Business Policy and Strategic Management 2012/20

CHAPTER 1
Part-1: Overview of Strategic
Management

Business Policy and Strategic

Management (BPSM)

Brief Contents: An overview of Business policy:

Conceptual approach

1.1 Definition of Policy

1.2 Types of Policy
1.3 What does Policy Do?
1.4 Why have Policies
1.5 Nature and Essential Futures of Policy
1.6 What is Good Policy?
1.7 Criteria for Good Policy
1.8 Determinants of Business Policy
1.9 Merits and Demerits of Policy
1.10 Policy Making and Policy Documents /Formulation of
Policies

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Learning outcomes: after successfully completing this chapter,

learners will be able to:
Define what policy does mean.
List the concepts that are common to any business policy
identify and explain types of business policies
understand the reason behind having policies
List the criteria that have to be considered in good policy selection
Identify the Merits and Demerits of policy

Part one: The overview of Strategic Management

Chapter one: An overview of Business policy: Conceptual
approach

“The most important part of every business is to know what ought to be

done.”
1. Definition of policy
What is Policy?
In a business circle one frequently hears the word “policy”. It is a term often used loosely
but it involves a vast gamut of principles and it is basic to the success of organizations.
When a group of people are asked ‘what is policy?’ they will typically reply with a range of
responses such as:
 policy is rules or guidelines;
 policy is an organization’s principles;
 policy sets out the way that things are done;
 policy creates a framework for the way we do our work;
 policy sets the standards for an organization;
 Policy arises from best practice.
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Policy is an umbrella and a multidimensional term.

The word "policy" as an umbrella concept provides a framework for action. In practice in
organizations, it is useful to think of policy as having a range of elements but getting
emphasis when used in particular situations.

These elements of policy include:

 Policy creates a framework for action within an organization. It is a wider framework
within which an organization operates (awards, legislation, Government policy, etc).
 Policy is a decision.
 Policy is grounded in legitimate authority.
 Policy is a written product.
 Policy is in the hearts and minds of people (it needs to be known, to be acted on).
 Policy creation is an ongoing process.
The term policy has been derived
 from a Greek word “politieia” - meaning ‘citizen’; and
 From Latin word “polities” – meaning ‘polished, i.e. to say clear’.

The word "policy" can be used to cover matters ranging from high order strategy to
administrative detail. Policy can encompass a position, an intention or a plan on any issue
where the government or the organization needs to take action. To assure consistency and
uniformity of action, sound policy must be formulated. The dictionary meaning of the word
‘policy’ is or policy can mean:
 The art or manner of governing nation or the line of conduct, which rulers of nation adopts
(Webster).
 A plan of action, usually based on certain principles, decided on by a body or individual, or
a principle or set of principles on which to base decisions, or a course of conduct to be
followed (Chambers English Dictionary)
Policy/ Policies
 Is a general guide to action? Typically it doesn’t tell a person exactly what to do, but it
does point out the direction to go. (Newman)

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 Is a statement or general understanding which provides guidelines to act in any course of

action.
 Is a rule or set of rules that people must follow. Policies have the power to influence how
you and others act. They can be set by government, schools, organizations, and other
groups.
 Is a formal document or written statement that communicates management's intent,
objectives, requirements, responsibilities, and standards.
 Is a formal statement of principles established to provide guidance to the administration
regarding the operation of the constituency?

In short, a policy is a set of guiding principles, an acceptable practice, or a rule intended to

influence organization decision-making. Policies are formal in nature, broad in their
application, and rarely change unless a regulation, law, or code of practice changes in the
industry. While policies are typically written and defined by management, they are
commonly reviewed, approved, and maintained at periodic and specified intervals and
whenever legal requirements or regulations change. Policies delimit an area within which
decision is to be made and assumes that the decision will be consistent with and contributive
to objectives.

Policy restricts the freedom of action and it is generally expressed in qualitative, conditional
and general way. Business policy is management’s expressed or implied interest to govern
action in the pursuit of company’s objectives. It is simply, the guide to action for the
successful achievement of the objectives of the enterprise.

Some concepts that are common to any business policy are:

 Policy is a necessity if a given business is to realize its objectives.
Policy and objectives are not the same nature.
 Objective is an end; Policy is a means to that end.
 Objective involves accomplishment; Policy involves the method.
 Objectives are the criteria for action; Policies are the part of the action.
Setting objectives and policies are both the sole duties and responsibilities of managers
whose business is decision making.

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 Policy is a definite statement of purpose and procedure.

For a business to function effectively, managers must base their decisions on governing
principles; because policy is basic to this effort. A definite statement of principles or
procedures will bring about an understanding of requirements for effective action or
management.

 Policy is a means by which company objectives are effectively reconciled with internal
factors and organizational functions.
The objectives and decision making are contingent on internal factors. Managers must set
goals that are reasonable in accordance with internal factors – the company’s resources and
organizational functions, - and which involves various sections.
 Policy is a statement of procedure or principle by which a company intends to realize its
objectives.
It insures proper direction toward definite objectives of a business in the light of internal
factors and organizational functions.

1.2. Types of policy

Policies should express and embody society’s needs and values. The function of managers
(executives) is leadership and guidance of an organization. In order to lead and guide the
organization efficiently, managers have to set up policies for all levels, from the highest to
the lowest.
 General policies
General policies are statements of principles that guide the organization. They are broad and
comprehensive; and basic to the direction of the company. They decide questions involving
geographical locations, product lines, product distribution, diversification, decentralization.
 Specific
As each unit or department has its own objectives, the executive must formulate policy
keeping these in mind.
Hiring or discharging employees, vacations, extension of credit to customers, restrictions on
inventories, and insurance would all come under minor policies.
1.3. What does policy do?

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Effective policy making is one of the most important issues. Every aspect of policy making
should directly and indirectly improve the learning, development and wellbeing of
community.

Policy work can:

 improve decision making
o Good policy work relies on powerful tools such as the use of evidence,
analysis and evaluation.
 explain why things need to change
o Effective policy development, documentation and communication help organizations,
government and government agencies to communicate their intentions and explain
their actions.
 help to focus on what is important
o Policy work shows how the department is implementing change and how it is dealing
with new challenges.
 inform judgments and guide actions
o Policy guidelines help decision makers across organization to solve problems, to plan
ahead and to make appropriate judgments.
 manage risks and entitlements (power)
o Good policy always considers risks to people and organizations.
 strengthen relationships and build capacity
o Policy activity engages people and organizations within and outside government in an
exchange of ideas and information.
1.4. Why have policies?
Some of the reasons we have policies are:
 People working in an organization need to have a framework for action that help them get
on with the job they need to do.
 People in the organization don't have to keep on discussing and re-discussing the same
issues every time they arise - one thought out decision can be applied to many similar
cases - efficiency.
 Legal and other requirements can be met.

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 tools in quality improvement

 to comply with accreditation standards

1.5. Nature and essential features of policy

A policy is must be written in brief. The worthiness of policy depends on the trust and faith
on policy makers. It should be formulated with context of organizational objectives; should
be accepted by everyone in an organization. Policy should be definite, clear, flexible and
understandable to everyone in the organization must not leave any scope for ambiguity. It
should be translated into action within the framework of corporate resources and the external
environment. Policy should be related to the objective and compatible with the public
interest. It should conform to economic principles, status and regulations. It should be
properly communicated to those who are expected to work within the policy framework.

Policies should be based on facts and sound judgment and should not continue merely
personal reflections. Since policies are intended to be general principles to guide future
actions, they should not prescribe detailed procedures. Policies should be subject to
evaluation. From time to time policies must be evaluated so that changes or innovations may
be corporate. It should, as far as possible, be stated in writing.

The nature/ characteristic of corporate policy can be judged based on:

 Policies are generally formulated with the long-term in mind.
 Policies direct actions towards the achievement of objectives.
 Policies are designed to secure consistency of purpose and to avoid short sighted
decisions that are and based on expediency.
 Policies are means to end and as such explain what people should do while objectives
decide what to do and policies state how to do.
 Policies are generally expressed in a quantitative, conditional and general way.
 Policies are standing plans designed to guide actions in areas of repetitive operations.
 Policies are influenced by the interests and attitudes of policy makers.

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 Policies may be the explicit declarations in writing or may be inferred from the behavior
of members of an organization.
 Policy formulation is a function of all managers in an organization. However, higher
level managers play a much more important role in policy making.

These are policy characteristics which are necessary to solving the policy problem:
Flexibility, Comprehensiveness, Coordination, and Ethics.
1.6. What is good policy?
 Good policy is beneficial.
o Good policy creates public value. Policy change should benefit individuals,
organizations and services.
 Good policy is necessary.
o A clear rationale for a new policy or revising an existing policy is an essential first
step.
 Good policy has an end in mind.
o The direction to be set, or the problem to be fixed by policy change, must be clear
from the outset. Good policy making considers both the immediate short term and
longer term systems impact.
 Good policy aligns with the goals.
o Policy is an instrument of change that must be attuned to corporate goals.
 Good policy is well informed, concise and rigorous.
o Good policy uses evidence and information as the basis for analysis which should in
turn be rational, comprehensive, thorough and balanced. Quantitative and qualitative
information should be applied.
 Good policy is ethical.
 Good policy is transparent.
o The processes used to develop policy need to be clearly communicated and widely
understood. They should engage those individuals and organizations who will be
affected by policy change from the outset.
 Good policy is intelligible.

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o Clarity and economy are essential features of good policy. Policy should be described
in as few words as possible with clear messages which are readily understood. A good
policy should be in plain English.
 Good policy is open to change and improvement.
o All policy documents are constructed, published and written in a particular time and
place. They should be reviewed, refreshed, replaced as we move forward.

 Good policy is on time.

o Effective policy development and implementation aligns with departmental milestones
and targets, and responds rapidly to emerging challenges and changes of direction.
 Good policy can be enacted.
o Good policy foresees the challenges of implementation and adapts to the shifting
realities of our operational environments.
1.7. Criteria for good policy
Criteria for good policy include:
 Is it client focused?
 Will it be useful for the intended users, e. g, service users, staff and management
members?
 Does it include policies on all areas relevant for accreditation and legislative
requirements?
 Will it improve the likelihood service a quality service?
 Is it easy to find and access?
 Does it inspire the reader?
1.8. Determinants of business policy
The common factors those determine business policy are:
o Market structure
The nature and scope of the market for the company’s product is a key factor in policy
determination. Segmentation of market, designing different products for different segments,
etc is the policy matter which should be carefully analyzed.
o Competition
Business policy is influenced by competition. Hence every firm must take into account the
competitors strengths and weaknesses.

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o Government policies
Government policies for reservation of certain products for public sectors, private sectors and
small scale sector, industrial licensing, export-import control act, control of wealth in few
hands, price amalgamation and merger, expansion, foreign exchange regulation act, etc
exercises significant influences on business policy.

o Technology
Technological development forces the management to go for it. If the organization doesn’t
adopt the advanced technology it cannot face risk and return of technological obsolesces.
Therefore, the nature of technology cost and risk involved in it are the determinants of
technology.
o Social and political environment
It is known that enterprises deal with people, religion, cultural and ethnic dimensions of
social environment. The social environment consists of the views, pressures and inter-
relationship of various sections of the society. Therefore, enterprises must keep in mind the
above noted facts into consideration while formulating the policies.
o Business objectives
Business objectives are concerned with profitability, market share, growth, diversification,
social responsibility, etc Therefore, policy makers should take into account the objectives
of business while formulating the corporate policy.
o Management philosophy
Management philosophy exercises a significant influence on policy formulation. Autocratic
and paternalistic management formulates the policies without consulting subordinates. And
participative and democratic management consults while formulating the policies.
1.9. Merits and demerits of policy
The merits or importance of policy can be understood from the following points.
 Policies are the guideline for the member of organization to take decision and action in a
specific situation, which may occur frequently under similar conditions. Without policy
guidelines, decisions taken at different levels of management may be inconsistent with
the basic aim and the philosophy of the company.

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 Policies help to accomplish the predetermined goals and objectives and prevent unwanted
deviations from planned course of action.
 Written down policies serve as a means of communication and help to avoid
misunderstandings between employees and management.
 Written down policies provide a frame of reference to management and subordinates. The
framed policies save the time of managers in taking decisions for recurring nature of
problems.

Some of the demerits or disadvantages of (written) policies are:

 Written down policies curb (restrict) creative thinking and reduce management
flexibility.
 It is difficult to adopt written policies to situations and conditions, which change from
time to time.
 It is likely to be interpreted in many cases differently depending on the background of
the interpreter.
 In case conditional policy statement, there is a greater chance of being communicated to
those from who they are to be kept secret.
1.10. Policy making and policy documents / Formulation of
policies
Policy formulation is a complex process that requires both systematic analysis and judgment
experience. The various steps involved in the process of policy formulation are:
1.11. Analysis of environment
At the time of formulation of policy, the management should understand and analyze the
internal and external environment of accompany. Any change in the environmental forces
affects the organizational goals and policies. Therefore, policy makers should monitor and
forecast the environmental changes.
1.12. Goal specification
Policies should be formulated in the light of corporate goals. Corporate goals are based on
market condition, competition, government policies, input supply position, resources, etc
All the above factors should be kept in mind while making policy.
1.13. Policy alternatives

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Every policy should have an alternative which may be used in the situation when original
policy doesn’t work. The environmental analysis will reveal the strength, weakness and risk
of an organization, which will lead to generate alternative policies.
1.14. Evaluation of policy alternatives
Alternative policy should be evaluated in terms of their contribution to corporate goals. The
effectiveness of policy can be tested by evaluating the profitability, growth, and image of the
company in the minds of customers.

1.15. Selecting policy

Selecting policy from alternatives is the last step in the process of policy formulation. The
policy finally chosen should be tested in terms of its influence on organizations. If it is
suitable, it must be used; if not it should be reviewed and revised. The selected policy should
be communicated to all those who are concerned with it.

Policy making is a continuous and complex task that crosses all levels of the department’s
work, ranging from the most general to the most specific. A well designed policy document
is more likely to be better received and understood.

What should policy document include?

A policy documents should be brief, written in plain English and include the following core
elements:
 Purpose/ intention - a brief, clear and direct explanation of what the policy is intended to
achieve and to whom it is intended to apply
 Legislative base - a reference to the legislation that provides the authority for the policy
statement
 Scope - to whom and to what the policy applies, where the policy will have effect and the
public value it will add
 Context - a brief description of the context within which the policy will operate,
including connections with government directions

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 Principles - a description of the principles that have shaped the development of the policy
and their effect on the way in which it should be applied
 Responsibility - Identification of those responsible for implementing the policy and what
is expected of them
 Policy statement - the policy itself
 Evaluation process - a description of the way in which the impact of the policy will be
assessed and a timeline for this
 Review date - a date for review of the policy
 Document and version control - the document and author name version, sign off and
publication date
 Contacts, supporting tools and resources people - as a minimum, a contact person who
can assist with inquiries about the policy and any other tools or supporting materials that
will help the policy to be understood and successfully implemented.

Review Questions
Define what policy does mean?.
List the concepts that are common to any business policy
Identify and explain types of business policies?
can you list the reason behind having policies?
List the criteria that have to be considered in good policy selection?
Identify the Merits and Demerits of policy?

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2
CHAPTER
The Nature of Strategy and
Strategic Management
Brief Contents
2 .1 Introduction What Is Strategy?

2.1.1 The Role of Strategy in Sucess

2.1.2 A framework for analyzing business strategy

2.1.3 Strategic Issues

2.1.4 Strategic Choice

2.1.5 The Strategic Options

2.1.6 The Distinctive Nature of Strategy

2.2 Strategic Management

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2.2.1. What is Strategic Planning?

2.2.2. Strategic Analysis

2.2.3. Strategic Formulation

2.2.4. Strategic Implementation

Learning outcomes: After successful completion of this chapter, learners

will be able to:

Define the term strategy

Identify the roles of strategy for success
List and explain the elements used to evaluate the alternative strategies
Chapter two: The nature of strategy and strategic management

“Without strategy an organization is like a ship without rudder, going in

circles.”
2.1. What is strategy?
To the relative success of an organization in its business over time a consistent, coherent,
effective and appropriate strategy is critical. Strategies are actions that determine whether an
organization survives, prospers, or dies. Strategy is purposeful. For managers, understanding
those which make a difference to the success of an organization is a key skill; because
strategy involves many activities. Managers of any organization must address and timely
answer three central questions.

What is the company’s present situation?

 Where are we now?
 Pushes managers to evaluate the industry conditions and competitive pressure; the
company’s current performance and market standing; its resource strengths and
capabilities; and the competitive weaknesses.

Where does the company need to go from here?

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 Where do we want to go or to be?

 Businesses to be in & market positions to stake out; buyer’s needs & groups to serve;
outcomes to achieve.
 Forces management to think strategically about the direction the company should be
headed in order to grow the business and strengthen the company’s market standing and
financial performance.

How should the company get there?

 How do we get there?
 Challenges managers to craft and execute a strategy to move the company down the chosen
strategic path and achieve the targeted outcomes.
 The ‘how’s that define a firm’s strategy.
 How to grow the business
 How to please customers
 How to outcompete rivals
 How to respond to changing market conditions
 How to manage each functional pieces of the business and develop needed
organizational capabilities
 How to achieve goals & objectives
Managers at all levels have an important role in ensuring the survival and prosperity of the
organizations for which they are responsible. Generally, managers should pursue strategy
with consistency. They should know the uniqueness and distinctiveness of their organization,
its resources and capabilities, the way it competes for scarce resources and customers for its
services.

Managers must be able to act on uncertain predications of unknown future, and seek out
sources of innovation in the way their business operates and competes; and they must also be
able to implement effective change and to align collective objectives in their organization to
allow new capabilities and skills to be developed.

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The concept of strategy has several meanings. We develop a meaningful understanding of

what strategy is through learning and experience of using theories and concepts to understand
cases and real-life situations, and of developing strategies.
Some of the definitions of strategy are:
 Strategy is the pattern of activities followed by an organization in pursuit of its long-term
purposes.
 Strategy is a course of action that helps to achieve organizational goals.
 Strategy is about winning
 Strategy is about charting an unknown future. It is also about how decisions are taken.
 Strategy is a plan of action that prescribes resource allocation and other activities for
dealing with environment, achieving a competitive advantage, which help the
organization to attain its goals.
 A company’s strategy is management’s game plan for
 growing the business,
 conduct operations
 staking out a market position,
 attracting and pleasing customers,
 competing successfully,
 conducting operations, and
 Achieving targeted organizational objectives.
 Strategy is recognizing
 Where are we now?
 What we have now?
 Who are our competitors?
 Where do we want to go?
 How do we get there?
Strategy is
 Is the art of war, especially the planning of movements of troops and ships etc., into
favorable positions, plan of action or policy in business or politics etc.
 is refer to the
 determination of the long run goals and objectives of an enterprise, and
 the adoption of courses of action and

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 The allocation of resources necessary for carrying out these goals/ the activities.
 Is the pattern or plan that integrates organization’s major goals, policies, and action
sequences into a cohesive whole.
 A well-formulated strategy helps to marshal and allocate organization’s resources
into a unique and viable posture based upon its
 relative internal competences and shortcomings,
 anticipated changes in the environment, and
 Contingent moves by intelligent opponents.
 is the pattern of objectives, purposes or goals and the major policies and plans for achieving
these goals, stated in such a way as to define
 what business the company is in or is to be in and
 The kind of company it is or it to be.
 Is all about competitive advantage.
 The sole purpose of strategic planning is to enable a company to gain efficient and a
sustainable edge over its competitors.
 Corporate strategy thus implies an attempt to alter a company’s strength relative to
that of its competitors in the most efficient way.
Competitive advantage refers to what sets the organization apart from others and provides
with a distinctive edge in the market place.
2.1.1. The role of strategy in success
Effective strategy can have a significant impact on the organization’s success through the
creation of dynamic match between the organization and its environment, and how managers
play central role in making that happen. Strategy is integrative and cross-functional which
concerned to the whole organization interaction with environment. It has a long-term horizon
and its projection and forecast to uncertain future.

The role or purpose of strategy is to identify the potential for competitive advantage within
an industry in terms of the factors that determine a firm’s ability to survive and prosper. To
survive and prosper in an industry, a firm must meet customers’ needs and survive
competition.
Strategy is source of competitive advantage; and helps to achieve success, but it does not
guarantee. Soundly formulated and efficiently implemented strategy is the key to success.

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The key common factor or ingredient for success is to have a soundly formulated and
effectively implanted strategy.

The four common/ critical elements in successful strategies

Successful
strategy

Effective implementation

Long-term, Profound
Objective
simple and understanding of
appraisal of
agreed the competitive
resources
objectives environment

The features of strategy that contribute to the success are such as:
 Goals should be simple, consistent, and long term.
o Clarity of goals
 Profound understanding of the competitive environment.
o Deep and insightful appreciation of the arena in which one is competing or
understanding the battlefield conditions where it would engage them.
 Objective appraisal of resources.

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o Emphasizing upon exploiting internal strength to the fullest and protecting areas of
weakness.
 Effective implementation.
o Not only the strategies are sound, but their implementation is also effective.
o Having effective leaders; eager to make decisions, to implement them, and to demand
loyalty and commitment from subordinates.
o Be structured to implement the strategies effectively. Structures and systems that
permitted the effective exploitation of the specialized skills and individual organization
members with the coordination and communication needed to integrate these individual
effects and focus them upon achieving the underlying strategic goal.
The role of strategy in success can be made in relation to most fields of human endeavor.
Whether we look at warfare, chess, politics, sport, or business, successful individuals and
organizations are seldom the outcome of some random process or the superiority in initial
endowments of skills and resources.

Strategies that build upon the above four elements almost always play an influential role.
High achievers in any competitive area or successful individuals in terms of recognition,
power, and material rewards are not, most commonly, those with the greatest innate abilities.
Central to the success of individuals within each of their highly competitive spheres is the
pursuit of strategies that share the same elements identified above, i.e.
 Having clear, long-term career objectives.
 knowing their environment
 Tend to be fast learner in terms of understanding ‘the game’
 knowing themselves well
 Appreciate their strengths and weaknesses
 pursuing their careers with commitment, consistency and determination
Hence, to be successful clear objectives, understanding the environment, resource appraisal,
and effective implementation are very vital.
2.1.2. A framework for analyzing business strategy
The framework views strategy as forming a link between the firm and its environment. The
task of business strategy is determining how the firm will deploy its resources within its

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environment and satisfying the long-term goals, and how to organize itself to implement that
strategy.

The firm The industry environment

Goals & values Competitors
Resources & capabilities Strategy Customers
suppliers
Structure & system

The firm combines three sets of key characteristics: Goals & values; Resources &
capabilities; and Structure & system.
The external environment of the firm comprises the whole range of economic, social,
political, and technological factors that influence a firm’s decisions and its performance.
However, for most strategy decisions, the core of firm’s external environment is its industry,
which is defined by its relationships with customers, competitors, and suppliers.
2.1.3 Strategic Issues
A key skill for strategists to develop is the ability to recognize those issues facing an
organization that are strategic.
Strategic issues are those which, if they are not addressed appropriately, will severely affect
(handicap) the organizations’ ability to function effectively. They can be characterized by
developments inside or outside an organization that are likely to have an important impact on
its ability to meet or determine its purpose and objectives.
Strategic issues are important to an organization and have biggest impact, and they are
identified by strategic analysis.
Benefits of identifying strategic issues (problems)
Strategic issues
 creates pressure or tension in the organization
 gives a clue about how to resolve the problems identified
 Enable management to see that there will be consequences to the organization if the issues
are not handled well.
 give attention to focus on which is really important to the organization
A helpful way of identifying strategic issues might be by reference to the (military)
distinction between strategy and tactics:

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 Strategy (Military) is the holistic deployment of resources in a favorable position in a way

that can influence the result of a war.
 Tactics are maneuvers and actions utilized to win a battle.
2.1.4. Strategic choice
Understanding strategy and strategic issues help us to recognize when the choices we make
as a manager and useful to identify the scope of the strategist’s task.
Strategic choices involve some or all of the following topics/ issues, and may be provoked by
the types of questions suggested below:
 Determining the nature, domain and scope of activities
 What business is the organization in, or in what sector is it active?
 What product or services does the organization provide, and in what market?
 How does the organization provide its product or service?
 What are the skills, capabilities, and competences it utilizes?
 Is it important that the organization is different from its competitors?
 If a particular strategy is pursued, is it reversible?
 Evaluation the success of activities
 How does the organization define success?
 Are measures of competitive advantages or superior profitability appropriate, does the
organization pursue alternatives, such as efficiency and effectiveness?
 From what values and beliefs are its measures and definitions of success derived?
 What is the organization’s time horizon for achieving success?
 To what extent can the future be predicted when establishing targets for success?
 Can quantifiable measures of success be established?
 Will there be adequate and reliable information available to allow for the evaluation of
success?
 The acquisition, allocation and commitment of a distinctive set of resources and
capabilities
 How quickly must scarce resources and capabilities be replenished?
 If a new strategy is pursued, what new resources or capabilities will be required?
 Will these be acquired through purchase or internal development?
 How important are finance, skills, information, knowledge, or raw materials in the mix
or resources required?

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 Once committed, can resources or capabilities be recovered?

 What competing claims are there for resources?
 How should the organization measure the effective use of these capabilities and
resources?
 Creating an effective match with the challenges of the environment
 To what extent do the organization’s skills and resource match the needs of the
environment?
 Can the organization influence or change the environment?
 Which organization does it compete with?
 Is the organization like its competitors?
 To what extent does it rely on collaborators to provide skills, or elements of product
offerings?
 How does it manage its boundaries?
 Managing the network of relationships with and between its stakeholders
 What objectives do the owners, financiers, employees; management, suppliers,
customers and competitors have for the organization?
 Are these stakeholders in conflict?
 What is the balance of power amongst stakeholders?
 How significant are the resource each contributes?
 What is the influence of for example, regulators, and taxing authorities planning
bodies, politicians, voters, or the media?

2.1.5 The strategic options

The strategic options:
 Should be taken/ based on SWOT analysis, i.e. built upon strengths to overcome
weaknesses and take advantage of opportunities to minimize threats of the organization.
 should be examined in terms of (to prove whether these options are appropriately taken or
not)
 suitability
 feasibility and
 acceptability
Assessing suitability

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Assessing suitability consists of examining the extent to which the strategy:

 Exploits the opportunities in the environment and minimizes the threats.
 Capitalizes on the organization’s strengths and core competencies and gives remedies to
the weakness.
 addresses the political issues of the country
Here, each strategic option should be assessed against a number of key factors such as
organization’s environment, resources, competencies and expectations.
Suitability also should attempt to mach specific options with a range of possible future
outcomes and are particularly useful where a high degree of uncertainty exists. This provides
a means of keeping many more options under consideration.
Assessing acceptability
The acceptability of strategies can be assessed in terms of
 return:
 Forecasting the return on capital employed at specific time after a new strategy is
implemented.
 The cost benefit analysis of the new strategies and the payback period of a significant
capital injection needed to implement the strategy.
 risk:
 Against the possible risks that the organization may face in pursuing a new strategy.
 Can be assessed in relation to sensitivity analysis or what if analysis.
 This technique allows each of the important assumptions underlying a particular strategy
to be questioned and need to be changed; and
 Reaction of stakeholder.
 Against stakeholder reactions.
 It is important to assess the likely reactions of stakeholders to new strategies, because the
reactions could be crucial to the successful implementation of the organizational
strategy.
Assessing feasibility
Assessing the feasibility of option is concerned with whether an organization has the
resources and competencies to deliver a strategy. The methods used to assess feasibility are:-
 Fund flow analysis
 Be used to identify the funds which would be required for any strategy to be designed.

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 Highlights whether the proposed strategy is likely to be feasible in financial terms.

 Break even analysis,
 It can be used to assess the feasibility of meeting targets of return.
 Resource deployment analysis
 This is a way of comparing options with each other in relation to the key resources and
competencies for each strategy.
2.1.6 The Distinctive nature of Strategy
Strategy requires managers to adopt an organization-wide perspective, together with a longer
time horizon. There are a number of ways in which strategy is distinctive when compared to
the functional disciplines of finance, marketing, human resources, operations, information,
etc.
The distinctive natures of strategy are:-
 Strategy is integrative and cross-functional
o Strategy traverses or travels across traditional functional boundaries, and the
management of relationships across the boundaries between organizational units is an
important strategic task.
 Strategy concerns the whole organization interacting with its environment.
o What happens in the environment affects the internal workings of the organization, and
vice versa.
 Strategy has a long-time horizon and is concerned with projection and prediction of an
uncertain future.
o An organization’s past history helps to determine the resources and capabilities
available at any one time, but strategy’s main interest is with predicting the future.
Uncertainty comes from the unpredictability of the actions of other actors.
The pace, variability, and dynamism of change vary from sector to sector. Making a strategy
requires the assessment of information about the features of the organization and its
environment.
The levels of strategy
Since making strategy demands cross-functional, integrative management of the whole
organization in its environment, some analysis of the levels of which strategy can exist
within an organization is required.

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Strategy is concerned with all levels, but it is helpful to create a classification that can help us
to focus our attention at any one time. The hierarchies/ levels of strategy in organization are
the following three.
Corporate strategy

Business strategy

Internal unit strategy

Corporate strategy is the management of the organization’s activities as a corporation, to

gain maximum benefit from the combination of related or unrelated business. It governs the
entire corporation.
Business strategy governs only the single business of the corporation and is subordinated to
the corporate strategy. It is strategy in one business devoted to competing with a particular
related product group, or using specific resources and capabilities.
Internal unit strategy contributes to the success of business and corporate strategy within
corporations and business, identifiable units are charged with technical, specialist,
operational or functional tasks. These units need to have their own strategies for executing
these functions or operations, and enlisting support from staff and other internal units.
Strategy at any one level in the organization is usually constrained by and influences
strategies at other level.
Strategic fit
The relationship between an organization’s environment and its internal resources and
capabilities is a theme that underlies most thinking about strategy. A fundamental tenet of
most thinking about strategy is that creating a “match” or “fit” between the organization
and its environment is essential to its relative success.
Strategic fit is the fitness between the firm, the strategy and the industry. It is the effective
match between external relationship and its distinctive capabilities. Strategic fit is important
to success.
Corporate success is based on an effective match between the external relationships of a firm
and its own distinctive capabilities.
For a strategy to be successful, it must be consistent;
 with the firm’s goals and values

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 with its external environment,

 with its resources and capabilities, and
 With its organization and systems.
Competitive advantage and superior performance is achieved through the exploitation of
opportunities in the environment using an organization’s unique set of resources and
capabilities.
Lack of consistency between the strategy pursued by a firm and its external and internal
environments is a common source of failure.
Sustaining effective strategic fit
A sophisticated approach to strategic fit needs to account for the following factors:
 The fit between the organization and its environment is dynamic and interactive.
 An effective strategic fit will be one that utilizes an organization’s distinctiveness in a
unique interaction with differentiated environment.
 Matching the organization’s resources and capabilities to the environment
 To create the best match we have to think strategically.
Your most dangerous competitors are those that are most like you. The differences
between you and your competitors are the basis of your advantage, which can only happen
at someone else’s expense.
Changes in a competitive milieu
Changes occur because of pressures from environment: from outside – from government,
competitors, suppliers, or customers; as well as from inside – from owners, management or
employees decide to change the nature of the business.

2.2. Strategic management

Strategic
A framework for strategic management
planning

External environment

Resource Strategic
requirement managemen Organization
t al structure

Strategic
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2.2.1. Why is planning/ strategic planning?

Because, we have unlimited needs and wants but limited resources to satisfy them, hence
 We have to prioritize them or set priorities
 Resources determination needs decision making
 To synchronize the unlimited needs and wants with the available resources to fit with
the environment
 To satisfy public needs by providing better service and performance
 Equips/arms top management and staff in making key decisions
Planning is essential activity to all organizations to survive as well as achieve
organizational objectives.
“Failing to plan is planning to fail.”
We plan;
 To ensure that organizations achieve their goals
 To obtain resources necessary for investment and for its ongoing function
 To co-ordinate actions /activities
 To measure and improve performance.
Concepts related to planning
 Planning has dimensions
Dimension of planning are: time – time horizon, and scope – levels at which planning is
carried.
 Complexity of planning
Plans have inherent or discretionary complexity and different actors involve in planning.
 Degree of structure
Plans are formal and structured in terms of Process and actual planning development
 Planning is dynamic
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Strategic planning
Strategic planning is the process of determining what an organization intends to be in the
future and how it will get there.
It is envisioning about the future and developing necessary procedures and operations.
Strategic planning developing objectives for an organization and its sub part, alternatives
courses of action to reach these objectives and doing these on the basis of SWOT
The purpose of strategic planning is to enable organizations to gain a sustainable age over its
competitors.
Aspects of strategic planning
 Future aspect
o Future oriented; Recognizes environment will charge; Anticipate events than react as they
occur.
 External aspects
o Takes into account external environment
 Internal aspects
o Staff stability; Change in leadership
 Dynamic aspect
o Continues process; Changing objectives and strategies in light of shifting circumstances
within the environment.
Finding the fit
There should be fit among the three sets of forces.
1. What you intend to accomplish?
o Vision, mission, objectives
2. What is needed and feasible?
o Opportunity and threat
3. What you are capable of doing?
o Strength and weakness
Important points to strategic planning
The 1st step in strategic planning is “Planning to plan” or get organized.
Strategic planning
 is way of thinking and ongoing process, but never perfect or complete.
 has to be continuously improved
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 should be kept realistic, simple and manageable

 Tool/ means of improving organizations effectiveness
Organizational profile describes background and the roots why/ how the organization
established.

Understanding the planning process

Planning is:
 Continuous, systematic process of making decisions about goals and activities.
 Decision making process
 Not informal or haphazard
 Formal /formal planning
 Purposeful effort
 Directed and controlled
 Provides individuals and work units with clear map to follow in the future activities
Steps followed during formal planning
The steps are:
1. situation analysis
2. setting goals
3. identifying alternative strategies
4. evaluation and selection of strategies
5. implementation
6. monitoring and control
Levels of planning
Types of managers according to levels are top, middle and lower. Similarly levels of
planning are:
 Strategic planning - long –term goals and strategies
 Tactical planning - helps to translate strategic plans/ goals into specific
 Operational planning - procedures and processes required at lower level
Definition and key attributes of strategic management
Management is the art of getting things done with through people. The key forces reshaping
today’s business environment are competition and speed of change. Industry competition is

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increased by globalization, new technology formation of new enterprises and the dissolving
of industry boundaries. Acquiring deep insight into the determinants of business success is
the basis for developing sound strategy.

Strategic management
Strategic management is all about managing an enterprise/ organization to achieve superior
performance. At the heart of strategic management the main question is: Why & how do some
firms outperform others?
Strategic management consists of analysis, decisions, and actions of organizations
undertakings to create and sustain competitive advantages. It is the process of guiding
members of an organization and its stake holders to envision about the future and to develop
necessary procedures / operations to achieve their goals or be successful in the future
Strategic management is plans and actions that lead to superior competitive standing.
 What changes and trends are occurring in the competitive environment?
 Who are our competitors and what are their strengths and threats?
 Who are our customers?
 What products/ services should we offer? How can be offering them most efficiently?
 What does the future hold for our industry?
 How can we change the rule of the game?
Strategic management is a set of decision and actions used to formulate and execute
strategies that will provide a competitive superior fit between the organization and its
environment so as to achieve organizational goals. It includes environmental scanning
(analysis), strategic implementation, strategic formulation and evaluation and control. And
it also entails three ongoing processes: analysis, decision and action – resource allocation
The essence of strategic management is
 To identify the sources of profit available to the business enterprise, and
 To formulate and implement strategies that exploits these sources of profit.
Key attributes of strategic management
There are four key attributes of strategic management. They are strategic management
 Directed towards overall organization goals and objectives

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 Efforts must be directed to total organization

 Involves the inclusion of multiple stakeholder in decision making
 Managers must incorporate the demand of stakeholders
 Requires the need to incorporate both short-term & long-term perspectives.
 Managers must maintain the vision of the future of the organization and focus on the present
need.
 Involves recognition of trade-offs between effective and efficiency.
Aware of the need for organizations to strive to act effectively and efficiently.
Effectiveness – doing the right things; and efficiency – doing things right.
Major elements of strategic management
Strategic management involves five major tasks.
 Developing strategic vision & mission
 Setting objectives
 Formulating (crafting) strategy to achieve objectives
 Implementing & executing strategy, and
 Evaluating performances & taking corrective actions
They will be discussed in detail in the later topics.
The strategic management process and employee involvement
The strategic management process is the way in which strategists determine objectives and
make strategic decisions. And the three ongoing process of strategic management are:
Analysis, Decision and Action. And, these three processes are also referred to as : Strategic
analysis, Strategic choice/ formulation, and Strategic implementation. They are highly
interdependent.

The strategic management process

External analysis
(external environment) Strategic control
Direction Setting
Vision Develop control
Mission Generate evaluative & Allocate & merge Build relationship systems, measure
Value & design
selective strategies strategies & evaluate
Goals/ objectives structure performance
Internal analysis (internal
environment)

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Strategy formulation, Strategy implementation & evaluation

The analytical constructs of the strategy process

2.2.2. Strategic analysis

Strategic analysis is the starting point of strategic management process. It consists of
advanced work that must be done in order to effectively formulate and implement strategies.
The steps are:
1. Analyzing organizational goals/ objectives
Organizations must have clearly articulated goals and objectives to channel the efforts of
individuals throughout the organization toward common ends. Goals and objectives also
provide a means of allocating resources effectively.
2. Analyzing external environment
Management must monitor and scan the environment as well as analyze the competitors to
determine the opportunities and threats in the external environment.
3. Assessing internal environment
Analyzing a firm’s internal environment helps to identify both strengths and weaknesses
that can determine how well the firm will succeed in the industry. Analyzing the strength &
relationships among activities that comprise a firm’s value chain can be a means of potential
source of competitive advantage for the firm.
4. Assessing a firm’s intellectual asset

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Assessing human capital, networks & relationships, use of technology, means of

accumulating and storing knowledge. Workers’ knowledge and firm’s intellectual assets
(patents, trademarks) are important drivers of competitive advantage and wealth creation in
today’s economy.

2.2.3. Strategic formulation

Strategic choice/ formulation are developed at several levels: mainly at three levels
1. formulating corporate level strategy
It addresses issues concerning a firm’s portfolio (or group) of business and focuses on two
issues:
 what business to compete in, and
 How the business (portfolio) can be managed to achieve synergy.
2. formulating business level strategy
 Addresses the issue of how to compete in a given business environment to maintain
competitive advantage.
 Concerns how to create and sustain competitive advantage in an individual business.
 Questions raised here:
 How the firm competes and outperforms its rivals, and
 How it achieves and sustains its competitive advantage.
3. formulating functional level strategy
 Directed at improving the effectiveness of functional operations within a company.
4. Formulating international strategy
 expanding the scope of operation to include foreign market
 Attaining competitive advantage international markets or global competitiveness.
 Transnational strategy that multinational firms follow.
 Recognizes the importance of local responsiveness
5. Formulating internet strategy
 Effective use of internet and e-commerce strategies helps organizations to improve their
competitive position in the industry.

2.2.4. Strategic implementation

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Effective strategies are of no value unless properly implemented. Strategic implementation

involves ensuring firms proper strategic controls and organizational design and establishing
effective means of integration and coordination of activities within the firm as well as its
stakeholders. In strategic implementation leadership plays central role, and done through the
following three steps. Implementing strategy by:

1. achieving effective strategic control

Firms unable to successfully implement their strategies unless they exercise strategic
control, two types:
 Informational control - continually monitoring and scanning the environment, and
responding effectively to threats and opportunities.
 Behavioral control - balancing rewards and incentives, culture and boundaries
(constraints)
2. creating effective organizational design
Having organizational structure and designs consistent with strategy is vital to succeed. Due
to rapidly changing competitive environments, firms must design their companies to ensure
that their organizational boundaries more flexible and permeable. Organizations should
consider creating strategic alliance to capitalize on the capabilities of other organizations.
3. Effective strategic leadership to create learning and ethical organization
Effective leaders/ effective strategic leadership set direction; engage in several ongoing
activities; design organization and develop organizational commitment towards excellent and
ethical behavior. Effective leaders need to create a learning organization
Learning organizations can benefit from individual and collective talents throughout the
organization. Today’s success doesn’t guarantee success in the future. Foster corporate
entrepreneurship and new venture creation.
Employee involvement
Enhancing employee involvement in strategic management process is very vital. Everyone
needs to be involved in strategic management process. Employees must involve in all stages:
Analysis, Formulation, and Implementation.

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To develop and mobilize people and other assets in the organization, leaders are needed. No
longer can organizations be effective if the top “does the thinking” and the rest of the
organization “does the work”.

PART 2: STRATEGY FORMULATION

Chapter 3: The Business Vision, Mission and Objectives

Brief Contents
3 .1 Defining vision and mission of an organization

3.1.1. What is Vision?

3.1.2. What is business mission?

3.3. How are Mission Statements formulated?

3.4. Organizational Objectives and Goals

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Chapter Three: The Business Vision, Mission & Objectives

“Where there is no vision, the people perish.”

“An organization without mission, vision and objectives is not an
organization; it is simply a collection of individuals/ resources.”
3.1. Defining vision and mission of an organization
Here we deal the major elements of strategic management which are crucial for planning and
decision making in strategic management.
 Developing strategic vision and mission,
 setting objectives,
 crafting strategy,
 implementing and executing strategy and
 Evaluating performances and taking corrective actions.
The figure below shows how the five tasks are interconnected to each other and how the
processes continue.
Task 1 Task 2 Task 3 Task 4
Develop strategic Setting Crafting strategy to Implementing & Evaluating &
Task 5 correcting
vision & mission objective achieve objectives Executing strategy
s

Revise/ improve/ recycle

change as needed

The first direction setting task is defining mission what business the company will be in, and
forming a strategic vision of where the organization needed to go. Managers have to think
strategically about where they are trying to take the company. Developing a carefully

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reasoned answer pushes managers to consider what the company’s business character. What
the company seeks to do and to become is commonly termed the companies situation.
Management’s concept of the business needs to be supplemented with a concept of the
company’s future business make up and future direction.
3.1.1 What is Vision?
Management’s view of the kind of company it is trying to create and its intent to stake out a
particular business position represents a strategic vision for the company.
Vision defines the desired or intended future state of an organization or enterprise in terms of
its fundamental objective and/or strategic direction.
For example a charity working with the poor might have a vision statement which read "A
world without poverty"
Vision
 is a statement about a company’s long-term direction.
 hope for the reality to be
 desired situation opposing the existing situation
 not realized in short or one’s life time.
 Keeps an organization moving forward.
 Should be a description of the desired outcome of the strategic plan.
Organizations need a vision based on a set of values that everyone in share. Vision is used to
set out a 'picture' of the organization in the future. Vision is what keeps an organization
moving forward even against discouraging odds. Visions are broad, but point where to go.
Vision must be compelling, inspiring and make people want to join the organization. It is the
banner, around which the organization rallies, since it is the driving force that keeps the
organization move towards a feasible by inspired future conditions. If vision is vivid and
meaningful enough, people can do outstanding things to bring to realization. However, if it is
lacking, no amount of resources will induce people to move forward.

Vision Statement is a statement of the future ideal you are working towards. It outlines what
the organization wants to be, or how it wants the world in which it operates to be. It provides
inspiration and the basis for all the organization's planning. It concentrates on the future and
provides clear decision-making criteria.
The advantage of having a vision statement is that

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 it creates value for those who get exposed to the statement, and those prospects are
managers, employees and sometimes even customers.
 It creates a sense of direction and opportunity.
 It is an essential part of the strategy-making process.

Purpose of Vision
 Shared vision is an initial force that brings people together.
 Clearly articulated vision can provide energy, momentum and strengths to individuals.
 It inspires stakeholders.
 It is life-blood of an organization.
 It helps to see what you are working towards.
 It provides bases for partnership and incentive to work through internal conflict.
 It binds an organization together in times of crises.
Therefore, a firm’s vision is determined by asking the following questions:
 What would the country lose if our organization ceased to exist?
 Why do we want to dedicate our creative energies to this organization’s effort?
 What does our organization do to fill basic human needs?
 what does our organization do that impact the country?
A vision is the hope for “the reality to be” to replace “the reality that is”.
Why is a strategic vision important?
A managerial imperative exists to look beyond today and think strategically about
 impact of new technologies
 how customers’ needs & expectations are changing
 what it will take to outrun competitors
 which promising market opportunities ought to be aggressively pursued
 External and internal factors driving what a company needs to do to prepare for the
future.
Features of an effective vision statement include:
 Clarity and lack of ambiguity
 Vivid and clear picture

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 Description of a bright future

 Memorable and engaging wording
 Realistic aspirations
 Alignment with organizational values and culture
To become really effective,
 An organizational vision statement must become assimilated into the organization's
culture.
 Leaders have the responsibility of communicating the vision regularly,
 creating narratives that illustrate the vision,
 acting as role-models by embodying the vision,
 creating short-term objectives compatible with the vision, and
 Encouraging others to craft their own personal vision compatible with the
organization's overall vision.
3.1.2. What is business mission?
Historically mission is associated with Christian religious groups; indeed,
for many years, a missionary was assumed to be a person on a
specifically religious mission.
The word "mission" dates from 1598, originally of Jesuits sending
"mission", Latin for "act of sending" members abroad.
Mission defines the fundamental purpose of an organization or an
enterprise, succinctly describing why it exists and what it does to achieve
its Vision. Mission is a very broad and general statement about the basic purpose of the
organization. It is a declaration of organization’s purpose or clarifies the purpose.
Mission:
 general statement about the basic purpose of the organization
 the description of an organization’s reasons for existence,
 fundamental purpose Clarifies/ declares the purpose
 defines company’s business; Product/ market; Territory/ geography
 Is the guiding principle that drives the processes of goal and action plan formulation, “a
pervasive, although general, expression of the philosophical objectives of the
enterprise.”
 should focus on

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 “long – range economic potentials,

 attitudes toward customers,
 product and service quality,
 Employee relations and Attitudes toward owners.”
 Provides identity, continuity of purpose, and overall definition, and should convey the
following categories of information.
1. Precisely why the organization exists, its purpose, in terms of
 its basic product or service,
 its primary markets, and
 Its major production technology.
2. The moral and ethical principles that will shape the philosophy and character of the
organization.
3. The ethical climate within the organization.
Thus mission outlines the firm’s identity and provides a guide for shaping strategies as all
organization. Our definition of mission, as illustrated below includes four elements
 purpose,
 strategy,
 behavior standards and
 Values.
A strong mission exists when the four elements of mission link tightly together, resonating
and reinforcing each other.

Why the Origination exists

Purpo
se

Valu What the organization

es believes in
Strateg
y
The competitive position Behavi
and distinctive competence or
Standa
The policies and behavior patterns that underpin
rdsdistinctive competence and the value system

Figure: The Ash ridge Mission Model

Purpose

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It is believed that leaders will find it easier to create employees with commitment and
enthusiasm if they choose a purpose aimed at a higher ideal.
 What is the organization?
 For whose benefit is all the effort being put in?
 Why should a manager or an employee do more than the minimum required?
Strategy
 To achieve a purpose, there needs to be a strategy.
 If the purpose is to be the best, there must be a strategy explaining the principles
around which the company will become the best.
Behavior Standards
 Purpose and strategy are empty intellectual thoughts unless they can be converted into
action.
 By translating purpose and strategy into actionable policies and standards senior managers
can dramatically change the performance of the employees.
 Human beings are emotional. To capture the emotional energy of an organization the mission
needs to provide some philosophical or moral rationale for behavior to run alongside the
commercial rationale. This brings us to the next elements of our definition of mission.
Values
 Values are the beliefs and moral principles that lie behind the organization’s culture.
 Values give meanings to norms and behaviors in the organization.
 In many organizations, organizational values are not explicit and can only be understood by
perceiving the philosophical rational that lies behind management behavior.
 Values can provide a rational for behavior that is just as strong as strategy.
A strong mission exists when the four elements of mission reinforce each other. This is most
easily perceived by looking at the links between the strategy and the value system and
whether both can be acted out through the same behavior standards.
A mission should:
 define what the company is
 define what the company aspires to be
 limited to exclude some ventures
 broad enough to allow for creative growth
 distinguish the company from all others

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 serve as framework to evaluate current activities

 stated clearly so that it is understood by all
Criteria for evaluating mission
Criteria for evaluating mission statement include the following. The mission statement
A Is clear and understandable to all personnel, including rank and file employees.
B Is brief enough for most people to keep it is mind. This typically means one hundred words or
less, which is possible.
C Clearly specifies the organization’s basic function.
D Should serve as a template and be the means by which officials and others in the organization
can make decisions.
E the wording should help it serves as an energy source and rallying point for the organization.
The role of mission
The role played by mission in guiding the organization is an important one specifically it
1. Serves as a basis for consolidation around the organization’s purpose.
2. Provides impetus to and guidelines for resource allocation.
3. Defines the internal atmosphere of the organization, its climate.
4. Serves as a set of guidelines for the assignment of job responsibilities.
5. Facilitates the design of key variables for a control system.
Components of a mission statement
Many people mistake vision statement for mission statement, and sometimes one is simply
used as a longer term version of the other.
A mission statement defines a company’s business and provides a clear view of what the
company is trying to accomplish.
A mission statement is a formal, short, written statement of the purpose of a company or
organization.
The mission statement should:
 guide the actions of the organization,
 spell out its overall goal,
 provide a sense of direction, and
 Guide decision-making.
 Provides "the framework or context within which the company's strategies are
formulated."

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 A mission statement is a statement of purpose.

It will usually answer in a creative paragraph or two the following questions:
 What is the organization?
 What are core beliefs and commitments?
 Who is the service user?
 What is their need?
 What will be the benefit to them from this service?
 What will the service do to provide this benefit?
Mission statements often contain the following:
 Purpose and aim of the organization
 The organization's primary stakeholders: clients, stockholders, congregation, etc.
 Responsibilities of the organization toward these stakeholders
 Products and services offered
The mission statement consists of a statement
1. containing the reason for using your product
2. of some desired future state (vision)
3. of the key values the organization is committed to
4. of major goals
The mission statement can be used to resolve differences between business stakeholders.
Stakeholders affect, and are affected by, the organization's strategies.
A mission statement is like a flag the organization can hold up that gives the essence of what
it is about. Some mission statements are complex, long, and very broad; whereas some
mission statements are simple and direct.
Characteristics of a mission statement
In order to be effective, a mission statement should possess the following seven
characteristics.

Mission statement should be

Feasible:
 A mission should always aim high but it should not be an impossible statement.
 realistic and achievable
Precise:

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 Should not be so narrow to restrict the organization’s activities nor should it be too
broa to make itself meaningless.
Clear:
 Should be clear enough to lead to action.
 Should not be a high sounding set platitudes meant for publicity purposes.
Motivating:
 Should be motivating for members of the organization or being its customers.
Distinctive:
 The indiscriminate one (random, arbitrary) is likely to have little impact.
 If all defined their mission in a similar fashion, there would not be much of a
difference among them.
 If defined as providing value for money, for years it created an important distinction
in the public mind.
 indicate major components of strategy:
Along with the organizational purpose should indicate the major components of the strategy
to be adopted.
 indicate how objectives are to be accomplished:
Besides indicating the broad strategies to be adopted, it should also provide clues regarding
the manner in which the objectives are to be accomplished.

Criteria of mission statement

 Be clear and understandable
 Be brief enough for most people to keep in mind
 Clearly specify the organizations basic functions
 Serve as template and be a means by which officials or others make decision
 Serve as energy source and relay point for organization.
3.2. How are Mission Statements formulated?
Chief executive plays a major role in formulating a mission statement both formally and
informally.
Mission statements could be formulated on the basis of
 The organizational purpose that the entrepreneur decides in the initial stages of an
organizations growth.

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 Major strategists could also contribute to the development of a mission statement.

 They do this informally by lending a hand in the creation of a particular corporate identity or
formally through discussions and the writing down of a mission statement.
A mission statement once formulated,
 should serve the organizations for many years.
 But a mission may become unclear as;
 the organization grows, and
 adds news products markets and technologies to its activities.
 Then the mission has to be reconsidered and re-examined to either change or discard.
Strategic vision Vs mission
A strategic vision concerns A mission statement focuses on
 a firms future business path  current business activity
 Where are we going?  Who we are & what we do?
 Market to be pursued  Current product & service offerings
 Future technology-product-customer  Customer needs being served
focused  Technological & business capabilities
 Kind of company that management is
trying to create

What is the mandate/ mandate analysis?

The mission statement is preceded by identifying the mandate and taking into account the
interest of stakeholders.
The mandate of an organization is what the organization formally requires it to do. This
mandate can be codified in laws, regulations, decrees or charters.
The limits of mandate are defined by the following questions: These are:-
 What must be done?
 What could be done?
 What must not be done?
Therefore the mission statement should be consistence with the organization’s mandate.
The mission statement also raises the following questions.
 Who are our client and stakeholders?

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 What do our clients or stakeholders want?

 What do they consider important?
 Is the firm doing the right thing or should it change the function/service or strategy?

What are Values?

Mission of the company communicates the firm's core ideology and visionary goals. It
should contain the company's core values, core purpose, and visionary goals. When the
visionary goals are selected, the core values and purpose of the firms should be discovered.
Values and purpose are in the company already; the mission just describes them. In that case,
the stakeholders are more likely to believe in the company's mission.
Values are desirable qualities and beliefs that are shared among the stakeholders of an
organization. They are often linked with our beliefs and commitments and what we see to be
the rights of service users. They drive an organization's culture and priorities.
Values define the philosophy of operation and the organization culture being practiced by the
organization. There must be congruence between the organization’s values and the strategic
plan.
For example, values include:
 People having equal access to services irrespective of their country of origin,
 Respecting the worth and dignity of each person,
 Service users being involved in choices about available services.
The values of individuals and organizations will affect their approaches to service delivery
and answers to such questions as:
 What are quality services?
 How do you get quality services?
 How do you know you are providing quality services?
Values are:
Individual Values:-
This is examination of personal values of the organization’s manager and staff.
These values often become part of the organizational system.
This is important because the organization’s values are often reflective of consensual values
of individuals.
Strategic Values:-
These are values related to strategic logic of the organization.
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They define not what kind of people we are but what we do such as commitment to
excellence and empowerment.
Operational Values:-
These are related to day-to-day operations of different parts of the organization.
They define how things are done.
Acceptance of the values represented by mission can lead to three characteristics of firms
that accomplish this acceptance.
Values stand for something
The way in which business is to be conducted is widely understood.
Values are accepted by all employees
Through the firm’s organization structure from topmost level of management down to the
lowest level of production jobs
Employees feel special because of a sense of identity which distinguishes the firm from other
firms.

A sense of mission is an emotional commitment felt by people towards the organization’s

mission. It occurs when there is a match between the values of an organization and those of
an individual. Because organization values are rarely explicit, the individual sense them
through the organization’s behavior standards. Making an organization’s values explicit
does not of course mean that these explicit values will be acted on all the time. Statements of
values that are too general (umbrella like) will not be as useful as more specific statements
that identify your organization’s values as different from other organizations’ values.

3.3. Organizational Objectives and Goals

When you have something you want to accomplish, it is important to set both goals and
objectives. The two key sides of writing goals and objectives: be persistent with your goals,
but flexible.

Strategic goals/ objectives

 Convert strategic vision & mission into specific performance targets
 Create yardsticks to track performance
 Pushes firms to inventive & focused on results
 Helps prevent complacency & coasting.

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Strategic goals help firms

 Increase firms market share
 Overtake key rivals on quality & customer service or product performance
 Attain lower overall costs than rivals
 Boast firm’s reputation with customers
 Attain stronger foothold in international market
 Achieve technological superiority
 Becomes leaders in new product introduction
 Capture attractive growth opportunities
Aims/ goals
 Aims and goals are often use interchangeably.
 Aims are general statements of what we intend to achieve in relation to clients needs.
 Aim is a broad statement of what we are trying to achieve. Because of this aim/ goals
are not usually written in a way that we would know whether we have achieved them.
The first step in managing anything is to define your objective before you release any
resources or anytime trying to achieve it.
Objective
 Indicate how goals are achieved.
 Desirable outcomes of organizational activity
 Is very specific statement
 are more specific than goals.
 are specific statements of what you intend to achieve.
 is a very specific statement what is to be done to accomplish the mission.
 Ideally should be SMART:
A statement of an objective makes clear.
 What is to be accomplished
 How much is to be accomplished
 By when it is to be accomplished
 By whom it is to be accomplished
Examples of goals, objectives and targets
 Goal: earn $20,
 Objective: sell second hand shirts for $2 each,

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 Target: 10 people Goals: knows about the human body.

Example of objectives
 To achieve 10% annual growth in earning per share.
 To achieve 20% - 25% return on equity.
 To achieve 27% return on capital employed.
 For 35 parents each week with to have a 2 hour break from their children for the next
12 months.
 For 10 newly arrived migrants each week to be able to find out the services available
for them in their area
 For 35 children under the age of 5 to experience a creative learning environment for
four hours per week for the next 12 months.
 For 30 older women living in a particular area to get to know each other over the next
12 months.
Objectives are the end results of planned activity. They state what is to be accomplished by
when and should be quantified if possible.
Example of an objective of Regional agriculture research institute
As an intention
Conducting problem solving need based practical research
As a direction
Increase variety of agricultural research outputs.
As an expected result
Increase the number of variety research output that improve productivity from the existing
5% to 20% by the end of 2010.

What are the differences between goals and objectives?

The two terms are often used interchangeably, confusion sometimes arises. Although both
goals and objectives use the language of outcomes, the characteristic that distinguishes goals
from objectives is the level of specificity. The difference between where we are (current
status) and where we want to be (vision and goals) is what we do (target objectives and
action plans).
Goals are statements about general aims or purposes of activities that are broad, long-range
intended outcomes; and used primarily in policy making and general program planning.

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Objectives are brief, clear statements that describe the desired learning outcomes of
instruction.
Goals are what we want to achieve. Goals (aims) are where you want to go. Objectives are
how you are going to get.

Goals express intended outcomes in general terms and objectives express them in specific
terms. Objectives are short but clear statements about the specific outcomes. A goal is
something personal that you aim to become or have done. An objective is something that is a
requirement that should be met in any way possible. Goals are what you aim for, what you
want to obtain; objectives are the move or plan on how to achieve the goals. Goals are
written in broad, global, and sometimes vague, language. Objectives are statements that
describe the intended results of instruction in terms of specific student behaviors.

 Goals are general directions that are not specific enough to be measured. On the other hand,
objectives are specific, measurable and set within a timeframe.
 Goals are broad objectives are narrow.
 Goals are general intentions; objectives are precise.
 Goals are intangible; objectives are tangible.
 Goals are abstract; objectives are concrete.
 Goals can't be validated as is; objectives can be validated
 Goals are what you set to achieve the mission of your organization or program. Goals
should include words such as "increase/decrease," "deliver," "improve" and "create."
Objectives are milestones that are along the way to reaching your goal.
In reality,
 An aim is a target -something to which you aspire, or something you aim to achieve. An
objective on the other hand, is something that you can achieve.
o E.g.: My aim is to lose weight, but my objective is to lose one pound a week.
 Goals are broad statement of desired outcomes – what we hope will know and be able to
do as a result of completing the program/course. Objectives are clear, brief statements used
to describe specific measurable act.

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 Objectives are potential goals. Goals are accomplishments (things you wish to complete).
Aims are your ability to not be side tracked while reaching for your goals. Visions are
visualizing your entire task to complete a goal.
 A goal is a target or a desired result. The aim is the process of orienting yourself and your
actions towards a goal or an ambition. An aim is like a relatively long term plan of action.

 Goals are what you aim for, what you want to obtain; objectives are the move or plan on
how to achieve the goals target are the ones, the thing or the place where you must execute
the objectives to attain the goals.

Writing Good Goals

Goals should be very clear, and someone should be able to determine what the program's
purpose is from reading only your goals. A useful model for writing aims is using: for..........
(Such and such a group of people); to ...........(gain such and such a benefit).

Linking Goals and Objectives

Each goal should have at least one objective, though most will have several. The objective
shows your funder how you will get to your goal.

Setting Objectives
Objective setting requires of all managers regardless of their position. Because every unit in
the organization need concert, measurable performance targets that contribute meaningfully
toward achieving company objectives.
An alternative approach to setting objectives is to write objectives such as: For the client/
customer to
 identify what the need is
 articulate the need
 identify what needs to be done to meet the need
 increase their self esteem / confidence so it is possible for them to act to meet their
needs
 do what needs to be done to meet their needs.

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Purpose of setting objectives

The purpose of setting objectives is to convert managerial statements of business mission and
vision into strategic performance targets.
Objective setting implies challenge, establishing performance targets that require stretched
and disciplined effort. The challenge of trying to close the gap between actual and desired
performance pushes an organization to be more inventive.
The objectives established by managers include both short range and long range performance
objectives.
Short range objectives
Spell out the immediate improvement and outcome management desires.
Long-term objectives
Prompt managers to consider what to do now to position the company to perform well over
the long term.

Roles of Objectives
The achievement of corporate objectives should result in the fulfillment of the corporation’s
mission. Objectives play an important role in strategic management, such as
 Objectives define the organization’s relationship with its environment
By stating its objectives, an organization commits itself to what it has to achieve for its
employees, customers and the society at large.
 Objectives help on organization pursue its mission and purpose
By defining the long-term position that an organization wishes to attain and the short-term
targets to be achieved
 Objectives provide the basis for strategic decision making
By directing the attention of strategists to those areas where strategic decisions need to be
taken. Objectives lead to desirable standards of behavior and in this manner, help to
coordinate strategic decision making
 Objectives provide the standard for performance appraisal
By stating goals and targets to be achieved in a given time period, and the measures to be
adopted, objectives lay down the standards against which organization as well as individual
performance would have no clear and definite basis for evaluating its performance.

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Characteristics of Objectives
Objectives as measures of organizational behavior and performance should possess certain
desirable characteristics in order to be effective. Such characteristics are manly:
 Objectives should be understandable:
Objectives play an important role in strategic management and are put to use in a variety of
ways. They should be understandable by those who have to achieve them.
If something is not understandable by managers no action will be taken or ever a wrong
action might be taken.
 Objectives should be concrete and specific
Better to say “Our Company plans to achieve a 12% increase in sale” than “our company
seeks to increase its sales”. The first statement implies a concrete and specific objective and
is more likely to lead and motivate the managers.
 Objectives should be related to a time frame
If objectives are related to a time frame, then managers knew the duration within which they
have to be achieved. If the statement given above is restricted as “our company plans to
increase its sales by 12% by the end of two years” it enhances the specificity of objectives.
 Objectives should be measurable and controllable:
Many organizations perceive themselves as companies, which are attractive to work for. If
measures like the number and quality of job applications received, it would be possible to
measure and control the achievement of this objective with respect to comparable companies
in a particular industry and in general.
 Objectives should be challenging
Objectives that are too high and too low are both de-motivating and, therefore, should be set
at challenging but not unrealistic levels. To set a high sales target in a declining market does
not lead to success and also a low sales target in a burgeoning (rapidly increasing, growing,
mushrooming) market is easily achievable and therefore, leads to sub-optimal performance.
 Different objective should correlate with each other
Organizations set many objectives in different areas. If objectives set in one area are
disregarding the other areas, such an action is likely to lead to problems. Different objectives
correlate with each other are mutually supportive, and result in synergistic advantages. This
is specifically true for organizations, which operate on a profit center basis.
 Objectives should be set within constraints

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There are many constraints - internal as well as external, which have to be considered in
objective-setting. For example: resource availability is an internal constraint which affects
objective setting. Different objectives compete for scarce resources and tradeoffs are
necessary for optimum resource utilization. Organizations face many interests, and
environmental pollution. All these limit the organizations ability to set and achieve objective.
In sum, objective setting is a complex process; we will further examine a few issues relevant
to objective in order to understand this complex process.
Making Objectives SMART
You should create your objectives to be SMART. SMART objectives means
1. Specific (S)
 Well defined, significant, stretching
 Clear to anyone that has a basic knowledge of the project
 Objectives must be clear and un ambiguous, vagaries and platitudes have no place in
objective /goal setting
 When objectives are specific, they communicate exactly what is expected, when, and how
much
 Focus, creates a powerful force: goal/objective power
The more focused your energies, the more power you generate
N.B:- Too many goals dilute focus, Optimal 2 - 3 goals per unit at any one time!
2. Measurable (M)
 Measurable, meaningful, motivational
Know if the goal is obtainable and how far way the completion is
Know when it has been achieved
 Track team progress ; help/ keep the team motivated
N.B:- A goal without a measurable outcome is like a sports competition without a
scoreboard or scorekeeper.
3. Attainable (A)
 agreed upon achievable, acceptable, action-oriented
 Agreement with all the stakeholders what the goals should be
 Goals must be achievable and attainable by all employees.
 The best goals require employees to stretch a bit to achieve them, but they are not
extreme.

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 Goals that are set too high or too low become meaningless, and employees naturally
come to ignore them.
N.B: Supervisors and managers must work with their employees to set goals.
4. Relevant (R)
 Realistic, relevant, reasonable, rewarding, result-oriented
 Goals must be aligned to the firm’s visions and mission
 must be based on the current conditions and realities of the environment i.e. with the
availability of Rs, Knowledge and time
N.B: Unrealistic goals/ irrelevant goals
 Make firm’s loss focus and goals are ignored.
 Loss of team motivation
 Employees feel overburdened, over whelmed and stressed out.
5. Time-bound (T)
 Time-based, timely, tangible, traceable
 Goals must have starting points, ending points and fixed durations.
 Deadline bolsters employee’s commitment to achieving the goal.
 Creates urgency
N.B:
N.B: Time must be measurable, attainable and realistic.
 SMART goals = SMART organization
 SMART goals propel firms’ fast forward.

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CHAPTER
4. Analyzing Organizational Environment

Brief contents:
4.1. The external environment assessment/ analysis

4.1.1. Environmental Scanning/ Analysis

4.1.2. The General Environment (the macro environment analysis)

4.1.3. The Micro environment analysis

4.2. Analysis of internal environment: organization capability

4.2.1. How do we analyze Internal Strengths and Weaknesses?

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Chapter Four: Analyzing organizational environment

4.1. The external environment assessment/ analysis

What is environment?
As to the oxford dictionary “environment”
“environment” is a surrounding objects, regions or
circumstances.”
circumstances.” The business environment consists
consist of all those aspects and forces in the
surroundings of business enterprises under which business operations are to be carried out
effectively and efficiently.

4.1.1. Environmental Scanning/ Analysis

Pioneering organizations have gone out of success because of their failure to adapt to
environmental change or, even worse, by failing to create change. To be successful overtime,
an organization needs to be in tune with its external environment.
environment. There must be a strategic
fit between
 what the environment wants and what the organization hat to offer, as well as
 What the organization needs and what the environment can provide.
Before an organization can begin strategy formulation,
formulation, it must scan
 the external environment to identify possible opportunities and threats and
 Its internal environment for strengths and weaknesses.
Environmental scanning is the monitoring, evaluating, and disseminating of information
from the external and internal environments to key people within the corporation. It is a tool
that organization uses to avoid strategic surprise and to ensure long-term health.
health. Research
has found a positive relationship between environmental scanning and success.
success. In
undertaking environmental scanning, strategic managers must first be aware of the many
variables within an organization societal and task environments.

The societal, or macro environment includes the general forces that do not directly touch on
the short-run activities of the organization but that can, and often does, influence its long-run
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decisions. Environmental analysis involves identifying the major present and future threats
and opportunities to or from the organization’s principal constituents (components -
stakeholders, customers, competitors, suppliers, employees, and general public) along the
dimensions of the organization’s economic, political/ legal, technological, and social
environments.
Characteristics of Environment
Business environment exhibits many characteristics. Some of the important and obvious
characteristics are briefly:-
Environment is complex
 Environment consists of a number of factors, events, conditions and influences arising from
different sources. All these do not exist in isolation but interact with each other to create
entirely new sets of influences. All in all, environment is a complex phenomenon relatively
easier to understand in parts but difficult to grasp in its totality.
Environment is dynamic
 Environment is constantly changing in nature. Due to many and varied influences operating,
there is dynamism in the environment causing it to continuously change its shape and
character.
Environment is multi-faceted
 What shape and character an environment assumes depends on the perception of the
observer. Different observers may view a particular change in the environment, or a new
development, differently. This is frequently seen when one company welcomes the same
development, as an opportunity while another company perceives it as a threat.
Environment has a far-reaching impact on organizations.
 The growth and profitability of an organization depends critically on the environment in
which it exists and environmental change has an impact on the organizations is several
different ways.
Since the environment is complex, dynamic, & multi-faceted and has a far-reaching impact,
impact,
dividing it into external and internal components enables us to understand it better.
Environment is further classified as external and internal, it includes all the factors outside
the organization, which provide opportunities or pose threats as well as strength and
weaknesses to the organization.
Generally environmental influences could be described as

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1. Opportunity:
 It is a favorable condition in the organization’s environment, which enables it to consolidate
and strengthen its position.

2. Threat:
 It is an unfavorable condition in the organization’s environment, which creates, arises for or
causes damage to the organization.
3. Strength:
 It is an inherent capacity, which an organization can use to gain strategic advantage over its
competitors.
4. A weakness:
 It is an inherent limitation or constraint, which creates a strategic disadvantage.
Conducting Environmental Analysis
Firms must continually monitor the events and general trends in their environment as well as
the actions and intentions of their competitions. To obtain the information a manager has to
deal with environmental scanning and competitors’ intelligence.
intelligence. Environmental analysis is
the process by which strategists monitor the environmental factors to determine opportunities
or threats to their firms. It consists of:
1. Identifying threats and opportunities
Scanning activities involve monitoring and evaluating information from the external
environment and disseminating it to key people in the organization. Therefore, manager must
direct their efforts to evaluate those trends that have a significant impact on their pursuit and
future product market activities.
2. Gathering of information about competitors intelligence
A continuous scanning of changes in the external environment enables the mangers to
determine how the firm should be positioned in the long run to exploit new opportunities.
The information about the competitors helps the manager to develop strategies to counteract
their competitors. Firms gather information about competitors such as
 new product introduction capacity increase,
 cost structure
 Executive compensation plan, and

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 Financial position.
3. Forecasting future direction of environmental changes
After gathering the information of environment and competitors etc, intelligent managers are
able to forecast about future direction of environmental changes. Apart from this, managers
also need to forecast about more specific issues such as
 customer preference,
 demand for existing products and proposed products availability and
 price of input materials and
 impact on technological innovation.
Factors to be considered for environmental scanning
The external environment in which an organization exists consists of a variety of factors.
These factors (influences) are events, trends, issues, and expectations of different interested
groups.
 Events are important and specific occurrences taking place in different environmental sectors.
 Trends are the general tendencies or the courses of action along which events take place.
 Issues are the current concerns that arise in response to events and trends.
 Expectations are the demands made by interested groups in the light of their concern for
issues.
After the environment scanning process is complete, the strategists are faced with the
question of “how to structure the mass of information available to them.” The problem
boils down to sifting the information in such a manner that a clear picture emerges of what
opportunities and threats operating in different sectors of the environment face the
organization.

Potential Benefits of environmental analysis

Information about environment is necessary for the successful conduct of the business
activities. Environment opens up fresh avenues for the expansion of new entrepreneurial
operation. An acquisition of knowledge about the changing environment will keep
entrepreneurs and mangers to be dynamic in their approach, which helps the business to
avoid ecological strains and stresses and maintains harmony with business environments.
Very specifically studying organization environment or environmental analysis has at least
the following benefits

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C Increase managerial awareness of environment changes

C Increase understanding of the context in which industries and market functions.
C Increases understanding of multilateral settings
C Improves resource allocation decisions
C Facilities risk management
C Focuses attention the primary influences on strategic changes.
Components of Environment
The classification of the relevant environment into components or sectors helps an
organization to cope with its complexity, comprehend the different influences operating, and
relating the environmental changes to its strategic management process.
Depending on a variety of factors an organization may divide its relevant environment into
components capable of being analyzed conveniently, such as:
 the size of the organization
 level and scope of activities
 geographical spread of markets
 nature of products
 type of technology used , and
 managerial philosophy
Broadly external environment further is classified into
 the macro (general) environment and
 The micro or industry and competitive environment.
These environments work together and influence each other for good or for bad of the
organization. Their interaction influences the company strategy situation and the final choice
of strategy. That is the reason why and very necessary, environmental analysis becomes a
prerequisite of strategic planning and strategy section.

Opportunities and
Societal, political, Industry
Threats
Regulatory Factors Attractiveness
External Factors

Conclusions
about how Identificatio Drafting
Internal n and Strategy
Company’s Strategic /external Education of for
Factors Alternatives overall
Situation matters Situation

Internal Key
Shared Values Internal Factors
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Culture
and Influences
Weaknesses
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4.1.2. The General Environment (the macro environment

analysis)
General environment consist of those external factors that shapes and influences the internal
environment and poses threats and opportunities to the organization. Change in the macro
environment can be of immense important to an organization that can bring about the birth
and death of an entire industry, make markets expand or contracts and determine the level of
competitiveness. Therefore, it is essential for the managers to be alert to actual and potential
changes in the macro environment and anticipate the impact on their industry and market.
The components of the general environment are
 Social Environment/ sociological factors
The social environment of a business consists of :
 the population density,
 class structure,
 rural-urban mobility
 inter-state migration,
 nature of social organization,
 development of social institutions,
 growth of educational opportunities,
 change in lifestyle,
 age at the time of marriage of men and women,
 women’s participation in the work force,
 consumer behavior,
 values and attitude of people toward work,
 Wealth, family religion and ethnics.
Class structure depends on the occupation of people.
people.
 Rural society comprises farmer, artisans, and those engaged in traditional craft.

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 The rural society (traditional society) may not be congenial for the development and
growth of modern entrepreneurs. Thus, it can be said that business has to produce that
what actually the society. The overall social climate in which business operates has
broad systemic implications for organizations.
 Political and Legal Environment
The political environment consists of factors related to management of public affairs and
their influence on an organization.
Factors/ influences operating in the political environment
Some of the important factors and influences operating in the political environment are:
 The political system and its features like
o nature of the political system,
o ideological stands of political parties and
o Centers power.
 The political structure,
o its goals and stability.
 Political processes like
o operation of the party systems elections,
o funding of elections
o legislation with respect to economic and industrial promotion and regulation.
 Political philosophy,
philosophy, government’s role in business,
o its policies and interventions in economic and business development.
Politics play an important role in business dealings and strategic planning. In broad sense
o it promotes and control the business actions.
o Stable, honest, efficient and dynamic political system ensures personal security to the
people.
o Firms must cope with government policy regarding economic policy and regulatory
policies, etc.
o Political environment sometimes offers opportunity and sometimes threats to the
organization.
Role of the Government towards business
The role of the government towards business can be understood from the following noted
facts.
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 Government established laws and regulations for the successful operation of business
 Government enforces the laws and provides a system of courts for adjudicating
differences between business firms and government agencies.
 Government regulates the circulation of money and credit and protects the integrity of
the birr’s by means of which transaction can be affected.
 Government provides infrastructure facilities such as transport, power, finance and other
civic amenities for the smooth functioning of business.
 Government issues licenses to competent business establishment,
establishment, conducts inspection, and
assures quality products to consumers.
 Government uses tariff and quotas to protect business from foreign competition,.
Therefore, business executives
 should take into account the working of the political system and public opinion while taking
business decisions because today’s public opinion becomes tomorrow’s legislations.
 If the business executives do not learn how to deal with the public opinion,
opinion, the business will
face disaster.
 Business cannot be developed without the support and encouragement of the politicians who
make the government, therefore business executives should take keen interest in political
affairs at local state levels.
 Business executive should try to anticipate changes in Government policies and political
forces for the successful operation of business.
 Economic Environment
The economic environment consists of macro level factors related to the means of production
and distribution of wealth that have an impact on the business of an organization. There is a
close relationship between business and its economic environment.
environment. Business obtains all its
needed input from economic environment and it absorbs the output of business units.
Economic environment is multi-dimensional in nature and refers to all forces which have an
impact on business.
The factors/ forces which make up the total economic environment that have tremendous
impact on business firms are such as:
 trends in fiscal policies, credit policies, monetary policies, money supply,
 inflation rate, interest rate, exchange rate, employment rate,
 Balance of payment, budget deficit.

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Each of these factors can serve as an opportunity and threat. Some of the important factors
and influences operating in the economic environment are:
 The economic stages existing at a given time in a country.
 The economic structure adopted, such as a capitalistic, socialistic or mixed economy.
 Economic planning,
planning, such as five-year plans, annual budgets etc.
 Economic policies such as industrial, monetary and fiscal policies.
 Economic indices like national income, distribution of income, rate and growth of GNP, per-
capital income, disposable personal income, rate of savings and investments, value of exports
and import the balance of payments etc.
 Infrastructural factors such as financial institutions, banks mode of transportation
communication facilities etc.
 Cultural Environment
The term culture includes knowledge, belief, art, morals, laws, custom, values, norm, and
accepted behavior patterns.
According some writers,
 culture consists of behavior patterns that number of a society learn through language and
other form of symbolic interaction their customs, habits, beliefs, and values, the common
viewpoints which bind them together as a social entity.
 Cultures change gradually,
gradually, packing up new ideas and dropping old ones,
ones, but many of the
cultures of the past have been so persistent and self contained that the impact of such sudden
change has torn them apart, uprooting their people psychologically.
 When people with different cultural background promote, mange, organize then they tend to
acquire distinct culture and adjust its methods of operation according to society’s values and
changes
 culture determines the types of goods and services to be produced, because,
o the type of food people eat,
o the clothes they wear,
o the festivals they celebrate,
o building material they use to construct houses vary farm culture to culture.
culture. Therefore,
business environment should identify these cultural differences and produce such
products and services, which are suitable to a particular culture.

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 Human behavior is strongly guided by the culture.

culture. Therefore, the attitude towards work
depends on, his culture in which he has been brought up.
 The awareness about the cultural background of employees may help the management to
better understand the behavior and conduct of employees.
 Business and culture are tied together in many ways.
ways. Culture creates and changes,
people‘s tastes and preferences for commodities which in turn influence the habits and
customs of people. Therefore, an understanding of the cultural background and knowledge of
how to bring about cultural change can be helpful in meeting the need for change.
 Technological Environment
Technology is a systematic application of scientific or other organized knowledge to
practical tasks.
tasks. During the last 150 years technology has developed beyond anybody’s
comprehension. Science and technology have enabled to conquer distances; control birth
rate; saving; generate, preserve and distribute energy, discover new materials.
materials.

Technology is the application of scientific knowledge to practical problem. Technological

development is strong and pervasive forces in the business environment. The technological
environment consists of those factors related to knowledge applied,
applied, and the materials and
machines used in the production & an organization. Some of the important factors and
influences operating in the technological environment are:
 Sources of technology
 Like company sources, external sources and foreign sources: cost of technology acquisition;
collaboration in, and transfer of technology.
 Technological development
 Stages of development, change and rate of change of technology and research and
development.
 Impact of technology on human beings,
 The man-machine system and the environmental effects of technology.
 Communication and infrastructure technology, and
 Technology in management

Strategists can ill-afford to ignore the technological environment, as technology, besides

customer functions, defines the business, besides customer groups; and customer functions

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defines the business, of their organization. The strategic implications of technological

change are three:
o it can change relative competitive cost positions within a business;
o it can create new markets and new business segments: and
o it can collapse or merge previously independent businesses by reducing or eliminating
their segment cost barriers.

Impact of technology on society

The main effects of technology on society can be:
 Technology affects economic growth, standard of living of the people and culture.
 Technology is very much involved in our daily living. Right from the morning till night,
we are surrounded by so much of technology that we cannot live without electricity,
running water, transport, telephone, etc.
 Technology raises our standard of living. In spite of inflationary pressure and a high
degree of unemployment,
unemployment, generally families eat better, wear wider variety of clothing and
live in more comfortable houses.
 Technology allows physicians to prevent epidemics;
epidemics; many sever diseases, reduce the
changes of physical and metal defects in infant and generally lengthen the average life
span. The effects of technology are not always favorable, it may be unfavorable too:
too: For
example installation of automatic machine puts people out of work. Air and water
pollution are the effects of technology. These unfavorable effects arise due to improper
and irresponsible use of scientific developments.
developments.

Impacts of technology on business operations

The favorable effects of technology on business are:
 Technology helps in discovering new products and services.
services. Many of today’s common
products were not available even on hundred years ago.
 It increases the productivity in terms of both quality and quantity.
quantity.
 It enables a business organization to adopt efficient and safer techniques of production.
 It provides safer and more comfortable working conditions to the employees.
employees.
 It helps the manufactures in marketing to promote their product through radio, television
and printing press.

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 It enables business people to be more aware of changes occurring in the business

environment, such as:
 New laws, changing economic conditions, changes in consumer preferences.
 Through the use of electronic data processing equipment, a manager can plan, co-
ordinate and control the activities.
The unfavorable effects of technology on business can be understood from the following
facts.
 A new technology may destroy the industry; for example
 Xerography hurts, the carbon paper industry,
 television hurts radios and movies,
 Synthetic fiber hurt cotton fabrics, etc.
 Introduction of new technology dislocates some workers unless they are well equipped to
work on new machines.
 With the advent of technology jobs tend to become more intellectual or upgraded.
 Technology has created antibiotic which causes side effects but the same technology has
shown remedial measures for the side effect.

The environmental impacts of conventional technology are relatively well known today. Air
pollution, acid rain, industrial waste disposal, toxic effluent, noise and vibrations, crowding
and congestion are the side effects of urbanization and industrialization. Thus government
and entrepreneurs should come forward with such technology through which they can control
the side effects of technology on business and society.

4.1.3. The Micro environment analysis

Requirements for Competitive Success

Two of the primary determinants of organizational performances are the industry
environment in which an organization competes and the country in which it is located. Both
of these factors are aspects of the organization’s external environment.
environment. Some organizations
do well because their external environment is extremely attractive.
attractive. Others do poorly because
their external environment is hostile.
hostile.

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To succeed an organization must either fit its strategy to the industry environment in which it
operates, or be able to reshape the industry environments to its advantage through its chosen
strategy. Organizations typically fail when their strategy no longer fits the environment in
which they operate. Organizations to avoid the mistakes that some other organizations made,
they must understand the force that drive competition in the industry in which they are
operating. Otherwise they have little hope of either pursuing strategies that fit existing
industry environment or identifying strategies that might reshape the industry environment to
their advantage.
There are models that can assist managers in analyzing the environment. The models provide
a framework that can be used to identify environmental opportunities and treats.
Opportunities arise when environmental trends create the potential for organization to
achieve a competitive advantage.
So that, some essential requirements are needed for success.

Competitive success requires:

 Reshaping environment by choice. Creates a new environment where there is a fit
between strategy and environment
 Fitting with existing environment

Creates a new environment where there

Reshape environment by choice
is a fit between strategy and environment

Competitive success
requires Fit with existing environment

Requirements for competitive success

The microenvironment
To understand the environment of a particular firm, we need to analyze both the general
environment and the firm’s industry competitive environment.
The Micro external environment is
 Also known as:
o near environment
o task environment
o business environment
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o competitive environment
 Mainly concerned with industry environment.
environment.

Generally, firms compete with other firms in the same industry. Gathering industry
information and understanding competitive dynamics among the different organizations in
the industry is vital to successful strategic management. An industry can be defined as a
group of organizations offering products or services that are close substitutes for each other.
An industry
industry is composed of:
 a set of firms that offer similar products or services,
services,
 provide to similar customers,
customers, and
 Use similar methods of operation.
operation.
Industry is defined as a group of business whose products are close substitutes. But this
definition can be inadequate because some organizations and industries produce goods and
services and concerned with supply of products side economic system. Close substitutes are
products or services that satisfy the same basic consumer needs . For example,
example, the metal and
plastic body panels used in automobile construction is close substitutes for each other. They
are serving the same consumer need. The task facing managers is to analyze competitive
forces in an industry environment in order to identify the opportunities and threats
confronting an organization.

A market:
market:
 Consists of a group of customers with specific set of requirement, which may be
satisfied by one or more products.
 Analysis of market will give an understanding about the customers’ requirements, the
products which satisfy their requirements, the organization producing the product and the
means by which customers obtain those products (distribution channels).
Why analysis of industry and market is necessary? (Competitive
environment)
The analysis of industry and market (competitive environment) is necessary for the following
reasons.
 To identify other industries core competencies.
 To understand the nature of customers and their need,

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 To identify new markets to exploit,

 To identify threats from existing and potential competitors,
 To understand market to obtain resources
Porter’s five forces’ model of industry analysis
Michael E. Porter of the Harvard School of Business Administration has developed a
framework that helps managers for analyzing the nature and extent of competition within an
industry. He says that there are five competitive forces,
forces, which determine the degree of
competition within an industry. And the framework is known as the Porter’s five forces
model.
model. This model focuses on five forces that shape competition within an industry. The five
forces are:
1. The threat of entrants to the industry
 The risk of new entry by potential competitors.
2. The threat of substitute products
 The closeness of substitutes to an industry’s products.
3. The power of buyers/ customers
 The bargaining power of buyers.
4. The power of suppliers
 The bargaining power of suppliers, and
5. Rivalry among competitors in the industry
 The degree of rivalry among established organizations within an industry.
The Porter’s “Five-Force” competition Model:- A key Analytical Tool

Suppliers
Bargaining power of suppliers

Industry
competito
Potential entrants Substitutes
Threat of new entrants rs Threat of substitute products

Rivalry among
established firms

Buyers
Bargaining power of buyers

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Porter argues that

 The stronger each of these forces,
forces, the more limited is the ability of established
organizations to raise prices and earn greater profits.
 Within porter’s framework, a strong competitive force can be regarded as a threat since
it depresses success.
 A weak competitive force can be viewed as an opportunity,
opportunity, for it allows an organization
to get better success. Because of factors beyond an organization direct control,
control, such as
industry evolution, the strength of the five forces may change through time. In such
circumstances, the task facing strategic managers is to recognize opportunities and threats
as they arise and to formulate appropriate strategic responses.
 In addition, it is possible for organizations, through its strategy, to alter the strength of
one or more of the five forces to its advantages.
Exercise:
 Discusses the level of competitive about Ethiopian Airlines in the industry taking the
porter’s 5 force model.
The threat of new entrants to the industry
A new entrant into industry represents a competitive threat to
to existing firms. It adds new
production capacity and potential to erode the market share of the existing industry. New
entrants into the industry are potential competitors.
competitors. Potential competitors are organizations
that currently are not competing in an industry but have the capability to do so if they
choose.

Existing (established) organizations try to discourage potential competitors from entering,

since the more organizations enter an industry, the more difficult it becomes for established
organizations to hold their share of the market and to generate success. Thus a high risk of
entry by potential competitors represents a threat to the profitability of established
organizations.

On the other hand, if the risk of new entry is low, established organizations could take
advantage of this opportunity to raise prices and earn greater returns. The strength of the
competitive forces of potential rivals is largely a function of the height of barriers to entry.
The concept of barriers to entry implies that there are significant costs in joining an industry.

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The greater the costs that potential competitors must bear, the greater are the barriers to
entry. High entry barriers keep potential competitors out of an industry even when industry
returns are high. The principal sources of barriers to entry are:
 Economies of scale
 Absolute cost advantage
 Brand loyalty and switching cost
 Capital requirement
 Product differentiation
 Access to distribution channels
 Government and legal barriers
 Retaliation by established producers
When this risk is low,
low, established organizations can charge higher prices and earn greater
profits than would have been possible otherwise clearly, then, it is the interest of
organizations to pursue strategies consistent with these aims. Indeed, empirical evidence
suggests that the height of barriers to entry is the most important determinant of success rates
in an industry.
The threat of substitute products
Here, the products of industries that serves similar consumer needs as those of the industry
being analyzed. A substitute may be regarded as something, which meets the same needs as
the product in any industry.
industry. The extent of threat from particular substitute depends on two
factors.
factors.
 The extent to which price and performance of this substitute can match industries
product. If the price and performance of existing product rise above that of the
substitute product, customer tends to switch to the substitute.
 The willingness of buyers to switch to the substitute. Buyer will be more willing to
change substitute if switching costs are low.
low.
For example:
 Organization in the coffee industry competes indirectly with those in the tea and soft-
drink industries. (All three industries serve consumer needs for drinks).
The extent to which substitutes limit price and profit depends on:
 The buyers propensity to substitute
 Relative price and performance of substitutes

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The existence of close substitutes presents a strong competitive threat,

threat, limiting the price an
organization can charge and thus its success. However, if an organization’s products have
few close substitutes (that is, if substitutes are weak competitive force), then, other things
being equal the organizations has the opportunity to raise price and earn additional profits.

The bargaining power of buyers

Buyers of an industry product can exert bargaining power over that industry by forcing
prices down, by reducing the amount of good they purchased from the industry, and by
demanding better quality for the same price. The strength of buying power that firms face
from their customers depends on two sets of factors:
 Buyer’s price sensitivity and
 Relative bargaining power. The extents/ factors to which buyers are sensitive to the
prices changed by the firms in an industry depend on:
 Cost of product relative to total costs
 Product differentiation
 Competition between buyers
Some factors that influence the bargaining power of buyers relative to that of seller are:
 Size of concentration of buyers relative to producers
 Buyers’ switching cost
 Buyers’ information
 Buyers’ ability to backward integration. Buyers can be viewed as a competitive
threat
 when they force down prices or
 When they demand higher quality and better service (which increases operating
costs).

Alternatively, weak buyers give an organization the opportunity to raise prices and earn
greater returns. An industry’s buyers tend to be powerful relative to the firms if they are

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buying from when the conditions listed below apply (these factors also apply to a group of
consumers and to industrial and commercial buyers):
buyers):
 Buyers are concentrated as in cooperatives, or they account for a large volume of
purchases.
 Products are undifferentiated or standardized.
standardized.
 The seller’s component represents a large portion of the total cost of the buyer’s
finished product.
product. When the seller’s product has a small cost share, buyers tend to be
less prices sensitive.
 Buyers are earning low profits and are thus more price sensitive than if they were
highly profitable.
 The sellers’ product is not critical in one way or another to the buyer. If it is critical to the
quality, price, appeal,
appeal, etc,, of an industrial buyer group’s finished product, for example,
then the sellers will have power over the buyers.
 There is a threat that buyers can integrate backward to make the suppliers’ product.

The bargaining power of suppliers

Providers of goods and services to an industry have power over their customers through their
ability to set price and control quality, delivery time, and order quantity. If these customers
cannot successfully playoff one supplier against another to protect themselves, then the
industry’s profits can be drained off by suppliers. The bargaining power of suppliers that
can be viewed as a threat when they:
 are able to force up the price that an organization must pay for input or
 Reduce the quality of goods supplied,
supplied, thereby depressing the organization’s success.

Alternatively, week supplies give a company the opportunity to force down prices and
demand higher quality. The power of suppliers is high in the following situations:
 There are few suppliers who are more concentrated than their customers
 Suppliers’ product is differentiated
 Customers switching costs are high
 There is little pressure on suppliers to protect themselves from substitutes or
replacements for their product
 When suppliers have the capability to integrate forward.
forward.

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A supplier of engines to a manufacturer of lawnmowers would have a strong bargaining

position if the mower company realized the engine supplier’s ability to make the whole
lawnmower.

Rivalry among established organizations

It describes the intensity of rivalry among competitors or established organizations within in
the industry. Some industries appear “sleepy” because of a low level of rivalry among
competitors (example the manufacturers of fasteners, nuts and bolts and other devices used
to connect the components of products). On the other hand, some industries are
characterized by a high level of competitive activity (example, the brewing industry has many
competitors who battle fiercely with each other over market share).
share).

If this competitive force is weak,

weak, organizations have an opportunity to raise prices and earn
grater profits. But if it is strong,
strong, significant price competition,
competition, including price wars, may
result from the intense rivalry. Price competition limits profitability by reducing the margins
that can be earned on sales. Factors that play important role in determining the nature and
intensity of competition between established firms are:
 Concentration
 Diversity of competitors
 Product differentiation
 Excess capacity
 Exit barriers and
 Cost conditions
Generally, the factors that tend to precipitate intense rivalries in an industry are:
are:
 Relative equilibrium in size and power among a large number of competitors
 Slow or stagnant growth of industry demand such that expansion of one competitor
would come at the expense of others
 Undifferentiated products and low switching costs
 High fixed costs or product Perishability
 Even small capacity additions generate large volume increases which raise pressure to
cut prices

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 High exit barriers causing firms to bear low or negative returns on investment
 Wide spectrum of strategies and types of firms which generates confusion and frequent
“collision” in the market. The opposite case might be an oligopoly like the
automobile industry where most actions are reactions to another competitor and rivalry
is somewhat orderly, albeit intense.
Intense rivalry among established organizations constitutes a strong threat to success.
success. And it
is largely a function of three factors.
factors.
 Industry competitive structure
 Demand conditions and
 The height of exit barriers in the industry

Competitive structure
Competitive structure refers to the number and size distribution of organizations in an
industry. Different competitive structures have different implications for rivalry. Structures
vary from fragmented up to consolidated.

Fragmented Consolidated
One firm or one dominant firm (Monopoly)
Many firms no dominant firms

Few firms
Shared dominance
(Oligopoly)

The continuum of industry structures

Demand conditions
Industry demand conditions are another determinant of the intensity of rivalry among
established companies. Growing demand tends to moderate competition by providing greater
room for expansion.
expansion. Demand grows when the market as a whole is growing through the
addition of new consumers or when existing consumers are purchasing more of an
industry’s product. When demand is growing, companies can increase revenues without
taking market share away from other companies. Thus growing demand gives an
organization a major opportunity to expand operations.

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Declining demand results in more competition as organization fight to maintain revenues and
market-share. Demand declines when consumers are leaving the market place or when each
consumer is buying less. When demand is declining, an organization can attain growth only
by taking market share away from other organization. Thus, declining demand constitutes a
major threat, for it increase the extent of rivalry between established organizations.

Exit barrier
Exit barrier are a serious competitive threat when industry demand is declining. They are
economic, strategic, and emotional factors that keep organization competing in an industry
even when returns are low. If exit barriers are high,
high, organization can become locked into an
unfavorable industry and excess productive capacity can result. In turn, excess capacity
tends to lead to intensified price competition,
competition, with organizations cutting prices in an attempt
to obtain the orders needed to utilize their idle capacity. Common exit barriers include the
following:
 Investments in plant and equipment that have no alternative uses and cannot be sold off.
If the organization wishes to leave the industry, it has to write off the book value of these
assets.
 High fixed costs of exit,
exit, such as severance pay to workers who are being made redundant.
 Emotional attachments to an industry,
industry, as when an organization is unwilling to exit from
its original industry for sentimental reasons.
 Strategic relationship between business units.
units. For example, within a multi-industry
organization, a low-return unit may provide vital inputs from a high return unit based in
another industry. Thus the organization may be unwilling to exit from the low-return
units.
 Economic dependence on the industry,
industry, as when an organization is not diversified and so
relies on the industry for its income.

Interactions among these factors

The extent of rivalry among established organization within an industry is a function of
competitive structure, demand conditions, and exit barriers. The interaction of these factors
determines the extent of rivalry. These issues are summarized as follows: Demand conditions
and exit barriers as determinants of opportunities and threats in consolidated industry

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Demand Conditions
Demand decline
Demand growth

High High threat of Opportunities to raise

excess capacity prices through price
and price wars. leadership and to
expand operations.
Exit barriers Moderate Opportunities to raise
Low threat of excess prices through price
capacity and leadership to expand
price-wars operations.

When demand growth is high, the environment of consolidated industry may be favorable.
When demand is declining and exit barriers are high, the probable emergency of excess
capacity is likely to causes to price wars. Thus, depending on the interaction between these
various factors,
factors, the extent of rivalry among established organization in a consolidated
industry might constitute an opportunity or a threat.

4.2. Analysis of internal environment: organization capability

When internal analysis is conducted, the strengths and weaknesses of major functional areas
within the organization are assessed. Internal analysis provides strategic decision-makers
with an inventory of the organization’s skills and resources as well as its overall and
functional performance levels.
levels. Strategists are primarily interested in organizational
capability because of two reasons.
1. They wish to know what capacity exists within the organization to exploit opportunities
or face threats in its environment.
2. They are interested in knowing what potential should be developed within the
organization so that opportunities could be exploited and threats could be faced in future.

Organizational capability is the inherent capacity or potential of an organization to use its

strength and overcome its weaknesses in order to exploit opportunities and face threats in its

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external environment. It is the sum total of resources and behavior, strength and weaknesses,
synergistic effects occurring in, and the distinctive competence of any organization.
Organizational capability is measured and compared through the process of organizational
appraisal.
appraisal.

4.2.1. How do we analyze Internal Strengths and Weaknesses?

Resources and Core Competencies
Strategic planning is strongly influenced by internal resources. Resources are inputs to
production that can be accumulated over time to enhance the performance of a firm. It can
take many forms,
forms, but tend to fall into two broad categories.
categories. Tangible assets such as real
estate, production facilities, raw material and so on; Intangible assets such as company
reputation, culture, technical knowledge, patents,
patents, as well as accumulated learning and
experience.
experience.
Grant has classified a company’s resources as
 Tangible :Physical, Financial
 Intangible: Technology, Reputation, Culture
 Human: Skills & knowledge, Communication, Motivation
Grant’s Resources, Capabilities and competitive Advantage
Industry Key
Competitive Strategy Success Factors
Advantage

Organizational
Capabilities

RESOURCES

TANGIBL INTANGIBL HUMAN

Specialised skills
E E and knowledge
Financial Technology Communication and
Physical Reputation interactive abilities
Culture Motivation

As to Grant’s the sustainability of competitive advantage is tested by:

 Durability
 Replicability
 Mobility
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 Appropriability
Sustainability and Appropriability
Sustainable Competitive Advantage is the result of
Durability: Some resources are more durable than others and, hence, they are a more secure
basis for competitive advantage. The increasing pace of technological change is shortening
the useful life-span of most capital assets.
Transferability (Mobility): The simplest means of acquiring the resources and capabilities
necessary for imitating another firm’s strategy is to buy them. If rivals can acquire on
similar resources for imitating the strategy of a successful company, then that company’s
competitive advantage will be short lived. The ability to buy a resource or capability depends
on its transferability – the extent to which it is mobile between and among companies.

Replicability: If a firm cannot buy a resource or capability, then it must build it.
Appropriability: The returns generated from a resource (Grant). Grant uses three categories
to explain this: property rights, relative bargaining power and embeddedness of the resource
Effective internal analysis provides a clearer understanding of how an organization can
compete through its resources. Resources are a source of competitive advantage.
advantage. Because:
 Resource is instrumental for creating customer value,
value, if it increases the benefits
customer derive from a product or service relative to the costs they incur (earn, acquire),
then the resources can lead to competitive advantage.
 Resources are a source of advantages
 if they are rare and note equally available to all competitors.
competitors.
 For every extremely valuable resource,
resource, if all competitors have equal access; the
resources cannot provide a source of competitive advantage.
 Resources can enhance a firm’s competitive advantage.
advantage.
 as strategies are changed and organizations are restructured
 When they are well organized,
organized, many firms’ layoff long-time employees and lose as
well their potentially valuable skills.

Resources are rare/ scarce

Resources are Resources are
Inimitable Core competence Organized

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Resources and Core Competence

If resources are valuable, rare, and inimitable and organized, they can be viewed as sources
of a firm’s core competencies. Valuable resources are/must be; rare, imperfectly imitable,
and non-substitutable.
non-substitutable. Core competence is something a firm does especially well relative to
its competitors. They are the unique skills or knowledge an organization possesses that give
it an edge over competitors.
competitors. - A set of skills or expertise in some activity, rather than
physical or financial assets.

Before developing core competencies a firm may think of developing benchmarking.

Benchmarking is the process of assessing how well one organization basic functions and
skills compared to those of some other organization or set of organization.
The goal of benchmarking is:
 to understand thoroughly the “best practices” of other firms,
firms, and
 to undertake actions to achieve both better performance and lower costs.
The downside of benchmarking is that it only helps organization performs as well as its
competitors; strategic management ultimately is about surpassing those organizations.

Kay’s Sources of Corporate Success

Corporate success derives from a competitive advantage.
advantage. Competitive advantage is based on
distinctive and strategic assets. These assets and capabilities are most often derived from and
matched with the relationships that an organization has with its customers, suppliers,
employees, the government and so on. It is also suggested that there are three types of
distinctive capabilities:
capabilities: Architecture, Reputation and Innovation.

1. Corporate Success

2. A competitive advantage.
Corporate Success
3. Distinctive capabilities and
strategic assets.

4. Relationships
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Architecture: Architecture is the term used to describe relationships, both formal and
informal, between internal staff, with customers and suppliers, and inter firm collaborative
arrangements (networks).
Reputation: Reputation is built on relationships with an organization’s suppliers and
customers. A particular reputation, perhaps for reliability or speed of service, is a source of
advantage where the buyer values this reputation. Reputations are, however, a wasting source
of advantage if they are not maintained.

Innovation: Innovation can be a source of competitive advantage when it provides means for
an organization to compete more efficiently, offering a product which is more valuable to the
customer; or when it allows the organization to compete in new ways.

Tools/ models that help to analyze the internal aspects of the

organization
MC Kinsey framework
MC Kinsey framework is one of the tools that help to analyze the internal aspects of the
organization. It consists of seven elements where the first three elements are taken to be the
hardware of the organization and the other four elements are considered as the software.
software.
The hardware is:
 Strategy. To identify the strength and weakness of the organization, the course of action to
achieve organization objective should be assessed.
 Structure. The kind of structure or chart of the organization that is prevailing should also
be assessed in terms of hierarchy and the type of work unit it has.
 System. The overall system of the organization that is how it accomplishes its activities by
using its different chain of activities should be analyzed.

The software of the organization that assessed in relation to the prevailing conditions of the
organization is:
 Staff. The assessment to prove whether the organization is having adequate manpower with
necessary requirements. Also assesses the assignment of the right person to the right job.
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 Skill. To checks whether the employees have the necessary skills needed to carry out the
organizations’ strategy and achieve organizational goals.
 Shared values. The assessment to prove whether the employees share the same guiding
values in the organization.
 Style. The assessment to identify whether the organization’s employees stare a common
way of thinking and behavior.

SWOT analysis
The other most basic technique for the analysis of the firm and industry conditions is SWOT
analysis. SWOT analysis provides a framework for analyzing the four elements of an
organization’s internal and external environment.
 Opportunities and threats
 strengths and weaknesses
SWOT analysis provides “inputs” a basic listing of conditions both inside and surrounding
an organization. It helps executives summarize the major facts and forecasts derived from the
external and internal analysis. From this, executives can derive a series of statements that
identify the primary and secondary strategic issues confronting the organization. The
strengths and weaknesses portion of SWOT refers to the internal conditions of a firm where
the firm excels (shows strength) and where it may be lacking relative to similar competitors
(shows weaknesses).

Strategy formulation builds on SWOT analysis to utilize strengths of the organization in

order to capitalize on opportunities, counteract threats, and alleviate internal weaknesses. In
short, strategy formulation moves from simply analysis to devising a coherent course of
action.
After analyzing the external environment and internal resources, strategic decision makers
have the information they need to formulate corporate, business, and functional strategies of
the organization.

Process of Internal Analysis

The process of internal analysis involves the following steps.
1. Perform a complete financial analysis.
analysis.
2. Comprehensively identify the major functional areas that make up SBU operations.
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3. Enumerate (name, list, specify, itemize) the critical operational factors of each
functional area.
4. Identify both qualitative and quantitative variables to describe performance of the
SBU on each operational factor.
factor.
5. Conduct research to assign either qualitative or quantitative values to the variables
identified in (4).
6. Organize findings by function according to whether they represent strengths or
weaknesses.

Identification of Major Functional Areas

Whatever organization is analyzed, the analyst should select a comprehensive set of
categories that define the firm’s operations. These categories, or functional areas, can vary
from one organization to another, and depend upon a vertical or a horizontal analysis. For
horizontal analysis,
analysis, the common functional areas are such as
 marketing,
 personnel,
 production, and
 R & D, along with
 organization structure,
structure,
 present and past strategies,
strategies, and
 External relations in addition to finance.
Although most organizations will have these functions in operation, the analyst should not
restrict the internal analysis to them. The particular set of functions for which data are
gathered should be tailored to the firm in question. The key characteristic of the set of
functions selected must be comprehensiveness. Analysts should make sure that all pertinent
functions are covered.

Operational Factors of Each Functional Area

After identifying the appropriate functional areas to study in the internal, the next step is to
decide what aspects of each one to analyze.
analyze.
 Marketing

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This function is analyzed by examining the operating characteristics of the organizations’

products/services, price, promotion, distribution, and new product development systems.
Examples of checkpoints factor are for
 Products/services: Market share; Penetration; Quality level ; Market size; Market
expansion rate
 Price: Relative position (leader or follower); Image; Relationships to gross profit margin
 Promotion: Effectiveness; Appropriateness of emphases; Budget as percent of sales; is
return measurable, acceptable?
 Distribution: Delivery record; Unfilled orders; Costs; Are other methods more
appropriate?
 New product development : New product introduction rate; Sources of ideas effective?;
Extent of market feedback; Success rate
The problem is not to identify simply what the organization’s marketing department is
doing, but instead what it is doing particularly well or poorly.
 Personnel and Union Relations
The overall purpose of the personnel function is to manage the relationship between
employees and the organization. Therefore, internal analysis of the personnel function is an
assessment of the strengths and weaknesses of that relationship.
This function can be analyzed by examining the following factors and questions or others
tailored to the organization:
 Job analysis factors
o Are necessary skills present?
o Are all necessary jobs present?
o Are selection and placement systems effective?
o Recruiting capability; Training effectiveness
 Job evaluation factors
o Pay scales appropriate?
o Do pay differentials reflect job content differences?
o Image of pay scale within labor market; Adequacy of benefits
 Turnover/ absenteeism
o Turnover rate; Absenteeism rate
 Attitude of employees, managers
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 Performance evaluation: Reliability; Validity

 Union-management relations
 Unions representing employees; Bargaining positions; Quality of relations; Negotiation
schedule
 Production
The production or manufacturing area’s strengths and weaknesses relate to the
organization’s ability to produce its products/services at the desired quality level onetime at
the planned-for-costs. Examples of evaluative factors for production are the following:
 Facilities and equipment
 Capacity level; Per-unit costs of manufacturing; Obsolescence; today, future; Level of
technology applied; Process optimality; Replacement, maintenance
 Quality level
 Defective units; Inspection costs; Remanufacturing costs; Competitive position;
Consistency
 Inventory
 Level, turnover; Costs and trends;
 Is inventory rationally maintained?
 Procurement
 Sources; Quality of inputs; Constant lead times
 Planning, scheduling
 Formal system; Productivity
 Is demand smoothed?
 Excessive overtime charges?
For most service organizations, the process of providing the service can be roughly equated
to the production of a product. Costs of providing the service, as well as quality of the service
delivered, can be the focus of analysis.
 Research and Development
Research and development (R&D) provides technical analysis and support to other
department, and designs products or processes to meet market needs and thereby generate a
profit. Operation of R&D must strike a balance between practicality and creativity in order
to contribute successfully to profit goals. The correct balance between creativity and
practicality for a particular firm is a strategic issue that cannot be decided absolutely.

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Conducting an internal analysis of the R&D function involves identifying strengths and
weaknesses in R&D activities such as the following:
 Demand for R&D
 Is demand for R&D services stable?
 Is R&D funding stable?
 Is R&D funding vulnerable to profit variations?
 Facilities and equipment
 Are facilities and equipment state-of-art?
 Is obsolete equipment expendable?
 Is space a problem?
 Market and production inputs
 Does market information get fed into the R&D process?
 Does production information influence the R&D process?
 Are marketing and production influences balanced?
 Planning and scheduling
 Are jobs planned and scheduled?
 Are costs effectively monitored?
 Are human resource needs planned?
 Is the level of uncertainty associated with the type of R&D activity in which the
organization is involved appropriate for the intended level of risk?

 Organization (organizational structure)

Organization structure must support strategies and facilitate their successful implementation.
To do so, structure must prevent a certain set of problems from materializing. These
problems are the characteristics that are searched for to determine the appropriateness of a
change in structure. Changing structure is risky.
risky. Therefore, it should not be tampered with
unless there is either a problem present that must be corrected or one that can reasonably be
expected to develop if a change is not made. In either case, though, organization structure
should be changed only because of specific problems. That is, there is no absolutely best
structure,
structure, but only the structure that minimizes organization-related problems.

Some of the criteria that can be used to analyzed organization structure are as follows:

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 Does structure make sense?

 Is it confusing?
 Are there too many levels?
 Are there horizontal communication channels?
 Does it expedite communication?
 Are the forms of organization used appropriate?
 Accountability and control
 Does structure fix responsibility?
 Are there single functions assigned to more than one person?
 Are there too many committees?

 Present Strategies
Whether present strategies are stated explicitly, must be inferred from behavior of the
organization, the goals and action plans currently applicable must be identified and analyzed.
The idea is to determine which strategies are working (that is, which action plans are being
implemented in such a way that their associated goals are being met) and which ones are not.
Information about the relative success of current strategy can then be fed into the process of
formulating and implementing new strategies. In this way problems associated with existing
strategies can be corrected by formulating modifications or replacements for them and
effective strategies can be improved upon, retained as is, or extended so that strategic success
is facilitated. The following steps can be followed to evaluate current strategy at any of the
levels of strategy:
 Select strategy levels for analysis.
 Identify present goals and action plans at each level.
 Determine extent to which short and long-term goals have or have not been met.
 Determine which action plans have and have not been effective.
Of course, a strategy successfully carried out constitutes a positive attribute of the firm, and
unsuccessfully implemented one is a problem to be dealt with. For an internal analysis,
however, the point is to identify strategies that are particularly effective - they become
strength. Weaknesses are strategies that have been especially unsuccessful in their operation.

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 Competitive advantages
A winning business strategy is grounded in sustainable competitive advantages. A company
has competitive advantage whenever it has an edge over rivals in
 attracting customers and
 Defending against competitive forces.
There are many sources of competitive advantage:
advantage:
having the best made product on the market,
delivering superior customer service,
achieving lower cost, than rivals,
being in a more convenient geographic location,
proprietary technology,
features and styles with more buyer appeal,
a well-known brand name and reputation,
shorter lead time in testing and developing new product,
providing more value for customers for their money and
Combinations of two or more of these advantages.

Competitive Change during Industry Evolution

Over time most industries pass through a series of well-defined stages,
stages, from growth to
maturity and eventually into decline. These stages have different implications for the form of
competition.
 The strength and nature of each of Porter’s five competitive forces typically changes as
an industry evolves.
evolves. This is particularly, true regarding potential competitors and rivalry.
rivalry.
 The changes in the strength and nature of these forces give rise to different opportunities
and threats at each stage of an industry’s evolution.
 The task facing managers is to anticipate how the strength of each force will change with
the stage of industry development and to formulate strategies that take advantage of
opportunities as they arise and that counter emerging threats.

The industry life cycle model

It is a useful tool for analyzing the effects of industry evolution on competitive forces. The
model is similar to the product life cycle model known in the marketing literature. Using the

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industry life cycle model, we can identify five industry environments,

environments, each linked to a
distinct stage of an industry’s evolution:
 An embryonic industry environment
 A growth industry environment
 A shakeout environment
 A mature industry environment and
 A declining industry environment

Industry life cycle

Variations on the theme
It is important to remember that the industry life cycle model is a generalization. In practice,
industry life cycles do not always follow the pattern or the steps. In some cases, growth is so
rapid that the embryonic stage is skipped altogether. In other instances, industries fail to get
past the embryonic stage. Industry growth can be revitalized after long-periods of decline,
either through innovations or through social changes. The time span of different stages can
also vary significantly from industry to industry.
 Some industries can stay in maturity almost indefinitely if their products become basic
necessities of life.
 Others skip the mature stage and go straight into decline.
 Still other industries may go through not one but several shakeouts before they enter full
maturity.

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CHAPTER
5. Strategy Formulation: Options and Choices

Brief contents:
5.1. Levels of Strategy / The strategy hierarchy

5.1.1. Corporate-Level Strategy/ Corporate strategy

5.1.2. Business-Level Strategy/ Business Unit Level Strategy

5.1.3. Functional-level Strategy / Functional strategies

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5.1.4. Operational level strategies

5.1.5. Social Strategy/ societal level strategy

5.2. Strategic Formulation (options and choices)

5.2.1. Competitive Organizational Strategy

5.2.2. Corporate Strategy

Learning outcomes: After successfully completing the

chapter learners will be able to:

understand how to formulate and choose strategies

list and explain levels of strategy
explain Porter's Four Generic Competitive Strategies

Chapter five: Strategy Formulation: Options and Choices

Developing a strategic vision and mission, establishing objectives, and deciding on a strategy
are basic direction setting tasks. They map out where the organization is moving. All the
three together constitutes strategic plan. Strategy formulation is often referred to as strategic
planning of long-range planning and it is concerned with developing an organization mission,
objectives, strategies, and policies. It is useful to consider strategy formulation as part of a
strategic management process that comprises three phases:
 Diagnosis,
 formulation, and
 Implementation.

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Diagnosis includes performing a situation analysis which is analyzing the organization's

external environment, including major opportunities and threats; and Identifying the major
critical issues, which are a small set, typically two to five, of major problems, threats,
weaknesses, and/or opportunities that require particularly high priority attention by
management.

Analysis of the internal environment of the organization, including identification and

evaluation of current mission, strategic objectives, strategies, and results, plus major
strengths and weaknesses; Strategy formulation begins with situation analysis: the process of
finding a strategic fit between external opportunities and internal strengths while working
around external threats and internal weaknesses.

Formulation, the second phase in the strategic management process, produces a clear set of
recommendations, with supporting justification, that revise as necessary the mission and
objectives of the organization, and supply the strategies for accomplishing them.
There are four primary steps in this phase:
 Reviewing the current key objectives and strategies of the organization, which usually
would have been identified and evaluated as part of the diagnosis
 Identifying a rich range of strategic alternatives to address the three levels of strategy
formulation.
 Doing a balanced evaluation of advantages and disadvantages of the alternatives relative
to their feasibility plus expected effects on the issues and contributions to the success
of the organization
 Deciding on the alternatives that should be implemented or recommended.

In organizations, and in the practice of strategic management, strategies must be

implemented to achieve the intended results. The most wonderful strategy in the history of
the world is useless if not implemented successfully. Implementation is third and final stage
in the strategic management process involves developing an implementation plan and then
doing whatever it takes to make the new strategy operational and effective in achieving the
organization's objectives.
5.1. Levels of Strategy / The strategy hierarchy

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In most (large) corporations there are several levels of management. Each level (of strategy)
involves different strategic decisions. Strategic management is the conduct/ way of drafting,
implementing and evaluating cross-functional decisions that will enable an organization to
achieve its long-term objectives. Strategic management 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.
It provides overall direction to the enterprise. It gives direction to corporate values,
corporate culture, corporate goals, and corporate missions.
There is wide diversity in the strategic management literatures attached to the different levels
of strategy that may exist in a firm. Strategy can be formulated on different levels.
Thompson and Strickland propose four levels:
o corporate strategy,
o business strategy,
o functional area support strategy, and
o Operating-level strategy.
Each layer provides strategic guidance of the next level of subordinate managers.

Corporate-Level Managers Corporate Strategy

Business-Level General Managers Business Strategies

Heads of major Functional Areas Functional Strategies

Plant Managers, Lower-Level Operating Strategies

Supervisors

Two-way Influence

A Diversified Company

5.1.1. Corporate-Level Strategy/ Corporate strategy

Corporate level strategy refers to the overarching strategy of the diversified firm. It answers
the questions of:
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 "which businesses should we be in?" and

 "How does being in these businesses create synergy and/ or add to the competitive
advantage of the corporation as a whole?"
Corporate level strategy fundamentally is concerned
 with the selection of businesses in which the company should compete and
 with the development and coordination of that portfolio of businesses.
Corporations are responsible for creating value through their businesses. They do so by
 managing their portfolio of businesses,
 ensuring that the businesses are successful over the long-term,
 developing business units, and
 sometimes ensuring that each business is compatible with others in the portfolio

Under this broad corporate strategy there are typically business-level competitive strategies
and functional unit strategies.

5.1.2. Business-Level Strategy/ Business Unit Level Strategy

Organizations must maintain a balance, ensuring that all business units are aligned with the
overall corporate strategy, while allowing individual business units to proactively act to
address the challenges and opportunities in their specific businesses. A strategic business unit
(SBU) is a semi-autonomous unit that is usually responsible for its own budgeting, new
product decisions, hiring decisions, and price setting. It may be a division, product line, or
other profit center that can be planned independently from the other business units of the
firm. An SBU is treated as an internal profit centre by corporate headquarters.

At the business unit level, the strategic issues are less about the coordination of operating
units and more about developing and sustaining a competitive advantage for the goods and
services that are produced. At the business level, the strategy formulation phase deals with:
 positioning the business against rivals
 anticipating changes in demand and technologies and adjusting the strategy to
accommodate them and

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 Influencing the nature of competition through strategic actions such as vertical

integration and through political actions such as lobbying.
Business strategy consists of action plans that relate to goals (at the business level). It focuses
on expected operational results of a business unit; and it refers to the aggregated strategies of
single business firm or a strategic business unit (SBU) in a diversified corporation. Michael
Porter identified three generic strategies such as cost leadership, differentiation, and focus
that can be implemented at the business unit level to create a competitive advantage and
defend against the adverse effects of the five forces. Business-level action specifications
should be devolved so that collectively they define the following elements:
 The strategic posture represented by the strategy.
 The firm’s product market scope;
 Input-output transformations in which the firm is engaged;
 What synergies are sought in the operation of the firm?
When taken together, these elements of business-level strategy should combine uniquely to:
 define the business of the SBU or firm, and
 describe its competitive edge.
Thus strategy aligns the strategic business unit or firm relative to its competitors,
distinguishes it from them, and hopefully propels it beyond them.
5.1.3. Functional-level Strategy / Functional strategies
The functional level of the organization is the level of the operating divisions and
departments. The strategic issues at the functional level are related to business processes and
the value chain. Functional units of an organization are involved in higher level strategies by
providing input into the business unit level and corporate level strategy, such as providing
information on resources and capabilities on which the higher level strategies can be based.
Once the higher-level strategy is developed, the functional units translate it into discrete
action-plans that each department or division must accomplish for the strategy to succeed.
In contrast with the other levels of strategy, functional strategies serve as guidelines for the
employees of each of the firm’s subdivisions.
Functional strategies are developed for each of the functional parts of the firm to guide the
behavior of people in a way that would put the other strategies into motion such as
marketing strategies,
strategies, new product development strategies, human resource strategies,

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financial strategies, legal strategies, supply-chain strategies, and information technology

management strategies.
5.1.4. Operational level strategies
An additional level of strategy called operational strategy was encouraged by Peter
Drucker in his theory of management by objectives (MBO). It is very narrow in
focus and deals with day-to-day operational activities such as scheduling criteria. Operational
level strategies are informed by business level strategies which, in turn, are informed by
corporate level strategies.
5.1.5. Social Strategy/ societal level strategy
In addition to this four, one additional layer of strategy which is recently emerged called
societal level strategy is also mentioned by some other authors.
Social strategy consists of goals and action plans of which the overall purpose is to guide the
ways in which management intends the organization to respond to the major social demands
placed on it. It is an explicit definition of the organization’s social responsibilities: how it is
expected to react to the demands of particular groups of external constituents.
The idea of social responsibility in a separate (from corporate, business, and functional)
strategy level was introduced in 1979 by Ansoff and modified by Schendel and Hofer.
The development of societal legitimacy (or enterprise) strategy is Ansoff’s proposed
solution to increasing importance of socio-political variables in the life of the firm.
Included in these variables are “new consumer attitudes new dimensions of social control
and, above all, a questioning of the firm’s role in society.”

5.2. Strategic Formulation (options and choices)

Strategy formulation is often referred to as strategic planning of long-range planning and is

concerned with developing an organization mission, objectives, strategies, and policies. It
begins with situation analysis - the process of finding a strategic fit between external
opportunities and internal strengths while working around external threats and internal
weaknesses.
5.2.1. Competitive Organizational Strategy
Competitive strategy is often called Business level strategy/ business unit level strategy. It
involves deciding how the company will compete within each line of business (LOB) or

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strategic business unit (SBU). Competitive strategy creates a defendable position in an

industry so that a firm can outperform competitors. It raises the following questions:
 Should we compete on the basis of low cost (price), or
 Should we differentiate our products or services on some basis other than cost, such as
quality or service?
 Should we compete head-to-head with our competitors for the biggest but most sought
after share of the market? or
 Should we focus on a niche in which we can satisfy a less sought after but also
profitable segment of the market?
A company has competitive advantage whenever it can attract customers and defend against
competitive forces better than its rivals. Successful competitive strategies usually involve
building uniquely strong or distinctive competencies in one or several areas crucial to success
and using them to maintain a competitive edge over rivals. Some examples of distinctive
competencies are:

 superior technology and/or product features,

 better manufacturing technology and skills,
 superior sales and distribution capabilities, and
 Better customer service and convenience.
The essence of strategy lies in creating tomorrow's competitive advantages faster than
competitors mimic the ones you possess today. Competitive strategy is about being different.
It means deliberately choosing to perform activities differently or to perform different
activities than rivals to deliver a unique mix of value. According to Michael Porter, a firm
must formulate a business strategy that incorporates three generic strategies: cost leadership,
differentiation, and focus that can be implemented at the business unit level to create a
competitive advantage and defend against the adverse effects of the five forces

Before using one of the two generic competitive strategies (lower cost or differentiation), the
firm or unit must choose
 the range of product varieties it will produce,
 the distribution channels it will employ,
 the types of buyers it will serve,

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 the geographic areas in which it will sell, and

 the array of related industries in which it will also compete.
This should reflect an understanding of the firm’s unique resources.
Porter's Four Generic Competitive Strategies
We will consider competitive strategy by using Porter's four generic strategies as the
fundamental choices, and then various competitive tactics.
The four generic competitive strategies which he argues cover the fundamental range of
choices depicted in the figure below.

Broad target Cost-

Differentiatio
Competitive scope leadershi
Narrow n
target p
Low Differentiatio
cost n
Cost CompetitiveDifferentiatio
Advantage n focus
focus n focus
Porter’s generic
competitive strategies
When the lower cost and differentiation strategies
 have a broad mass-market target, they are called cost leadership and differentiation.
 are focused on a market niche (narrow target), they are called cost focus and
differentiation focus.
focus.
1. Cost leadership
Cost
Cost leadership is a lower cost strategy or overall Price Leadership.
Leadership. It is the ability of an
organization or business units to design, produce, and market a comparable product more
efficiently than its competitors. Cost leadership is a low-cost competitive strategy that aims
at the broad mass market and requires:
 aggressive construction of efficient scale facilities,
facilities,
 vigorous pursuit of cost reductions from experiences,
 tight cost and overhead control,
control,
 avoidance of marginal customer accounts,
accounts, and
 cost minimization in areas like R&D, service, sales force, advertising, and so on.
Because of its lower costs, the cost leader is able to charge a lower price for its products than
its competitors and still make a satisfactory profit. Having a lower-cost position gives a

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company or business unit a defense against rivals. Cost leadership is appealing to a broad
cross-section of the market by providing products or services at the lowest price. It requires
being the overall low-cost provider of the products or services. Implementing this strategy
successfully requires continual, exceptional efforts to reduce costs without excluding product
features and services that buyers consider essential. Some conditions that tend to make this
strategy an attractive choice are:
 The industry's product is much the same from seller to seller
 The marketplace is dominated by price competition, with highly price-sensitive buyers
 There are few ways to achieve product differentiation that have much value to buyers
 Most buyers use product in the same ways
 Switching costs for buyers are low
 Buyers are large and have significant bargaining power

2. Differentiation/ Differentiation strategy

Differentiation strategy is the ability to provide unique and superior value to the buyer;
and it is appealing to a broad cross-section of the market through offering
differentiating features that make customers willing to pay premium prices. This
specialty can be associated with

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 Product/service
Product/  design or brand  superior technology,
quality, image,  prestige, or
 special features,  dealer network,  Convenience.
 after-sale service,
service,  customer services,
Sustainable differentiation usually comes from advantages in core competencies, unique
company resources or capabilities, and superior management of value chain activities.
3. Cost focus
In using cost focus, the company or business unit seeks a cost advantage in its target segment.
The cost focus strategy is Price focus strategy and a market niche strategy, concentrating on a
narrow customer segment and competing with lowest prices, requires/ having lower cost
structure than competitors.

Cost focus strategy is a lower-cost competitive strategy that focuses on a particular buyer group
or geographic market and attempts to serve only this niche, to the exclusion of others. It focuses
its efforts better able to serve its narrow strategic target more efficiently than can its competitors
as well as requires a trade-off between profitability and overall market share.
4. Differentiation focus
Differentiation strategy is a second market niche strategy, concentrating on a narrow customer
segment and competing through differentiating features. It is that concentrates on a particular
buyer group, product line segment, or geographic market. In using differentiation focus, the
company or business unit seeks differentiation in a targeted market segment. This strategy is
valued by those who believe that a company or a unit that focuses its efforts is better able to
serve the special needs of a narrow strategic target more effectively than can its competition.
Some conditions that tend to favor focus, i.e. price or differentiation focus are:
 The business is new and/or has modest resources
 The company lacks the capability to go after a wider part of the total market
 Buyers' needs or uses of the item are diverse; there are many different niches and
segments in the industry
 Buyer segments differ widely in size, growth rate, profitability, and intensity in the five
competitive forces, making some segments more attractive than others
 Industry leaders don't see the niche as crucial to their own success
 Few or no other rivals are attempting to specialize in the same target segment

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 Best-cost Provider Strategy:

This strategy not one of Porter's basic four strategies, it is mentioned by a number of other
writers; and it is taken as a fifth strategy alternative. The best-cost provider strategy is a mixture
or hybrid of low-price and differentiation, and targets a segment of value-conscious buyers that
is usually larger than a market niche, but smaller than a broad market. It is a strategy of trying to
give customers the best cost/ value combination, by incorporating key good-or-better product
characteristics at a lower cost than competitors.

This strategy could be attractive in markets that have both variety in buyer needs that make
differentiation common and where large numbers of buyers are sensitive to both price and value.
Porter argues that this strategy is often temporary, and that a business should choose and achieve
one of the four generic competitive strategies. Otherwise, the business is stuck in the middle of
the competitive marketplace and will be out-performed by competitors who choose and excel in
one of the fundamental strategies. His argument is analogous to the threats to a tennis player
who is standing at the service line, rather than near the baseline or getting to the net.
 Competitive Tactics
In general, tactics are shorter in time horizon and narrower in scope than strategies. Among the
various tactics that may be useful and dealt in this section are:
 competitive tactics, and
 Cooperative tactics.
Two categories of competitive tactics are those dealing with
 timing (when to enter a market) and
 Market location (where and how to enter and/or defend).

Timing Tactics:
When to make a strategic move is often as important as what move to make. We often speak of
first-movers - the first to provide a product or service; second-movers or rapid followers, and late
movers - wait-and-see

Market location tactics

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These fall conveniently into offensive and defensive tactics. Offensive tactics are designed to
take market share from a competitor, while defensive tactics attempt to keep a competitor from
taking away some of our present market share, under the onslaught of offensive tactics by the
competitor. Some offensive tactics are:
 Frontal assault  Bypass attack
 Flanking maneuver  Guerrilla warfare
 Encirclement
Some defensive tactics are:
 Raise structural barriers:
 Increase expected retaliation:
 Reduce inducement for attacks:

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 Cooperative strategies
Another group of "competitive" tactics involve cooperation among companies. These could be
grouped under the heading of various types of strategic alliances. Strategic alliances/ cooperative
strategies involve an agreement or alliance between two or more businesses formed to achieve
strategically significant objectives that are mutually beneficial.
Some of the reasons for strategic alliances are to:
 obtain/ share technology,
 share manufacturing capabilities and facilities,
 share access to specific markets,
 reduce financial/political/market risks, and
 achieve other competitive advantages not otherwise available.
5.2.2. Corporate Strategy
In this aspect of strategy, we are concerned with broad decisions about the total organization's
scope and direction. Basically, we consider what changes should be made in our growth
objective and strategy for achieving it, the lines of business we are in, and how these lines of
business fit together. Corporate level strategy is the grand strategy that comprises the overall
strategy of elements for the corporation as a whole. It is primarily about the choice of direction
for the whole firm. Corporate strategy involves four kinds of initiatives:
 Making the necessary moves to establish positions in different businesses and achieve an
appropriate amount and kind of diversification.
 Initiating actions to boost the combined performance of the businesses the company has
diversified into.
 Pursuing ways to capture valuable cross-business strategic fits and turn them into competitive
advantages
 Establishing investment priorities and moving more corporate resources into the most
attractive lines of business (LOB's).
Corporate strategy deals with three key issues facing the corporation as a whole.
 The firm’s overall orientation toward growth, stability, or retrenchment
 The industries or markets in which the firm competes through its products and business units
 The manner in which management coordinates activities, transfers resources and cultivates
capabilities among product lines and business units
To deal with each of the issues, corporate
c level strategy is organized and examined based on
three main strategy components/ parts.
 directional strategy
o orientation toward growth,
growth,
 o what should be our growth objective, ranging from retrenchment through stability to
varying degrees of growth - and
o how do we accomplish this,
 portfolio strategy
o coordination of cash flow among units,
units,
o what should be our portfolio of lines of business,
o which implicitly requires reconsidering
o how much concentration or diversification we should have, and
 parenting strategy
o Building organization synergies through resources sharing and development.
o how we allocate resources and manage capabilities and activities across the portfolio –
o where do we put special emphasis, and
o How much do we integrate our various lines of business.
1. Directional strategy
Every product or business unit must follow a business strategy to improve its competitive
position. Similarly every corporation must decide its orientation toward growth by asking the
following three questions:
 Should we expand, cut back, or continue our operations unchanged?
 Should we concentrate on our activities within our current industry or diversify into other
industries?
 If we want to grow and expand, should we do so through internal development or external
acquisitions, mergers or joint ventures?
Organization’s directional strategy is composed of three general orientations toward growth.
 Growth strategies
o expand the company’s activities, such as increasing sales or adding products.
 Stability strategies
o make no change to the company’s current activities.
 Retrenchment strategies
o reduce the organizations level of activities.
 Growth strategies
Growth objectives can range from drastic retrenchment through aggressive growth. By far the
most widely pursued organization strategies of business firms are those designed to achieve
growth in sales, assets, profits, or some combination of these.
All growth strategies can be classified into one of two fundamental categories
  Concentration within existing industries or
 Diversification into other lines of business or industries.

Mergers, Acquisitions, and Strategic Alliances

Each of the four growth strategy categories just discussed can be carried out internally or
externally, through mergers, acquisitions, and strategic alliances. Various forms of strategic
alliances, mergers, and acquisitions have emerged and used extensively in many industries today.
They are used particularly to bridge resource and technology gaps, and obtain expertise and
market positions more quickly than could be done through internal development.

They are particularly necessary and potentially useful when a company wishes to enter a new
industry, new markets, and new parts of the world. Acquisitions involve buying an existing
business; internal new ventures involve starting a new business from scratch; and joint ventures
typically involve starting a new business from scratch with the assistance of a partner.

 Stability Strategies
There are a number of circumstances in which the most appropriate growth stance for a company
is stability, rather than growth. An organization may choose stability over growth by continuing
its current activities without any significant change in direction. The stability strategies can be
appropriate for a successful corporation operating in a reasonably predictable environment. They
are very useful in the short run but can be dangerous if followed for too long. They may be used
for a relatively short period, after which further growth is planned. And they usually involve
with circumstances that either permit a period of comfortable coasting or suggest a pause or
caution. Some of the more popular of these strategies are:
 the pause strategy,
strategy,
 the no change strategy,
strategy, and
 the profit strategy.
strategy.
1. Pause strategy
A pause strategy also called pause and then proceed or a timeout. It is an opportunity to rest
before continuing a growth or retrenchment strategy. It is typically a temporary strategy to be
used until the environment becomes more hospitable or to enable an organization to consolidate
its resources after prolonged rapid growth.
2. No change strategy
A no change strategy is a decision to do nothing new, a choice to continue current operations and
policies for the foreseeable future. Rarely articulated as a definite strategy, a no-change
strategy’s success depends on a lack of significant change in an organization situation.
3. Profit strategy
A profit strategy is grab profits while you can. It is a decision to do nothing new in a worsening
situation, but instead to act as though the organization’s problems are only temporary. It is an
attempt to artificially support profits when a company’s sales are declining by reducing
investment and short term discretionary (optional, flexible) expenditure. It is a non-
recommended strategy
 Retrenchment strategies/ Exit strategy
Retrenchment Strategies
Management may pursue retrenchment strategies when the company has a weak competitive
position in some or all of its product lines resulting in poor performance, that is when sales are
down and profits are becoming losses. These strategies generate a great deal of pressure to
improve performance.
Restructuring
So far we have focused on strategies for expanding the scope of a company into new business
areas. We turn now to their opposite. i.e. strategies for reducing the scope of the company by
exiting from business areas.
In recent years reducing the scope of a company through restructuring has become an
increasingly popular strategy, particularly among the companies that diversified their activities.
In most cases, organizations that are engaged in restructuring are divesting themselves of
diversified activities in order to concentrate on their core businesses. The first question that must
be asked is
 Why are so many companies restructuring at this particular time?

Exit strategies
Organizations adopt/ employ different strategies for exiting from business areas and various
turnaround strategies to revitalize (refresh, revive) their core business area.
The three main strategies for exiting business areas are
 divestment,
Independent investor
 harvest, and Divestm (spin-off)
Another
 liquidation ent
organization
Exit Business unit
Harve management (MBO)
Strategies
st
Liquidat
ion
Exit strategy
Divestment
Of the three main strategies, divestment is usually the favored one. It represents the best way for
a company to recoup as much of its initial investment in business unit as possible. The idea is to
sell the business unit to the highest bidder.
Harvest and Liquidation:
A harvest or liquidation strategy is generally considered inferior to a divestment strategy since
the company can probably best recoup its investment in a business unit by divestment. A harvest
strategy involves halting investment in a unit in order to maximize short to medium-term cash
flow from that unit before liquidating it. A liquidation strategy is the least attractive of all to
pursue since it requires the organization to write off its investment in a business unit, often at a
considerable cost.
Turnaround:
This strategy, dealing with a company in serious trouble, attempts to resuscitate (save) or revive
the company through a combination of contraction (general, major cutbacks in size and costs)
and consolidation (creating and stabilizing a smaller, leaner company). Although difficult, when
done very effectively it can succeed in both retaining enough key employees and revitalizing the
company.
Captive company strategy
This strategy involves giving up independence in exchange for some security by becoming
another company's sole supplier, distributor, or a dependent subsidiary.

Sell out
If a company in a weak position is unable or unlikely to succeed with a turnaround or captive
company strategy, it has few choices other than to try to find a buyer and sell itself (or divest, if
part of a diversified corporation).
2. Portfolio Strategies
Strategic planning is the process of developing and maintaining a strategy fit between
organization’s goals & capabilities and its changing marketing opportunities. And the steps are
 Defining the company mission
 Setting company’s objectives and goals
 Designing the Business Portfolio
 Developing business unit strategy
  Designing functional plans
Designing the Business Portfolio
Based on the company’s mission statement and objectives, managers must plan its business
portfolio. Business portfolio is the collection of businesses and products that make up the
company or the company comprises. It is best if it fits the company’s strengths and weakness to
opportunities in the environment. Companies must analyze their business portfolio
& decide which business should receive more, less, or no investment, and
develop growth strategies for adding new products or businesses to the
portfolio.

One of the most popular aids to developing corporate strategy in Multi Business Corporation is
portfolio analysis. Portfolio analysis is a tool that management uses to identify & evaluate the
various businesses that make up the company. In portfolio analysis, top management views its
product lines and business units as a series of investments from which it expects a profitable
return; and the product lines/ business units form a portfolio of investments that top management
must constantly juggle (organize, manage, fit in) to ensure the best return on the corporation’s
invested money.
What should be our portfolio strategy?
This second component of corporate level strategy is concerned with making decisions about the
portfolio of lines of business (LOB's) or strategic business units (SBU's), not the company's
portfolio of individual products.
The best test of the business portfolio's overall attractiveness is whether the combined growth
and profitability of the businesses in the portfolio will allow the company to attain its
performance objectives. Questions related to this overall criterion are such as:
 Does the portfolio contain enough businesses in attractive industries?
 Does it contain too many marginal businesses or question marks?
 Is the proportion of mature/ declining businesses so great that growth will be sluggish?
 Are there some businesses that are not really needed or should be divested?
 Does the company have its share of industry leaders, or is it burdened with too many
businesses in modest competitive positions?
 Is the portfolio of SBU's and its relative risk/ growth potential consistent with the strategic
goals?
 Do the core businesses generate dependable profits and/ or cash flow?
 Are there enough cash-producing businesses to finance those needing cash
 Is the portfolio overly vulnerable to seasonal or recessionary influences?
  Does the portfolio put the corporation in good position for the future?
It is important to consider diversification versus concentration while working on portfolio
strategy. However, having a single business puts "all the eggs in one basket," which is dangerous
when the industry and/or technology may change. Strategic management within multi-business
companies has been closely associated with the development and application of portfolio
planning models, and more recently with the application of shareholder value models to
restructuring strategies.
Portfolio Planning Models
Portfolio matrix models can be useful in reexamining a company's present portfolio. The
purpose of all portfolio matrix models is to help a company understand and consider changes in
its portfolio of businesses, and also to think about allocation of resources among the different
business elements. The primary models are
 the BCG Growth-Share Matrix and
 the GE Business Screen
These models consider and display on a two-dimensional graph each major SBU in terms of
some measure of its industry attractiveness and its relative competitive strength.

Portfolio Planning Models: Boston Consulting Group (BCG) approach

To analyze business portfolio, the formal portfolio planning method used is Boston Consulting
Group (BCG) approach. The BCG approach is called growth-share matrix. It the best known
planning method and developed by Boston Consulting Group a leading management consulting
firm. The BCG Growth-Share Matrix model considers two relatively simple variables:
 growth rate of the industry as an indication of industry attractiveness, and
 relative market share as an indication of its relative competitive strength.
high
Questio Star
Market n mark growth rate
Dog Cas
Low h High
Relative cow market share

Fig: Growth-share matrix

The growth-share matrix defines four types of businesses (SBUs). These are stars, cash cow,
question marks, and dogs.
Question Marks
 sometimes called “problem children” or “wild cats”
 are new products with the potential for success that need a lot of cash for development.
 Low share business unit in high growth market.
 Require a lot of cash to hold their share, and require management to think hard to build to
stars and which should be phased out.
Stars:
 are market leaders typically of the peak of their product life cycle and
 are usually able to generate enough cash to maintain their thigh share of the market.
 high growth, high share business or product
 Often need heavy investment to finance their rapid growth.
 Eventually their growth slow down and they will turn into cash cows.
Cash Cows:
 Low growth, high share business or products
 need less investment to hold their market share
 Produce a lot of cash that the company uses to pay its bills & to support other investment.
 As these products move along the decline stage of their life cycle, they are “milked” for
cash that will be invested in new question mark products.
Dogs:
 are those products with low market share that do not have the potential (because they are in
an unattractive industry) to bring in much cash.
 Low growth a low share business or product
 may generate enough cash to maintain themselves but don’t promise to be large sources
of cash.
 According to the BCG growth-share matrix, dogs should be either sold off or managed
carefully for the small amount of cash they can generate.
Star Question Cash Dog
mark cow
Earning growing Low, High, Low,
unstable, stable unstable
growing
Cash Neutral Negative Positiv Neutral or
flow e negative
strateg Invest Invest or milk divest
y for
 growth divest

Portfolio Planning Models: The GE and McKinsey Matrix

The General Electric (GE}
( Business Screen also associated with McKinsey, and considers two
composite variables, which can be customized by the user, for
 industry attractiveness e.g. one could include industry size and growth rate, profitability,
pricing practices, favored treatment in government dealings, etc. and
 Competitive strength e.g. market share, technological position, profitability, size, etc.
The key feature of GE’s success is its highly effective and constantly evolving system of
corporate management.

Strategy recommendations as shown by three regions of figure below:

Business Unit position

attractivenes

Low Mediu Hig

Industry

Low
Buil
s

Mediu Hol
d

High Harves
t

The McKinsey – General Electric Portfolio analysis matrix.

3. Parenting Strategies
This third component of corporate level strategy, relevant for a multi-business company (it is not
for a single-business company), parenting strategy. It is concerned with how to allocate resources
and manage capabilities and activities across the portfolio of businesses.

Corporate Parenting, in contrast to portfolio analysis, views the corporation in terms of resources
and capabilities that can be used to build business unit value as well as generate synergies cross
business units. The best parent companies create more value than any of their rivals would if
they owned the same business. And have what we call “parenting advantage.”Corporate
parenting generates corporate strategy by focusing on the core competencies of the parent
corporation and on the value created from the relationship between the parent and its business.

The Generic Building Blocks of Competitive Advantage

As noted earlier, the four factors which build competitive advantage are efficiency, quality,
innovation and customer responsiveness. They are the generic building blocks of competitive
advantage. These factors are generic in the sense that they represent four basic ways of lowering
costs and achieving differentiation that any company can adopt, regardless of its industry or the
products or services it produces; and all highly interrelated. Thus, for example, superior quality
can lead to superior efficiency, while innovation can enhance efficiency, quality, and customer
responsiveness.

Choosing the best strategy alternatives

Decision making is a complex subject. This section can only offer a few suggestions. Among
the many sources for additional information some factors to consider when
 It is important to get as clear as possible about objectives and decision criteria (what makes a
decision a "good" one?)
 The primary answer to the previous question, and therefore a vital criterion, is that the chosen
strategies must be effective in addressing the "critical issues" the company faces at this
time
 They must be consistent with the mission and other strategies of the organization
 They need to be consistent with external environment factors, including realistic assessments
of the competitive environment and trends
 They fit the company's product life cycle position and market attractiveness/ competitive
strength situation
 They must be capable of being implemented effectively and efficiently, including being
realistic with respect to the company's resources
 The risks must be acceptable and in line with the potential rewards
Part three:
(control)
Strategy implementation
6
and Evaluation

CHAPTER
6. Implementing Strategies (Strategies in Action)

Brief contents:
6.1. The nature of strategy implementation
6.2. Strategy Implementation issues
6.3. Approaches to strategy implementation
Chapter Six: Implementing Strategies (Strategies in Action)
6.1. The nature of strategy implementation
Successful strategy formulation doesn’t guarantee successful strategy implementation!
Successful strategy formulation doesn’t guarantee successful strategy implementation.
Steps to strategic management
 Environmental analysis
 Establish organizational direction
 Strategy formulation
 Strategy implementation
 Strategic control
Strategy formulation Versus Strategy implementation
 Strategy Formulation: easier to say “going to do it”
 Strategy Implementation: more difficult to “do” something
Strategy Formulation Strategy Implementation
Positioning forces before the action Managing forces during the action
Focuses on effectiveness Focuses on efficiency
Primarily an intellectual process Primarily an operational process
Requires good intuitive and Requires motivation and leadership
analytical skills skills
Requires coordination among a few Requires coordination among
individuals many persons
Strategy implementation
Once the strategies have been formulated, then the task remains of implementing those
strategies. Strategy implementation
 means change.
 Shift in responsibility from strategists to divisional and functional managers
  varies among different types and sizes of an organization.
Successful implementation requires:
 Support  Motivation
 Discipline  Hard work

6.2. Strategy Implementation issues

Strategy Implementation considers different issues
 Marketing Issues
 Marketing variables affect success/failure of strategy implementation
 Centrally important to Implementation
o Market segmentation
o Product positioning
 Finance/Accounting Issues
 Central to strategy implementation
 Essential for implementation
o Acquiring needed capital
o Developing projected financial statements
o Preparing financial budgets
o Evaluating worth of a business
 Financial Budget
o Details how funds will be obtained and spent for a specified period of time
 Types of Budgets
o Cash budgets o Expense Budgets
o Operating budgets o Divisional budgets
o Sales budgets o Variable budgets
o Profit budgets o Flexible budgets
o Factory Budgets o Fixed budgets
 Evaluating worth of a Business
o Central to strategy implementation – integrative, intensive, & diversification
strategies often implemented through acquisitions of other firms
Three Basic Approaches
What a firm owns
What a firm earns
 What a firm will bring in the market
 Research & Development Issues
 New products and improvement of existing products that allow for effective strategy
implementation
 Constraints
o Level of support constrained by resource availability
o Technological improvements shorten product life cycles
 Three Major R&D approaches to implementing strategies
o 1st firm to market new technological products
o Innovative imitator of successful products
o Low-cost producer of similar but less expensive products
 Management Information Systems (MIS) Issues
 Information is the basis for understanding the firm. One of the most important factors
differentiating successful from unsuccessful firms
 Functions of MIS
o Information collection, retrieval, & storage
o Keeping managers informed
o Coordination of activities among divisions
o Allow firm to reduce costs
6.3. Approaches to strategy implementation
There are several approaches that can be used either quite successfully or disastrously to change
a company’s direction in its industry and environment. These approaches include:
 Commander approach
 Organizational change approach
 Collaborative approach
 Cultural approach
 Crescive approach
Commander approach
 Manager determines “best” strategy
 Manager uses power to see strategy implemented
 Three conditions must be met
 Manager must have power
 Accurate and timely information is available
 No personal biases should be present
 Limitations
 Can reduce employee motivation and innovation
 Advantages
 Managers focus on strategy formulation
 Works well for younger managers
 Focuses on objective rather than subjective
The Organizational Change approach
 Focuses on the organization
 Behavioral tools are used
 Includes focusing on the organization’s staffing and structure
 Often more effective than Commander
 Used to implement difficult strategies
 Limitations
 Managers don’t stay informed of changes occurring within the environment
 Doesn’t take politics and personal agendas into account
 Imposes strategies in a “top-down” format
 Can backfire in rapidly changing industries
Collaborative Approach
 Enlarges the Organizational Change Approach
 Manager is a coordinator
 Management team members provide input
 Group wisdom is the goal
 Advantages
 Increased quality and timeliness of information
 Improved chances of effective implementation
 Limitations
 Contributing managers have different points of view and goals
 Management retains control over the process
Cultural Approach
 Includes lower levels of the company
 Breaks down barriers between management and workers
 Everyone has input into the formulation and implementation of strategies
 Works best in high resource firms
 Advantage
 More enthusiastic implementation
 Limitations
 Workers should be informed, intelligent
 Consumes large amounts of time
 Strong company identity becomes handicap
 Can discourage change and innovation
Crescive Approach
 means “increasing” or “growing”
7
 Addresses formulation and implementation simultaneously
 Subordinates develop, champion, and implement strategies on their own
 “Bottoms-up” approach
 Ultimate strategy is sum of all “success-ful” approaches
 Advantages
 Encourages middle management to participate
 Strategies are more operationally sound
 Limitations
 Resources must be available
 Tolerance must be extended

CHAPTER
 Brief contents

7. Strategy review, evaluation and control:

7.1. What is Control?

7.2. Nature of control
7.3. Purpose of organizational control
7.4. Managerial approaches to implementing controls
7.5. Types of Control
7.6. Differences between Strategic and Operational Control
7.7. Approaches to the Evaluation Organizational Effectiveness
7.8. Strategic Control Process

7.9. Strategy Audits

7.10. The Evaluation of Corporate Strategy

Specific Objectives:
Define the term control,
List the purposes of managerial control,
Identify and elaborate the three approaches of controlling,
Able to list and explicitly discuss the type of managerial controlling

Chapter seven: Strategy review, evaluation and control

7.1. What is Control?

Management control is a systematic effort:
  to set performance standards with planning objectives,
 to design information feedback systems,
 to compare actual performance with these predetermined standards,
 to determine whether there are any deviations and to measure their significance, and
 to take any action required to assure that all corporate resources are being used in the most
effective and efficient way possible in achieving corporate objectives.

Strategic control simply means monitoring the strategic management process, comparing its
performance to specified standards, and then taking action where needed to ensure that the
planned events outlined in the strategic formulation process actually occur.

7.2. Nature of Control

Management control: refers to the process by which an organization influences its subunits and
members to behave in ways that lead to the attainment of organizational objectives
7.3. Purposes of organizational control
 to guide the use of strategy
 to indicate how to compare actual results with expected results
 to suggest corrective actions to take when the difference between actual and expected
result is unacceptable
7.4. Managerial approaches to implementing controls
Regardless of whether the organization focuses control on inputs, production, or outputs,
another choice must be made between different approaches for control. There are three control
approaches regarding the mechanisms managers will use to implement controls:

 market control,
 bureaucratic control, and
 Clan control.
7.4.1. Market control
 it involves the use of price competition to evaluate output.
 Managers compare profits and prices to determine the efficiency of their organization.
 In order to use market control,
o there must be a reasonable level of competition in the goods or service area and
o it must be possible to specify requirements clearly.
Market control is not appropriate in controlling functional departments, unless;
 the price for services is set through competition and
  Its representative of the true value of provided services.
7.4.2. Bureaucratic control
 Is the use of rules, policies, hierarchy of authority, written documentation, reward systems,
and other formal mechanisms to influence employee behavior and assess performance.
 Can be used when behavior can be controlled with market or price mechanisms.
7.4.3. Clan control
 Represents cultural values almost the opposite of bureaucratic control.
 Relies on values, beliefs, corporate culture, shared norms, and informal relationships to
regulate employee behaviors and facilitate the reaching of organizational goals.
 Organizations that use clan control require trust among their employees. Given minimal
direction and standards, employees are assumed to perform well - indeed, they participate in
setting standards and designing the control systems.
7.5. Types of Control
Management can implement controls before an activity commences, while the activity is going
on, or after the activity has been completed. The types of organizational control are:
 feed forward,
 concurrent, and
 feedback
 strategic control,
 management control, and
 Operational control.
7.5.1. Feed forward Control
 Is sometimes called preliminary control, pre-control, preventive control, or steering control.
 Focuses on the regulation of inputs (human, material, and financial resources that flow into
the organization) to ensure that they meet the standards necessary for the transformation
process.
 Are desirable because they allow management to prevent problems rather than having to cure
them later.
 Require timely and accurate information that is often difficult to develop.
However, some authors use term "steering control" as separate types of control. This types of
controls are designed to detect deviation some standard or goal to allow correction to be made
before a particular sequence of actions is completed.
7.5.2. Concurrent Control
 sometimes is called screening or yes-no control, because it often involves checkpoints at
which determinations are made about whether to continue progress, take corrective action, or
stop work altogether on products or services.
 Takes place while an activity is in progress.
 Involves the regulation of ongoing activities that are part of transformation process to ensure
that they conform to organizational standards.
 Is designed to ensure that employee work activities produce the correct results.
Since concurrent control involves regulating ongoing tasks, it requires a thorough
understanding of the specific tasks involved and their relationship to the desired and product.
7.5.3. Feedback Control
 Focuses on the outputs of the organization after transformation is complete.
 Sometimes called post action or output control, fulfils a number of important functions.
 For one thing, it is often used when feed forward and concurrent controls are not feasible or
are too costly.
 Sometimes, feedback is the only viable type of control available.
 has advantages over feed-forward and concurrent control.
o It provides managers with meaningful information on how effective its planning effort was.
 If feedback indicates little variance between standard and actual performance, this is evidence
that planning was generally on target.
 If the deviation is great, a manager can use this information when formulating new plans to
make them more effective. Second, feedback control can enhance employees’ motivation.
The major drawback of this type of control is that,
 The time the manager has the information and if there is significant problem the damage is
already done. But for many activities, feedback control fulfills number important functions.

Multiple Controls
Feed-forward, concurrent, and feedback control methods are not mutually exclusive. Rather, they
are usually combined into a multiple control systems. Managers design control systems to define
standards of performance and acquire information feedback at strategic control points. Strategic
control points are those activities that are especially important for achieving strategic objectives.
When organizations do not have multiple control systems that focus on strategic control points,
they often can experience difficulties that cause managers to reevaluate their control processes.
7.5.4. Strategic Control
Strategic control, the process of evaluating strategy, is practiced both after the strategy is
formulated and after it is implemented. Strategic control is concerned with
  tracking the strategy as it is being implemented,
 detecting any problems areas or potential problem areas, and
 Making any necessary adjustments.
Newman and Logan use the term "steering control" to highlight some important characteristics
of strategic control. Ordinarily, a significant time span occurs between initial implementation of
a strategy and achievement of its intended results. During that time, numerous projects are
undertaken, investments are made, and actions are undertaken to implement the new strategy.
Also the environmental situation and the firm's internal situation are developing and evolving.
Strategic controls are necessary to steer the firm through these events. They must provide some
means of correcting the directions on the basis of intermediate performance and new
information.
The importance of strategic control
Henry Mintzberg,
o one of the foremost theorists in the area of strategic management,
o Tells us that no matter how well the organization plans its strategy, a different strategy
may emerge.
o Starting with the intended or planned strategies, he related the five types of strategies in
the following manner:
 Intended strategy  Unrealized strategy
 Deliberate strategy  Emergent strategy
 Realized strategy
Recognizing the number of different ways that intended and realized strategies may differ
underscores the importance of evaluation and control systems so that the firm can monitor its
performance and take corrective action if the actual performance differs from the intended
strategies and planned results.
7.5.5. Management Control
Where management control is imposed, it functions within the framework established by the
strategy. Normally these objectives (standards) are established for major subsystems within the
organization, such as SBUs, projects, products, functions, and responsibility centers.
Management control focuses on the accomplishment of:
o the objectives of the various sub-strategies comprising the master strategy and
o the objectives of the intermediate plans
o For example, "are quality control objectives being met?"
Typical management control measures include:
 o ROI, residual income, cost, product quality, and so on.
o These control measures are essentially summations of operational control measures.
o Corrective action may involve very minor or very major changes in the strategy.
7.5.6. Operating Control
Operational control systems:
o are designed to ensure that day-to-day actions
o Are consistent with established plans and objectives.
o Focuses on events in a recent period.
o Are derived from the requirements of the management control system.
Operational control is concerned individual and group performance as compared with the
individual and group role prescriptions required by organizational plans. For example, "are
individual sales quotes being met?"

Each of these types of control is not a separate and distinct entity and, in fact, may be
indistinguishable from others. Moreover, similar measurement techniques may be used for each
type of control. Corrective action is taken where performance does not meet standards. This
action may involve
o training, o leadership, o Termination.
o motivation, o discipline, or
Recent conceptual contributors to the strategic control literature have argued for anticipatory feed
forward controls that recognize a rapidly changing and uncertain external environment.
Schreyogg and Steinmann (1987) have made a preliminary effort, in developing new system to
operate on a continuous basis, checking and critically evaluating assumptions, strategies and
results. They refer to strategic control as: "The critical evaluation of plans, activities, and results,
thereby providing information for the future action". Schreyogg and Steinmann proposed an
alternative to the classical feedback model of control: a 3-step model of strategic control which
includes:
o premise control,
o implementation control, and
o Strategic surveillance.
Premises Control
Planning premises/assumptions are established early on in the strategic planning process and act
as a basis for formulating strategies. "Premise control has been designed to check systematically
and continuously whether or not the premises set during the planning and implementation
process are still valid. It involves the checking of environmental conditions. Premises are
primarily concerned with two types of factors:
 Environmental factors (for example, inflation, technology, interest rates, regulation, and
demographic/social changes).
 Industry factors (for example, competitors, suppliers, substitutes, and barriers to entry).
All premises may not require the same amount of control. Therefore, managers must select
those premises and variables that
 are likely to change and
 would a major impact on the company and its strategy if they did.
Implementation Control
Strategic implantation control provides an additional source of feed-forward information.
"Implementation control is designed to assess whether the overall strategy should be changed in
light of unfolding events and results associated with incremental steps and actions that
implement the overall strategy." Strategic implementation control does not replace operational
control. Unlike operations control, strategic implementation control continuously questions the
basic direction of the strategy. The two basic types of implementation control are:
1. Monitoring strategic thrusts (new or key strategic programs). Two approaches are useful in
enacting implementation controls focused on monitoring strategic thrusts:
a. one way is to agree early in the planning process on which thrusts are critical factors in the
success of the strategy or of that thrust;
b. the second approach is to use stop/go assessments linked to a series of meaningful
thresholds (time, costs, research and development, success, etc.) associated with particular
thrusts.
2. Milestone Reviews
 Milestones are significant points in the development of a program, such as points where large
commitments of resources must be made.
 A milestone review usually involves a full-scale reassessment of the strategy and the
advisability of continuing or refocusing the direction of the company.
 In order to control the current strategy, must be provided in strategic plans.
Strategic Surveillance
Compared to premise control and implementation control, strategic surveillance is designed to be
a relatively unfocused, open, and broad search activity. "strategic surveillance is designed to
monitor a broad range of events inside and outside the company that are likely to threaten the
course of the firm's strategy." The basic idea behind strategic surveillance is that some form of
general monitoring of multiple information sources should be encouraged, with the specific
intent being the opportunity to uncover important yet unanticipated information. Strategic
surveillance appears to be similar in some way to "environmental scanning." The rationale,
however, is different. Environmental, scanning usually is seen as part of the chronological
planning cycle devoted to generating information for the new plan. By way of contrast, strategic
surveillance is designed to safeguard the established strategy on a continuous basis.
Special Alert Control
Another type of strategic control is a special alert control.
A special alert control is the need to thoroughly, and often rapidly, reconsider the firm's basis
strategy based on a sudden, unexpected event." The analysts of recent corporate history are full
of such potentially high impact surprises (i.e., natural disasters, chemical spills, plane crashes,
product defects, hostile takeovers etc.). While Pearce and Robinson suggested that:
 special alert control be performed only during strategy implementation,
 Preble recommends that because special alert controls are really a subset of strategic
surveillance that they be conducted throughout the entire strategic management process.
The characteristics of each control component are including
 the component's purpose,  degree of focusing,
 mechanism used to implement it,  information sources, and
 the procedure to be followed,  organizational/personnel to be utilized.
7.6. Differences between Strategic and Operational Control
The differences between strategic and operational control are highlighted by reference to a
general definition of management control: Management control is the set of measurement,
analysis, and action decisions required for the timely management of the continuing operation of
a process. This section discusses in the terms of.
Measurement:
 Strategic control requires data from more sources.
 Strategic control requires more data from external sources.
 Strategic control is oriented to the future.
 Strategic control is more concerned with measuring the accuracy of the decision premise.
 Strategic control standards are based on external factors.
 Strategic control relies on variable reporting interval.
Analysis:
 Strategic control models are less precise.
 Strategic control models are less formal.
 The principal variables in a strategic control model are structural.
 The key need in analysis for strategic control is model flexibility.
  The key activity in management control analysis is alternative generation.
 The key skill required for management control analysis is creativity.
Action:
 The relationship between action and outcome is weaker in strategic control.
 The key action variables in strategic control are organizational.
 Alternative actions in strategic control are less easy to choose in advance.
 The worst failing in strategic control is omitting a worthwhile action.
 The time for strategic control is longer.
 The timing of strategic control is events oriented.
 Strategic control has little repetition.
Implications for Information Systems
 Strategic control requires a greater variety of data types.
 The total volume of data required for strategic control is smaller.
 Strategic control data are more aggregated.
 Strategic control data are less accurate.
 The most important strategic control information is structural.
 The receipt of data for strategic control is more sporadic.
 Strategic control data are less processable by computer.
 The key decision in information for strategic control is what data to save.
Implications for Controlling Formal Plans
 Contingency plans are less possible in strategic control.
 Triggering contingency planning is more important in strategic control.
 Preprogrammed variance analysis is less possible in strategic control.
 A variance inquiry system is more necessary in strategic control.
 A variance inquiry language is more necessary in strategic control.
 An augmented formal planning system in more necessary in strategic control.
7.7. Approaches to the Evaluation Organizational Effectiveness
An organization's effectiveness is in major part a measure of the effectiveness of its master
strategy. Selection of the appropriate basis for assessing organizational effectiveness presents a
challenging problem for managers and researchers. There are no generally accepted
conceptualizations prescribing the best criteria. Different organizational situations - pertaining to
the performance of the organization's structure, the performance of the organization's human
resources, and the impact of the organization's activities -require different criteria. J. Barton
Cunningham, after reviewing the relevant literature, concluded that seven major ways of
evaluating organizational effectiveness existed:
 o rational goal model, o organizational development
o systems resource model, model,
o managerial process model, o The bargaining model.

7.7.1. The Rational Goal Model

The rational goal approach focuses on the organization's ability to achieve its goals. An
organization's goals are identified by establishing the general goal, discovering means or
objectives for its accomplishment, and defining a set of activities for each objective. The
organization is evaluated by comparing the activities accomplished with those planned for. These
criteria are determined by various factors.
7.7.2. The Systems Resource Model
This model analyzes the decision makers’ capability to efficiently distribute resources among
various subsystems’ needs. The systems resources model defines the organization as a network
of interrelated subsystems. These subsystems needs may be classified as:
 bargaining position -ability of the organization to exploit its environment in acquisition
of scarce and valued resources;
 ability of the systems' decision-makers to perceive, and correctly interpret, the real
properties of the external environment;
 ability of the system to produce a certain specified output;
 maintenance of internal day-to-day activities;
 ability of the organization to co-ordinate relationships among the various subsystems;
 ability of the organization to respond to feedback regarding its effectiveness in the
environment.
 ability of the organization to evaluate the effect of its decisions;
 ability of the organization' system to accomplish its goals.
7.7.3. The Bargaining Model
Each organizational problem requires a specific allocation of resources. The bargaining model
presumes that an organization is a cooperative, sometimes competitive, resource distributing
system. Decisions, problems and goals are more useful when shared by a greater number of
people. Each decision-maker bargains with other groups for scarce resources which are vital in
solving problems and meeting goals.

The overall outcome is a function of the particular strategies selected by the various decision-
makers in their bargaining relationships. This model measures the ability of decision-makers to
obtain and use resources for responding to problems important to them. Each of the subsystems'
needs should be evaluated from two focal points:
 o efficiency and
o Stress.
Efficiency is an indication of the organization's ability to use its resources in responding to the
most subsystems' needs. Stress is the tension produced by the system in fulfilling or not
fulfilling its needs.
7.7.4. The Managerial Process Model
The managerial process model assesses the capability and productivity of various managerial
processes for performing goals. The managerial process model is based on the intuitive concept
of substantial rationality, which inter-relates the drives, impulses, wishes, feelings, needs, and
values of the individuals to the functional goals of the organization.
7.7.5. The Organizational Development Model
This model appraises the organization's ability to work as a team and to fit the needs of its
members. The model focuses on developing practices to foster:
1. supervisory behavior manifesting interest and concern for workers;
2. team spirit, group loyalty, and teamwork among workers and between workers and
management;
3. confidence, trust and communication among workers and between workers and
management;
4. More freedom to set their own objectives.
The model's procedure attempts to answer four main questions:
1. Where are we?
2. Where do we want to go?
3. How will we get there?
4. How will we know when we do get there?
These questions can be divided into four areas:
o question one is concerned with diagnosis,
o question two with the setting of goals and plans,
o question three with the implementation of goals, and
o Question four with evaluation.
This model is concerned with changing beliefs, attitudes, values, and organizational structures
so that individuals can be better adopt to new technologies and challenges. It is a process of
management by objectives in contrast to management by control.
7.7.6. The Structural Functional Model
The structural functional approach tests the durability and flexibility of the organization's
structure for responding to a diversity of situations and events. According to this model, all
systems need maintenance and continuity. The following aspects define this:
o security of the organization as whole in relation to the social forces in its environment
(this relates to ability to forestall threatened aggressions or deleterious consequences
from the actions of others);
o stability of lines of authority and communication (this refers to the continued capacity of
leadership to control and have access to individuals in the system);
o stability of informal relations within the organization;
o continuity of policy making (this refers to the ability to reexamine policy a continuing
basis);
o Homogeneity of outlook (this refers the ability to effectively orient members to
organization norms and beliefs).
7.7.7. The Functional Model
In the functional approach an organization's effectiveness is determined by the social
consequences of its activities. The crucial question to be answered is: How well do the
organization's activities serve the needs of its client groups? The appraisal of an organization's
effectiveness should consider whether these activities are function or dysfunctions in fulling the
organization's goals. These seven models have their strengths and shortcomings depending upon
the organizational situation being evaluated. The choice of evaluation approach usually hinges
on the organizational situation that needs to be addressed.
7.8. Strategic Control Process
Although control systems must be tailored to specific situations, such systems generally follow
the same basic process. Regardless of the type or levels of control systems an organization needs,
control may be depicted as a six-step feedback model:
1. Determine what to control. What are the objectives the organization hopes to accomplish?
2. Set control standards. What are the targets and tolerances?
3. Measure performance. What are the actual standards?
4. Compare the performance the performance to the standards. How well does the actual match
the plan?
5. Determine the reasons for the deviations. Are the deviations due to internal shortcomings or
due to external changes beyond the control of the organization?
6. Take corrective action. Are corrections needed in internal activities to correct organizational
shortcomings, or are changes needed in objectives due to external events?

Feedback from evaluating the effectiveness of the strategy may influence many of other phases
on the strategic management process. A well-designed control system will usually include
feedback of control information to the individual or group performing the controlled activity.
Simple feedback systems measure
 outputs of a process and feed into the system or
 the inputs of a system corrective action to obtain desired outputs.
The consequence of utilizing the feedback control systems is that the unsatisfactory performance
continues until the malfunction is discovered. One technique for reducing the problems
associated with feedback control systems is feed-forward control. Feed-forward systems:
 monitor inputs into a process to ascertain whether the inputs are as planned;
 if they are not, the inputs, or perhaps the process, are changed in order to obtain desired
results.
7.8.1. Determine What to Control
The first step in the control process is determining the major areas to control. Usually base their
major controls on the organizational mission, goals and objectives developed during the planning
process. Must make choices because it is expensive and virtually impossible to control every
aspect of the organization's activities. In deciding what to control,
 The organization must communicate through the actions of its executives that strategic
control is a needed activity.
 Without top management's commitment to controlling activities, the control system
could be useless.
7.8.2. Set Control Standards
The second step in the control process is establishing standards.
A control standard:
 is a target against which subsequent performance will be compared.
Standards
 are the criteria that enable managers to evaluate future, current, or past actions.
 are measured in a variety of ways, including physical, quantitative, and qualitative terms.
 Five aspects of the performance can be managed and controlled:
o quantity, o cost, and
o quality, o behavior.
o time
 Each aspect of control may need additional categorizing.
An organization must identify the targets, determine the tolerances those targets, and specify the
timing of consistent with the organization's goals defined in the first step of determining what to
control. For example, standards might indicate. Standards may also reflect specific activities or
behaviors that are necessary to achieve organizational goals. Goals are translated into
performance standards by making them measurable. An organizational goal to increase market
share, for example, may be translated into a top-management performance standard to increase
market share by 10 percent within a twelve-month period. Helpful measures of strategic
performance include:
 sales (total, and by division, product category, and region),
 sales growth,  cash flow,
 net profits,  market share,
 return on sales,  product quality,
 assets,  valued added, and
 equity, and  employees productivity.
 investment cost of sales,
Quantification of the objective standard is sometimes difficult. For example, consider the goal of
product leadership. An organization compares its product with those of competitors and
determines the extent to which it pioneers in the introduction of basis product and product
improvements. Such standards may exist even though they are not formally and explicitly stated.
Setting the timing associated with the standards is also a problem for many organizations. It is
not unusual for short-term objectives to be met at the expense of long-term objectives.

Management must develop standards in all performance areas touched on by established

organizational goals. The various forms standards are depend on what is being measured and on
the managerial level responsible for taking corrective action. Commonly uses as an example, the
following eight types of standards have been set by General Electric:
 Profitability standards. These standards indicate how much profit General Electric would
like to make in a given time period.
 Market position standards: These standards indicate the percentage of total product market
that company would like to win from competitors.
 Productivity standards: These production-oriented standards indicate various acceptable
rates which final products should be generated within the organization.
 Product leadership standards: Product leadership standards indicate what levels of product
innovation would make people view General Electric products as leaders in the market.
 Personnel development standards: Personnel development standards list acceptable of
progress in this area.
 Employee attitude standards: These standards indicate attitudes that General Electric
employees should adopt.
 Public responsibility standards: All organizations have certain obligations to society.
General Electric's standards in this area indicate acceptable levels of activity within the
organization directed toward living up to social responsibilities.
 Standards reflecting balance between short-range and long-range goals. Standards in this
area indicate what the acceptable long- and short - range goals are and the relationship
among them.
The Critical Control Points and Standards
 The principle of critical point control, one of the more important control principles, states:
"Effective control requires attention against plans".
 There are, however, no specific catalog of controls available to all managers because of the
peculiarities of various enterprises and departments, the variety of products and services to be
measured, and the innumerable planning programs to be followed.
7.8.3. Measure Performance
Once standards are determined, the next step is measuring performance. The actual performance
must be compared to the standards. In some work places, this phase may require only visual
observation. In other situations, more precise determinations are needed. Many types of
measurements taken for control purposes are based on some form of historical standard.

These standards can be based on data derived from the PIMS (profit impact of market strategy)
program, published information that is publicly available, ratings of product / service quality,
innovation rates, and relative market shares standings. PIMS was developed by Professor Sidney
Shoeffler of Harvard University in the 1960s. Strategic control standards are based on the
practice of competitive benchmarking. The process of measuring a firm's performance against
that of the top performance in its industry. The proliferation of computers tied into networks has
made it possible for managers to obtain up-to-minute status reports on a variety of quantitative
performance measures. Managers should be careful to observe and measure in accurately before
taking corrective action.
7.8.4. Compare Performance to Standards
The comparing step determines the degree of variation between actual performance and
standard. If the first two phases have been done well, the third phase of the controlling process -
comparing performance with standards - should be straightforward. However, sometimes it is
difficult to make the required comparisons (e.g., behavioral standards). Some deviations from the
standard may be justified because of changes in environmental conditions, or other reasons.
7.8.5. Determine the Reasons for the Deviations
The fifth step of the control process involves finding out: "why performance has deviated from
the standards?" Causes of deviation can range from selected achieve organizational objectives.
Particularly, the organization needs to ask if the deviations are due to internal shortcomings or
external changes beyond the control of the organization. A general checklist such as following
can be helpful:
 Are the standards appropriate for the stated objective and strategies?
 Are the objectives and corresponding still appropriate in light of the current environmental
situation?
 Are the strategies for achieving the objectives still appropriate in light of the current
environmental situation?
 Are the firm's organizational structure, systems (e.g., information), and resource support
adequate for successfully implementing the strategies and therefore achieving the objectives?
 Are the activities being executed appropriate for achieving standard?
The locus of the cause, either internal or external, has different implications for the kinds of
corrective action.
7.8.6. Take Corrective Action
The final step in the control process is determining the need for corrective action. Managers can
choose among three courses of action:
1. they can do nothing
2. they can correct the actual performance; or
3. They can revise the standard.

Maintaining the status quo if preferable when performance essentially matches the standards.
When standards are not met, managers must carefully assess the reasons why and take corrective
action. Moreover, the need to check standards periodically: is to ensure that the standards and
the associated performance measures are still relevant for the future. The final phase of
controlling process occurs when managers must decide action to take to correct performance
when deviations occur. Corrective action depends on
 the discovery of deviations and
 the ability to take necessary action.
Often the real cause of deviation must be found before corrective action can be taken. Causes of
deviations can range from unrealistic objectives to the wrong strategy being selected achieve
 organizational objectives. Each cause requires a different corrective action. Not all deviations
from external environmental threats or opportunities have progressed to the point a particular
outcome is likely, corrective action may be necessary. There are three choices of corrective
action:
 Normal mode follow a routine, no crisis approach; this take more time
 Ad hoc crash mode saves time by speeding up the response process, geared to the problem ad
hand.
 Preplanned crisis mode specifies a planned response in advance; this approach lowers the
response time and increases the capacity for handling strategic surprises. The below checklist
suggest the following five general areas for corrective actions:
 Revise the Standards. It is entirely possible that the standards are not in line with objectives
and strategies selected. Changing an established standard usually is necessary if the standards
were set too high or to low are the outset. In such cases it's the standard that needs corrective
attention not the performance.
 Revise the Objective. Some deviations from the standard may by justified because of changes
in environmental conditions, or other reasons. In these circumstances, adjusting the
objectives can y much more logical and sensible then adjusting performance.
 Revise the Strategies. Deciding on internal changes and taking corrective action may involve
changes in strategy. A strategy that was originally appropriate can become inappropriate
during a period because of environmental shifts.
 Revise the Structure, System or Support. The performance deviation may by caused by an
inadequate organizational structure, systems, or resource support. Each of these factors is
discussed elsewhere in this chapter, or other part of this thesis.
 Revise Activity. The most common adjustment involves additional coaching by management,
additional training, more positive incentives, more negative incentives, improved scheduling,
compensation practices, training programs, the redesign of jobs or the replacement of personnel.
Managers can also attempt to influence events or trends external to itself through advertising or
other public awareness programs. In such case, the changes should be made only after the most
intense scrutiny. Management must remember that adjustments in any of the above areas may
require adjustments in one or more of the other factors. For example, adjusting the objectives is
likely to require different strategies, standards, resources, activities, and perhaps organizational
structure and systems.

7.9. Strategy Audits

In order to better understand what strategic control performance measures are and how a
manager can take such measurements, we need to introduce two important topics:
1. strategic audits and
2. strategic audit measurement methods.
Strategic Audit is an examination and evaluation of areas affected by the operation of a strategic
management process within an organization. may be needed under the following conditions:
o Performance indicators show that a strategy is not working or is producing negative side
effects.
o High-priority items in the strategic plan are not being accomplished.
o A shift or change occurs in the external environment.
o Management wishes:
 to fine-tune a successful strategy and
 to ensure that a strategy that has worked in the past continues to be in tune with
subtle internal or external changes that may have occurred.
Assessing the Firm's Operational and Strategic Health
To aid in control, firms will occasionally perform audits to ensure that certain aspects of their
operations are in order. Such audit may include
 operational audits assessing the firm's operating health and
 strategic audits Assessing the firm's strategic health.
Measures of operational Health
Measures or indicators of a firm's current operating health are
 to assess a firm's current operating health,
 short-term financial, market, technological, and production position are used, While current
strategic health is based on
 strategic market position,
 technological position,
 production capabilities, and
 Financial health.
Strategic Audit Measurement Methods
There are several generally accepted methods for measuring organizational performance.
One way for categorizing these methods divides into the distinct types:
 qualitative and
 Quantitative.
However, a few methods do not fall neatly into one or other of these categories but rather are a
combination of both types. Qualitative Organizational Measurements; There is no universally
 endorsed list of critical questions designed to reflect important facets of organizational
operations. However, several that might be useful to the practicing managers are presented
below.
Sample Questions to be asked for Qualitative Organizational Measurement
 Are the financial policies with respect to investment dividends and financing consistent with
opportunities likely to be available?
 Has the company defined the market segments in which it intends to operate sufficiently
specifically with respect to both product lines and market segments? Has it clearly defined the
key capabilities needed for success?
 Does the company have a viable plan for developing a significant and defensible superiority over
competition with respect to these capabilities?
 Will the business segments in which the company operates provide adequate opportunities for
achieving corporate objectives? Do they appear as attractive as to make it likely that an
excessive amount of investment will be drawn to the market from other companies? Is adequate
provision being made to develop attractive new investment opportunities?
 Are the management, financial, technical and other resources of the company really adequate to
justify an expectation of maintaining superiority over competition in the key areas of capability?
 Does the company have operations in which it is not reasonable to expect to be more capable
than competition? If so, can the board expect them to generate adequate returns on invested
capital? Is there any justification for investing further in such operations, even just to maintain
them?
 Has the company selected business that can reinforce each other by contributing jointly to the
development of key capabilities? Or are there competitors that have combinations of operations
which provide them with an opportunity to gain superiority in the key resource areas? Can the
company's scope of operations be revised so as to improve its position vis-à-vis competition?
 To the extent that operations are diversified, has the company recognized and provided for the
special management and control systems required?
7.10. The Evaluation of Corporate Strategy
Each organization has its own approach to evaluation. There are not absolute answers as to the
proper evaluation standards. However, there are three basic questions to ask in strategy
evaluation:
1. Is the existing strategy good?
2. Will the existing strategy be good in the future?
3. Is there a need to change a strategy?
 The first question may need additional detailing to indicate whether the current strategy is useful
and beneficial to the organization. Seymour Tilles has written a classic article on the qualitative
assessment of organizational performance. This article serves several particular questions to be
asked for evaluation.
These questions are:
1. Is the strategy internally consistent?
o Internal consistency refers to the cumulative impact of various strategies on the
organizations.
o According to Tilles, a strategy must be judged not only in relationships to other strategies.
2. Is organizations strategy consistent with its environment?
o An important test of strategy is whether the chosen strategy in consistent with environment
(constituent demands, competition, economy, product / industry life cycle, suppliers,
customers) - whether the really make sense with respect to what is going on outside.
3. Is the strategy appropriate in view of available resources?
o Resources are those things that company is or has and that help it to achieve its corporate
objectives.
o Included are money, competence, facilities and other.
o Without appropriate resources, organization simply cannot make strategic work.
4. Does the strategy involve an acceptable degree of risk?
o Strategy and resources, taken together, determine the degree of risk which the company is
undertaken.
o Each company must determine the amount of risk it wishes to incur. This is a critical
managerial choice.
o In attempting to assess the degree of risk associated with a particular strategy, management
must assess such issues as the total amount of resources a strategy requires, the proportion
of the organization's resources that a strategy will consume, and the amount of time that
must be committed.
5. Does the strategy have an appropriate time horizon?
o A significant part of every strategy is the time horizon on which it is based.
o For example, a new product developed, a plant put on stream, a degree of market
penetration, become significant strategic objectives only if accomplished by a certain time.
o Management must ensure that the time necessary to implement the strategy is consistent.
o Inconsistency between these two variables can make it impossible to reach goals in a
satisfactory way.
6. Is the strategy workable? E. P. Learned and others, building on the Tilles model, suggest that the
following are also proper evaluative questions:
7. Is the strategy identifiable? Has it been clearly and consistently identified and are people aware
of it?
8. Is the strategy appropriate to the personal values and aspirations of key managers?
9. Does strategy constitute a clear stimulus to organizational effort and commitment?
10. Is the strategy socially responsible?
11. Are there early indications of the responsiveness of markets and market segments to the
strategy?
12. Does the strategy rely on weakness or do anything to reduce them?
13. Does the strategy exploit major opportunities?
14. Does it avoid, reduce, or mitigate the major threats? If not, are there adequate contingency
plans?
All these questions can be applied as the strategy progresses through its various stages, including
implementation. The answers can provide guidelines as to how the strategy should be altered or
changed.
The second basic question
 "Will the existing strategy be good in the future?"
 seeks to ascertain if the strategy would continue to satisfy the firm's objective in the future.
 The answer to this is based upon unforeseeable changes in the organization's environment or
resources, or changes in its mission, goals, or objectives.
The answer to the third question
 "Is there a need to change the strategy?"
 will provide direction toward a strategy formation task.
Qualitative measurements methods
 can be very useful, but their application involves significant amounts of human judgment.
 Thus, conclusions based on such methods must be drawn carefully.
Quantitative Organizational Measurements
Quantitative measurements
 provide information and insight as to how well an organization is accomplishing its goods and
objectives.
In attempting to evaluate the effectiveness of corporate strategy quantitatively, we can see how
the firm has done compared with its own history, or compared with its competitors.
Many quantitative measures may be developed to determine performance results.
These standards expressed in quantitative terms include:
 Sales (growth of sales)
 Net profit
 Dividend returns
 Return on equity
 Return on investment
 Return on capital
 Marker share
 Earnings per share
Business Policy and Strategic Management Department of
Management

The list is long and many other factors could be included. The objective of all of these
endeavors is financial control.

Summary Questions

Dear students by now you are able to identify somehow whether you are grasp the main
concept of this last chapter or not, so please go through them seriously and know your
position. The questions are:

1. How can you define the term control with regard to management concept?
2. List and clearly describe the three approaches of managerial controlling?
3. What are the types of control? List and discuss them?
4. What is strategy? How can we formulate good strategy? Can you list the three major
questions that used to evaluate the given strategy?

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