal structure and the virtual
structures. Modern organizational structures have evolved from
several organizational theories, which have identified certain
principles as basic to any organization. Examples of the architecture
used in modern organizational design are: Matrix structures,
Horizontal structures and Virtual structures.
Matrix Structure
Webster’s Dictionary defines a matrix as “something within which
something else originates or develops”. A mathematical matrix is a
rectangular arrangement of elements into rows and columns. In an
organization, when the structure needs to be multi-focused a
structure designed as a matrix is often used, for example, when
there is a requirement for simultaneous emphasis on both product
and function or product and geography etc.
There could be different designs of the matrix. The balanced matrix
gives dual lines of authority to both the functional and product
chains simultaneously. The matrix provides for lateral chains of
influence, therefore, managers report laterally as well as vertically.
The normal vertical hierarchy is “overplayed” by a form of lateral
influence.
Figure 17.1 shows the matrix structure where the horizontal and
the vertical intersect into a grid. The grid is a network of interfaces.
A matrix interface determines “who works with whom”. These
224
interfaces can be between the project teams and the functional
Notes
elements of an organization. On the horizontal axis it could be a
process flow, product line or activity set that is not a project but,
___________________
which requires multidisciplinary cooperation if timely success is to
___________________ be achieved. At any given time, project managers direct the activities
of projects, while the functional heads allocate their resources to
___________________
meet the requirements of these projects.
___________________
___________________ CEO
___________________
Vice President Vice President
Vice President Vice President Vice President
Sales and Research and
___________________ Engineering Finance Purchasing
Marketing Development
___________________
Product A
Manager
___________________
___________________ Product B Product Team

Manager
Product C
Manager
Product D
Manager
Two-bossemployee
Figure 17.1: The Matrix Organizational Structure
Two variations have evolved that shift emphasis either toward the
traditional vertical hierarchy or toward the horizontal teams. The
functional matrix gives functional bosses primary authority, while
project or product managers simply coordinate product activities.
The product matrix gives the project or product managers primary
authority, while the functional managers simply offer advisory
expertise as needed for projects.
The success of the matrix organization requires the participants to
have a clear sense of the goals, objectives, and accountability
performance metrics. There must be both vertical and horizontal
alignment of goals, objectives, and metrics if the matrix is to function
properly. Other conditions necessary for the matrix organization’s
success are:
• Economies of scale in the use of internal resources;
• Environmental pressure for two or more critical factors; and
• Complexity and uncertainty in the environment.
Top leadership holds the balance of power in this organizational
structure. In order to be effective, the leadership must promote
Unit 17: Modern Organisational Structure
225
effective communication throughout the organization and also see
Notes
that the power of balance is maintained properly. The project
manager acts as an integrator to achieve the specific project
___________________
objectives.
___________________
A matrix form permits efficient utilization of resources. Resources
can be freely allocated across different projects and specialists are ___________________
available to all products/projects on an equal basis. Further,
___________________
knowledge and experience can be transferred from one project to
another. It encourages learning among project unit and functional ___________________
department members, and makes for better communication and
more flexibility. Quick decisions can be taken. Frequent interaction ___________________
among project unit and functional department members encourage
___________________
cross fertilization of ideas. The dual lines of authority reduce
tendencies of departmental managers to become ‘myopic’. ___________________
The matrix structure is best when environmental change is high ___________________

and when goals reflect a dual requirement for both product and
___________________
functional goals. Membership of the teams is based on special
knowledge for the given aspects of the work. A matrix structure
helps employees to develop and grow. It enlarges their experience
and broadens their outlook. It exposes them to a wider arena full
of challenges. As a result, lower level of people can have a greater
say in important decisions. The opportunity to participate in
important decisions fosters higher levels of motivation and
commitment.
Weaknesses of this type of organizational structure include the fact
that dual authority, particularly in the balanced matrix, can be
frustrating and confusing to employees. This matrix structure
purposefully violates the principle of ‘unity of command’ which has
been considered an important management principle. The principle
states that one should receive orders from one and only one
individual in the chain of command.
There is a requirement to strike a balance between project and
functional authority. These two kinds of influence are negatively
correlated - the more successful the lateral collaboration, the lesser
is the influence of the vertical hierarchy. Conversely, the better the
vertical relationships in the line hierarchy, the more likely are
lateral activities are to suffer.
It often fosters power struggles between product and functional
managers, as both functional and product managers share the same
set of resources. Managers may try to safe guard control over
operations by building protective firewalls. There are three factors
that need to be controlled: role conflict, role ambiguity and role
overload. Misalignment, competition or conflict among managers’
goals, objectives, and metrics will create gridlock in the matrix —
across functions, across locations, or all of the above and more.
226
In spite of these limitations, as organizations take more
Notes
multidisciplinary approaches and multiple assignments at once to
accomplishing work, the advantages overtake the disadvantages.
___________________
Therefore, the importance in the power of the matrix organization
___________________ and management style will keep increasing.
___________________ Horizontal Structure

___________________ The horizontal structure organizes employees around core processes
by bringing together people who work on a common process so they
___________________
can easily communicate and coordinate their efforts. It tries to
___________________ replicate the advantages of the most widely used structure, the
simple structure of small organizations. Here the owner-manager
___________________
makes most of the decisions directly and monitors all activities,
___________________ while the staff serves as an extension of the manager’s supervisory
authority. The traditional vertical hierarchy with departmental
___________________ boundaries is eliminated. Divisions of the organization work on a
___________________
product basis. Large functional units are divided into smaller units,
each grouped in terms of product manufactured and sold.
Figure 17.2 shows the dominant characteristics of the horizontal
structure. The horizontal structure has generally found favour with
multi-product enterprises who want to expand and diversify products
using a differentiation strategy with the products having distinct
manufacturing and marketing features. It is particularly suited to
tremendously large, complex and multi-product organizations. For
example, Ford was concerned regarding customer service. It decided
that the horizontal model offered the best chance to gain a faster,
more efficient, and better integrated approach to customer service.
Several horizontally-aligned groups of multi-skilled teams, with their
focus on core processes in areas such as parts supply, logistics, and
technical support were formed, greatly improving customer service.
CEO
Research and Sales and Materials

Development Marketing Management Engineering
Product
teams
Manufacturing units
Figure 17.2: The Horizontal Organizational Structure

227
Horizontal structure is characterized by a focus on results and
Notes
performance than on means. The structure is organized, basically,
according to organizational outputs. The divisional head is
___________________
responsible for performance and holds complete strategic and
operating decision-making authority. The structure created around ___________________
cross-functional core processes rather than tasks, functions, or
___________________
geography. Self-directed teams are the basis of organizational design
and process owners have responsibility for each core process in its ___________________
entirety. Team members are given the skills and authority to make
___________________
decisions central to the team’s performance.
___________________
As customers drive the horizontal corporation with effectiveness
measured by performance objectives, the horizontal structure ___________________
increases the emphasis on products, and thereby helps in orderly
and even development of products. The products which need to be ___________________
carefully nursed and skilfully developed, receive prompt and ___________________
improved attention. Other products, whose life is over, may be
discontinued. In response to changing conditions products can be ___________________
developed, added or dropped.
The horizontal structure is more effective in building shareholder
value and strengthening its core competencies. It is more flexible
and responsive to changes in customer needs because of enhanced
coordination. As it is relatively flat, it allows organizations to greatly
expand their operations, though units can work together to benefit
for synergies.
This organizational structure encourages learning and innovation
and has the potential to positively influence the firm’s diversification
strategy by encouraging managers to pursue additional marketplace
opportunities. The culture is open, trustful and collaborative, with
a focus on continuous improvement. The horizontal structure
facilitates a wide span of control at the top leading to a flat
organization structure. It frees the top management from routine
tasks so that they can focus on the long term objectives of the
organization.
The major weakness of the horizontal structure is that it can harm
rather than help organizational performance unless managers
determine which core processes are critical for bringing value to
customers.
Virtual Organization Structure

The ‘virtual organization’ is described as one which will appear
almost edgeless, with permeable and continuously changing
interfaces between company, supplier, and customer; ……. operating
divisions [will be] constantly reforming according to need [and] job
responsibilities will regularly shift, as will lines of authority-even
228
the very definition of employee will change, as some customers and
Notes suppliers begin to spend more time in the company than will some
of the firm’s own workers. One of the Canada’s best performing
___________________
natural resources companies created a unique organizational
___________________ structure that combines the advantages of small business units
with Virtual Structures – groupings of these business units – that
___________________ can address different strategic issues and competitive environments.
It created over 100 business units. Based on the requirement, it
___________________
subdivided the units on the basis of:
___________________ • Business Units serving a common customer group,
___________________ • Business Units located in a common geography,
___________________ • Business Units served by a common supplier group, and
___________________ • Business Units in a similar phase of development.
___________________ Each of the 100-plus business units represents a small team with
accountability for strategy, resources and performance. According
___________________ to the authors, “This enables the CEO and his team to push
accountability for value as close as possible to the ‘coal face’, where
value is actually created or destroyed.”
Virtual structure is a dynamic grouping of business units that can
address different strategic issues and competitive environments. It
is a unique organizational structure and form of business
organization that is emerging. The benefit of these virtual business
units is their ability to tackle corporate strategic issues that the
operational business units cannot address on their own without
creating new layers of bureaucracy that too often become permanent.
Moreover, because they are “virtual”, these larger groupings of
business units can be “organized” in many different ways to meet
the company’s priorities, even as they evolve over time. This gives
the company enormous capacity to organize and reorganize in
response to an ever-moving agenda and competitive environment.
In some ways the Virtual Structure as shown in Figure 17.3
resembles a horizontal structure, we have discussed earlier.
Business Units
served by a Common
Supplier Group
Business Units in a
Similar Development
Phase
Single Business Unit

Business Units
serving a Common
Customer Group
Business Units located in a

Common Geography
Figure 17.3: The ‘Virtual’ Organizational Structure

229
In a conventional business organization the mission statements and
Notes
competitive strategy making, reflected in the business objectives,
flows naturally from the vision statement. This is not so in the new
___________________
organizational architecture. The single-minded emphasis on focus
means that corporate culture, corporate missions and corporate ___________________
objectives, are determined at the unit level and requires a hands-
___________________
off policy from the corporate centre.
___________________
Table 17.1: Contrasts between Modern and Virtual
Organizations ___________________
Modern organization Virtual organization ___________________
1. Function in design structure. 1. De-functionalized project-based ___________________

design held together by network
___________________
capabilities
___________________
2. Hierarchy governing formal 2. Instantaneous, remote computer
communication flows and communication for primary ___________________
managerial imperative – the interaction; increase in face-to-
major form and basis of formal face informal interaction;
communication. decrease in imperative actions
and increase governance through
accountability in terms of para-
meters rather than instruction
or rules.
3. The files. 3. Flexible electronic immediacy

through IT.
4. Impersonal roles. 4. Networking of people from

different organizations such that
their sense of formal organi-
zational roles blurs.
5. Specialized technical training for 5. Global, cross-organizational

specific careers. computer-mediated projects.
The organization design is based on the technological capacities of

digitalization amongst other things. Digitalization is just one part
of the tendencies towards ‘virtuality’. The enabling mechanism of
the ‘virtual organization’ allows time and space to be collapsed, and
the informational controls of conventional bureaucracies superseded.
This is reflected in Table 17.1.
These new organizational structures are based on being able to
pick points of leverage carefully. The relationship among the business
units is inconsistent and asymmetric. The asymmetrical structure
of these organizations runs counter to traditional notions of balance,
equity, and fairness.
230
There are flexible relationships among its business units. R&D, for
Notes
example, could be managed centrally for two businesses, but not a
third. Or the corporate centre might play a role in managing certain
___________________
processes in one business unit but it may not do so in another. The
___________________ logic is that just like there the differences between a mature business
and a start-up there are differences between units and these need
___________________
to be recognized. The organization has to avoid imposing
___________________ standardized rules and procedures that ignore the unique
requirements of each business unit. Therefore, it has many of the
___________________
advantages of small business units.
___________________
Check Your Progress
___________________
Fill in the blanks:
___________________
1. A ................. matrix is a rectangular arrangement of elements into
___________________ rows and columns.
2. The normal vertical hierarchy is ................... by a form of lateral
___________________
influence.
Though the advantages of this structure outweigh its disadvantages,

managing this type of organization is challenging. The organizational
architecture of this type of organization is based on conflict. Conflict
is encouraged to help incubate new ideas and foster innovation,
very often conflict within the organization is essential – and
inevitable. The conflict has to be managed so that it does not become
self destructive. Management also has to create a relationship
between the corporate centre and the unit, in a manner, that the
strategic choices are integrated to the vision of the larger
organization.
Strategy and Structure

Today’s modern business practices demand leveraged operations,
technology, and knowledge throughout the enterprise, using a
multiplicity of corporate structures for competitive advantage. The
task of organization is particularly challenging because most large
companies are active not in one line of business but in several, and
even a company that makes a single product will probably wish to
excel in a number of dimensions.
An organization with a focused approach normally employs a multi–
divisional structure. Many companies in India use this model. For
example, Tata Motors was organized into three major manufacturing
divisions at Jamshedpur: the Automotive Division, the Excavator
Division and the General Engineering Division. Escorts Ltd. was
organized into the Tractor Division, the Motorcycle Division, the
Agency Sales Division, the Automotive Division, and the Farm
Equipment Division etc.
231
When operations are related to a limited set of businesses, corporate
Notes
management is likely to perform better in forming the strategic
direction of the different units. Highly diversified organizations do
___________________
well when the corporate management follows a ‘hands off’
relationship with the different units. The greater the diversity among ___________________
the businesses in multi business firms, the greater is the necessary
___________________
degree of decentralization and self containment.
___________________
The complex challenges have pioneered a range of novel hybrid
organizational designs. An industrial company might, for example, ___________________
have manufacturing units that are organized geographically by
___________________
product, as well as customer-oriented business units dealing with
sales and services that are organized by the industries they serve. ___________________
These hybrids require complex coordination, promoted by advanced
information technology and by corporate cultures that foster ___________________
cooperation. ___________________
___________________
Good
Organizational Design
Economizes on the
bureaucratic costs of Enhances a company’s
organizational structure value creation skills
Leading to differentiation
Leading to a
advantages and ability to
low-cost advantage
charge a premium price
Which increases profit
Figure 17.4: Structure and Strategy
Different strategies require different types of organizational

structures to deliver results. The structure of the organization must
support the organization’s competitive approach. For example, if
the organization uses a low-cost leadership strategy, the organization
has to be designed for efficiency whereas if the organization uses
the differentiation strategy, the design calls for a learning structure
with strong horizontal coordination. Therefore, organizational
structure and design are vital in context of the strategic management
of organizations.
232
Even two organizations, competing in the same industry with a
Notes
similar set of products, technologies, and markets, may find that a
structure that works for one organization may need some
___________________
modification in another; the issue depends on several factors such
___________________ as environment, strategy and goals, culture, technology and size.
___________________ The schematic relationship between structure and how the
organization benefits from good organizational design is shown in
___________________
Figure 17.4. The structural components of an organization facilitate
___________________ the smooth translation of organizational strategy and policies into
action. They distribute authority and accountability; establish
___________________
systems of control and inspection. Properly designed, the
___________________ organizational structure encourages desired behaviour. Above all, it
infuses the corporation’s work with meaning, for the people working
___________________ in the organization. It also supports the organization’s competitive
___________________ approach. Therefore, a strategy – structure fit is one of the necessary
requirements for competitive advantage.
___________________
Good organizational design can lead to optimizing the bureaucratic
costs which results in a low cost advantage, providing increased
profits. In addition, enhancing the value creation skills of the
organization leads to differentiation advantages and the ability to
charge a premium price, thereby impacting the bottom line. In order
to maximize the benefits to the organization, it is necessary and
important that the structure of the organization should align itself
and focus on furthering organizational objectives. There should be
benchmarks by which an organization can determine whether or
not it is benefiting from the way the organizational structure is
designed.
The main factors that need to be considered in the deciding on the
design of the organization are how to group tasks, functions, and
divisions; how to allocate authority and responsibility; should it be
a tall or flat organization; how to ensure a minimum chain of
command; should there be centralization or decentralization? In
addition, the important requirements for organizational alignment
are that the design should incorporate integration and integrating
mechanisms; it should define degrees of direct contact, liaison roles
and the function and structure of specialized teams.
One or more of the following symptoms of structural deficiency may
appear as an indication of the structure being out of alignment:
• Decision-making is delayed or lacking in quality.
• The organization does not respond innovatively to a changing
environment.
• Too much conflict from departments being at cross purposes is
evident.
233
In case it becomes apparent from its symptoms that there is a lack
Notes
of alignment or such a danger is imminent, an analysis of the
structure is necessary. Analysis involves the examination of the ___________________
various factors that may influence the structure of the organization.
Some factors that have an influence on structure are discussed ___________________
below. ___________________
Nature of Environment ___________________
The environment can be simple, complex or dynamic. In a simple ___________________

and static environment, organizations can gear themselves for
___________________
operational efficiency. They standardize operations and processes
of control. Examples are mining companies or some mass-production ___________________
companies. With increasing complexity there is a need to devolve
___________________
decision-making responsibilities to lower levels or specialists. This
means that organizations in complex environments tend to be more ___________________
devolved for operational purposes.
___________________
In dynamic conditions, it is necessary for the organization to increase
its ability of sensing change and responding to it. Adhocracy/
Missionary or divisional styles, with more emphasis on cultural
and self-controls will be required. Where the environment is both
complex and dynamic – for example, among organizations operating
at the frontiers of scientific development, there is a need for speed
and flexibility. Often, the level of complexity is such that
responsibility and authority must be devolved to specialists.
Therefore, self-control and the personal motivation have to be the
dominant control processes in the organization.
External Environment on Structure

The external environment influences the effectiveness of the firm’s
day-to-day operations and its long-term growth. Factors such as
economic conditions, changes in market conditions, advances in
technology, legal and political conditions, all come within the purview
of environment. If the structure fits the type of environment that
it faces, the organization will be more successful.
Often, different departments and divisions of the organization may

have to respond to different environments. The structure of these
sub-units should be designed taking this into consideration. For
example, many medium sized organizations in India prefer to set-
up small legally independent units rather than consolidate their
operations due to the legal protection provided to workers and to
avoid union formation.
234
___________________
1. An organization with a focused approach normally employs a multi–
___________________ divisional structure.
2. Similar strategies require different types of organizational structures to
___________________
deliver results.
___________________
___________________ Type of Strategy

___________________ Matching organizational design to the types of strategy that the
organization is pursuing is a two way process. Organizational
___________________ configuration influences preferences for particular types of strategy.
___________________ Different product/market strategies may require different forms of
organizational design. For example, a low-price strategy will need
___________________ to find an organizational design that ensures a cost- efficient
operation with an emphasis on cost control. On the other hand, a
___________________
differentiation strategy may need the organization to possess a high
degree of creativity to develop and sustain the product or service
qualities which provide competitive advantage.
Based on this view, the low-price strategy will require a mechanistic
system of control, with clear job responsibilities, frequent and
detailed reports on organizational efficiency and cost, and a clear
delineation of responsibility for budgets and expenditure. There
will be a strong emphasis on administrative controls. The
organization following a differentiation strategy, on the other hand,
will need a great encouragement of informality and creativity within
a more devolved structure, but a good deal of coordination between
its various activities. The emphasis will be more on groups working
together on problems and opportunities rather than on individual
departments and specific job functions. Cultural and self-control
processes are of great importance with this type of strategy.
Strategic focus in diversified firms concerns the degree to which the
various businesses and products are structured around a reasonably
well-defined commonality. An organization that has different units
seeking different strategies may experience conflicts in terms of
organizational design and the need to have different types of control
systems. However, such conflicts are now a common part of
organizational life and a number of solutions to this type of problem
are available.
The important requirement is that management is aware of the
need to balance the organization in terms of its commonalities. This
commonality may not be advantageous in itself. However, a strategic
focus helps management in deciding where to concentrate its
attention and resources. In addition, it influences the manner in
which the organization defines itself.
235
Technology
Notes
The nature of the tasks undertaken by the organization has an
important influence on the various aspects of organizational design ___________________
and control. For example, mass production systems require the ___________________
standardization of processes, centralization with greater direction
and control by senior managers. This may be implemented through ___________________
formal planning systems or by direct supervision. Organizations
___________________
with less standardized operational processes are likely to have more
devolved and informal decision-making processes. ___________________
The more sophisticated and complex the technology of an ___________________

organization, the more elaborate the structure becomes. When the
___________________
work requires innovativeness and creativity, a good deal of
responsibility and power is likely to devolve to those specialists ___________________
concerned with the technology itself. Such an organization may
___________________
tend to operate as an adhocracy. In turn, this creates the need for
effective exchange of information between the specialists and the ___________________
operating core of the business. This is often accomplished by
integrating and coordinating mechanisms such as committees, joint
working groups and project teams, etc. Alternately, there may be
an emphasis on social control through professional networks, or a
combination.
Size on Structure
There is considerable evidence that an organization’s size is a
significant influence on structure. It has been seen that as the size
of the organization increases, the number of hierarchical levels also
goes up. This is shown in Figure 17.5.
10
9
Number of Hierarchical Levels
8
7
6
5
4
1,000 2,000 3,000 10,000

Employees
Figure 17.5: Number of Levels
The larger the size of the organization, the greater is the

specialization and horizontal differentiation. In order to facilitate
coordination, there is a corresponding increase in vertical
236
differentiation. The increase in complexity makes it more difficult
Notes
for top management to directly oversee what is going on throughout
the organization. Direct control and communication, therefore, is
___________________
replaced by formalized rules and regulations. This increases the
___________________ distance between the top management and the operating level and
often results in the inability of the organization to make rapid and
___________________
informative decisions.
___________________
This type of problem creates the need to redesign the organization
___________________ such that decision making becomes more decentralized. The result
is that, a new organizational framework.
___________________
___________________
Information-processing Perspective on Structure
___________________
Through most of the 20th century, the hierarchical, functional
structure predominated. But in recent years, organizations have
___________________ developed other structural designs, often aimed at increasing
horizontal communication. Vertical linkages are designed primarily
___________________
for control, in contrast to horizontal linkages that are designed for
coordination and collaboration; all organizations need a mix. Figure
17.6 shows the relationship between the organizational structure
and the capability of information processing.
Functional Divisional Matrix Horizontal

Structure Structure Structure Structure
Horizontal:
• Coordination
• Change
• Learning
Vertical: • Innovation
• Control • Flexibility
• Efficiency
• Stability
• Reliability Dominant Structural Approach
Information Processing Capacity
Figure 17.6: Effect of Structure on Information Processing
• Vertical Information Linkages: The lines of the organization

chart act both up and down the chain as the communication
channel. Vertical linkages emphasize on efficiency and control.
For repetitious problems and decisions, rules or procedures
are established so employees know how to respond without
communicating on each separate issue. For example, the
strategy for budgetary control is through an increase in vertical
information capacity in the form of periodic reports, written
information and computer-based communications distributed
to managers.
237
• Horizontal Information Linkages: Horizontal linkages
Notes
emphasize on learning. Many organizations require a
considerable amount of information flow. Structure that is flat ___________________
is more responsive to flow of information. Organizations that
require large amounts of information flow are normally designed ___________________
with flatter organizational structure. ___________________
A classic structure will have the maximum number of vertical ___________________
linkages and the minimum amount of information processing
capability. Such organizations are typified with values that promote ___________________
control, efficiency, stability and reliability. The least number of ___________________
vertical linkages are found in a horizontal structure and it has the
maximum information processing capability. These organizations ___________________
value coordination, change, learning, innovation and flexibility. The ___________________
other organizational structures fall in between these two. The
structure must fit information requirements of the organization so ___________________
people have neither too little information nor too much irrelevant
___________________
information.
Where flatter organizational structures are not possible, cross-

functional information systems can be used. These enable employees
to routinely exchange information. Alternatively, a liaison role can
be used. This involves identifying a person in one department who
has the responsibility for communicating and achieving coordination
with another department.
Where the problem is more acute, task forces or temporary

committees composed of representatives from each department which
links several departments are used to solve common problems. The
task force is disbanded after tasks are accomplished.
Box 17.1: Vertical and Horizontal Linkages
Vertical linkages – emphasis on Specialized tasks, hierarchy of

efficiency and control. authority, rules and regulations,
formal reporting systems, few
teams or task forces,centralized
decision-making.
Horizontal linkages – emphasis on Shared tasks, relaxed hierarchy

learning. and few rules, face-to-face
communication, many teams and
task forces, informal/decentralized
decision-making.
Box 17.1 summarizes the emphasis that different types of linkage

mechanisms provide. Depending upon the nature of the business
and the core capabilities required for the functions of the
organization, the linkages need to be selected.
238
People on Structure
Notes
To be effective, the basic structure is governed by a set of rules and
___________________ regulations, reward-punishment systems, information networks,
___________________ control procedures etc. These apply to the people who are a part of
the organization. The result is the organization attracts and retains
___________________ those whose attitudes, aspirations, experiences and roles as
___________________ organization members are related to and reflected in the structure
of the organization.
___________________
Depending on the nature of the work, it is necessary to design the
___________________ organization for excellence in performance. Organizations should
___________________ accommodate the psychological needs of employees adequately.
Choosing the right structure for the type of people the organization
___________________ requires, therefore, assumes importance. For example, an
___________________ organization in the knowledge industry will require a structure
that is different from that of a manufacturing organization. An
___________________ international organization’s requirements of its people and
organizational structure may differ significantly from that of a local
organization.
Check Your Progress

Fill in the blanks:
1. Organizational .......................... influences preferences for particular
types of strategy.
2. There is considerable evidence that an organization’s .......................
is a significant influence on structure.
Summary
The structural components of an organization facilitate the smooth
translation of organizational strategy and policies into action.
Properly designed, the organizational structure encourages desired
behaviour. It also supports the organization’s competitive approach.
In addition to organization design affecting strategy, other factors
– environmental stability, workflow technology, size and life cycle,
and corporate culture – must “fit” in the design of the organization.
There is considerable evidence that an organization’s size is a
significant influence on structure. Structural designs of organizations
are often aimed at optimizing the information processing capability.
The structure must fit information requirements of the organization
so people have neither too little information nor too much irrelevant
information.
239
Questions for Discussion Notes
1. Do you think that matrix interface determines who works with
whom? ___________________
2. What are the conditions necessary for the matrix organization’s ___________________
success?
___________________
3. Describe Virtual Organization Structure.
___________________
4. Explain schematic relationship between structure and how the
___________________
organization benefits from good organizational design.
5. Highlight external environment on structure. ___________________
6. Elucidate Vertical and Horizontal Linkages. ___________________
___________________
___________________
___________________
241
Unit 18 Notes
Learning and Organisational Strategy ___________________
___________________
___________________
___________________
\ Characteristics of an Ideal organization
___________________
\ Organizational Learning
___________________
\ Knowledge Management
___________________
Introduction ___________________
___________________
Peter Senge one of the earliest proponents of the Learning
Organization, says, “Learning disabilities are tragic in children,
but they are fatal in organizations. Because of them, few corporations
live even half as long as a person — most die before they reach the
age of forty.” The reason for the limited life of most business
organizations is because they have traditionally been seen as
hierarchies and bureaucracies set up to achieve order and maintain
control. They are structures built for stability rather than change.
This model of the organization is not suited to the dynamic conditions
and global forces for change of the twenty first century. The world
is simply too complex to figure it all out from the top, and too
rapidly changing to abide with the slow bureaucratic decision-making
processes that come with top-down decision making in complex
organizations.
Characteristics of an Ideal Organization

The ideal organization needs to be seen not as a stable hierarchy,
but as an adaptive, continually changing ‘learning organization’.
Unlike popular belief that learning is an intellectual exercise,
learning has two dimensions, which are:
• A Cognitive or Intellectual Dimension, and
• An Action Dimension.
Both these dimensions are intricately intertwined and assessed
relative to the needs of the organization, whether the need is
cognitive or for action, or for both.
In traditional organizations, the job of people at the top has been
to “put the pieces together” and maintain a broad overview of what
242
needs to be done to ensure the success of the enterprise as a whole.
Notes
It was sufficient for one person to know what needs to be done and
simply give orders. Making explicit the reasoning behind the orders
___________________
was unimportant.
___________________
What changes in a learning organization is that this responsibility
___________________ is spread more and more widely throughout the organization. The
concept of the learning organization includes a number of
___________________
dimensions, given below:
___________________
• Facilitates the learning of all its members and continuously
___________________ transforms itself,
___________________ • Facilitates participative and innovative development with and

between people and institutions commercially, technologically,
___________________ and socially,
___________________ • Forms the strategy, structure, and culture of the enterprise
into a learning system,
___________________
• Encourages double loop learning in which learning informs
and impacts on strategic directions,
• Responds to changes in the internal and external environment
of the organization by detecting and correcting error, and
• Has as its primary aim rapid and continual regeneration of
the total organization depending on rapid and continual
learning.
The very idea of a “learning organization” is a vision. In essence, it
is the vision of an organization that is continually expanding its
capacity to learn and to create its future.
The fundamental building block for learning organizations is
partnership — the relationships formed by small numbers of people
who share commitment and responsibility toward building a new
type of organization.
The partnership of a small number of people, who share a deep
sense of responsibility, who continually challenge one another’s
thinking, who continually remain open to further elaboration of the
vision, and who continually operate in a mode of genuine inquiry,
challenging and pushing one another to deeper understanding,
creates an incredibly powerful model for others to see what a learning
organization is all about.
Simply put, the objective of the learning organization is to address
three issues, efficiency, effectiveness, and innovation. In order to do
so, the organization must have the capability to sense the signals
of change accurately, it must do so in good time so that it can take
the right actions, and it must process the signals to create
Unit 18: Learning and Organisational Strategy
243
capabilities to face the changes. This capability has also been called,
Notes
dynamic capabilities’. Dynamic capabilities in organizations are
based on a few simple concepts:
___________________
• Organizations don’t learn, people learn.
___________________
• Most innovation is about small scale problem solving.
___________________
• Ability to think creatively, is man’s standard equipment.
___________________
• With every pair of hands, we get a brain free.
___________________
• Repeated pattern of small improvements can result in savings.
___________________
These concepts become powerful tools to create dynamic capabilities.
When used properly, they also create the ability of the organization ___________________
to change its learning with changing environmental conditions and
___________________
to create value out of this new learning.
___________________
The concept of continuous improvement in core capabilities is the
basis of learning organizations. Core capabilities have to be ___________________
continuously redefined and realigned with changes in the business
environment. This ability can be built only when organizations are
willing to unload the burden of past experience when it interferes
in receiving and processing new knowledge, the ability of the
organization to break defensive routines, the ability to overcome
tunnel vision, and unbound the bounded rationality that comes in
the way of generating organizational capabilities.
John Dewey (1859–1952), an influential thinker on education in the
twentieth century, said “All learning is a continual process of
discovering insights, inventing new possibilities for action, producing
the actions, and observing the consequences leading to insights.”
Check Your Progress

Fill in the blanks:
1. The ideal organization needs to be seen not as a stable hierarchy, but
as an adaptive, continually changing ...................... .
2. The very idea of a learning organization is a ..................... .
Organizational Learning
Every organization would like to build on its capabilities. In order
to do so, it has to keeping learning. There are at least two
fundamental dimensions of organizational knowledge:
• The Conceptual, and
• The Enactive.
244
The enactive knowledge is embedded in routines, policies and
Notes
procedures, longstanding organizational structures. In general, “the
way we do things around here”, that embody past learnings into
___________________
constraints and guidelines for present actions is “enactive”. It is
___________________ “enactive” because it directly shapes people’s actions. The conceptual
form of memory questions the enactive knowledge and captures the
___________________
reasons why these procedures, structures, and policies made sense
___________________ in the first place.
___________________ Traditional organizations build on their enactive knowledge base

and often ignore their conceptual knowledge. The central task of
___________________
management in a learning organization is to continually build the
___________________ knowledge base, both conceptual and the enactive. The aim should
be to encourage processes which unlock the knowledge of individuals,
___________________ and encourage the sharing of information and knowledge, so that
___________________ each individual becomes sensitive to changes occurring around them
and contributes to the identification of opportunities and required
___________________ changes and the organization builds on its conceptual knowledge
base.
The ‘conceptual’ organization is capable of taking a holistic view of
its environment rather than being reliant on partial, filtered
information from its various functions. There is an absence of power
plays and blocking routines, so that a shared vision of the future is
created and reinforced by mutual support by organizational
members. The people making critical decisions develop synergy
between those decisions, surfacing assumptions and the reasoning
behind decisions. Such an organization is creative and continually
changing, and it will be able to cope with the ambiguity and
contradictions it is likely to face.
Experience
Experiment
LEARNING Reflection
Concept
Figure 18.1: The Learning Cycle
The capabilities required to discover insights and invent new

possibilities for action are possible if the learning process can be
captured and integrated into the organization. Organizations have
a choice as far as learning is concerned, they can ignore the signals
245
or they can undertake planned and systematic learning. This is
Notes
reflected by the learning cycle shown in Figure 18.1 which shows
the way organizations acquire and deploy knowledge with a high
___________________
chance of success.
___________________
Learning can be considered as a single loop system or a double loop
system. The simplest model of organizational learning is a single ___________________
loop learning process. This is also called ‘adaptive learning’. In
___________________
single loop learning, the organization reviews the performance
against targets and takes corrective action. It does not result in the ___________________
sharing of experience. This calls for some level of learning for the
___________________
organization.
___________________
Double loop learning occurs when organizations challenge the
governing assumptions. Such methods of learning are benchmarking, ___________________
structured audits and learning networks. These are often considered
as double loop systems. This is because the experience is shared or ___________________
documented. ___________________
The learning cycle is shown in Table 18.1. This table shows the
differences between single loop learning, which is reflected as post
project reviews in the table, and double loop learning which is shown
the remaining three rows. Though single loop learning means that
they address a problem when it is detected, even in the case of
single loop learning there is requirement for evaluation and review
against the objectives and targets.
Table 18.1: Learning Mechanisms
Reflection Concept Experiment Experience
Post Project Theories and Testing and Capture

Reviews model prototyping experience
Benchmarking New structures R&D activities Sharing

and process experience
designs
Structured Formal planning Designed Documentation

audits reviews experiments
Learning Pilot projects Measurement Display

networks measurement
The learning ability of an organization is limited by a number of

factors. The most common limitation is the failure to define the
problem. Problem is defined with problem solving capabilities.
Organizations often lack either the time or the ability of exploration.
Exploration is another very important requirement for organizational
learning.
246
Notes Identify
___________________
___________________ Review Define
___________________ Problem Solving

Cycle
___________________
___________________ Implement Explore
___________________
___________________ Select
___________________
Figure 18.2: Problem Solving Cycle
___________________
Figure 18.2 shows the problem solving cycle. Problem solving attitude
___________________ is a very critical requirement for learning organizations. Some of
the ways in which problem solving attitude can be enhanced is by
providing training. In addition developing a problem solving attitude,
the organization should develop the exploration process, and measure
and document it. In the absence of these capabilities, there is a
tendency in many organizations to repeat well tried solutions and
have limited perspectives in problem solving and exploration.
The different stages of organizational learning and their impact
with time are shown in Figure 18.3. It is shown in the figure that
in the ‘fire fighting mode’ there is an early impact and then the
impact remains constant with time. The impact grows with time
with the different modes of leaning and the maximum impact is
when the organization is willing to innovate and experiment.
Innovation
and
Experimentation
Improving
Impact the
Process
Process
under
Control
Firefighting
Mode
Time
Figure 18.3: Stages of Organizational Learning
The process has to be formalized and made acceptable; this is an

important part of organizational learning.
247
Some of the ways in which organizational learning can be enhanced
Notes
is by the organization developing a learning process, and measuring
and documenting the learning. The process has to be formalized
___________________
and made acceptable; this is an important part of organizational
learning. There has to be an urge in the organization to experiment, ___________________
display itself and challenge itself. In other words, it should go out
___________________
looking for trouble, use different perspectives and provide itself
time to reflect. ___________________
New concepts that add to the learning capability of the organization ___________________
are finding acceptance. The learning organization is a concept that
___________________
has being accepted in business organizations today, especially in
progressive organizations and knowledge based industries. ___________________
The learning organization is based on the principle that ___________________

organizations need to question the existing framework in which
decisions take place. Rather than regarding experience as something ___________________
that is fixed, managers need to continually challenge experiences ___________________
from the world around them and from the different experiences of
those around them. This facilitates organizational learning and
allows them to develop into organizations that are pluralistic and
learn to welcome conflicting ideas and views so that debate and
experimentation can be established as a norm and organizational
capabilities can be enhanced and built upon.
Check Your Progress

1. Every organization would like to build on its capabilities.
2. Learning can not be considered as a single loop system or a double
loop system.
Knowledge Management
Peter Drucker said, “Knowledge has become the key economic
resource and the dominant - and perhaps even the only - source of
competitive advantage.” Effective management of knowledge, change,
and innovation are central or “core competencies” that must be
mastered for organizations to succeed. In that sense, managing
knowledge has always existed in one form or another. Examples
include on-the-job peer discussions, formal apprenticeship, discussion
forums, corporate libraries, professional training and mentoring
programs. However, with computers becoming more widespread in
the second half of the 20th century, specific adaptations of technology
such as knowledge bases, expert systems, and knowledge repositories
have further enhanced the process.
248
It is profoundly important in getting people to think about new
Notes
ways of managing organizations rather than creating new
organizational structures. Knowledge can be the basis for this
___________________
transformation. You have to start with new ideas and concepts
___________________ before you can change people’s actions and behaviour. With the
insight and inspiration that these ideas give, there’s a very great
___________________
challenge in figuring out how to operationalize them. This challenge
___________________ is met through knowledge management.
___________________ Knowledge Management (KM) is emerging as one of the management

tools to gain competitive advantage. For example, a bond trader
___________________
who is the first to understand an opportunity to arbitrage securities
___________________ across two different markets can earn extraordinary returns until
other traders figure out the secret. A company thoroughly familiar
___________________ with how to compete in a particular geographic market—China,
___________________ say—has huge advantages over competitors lacking that familiarity.
___________________ Put simply, there is great value in sharing, across a whole company,
proprietary insights into customers, competitors, products,
production techniques, emerging research, and the like. It is one of
the most important set of practices and policies that an organization
can adopt, marking a significant step in an enterprise’s evolution
toward becoming a global, learning organization that can survive in
the knowledge based economy.
There is a broad range of thought on Knowledge Management with
no unanimous definition. The approaches vary by author and school.
Knowledge Management may be viewed from each of the following
perspectives:
• Techno-centric: A focus on technology, ideally those that
enhance knowledge sharing/growth.
• Organizational: How does the organization need to be
designed to facilitate knowledge processes? Which organizations
work best with what processes?
• Ecological: Seeing the interaction of people, identity,
knowledge and environmental factors as a complex adaptive
system.
Knowledge management processes are considered to be at the
intersection of technology, organizational structures, and cognitive-
based strategies. It is a concept based on dynamism, as it keeps
changing all the time. Knowledge is a mix of experience, values,
contextual information and expert insight that provides a framework
for evaluating and incorporating new experiences and information.
It originates and is applied in the minds of people who learn. In

organizations, it often becomes embedded not only in documents or
repositories but also in organizational routines, processes, practices,
249
and norms. For example, if case technology becomes the tool, the
Notes
organizational structure becomes the context, and the knowledge
becomes basis for advancement and organizational culture the ___________________
vehicle to carry it forward.
___________________
Implementations of “knowledge management”, therefore, has many
aspects which range from technology-driven methods of accessing, ___________________
controlling, and delivering information to the architecture of the ___________________
organization, and also to massive efforts to change corporate culture.
The type of knowledge that organizations are forced to manage is, ___________________
therefore, of central importance to organizations. ___________________
The function of knowledge management would be little more than ___________________
compliance if all knowledge were codified and formal (explicit). In
practice, of course, companies find it far more difficult than do ___________________
individuals to take advantage of all this knowledge. An individual’s ___________________
knowledge is self-contained, always available. The reality is that
much of the information in organizations is held within the personal ___________________
and collective experiences of the workforce; it is tacit knowledge.
Tacit knowledge is unarticulated knowledge that is in a person’s

head that is often difficult to describe and transfer. It includes
lessons learned, know-how, judgment, rules of thumb, and intuition,
etc. It is the key characteristic of team-based learning organizations.
Explicit knowledge is generally easy to access and manage, but
tacit knowledge often defies capture given its highly personal and
subjective, but critical, nature. The role of knowledge management
to ensure that individual learning becomes organizational learning.
There are four modes based on conversion of explicit and tacit
knowledge into organizational learning:
• Socialization,
• Externalization,
• Combination, and
• Internationalization.
Socialization is a process of sharing mental models and technical

skills through shared experiences. Externalization is the process of
articulating tacit knowledge into explicit concepts of languages.
Combination and systemization of concepts through symbols such

as language or figures is achieved through media. Finally,
internalization is the conversion process from explicit into tacit
knowledge.
250
Notes Tacit Tacit
___________________ Socialization Externalization
___________________ Tacit Explicit
___________________
___________________
___________________
Tacit
___________________ Explicit
___________________ Combination
Internalization
___________________
Explicit Explicit
___________________
Figure 18.4: Conversion to Organization Knowledge
___________________
In the ultimate analysis, knowledge management is jointly a goal
and a process. As a goal, knowledge management is focused on
sharing information for the benefit of the organization. As a process,
it is based on the ability of all members of the organization to add
value to the basic business processes through the creation,
communication, codification, and coordination of both explicit and
tacit knowledge. In order to be successful in this effort, the specific
objectives of any knowledge management have to be:
• To create knowledge repositories to store knowledge and
information,
• To improve knowledge access or transfer,
• To enhance the knowledge environment to facilitate creation,
transfer, and use of knowledge, and
• To manage knowledge as an asset and to recognize its value.
In today’s context, most work is information based, organizations
compete on the basis of knowledge and products and services are
increasingly complex, endowing them with a significant information
component. In addition, knowledge and information have now become
the medium in which business problems occur. Organizations need
means for knowledge acquisition, knowledge creation, and finally
knowledge application.
This view is creating an increasing recognition that information

and knowledge have to be treated as corporate assets, and that
businesses need strategies to manage those assets as managing
knowledge represents the primary opportunity for achieving
substantial savings, significant improvements in human
251
performance, and competitive advantage. Some additional business
Notes
factors, because of which knowledge management is being considered
an important component of strategy, include the following: ___________________
• Marketplaces are increasingly competitive and the rate of
___________________
innovation is rising.
___________________
• Reductions in staffing create a need to replace informal
knowledge with formal methods. ___________________
• Competitive pressures reduce the size of the work force that ___________________
holds valuable business knowledge.
___________________
• The amount of time available to experience and acquire
knowledge has diminished. ___________________
• Early retirements and increasing mobility of the work force ___________________

lead to loss of knowledge. ___________________
• There is a need to manage increasing complexity as small
___________________
operating companies are trans-national sourcing operations.
• Changes in strategic direction may result in the loss of
knowledge in a specific area.
These changes make the need for life-long learning for a business
organization an inescapable reality. Companies have to be much
more flexible, more responsive, and make better decisions — because
even small mistakes can be fatal to them. It’s not essential for only
large companies but also for small companies who need formal
approaches to knowledge management because they do not have
the market leverage, inertia, and resources that big companies do.
Knowledge Organizations
Effective knowledge management begins with drawing a distinction
between information and knowledge, because these terms are often
used interchangeably. If information is the raw material—the
input—used to make decisions, knowledge is what provides the
context for how people think.
The idea of applying market principles to knowledge-management

activities is relatively new. Therefore, there are few examples of
companies that have fully adopted the concept. Among those that
have, however, the potential appears to be great. An example is
J.M. Huber, a large privately-owned US company.
J. M. Huber works in three diversified business sectors. In The idea

behind this move was to capture the lessons learned from projects
and events and use this knowledge to improve its future
performance. Members of project teams had to conduct post-project
meetings to answer three basic questions:
252
• What happened?
Notes
• Why did it happen?
___________________
• What can we do about it?
___________________
At the end of the meeting, the team emerged with an action plan
___________________ and a list of lessons learned to improve future performance. These
findings were submitted to a common electronic-document library
___________________
accessible to all employees through a portal.
___________________
They found that lessons may be specific to a particular business
___________________ sector especially when they pertain to areas such as manufacturing
processes and procedures. However, other lessons - for instance,
___________________ those pertaining to strategy, safety, or marketing – were generally
___________________ useful across all three business sectors.
___________________ This made them decide to encourage this process. As a result, today
the process has become part of Huber’s culture. Its database contains
___________________ more than 8,000 reports. Managers can reach knowledge seekers
interested in the same subjects. In addition, this has also become
a means of advancement in the organization as it simultaneously
builds their reputation with colleagues in other divisions and with
top management.
Once people in the organization realized the importance as well
advantages that could accrue to them, the self-interest of the
knowledge creators and knowledge seekers took over and reinforced
this within the culture of the organization. Huber’s management
says that this exchange of knowledge has been instrumental in
improving company performance significantly.
Check Your Progress

Fill in the blanks:
1. ................. can be the basis for this transformation.
2. .............. knowledge is unarticulated knowledge that is in a person’s
head that is often difficult to describe and transfer.
Summary
The very idea of a “learning organization” is a vision. In essence,
the vision of a learning organization is one that is continually
expanding its capacity to create its future. This is the ideal for an
organization. It needs to be seen not as a stable hierarchy, but as
an adaptive, continually changing ‘learning organization’.
The fundamental building block for learning organizations is
partnership — the relationships formed by small numbers of people
who share commitment and responsibility toward building a new
253
type of organization. Such organizations have the capability to sense
Notes
the signals of change accurately, it must do so in good time so that
it can take the right actions, and it must process the signals to
___________________
create capabilities to face the changes. This capability has also
been called, ‘dynamic capabilities’. ___________________
Dynamic capabilities can be built only when organizations are willing ___________________
to unload the burden of past experience when it interferes in
___________________
receiving and processing new knowledge, the ability of the
organization to break defensive routines, the ability to overcome ___________________
tunnel vision, and unbound the bounded rationality that comes in
___________________
the way of generating organizational capabilities.
___________________
There are at least two fundamental dimensions of organizational
knowledge. These are conceptual and enactive knowledge. The ___________________
central task of management in a learning organization is to
continually build the knowledge base, both conceptual and the ___________________
enactive. Knowledge Management (KM) is emerging as one of the ___________________
management tools to gain competitive advantage. Knowledge
management processes are considered to be at the intersection of
technology, organizational structures, and cognitive-based strategies.

1. “In essence, the vision of a learning organization is one that is
continually expanding its capacity to create its future.” Discuss
critically.
2. What are the dimensions of learning organization?
3. “Traditional organizations build on their enactive knowledge
base and often ignore their conceptual knowledge.” Do you
agree with this statement? If yes, give reasons.
4. Discuss The Learning Cycle.
5. Explain the Learning Mechanisms.
6. Throw some light on the stages of organizational learning.
7. What do you understand by knowledge management?
8. Why is difficult to introduce KM in most organizations?
255
Unit 19 Notes
Behavioural Strategic Implementation ___________________
___________________
___________________
___________________
\ Stakeholders and Strategy
___________________
\ Strategic Leadership
\ Leadership Approaches ___________________
\ Corporate Culture and Strategic Management
___________________
\ Social Responsibility and Strategic Management
___________________
Introduction ___________________
Successful strategy formulation does not at all guarantee successful

strategy implementation. It is always more difficult to actually carry
out something than to say you are going to do it. Strategy
implementation requires support, discipline, motivation and hard
work from all managers and employees. Managers should pay careful
attention to a number of key issues while executing the strategies.
Chief among them are how the organisation should be structured
to put its strategy into effect and how such variables as leadership,
power and organisational culture should be managed to enable
employees to work together while implementing the firm’s strategic
plans. Organisations in stable, predictable environments often
become relatively tall, with many hierarchical levels and narrow
spans of control. On the other hand, companies in dynamic, rapidly
changing environments usually adopt flat structures with few
hierarchical levels and wide spans of control.
Stakeholders and Strategy

A firm’s stakeholders are the individuals, groups, or other
organisations that are affected by and also affect the firm’s decisions
and actions. Depending on the specific firm, stakeholders may
include government, employees, shareholders, suppliers, distributors,
the media and even the community in which the firm is located
among many others.
• When it comes to corporate mission values stakeholders will
maximise the value for all stakeholders, as opposed to
shareholders who only maximise the value for themselves.
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• Stakeholders also play a role in the decision making process in
Notes
a business. Although since employees and customers are
included in being stakeholders they too are considered when it
___________________
comes to decision making.
___________________ • When it comes to accountability, it does not just come down to
___________________ being accountable to themselves. Accountability lies with the
customer, suppliers, government, community and employee
___________________ stakeholders.
___________________ Stakeholder Management
___________________
An organisation needs to have an effective stakeholder management
___________________ system in place, which provides a great support in achieving its
strategic objectives. It interprets and influences both the external
___________________ and internal environments and creates positive relationships with
stakeholders through the appropriate management of their
___________________
expectations and agreed objectives. Stakeholder Management is a
___________________ process and control that must be planned and guided by underlying
principles.
Stakeholder Management, within business or projects, prepares a
strategy that utilises information or intelligence collected during
the following common processes:
• Stakeholder Identification: identify the parties, either
internal or external to organisation, that are affected by the
business. For this purpose, a stakeholder map can be used.
• Stakeholder Analysis: Identify and acknowledge stakeholder’s
needs, concerns, wants, authority, common relationships,
interfaces, and put this information in line within the
Stakeholder Matrix.
• Stakeholder Matrix: Position the stakeholders on a matrix
based on their level of influence, impact or enhancement they
may provide to the business or its projects.
• Stakeholder engagement: Engaging stakeholders does not
seek to develop the project/business requirements, solution or
problem creation, or establishing roles and responsibilities.
The process focuses on knowing and understanding each other,
at the Executive level. It gives an opportunity to discuss and
agree expectations of communication and, primarily, agree a
set of Values and Principles that all stakeholders will abide
by.
• Communicating Information: expectations are established
and agreed for the manner in which communications are
managed between stakeholders - who receives communications,
when, how and to what level of detail. Protocols may be
established including security and confidentiality classifications.
Unit 19: Behavioural Strategic Implementation
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An organisation can follow these basic tips to manage their
Notes
stakeholders effectively:
• The organisation must prioritise business and stakeholders’ ___________________
needs. In order to feel like the organisation is still yours without
___________________
offending or losing big stakeholders that contribute money to
keep your company in business, the organisation needs to think ___________________
strategically and balance out business needs and stakeholders’
___________________
needs. This means that they have to capture business processes
and link them to projects software and capabilities. They will ___________________
also need to modify their prioritisation as their understanding
of the application and stakeholder needs change. They also ___________________
need to take into consideration the customer needs as well by ___________________
involving them in the project.
___________________
• The organisation should develop the growth activities around
stakeholder needs. By leveraging certain developments or user ___________________
centre designs, an organisation can accept the fact that
___________________
stakeholder needs will change over time. As you business
changes so will the needs of the stakeholders and they will
need to also meet their changing needs.
• The organisation should understand the available assets. By
understanding what assets are available to the business, they
can also balance asset reuse with stakeholders needs. Some
examples of business assets would be legacy applications,
reusable components, etc.
Check Your Progress

Fill in the blanks:
1. ................... Management is a process and control that must be
planned and guided by underlying principles.
2. The organisation should understand the available .................... .
Strategic Leadership
Leadership is the art and process of influencing people so that they
will strive willingly and enthusiastically towards achievement of
the organisation’s purpose. Specific styles of leadership are often
associated with specific approaches to the crafting and execution of
strategies. The organisation’s purpose and strategy do not just drop
out of a process of discussion, but are actively directed by an
individual with strategic vision, whom we call “strategic leader”.
Strategic leadership establishes the firm’s direction by developing
and communicating a vision of the future and inspiring organisation
members to move in that direction. Unlike managerial leadership
which is generally concerned with the short-term day-to-day
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activities, strategic leadership is concerned with determining the
Notes
firm’s strategy, direction, aligning the firm’s strategy with its culture,
modelling and communicating high ethical standards, and initiating
___________________
changes in the firm’s strategy when necessary. The most successful
___________________ leadership is not just to define the vision and mission of an
organisation in a cold, abstract manner but to communicate trust,
___________________
enthusiasm and commitment to strategy.
___________________
Example: Bill Gates of Microsoft, Akio Morita of Sony, Jack Welch
___________________ of General Electric, Gianni Agnelli of Fiat, Narayana Murthy of
Infosys, are all examples of strategic leaders who have guided and
___________________
shaped the direction of their companies.
___________________
It is rightly said:
___________________
“Visionary leadership inspires the impossible: fiction becomes truth”.
___________________
Strategic leadership thus enhances prospects for the organisation’s
___________________ long-term success, while at the same time maintaining its short-
term financial stability.
Role of a Strategic Leadership

Leaders play a central role in performing six critical and
interdependent activities in implementation of strategies:
• Clarifying strategic intent: Leaders motivate employees to
embrace change by setting forth a clear vision of where the
business’s strategy needs to take the organisation.
• Setting the Direction: Leaders set the direction and scope of
the organisation through formulating appropriate corporate and
business strategies.
• Building the organisation: Since leaders are attempting to
embrace change, they are often required to rebuild their
organisation to align it with the ever – changing environment
and needs of the strategy. And such an effort often involves
overcoming resistance to change and addressing problems like
the following:
❖ Ensuring a common understanding about organisational
priorities.
❖ Clarifying responsibilities among managers and
organisational units.
❖ Empowering managers and pushing authority lower in the
organisation.
❖ Uncovering and remedying problems in coordination and
communication across the organisation.
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❖ Gaining personal commitment from managers to a shared
Notes
vision.
❖ Keeping closely connected with “what’s going on in the ___________________
organisation”.
___________________
• Shaping organisational culture: Leaders play a key role in
___________________
developing and sustaining a strategy supportive culture.
Leaders know well that the values and beliefs shared ___________________
throughout their organisation will shape how the work of the
___________________
organisation is done. And when attempting to embrace
accelerated change, reshaping their organisation’s culture is ___________________
an activity that occupies considerable time for most leaders.
___________________
• Creating a learning organisation: Leaders must also play
___________________
a central role in creating a learning organisation. Learning
organisation is one that quickly adapts to change. The five ___________________
elements central to a learning organisation are:
___________________
❖ Inspiring and motivating people with a mission or purpose.
❖ Empowering people at all levels throughout the organisation.
❖ Accumulating and sharing internal knowledge.
❖ Gathering external information.
❖ Challenging the status quo to stimulate creativity.
• Instilling ethical behaviour: Ethics may be defined as a
system of right and wrong. Business ethics is the application
of general ethical standards to commercial enterprises. A leader
plays a central role in instilling ethical behaviour in the
organisation.
The ethical orientation of a leader is generally considered to be a

key factor in promoting ethical behaviour among employees. Leaders
who exhibit high ethical standards become role models for others in
the organisation and raise its overall level of ethical behaviour. In
essence, ethical behaviour must start with the leader before the
employees can be expected to perform accordingly.
Check Your Progress

Fill in the blanks:
1. ................. is the art and process of influencing people so that they
will strive willingly and enthusiastically towards achievement of the
organisation’s purpose.
2. Leaders play a central role in performing ..................... critical and
interdependent activities in implementation of strategies.
260
Notes
Leadership Approaches
Research has found that some leadership approaches are more
___________________
effective than others for bringing about change in organisation.
___________________ Three types of leadership that can have a substantial impact are
transactional, transformational and charismatic leadership. These
___________________ types of leadership are briefly explained below:
___________________
Transactional Leadership
___________________
Transactional leaders clarify the role and task requirements of
___________________ subordinates, initiate structure, provide appropriate rewards, and
try to be considerate to and meet the social needs of subordinates.
___________________ The transactional leader’s ability to satisfy subordinates may
improve productivity. Transactional leaders excel at management
___________________
functions. They are hardworking, tolerant, and fair minded. They
___________________ take pride in keeping things running smoothly and efficiently.
Transactional leaders often stress the impersonal aspects of
___________________
performance, such as plans, schedules and budgets. They have a
sense of commitment to the organisation and conform to
organisational norms and values. In short, transactional leaders
use the authority of their office to exchange rewards such as pay
and status for employees and generally seek to enhance an
organisation’s performance steadily, but not dramatically. In other
words, transactional leadership is important to all organisations,
but leading change requires a different approach, viz.
transformational leadership.
Transformational Leadership
Transformational leaders have a special ability to bring about
innovation and change. They encourage the followers to question
the status quo. They have the ability to lead change in the
organisation’s mission, strategy, structure and culture as well as
promote innovation in products and technologies. Transformational
leaders do not rely solely on tangible rules and incentives to control
specific transactions with followers. They focus on intangible
qualities such as vision, shared values, and ideas to build
relationships and find common ground to enlist in the change
process.
Charismatic and Visionary Leadership

Charismatic leadership goes beyond transactional and
transformational leadership. Charisma is a “fire that ignites
followers’ energy and commitment, producing results above and
beyond the call of duty”. The charismatic leader has the ability to
inspire and motivate people to do more than what they would
normally do, despite obstacles and personal sacrifice. Followers
transcend their own self-interests for the sake of the leader.
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Charismatic leaders are often skilled in the art of visionary
Notes
leadership. A vision is an attractive, ideal future that is credible
yet not readily attainable. Visionary leaders see beyond current
___________________
realities and help followers believe in a brighter future. They speak
to the hearts of their followers, letting them be part of something ___________________
bigger than themselves. Thus, visionary leaders have a strong vision
___________________
for the future and can motivate others to help realise it. They have
an emotional impact on subordinates because they strongly believe ___________________
in the vision and can communicate it to others in a way that makes
___________________
the vision real, personal and meaningful to others.
___________________
When charismatic and visionary leaders respond to organisational
problems, they can have a powerful, positive influence on ___________________
organisational performance.
___________________
Check Your progress ___________________

___________________
1. Two types of leadership that can have a substantial impact.
2. Charismatic leaders have a special ability to bring about innovation
and change.
Corporate Culture and Strategic Management

A company’s culture is manifested in the values and business
principles that management preaches and practices.
Example: Culture is manifested in:
• Corporate stories
• Attitudes and behaviours of employees
• Core values
• Organisation’s politics
• Approaches to people management and problem solving
• Relationships with stakeholders; and
• Atmosphere that permeates its work environment.
An organisation’s culture is similar to an individual’s personality.
Just as an individual’s personality influences the behaviour of an
individual, the shared assumptions (beliefs and values) among a
firm’s members influence the opinions and actions within that firm.
Quite often, the elements of company culture originate with a
founder or other early influential leader who articulates the values,
beliefs and principles to which the company should adhere. These
elements then get incorporated into company policies, a creed or
262
value statement, strategies and operating practices. Over time, these
Notes
values and practices become shared by company employees and
managers. Culture is thus perpetuated as:
___________________
• New leaders act to reinforce them.
___________________
• New employees are encouraged to adopt and follow them.
___________________
• Stories of people and events told and retold.
___________________
• Organisation members are honoured and rewarded for
___________________ displaying cultural norms.
___________________ Influence of Culture on Behaviour
___________________ An organisation’s culture can exert a powerful influence on the
___________________ behaviour of all employees. It can, therefore, strongly affect a
company’s ability to adopt new strategies. A problem for a strong
___________________ culture is that a change in mission, objectives, strategies or policies
is not likely to be successful if it is in opposition to the culture of
___________________
the company. Corporate culture has a strong tendency to resist
change because its very existence often rests on preserving stable
relationships and patterns of behaviour.
Example: The male-dominated Japanese centred corporate culture
of the giant Mitsubishi Corporation created problems for the
company when it implemented its growth strategy in North America.
The alleged sexual harassment of its female employees by male
supervisors resulted in lawsuits and a boycott of the company’s
automobiles by women activists.
There is no one best corporate culture. An optimal culture is one
that best supports the mission and strategy of the company. This
means that, like structure and leadership, corporate culture should
support the strategy. Unless strategy is in complete agreement with
the culture, any significant change in strategy should be followed
by a change in the organisation’s culture. Although corporate cultures
can be changed, it may often take long time and requires much
effort. A key job of management therefore involves “managing
corporate culture”. In doing so, management must evaluate what a
particular change in strategy means to the corporate culture, assess
if a change in culture is needed and decide if an attempt to change
culture is worth the likely costs.
Creating Strategy Supportive Culture

Once a strategy is established, it is difficult to change. It is the
strategy-maker’s responsibility to select a strategy compatible with
the organisation’s prevailing corporate culture. If it is not possible,
once a strategy is chosen, it is the strategy implementer’s
responsibility to change the corporate culture that hinders effective
execution of a chosen strategy.
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Changing a Problem Culture
Notes
Changing a company’s culture to align it with strategy is one of the
toughest management tasks. This is because the deeply held values ___________________
and habits are heavily anchored, and people cling emotionally to ___________________
the old and familiar. It takes concerted management action over a
period of time to root out certain unwanted behaviours and instil ___________________
behaviours that are more strategy- supportive. Changing culture
___________________
requires competent leadership at the top. Great power is needed to
force major cultural change, to overcome the spring back resistance ___________________
of entrenched cultures, and great power normally resides only at
___________________
the top.
___________________
Changing a problem culture involves the following four steps:
___________________
Step 1: Identify facts of present culture that are strategy –
supportive and those that are not. ___________________
Step 2: Clearly define desired new behaviours and specify key ___________________
features of “new” culture.
Step 3: Talk openly about problems of present culture, and how
new behaviours will improve performance.
Step 4: Follow with visible, aggressive actions to modify culture.
Managing Culture Change

As already explained in earlier sections, the culture that an
organisation wishes to develop is conveyed through rites, rituals,
myths, legends, actions etc. Only with bold leadership and concerted
action on many fronts can a company succeed in tackling a major
cultural change. Top leadership should play a key role in
communicating the need for a cultural change and personally
launching actions to prod the culture into better alignment with
strategy.
Changing culture requires both (a) Symbolic actions and (b)
Substantive actions. They require serious commitment on the part
of the top management.
The following measures are helpful in building a strategy supportive
culture:
• Emphasise key themes or dominant values: Leaders must
emphasise dominant values through internal company
communications. They must repeat at every opportunity the
messages of why cultural change is good for the company.
• Stories and legends: Leaders must tell stories, anecdotes
and legends in support of basic beliefs. Organisational members
must identify with them, and share those beliefs and values.
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• Rewards: Visibly praising and generously rewarding people
Notes
who display new cultural norms will slowly change the culture.
___________________ • Recruiting and hiring: New managers and employees are to
be recruited who have the desired cultural values.
___________________
• Revising policies and procedures in ways that will help the
___________________ new culture.
___________________ • Leading by example: If the organisation’s strategy involves
low-cost leadership, senior management must display in their
___________________
own actions and decisions, inexpensive decorations in the
___________________ executive suites, conservative expense accounts and enter-
tainment allowances, lean corporate allowances, few executive
___________________ perks, and so on.
___________________ • Ceremonial events: In ceremonial functions, companies must
honour individuals and groups who exhibit cultural norms and
___________________
reward those who achieve strategic milestones.
___________________
• Group gatherings: Top management must participate in
employee training programmes etc. to stress strategic priorities,
values, ethical principles and cultural norms.
Every group gathering must be seen as an opportunity to repeat
and ingrain values, praise good deeds, reinforce cultural norms and
promote changes that assist strategy implementation. Thus, best
companies and best executives expertly use symbols, role models,
and ceremonial occasions to achieve the strategy-culture fit.
Managing Culture Clash

When merging or acquiring another company, top management must
give some consideration to a potential clash of corporate cultures.
Integrating cultures is a top challenge to a majority of companies.
It is dangerous to assume that the firms can simply be integrated
into the same reporting structures. The greater the gap between
the cultures of the two firms, the faster executives in the acquired
firm quit their jobs, and valuable talent is lost.
There are four general methods of managing two different cultures.
They are: (1) Integration (2) Assimilation (3) Separation, and
(4) Deculturation.
• Integration involves merging the two cultures in such a way
that separate cultures of both firms are preserved in the
resulting culture.
• Assimilation: Here, the acquired firm willingly surrenders its
culture and adopts the culture of the acquiring company.
• Separation: Here there is a separation of the two companies’
cultures. They are structurally separated, without cultural
exchange.
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• Deculturation: This involves imposition of the acquiring firm’s
Notes
culture forcefully on the acquired firm. This often results in
much confusion, conflict, resentment and stress.
___________________
Personal Values and Ethics ___________________
Values, personal values, and core values all refer to the same thing. ___________________
They are desirable qualities, standards, or principles. Values are a
person’s driving force and influence their actions and reactions. ___________________
Ethics is defined as “the discipline dealing with what is good and ___________________
bad, and right and wrong, or with moral duty and obligation.” ___________________
Ethics refers to the moral principles and values that govern the ___________________
behaviour of a person or group. Ethics helps us in deciding what is
good or bad, moral or immoral, fair or unfair in conduct and decision- ___________________
making. In other words, ethics serve as a “moral compass” to
___________________
guide our actions.
___________________
There are many sources for an individual’s ethics. These include
family background, religious beliefs, community standards and
expectations etc.
Importance of Ethics
There has been a growing interest in corporate ethics over the past
several years. This is perhaps because of a spate of recent corporate
scandals at such firms as Enron, Tyco, Texaco etc. Without a strong
ethical culture, the chances of ethical crises occurring in companies
cannot be ruled out. Due to this, companies face enormous costs in
terms of financial and reputational loss as well as erosion of human
capital and relationships with suppliers, customers, society at large
and governmental agencies.
An ethical organisation is driven by ethical values and integrity.
Such values shape the search for opportunities, the design of systems
and the decision-making processes of the organisation. They provide
a common frame of reference that serves as a unifying force across
different functions and employee groups. Organisational ethics define
what a company is and what it stands for.
The potential benefits of an ethical organisation are many. A strong
ethical orientation can have a positive effect on employee
commitment and motivation to excel. This is particularly important
in today’s knowledge-intensive organisations, where human capital
is critical in creating value and competitive advantage. An ethically
sound organisation can also strengthen its bonds among its suppliers,
customers and governmental agencies.
The ethical orientation of a leader is generally considered to be a
key factor in promoting ethical behaviour among employees. Leaders
266
who exhibit high ethical standards become role models for others in
Notes
the organisation and raise its overall ethical behaviour. In essence,
ethical behaviour must start with the leader, who plays a central
___________________
role in instilling ethical behaviour in the organisation.
___________________
Some may think that ethics is a question of personal scruples. But
___________________ ethics is as much an organisational issue as a personal issue. Leaders
who fail to provide leadership in establishing proper systems and
___________________
controls cannot create an ethical organisation. Unethical business
___________________ practices reflect the values, attitudes and behavioural patterns that
define an organisation’s operating culture. Thus ethics plays a critical
___________________
role in organisations.
___________________
Approaches to Ethics
___________________
When an ethical dilemma arises, there are four approaches to guide
___________________ our action. These four approaches are:
___________________ • Utilitarian approach
• Individualism approach
• Moral – rights approach
• Justice approach
Utilitarian Approach
According to this approach, moral behaviour is one that produces
the greatest good for the greatest number.
Individualism Approach
According to this approach, acts are moral when they promote the
individual’s best long-term interests, which ultimately lead to the
greater good.
Moral – Rights Approach

According to this approach, the fundamental rights and liberties
should be respected in all decisions. Thus, an ethically correct
decision is one that best maintains the rights of those people affected
by it. Six moral rights should be considered during decision-making:
• Right of free consent
• Right of privacy
• Right of freedom of conscience
• Right of free speech
• Right to due process
• Right to life and safety
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To make ethical decisions, managers need to avoid interfering with
Notes
the rights of others.
Justice Approach ___________________
According to this approach, moral decisions must be based on equity, ___________________
fairness and impartiality. Four types of justices are of concern to ___________________

managers:
___________________
• Distributive justice requires that individuals should not be
treated differently on the basis of race, sex, religion or national ___________________
origin. Individuals who are similar should be treated similarly.
___________________
Thus, men and women should not receive different salaries if
they are performing the same job. ___________________
• Procedural justice requires that rules be administered fairly. ___________________

Rules should be clearly stated and be consistently and
impartially administered. ___________________
• Compensatory justice requires that individuals should be ___________________

compensated for the cost of their injuries by the party
responsible. Moreover, individuals should not be held
responsible for matters over which they have no control.
• Natural duty principle: This principle reflects a duty to help
others who are in need or danger; duty not to cause unnecessary
suffering; and the duty to comply with the just rules of an
institution.
Building an Ethical Organisation

A firm must have several key elements before it can become a
highly ethical organisation. These elements must be constantly
reinforced in order for the firm to be successful:
Role Models
For good or bad, leaders are role models in their organisation. The
values as well as the character of leaders become transparent to an
organisation’s employees through their behaviour. Leaders must
take responsibility for ethical lapses within the organisation, which
enhances the loyalty and commitment of employees through the
organisation.
Code of Ethics
They are another important element of an ethical organisation.
Such mechanisms provide a statement and guidelines for norms
and beliefs as well as decision–making. They provide employees
with a clear understanding of the ethical standards of the
organisation. Many large companies have developed such codes code
of conduct.
268
Reward and Evaluation Systems
Notes
An appropriate reward and evaluation system should consider both
___________________ the outcomes and the means adopted to achieve the organisational
___________________
goals and objectives. Inappropriate reward systems may cause
individuals to commit unethical acts.
___________________
Policies and Procedures
___________________
Most of the unethical behaviours in organisations could be traced
___________________ to the absence of policies and procedures to guide behaviour. It is
___________________ important to carefully develop policies and procedures to guide
behaviour so that all employees are encouraged to behave in an
___________________ ethical manner. However, it is not enough merely to have policies
___________________
“on the books”. Rather, they must be effectively communicated,
enforced and monitored. The company should also follow sound
___________________ corporate governance practices.
___________________ Ethics Training
The purpose of ethic training is to encourage ethical behaviour.
Companies should provide appropriate training in ethical standards.
It enables managers to align ethical behaviour with organisational
goals.
Ethics Audit
Companies should undertake periodic audits to ensure that proper
ethical standards are being followed by all deportments of the
organisation.
Chief Ethics Officer

Some large corporations appoint a senior officer with the exclusive
responsibility of overseeing the ethical conduct of employees. He
functions like a watchdog on ethics.
Ethics Committee
An ethics committee establishes polices regarding ethical conduct
and resolves major ethical dilemmas faced by the employees of an
organisation. Ethics committee performs such functions as
organisation of regular meetings to discuss ethical issues, identifying
possible violations of the code, enforcing the code, rewarding ethical
behaviour etc.
Ethics Hotline
This is a special telephone line that enables employees to bypass
the proper channel for reporting their ethical dilemmas and
problems. The line is usually handled by an executive also
269
investigates the matter and helps resolve the problems of the
Notes
concerned employees.
___________________
Check Your Progress
___________________
Fill in the blanks:
1. A company’s ................. is manifested in the values and business ___________________
principles that management preaches and practices.
___________________
2. An organisation’s culture is similar to an individual’s ................. .
___________________
Social Responsibility and Strategic Management ___________________
___________________
Corporate social responsibility (CSR) consists of “actions that appear
to further some social good, beyond the interests of the firm” It ___________________
includes such topics as environmental ‘green’ issues, treatment of
employees and suppliers, charitable work and other matters related ___________________
to the community. A brief idea of the areas included in CSR is ___________________
given in figure.
It is important to note that CSR requires firms to go beyond what
the law requires – just doing the minimum required by the law is
not sufficient. “Corporate social responsibility is concerned with the
ways in which an organisation exceeds the minimum obligations to
the stakeholders”.
Corporate Social Responsibility is therefore a company’s duty to
operate its business by means that avoid harm to other stakeholders
and the environment, and also to consider overall betterment of
society in its decisions and actions. The essence of socially responsible
behaviour is that a company should strive to balance its actions to
benefit its shareholders without any adverse impact on other
stakeholders like employees, suppliers, customers, local communities
and society at large, and, further, to proactively mitigate any harmful
effects on the environment its actions and business may have.
Responsibilities of Business
A business organisation has four responsibilities:
• Economic responsibilities: are the most basic responsibilities
of a business firm. This involves the essential responsibility of
business to provide goods and services to society at a reasonable
cost. In discharging that economic responsibility, the company
provides productive jobs to its workforce, pays taxes to central,
state and local governments.
• Legal responsibilities: reflect the firm’s obligation to comply
with the laws that regulate business activities, especially in
the areas of consumer safety and pollution control.
270
• Ethical responsibilities: reflect the company’s notion of right
Notes
or proper business behaviour. Ethical responsibilities go beyond
legal requirements. Firms are expected, though not legally
___________________
bound, to behave ethically.
___________________
• Discretionary responsibilities: are those that are voluntarily
___________________ assumed by business organisations that adopt the citizenship
approach. They support ongoing charities, public- service
___________________ advertisement campaigns, donations, medical camps, public
___________________ welfare activities etc. A commitment to full corporate
responsibility requires strategic managers to attack social
___________________ problems with the same zeal in which they tackle business
___________________
problems.
___________________
Business managers should keep in mind that economic and legal
responsibilities are mandatory, ethical responsibilities are expected,
___________________ and discretionary responsibilities are desirable.
___________________ The above four responsibilities are listed in order of priority. A
business firm must first make a profit to satisfy its economic
responsibilities. A firm must also follow the laws as a good corporate
citizen. Carrol, however, argues that business firms have obligations
beyond the economic and legal responsibilities; that firms must also
fulfil its social responsibilities. Social responsibility includes both
ethical and discretionary responsibilities, but not economic and legal
responsibilities.
Need for CSR: The Strategy

After considering the arguments for and against CSR, it becomes
evident that it is in the enlightened self-interest of companies to be
good corporate citizens and devote some of their resources and
energies to employees, the communities in which they operate, and
society in general. There are five important reasons why companies
should undertake social responsibilities.
Self-interest of the Organisation

Every organisation obtains critical inputs from the environment
and converts them into goods and services to be used by society at
large. In this process they help shareholders to get appropriate
returns on their investment. It is expected that organisations
acknowledge and act upon the interests and demands of other
stakeholders such as citizens and society in general that are beyond
its immediate constituencies – owners, customers, suppliers and
employees. That is, they must consider the needs of the broader
community at large, and act in a socially responsible way.
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It generates Internal Benefits
Notes
CSR generates internal benefits like employee recruitment,
workforce retention and training. Companies with good CSR ___________________
reputation are better able to attract and retain employees compared
___________________
to companies with tarnished reputations. Some employees just feel
better about working for a company committed to improving society. ___________________
This can contribute to lower turnover and better worker productivity.
___________________
This also benefits the firm by way of lower costs for staff recruitment
and training. Provision of good working conditions results in greater ___________________
employee commitment.
___________________
It Reduces Risks
___________________
CSR reduces the risk of damage to reputation and increases buyer
___________________
patronage. Consumer, environmental and human rights activist
groups are quick to criticise businesses that are not socially ___________________
responsive. Pressure groups can generate adverse publicity, organise
boycotts, and influence buyers to avoid an offender’s products. ___________________
Research has shown that adverse publicity is likely to cause a decline
in a company’s stock price.
In the Best Interest of Shareholders

CSR is in the best interest of shareholders. Well-conceived social
responsibility strategies work to the advantage of shareholders in
several ways. Socially responsible behaviour can help avoid or
prevent legal and regulatory actions that could prove costly or
burdensome. A study of leading companies found that environmental
compliance and developing eco-friendly products can enhance
earnings per share, profitability, and the likelihood of winning
contracts.
It gives Competitive Advantage

Being known as a socially responsible firm may provide a firm a
competitive advantage.
Example: Firms that are eco-friendly enhance their corporate image.
In western countries, many consumers boycott products that are
not “green”. Companies that take the lead in being environmentally
friendly, such as by using recycled materials, producing ‘green’
products, and helping social welfare programmes, enhance their
corporate image.
In sum, companies that take social responsibility seriously can
improve their business reputation and operational efficiency while
reducing their risk of exposure and encouraging loyalty and
innovation. Overall, companies that take special pains to protect
the environment (beyond what is required by law), are active in
community affairs, and are generous supporters of charitable causes
272
are more likely to be seen as good companies to work for or do
Notes
business with. It will also benefit the shareholders.
___________________
Check Your Progress
___________________ 1. Legal responsibilities: are the most basic responsibilities of a business
firm.
___________________
2. Discretionary responsibilities are those that are voluntarily assumed by
___________________ business organisations that adopt the citizenship approach.
___________________
Summary
___________________
A firm’s stakeholders are the individuals, groups, or other
___________________ organisations that are affected by and also affect the firm’s decisions
and actions. An organisation needs to have an effective stakeholder
___________________ management system in place, which provides a great support in
___________________
achieving its strategic objectives. Strategic leadership establishes
the firm’s direction by developing and communicating a vision of
the future and inspiring organisation members to move in that
direction. A company’s culture is manifested in the values and
business principles that management preaches and practices. An
organisation’s culture can exert a powerful influence on the
behaviour of all employees. Ethics refers to the moral principles
and values that govern the behaviour of a person or group. Ethics
helps us in deciding what is good or bad, moral or immoral, fair or
unfair in conduct and decision-making. Corporate social
responsibility (CSR) consists of “actions that appear to further some
social good, beyond the interests of the firm” It includes such topics
as environmental ‘green’ issues, treatment of employees and
suppliers, charitable work and other matters related to the
community. Corporate Social Responsibility is a company’s duty to
operate its business by means that avoid harm to other stakeholders
and the environment, and also to consider overall betterment of
society in its decisions and actions.

1. “Visionary leadership inspires the impossible: fiction becomes
truth”. Substantiate.
2. Discuss the three approaches to leadership. Assess the
importance of each of them.
3. “An organisation’s culture is similar to an individual’s
personality.” Comment.
4. “There is no best or worst culture”. Elucidate.
5. What do you mean by problem culture? How will deal with
such a culture?
6. CSR is not an obligation, then why most of the successful
companies engage in it?
273
Unit 20 Notes
Case Study ___________________
___________________
___________________
concept of topics studied in this Block. ___________________
___________________
Case Study: Beyond Core Competencies ___________________
___________________
The Eastman Kodak Company was an iconic industry leader. For
decades, it was synonymous with photography. But it got stuck in its ___________________
core competence of traditional film products and missed the rise of
digital photography and printing. To survive, it has stopped selling ___________________
film cameras, focusing on the digital ones that dominate the market.
But it arrived late. In 2005, IBM sold its PC division to its former
competitor, Lenovo.
In the preceding decade, IBM appeared to be headed into extinction.

From one SEC filing, it revealed that it lost nearly a billion dollars
on the PC business over three-and-one-half years. It sold this money-
losing division systematically evolved itself to become, once again, a
respected technology competitor. Organizations such as IBM and GE
have adapted over the years to remain competitive in the market.
They have gone through different cycles of disruptive innovations,
leaving some businesses, and creating new ones. Others like Kodak
and Nokia are re-strategising in order to remain relevant in a dynamic
global market.
The latter just signed a partnership agreement with Microsoft to

develop new mobile solutions, after the new CEO acknowledged that
the phone maker has been left behind by its competitors. Here, Nokia
understood that its sole strengths are not enough to win. C. K Prahalad
and Gary Hamel’s HBR classic Core Competence of the Corporation
made popular the notion that knowing and mastering core business
factors can be leveraged across products and markets. Yet the ways
companies make products, especially electronics, have been disrupted
and redesigned. As Nokia’s boss noted, Nokia’s core competence is in
phone designs, but the trend in China, where manufacturers buy
phone chipsets from vendors and make phones at unbelievable pace
and price, controlling one-third of the global phone market, introduces
a new dimension of competition.
From my experience establishing a small semiconductor company in

Nigeria, I see consumer electronics design becoming a commodity.
Companies that are too obsessed with design competence could suffer,
Contd...
274
Notes especially in the developing markets. Businesses such as Cisco, Dell,
HP, and Motorola have seen their
___________________ R&D spending dropped as a percentage of sales; yet, most get products
___________________
to market faster. Why? There are other firms like MediaTek and
Flextronics that do to design what China’s Shenzhen district does to
___________________ manufacturing. They develop chipsets and license to manufacturers
who then produce and sell. Companies like Best Buy and Wal-Mart
___________________ rely on these design houses for some of their branded tech products,
enabling them to sell at competitive prices, with no R&D cost. Looking
___________________
outside for new insights is everywhere: P&G expects 50% of new
___________________ products ideas to come from outside the company. With crowd sourcing
services, lower wages, and improving designers in most emerging
___________________ nations, multinational corporations must evaluate how to retool
products to make them relevant to new markets. While core
___________________ competence remains vital - differentiation offers a competitive
___________________
advantage - firms must examine their organizational ambidexterity.
They must be ready to let go, just as Kodak is doing on traditional
___________________ cameras. They must be ready to go beyond their core competence and
its associated core products and markets of today, which may be
irrelevant tomorrow, to evolve and prosper. And the ability to do that
may become a new core competence.
Question:
Source: Adapted from Article by Ndubuisi Ekekwe, founder of the non-profit

African Institution of Technology.
Block–V
Detailed Contents
UNIT-21: STRATEGIES AT FUNCTIONAL AND OPERATIONAL LEVEL
UNIT-22: STRATEGIC CONTROL AND EVALUATION
UNIT-23: CORPORATE GOALS AND STRATEGIC GAP
UNIT-24: LIFE CYCLE APPROACH TO STRATEGIC PLANNING
UNIT-25: CASE STUDY

277
Unit 21 Notes
Strategies at FFunctional
unctional and ___________________
___________________
Operational LLevel
evel ___________________
___________________
___________________
\ Functional Strategies
___________________
\ Operational Plans and Policies
\ Personnel (HR) Plans and Strategies ___________________
___________________
Introduction ___________________
Once corporate level and business level strategies are developed,

management must turn its attention to formulating strategies for
each functional area of the business unit. For effective
implementation of strategies, functional strategies provide direction
to functional managers regarding the plans and policies to be adopted
in each functional area.
A Functional Strategy is the approach taken by a functional area
to achieve corporate and business unit objectives and strategies by
maximising resource productivity. It is concerned with developing
and nurturing a distinctive competence to provide a company or
business unit with a competitive advantage. Just as a multi-
divisional corporation has several business units, each with its own
business strategy, each business unit has its own set of departments
with its own functional strategy.
Nature of Functional Strategies

Functional strategies are essential to implement business strategy.
In fact, the effectiveness of a corporate or business strategy execution
depends critically on the manner in which the strategies are
implemented at the functional level. The corporate strategy provides
the long-term direction and scope of a firm. The business strategy
outlines the competitive posture of its operations in an industry.
The functional strategy clarifies the business strategy, giving specific
short-term guidance to operating managers in the areas of operations
likemarketing, finance, HR, R&D, etc., and increases the likelihood
of their success.
278
Orientation of the functional strategy, therefore, depends on the
Notes
business strategy.
___________________ Example: If a business unit follows a differentiation strategy
through high quality products, its production strategy emphasises
___________________
expensive quality assurance processes over cheaper, high-volume
___________________ production; a human resource functional strategy that emphasises
hiring and training of a highly skilled, but costly workforce; and a
___________________
marketing functional strategy that emphasises extensive advertising
___________________ to increase demand rather than using marketing incentives to
retailers. Similarly, if the business unit follows a low- cost
___________________
competitive strategy, a different set of functional strategies
___________________ emphasising cost-cutting measures would be needed to support the
business strategy.
___________________
Need for Functional Strategies
___________________
Functional managers need guidance from the corporate and business
___________________
strategies in order to make decisions. In simple terms, functional
strategies tell the functional manager what to do in his area to
achieve business objectives.
Glueck and Jauch have suggested five reasons to show why
functional strategies are needed. Functional strategies are developed
to ensure that:
• The strategic decisions are implemented by all the parts of an
organisation.
• There is a basis available for controlling activities in different
functional areas of a business.
• The time spent by functional managers on decision-making
can be reduced.
• Similar situations occurring in different functional areas are
handled by the functional managers in a consistent manner.
• Coordination across different functions takes place where
necessary.
Functional Plans and Policies

The process of developing functional plans and policies is quite
similar to that of strategy formulation, with the difference that
functional heads are responsible for its formulation and
implementation. Environmental factors relevant to each functional
area will have an impact on the choice of strategies. Finally, the
actual process of choice involves a negotiation between functional
managers and business unit managers. Thus, functional strategies
are generally formulated in all the key functional areas.
Unit 21: Strategies at Functional and Operational Level.
279
For each of the functional strategies, a set of policies will have to
Notes
be established for appropriate areas of the business. The policies
will ensure that the strategies are carried out as intended and that
___________________
the different functional areas are working towards the same ends.
Companies have plans and policies that cover nearly every major ___________________
aspect of the firm. The firm should have strategies in every major
___________________
aspect of business, at least in the key functional areas. We will
highlight some of the most important issues for each functional ___________________
area that need to be addressed through their respective functional
___________________
strategies.
___________________
The functional strategies should be comprehensive; but at the same
time, they should not leave so much choice to operating managers ___________________
that they work sub-optimally or at cross purposes. At the same
time, the functional strategies should be flexible enough, to leave ___________________
room to managers for responding quickly to situations and make ___________________
exceptions for good reasons. The functional strategies required in
the key functional areas are outlined below: ___________________
Financial Strategy
In the financial management area, the major concern of the strategy
relates to the acquisition and utilisation of funds. The major issues
involved are the sources from where the funds would come, from
equity or by borrowing. How much of the borrowing would be short-
term and long-term. In terms of usage of funds, the policy decisions
would relate to whether and to what extent funds have to be deployed
in fixed assets and current assets. The long-term or capital
investment decisions relate to buying or leasing the fixed assets. A
retrenchment strategy or paucity of funds may compel the
organisation to lease rather than buy. In case of an organisation,
where capital investment decisions are decentralised, a “hurdle rate”
may be fixed so as to avoid investment in weaker projects by one
division and non-investment by another division.
Cash Flow
Apart from capital budgeting, another consideration in financial
strategy, which influences other functional areas is the cash flow.
A company may frame bonus and dividend policies based on
availability of cash. In case, a company proposes expansion through
internally generated funds, it may reduce bonus and dividend. This
is particularly so, when it has formulated ambitious growth
strategies which require large cash. Similarly, if the firm has high
risk business, it should have a conservative debt/equity ratio to
guard against heavy interest burden.
The funds position and optimisation orientation of the top
management also determine the accounts receivable and payable
280
policies. Financial strategies and policies may even determine the
Notes
accounting policies as these affect the profitability, the balance-
sheet and hence, the cash flow through taxes, dividend, bonus, etc.
___________________
___________________ Marketing Strategy
___________________ Functional strategies in marketing area are required for marketing–

mix decisions, i.e. the four Ps of Marketing, viz. Product Design,
___________________ Product Distribution, Pricing and Promotion aspects of marketing.
___________________
In terms of specifics, the product decisions relate to such issues as
the variety of product (shape, size, model,etc.), quality requirements,
___________________ introduction/withdrawal of products, nature of customers etc. Specific
policies are also required regarding distribution channels i.e. through
___________________
retailers or direct selling. What would be the spread of distribution
___________________ network? Whether new dealers will be established or old ones
developed? The promotion strategies will relate to the mode of
___________________
promotion, coverage and nature (corporate, product or brand
___________________ promotion). Again, clear and specific strategies will have to be made
about pricing, etc., full cost or standard cost based pricing. Offensive
vs. defensive postures also influencethe pricing policies.
HR Strategy
HR strategy deals with matters like HR planning, recruitment and
selection, training and development, compensation management,
performance management, rewards and incentives, etc. Which
compensation/reward system will be able to attract people of the
desired type to join the organisation so as to meet the task
requirements demanded by the strategy? Which strategies are
necessary to groom the internal people for new positions? The
problem becomes acute in the context of turnaround strategies. On
one hand, the most competent people leave and the firm finds it
difficult to attract suitable replacements. On the other hand, it
faces the problem of surplus staff. HR strategies for retrenchment,
though painful, are quite necessary but difficult to develop.
Production Strategy
The functions relating to production, need strategies relating to
quality assurance, machine utilisation, location of facilities, balancing
the line, scheduling of production, and material management. The
strategy for entering into export market will dictate a different
policy regarding quality of products and maintenance. Location of
facilities may be determined by closeness to market or input supply
points. Decisions must be made to determine whether and how
much to make or buy, on the basis of cost differential, availability,
criticality of the item, capacity if expansion becomes necessary. In
case of bought out items, policies regarding number of suppliers
and the criteria for selecting them are necessary.
281
R&D Strategy
Notes
In the area of research and development, functional strategies
regarding the nature of research are necessary.In case of expansion ___________________
through new product development, heavy emphasis has to be laid
___________________
on the basic and the applied research.
___________________
On the contrary, for expansion in the same line, research emphasis
has to be on product/process improvement to cut the cost and to add ___________________
value. It may be noted that in case of basic research, the firm
___________________
should be prepared to commit resources and wait for outcome for
several years. It cannot have basic research unless it is prepared to ___________________
commit resources on long-term basis.
___________________

Fill in the blanks:
___________________
1. .................. is concerned with developing and nurturing a distinctive
competence to provide a company or business unit with a competitive ___________________
advantage.
2. Apart from capital budgeting, another consideration in financial strategy
which influences other functional areas is the .................. .
Operational Plans and Policies

Operations management is the core function of any organisation.
This function converts inputs (raw materials, supplies, machines
and people) into value added outputs. Operations management
covers all manufacturing processes in an organisation and includes
raw material sourcing, purchasing, production, distribution and
logistics. This function contributes to the organisation’s ability to
add value to the goods and services.
Importance of Operational Strategy

The key to successful survival of an enterprise is how efficiently the
production activity is managed. The two major factors that contribute
to business failures are: obsolescence of the product line and
excessive production cost. These factors themselves have been the
outcome of ineffective production planning.
Operations strategy plays a crucial role in shaping the ultimate
success of a firm. It enables an organisation to make optimal
decisions regarding product, production capacity, plant location,
choice of machinery and equipment, maintenance of existing facilities
and host of other aspects of production. Constant review of
production plan aids in maintaining proper balance of capital
investment in plant, equipment and inventory, efficient operation
of the production system, product mix, quality control, and ensures
effective material handling and planning of facilities.
282
Within the broad framework of corporate and business strategies,
Notes
production strategy helps in maintaining full co-ordination with
marketing and engineering functions to formulate plans to improve
___________________
products and services. It calls upon management to keep in constant
___________________ touch with finance and personnel to achieve the optimal use of
assets, cost control, recruitment of suitable personnel and
___________________
management of labour disputes and negotiations.
___________________
Components of Operational Plan and Policies
___________________
The different components of a production strategy should ideally
___________________ consist of the following:
___________________ Product Mix
___________________
A firm should decide about the product mix (how many and what
___________________ kind of products to be produced) keeping in view the objectives such
as productivity, cost efficiency, quality, reliability, flexibility etc.
___________________
Capacity Planning
Capacity Planning is the process of forecasting demand and deciding
what resources will be required to meet that demand. Meclain and
Thomas suggested that capacity planning involves the following
five sequential steps.
• Predict future demand and competitive reactions: The
firm should forecast the demand for various products/services
and also estimate customer reaction to the products offered by
it. It should also take care of potential countermoves by
competitors.
• Translate above estimates into capacity needs: Based on
forecasts, the firm must decide the quantity that can be
manufactured keeping input limitations, such as plant
equipment, manpower, etc. in mind.
• Create alternative capacity plans: Depending on what the
market might absorb and what the organisation can produce,
management should create alternative capacity plans for
various products/services that are offered to customers.
• Evaluate each alternative: The firm should identify the
opportunities and threats associated with each alternative, and
carefully evaluate, in terms of additional costs involved, payoffs,
etc.
• Select and implement a particular capacity plan: The
capacity plan that best serves organisational objectives should
be selected and implemented.
283
One of the most vital decisions which have to be made regarding
Notes
production capacity is whether the company should build so much
capacity to satisfy the entire demand during peak periods and keep
___________________
the production facilities idle during lean periods.
___________________
There are some organisations that prefer to build small capacity to
take care of normal requirements and meet peak demand by way ___________________
of imports or subcontracting. Some organisations employ measures
___________________
such as off-peak discounts, mail early campaign, etc. to induce
customers to avoid peak periods. ___________________
Technology and Facilities Planning ___________________
Choosing Machines and Equipments ___________________
A strategic decision to be made by a production manager is what ___________________

type of equipments the organisation will require for production ___________________
purposes, how much it will cost, what will be its operating cost and
what services it will render to the organisation and for how long. ___________________
Choice of equipment for making a particular product essentially

depends on the basic manufacturing process. The decision-maker
must, therefore, familiarise himself with the production process to
be adopted.
Another consideration in the choice of new equipment for a plant is
the type and degree of operating skill required and presently
available skills within the organisation. Other factors worth
consideration are the ease with which the equipment can be operated
and the safety features of the equipment.
Equipment Investment
Acquisition of equipment involves capital expenditure which will
have long-term effects on the financial position of the company.
Hence, before taking a final decision regarding investment in a
machine, detailed analysis of such investment in terms of cost-
benefits must be made and its desirability and worth-whileness
should be evaluated with the help of internal rate of return or net
present value method.
The decision to replace the existing machine is equally important
to the enterprise. In this regard the management has to decide
when the replacement should be made and the best replacement
policy that must be considered while making comparisons between
an existing unit of equipment and its possible replacement. In order
to make a sound economic comparison, all the factors must be
converted into cost considerations. The rate of return so obtained is
compared with the cut-off rate to ascertain whether the replacement
is economically viable.
284
Thus, clear-cut policy guidelines regarding methodology or
Notes
computation of net investment outlay, incremental operating
expenditure and income, depreciation, obsolescence, salvage value,
___________________
etc. will help management in taking decisions regarding acquisition
___________________ and/or replacement of machines.
___________________ Physical Facilities Decisions
___________________ Facilities strategy covers plans for location analysis and selection,
___________________
design and specifications including layout of equipment, plant,
warehouses and related services. Facilities Planning deals with the
___________________ separate but interrelated costs of material, supplies, manpower,
services and facilities. Its mission is to find ways to minimise the
___________________
aggregate of such costs in making and distributing the products at
___________________ the proper time.
___________________ Plant Location
___________________ Plant location is essentially an investment decision having long-
term significance. Once a plant is acquired, it is a permanent asset
that cannot readily be sold. The management may also contemplate
relocation of the plant when business expansion and advanced
technology require additional facilities to serve new market areas,
to produce new products, or simply to replace the old, obsolete
plants to increase the company’s production capacity.
The selection of an appropriate plant site calls for location study of
the region in which the factory is to be situated, the community in
which it should be placed and finally, the exact site in the city or
countryside.
Plant Building
Once the company has chosen the plant site, due consideration
must be given to providing physical facilities. A company requiring
extensive space will always construct new buildings.
On planning a building for the manufacturing facilities, a number
of factors will have to be kept in mind such as nature of the
manufacturing process, plant layout and space requirements,
lighting, ventilating, air-conditioning, service facilities and future
expansion.
Plant Layout
Plant layout involves the arrangement and location of production
machinery, work centres and auxiliary facilities and activities
(inspection, handling of material storage and shipping) for the
purpose of achieving efficiency in manufacturing products or
supplying consumer services. Plant layout should co-ordinate
material, men and machines and achieve the following objectives:
285
• Facilitate the manufacturing process.
Notes
• Minimise material handling.
___________________
• Maintain flexibility of arrangement and operation.
• Maintain high turnover of work-in-process. ___________________
• Hold-down investment in equipment. ___________________
• Make economical use of building space. ___________________
• Promote effective utilisation of manpower. ___________________
• Promote employee convenience, safety and comfort in doing ___________________

the work.
___________________
In designing plant layout a number of factors such as nature of
product, volume of production, quality, equipment, type of ___________________
manufacture, building plant site, personnel and materialhandling ___________________
plan should be kept in view.
___________________
Maintenance of Equipment
Maintenance of equipment is an important component of planning
consideration. It is intimately linked with replacement policies.
Every manufacturing enterprise follows some maintenance routine
in order to avoid unexpected breakdown and thus minimise
costsassociated with machine down time, possible loss of potential
sales, idle direct and indirect labour delays, customer dissatisfaction
from possible delays in deliveries and the actual cost of repairing
the machine.
A number of strategies can be adopted for maintenance of machines
and equipment. Two most important ones are carrying excess
capacity and preventive maintenance.
Excess Capacity
In carrying excess capacity method, an organisation carries stand-
by capacity, which is used, if trouble occurs. This excess capacity
can be whole machine or it can be major parts or components which
ordinarily take time to obtain. Carrying excess capacity involves
cost which must be compared with costs arising out of a slow-down
or a shut-down of a whole series of dependent operations. Therefore,
the decision in this regard is cost trade-offs.
Preventive Maintenance
Preventive maintenance is based on the premise that good
maintenance prevents breakdowns. Preventive maintenance means
preventing breakdowns by replacing worn-out machines or their
parts before their breakdown. It anticipates likely difficulties and
does the expected needed repairs at a convenient time before the
286
repairs are actually needed. Preventive maintenance depends upon
Notes
the past knowledge that certain wearing parts will need replacement
after a normal interval of use.
___________________
___________________ Inventory Management
___________________ This is concerned with management of inventory consisting of raw

material, work-in-process, goods in transit, finished goods, etc.
___________________ Inventory management is a critical function because substantial
___________________
money can be locked up in inventory, which can be put to productive
use. There are various techniques that can be used for effective
___________________ inventory management.
___________________ • Economic Order Quantity
___________________ • ABC analysis
___________________ • Just-in-Time (JIT) Inventory systems, etc.
___________________ Quality Management

Quality is a major consideration in Production/Operations strategy.
By using techniques like Total Quality Management (TQM), Six
Sigma, etc., organisations strive to produce ‘Zero defect products’
Operations strategy should consist of appropriate Quality
improvement programmes to achieve total Quality in products and
services of the organisation.
Check Your Progress

1. Operations management is not the core function of any organisation.
2. The firm should also take care of potential countermoves by competitors.
Personnel (HR) Plans and Strategies

Personnel policies are guides to action. Brewster and Ricbell defined
HR policies as “a set of proposals and actions that act as a reference
point for managers in their dealings with employees”. Management
should pay attention to the following aspects of HR policies:
• HR policies must be related to the strategic objectives of the
firm.
• They should be stated in definite, clear and understandable
language.
• They should be sufficiently comprehensive and provide
yardsticks for future action.
• They should be stable enough to assure people that there will
not be drastic overnight changes.
287
• They should be built on the basis of facts and sound judgment.
Notes
• They should be just, fair and equitable.
___________________
• They must be reasonable and capable of being accomplished.
• Periodic review of HR policies is essential to keep in tune with ___________________
changing circumstances. ___________________
HR Planning ___________________
HR planning is the first key component for developing a human ___________________

resource strategy. It involves translating corporate – wide strategic
___________________
objectives into a workable plan and serves as a blue-print for all
specific HR programmes and policies. It is the process of analysing ___________________
and identifying the need for and availability of human resources so
___________________
that the organisation can meet its objectives. It helps determine the
manpower needs of firms and develop strategies for meeting those ___________________
needs.
___________________
According to Jeffrey Mello, the key objectives of HR planning are:
• Prevents overstaffing and understaffing.
• Ensures the organisation has the right number of employees
with the right skills in the right places and at the right time.
• Ensures the organisation is responsive to changes in its
environment.
• Provides direction and coherence to all HR activities and
systems.
• Unites the perspectives of line and staff managers.
• Facilitates leadership continuity through succession planning.
Although HR planning follows from the strategic plan, the
information collected in the HR planning process contributes to the
assessment of internal organisation’s environment done in strategic
planning.
Staffing
Staffing, the process of recruiting applicants and selecting
prospective employees, remains a key strategic area for human
resource strategy. Given that an organisation’s performance is a
direct result of the individuals it employs, the specific strategies
used and decisions made in the staffing process will directly impact
the success of the strategic plan.
Recruitment
Recruitment means attracting people to apply for jobs in the
organisation. The strategic issues in recruitment are:
288
• Temporary versus permanent employees
Notes
• Internal versus external recruiting
___________________
• When and how extensively to recruit
___________________ • Methods of recruiting
___________________
Selection
___________________
Once a sufficient pool of applicants has been received, critical
___________________ decisions need to be made regarding applicant screening, methods
of selection and placement. The selection methods should be reliable
___________________
and valid.
___________________
Placement
___________________
After selecting a candidate, he should be placed on a suitable job.
___________________ Placement is an important human resource activity. If neglected, it
may create employee adjustment problems. An employee placed in
___________________
a wrong job may quit the organisation in frustration.
Training and Development

Training and development of employees is a key strategic issue for
organisations. It is the means by which organisations determine
the extent to which their human assets are viable investments.
Training involves employees acquiring knowledge and skills that
they will be able to use on the job.
There are two key factors to develop successful training programmes
in organisations. The first is planning and strategising the training.
This involves four distinct steps:
• Needs assessment
• The establishment of objectives and measures
• Delivery of the training
• Evaluation
The second key factor is to ensure that desired results are achieved
or accomplished. Training needs are to be integrated with
performance management systems and compensation.
Performance Management
An organisation’s long-term success in meeting its strategic objectives
rests on managing employee performance and ensuring that
performance measures are consistent with the strategic needs. One
purpose of performance management system is to facilitate employee
development. The second purpose is to determine appropriate
rewards and compensation, which must be clearly linked to
achievement of strategic goals.
289
Compensation and Rewards
Notes
Organisations face a number of key strategic issues in setting their
compensation and reward policies and programmes. These include: ___________________
• Compensation relative to the market. ___________________
• Balance between fixed and variable compensation. ___________________

• Appropriate mix of financial and non- financial compensation. ___________________
• Developing an overall cost-effective compensation programme
___________________
that results in high performance.
___________________
In addition to these strategic issues, the fast pace of change and the
need for organisations to respond in order to remain competitive ___________________
create challenges for all HR programmes, but particularly for
compensation. Organisations should revaluate their compensation ___________________
programmes within the context of their corporate strategy and ___________________
specific HR strategy to ensure that they are consistent with the
necessary performance measures required by the organisation. ___________________
Overly rigid compensation systems inhibit the flexibility needed by
the company’s competitive strategies. HR strategy must encourage
creativity to meet strategic objectives. Therefore, compensation
systems must ensure that behaviours that help achieve strategic
objectives are appropriately rewarded.
Industrial Relations
Industrial relations is a key strategic issue for organisations because
the nature of the relationship between employees can have a
significant impact on morale, motivation and productivity.
Consequently, how organisations manage the day- to- day aspects
of the employment relationship can be a key variable affecting their
ability to achieve strategic objectives.
Unionised employees present a number of key strategic challenges
for management:
• The power base within the organisation is redistributed.
• Management’s ability to manage workers at their discretion to
achieve the organisation’s strategic objectives gets severely
curtailed.
• Outside leadership may pose additional challenges to the
management.
• Unionised work setting can greatly impact the organisation’s
cost structure. Since liberalisation of the Indian economy since
1990s, there is a perceptible change in the industrial relations
scenario of our country. Labour militancy, strikes and lockouts
have reduced drastically. However, in certain sectors of the
economy, especially the government and public sector, there is
not much change in the clout of the unions.
290
Through appropriate collective bargaining and participative
Notes
management practices, industrial relations can be managed
effectively. HR strategy must incorporate long-term plans and
___________________
programmes to maintain industrial peace for effective
___________________ implementation of the business strategy.

1. .................. policies are guides to action.
___________________
2. ............... means attracting people to apply for jobs in the organisation.
___________________
___________________ Summary
___________________ Functional Strategy is concerned with developing and nurturing a
distinctive competence to provide a company or business unit with
___________________
a competitive advantage. Functional strategies are essential to
___________________ implement business strategy. Functional policies will ensure that
the strategies are carried out as intended and that the different
functional areas are working towards the same ends. Companies
have plans and policies that cover nearly every major aspect of the
firm. Operations strategy plays a crucial role in shaping the ultimate
success of a firm. It enables an organisation to make optimal
decisions regarding product, production capacity, plant location,
choice of machinery and equipment, maintenance of existing facilities
and host of other aspects of production. Personnel policies are guide
to action. Brewster and Ricbell defined HR policies as “a set of
proposals and actions that act as a reference point for managers in
their dealings with employees”.

1. Analyse the importance of functional strategies. Are they more
important than business strategy?
2. Discuss the functional strategies required in key functional
areas of business.
3. “Operations management is the core function of any
organisation”. Justify
4. Why is choice of equipments to be used in business a major
strategic decision?
5. “It is necessary to have personnel strategies in place in order
to make other strategies successful.” Comment.
6. Evaluate the importance of effective marketing and R&D
strategies.
7. “The key to successful survival of an enterprise is how
efficiently the production activity is managed.” Discuss.
8. How does obsolescence of the product line affect the
organisation?
291
Unit 22 Notes
Strategic Control and Evaluation ___________________
___________________
___________________
Learning Objectives:
___________________
___________________
\ Nature of Strategic Evaluation and Control
___________________
\ Strategic Control
\ Operational Control ___________________
\ Techniques of Strategic Control ___________________
\ Role of Organisational Systems in Evaluation ___________________
___________________
Introduction
Strategic evaluation and control is the final phase in the process of
strategic management. Its basic purpose is to ensure that the
strategy is achieving the goals and objectives set for the strategy.
It compares performance with the desired results and provides the
feedback necessary for management to take corrective action.
According to Fred R. David, strategy evaluation includes three basic
activities (1) examining the underlying bases of a firm’s strategy,
(2) comparing expected results with actual results, and (3) taking
corrective action to ensure that performance conforms to plans.
Sometime, the best formulated strategies become obsolete as a firm’s
external and internal environments change. Managers should,
therefore, identify important milestones and set strategic thresholds
to assist them in knowing the changes in the underlying assumptions
of a strategy and, if necessary alter the basic strategic direction.
The evaluation process thus works as an early warning system for
the organisation.
Strategic evaluation generally operates at two levels – strategic
and operational level. At the strategic level, managers try to examine
the consistency of strategy with environment. At the operational
level, the focus is on finding how a given strategy is effectively
pursued by the organisation. For this purpose, different control
systems are used both at strategic and operational levels.
Nature of Strategic Evaluation and Control

Strategic evaluation and control is defined as the process of
determining the effectiveness of a given strategy in achieving the
292
organisational objectives and taking corrective actions wherever
Notes
required. According to Pearce and Robinson, strategic control is
concerned with tracking a strategy as it is being implemented,
___________________
detecting problems or changes in its underlying premises, and
___________________ making necessary adjustments. In contrast to post-action control,
strategic control seeks to guide action on behalf of the strategies as
___________________
they are taking place and when the end result is still several years
___________________ off.
___________________ Strategic control in an organisation is similar to what the “steering

control” is in a ship. Steering keeps a ship, for instance, stable on
___________________
its course. Similarly, strategic control systems sense to what extent
___________________ the strategies are successful in attaining goals and objectives, and
this information is fed to the decision-makers for taking corrective
___________________ action in time. Strategic managers can steer the organisation by
___________________ instituting minor modifications or resort to more drastic changes
such as altering the strategic direction altogether. Strategic control
___________________ systems thus offer a framework for tracking, evaluating or
reorienting the functioning of the firm’s strategy.
Types of General Control Systems

Basically, there are three types of general control systems:
• Output control (i.e. control on actual performance results).
• Behaviour control (i.e. control on activities that generate the
performance).
• Input control (i.e. control on resources that are used in
performance).
Output Control
Output controls specify what is to be accomplished by focusing on
the end result. This control is done through setting objectives, targets
or milestones for each division, department, section and executives,
and measuring actual performance. These controls are appropriate
when specific output measures haven’t been agreed on. Often
rewards and incentives are linked to performance goals.
Example: Sales quotas, specific cost reduction or profit targets,
milestones or deadlines for completion of projects are examples of
output controls.
Behaviour Control
Behaviour controls specify how something is to be done. This control
is done through policies, rules, standard operating practices and
orders from superiors. These controls are the most appropriate when
performance results are hard to measure. Rules standardise the
behaviour and make outcomes predictable. If employees follow rules,
Unit 22: Strategic Control and Evaluation
293
then actions are performed and decisions handled the same way
Notes
time and again. The result is predictability and accuracy, which is
the aim of all control systems. The main mechanisms of behaviour
___________________
control are:
___________________
• Operating budgets
• Standard operating practices ___________________
• Rules and procedures ___________________
Example: One example of an increasingly popular behaviour control ___________________

is the ISO 9000 Standards Series on quality management and ___________________
assurance developed by the International Standards Association of
Geneva, Switzerland. The ISO 9000 series is a way of documenting ___________________
a company’s quality operations, and strictly complying with it. Many
___________________
corporations worldwide view ISO 9000 certification as assurance
that the firm sells quality products. ___________________
Input Control ___________________
Input controls specify the amount of resources, such as knowledge,

skills, abilities, of employees to be used in performance. These
controls are most appropriate when output is difficult to measure.
Basic Characteristics of Effective Evaluation and Control System
Effective strategy evaluation systems must meet several basic
requirements. They must be:
• Simple: Strategy evaluation must be simple, not too
comprehensive and not too restrictive. Complex systems often
confuse people and accomplish little. The test of an effective
evaluation system is its simplicity, not its complexity.
• Economical: Strategy evaluation activities must be economical.
Too many controls can do more harm than good.
• Meaningful: Strategy evaluation activities should be
meaningful. They should specifically relate to a firm’s objectives.
They should provide managers with useful information about
tasks over which they have control and influence.
• Timely: Strategy evaluation activities should provide timely
information. For example, when a firm has diversified into a
new business by acquiring another firm, evaluative information
may be needed at frequent intervals. Time dimension of control
must coincide with the time span of the event being measured.
• Truthful: Strategy evaluation should be designed to provide a
true picture of what is happening. Information should facilitate
action and should be directed to those individuals who need to
take action based on it.
294
• Selective: The control systems should focus on selective criteria
Notes
like key important factors which are critical to performance.
Insignificant deviations need not be focused.
___________________
• Flexible: They must be flexible to take care of changing
___________________
circumstances.
___________________ • Suitable: Control systems should be suitable to the needs of
___________________ the organisation. They must conform to the nature and needs
of the job and area to be controlled.
___________________
• Reasonable: Control standards must be reasonable. Frequent
___________________ measurement and rapid reporting may frustrate control.
___________________ • Objective: A control system would be effective only if it is
unbiased and impersonal. It should not be subjective and
___________________
arbitrary. Otherwise, people may resent them.
___________________ • Acceptable: Controls will not work unless they are acceptable
___________________ to those who apply them.
• Foster Understanding and Trust: Control systems should
not dominate decisions. Rather they should foster mutual
understanding, trust and common sense. No department should
fail to cooperate with another in evaluating and control of
strategies.
• Fix Responsibility for Failure: An effective control system
must fix responsibility for failure. Detecting deviations would
be meaningless unless one knows where they are occurring
and who is responsible for them. Control system should also
pinpoint what corrective actions are needed.
There is no ideal strategy evaluation and control system. The final
design depends on the unique characteristics of an organisation’s
size, management style, purpose, problems and strengths.
Check Your Progress

Fill in the blanks:
1. Output controls specify .............. is to be accomplished by focusing on
the end result.
2. Behaviour controls specify ................... something is to be done.
Strategic Control
Strategic control is a type of “steering control”. We have to track the
strategy as it is being implemented, detect any problems or changes
in the predictions made, and make necessary adjustments. This is
especially important because the implementation process itself takes
a long time before we can achieve the results. Strategic controls
are, therefore, necessary to steer the firm through these events.
295
Types of Strategic Control
Notes
There are four types of strategic controls:
___________________
Premise Control
___________________
Strategy is built around several assumptions or predictions, which
___________________
are called planning premises. Premise control checks systematically
and continuously whether the assumptions on which the strategy is ___________________
based are still valid. If a vital premise is no longer valid, the strategy
may have to be changed. The sooner these invalid assumptions are ___________________
detected and rejected, the better are the chances of changing the ___________________
strategy. The premise control is concerned with two types of factors:
___________________
• Environmental Factors: The performance of a firm is affected
by changes in environmental factors like the rate of inflation, ___________________
change in technology, government regulations, demographic
___________________
and social changes etc. Although the firm has little or no control
over environmental factors, these factors have considerable ___________________
influence over the success of the strategy because strategies
are generally based on key assumptions about them.
Example: A firm may assume massive increase in demand,
and embark on an expansion plan. If suddenly there is recession
and demand for the products of the firm fall down, it may have
to change its strategic direction.
• Industry Factors: Industry factors also affect the performance
of a company. Competitors, suppliers, buyers, substitutes, new
entrants, etc. are some of the industry factors about which
assumptions are made. If any of these assumptions go wrong,
strategy may have to be changed.
Strategic Surveillance
Strategic surveillance is a broad-based vigilance activity in all the
daily operations both inside and outside the organisation. With
such vigilance, the events that are likely to threaten the course of
a firm’s strategy can be tracked. Business journals, trade conferences,
conversations, observations, etc. are some of the information sources
for strategic surveillance.
Special Alert Control

Sudden, unexpected events can drastically alter the course of the
firm’s strategy. Such events trigger an immediate and intense
reconsideration of the firm’s strategy.
Implementation Control
Strategy implementation takes place as a series of steps,
programmes, investments and moves that occur over an extended
296
period of time. Resources are allocated, essential people are put in
Notes
place, special programmes are undertaken and functional areas
initiate strategy related activities. Implementation control is aimed
___________________
at assessing whether the plans, programmes and policies are actually
___________________ guiding the organisation towards the predetermined objectives or
not. Implementation control assesses whether the overall strategy
___________________
should be changed in the light of the results of specific units and
___________________ individuals involved in implementation of the strategy. Two
important methods to achieve implementation control are:
___________________
• Monitoring Strategic Thrusts: Strategic thrusts are small
___________________ critical projects that need to be done if the overall strategy is
___________________
to be accomplished. They are critical factors in the success of
strategy. One approach is to agree early in the planning process
___________________ on which thrusts are critical factors in the success of the
strategy. Managers responsible for these implementation
___________________
controls will single them out from other activities and observe
___________________ them frequently. Another approach is to use stop/go assessments
that are linked to a series of these thresholds (time, costs,
success, etc.) associated with a particular thrust.
• Milestone Reviews: Milestones are critical events that should
be reached during strategy implementation. These milestones
may be fixed on the basis of:
❖ Critical events
❖ Major resource allocation
❖ Time frames, etc.
Approaches to Strategic Control

According to Dess, Lumpkin and Taylor, there are two approaches
to strategic control.
Traditional Approach
Traditional approach to strategic control is sequential:
• Strategies are formulated and top management sets goals
• Strategies are implemented
• Performance is measured against goals
• Corrective measures are taken, if there are deviations.
Control is based on a feedback loop from performance measurement
to strategy formulation. This process typically involves lengthy time
lags and often tied to a firm’s annual planning cycle. This reactive
measure is not sufficient to control a strategy. As already explained,
this is because a strategy takes a long period for implementation
and to produce results. The uncertain future requires continuous
297
evaluation of the planning premises and strategy implementation.
Notes
There is a better contemporary approach for strategic control.
Contemporary Approach ___________________
Under this approach, adapting to and anticipating both internal ___________________
and external environment change is an integral part of strategic ___________________

control.
___________________
This approach addresses the assumptions and premises that provide
the foundation for the strategy. The key question addressed here is: ___________________
do the organisation’s goals and strategies still fit within the context ___________________
of the current environment?
___________________
This involves two key actions:
___________________
• Managers must continuously scan and monitor the external
and internal environment. ___________________
• Managers must continuously update and challenge the ___________________

assumptions underlying the strategy.
This may even need changes in the strategic direction of the firm.
While strategic control requires the contemporary approach,
operational control is generally done through traditional approach.
Check Your Progress

1. There are two types of strategic controls.
2. Control is based on a feedback loop from performance measurement
to strategy formulation.
Operational Control
Operational control provides post-action evaluation and control over
short periods. To be effective, operational control systemsinvolve
four steps common to all post-action controls:
Setting of Standards
The first step in the control process is setting of standards. Standards
are the targets against which the actual performance will be
measured. They are broadly classified into quantitative standards
and qualitative standards.
Quantitative
These are expressed in physical or monetary terms in respect of
production, marketing, finance, etc. They may relate to:
298
• Time standards
Notes
• Cost standards
___________________
• Productivity standards
___________________ • Revenue standards
___________________
Qualitative
___________________
Qualitative criteria is also important in setting standards. Human
___________________ factors such as high absenteeism and turnover rates, poor production
quality or low employee satisfaction can be the underlying causes
___________________
of declining performance. So, qualitative standards also need to be
___________________ established to measure performance.
___________________ Measurement of Performance

___________________ The second step in operational control is the measurement of actual
performance. Here, the actual performance is measured against the
___________________
standards fixed. Standards of performance act as the benchmark
against which the actual performance is to be compared. It is
important, however, to understand how the measurement of
performance actually takes place. Operationally measuring is done
through accounting, reporting and communication systems. A variety
of evaluation techniques are used for this purpose, which are
explained in the next section. The other important aspects of
measurement relates to:
Difficulties in Measurement
There are several activities for which it is difficult to set standards
and measure performance.
Example: Performance of a worker in terms of units produced in
a day, week or month can easily be measured. On the other hand,
it is not easy to measure the contribution of a manager or to assess
departmental performance. The solution lays in developing verifiable
objectives, stated in quantitative and qualitative terms, against
which performance can be measured.
Timing of Measurement
Timing refers to the point of time at which measurement should
take place. Delay in measurement or measuring before time can
defeat the very purpose of measurement. So measurement should
take place at critical points in a task schedule, which could be at
the end of a definable activity or the conclusion of a task.
Example: In a project implementation schedule, there could be
several critical points at which measurement would take place.
299
Periodicity in Measurement
Notes
Another important issue in measurement is how often to measure.
Generally, financial statements like budgets, balance-sheets, and ___________________
profit and loss accounts are prepared every year. But there are
___________________
certain reports like production reports, sales reports, etc. which are
done on a daily, weekly, monthly basis. ___________________
Identifying Deviations ___________________
The third step in the control process is identifying deviations. ___________________
The measurement of actual performance and its comparison with ___________________

standards of performance determines the degree of deviation or ___________________
variation between actual performance and the standard. Broadly,
the following three situations may arise: ___________________
• The actual performance matches the standards. ___________________
• The actual performance exceeds the standards. ___________________

• The actual performance falls short of the standards.
The first situation is ideal, but sometimes may not be realistic.
Generally, a range of tolerance limits within which the results may
be accepted satisfactorily, are fixed and deviations from it are
considered as variance.
The second situation is an indication of superior performance. If
exceeding the standards is considered unusual, a check needs to be
made to test the validity of tests and the measurement system.
The third type of situation, which indicates shortfall in performance,
should be taken seriously and strategists need to pinpoint the areas
where the performance is below standard and go into the causes of
deviation.
The analysis of variance is generally presented in a format called
‘variance chart’ and submitted to the top management for their
evaluation. After noting the deviations, it is necessary to find the
causes of deviation, which can be ascertained through the following
questions: (Thomas)
• Is the cause of deviation internal or external?
• Is the cause random or expected?
• Is the deviation temporary or permanent?
Analysis of variance leads to a plan for corrective action.
Taking Corrective Action

The last and final step in the operational control process is taking
corrective action. Corrective action is initiated by the management
to rectify the shortfall in performance.
300
If the performance is consistently low, the strategists have to do an
Notes
in depth analysis and diagnosis to isolate the factors responsible for
such low performance and take appropriate corrective actions.
___________________
There are three courses for corrective action:
___________________
• Checking performance
___________________
• Checking standards
___________________
• Reformulating strategies, plans and objectives.
___________________
Checking Performance
___________________
Performance can be affected adversely by a number of factors such
___________________
as inadequate resource allocation, ineffective structure or systems,
___________________ faulty programmes, policies, motivational schemes, inefficient
leadership styles, etc. Corrective actions may, therefore include the
___________________ change in strategy, systems, structure, compensation practices,
___________________ training programmes, redesign of jobs, replacement of personnel,
re-establishment of standards, budgets, etc.
Checking Standards
When there is nothing significantly wrong with performance, then
the strategist has to check the standards. A manager should not
mind revising the standards when the standards set are
unreasonably low or high level. Higher standards breed
discontentment and frustration. Low standards make employees
unproductive. So, standards check may result in lowering of
standards if it is concluded that organisational capabilities do not
match the performance requirements. It may also lead to elevation
of standards if the conditions have improved to allow better
performance. For example, better equipment, improved systems,
upgraded skills, etc. need modification in existing standards.
Reformulating Strategies, Plans and Objectives

A more radical and infrequent corrective action is to reformulate
strategies, plans and objectives. Strategic control, rather than
operational control, generally leads to changes in strategic direction,
which will take the strategist back to the process of strategy
formulation and choice.
Techniques like total quality management (TQM) and ISO 9000
standards series are examples of very good control mechanisms.
TQM is a management philosophy that aims at total customer
satisfaction through continuous improvement of all organisational
processes. The main elements of TQM are:
• Intense focus on the customer: The customer includes not
only outsiders but also internal customers.
301
• Concern for continuous improvement: TQM is committed
Notes
to improve quality continuously.
• Improvement in the quality of everything the organisation ___________________
does: TQM relates not only to the final product but also how
___________________
the organisation handles deliveries, responds to complaints etc.
• Accurate measurement: TQM uses statistical techniques to ___________________
measure every critical performance variable in the ___________________

organisation’s operations. These performance variables are then
compared against standards or benchmarks to identify ___________________
problems. The problems are traced to their roots, and causes ___________________
are eliminated.
___________________
• Empowerment of Employees: TQM involves all the employees
in the improvement process. Teams are widely used in TQM ___________________
programmes as empowerment vehicles for finding and solving
___________________
problems.
___________________
Check Your Progress
Fill in the blanks:
1. The first step in the control process is setting of ................. .
2. ................... action is initiated by the management to rectify the shortfall
in performance.
Techniques of Strategic Control

Organisations use many techniques or mechanisms for strategic
control. Some of the important mechanisms are:
• Management Information Systems: Appropriate information
systems act as an effective control system. Management will
come to know the latest performance in key areas and take
appropriate corrective measures.
• Benchmarking: It is a comparative method where a firm finds
the best practices in an area and then attempts to bring its
own performance in that area in line with the best practice.
Best practices are the benchmarks that should be adopted by
a firm as the standards to exercise operational control. Through
this method, performance can be evaluated continually till it
reaches the best practice level. In order to excel, a firm shall
have to exceed the benchmarks. In this manner, benchmarking
offers firms a tangible method to evaluate performance.
• Balanced scorecard: It is a method based on the identification
of four key performance measures i.e., customer perspective,
internal business perspective, innovation and learning
perspective, and the financial perspective. This method is a
302
balanced approach to performance measurement as a range of
Notes
financial and non-financial parameters are taken into account
for evaluation.
___________________

1. Inappropriate information systems act as an effective control system.
___________________
2. Benchmarking offers firms a tangible method to evaluate performance.
___________________
___________________
Role of Organisational Systems in Evaluation
___________________
There are six types of organisational systems involved in evaluation.
___________________
Information System
___________________
Organisations evaluate by comparing actual performance with
___________________ standards. Purpose of information management system is to enable
managers to keep the track of performance through control reports.
Whether strategic surveillance or financial analysis, both are based
on information system to provide relevant & timely data to managers
to allow them to evaluate performance & strategy & initiate
corrective action.
Control System
The control system is core of any evaluation process & is used for
setting standards, measuring performance, analysing variances, &
taking corrective action.
Appraisal System
This is the system that actually evaluates performance. When
measuring the performance of managers, it is contribution to the
organisational objectives which is sought to be measured. The
evaluation process through appraisal system, measures the actual
performance and provides for the control system to work.
Motivation System
The primary role of the motivation system is to induce strategically
desirable behaviour so that managers are encouraged to work
towards the achievement of organisational objectives. This system
plays an important role in ensuring that deviations of actual
performance with standards. Performance checks, which are a
feedback in the evaluation process, are done through the motivation
process.
303
Development System
Notes
The development system prepares the managers for performing
strategic and operational tasks. Among the several aims of ___________________
development, the most important is to match a person with the job ___________________
to be performed. This in other words is matching actual performance
with standards. This matching can be done, provided it is known ___________________
what a manager is required to do and what is deficient in terms of
___________________
knowledge, skills & attitude. Such a deficiency is located through
the appraisal system. The role of development system in evaluation ___________________
is to help the strategists to initiate & implement corrective action.
___________________
Planning System ___________________
The evaluation process also provides feedback to planning system ___________________
for the reformulation of strategies, plans & objectives. Thus planning
system closely interacts with the evaluation process on a continuous ___________________
basis. ___________________
Check Your Progress

Fill in the blanks:
1. Purpose of ................ system is to enable managers to keep the track
of performance through control reports.
2. The evaluation process also provides feedback to ............. system for
the reformulation of strategies, plans & objectives.
Summary
Strategic evaluation generally operates at two levels – strategic
and operational level. At the strategic level, managers try to examine
the consistency of strategy with environment. At the operational
level, the focus is on finding how a given strategy is effectively
pursued by the organisation. Strategic control is a type of “steering
control”. We have to track the strategy as it is being implemented,
detect any problems or changes in the predictions made, and make
necessary adjustments. Operational control provides post-action
evaluation and control over short periods. They involve systematic
evaluation of performance against predetermined objectives.
Organisations use many techniques or mechanisms for strategic
control. Some of the important mechanisms are Management
Information Systems, benchmarking, balanced scorecard, key factor
rating, responsibility centres, network technique, Management by
Objectives (MBO), Memorandum of Understanding, etc.. If the need
for evaluation is recognised from the outset, then a strategic
evaluation will ideally take place before the project begins delivering
activities. The purpose of evaluating causal connections between
activities, outputs and outcomes, is to explore whether or not the
304
project’s assumptions about the likely outcomes and effects of its
Notes
activities and outputs are well-founded. There are three fundamental
strategy evaluation activities, viz. reviewing external and internal
___________________
factors that are the bases for current strategies; measuring
___________________ performance and taking corrective actions.
___________________
___________________
1. Comment on the nature of strategic control and evaluation.
___________________
2. According to you, what should be the criteria for an effective
___________________ evaluation system?
___________________
3. How would you check whether a strategy can be implemented
within the resources of an enterprise?
___________________
4. “Strategic control is a type of steering control”. Discuss
___________________
5. Discuss the general approaches to strategic control.
___________________ 6. Analyse the role of organisational systems in evaluation.
305
Unit 23 Notes
Corporate Goals and Strategic Gap ___________________
___________________
___________________
___________________
\ Corporate Goals
___________________
\ Strategic Gap: An Introduction
___________________
\ Types of Strategic Gap
___________________
Introduction ___________________
Strategic planning is a great start. But on paper it’s just an idea; ___________________
it needs to be put into action. The projects created as a result of the
strategic planning phase need to be managed closely.
Implementation planning assists individuals and organizations with
creating plans, putting them into action, and getting results. In
order to activate strategies and projects effectively, it is important
to employ an implementation plan that maintains goals and achieves
desired end results.
What are Corporate Goals?

Companies require strategies to guide how to achieve objectives
and how to pursue the company’s mission. Strategy-making is all
about how to reach performance targets, how to outcompete rivals,
how to achieve sustainable competitive advantage, how to strengthen
the enterprise’s long-term business position, how to make
management’s strategic vision for the company a reality. A strategy
is needed for the company as a whole, for each business the company
is in, and for each functional piece of each business — Research &
Development, purchasing, sales and marketing, finance, human
resources and so on.
The strategy making spotlight however needs to be kept trained on
the important facets of management’s game plan for running the
enterprise – those actions that determine what market position the
company is trying to stake out and that underpin whether the
company will succeed. Strategy is inherently action oriented; it
concerns what to do, when to do it and who should be involved.
Unless there is action, unless something happens, unless somebody
does something, strategy thinking and planning simply go to waste
and, in the end, amount to nothing.
306
For most of the organizations, profitability is the main goal.
Notes
Maximizing shareholder value, risk, and other goals like high
productivity, good organizational leadership, high morale, good
___________________
organizational reputation, high organizational efficiency, profit
___________________ maximization, organizational stability, value to local community,
and service to public. Strategies as discussed are plans, big plans,
___________________
and important plans. They show the general direction in which the
___________________ organization would achieve its goals. Strategies emerge from goals.
___________________
Check Your Progress
___________________ 1. ..................... making is all about how to reach performance targets.
2. A strategy is needed for the ........................ as a whole.
___________________
___________________
Strategic Gap: An Introduction
___________________
A strategy gap refers to the gap between the current performance
of an organisation and its desired performance as expressed in its
mission, objectives, goals and the strategy for achieving them.
Often unseen, the strategy gap is a threat to the future
performance—and even survival—of an organisation and is
guaranteed to impact the efficiency and effectiveness of senior
executives and their management teams. The strategy gap is
considered to be real and exists within most organisations. An article
in the “Fortune magazine” stated that some 70% of CEOs’ failures
were the result of poor execution rather than poor strategies.
There are various schools of thought on what causes the gap between
vision and execution, and how the strategy gap might be avoided.
In 2005, Paul R. Niven, a thought leader in Performance
Management Systems, pinpointed four sources for the gap between
strategy and execution, namely: lack of vision; people; management;
and resources. He argued that few understand the organisation’s
strategy and as most employees’ pay is linked to short-term financial
results, maximising short-term gains becomes the foremost priority,
which leads to less rational decision making. Management is
spending little attention to the linkage between strategy and
financial planning. Unless the strategic initiatives are properly
funded and resourced, their failure is virtually assured.
Long-term goals and detailed, short-term budgets, with nothing to
link the two together. Does this organization sound familiar?
Whatever the answer, most business professionals understand that
achieving a long-term goal requires a series of logical, achievable,
sequential steps. Organizations cannot rely on chance or luck. Yet
the steps that lead from where a business is today to where it
Unit 23: Corporate Goals and Strategic Gap
307
wants to be – its objectives – often are missing. If an organization
Notes
is not getting its goals, it simply means that it has strategic gap
and there might be some loopholes in framing or execution of the
___________________
strategic plans.
___________________
Check Your Progress
___________________
___________________
1. A strategy gap refers to the gap between the current performance of
an organisation and its desired performance. ___________________
2. Organizations can only rely on chance or luck. ___________________
___________________
Types of Strategic Gap
___________________
Following are the types of the Strategic Gap:
___________________
Management-Induced Gaps
___________________
Management can cause a gap between strategy and execution
through both action and inaction. Four main ways management
causes this gap include failure to secure support for the plan, failure
to communicate the strategy, failure to adhere to the plan, and
failure to adapt to significant changes.
Failure to Secure Plan Support

The senior management team must develop a strategic plan with
objectives, goals, strategies, and tactics that everyone supports. If
people do not accept and support the plan, they are unlikely to put
in the right amount of effort to make it succeed. Their allocation of
resources may be counterproductive to implementing strategic
initiatives, while their management time is diverted into seeking
out factors that will justify their position. This misplaced time and
effort will lead to a gap, which could prevent the execution of the
plan.
To achieve buy-in, management must create a corporate culture
and a set of values that support the vision and guide employees’
decisions and behaviour. Employees must have the opportunity to
provide feedback regarding their ability to implement strategy. Not
listening to their views, not addressing –and resolving – conflicts
and major differences of opinion, and not building a learning
culture—one that tracks and learns from its own successes, failures,
and mistakes – will result in strategies that are unrealistic and
cannot be implemented. This situation leads to the strategy gap.
Failure to Communicate the Strategy

Operational managers and their employees are typically the people
within an organization who implement strategy. They need to know
308
how the strategy impacts them. Yet according to research by Kaplan
Notes
and Norton, creators of the Balanced Scorecard, “less than 5 percent
of the typical workforce understands their organization’s strategy.”
___________________
Without a clear idea of what the strategy, vision, and direction of
___________________ the organization are, they are unlikely to act in ways that will
result in effective implementation of the corporate plan.
___________________
Communication of strategy is vital in all management processes.
___________________
When budgeting, employees need to see the tactical plans and related
___________________ targets that affect them so they can modify their behaviour
accordingly. During the year, they need to assess how well they are
___________________
carrying out those tactics and the progress they are making
___________________ towardstrategic goals. When forecasting, employees need to know
when their activities are unlikely to achieve their KPIs and hence,
___________________ their strategic goals so they can act early to bring the tactical plan
___________________ back on target. Technology clearly has a role to play in facilitating
this communication. Failure to effectively communicate strategy
___________________ and how well or poorly it is being implemented will result in the
strategy gap.
Failure to Adhere to the Plan

As the year progresses, many organizations make decisions reactively
rather than strategically. Often the cause is the reporting of results
based on a purely financial view of the organization, such as on the
chart of accounts by cost centre, rather than by a strategic and
tactical view. As a result, operational managers focus on financial
variances that do not relate to the specific strategic initiatives
outlined in the plan. To put things back on track, the accounts
become the target of any decision rather than the agreed-on action
plans, which may have long been forgotten.
Test this for yourself. In your current reporting pack, how many of
the reports tie actual and forecast results back to the strategies
outlined in the strategic plan? The reports may monitor the goals,
but how many of them actually monitor KPIs by tactic? Without
this link, organizations are likely to act and react in ways that are
divorced from the strategic plan, which results in the strategy gap.
Failure to Adapt to Significant Changes

The reality of today’s business environment is that it continually
changes. Strategic plans are built on a set of assumptions, such as
market growth, production capability, and competitor actions. If
these assumptions change, it is unlikely that the plan will still hold
true. Following the attacks of September 11, 2001, for example,
most organizations found themselves in an economy that was
substantially different from the one that existed when they planned
earlier in the year. Continuing to follow a plan when the basic
309
assumptions on which it was founded have changed makes no sense.
Notes
Unless plans are modified to reflect changes to these assumptions,
the result will be the strategy gap.
___________________
Process-Induced Gaps ___________________
The traditional processes, an organization uses to implement and ___________________

monitor strategy are the second set of strategy gap causes. Once a
strategic plan has been researched and created, what happens next? ___________________
How is the plan translated into action? How are the organization’s ___________________
assets allocated to the various strategic initiatives? How is progress
monitored and the success or failure of tactics measured? For most ___________________
organizations, the key tool used to implement strategy is the annual ___________________
budget, while the processes of actual reporting and forecasting are
used to monitor achievement. But the ways in which these processes ___________________
are approached can lead to the strategy gap.
___________________
Lack of Strategic Focus ___________________
The objective of any process will determine what gets measured, by
whom, and how far in the future. It may seem obvious that the
budget should support the implementation of strategy. After all,
the purpose of this tool is to control how resources are allocated,
which in turn affects what an organization accomplishes. It also
may seem obvious that one of the roles of reporting would be to
monitor strategic progress. Unfortunately, there is very little
evidence to support that these processes actually achieve this.
Instead of being focused on long-term business health, traditional
planning and budgeting are internally driven and focused on current-
year profits.
In a survey conducted by Comshare, Incorporated participants said
that there is typically a gap between the strategic plan and the
budget created to support it. The budget tends to be financially
focused with emphasis on the chart of accounts by cost centre, while
the strategic plan tends to be behaviourally focused on strategies
and tactics. The result is that budget holders, operational managers,
and senior executives are often unaware of how strategic initiatives
impact the operating plan or whether resources have even been
allocated. Without this linkage, the budget becomes a pure numbers
exercise, allowing the strategy gap to emerge. As a result, the
budgeting and planning processes actually become barriers to
strategy deployment.
The same is also true when it comes to reporting actual results and
forecasting future performance. For many organizations, reporting
of actuals takes the form of a simple income and expense statement
by department, based on the chart of accounts. The reason reporting
takes this form is mainly because the general ledger holds income
310
and expense items, and these systems are used to generate the
Notes
reports. However, strategic plans, which are typically action-based
and measure activity, do not fit easily within the rigid account and
___________________
cost centre structure of a general ledger, and so the focus is lost. As
___________________ a result, there is no direction or logical connection in the budgeting
and reporting processes for budget holders to adapt their behaviour
___________________
to achieving strategic goals.
___________________
Calendar Based
___________________
For most organizations, budgeting is an annual process that follows
___________________ the strategic plan, and it is a process that just takes too long.
Hackett Best Practices report that a typical organization takes over
___________________
four months to complete a budget cycle. Organizations with an
___________________ annual budget must try to predict events that are 16 months away,
which is unrealistic and leads to the strategy gap. According to
___________________
Hackett, in today’s fast-paced business environment, planning should
___________________ be treated as a continuous exercise in operational decision making,
resource allocation, and performance management.
Yet nearly half of organizations treat planning and budgeting as a
strictly fiscal and annual exercise that leaves them unprepared to
deal with sudden change. Similarly, Hackett found that 74 percent
of organizations wait until the end of the month to issue reports.
Doing so, delays the opportunity to deal with important emerging
trends, which could be vital to the effective implementation of
strategy. Interestingly, most organizations have the data, it is their
processes and tools that let them down. What is required is a
planning, budgeting, and reporting process that is triggered by
change, not by the date on a calendar.
Financially Focused
An organization’s financial results are the outcome of its strategy
implementation or lack of strategy implementation. Although some
financial measures, such as investments and expenses, will be used
in implementing a tactical plan, most of the measures will be non-
financial. Indeed, the long-term viability of an organization may
well rest on the success of non-financial measures such as product
reliability, customer satisfaction, organizational learning and the
efficiency of the internal processes. The adoption of methodologies
like the Balanced Scorecard can ensure that organizations achieve
the correct balance of measures that will be needed to achieve
corporate objectives. The general ledger by itself will not be able to
supply all the data required. As already mentioned, the chart of
accounts is a transactional view of an organization. The reliance on
this view cannot support the planning and monitoring of strategy
and will lead to the strategy gap.
311
Internally Focused
Notes
Consider an organization that sets and achieves a revenue budget
that reflects a growth of 10 percent year on year. Is this achievement ___________________
a good result? Is it a good result, if the general ledger confirms that ___________________
the goal was achieved while staying within the cost budget? What
if the goal was built on the assumption that the market was due to ___________________
grow at 5 percent, when, if fact, it grew at 15 percent? In this case
___________________
market share was lost rather than gained.
___________________
In most organizations today, reports compare the performance of
the organization with the budget, not with competitors and the ___________________
market. Strategy is nearly always based on a combined internal
___________________
and external view that includes market and competitor assumptions.
To ensure that strategy is being implemented, actual reporting needs ___________________
to compare performance by strategic initiative and to check that
___________________
any external assumptions made while planning still hold true.
Without this strategic external view, decisions will be based on a ___________________
view of performance that is too narrowly focused, and the strategy
gap will develop.
Lack of Realistic Forecasting

Although business conditions can change rapidly, many surprises
that affect organizational performance can be predicted using
available data and technologies. By predicting future performance
from plans based on the current and perceived business environment,
contingencies drawn up in advance can be selected or corrections to
the existing plan can be made to avoid or exploit the impact of any
variances. The ability to recognize and exploit changing business
conditions is the driving force behind rolling forecasts—which also
deliver the benefit of reducing or eliminating the annual budget
process. According to Hackett Best Practices research, however, only
23 percent of organizations make use of this proven best practice.
When forecasting, many organizations once again focus solely on
financial results, such as how much revenue will be generated and
what the associated costs will be. As with planning, effective
forecasting requires modifying and developing plans to achieve
strategic goals. In some circumstances, such as when assumptions
have changed, strategic goals may have to be reset. Forecasting
involves two steps:
• Predicting the likely future performance based on current
knowledge.
• Evaluating or selecting alternative plans to change the
predicted outcome.
To predict future performance, the natural life cycle of an
organization’s products and services should be taken into account.
312
This consideration must take place bottom up; that is, each product
Notes
and service must be analyzed individually.
___________________ Once a forecast has been generated, it can be used as the basis for
“what if” analysis, the process of evaluating alternative scenarios.
___________________
The aim is to evaluate what changes are required to the tactical
___________________ plan to achieve the strategic goals. As with budgeting, this evaluation
needs to be done by strategic initiative. The result will be the
___________________
predicted income statement. Organizations that reduce the
___________________ forecasting process to a simple extrapolation into the future will
reap unrealistic and misleading predictions. They will be unable to
___________________
modify behaviour effectively to achieve strategic goals, which will
___________________ result in the strategy gap.
___________________ Other Factors

___________________ Two other factors that can contribute to the strategy gap are more
attributable to organizational behaviour than to the processes
___________________
themselves; nevertheless, they need to be taken into account when
designing a solution. The first factor is a lack of accountability and
commitment to the budgeting process. Budgeting is often a game in
which budget holders inflate costs and suppress revenues because
they expect senior management to demand reduced costs and
increased revenues during a second budget pass. In addition, when
a budget is handed down to budget holders without giving them a
chance for input, budget holders feel free to miss their targets.
After all, it was not their budget. This game playing produces
unrealistic budgets, an absence of accountability, and a lack of
commitment to the final plan. The result will be the strategy gap.
The second factor is wrongly focused incentive plans. Budget holders
and management often are paid on their ability to meet or beat the
budget. This fact will affect their decisions when it comes to planning
and reporting their performance and does little to help with the
implementation of strategy. In some cases it will actively work
against the implementation of strategy. Hackett found that when
management motivation was linked to strategy rather than to the
annual plan, budgeting cycles were reduced and managers were
less afraid of taking risks.
Technology System-Induced Gaps

The third area that causes the strategy gap involves the traditional
systems used to support the planning, budgeting, forecasting, and
reporting processes. Issues include fragmented systems and
misplaced 3, forecasting, and reporting are treated as separate,
disconnected processes and supported by different technology
solutions. In fact, these processes are all part of the much larger
process of strategy implementation. The following analogy illustrates
313
why this separation does not make sense. The journey that a business
Notes
takes over time is like travelling down a road. The road curves and
changes direction, and its exact route often are hidden from view.
___________________
In the same way, business direction continually varies because of
changing customer requirements, competitors’ actions, or other ___________________
occurrences in the business environment.
___________________
On this journey, the business objective rests on the horizon. This
___________________
objective, based on current circumstances and assumptions, is the
planned destination for the organization. It serves as a beacon, ___________________
guiding the organization’s actions and decisions. The journey is
___________________
divided into a number of shorter segments, each of which the
organization will arrive at over time, allowing the organization to ___________________
gauge its progress. To reach the point on the horizon, the traveller
outlines a route. This plan identifies the main roads to be travelled ___________________
and the major cities the traveller will pass through en route to the ___________________
final destination. In the same way, strategic plans outline the route
an organization will travel to reach its objective. The journey may ___________________
take months or years to complete. The key roads are analogous to
the strategic plan’s tactics that must be performed to achieve the
objective. Cities are analogous to key performance indicators that
will tell the organization if the tactics have been completed and if
it is on target for success.
Continuing, the traveller may plan in greater detail the portions of
the journey to be attempted in the near future. The plan may include
the names of townships, descriptions of landmarks, and locations of
road junctions. These are vital indicators. Without them, the traveller
may go in the wrong direction without realizing it until much later.
The budget is like that detailed plan outlining the organization’s
immediate route. It is very much linked to the strategic plan but
contains far more detail. With the budget, the business assigns
money, people, and assets to the initiatives that will keep the
organization on course to reach its objective.
Monitoring progress relative to the detailed plan is a vital activity
because it shows the organization whether it is on target. Past
performance is of interest, but it actually does little to help the
business navigate the road ahead. On the journey, organizations
will come up against unexpected diversions, such as construction
(activities that are not yet implemented), accidents (activities that
are having an adverse impact on performance), and heavy traffic
(intense competition for the same customers). These diversions will
cause delays and can even lead to dead ends unless the organization
can avoid them. Similarly, organizations may come across new roads
(new business opportunities) that were not on the map when the
journey started. They may discover that taking advantage of these
roads can enable them to reach their destination sooner than
anticipated.
314
Finally, like directional signs and mile markers, the forecast tells
Notes
an organization whether it is heading in the intended direction and
where it will end up unless it takes immediate action. The enterprise
___________________
must monitor position and make adjustments constantly.
___________________ Occasionally it may need to make a major detour – sometimes even
heading in what seems to be the wrong direction – to achieve its
___________________
final objective. By taking note of the signs – the projected forecasts
___________________ – and using judgment based on experience, business leaders can
make intelligent adjustments to the plan. These adjustments will
___________________
not be just a once-a-year activity. They may become necessary at
___________________ any time to keep on track toward the intended destination.
___________________ Strategic planning, budgeting, forecasting, and monitoring actual

are all part of the same process—moving an organization toward
___________________ its objective. Together, they are essential components in the
___________________ implementation and execution of strategy. When performed in
isolation, however, they provide little value.
___________________
Quite often, managers are asked to budget using systems that do
not allow them to see the strategic plan or latest forecast. It is like
asking someone to drive down the road with only partial sight, no
map, and no idea of the final destination. To drive performance, the
company needs to see the whole travel plan: objective, strategic
plan, forecast, actuals and budget. These elements are all part of
the same process. This journey, or performance management process,
is continuous. Markets and competitors do not remain motionless
to accommodate an organization’s annual planning process.
Travelling down this road smoothly and staying on course, like
driving a car, requires regular, small adjustments.
Unfortunately, the traditional systems that support planning,
budgeting, forecasting, and reporting are inflexible. Each component
is isolated from the others. In addition, often each piece of the
process is supported by a different technology than the others,
causing integration problems. For example, the strategic plan may
be presented as a text document; the budget may be prepared in a
spreadsheet; actual results may be reported in the general ledger;
and analysis may be performed using an Online Analytical
Processing (OLAP) tool. These systems are completely disjointed,
manually intensive, and error-prone. As a result, they help create
the strategy gap. In addition, these systems tend to suffer from
other problems that also create gaps:
• Difficult to change: Most existing management systems do
not allow changes to be made easily. Altering structures,
accounts, and basic assumptions so that management can
quickly see the impact of change is complex and time
consuming. Sadly, most systems are nothing short of glorified
adding machines – and they do not even do this very well.
315
• Reporting problems: Systems tend to report from one
Notes
perspective – usually accounts down the page, and time and
version across the page, with each page representing a cost
___________________
centre. Viewing data by product, turnover, geography, or any
other business perspective – such as strategy and tactic – is ___________________
extremely difficult. In addition, many systems require a great
___________________
deal of effort to disseminate actuals, the latest forecast, and
strategy information throughout the organization. These ___________________
difficulties prevent the detailed analysis of budgets, forecasts,
___________________
and actual results in context and can result in the approval of
unrealistic plans. ___________________
• File management issue: Many organizations still rely on ___________________
spreadsheets for preparing budgets and reporting results. While
spreadsheets are great personal productivity tools, they are a ___________________
nightmare when used as a corporate planning and reporting
___________________
system. In addition to flexibility and reporting problems already
discussed, spreadsheets and many other file- based systems ___________________
also incur version control and other problems because multiple
files have to be maintained, relinked, and then redistributed.
Apart from the time and error-prone nature of this task, you
can never be sure that users are now using the right version.
Misplaced Dependence on Enterprise Resource

Planning
A second system-induced gap can be caused by the reliance some
organizations have placed on their Enterprise Resource Planning
(ERP) systems to implement strategy. At first glance, such reliance
seems logical. Before ERP, the processes that made up the supply
chain – order entry, inventory management, billing, accounts
receivable, and others – were separate functions supported by
multiple stand-alone systems, often running on multiple
technologies. Each part of the process could be owned by a different
department or operating unit.
The problems these systems generated are similar to those
encountered with today’s planning, budgeting and reporting systems:
• Expensive in terms of both time (maintenance) and money
(hardware and software, personnel). Software had to be
maintained on individual desktops. Information Technology (IT)
staff had to learn multiple technologies. If the system had
been created in-house by a person who then left the company,
the organization had a big problem.
• Data integrity and version control issues. Changes in one system
were not automatically reflected in other systems, data often
had to be re-keyed, and data were shared by transferring files.
Many departments multiplied by many files equalled trouble.
316
Organizations could never be certain that the information they
Notes
were basing decisions on was accurate and up to date.
___________________ • Organizations could not easily see what was happening across
the enterprise, making it difficult to implement corporate
___________________
strategy, measure its success and make informed decisions.
___________________ Enterprise resource planning was hailed as the solution because
it integrated the supply chain processes and supporting systems.
___________________
The ERP systems increased the efficiency and speed of these
___________________ operations.
___________________ Because ERP systems appear to hold most of the actual data in a
centralized database, organizations today are looking to these
___________________ systems to solve their planning, budgeting, and reporting problems.
___________________ Many organizations are also trying to leverage their huge
investments in ERP implementations to get a return. Given that
___________________ many ERP vendors are now offering “integrated” planning,
budgeting, and reporting applications on top of ERP, this initially
___________________
seems an attractive solution. The problem, however, is that ERP is
the wrong vehicle for implementing strategic plans just as a farm
tractor is the wrong vehicle for taking a family on vacation. Gartner,
the Stamford, Connecticut-based research firm, reports that
“although ERP systems have largely addressed the needs of
transactional users, they have not been able to address the needs
of strategic and operational users.” The main reasons given are the
complexity of these systems for users and their closed architectures,
which make it difficult to integrate non-ERP data. All enterprise
resource planning systems are focused on transactions, not on
strategy. This very issue is the reason why today’s traditional
planning, budgeting, forecasting, and reporting systems fail.
Check Your Progress

Fill in the blanks:
1. .................. can cause a gap between strategy and execution through
both action and inaction.
2. ................ of strategy is vital in all management processes.
Implementing a strategic plan requires the dissemination of goals,

objectives, strategies, and tactics. Planners must be able to evaluate
the impact of economic drivers, forecast trends, and predict the
impact of competitors. Senior management needs the ability to
analyze alternative operating structures, investments, and
divestments. Enterprise resource planning was not designed to
deliver these capabilities. It is focused on operational efficiency.
Implementing strategy is about management effectiveness. The two
are different and require different tools and processes.
317
Summary Notes
Goals describe a future end-state – desired outcome that is
___________________
supportive of the mission and vision. Shapes the way ahead in
actionable terms. Best applied where there are clear choices about ___________________
the future. Puts strategic focus into the organization – specific
ownership of the goal should be assigned to someone within the ___________________
organization. May not work well where things are changing fast – ___________________
goals tend to be long-term for environments that have limited choices
about the future. ___________________
___________________
___________________
1. What are corporate goals?
___________________
2. How do strategic gaps hinder the achievement of corporate
goals? ___________________
3. What are the problems which are generated by ERP that are ___________________
similar to planning, budgeting and reporting systems?
4. Write brief note on Technology System-Induced Gaps.
5. Compare and contrast Process-Induced Gaps and Management-
Induced Gaps.
319
Unit 24 Notes
Life Cycle Approach to Strategic ___________________
___________________
Planning ___________________
___________________
___________________
\ IA - BS Matrix
___________________
\ Arthur. D. Little’s Life Cycle Approach to Strategic Planning
\ Business Portfolio Balancing ___________________
\ Strategic Funds Programming ___________________
___________________
Introduction
Formal planning and evaluation processes can play an important
part in organizations which develop and select strategies through
these fragmented, incremental processes. They can be an important
influence to ensure that the best practice is communicated through
the various parts of the organization, communicating the wider
organizational context to their ‘local’ decision makers. Planning can
be about changing minds, not just making plans.
In some organizations, especially in family managed business houses
or the visionary type organizations the dominant process for the
selection of strategies is command. The decision is taken at the
highest level with involvement/advice from the organization to
varying degrees. The efforts of those involved in formal evaluation
are concerned to ensure that selections made through command
process are well informed. It is important that, if strategies are
selected in this way, they have some completeness and are workable
in practice. Without some detailed substance in terms of specific
strategic choices development directions and methods, the vision
and intentions are not a basis on which strategy selection should
proceed. The role of formal planning in these circumstances is to
devise useful means of raising the level of debate among the decision-
makers during the selection process.
The pace of change, today, is unrelenting. It has created challenges,
ranging from direct threats like increased competition to
technological discontinuities. Organizations that have to maintain
or improve their position in the marketplace and create competitive
advantage for themselves will find that well thought out strategies
will play an increasingly important role in the future. They will
320
have to move towards a style of management that closely resembles
Notes
a planned approach.
___________________
IA - BS Matrix
___________________
The Planned Approach; Formal Evaluation: This is the ideal. The
___________________ rationale of selection of future strategies is ‘rational’. The
organization’s objectives, quantified where possible, are used as
___________________
direct yardsticks by which options are assessed. For example:
___________________ whether or not the strategies are likely to meet targets for return
on capital or market share.
___________________
EXTERNAL ENVIRONMENT
___________________
MARKET OPPORTUNITIES
___________________ A : Opportunities & Threats
B : Economic Climate
___________________
C : Societal Environmental Concerns & Values
___________________
What ought we to do?
What shall we do & Why?
POTENTIAL SYNERGIES STRATEGY
FIRM COMPETENCE
D : Markeing Capabilities
E : Other Corporate Resources
Figure 24.1: Business Strategy Mix Matrix
They provide quantified ‘answers’ regarding the relative merits of

different courses of action and to come up with the ‘right’ strategies.
Check Your Progress

Fill in the blanks:
1. The rationale of selection of future strategies is ...................... .
2. The organization’s objectives, quantified where possible, are used as
direct ……………… by which options are assessed.
Arthur. D. Little’s Life Cycle Approach to Strategic

Planning
Strategy selection is a complex process. Strategy will be driven by
the perception of the challenges and opportunities facing the
Unit 24: Life Cycle Approach to Strategic Planning
321
organization, and our strategic response to them. Choice of strategies
Notes
will depend on the relationship between the company and its
competitive environment; allocation of resources among competing
___________________
investment opportunities; and committing resources—often long-
term—needed to realize these opportunities. ___________________
Notwithstanding the complexity of the process of strategic choice, ___________________

the organization cannot live in a vacuum; it has to choose its
___________________
strategies so that it can survive in the marketplace. Once strategy
formulation is undertaken by the organization, it needs to evaluate ___________________
the strategic options it can exercise. In assessing strategies, there
are three types of evaluation criteria that can be used. ___________________
___________________
Assessing Suitability
___________________
Assessing the suitability of strategic options is the starting point of
the selection process. On the basis of the results of the exercise, a ___________________
more detailed analysis concerning the acceptability and feasibility
___________________
of these options can be undertaken.
It addresses the concern that under what circumstances of the
organization and its strategic intent, does the strategy bring the
results that it is looking for. There are a number of analytic
techniques that can be used to bring in clarity.
Suitability Business Profile

Portfolio Analysis
Is this a Will it lead to good
Does it strengthen
good financial
the balance of
strategy? performance?
activities?
Value Chain Analysis

Does it improve value
Life Cycle Analysis Positioning
for money?
Does it fit the stage Does it exploit core Is the positioning
we will be in? competencies? viable?
Figure 24.2: Testing Suitability
As has been shown in Figure 24.2, the different techniques that

have been identified provide answers for different points of view.
Life Cycle Analysis examines the stage of development of the
products; Portfolio Analysis examines the ability of the strategy to
strengthen the balance of activities; the Business Profile examines
the financial performance; Positioning tells the organization whether
or not the position is viable; and Value Chain Analysis provides
information whether or not the strategy improves the value for
money and exploits the core competencies of the organization. An
322
organization can use all or a combination of some of these techniques
Notes
described above. A short explanation on each of these analytical
tools is given in the paragraphs that follow.
___________________
___________________ Life Cycle Analysis
___________________ One of the tools described in this unit is the Product Life Cycle
Model. The product life cycle model is a representation of life stage
___________________ of a product. Based on the life stage of the product the organization
___________________ can decide the type of strategy it would like to follow for the product.
___________________ Table 24.1: Life Cycle - Portfolio Matrix, by Arthur D. Little
___________________ STAGES OF INDUSTRY MATURITY
Embryonic Growth Mature Ageing

___________________
Fast Grow Fast Grow Defend Position
___________________ Start-up Cost Cost Leadership Position
Dominant Leadership Renew Focus
___________________ Renew Fast Grow Renew
Defend Grow
Position
Differentiate Fast Grow Cost Leadership Find Niche

Fast Grow Catch-up Renew Hold Niche
Strong Start-up Differentiate Focus Grow
Cost Differentiate Harvest
Leadership Grow
COM
Differentiate Catch-up Harvest; Hang-in; Retrench

Fast Grow Differentiate Find Niche; Hold Turn
Focus Focus Niche; Renew; around
Favorable Start-up Grow Turn around;
Focus;
Differentiate;
Grow
Focus Harvest; Harvest Divest

Start-up Hang-in Find Niche Retrench
Grow Find Niche; Turn around
Tenable Hold Niche; Retrench
Catch-up
Turn around;
Focus
Differentiate;
Grow
Find Niche Turn around Withdraw Withdraw

Weak Turn around Retrench Divest
Grow
Table 24.1 describes the relationship between the stage of the

product’s life and its market position. This is called the Life Cycle
- Portfolio matrix. The market status is defined by its competitive
position. This has been broken up into five categories ranging from
323
dominant to weak. The product development stage has been
Notes
classified as embryonic, growth, mature and aging. The purpose of
the matrix is to establish the appropriateness of particular strategies
___________________
in relation to the two dimensions. It shows the likely or suitable
strategies that can be used, depending upon the life cycle position ___________________
of the product.
___________________
The position of the product within the life cycle is normally
___________________
determined by eight external factors; market growth rate; growth
potential; breadth of product lines; number of competitors; spread ___________________
of market share between these competitors; customer loyalty, entry
___________________
barriers and technology.
___________________
The competitive position of the organization within its industry can
also be established by looking at the characteristics of each category. ___________________
Few organizations are in a dominant position in an industry, unless
they are state monopolies. For example, the State Trading ___________________
Corporation and the Mines & Minerals Trading Corporation were ___________________
set up by the Government of India in the early sixties to give the
Government better control over foreign exchange. Even now, Oil &
Natural Gas Corporation (ONGC) has virtual monopoly in the
exploration sector. Normally, dominant businesses are controlled
by the State under the monopolies prevention legislations. However,
in specific products it is possible for an organization to be in a
dominant position.
Strong organizations are those that are in a position to follow
strategies without feeling threatened by competition. An organization
is in a favourable position where no single competitor stands out,
but where the company is better placed than most. Tenable and
weak competitive position indicates either the organization is
maintained by specialization or will find it difficult to survive
independently in the long run.
Positioning
Positioning is a basic proposition promoted by Michael Porter in
determining the generic strategies for competitive advantage. So
assessing whether the existing and future positioning is viable can
be done by asking whether demand is likely to grow or decline. For
example, the quality of the resources and the uniqueness of the
competencies are the basic features that determine the ability and
suitability of a positioning the product or service using a strategy
of differentiation. The extent to which the organization is capable
of supporting a particular positioning can be determined by using
the format given as Table 24.2.
324
Table 24.2: Assessing the Suitability of a Strategy
Notes
A B1 B2 C
___________________ Resources & Which of these Resources/ Which will be sustainable/
Competencies Competencies is likely to create difficult to Imitate
___________________ underpinning
Strategy Cost Reduction Added Value in
___________________ terms of Needs
perceived by
___________________ Customers
Valued Rare Complex Tacit
___________________
___________________
___________________
___________________
___________________ The first step in the analysis on the suitability of the positioning
___________________ strategy of the organization is to list out the key resources and
competencies underpinning the strategy. In order to complete the
first step, you need to fill in column A in the table.
These are then scored against two important competencies of the
firm. These competencies, ‘cost reduction’ and ‘value added’ have a
significant impact on the outcome. In the table above, these are
given in columns B1 and B2. We need to ask the question whether
each of the competencies identified in A strengthens cost reduction
or adds to the perceived value. A score is given on a scale of 1 to
5. For example, the in-house R&D activities may be the source of
significant cost reductions and unique product features valued by
the customers. It would, then, score highly both in columns B1 as
well as B2.
Finally, the analysis requires re-examining each of the resources
and competencies to establish whether it is sustainable and/ or
difficult to imitate. Unique resources and core competencies are
sources of competitive advantage. The criteria used to judge the
competitive advantage through the resources and competencies
include: whether it is valued by the consumers; whether it is rare;
is it complex to replicate; and whether it is embedded in the tacit
knowledge of the organization.
Generally speaking, few resources and competencies are difficult to
imitate. Most often, competitive advantage may not come directly
from specific resources and competencies but on the ability of the
organization to manage linkages between the separate activities.
However, assessing the relationship between the generic product /
market strategy and the strategic capability of the organization is
useful in preparing resource plans for the strategy and in identifying
its critical success factors.
325
___________________
1. The product life cycle model is not a representation of life stage of a
product. ___________________
2. Positioning is a basic proposition promoted by Michael Porter.
___________________
___________________
Business Portfolio Balancing
___________________
A number of techniques have been developed for displaying a
diversified organization’s operations as a portfolio of businesses. ___________________
The techniques provide simple frameworks for reviewing the ___________________
performance of multiple Strategic Business Units (SBUs’)
collectively. A SBU is a business that can be planned separately ___________________
from others, has its own set of Competitors, and is managed as a
___________________
Profit Centre. Techniques of portfolio analysis have their greatest
applicability in developing strategy at the corporate level. It charts ___________________
and characterizes the different businesses in the organization’s
portfolio and helps in determining the implications for resource
allocation.
A business portfolio is the collection of Strategic Business Units
(SBU) that makes up a corporation. The optimal business portfolio
is one that fits perfectly to the company’s strengths and helps to
exploit the most attractive industries or markets. A SBU can either
be an entire mid-size company or a division of a large corporation.
It normally formulates its own business level strategy and often
has separate objectives from the parent company.
The aim of a portfolio analysis is:
• Analyze its current business portfolio and decide which SBUs
should receive more or less investment.
• Develop growth strategies for adding new products and
businesses to the portfolio.
• Decide which businesses or products should no longer be
retained.
The basis for many of these matrix analysis grew out of work carried
out in the 1960s by the Boston Consulting Group (BCG). BCG
observed in many of their studies that producers tend to become
increasingly efficient as they gain experience in making their product
and costs usually declined with cumulative production. They came
up with a hypothesis to explain how an organization with the highest
market share in the industry generally will have the greatest
accumulated volume of production and therefore the lowest cost
relative to other producers in the market.
326
Techniques of business portfolio balancing have their greatest
Notes
applicability in developing strategy at the corporate level. It charts
and characterizes the different businesses in the organization’s
___________________
portfolio and helps in determining the implications for resource
___________________ allocation. The Boston Consulting Group Matrix (BCG Matrix) is
the best-known portfolio planning framework. The GE/ Mckinsey
___________________
Business screen is another well known portfolio framework, but it
___________________ is a more complex version of the BCG matrix. The aim of these
techniques is to develop growth strategies for adding new products
___________________
and businesses to the portfolio, and decide which businesses or
___________________ products should no longer be retained.
___________________
Check Your Progress
___________________ 1. A business portfolio is the collection of Strategic ............... that make

up a corporation.
___________________
2. The .................. is the best-known portfolio planning framework.
Strategic Funds Programming

Funds are used to maintain (1) the same level of production or
services, (2) the organization’s “market share,” or (3) a specified,
ongoing rate of growth.
Strategic funds are invested in the new programs required to meet
the organization’s goals and objectives. They are used to purchase
new assets, such as equipment, facilities, and inventory; to increase
working capital; and to support direct expenses for research and
development, marketing, advertising and promotion. In the private
sector, strategic funds are also used for mergers, acquisitions and
market development. A market penetration strategy, for example,
may call for a more intensive investment of funds in the current
business. A market expansion strategy usually requires aggressive
use of strategic funds for advertising and promotion. A company
must use strategic funds to produce more diverse products or services
and to develop new markets for them.
The programming of strategic funds begins with the identification
of basic organizational units (program or budget units) and the
formulation of goals and objectives for these units. The total amount
of strategic funds available to the organization can be determined
by subtracting baseline funds from total assets (revenue or
appropriation). Strategies must be formulated to carry out the goals
and objectives of each unit. Once estimates have been made as to
the funds required for each strategy, they can be ranked according
to their potential contribution to the achievement of the identified
goals and objectives. In undertaking this ranking, the kinds of
327
strategic funds available and the level of risk involved must be
Notes
taken into account.
The available strategic funds should be allocated to each program ___________________
according to some set of priorities. Key decision points concerning
___________________
risk and return are encountered (1) when funds available from
internal sources have been fully consumed and (2) when readily ___________________
available credit sources have been exhausted. At this point, proposed
___________________
strategies must be evaluated in terms of changes required in the
financial structure of the organization. The final step is to establish ___________________
a management control structure to monitor the generation and
___________________
application of funds to achieve the desired results.
___________________
The programming of strategic funds simply identifies feasible options
under different fiscal assumptions. A further assessment or risk ___________________
and return on investment must be made before the final option is
chosen. ___________________
___________________
Check Your Progress
Fill in the blanks:
1. ................... are invested in the new programs required to meet the
organization’s goals and objectives.
2. A company must use strategic funds to produce more diverse products
or services and to develop new ................ for them.
Summary
Different techniques that have been identified provide answers for
different points of view. Life Cycle Analysis examines the stage of
development of the products; Portfolio Analysis examines the ability
of the strategy to strengthen the balance of activities; the Business
Profile examines the financial performance; Positioning tells the
organization whether or not the position is viable; and Value Chain
Analysis provides information whether or not the strategy improves
the value for money and exploits the core competencies of the
organization.
The position of the product within the life cycle is normally
determined by eight external factors; market growth rate; growth
potential; breadth of product lines; number of competitors; spread
of market share between these competitors; customer loyalty, entry
barriers and technology.
Positioning is a basic proposition in determining the generic
strategies for competitive advantage. Gap analysis is a useful
technique that can be used to identify the extent to which the
existing strategies will fail to meet the performance objectives in
the future. Screening options basically are concerned with the
relative merits between different strategies.
328
The Life Cycle - Portfolio matrix depicts the relationship between
Notes
the stage of the product’s life and its market position. The market
status is defined by its competitive position. This has been broken
___________________
up into five categories ranging from dominant to weak. The product
___________________ development stages have been classified as embryonic, growth,
mature and aging. The purpose of the matrix is to establish the
___________________
appropriateness of particular strategies in relation to the two
___________________ dimensions.
___________________ Positioning - Resource Analysis is used to assess whether the existing

and future positioning are viable. The first step in the analysis on
___________________
the suitability of the positioning strategy of the organization is to
___________________ list out the key resources and competencies underpinning the
strategy. In order to complete the first step, you need to fill in
___________________ column A in the table. These are then scored against two important
___________________ competencies of firm. These competencies, ‘cost reduction’ and ‘value
added’ have a significant impact on the outcome. Finally, the analysis
___________________ requires re-examining each of the resources and competencies to
establish whether it is sustainable and/or difficult to imitate.

1. Define the position of product within the life cycle.
2. Describe the relationship between the stage of product’s life
and its market position.
3. Comment on Life Cycle-Portfolio matrix.
4. How is the programming of strategic funds useful in meeting
the goals and objectives of organisational units?
329
Unit 25 Notes
Case Study ___________________
___________________
___________________

___________________
___________________
Case Study: Strategic Control Techniques for Sony ___________________
Ericsson ___________________
___________________
Strategic control shapes the decisions that are taken by corporate
rulers in relation to the determination of the basic long-term goals ___________________
and objectives of the enterprise, and the adoption of courses of action
and the allocation of resources necessary for carrying out these goals.
Strategic decisions set or alter the structure of the basic parameters
within which an enterprise acts (Scott 1997). To control the
implementation of the new strategy, communication systems will be
used between the members of the organization. The communication
systems will assist in monitoring the new strategy and its effects on
the organization. The implementation of the new strategy will be
validated via its effect on the company and the industry. To assist
strategic control, control techniques will be used. The following part
lists the probable control techniques for Sony Ericsson.
Balanced Scorecard
The balanced scorecard was introduced by Robert Kaplan and David
Norton to measure whether the activities of the company is meeting
its objectives. The balanced scorecard have become a fertile field of
theories and scholastic research, as times past the balanced scorecard
was altered by various individuals depending on the need of the
environment. When Sony Ericsson implements the balance scorecard
it will translate the company’s vision into operating goals, the balance
scorecard will communicate the vision and then link it to individual
and organizational performance, the balance scorecard will also lead
to a much strategised business planning process, lastly the balanced
scorecard will help the company to know how to gain feedback and
learn from such feedback. This in turn will help the company adjust
its strategy according to the feedback and what they have learned
from it. A disadvantage of the balanced scorecard is studies not linking
balanced scorecard to improved financial performance. This could mean
that the balanced scorecard can create changes to the financial
performance but it doesn’t necessarily mean that the financial
performance will improve.
Contd...
330
Notes This also means that the balanced scorecard can only initiate the
movement in the financial performance and not create methods to
increase the financial performance of the firm.
___________________
Benchmarking
___________________
Benchmarking can help Sony Ericsson compare what it does against
___________________
what another organization does; it puts the basis of comparison on its
___________________
cost, time spent or quality of service. A problem with benchmarking
is it forces restriction on what has been done. Benchmarking does not
___________________ help the organization to achieve marketing share instead it is a catch-
up managerial tool.
___________________
Sony Ericsson Budget
___________________
The company’s budget in 2007 reached €5,380,000. This budget was
___________________ used for the cost of production and the other expenses made by the
firm. Each expense of the firm was duly noted and recorded. The cost
___________________ for the company includes the production expenses, supplies expense,
rent expense, salary expenses, tax expenses and other miscellaneous
___________________ expenses.
Project Program Management

Project management will not work if managers are not knowledgeable
about the project they are guiding. Putting project managers that
knows about economics into projects that are purely technical in nature
would cause the failure of such projects. There is a need for
performance measurements during project making. Performance
measurements help in knowing whether the people working in the
project can finish such task at the fastest time possible. There are
different methods used to measure performance this includes GANTT,
PERT and CPA. Gantt charts can be understood by a wide audience
because it makes use of a common technique for representing the
phases and activities of a project. Gantt charts show little information
per unit area of display. It can be said that projects are considerably
complex than can be communicated effectively with a Gantt chart.
Program Evaluation and Review Technique (PERT) is known as a
method that helps in analyzing the involved tasks in completing a
given project. PERT focuses on the time needed to complete a task.
Pert charts require the minimum time needed to complete the total
project. The limitation for PERT chart involves human errors. Creators
of PERT charts may omit certain activities; PERT chart creators may
also organize the activities in the wrong order. Critical Path Analysis
(CPA) calculates the longest path for planned activities until it reaches
the end of the project. CPA takes a look at the earliest and latest
instances that a certain activity can start and finish without making
the project longer. There are instances wherein a schedule made using
CPA is not realized accurately, this results to change in analysis and
failure of the project.
Question:
Source:http://ivythesis.typepad.com/term_paper_topics/2010/10/strategiccontrol-
techniques-for-sony-ericsson.html#ixzz1uqKSSP00

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UPES

CENTRE FOR CONTINUING EDUCATION

Dr. Kamal Bansal Ms. Deepa Verma Mr. Ashok Sahu

SLM Development Team

Mr. Tarun Batra Mr. Rahul Sharma Mr. Shantanu Trivedi

Course Code: MBCG743D

Version: July 2019

Unit 1 Business Policy – An Overview ........................................................................ 03

Unit 2 Strategy and Strategic Management ............................................................... 15

UNIT-1: BUSINESS POLICY – AN OVERVIEW

UNIT-2: STRATEGY AND STRATEGIC MANAGEMENT

UNIT-3: BASIC MODELS OF STRATEGIC MANAGEMENT

UNIT-4: STRATEGIC INTENT – VISION, MISSION AND OBJECTIVES

UNIT-5: CASE STUDY

Learning Objectives: ___________________

\ Business Policy ___________________

1. ...................... are statements either expressed or implied of those ___________________

2. Policies are general statements or undertakings that guide or channel ___________________

Concept of Strategy ___________________

A strategy is gamesmanship or administrative course of action

Nature and Characteristics of Strategy

___________________ Check your Progress

Check Your Progress

Characteristics of Business Policy

• They are overall guides determining the direction of managerial ___________________

Objectives of Business Policy

Advantages of Business Policy

in its proper perspective. For example, in the context of business

Disadvantages of Business Policy

• No problem can be solved very quickly on the basis of policies,

___________________ Scope of Business Policy

Classification of Business Policy

Check Your Progress ___________________

Fill in the blanks: ___________________

Questions for Discussion

Strategy and Strategic Management ___________________

Learning Objectives: ___________________

\ Dimensions of Strategic Management ___________________

Scale of the Objective Grand Limited

Scope of the Action Broad and General Narrowly Focused

Guidance Provided General and Ongoing Specific and

Degree of Flexibility Adaptable, but not Fluid, quick to adjust

Timing in Relation to Before Action During Action

Focus of Resource Deployment Employment

There is a unique relationship between strategy and tactics. Every

Check Your Progress ___________________

2. ................. are techniques or a science of dispensing and manoeuvring ___________________

Definition of Strategic Management

___________________ • Determination of long-term goals.

___________________ • Adoption of courses of action.

___________________ • Allocation of resources to achieve those goals.

with problems of operational nature. He generally focuses on day- ___________________

Check Your Progress

Levels at Which Strategy Operates

___________________ Corporate or Grand Strategy

___________________ Finance Marketing Human Resources

Corporate Level or Grand Strategy

Business Unit Level or Competitive Strategy

___________________ Check Your Progress