Professional Documents
Culture Documents
Unit 1
Unit 1
Structure
1.1 Introduction
1.2 Caselet
Objectives
1.3 What is Strategy?
1.4 Strategic Window
1.5 Corporate Strategy in Different Types of Organizations
1.6 Lack of Strategic Management in Some Companies
1.7 Ten Principles of Strategy
1.8 Case Study
1.9 Summary
1.10 Glossary
1.11 Terminal Questions
1.12 Answers
1.13 References
1.1 Introduction
Any discussion on business and management today is incomplete without
discussing two major forces: one is competition, and the other is strategy.
Both these forces coexist or are correlated; in simple words, we can say that it
is competition that drives strategy. For an organization to survive and grow, it is
important to have a strategy. You must have seen or read about the well-known
Fortune 500 list, an annual list compiled and published by Fortune magazine
that ranks the top 500 US companies. Every year, some new names are added
and some others are deleted from this prestigious list. One common reason,
which explains both the inclusions and the deletions, is the strategy of the
respective companies. So, strategy plays a vital role in organizations. Let us try
to understand what strategy is.
Strategy is a concept that is used universally but understood differently,
and, therefore, defined differently. In fact, strategy as a concept is better
described and more easily put into practice than defined. Most companies
recognize that strategy is central to business and management. It is also
recognized that it is strategy that makes the difference between success and
failure of many companies and businesses. Yet, there is always a lack of
conceptual clarity about what strategy is. In this unit define and explain strategy
Sikkim Manipal University
Page No. 1
Unit 1
to make the understanding of the concept and its application clear and
meaningful.
In this unit, we will discuss corporate strategy, its definition and nature, as
well as its levels in an organization. You will be able to understand corporate
strategy in different types of organizations, why some organizations do not
practice strategic management and the principles of strategic management.
1.2 Caselet
Every organization, big or small, follows a certain strategy to achieve its
goals, which are specific to its market. For example, for a long time, the oil
company Shell had focused on selling oil only. Thus, selling oil was its
corporate strategy. For the past few years, the company, like other major
oil producers, has found itself at the heart of the debate over climate change.
The companys operations alone led to carbon emissions that account for
some 3.6 per cent of global fossil-fuel CO2 emissions in any yeara total
greater than that of the entire United Kingdom. In response to this situation,
Shell took an early position on the issue and started adopting strategies to
address climate change. The company engaged in actions that began to
manage its carbon footprint. These actions have earned the company
credibility and a powerful voice within policy, advocacy and market circles.
Objectives
After studying this unit, you should be able to:
Explain strategy, its nature and levels of strategy
Discuss the concept of strategic window
Describe corporate strategy in different types of organizations
Explain why some organizations do not undertake strategic management
List ten principles of strategy
Page No. 2
Unit 1
strategy and military strategy is the same, i.e., to secure competitive advantage
over the rivals or opponents. We will discuss the similarity between business
and military strategies in detail later.
Andrews (1962): The pattern of objectives, purpose, goals and the major policies
and plans for achieving these goals stated in such a way so as to define what
business the company is or is to be and the kind of company it is or is to be.
Source: K R Andrews, The Concept of Corporate Strategy (Homewood: Jones Irwin,
1995)
Ansoff (1965): The common thread among the organizations activities and
product-markets ... that defines the essential nature of business that the
organization was or planned to be in future.
Source: H I Ansoff, Corporate Strategy (New York: McGraw-Hill, 1965).
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Self-Assessment Questions
1. The key or common objective of both business strategy and military
strategy is to secure competitive advantage over the rivals or the
opponents. (True/False)
2. A unified, comprehensive and integrated plan designed to assure that the
basic objectives of the enterprise are achieved. This definition of strategy
was given by________.
3. Business strategy is formulated, implemented and evaluated with an
assumption of__________, but military strategy is based on the
assumption of_________.
4. For single-business companies, corporate-level strategies and business
unit-level strategies would be quite distinct. (True/False)
Page No. 6
Unit 1
the market. (There was also Ambassador, but that was used more as an official
car). Even after Marutis entry, the strategic windows for cars remained open,
and other car companiesGeneral Motors, Tata Motors, Ford, Honda, Hyundai
all entered the Indian car market. Maruti, however, was the first mover and
continues to be the market leader.
Strategic windows are also important for timing the exit from a product or
a market. There are times when it is advisable, and also possible, to divert a
business which a company cannot operate profitably any longer. This means
that the strategic window for exit is open, that is, there are buyers or companies,
who are willing to acquire the business, and, the company should act on it. This
is what Hindustan Unilever did. They hived off their vanaspati (Dalda) business
to the US-based Bunge Ltd, who had plans to relaunch the product. If a company
does not exit in time, the strategic window may get closed; there may not be
any buyer, and the business may have to be closed down at considerable losses.
Self-Assessment Questions
5. The opportunities that companies should always look for and seize or
exploit at the right time are called _________.
6. Strategic windows arise as a result of _________.
7. Businesses and markets may evolve because of
(a) Development of new product (new demand)
(b) Emergence of new competing technologies
(c) Market redefinition or changes
(d) All of these
8. Strategic windows are not so important for timing the exit from a product
or a market. (True/False)
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Unit 1
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Unit 1
Self-Assessment Questions
9. The nature and focus of corporate strategy in different types of
organizations are different primarily because of the nature of their
operations and organizational objectives and priorities. (True/False)
10. As they are operating multi location (country) strategies, roles of strategic
planning and management become more critical in _______ companies
for optimizing manufacturing facilities, resource allocation and control.
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Unit 1
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Unit 1
10. Fear of the unknown: Managers may not be sure of their abilities to learn
new skills or take on new roles or adapt to new system. This is basically
inertia against change or fear for change.
11. Fear of failure: Whenever something new or different is attempted, there
is a chance of success, but, there is also some risk of failure. Many
companies and managers may like to avoid strategic planning and
management for fear of failure.
12. Suspicion: Employees may not trust management, or, the management
may not have enough confidence in the managers. This gives rise to
mutual suspicion.2
Self-Assessment Questions
11. All companies undertake strategic planning and management. (True/False)
12. Both overconfidence and fear of failure are among the reasons for not
adopting strategic planning and management. (True/False)
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Unit 1
Self-Assessment Questions
13. For strategy building, one should set a goal and stick to it. (True/ False)
14. Good leadership is a precondition for maintaining good morale of a
strategy. (True/ False)
Page No. 13
Unit 1
1. Return on assets
2. Customer satisfaction
3. Employees motivation and satisfaction
4. Market share
Costumers are divided into segments and respective accounts are handled
by specialized account managers, global accountant, local accountant and
general and mass market managers. The rest of the customers are handled
by sales promotion agents (dealers and partners).
The company also has telemarketing and telesales programmes.
Telemarketing plays a support role, marketing mostly to small organizations
with around 20 employees. The telesales team is able to access the target
customer in different locations through its computer network.
Modi Xerox is a quality company. Quality is its basic business principle or
philosophy. Quality means providing customers innovative products and
services which fully satisfy their requirements. Quality improvement is the
job of every Modi Xerox employee, whether a staff or a manager.
Leadership through quality is both a strategy (continuous pursuit of quality
improvement) and a process (a fundamental business principle on which
all work processes are based). Leadership through quality is fostered by
the management at all levels and is pursued as a proactive approach rather
than are active approach. This reflects positiveness in the companys
strategy.
Page No. 14
Unit 1
1.9 Summary
Let us recapitulate the important concepts discussed in this unit:
Strategy or corporate strategy is better described, and more easily put
into practice than defined. However, strategy, as mostly used or
understood, is an action plan or, a scheme of action or design of
execution of a plan.
Business strategy is similar to military strategy. Both business and military
organizations try to use their strengths to exploit the weaknesses of their
competitors or opponents to win or succeed. There is, however, a
significant difference between the two. Business strategy is formulated
based on the assumption of competition, military strategy is based on the
assumption of conflict.
Like strategy, strategic management has also been defined differently by
different authors and strategy analysts. However, the common elements
in most of the definitions are organizational objectives, the environment,
formulation of strategy, implementation and control.
In any organization, strategy can exist or operate at three levelscorporate
level, business unit level and functional level. In single business companies,
corporate-level strategies and business unit-level strategies may not be
much different. But, for multi-business companies (like Unilever or ITC),
strategies at two levels would be quite distinct. Functional-level strategies,
however, would be common to both types of companies.
Companies should always look for opportunities, and seize or exploit
opportunities at the right time. In other words, they should be constantly
aware of strategic windows. This is what Maruti (Suzuki) did. They entered
the Indian car market at the right time, i.e., when the strategic window
was open because of the obsolescence of Premier Padmini (earlier Fiat).
Some companies do not undertake strategic planning and management.
Some of the common reasons for this are poor reward structure, previous
bad experience, contentment with success, too expensive, overconfidence,
honest difference of opinion, fire fighting, self-interest or self-esteem, waste
of time, fear of the unknown, fear of failure, and suspicion.
Duro and Standstrom have mentioned 10 principles of strategy, which
are drawn from the military rule or warfare, but are equally applicable to
business. These are: 1. Set a goal and stick to it; 2. Maintain good morale
Page No. 15
Unit 1
1.10 Glossary
Competitive advantage: Advantage over competitors gained by offering
consumers greater value, either by means of lower prices or by providing
greater benefits and service that justifies higher prices.
Fortune 500: A list of top companies around the world compiled annually
by Fortune magazine, which ranks publicly listed corporations according
to their revenues.
Multilocation: The state of being in more than two places at the same
time
Strategic window: Short time period between specific events during
which there is an opportunity to capitalize on a market
Strategy: A plan, method, or series of maneuvers or stratagems for
obtaining a specific goal or result.
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Unit 1
1.12 Answers
Answers to Self-Assessment Questions
1. True
2. Glueck (1972)
3. Competition, conflict
4. False
5. Strategic windows
6. Market evolution
7. (d)
8. False
9. True
10. Multinational
11. False
12. True
13. True
14. True
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Unit 1
1.13 References
1. Abell, D F. 1978. Strategic Windows. Journal of Marketing 42(2).
2. Alkhafaji, A F. 2003. Strategic Management. New York: Harworth Press.
3. David, F R. 2003. Strategic Management: Concepts and Cases. 9th ed.,
Indian Reprint. New Delhi: Pearson Education.
4. Glueck, W F. 1980. Business Policy and Strategic Management. New
York: McGraw-Hill.
5. Porter, M E. What is Strategy. Harvard Business Review 72(6), 1996.
6. Thompson, AA, Jr, and A J Strickland. 2001. Strategic Management:
Concepts and Cases. New Delhi: Tata McGraw-Hill.
E-references
http://www.shell.com/home/content/aboutshell/our_strategy/
http://www.source2update.com/Company-History/Modi-XeroxMODXER.html
Endnotes
1
F Glueck, Taking the mystique out of planning, Across the Board (July August, 1985).
Page No. 18
Unit 2
Unit 2
Structure
2.1 Introduction
2.2 Caselet
Objectives
2.3 Strategic Management Model
2.4 Approaches to the Strategic Management Process
2.5 Levels in SMP
2.6 Participants in SMP
2.7 Strategic Drift
2.8 Case Study
2.9 Summary
2.10 Glossary
2.11 Terminal Questions
2.12 Answers
2.13 References
2.1 Introduction
In the previous unit, we had defined corporate strategy and strategic
management. In defining strategic management, we had mentioned the
external environment, formulation of strategy and also implementation and
control. Strategic planning and management should actually start with
organizational mission and objectives, consider internal competences and
resources, various strategy alternatives and the competitive situation and,
then proceed with formulation and implementation of the strategy. All these
constitute the strategic management process (SMP). And, this would be the
subject matter of our analysis in the various units starting with Unit 5. In this
unit, we shall give an overview of the strategic management process in terms
of different approaches, levels in SMP, planned or intended and realized
strategies, the people involved, roles of the chief executive, board of directors
and consultants, among others. We shall also discuss concepts like strategic
drift and the learning organization and their relevance and roles in the strategic
management process.
Page No. 19
Unit 2
2.2 Caselet
Every organization follows a strategic management model, which depends
on its size, products and other factors. The organizational structure of the
company is built on the basis of this model. Hindustan Unilever (HUL) is a
fast moving consumer goods (FMCG) company that markets about 100
products/brands grouped into different categories. The different categories
of products require different organizational structure. Therefore, the
company has adopted a hybrid organizational structure based on functions
and product divisionalization. Like most organizations, strategies at HUL
also operate at three levels: corporate, SBU and functional. These will be
discussed in more detail in the unit.
Objectives
After studying this unit, you should be able to:
Explain the different approaches to the strategic management process
Illustrate the strategy-making hierarchy in an organization
Describe the various participants in the strategic management process
Explain the meaning and nature of strategic drift
Page No. 20
Unit 2
Understanding
strategy
Understanding
corporate
strategy
(Ch. 1)
Strategic
management
process
(Ch.2)
Stability
Strategies
(Ch. 7)
Strategy
analysis
Strategy
formulation
Corporate
strategy
and corporate
governance
(Ch. 3)
Mission. goal,
objectives
(Ch. 4)
Strategy
for change
(Ch. 8)
Internal
competences
resources
(Ch. 5)
Expansion
strategies
(Ch.9)
Strategy
selection
External
environment
(Ch. 6)
Strategy
implementation
Structural
implementation
(Ch. 2)
Functional
implementation
(Ch. 13)
Industry &
competition
analysis
(Ch.10)
Strategy
evaluation control
Behavioural
implementation
(Ch. 14)
Strategy
evaluation
and control
(Ch. 15)
Selection &
activation
of strategy
(Ch.11)
Self-Assessment Questions
1. The _____process consists of four distinct steps or stages Defining
organizational mission, objectives or goals; formulation of strategy/
strategic plan; implementation of strategies; and strategy evaluation and
control.
2. Organizational competence and resources, the environment, various
strategy alternatives available, strategy selection criteria, etc., are _____
parts of SMP.
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Unit 2
Page No. 22
Unit 2
intuition and anticipation. Therefore, entrepreneurial-opportunistic and intuitiveanticipatory approaches of Steiner and others can be analysed together. So,
the two sets of approaches may be restated in the forms of three basic
approaches:
1. Entrepreneurial-opportunistic
2. Formal-structured and
3. Adaptive
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Unit 2
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Unit 2
the final decision, many times, is a compromised one, which may be at the cost
of organizational effectiveness or success.
The adaptive approach typically suits large public sector companies, where
there is greater focus on accountability than on growth. There are also important
pressure groups in the form of the controlling ministry and other related
government departments and ministries. In such companies, current problem
solving (with necessary adaptation and compromise) always has higher priority
than future planning. All large public sector companies in India like ONGC,
SAIL, BHEL, IOC, MMTC, STC and, also in other parts of the world, follow the
adaptive approach. The degree of adaptability and compromise on strategic
planning and decision making would depend on the progressiveness of the
companies and the concerned controlling ministries.
The adaptive approach also suits follower companies (in the private sector)
rather than leaders in the industry. Followers or imitators are companies that
avoid the risk of innovation and are content with producing and selling products
that have already been established in the market. They only concentrate on
market share.
Page No. 25
Unit 2
Hindustan Unilever, like many other companies, has also realized the
need for infusing entrepreneurial approach into their dominant formal-structured
approach for developing more effective business strategies. According to its
former Chairman, Keki Dadiseth, Hindustan Lever has grown in size. While it
has its own obvious benefits, it also has some drawbacks. What we need to
master is the art of creating and preserving the entrepreneurial ability and
connectedness of a small company within a large company.2
There are different ways in which the three approaches can be combined.
Individual companies have to work out the right combination based on growth
alternatives, investment opportunities or priorities, stakeholders pressures and
top managements style of functioning.
Activity 1
We have mentioned four different entrepreneurial-opportunistic approaches
(Reliance, Dell, Sony, Hero Honda) to the strategic management process.
Make a comparative analysis of these four approaches.
Self-Assessment Questions
5. ________ has classified various approaches to SMP into three forms,
calling it the three modes of the strategy-making process entrepreneurial
mode, adaptive mode and planning mode.
6. In the ______ approach, the focus is on exploiting opportunities against
environmental odds rather than problem solving.
7. In the __________ approach, the strategic management process depends
largely on the planning system.
8. Which of these approaches is essentially a balancing strategy more
remedial and reconciliatory, and, therefore, more reactive than proactive
as a decision-making process?
(a) Entrepreneurial-opportunistic
(b) Formal-structured
(c) Adaptive approach
(d) Combination approach
Page No. 26
Unit 2
Operations
strategies
Corporate/business
strategy
Top/Senior
management
Functional strategy
Middle
management
Marketing
strategies
Financial
strategies
HR
strategies
Page No. 27
Unit 2
Corporate
strategy
SBU 1
strategy
Corporate
management
SBU 2
strategy
Operations
strategies
Marketing
strategies
SBU top
management
SBU 3
strategy
Financial
strategies
Personnel
strategies
Middle
management
Corporate
SBU
Policy/operational
Functional
Type of decision
Conceptual/policy
Operational
Investment
implication
Risk involved
High
Medium
Low/Nil
High
Medium
Low
Time horizon
Long term
Medium term
Short term
Impact
Critical
Major
Minor
Flexibility
High
Medium
Low
Adaptability
Low
Medium
High
Page No. 28
Unit 2
Corporate level
Resource mibilization
Resource deployment
Merger and acquisition
divestment
Appropriation of earnings
Flow of decision
Flow of support
Page No. 29
Unit 2
Self-Assessment Questions
9. A ________ is a division or a product/product group unit which operates
as a separate profit centre having its own set of market and competitors
and its own marketing strategies.
10. Strategies at the functional level are often described as_____, and such
strategies are guided and controlled by overall SBU strategies.
11. Corporate-level strategy sets the short-term objectives of an organization
and broad policies and controls within which an SBU operates.
(True/False)
12. Operating strategies in comparison are relatively narrow strategies for
managing different operating units. (True/False)
Page No. 30
Unit 2
High
Rubber
Stamp
Permits
executives to
make all
decisions and
approves
what they
decide
Minimal
review
Reviews
selected
issues
brought to
him/her
Normal
participation
Involved to a
limited degree
to review
managements
performance,
decisions or
programmes
Active
participation
Questions,
reviews and
makes final
decisions on
mission,
objectives,
strategy,
policies;
performs
fiscal and
management
audit
(Active/
catalyst)
Takes the
leading role
in establishing
and
modifying
mission,
objectives,
strategy and
policies; has
very active
strategy
committee
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Unit 2
Strategic
Non-strategic
Deciding organizational
mission and objectives,
setting major policies,
priorities, etc.
Minimal or nil
Long-term planning
Short-term planning
Providing directions
Reviewing results
Developing resources
Leading organizational
resource development
team
Committing resources
Evaluating results /
performance appraisal
Negligible or nil
Measurement of performance
against plans; measuring
organizational and managerial
effectiveness
Mobilizing support
Page No. 32
Unit 2
1.
2.
3.
4.
5.
6.
7.
8.
Function
Degree of
importance*
Time spent
(per cent)
Long-term planning
External relationship
Review and control of organizational performance
Personnel development
Short-term planning
Performance appraisal
Meetings in the organization
Review of organizational relations
4.8
4.5
4.0
3.4
3.2
3.0
2.8
2.6
18.0
30.0
20.0
7.0
8.0
5.0
6.0
6.0
100.0
Effectiveness of the strategic role of the chief executive determines the direction
and pattern of growth of most of the companies. An effective chief executive is
a practical/realistic visionary a dreamer who also does. He becomes a catalyst
in the strategic management process and, mobilizes resources, managers and
supports the board to accelerate the growth process. Effective chief executives
are successful leaders; they lead by example and charter a new growth trajectory
for the company. Jack Welch of GE, Lee Iacocca of Chrysler Corporation, Michael
Dell of Dell Computers, Bill Gates of Microsoft, Keki Dadiseth of Hindustan
Unilever, P N Haksar of ITC, Dhirubhai Ambani of Reliance, Aditya Birla of
Hindalco Industries, Azim Premji of Wipro and N R Narayanamurthy of Infosys
have led their companies to unprecedented heights.
Sikkim Manipal University
Page No. 33
Unit 2
Page No. 34
Unit 2
Weightage*
2.7
2.3
2.3
2.2
2.2
2.1
2.1
2.0
2.0
2.0
1.6
1.6
1.5
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
1.4
Page No. 35
Unit 2
Page No. 36
Unit 2
Self-Assessment Questions
13. Managers at different levelstop, senior and middleparticipate in the
strategic planning and management process. (True/False)
14. The _______ plays the most important role in the strategic management
process of a company.
15. Most large companies and multinationals have created a separate
_____unit, which is equipped with specialized planning staff who form
the nucleus of strategic planning activities of a company.
16. In companies with no separate planning division or unit, ______can fill
that gap.
Page No. 37
Unit 2
Environmental
change
Amount of change
Strategic
change
3
2
4
Phase 1
incremental change
Phase 2
Flux
Phase 3/4
Transformational
change or demise
Time
Page No. 38
Unit 2
figure), but, this may not often happen in reality; and, even if it happens, the
time lag in the realignment process can cause significant problems of
performance in the organizations. Strategic drifts of this nature are, however,
not very common. More common drifts in organizations are the ones where the
strategic process lags behind the environmental forces.
But, all this emphasizes the delicate balance that an organization needs
to maintain in developing its strategy. It has internal pressurescultural or
managerialwhich tend to constrain strategy development, and environmental
forces, including markets and competitors, which it must cope with for a particular
strategic process to succeed. Every organization has to constantly endeavour
to align or realign these two forces to avoid the occurrence of a strategic drift.
Page No. 39
Unit 2
Activity 2
In every organization, there is a chance of strategic drift. Progressive
organizations try to prevent strategic drift through advance planning and
preventive strategies. Assume that you are the strategic planning manager
of one such company. Give your analysis of preventive planning and
strategies.
Self-Assessment Questions
17. The widening gap between demand for change by the environmental
forces and actual strategic change in a company is referred to as ______.
18. The risk of strategic drift implies that there is not much justification in
pursuing formalized planning approaches with predetermined objectives,
analyses and strategies. (True/False)
19. Managers in a learning organization have a __________mind.
20. The learning organization is also an evolving organization. (True/False)
Page No. 40
Unit 2
Page No. 41
Unit 2
2.9 Summary
Let us recapitulate the important concepts discussed in this unit:
There are different approaches to the strategic management process.
These approaches can be regrouped into three basic approaches:
entrepreneurial-opportunistic, formal-structured and adaptive.
Many companies use a predominantly entrepreneurial-opportunistic
approach and combine this with the formal-structured approach. Similarly,
a formal-structured approach may be combined with some elements of
adopting predominantly a formal-structured approach with elements of
entrepreneurial-opportunistic approach.
Corporate-level strategies, SBU-level strategies and functional-level
strategies all involve decision making. But, the types of decision making,
their scopes and impacts are different at different levels. For example,
corporate-level strategies are generally long term, SBU-level strategies
are generally medium term and functional level strategies are short term.
Managers at different levelstop, senior and middleparticipate in the
strategic management process. In addition, the board of directors plays
an important role. Consultants also have a role to play. In all, there are
five major participants in SMP: board of directors, chief executives (CEO),
corporate planning staff, other managers and consultants.
In the strategic management process of every company, there is a risk of
strategic drift. Strategic drift is the gap between demand for change by
the environmental forces and actual strategic change taking place in a
company.
In learning organizations, managers constantly challenge past experience
and practices and, strive for new innovative ways. In such organizations,
strategy is managed in a more unconventional, discontinuous way and,
not through incremental changes.
2.10 Glossary
Merger: The combining of two or more companies into one, through a
purchase acquisition or a pooling of interests
Strategic business unit: A division or a product/product group unit which
operates as a separate profit centre having its own set of market and
competitors and its own marketing strategies
Sikkim Manipal University
Page No. 42
Unit 2
Strategic drift: The widening gap between demand for change by the
environmental forces and actual strategic change in a company
Strategic management process: An ongoing process that entails
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 programmes.
2.12 Answers
Answers to Self-Assessment Questions
1. Strategic management
2. Internal
3. False
Page No. 43
Unit 2
4. True
5. Mintzberg (1973)
6. entrepreneurial-opportunistic
7. formal-structured
8. (c)
9. Strategic business unit
10. tactical
11. False
12. True
13. True
14. Chief executive
15. Corporate planning unit
16. Consultants
17. Strategic drift
18. True
19. Questioning
20. True
Page No. 44
Unit 2
5. The board of directors is the final authority in deciding the affairs and
direction of a company; the chief executive plays the most important role
in the strategic management process of a company. Refer to Section 2.6
for further details.
6. Management consultants can play very useful roles in the strategic
planning process of a company. Refer to Section 2.6.5 for further details.
7. Strategic drift is the widening gap between demand for change by the
environmental forces and actual strategic change in a company. Refer to
Section 2.7 for further details.
8. Due to the fear of strategic drift, every company should be a learning
organization. In learning organizations, managers constantly challenge
past experience and practices and, strive for new innovative ways. Refer
to Section 2.7.1 for further details.
2.13 References
1. Hill, C W L, and G R Jones. 1997. Strategic Management: An Integrated
Approach. 2nd edn. Boston: Houghton Mifflinco.
2. Johnson, G, and K Scholes. 2005. Exploring Corporate Strategy. 6th edn.
London: Pearson Education.
3. Mintzberg, H. 1973. Strategy Making in Three Modes. California
Management Review, Winter.
4. Senge, P. 1990. The Fifth Discipline: The Art and Practice of the Learning
Organization. New York: Doubleday Century.
5. Thomas, J. 1981. Managing a Business in India. New Delhi: Allied
Publishers.
6. Wheelen, T L, and J D Hunger. 1983. Strategic Management and Business
Policy. Massachusetts: Addison-Wisley.
7. Wright, P, C Pringle, and M Kroll. 1998. Strategic Management: Text and
Cases. Boston: Allyn and Bacon.
Endnotes
1
Keki Dadiseth, Business Growth Through People Growth: Our Blueprint for the New
Millennium , Chairman s Speech (Mumbai: Annual General Meeting of the Company,
April 20, 2000).
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Unit 2
A A Thompson Jr, A J Strickland III, and J E Gamble, Crafting and Executing Strategy:
The Quest for Competitive Advantage, 14th ed. (New Delhi: Tata McGraw-Hill, 2005) 34.
AIMS Research Survey, Best Boards, Business Today (March 7 21, 1999).
P Vaswani, Strategic Management Process in India , PhD Thesis Surat: South Gujarat
University, 1990.
Companies covered under the Foreign Exchange Regulation Act (FERA). FERA has now
been replaced with Foreign Exchange Management Act (FEMA).
10
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Unit 3
Unit 3
Structure
3.1 Introduction
3.2 Caselet
Objectives
3.3 Policy, Strategy, Tactics
3.4 Strategic Management
3.5 Strategic Planning and Strategic Management
3.6 Benefits of Strategic Management
3.7 Business Ethics and Strategic Management
3.8 Planning for Business Continuity
3.9 Case Study
3.10 Summary
3.11 Glossary
3.12 Terminal Questions
3.13 Answers
3.14 References
3.1 Introduction
A common debate found in strategic management literature is whether policy
comes before strategy or vice versa and what is the interrelation between the
two. The present unit throws light on this by considering the definitions and
features of both. The definitions and role of tactics are also dealt with.
Different definitions of strategic management are also given for clearer
understanding of the concept and process. The classification of management
functions into strategic and operational categories has been done. Four important
topics strategic planning, strategic management, limitations of strategic
management and business ethics have also been discussed.
An extension of strategic planning is business continuity planning. This is
a recent development in policy and strategic management. It essentially deals
with the damages due to a disaster to a businessnatural or manmade.
Appropriate planning and strategies are required to handle such damages or
disasters. Implementation issues are also involved. All these have been
discussed in this unit.
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Unit 3
3.2 Caselet
Birla Sun Life Insurance is one of the few Indian companies to have a fully
operational business continuity plan (BCP). It consists of a response plan
to restore and recover operations for critical processes within a
predetermined time after a disaster. The plan would ensure minimal impact
to the organization, its people, and most importantly, its customers.
The objective is to have a planned response in the event of any contingency,
ensuring recovery of critical activities within agreed time frames. The plans
would comply with various regulatory requirements and minimize the
potential business impact to the company. Additionally, it helps to create a
system that fosters continuous improvement of business continuity
management.
Highlights of the plan are as follows:
Crisis Management and incident response
Data back-up, data and system recovery as documented in the Disaster
recovery plan
Recovery of all critical business functions and supporting systems
Alternate recovery sites if primary location is unavailable
Communication with customers, employees and other stakeholders
Assurance to customers that they will continue to receive optimum
customer services at all times
Source: http://insurance.birlasunlife.com/Pages/Individual/About-Us/BusinessContinuity-Plan.aspx
Objectives
After studying this unit, you should be able to:
Distinguish between policy, strategy and tactics
Differentiate between strategic planning and strategic management
Discuss the benefits and limitations of strategic management
Explain the role of business ethics in strategic management
Describe business continuity planning in terms of all aspects
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A company decides to grow only through retained earnings and not resort
to capital issue or market borrowing.
A company will not consider adding any new products with less than 10
per cent return on investment.
A company sells on cash terms and also on credit terms.
A rental company charges a deposit for renting materials.
A car company charges extra money for delivering the car to the buyers
premises.
A company hires personnel with experience only.
A company has guidelines on how to collect outstanding amounts from its
customers.
A company responds to 50 per cent of customer enquiries within three
working days.
A company does not question the return of goods by customers that were
purchased during last one month.
A company does not give any discount on price.
A company gives 10 per cent discount on price if payment is made in
cash.
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Unit 3
policy and strategy has been well enunciated by Hofer and others (1984). This
is shown below.
First Phase: Till the mid-1930s: (Ad hoc policy)
Ad hoc policy making necessitated by the expansion of American firms in terms
of product, markets and customers; and, the consequent need for replacing
informal controls by framing functional policies to guide managers.
Second Phase: 1930s and 1940s (Planned policy)
Planned policy formulation instead of ad hoc policy making and shift of emphasis
to integration of function areas caused by environmental changes.
Third Phase: 1960s (Strategy)
Rapid pace of environmental changes and increasing complexity of management
necessitating a critical look at business in relation to environment and the need
for strategic decisions.
Fourth Phase: 1980s and later (Strategic management)
Shift of focus to strategic processes and the responsibility of management in
resolving strategic issues.
The evolutionary aspect gives a good perspective to the difference between
policy and strategy.
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decision. The distinction, or rather the relationship, between strategy and tactics
can be made clear in terms of five major factors or characteristics which relate
to both of them. These are given below:
1. Significance: Strategies have more significance or greater consequences
for an organization than tactics because strategies or strategic decisions
generally affect the entire organization or a significant part of the
organization. Tactics may affect only a particular supplier or vendor, a
particular sale or a customer.
2. Level of formulation or conduct: Because of their significance, strategies
are formulated at senior or top management level. Within an overall
strategy, tactics are employed by middle and lower levels of management
including salespersons in the field.
3. Information base: Since strategies are of major consequence to an
organization, these should be carefully worked out based on adequate
information about a companys resource, operations, environment,
competitors, customers or some or all of these. Information requirements
for tactical decisions would be much less.
4. Objectivity/subjectivity: Strategies are generally worked out by teams
and not by individual managers (except the CEO sometimes.) This, along
with the fact that those are based on carefully analysed information/data,
renders enough objectivity to strategies or strategic decisions. Tactics, by
their nature, are more subjectivesometimes left to the discretion of
individual managers.
5. Periodicity or time horizon: Strategies are not made or changed too
frequently. It takes time for a strategy to fully work itself out and to determine
its effectiveness or success or failure.
Strategies, therefore, have larger periodicity or time frame. Strategies,
which are changed too frequently, are bad strategies. Tactics, on the other hand,
can change quite frequently. If we consider policy, strategy and tactics together,
it becomes clear that policy comes before strategy and strategy comes before
tactics. All the three concepts are closely interrelated and play vital roles in the
business or management process of a company. As a sequence or conceptual
chain in the management process, policy, strategy and tactics can be written
as:
Policy Strategy Tactics
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Unit 3
Activity 1
Today, with increasing awareness about the threat to the environment, many
companies are adopting eco-friendly policies in various ways. Give an
example of a company that has changed its policies or adopted new policies
to make itself eco-friendly. Mention the specific steps taken.
Self-Assessment Questions
1. The five definitions of _______ given by Mintzberg and Quinn (1991) are
plan, ploy, pattern, position and perspective.
2. When some of the activities followed by a company may not be compatible
with each other or with organizational objectives or goals, ________ is
required.
3. Policy is the same as strategy. (True/False)
4. According to the New Webster Dictionary, ________ means the art or
manner of governing a nation or the principle on which any measure or
course of action is based.
5. Policy generally comes first; strategy comes later, and, sometimes, follows
from or is subject to policy. (True/False)
6. Strategy and tactics are also the same although they appear to be different.
(True/False)
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Level of
management
Top
Strategic
orientation
Somewhat creative
Middle
Supervisory
Nature of function
Operational
orientation
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Operational management
Higher level
Lower level
Innovative
Routinized
Imprecise
More precise
Complex
Less complex/simple
Organizationwide
Operationally specific
Consequential
Task driven
Result driven
Productivity driven
Long-term implication
Short-term/immediate implication
Self-Assessment Questions
7. All the management functions of a company can be broadly classified
into two categories __________and _________.
8. Strategic functions are performed more at the senior and top management
level, while operational functions are discharged more by _______
management levels.
9. Strategic management consists of three distinct steps or stages
formulation, strategy implementation, and evaluation and control.
(True/False)
10. Operational functions or operational management, as the name implies,
is concerned with routine matters of day-to-day management. (True/False)
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companies, the planning period was more than 5 years, but for 70 per cent of
the small companies, the period was less than 3 years.
A characteristic feature of the starting plans of many large Indian
companies is that the long-term planning horizons of these companies generally
coincide with the national planning period. This means that many of these
companies follow a five-year planning period which synchronizes with the 5year plans of the country. This is particularly true of public sector enterprises in
the core sector.
For example, companies like BHEL, SAIL, NTPC and NHPC have
formulated corporate plans which are linked to the national plans. The 5 year
planning period of these companies, however, is not a generalization. Corporate
plans of some of these companies are linked to the national plans, but, not
necessarily of exactly 5-year duration; the duration can be a multiple of 5 years.
For example, SAIL had prepared an ambitious corporate plan with a planning
horizon of 15 years (19852000). Such plans are more appropriately called
perspective plans.
Marico Industries, the maker of Parachute coconut oil, had prepared a
strategic business plan for the period, 199196. For the preparation of the plan,
a strategic planning team was formed consisting of six managers from different
functional areas/disciplines. The planning team made some forecasts about
the general macroeconomic environment during 199196 and how the Indian
economy would perform during the period in terms of aggregate demand,
technology development and availability of raw materials. In addition to these,
the company had considered other environmental factors also. Based on an
analysis of the major strengths and weaknesses of the company and the
environmental factors (opportunities and threats), a detailed SWOT analysis
(discussed later in Unit 6) of the company was undertaken. The objective of
SWOT analysis was to identify growth and expansion possibilities in existing
and new products/businesses. These were finally translated into projected
volumes, turnover and profitability.
Once a strategic plan is prepared, the same is submitted to the senior
management/top management for their consideration and approval. In Marico
Industries also, the strategic business plan prepared by the planning group was
submitted to the senior management and finally to the top management (CEO).
Deliberations took place at different levels and the business plan was finalized.
This became more like an annual plan which was to be revised and updated
every year during the reference period (199196) as per the strategic business
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plan. Maricos target was to increase its turnover to `300 crore by 199596. The
business plan also stipulated that Marico should add a new product to its portfolio
every year and seek technology tie-up for introduction of new products.
Strategic planning and strategic management are intimately related to
each other. Where strategic planning ends, strategic management takes over;
but, both are complementary to each other. They form vital links in an integrated
chain in corporate management. Both are continuous processes. Strategic
management may be more continuous, because it involves implementation and
monitoring also.
Self-Assessment Questions
11. A ________is a blueprint or document which incorporates details regarding
different elements of strategic management.
12. Strategic planning is concerned with environment or rather, the fit between
the environment, the internal competencies and business(es) of a
company. (True/False)
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Self-Assessment Questions
13. Strategic management allows an organization to be more _____ than
reactive in shaping its own future.
14. The benefits of strategic management are purely financial. (True/False)
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Self-Assessment Questions
15. Every company or business has _______ responsibility towards its
shareholders.
16. Almost all strategy formulations, implementation and evaluation decisions
have ethical implications. (True/False)
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1. Prevention
Conventionally, prevention is the best strategy; this means taking steps or actions
to prevent or minimize the chances of occurring of a disaster. Companies can
adopt many preventive control measures as safeguards. Common preventive
control measures are:
(a) Security controls: These involve controls by setting up barriers to protect
the site and prevent unauthorized entry into the premises. This means, in
other words, manned surveillance at the location.
(b) Infrastructure controls: These include appropriate infrastructural facilities
like UPS/back-up power, smoke/fire detectors, fire extinguishers, weather
forecasting systems , etc.
(c) Personnel controls: Skilled/trained personnel are posted to man sensitive
zones where key or critical resources may be located.
(d) Software controls: These involve modern methods of controls through
computerized systems or software. These include authentication,
encryption, firewall, intrusion detection systems, etc.
2. Response
Prevention is a pre-emptive measure; response is a reactive step. If prevention
is not possible, fast response is the next best alternative strategy. After an
interruption or damage has taken place, the BCP team should immediately
inform the management and the Damage Assessment Team. Two other teams
would also be involved: the Technical Team and the Operations Team.
The Damage Assessment Team would assess the nature and magnitude
of the damage. More specifically, the team should investigate into:
The cause of disruption or damage
The scope for preventing additional damage
What can be salvaged
What repairs, restorations and replacements are required
Based on the report of the Damage Assessment Team, the Technical
Team and Operations Team should get into action. The Technical Team is the
key decision maker for further actions of the BCP and the Operations Team
executes the actual damage control operations of BCP.
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3. Resumption
In this, the strategy is for resumption of normal or pre-damage activities of the
organization. Activities now shift to the command centre. The command centre
is different from the location of the normal business activity. Both resumption
and recovery actions are planned and coordinated from the command centre.
The centre should have required communication facilities, systems and
equipments for effective functioning of the BCP/Technical team.
The first decision to be taken by the Technical Team is whether important
or critical business operations can be resumed at the present site or those have
to move to an alternative location. If the present site is badly damaged and, is
not accessible for immediate use, operations may have to move to an alternative
site. Different kinds or types of alternatives may be available based on
infrastructure and facilities and the Technical Team has to choose the most
appropriate site.
4. Recovery
Along with the resumption of critical operations either at the original site or an
alternative location, the recovery process also begins. Recovery essentially
means reinstallation of the operating and control system. Necessary critical
operations are restored. As this happens, information restoration from back-up
tapes or offsite storage also begins. As soon as information/data restoration is
complete, critical business functions can resume.
5. Restoration
Restoration means restoration of the original site for normal functioning. The
restoration process is initiated simultaneously with the recovery work. In fact,
recovery and restoration teams are often common.
The five strategies mentioned above have to be planned and executed
within a time span usually decided by the top management in consultation with
the BCP team. The time span or duration of the process would depend on the
magnitude of the damage or disaster, recovery/restoration goals and the speed
with which different teams " BCP, Technical and Operational " can function.
3.8.5
Plans and strategies work together. A plan is also essential for implementation
of a strategy or strategies. A separate plan can be made for each of the five
strategies, i.e., prevention, response, resumption, recovery and restoration or
an integrated plan can be prepared incorporating or dealing with all the strategies.
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3.8.6 Implementation
Implementation of business continuity plans are mostly technology driven.
Implementation involves development and testing of IT system or solution. The
software and/or hardware elements are built into the systems. Implementation
of the mechanical and physical processes of restoration/recovery also take place
simultaneously. In fact, technology and other systems have to be harmonized
for proper implementation of a business continuity plan. During continuity
planning and implementation, care should also be takes to ensure that the
organizations business process does not come to a complete halt when there
is a disruption of the normal process flow. This is ensured through planning or
building redundancy, i.e., incorporating back-up service elements which may
be redundant during normal course of business.
An example will make this clear. A bank may be selling fixed deposits to
its account holders or customers through net banking. But, the bank can also
keep phone banking facility ready as a standby so that this can be availed of by
the customers if net services break down. There can also be emergency phone
numbers which customers can use in case of failure of normal communication
services.
3.8.7 Technology versus Business
Business continuity planning and implementation predominantly involve
technologyIT and software systems. But, it must not be forgotten that
technology is used for protection or restoration of business, and, therefore,
focus on business has to be simultaneous.
Also, operational aspects of BCP involves technology, but, technology is
not all or sufficient. Other knowledge areas or activities are equally important.
Sikkim Manipal University
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These include risk management, crisis management, impact analysis, costbenefit analysis, storage management, network management, recovery planning,
coordination and communication.11 This implies that business continuity planning
teams should be cross-functional or multi disciplinary so that all required
knowledge inputs or expertise are available. Organizations should develop and
engage such multi disciplinary teams for successful business continuity planning
and its implementation.
Self-Assessment Questions
17. To safeguard against natural or man-made disasters, ________is
essential.
18. ________is a pre-emptive measure, while _____response is a reactive
step.
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Towards this end, the company will strive for effective management of
business operations.
With headquarters based in Delhi, OIC has 21 regional offices, 311 divisional
offices and 635 branch offices in various parts of Indiametropolitan cities,
large, medium and small towns and some rural locations. The company
has overseas operations in Nepal, Kuwait and Dubai.
OIC is managed by a team of professionally qualified and experienced
managers. These managers have vast experience in conducting general
insurance business, both nationally and internationally. The company has
a dedicated project cell at headquarters and also major cities of India. A
special R&D team has been dedicated to work out special/innovative
insurance covers like stockbrokers policies, special package policies, etc.
OIC specializes in devising special covers for large projects like power
plants, steel plants, chemical plants and petrochemicals. It has a highly
technically qualified team of professionals to render high quality customer
service. The company has special reputation in the reinsurance market.
OIC follows a strategy of growth with stability. The company maintains a
steady growth in its premium income as well as investment income. During
the last 10 years, both premium income and investment income increased
by 810 per cent. Even capital and reserve funds grew by about the same
percentage.
OIC generally follows a policy/strategy of concentration in the existing
products and markets, i.e., on its popular policies which are major revenue
earners. The company also adapts its policies/strategies to emerging
environmental and market changes to remain contemporary.
* Based on S Lomash and P K Mishra, Business Policy and Strategic Management
(New Delhi: Vikas Publishing House, 2009), 36971 (Case IX).
3.10 Summary
Let us recapitulate the important concepts discussed in this unit:
Business policy or policy is different from strategy and strategy is different
from tactics. If we consider policy, strategy and tactics together, policy
comes before strategy and strategy comes before tactics as a sequence
or conceptual chain in the management process: PolicyStrategy
Tactics. But, all the three concepts are closely interrelated.
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3.11 Glossary
Business continuity planning: Proactively working out a means or
method of preventing or mitigating the consequences of a disaster natural
or man-made (sabotage or terrorism) and managing it to limit to the
level or degree that a business unit can afford.
Policy: The art or manner of governing a nation or the principle on which
any measure or course of action is based.
Strategic management: Set of decisions and actions which leads to the
development of a corporate organization.
Strategic plan (also called a corporate plan or perspective plan): A
blueprint or document
Strategy: The combination of competitive moves and business
approaches that managers employ to please customers, compete
successfully, and achieve organizational objectives which incorporates
details regarding different elements of strategic management.
Sikkim Manipal University
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3.13 Answers
Answers to Self-Assessment Questions
1. Strategy
2. Trade-off
3. False
4. policy
5. True
6. False
7. Strategic, operational
8. middle and lower
9. True
10. True
11. strategic plan
12. True
13. Proactive
14. False
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3.14 References
1. Glueck, W F. 1980. Business Policy and Strategic Management. New
York: McGraw-Hill.
2. Hofer, C A, E R Murray, R A Pitts, and Ram Charan. 1984. Strategic
ManagementA Casebook in Policy and Planning. 2nd ed. Minnesota:
West Publishing.
3. Mintzburg, H, and J B Quinn. 1991. The Strategy Process: Concepts,
Contests and Cases. New Jersey: Prentice Hall.
4. Ramesh, P, Business Continuity Planning, Technology Review 2002-04,
Tata Consultancy Services, July 2002.
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P Kotler, Marketing Management (New Delhi: Prentice Hall of India, 2000), 66.
W F Glueck, Business Policy and Strategic Management (New York: McGraw-Hill, 1980),
6.
G A Steiner, J B Miner, and E R Gray, Management Policy and Strategy (New York:
Macmillan, 1982), 25.
10
11
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Unit 4
Unit 4
Structure
4.1 Introduction
4.2 Caselet
Objectives
4.3 Definitions: Corporate Strategy and Corporate Governance
4.4 Growing Importance of Corporate Governance
4.5 Corporate Strategy and Corporate Governance: Complementarity
and Conflict
4.6 Code of Best Practice
4.7 Strategic Audit
4.8 Board and CEO Relationship
4.9 Managed Corporation
4.10 Governed Corporation
4.11 Corporate Strategy and Corporate Governance:
Need for more Integrative Relationship
4.12 Case Study
4.13 Summary
4.14 Glossary
4.15 Terminal Questions
4.16 Answers
4.17 References
4.1 Introduction
Corporate strategy and corporate governance are two important tools that help
in the functioning of any company. They are not the same, but generally
complementary to each other. Corporate governance is more operational, and
no strategy can succeed without operational support. Similarly, no governance
can achieve organizational objectives without a strategy or strategic management
system. A close link or relationship also exists between corporate strategy and
corporate governance through the roles of the board of directors and the CEO.
Both the board and the CEO have strategic roles to play. The two also have
important roles to play in the governance of a company.
There is, however, a basic difference between the roles of the board and
the CEO and other managers of a company. The board represents the interest
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Unit 4
of the shareholders who are the owners of a company whereas the CEO and
other managers represent the management of the company. The distinction
between ownership and management is very important, because, most of the
issues in the interrelation between corporate strategy and corporate governance
revolve round the relationship, and sometimes, conflict between the two.
Most of the analysis in this unit will be around this theme. In doing so, we
will discuss the definitional aspects of corporate strategy and corporate
governance, growing importance of corporate governance, stakeholders
expectations, major issues between corporate strategy and corporate
governance, code of corporate governance, empowerment of the board, role of
professional directors, code of best practice, strategic audit, boardCEO
relationship, the managed corporation and the governed corporation.
4.2 Caselet
The year 2001-02 saw the collapse of several high-profile and large
corporations, many of which were involved in accounting fraud. These
corporations included Enron and MCI in the US and One. Tel in Australia.
These events attracted the attention of the respective governments on the
issue of corporate governance. While the US government passed the
Sarbanes-Oxley Act in 2002, the CLERP 9 reforms were passed in Australia.
Today, any discussion of corporate governance makes reference to
principles raised in three documents released since 1990: The Cadbury
Report (UK, 1992), the Principles of Corporate Governance (OECD, 1998
and 2004), the Sarbanes-Oxley Act of 2002 (US, 2002).
Objectives
After studying this unit, you should be able to:
Explain the conceptual difference between corporate strategy and
corporate governance
Discuss the growing importance of corporate governance
Analyse the complementarities and conflicts between corporate strategy
and corporate governance
Explain the code of best practice, strategic audit, board and CEO
relationship
Distinguish between the managed corporation and the governed
corporation
Sikkim Manipal University
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Self-Assessment Questions
1. The system by which business corporations are directed and controlled
is called________.
2. Corporate governance is primarily guided by the_______.
3. It is correct to equate with corporate management with corporate
governance. (True/False)
4. Both corporate governance and corporate strategy start with organizational
objectives. (True/False)
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Weaknesses
Weaknesses
Internationalization difficult
Vulnerability of companies to global
market
Weaknesses
Source: T Clarke, and E Monkhouse, eds., Re-Thinking the Company, adap. (London:
Financial Times/Pitman Publishing, 1994)
Self-Assessment Questions
5. The affairs of a company are directed and controlled through the ______
who represent the shareholders of the company.
6. The _____ system should clearly address the three major issues of an
organizationcorporate objective; whom the organization should be
serving; and, how best to serve their interests.
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PROCESSING
Resources and
Capabilities
Financial
Human
Technological
Materials
Information
1
Controlling
Monitor activities
and make corrections
if needed
Use reporting and
control measures
1
Leading (creating shared vision, culture,
and values)
Empower employees
Use certain techniques to motivate employees
to follow
OUTPUTS
Outcome
Deliver quality products/
services
Achieve goals and objectives
efficiently and effectively
1. Dominantly governance activity
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Figure 4.1 shows all the major management activities in a company (inputoutput chain) and relationship among them. Activities like input (resources and
capabilities) management and processing have been shown as dominantly of
governance nature; and, activities like organizing (accomplishing the plan) and
output (outcome) have been classified as mix of both strategic and governance
factors. In fact, even in leading an activity of dominantly governance nature,
use of different motivational techniques involves strategies. Similarly, resource
and capability management, perceived primarily as strategic management of
human and financial resources, has major governance implications.
We can also see the interrelationship or interdependence between
governance and strategy through a chain in the reporting system in
organizations. We can more appropriately call this governance through report
or documentation system. A typical reporting system is shown in Figure 4.2.
Reports received
Beneficiaries
Limited reports
Trustees
Limited investment
performance reports
Investment
managers
Accounts
Analysts' reports
Company briefings
Board
Budgets/qualitative reporting
Executive
directors
Budgets/qualitative reporting
Senior
executives
Budgets/other
operating reports
Managers
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Conflict
Governance
Long-term growth
Development/diversification to require
additional funding (share issue or loans)
Table 4.3 shows some typical conflict situations between strategy and
governance. These include conflicts between growth and profitability; growth
and control/independence, cost efficiency and jobs; volume/mass production
and quality/specialization; and, the problems of sub-optimization, i.e.,
development of one part of an organization at the expense of another.6
Many of these situations also reflect conflicts of stakeholder interests or
expectations. For example, shareholders want cost efficiency, higher productivity
and profit, but, this may lead to job losses and clash with employees interests.
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Unit 4
Activity 1
Take a company of your choice and design the role of corporate governance
in the company. You may describe the corporate governance in terms of
organizational structure, rules, procedures and systems.
Self-Assessment Questions
7. Corporate governance and strategies play ________ roles in the smooth
and efficient functioning of organizations.
8. The interrelationship or interdependence between governance and
strategy can be seen through a chain in the ______ in organizations.
9. Activities like input (resources and capabilities) management and
processing have been shown as dominantly of _______nature
10. Activities like organizing (accomplishing the plan) and output (outcome)
have been classified as mix of both _____and _____factors.
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Unit 4
the company. The CEO, on the other hand, is responsible for day-to-day
management of the organization. The day-to-day management function
of the CEO consists of planning, organizing and implementation of
policies, programmes and strategies approved by the board.
Professional inputs from independent directors: Every company should
have non-executive directors, who bring to the board their professional
experience and expertise. The argument is that these experienced
professional directors, already in senior/top executive positions in other
companies or independent consultants, would supplement the efforts of
the fulltime executive directors on the board. Their involvement would
also provide a validity check and balance the ways in which executive
directors tend to influence governance and strategic decisions at the board
level.7
We will discuss benchmarking and best practices in the strategic
perspective in detail later in Unit 12.
Self-Assessment Questions
11. The ________has prescribed a code of best practice to serve as a
guideline to those companies which want to achieve higher standards of
corporate governance.
12. One of the constituents of the code prescribed by the Cadbury Committee
are:
(a) Higher pay for directors
(b) Separate positions of chairman and CEO
(c) Greater role of chairman in decision making
(d) Lesser role of chairman in decision making
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also when they should make presentation to or hold discussion with the full
board.
A sensitive issue is the strategic audit committees relationship with the
CEO. Any CEO would be generally apprehensive of such a committee. The
strategic audit committee needs to create and maintain an atmosphere of
mutuality. It is true that whenever a question or a discussion on the strategic
direction of a company comes up in a board meeting, it is perceived by many
CEOs as an implicit criticism of the current strategy and leadership of the
company. It is also true that regular strategic process involving the CEO reduces
chances of unpleasant or confronting situations. In fact, ideally, the functioning
of the strategic audit committee should be seen as a low-key operation, positive
in approach, designed to lend support and credibility to company leadership
and management.
The strategic audit committee and also the board should always be alert
and vigilant to ensure that there are no slippages. Business cycles indicate that
period of success may be followed by a period of slump. The strategic audit
committee and the board should be alert enough to get signals so that they can
act in time. This is necessary because complacence develops after success
both in the board and in the management.
If properly conceived, designed and conducted, strategic audit, more than
management audit, can be a powerful tool for monitoring the strategic process
of a company and also strike a good balance between corporate strategy and
corporate governance.
Self-Assessment Questions
13. _________is a new tool for systematic review of strategy by board
members without directly involving themselves with management of
companies.
14. A performance criteria commonly used as a measure by many companies,
is _________.
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Unit 4
between the two. We have given below three observations on the boards role
and the boardCEO relationship.
The Board is responsible for the successful perpetuation of the corporation.
That responsibility cannot be relegated to management9John G Surale,
non-executive chairman, General Motors (GM).
The success of the non-executive chairman arrangement is heavily
dependent on the chairmans relationship with the CEO. If the chemistry
is not good, the relationship isnt going to work10 Sir Denys Henderson,
former chairman and CEO of Imperial Chemical Industries (ICI) and
presently non-executive chairman.
How can outside directors constructively review managements strategy
if they dont have a deep knowledge of the business?11Bernard Marcus,
Chairman, the Home Depot (a retail chain in the US).
Managers and directors in most companies agree that the board should
be an effective watchdog without undermining the managements ability to run
the business. They also feel that boards should determine/decide how to distance
themselves from their CEOs in the course of normal management of business,
but at the same time, maintain a constructive and positive relationship with
them. This means striking a balance between management strategy and
governance of a company. In connection with this, directors and CEOs have
raised many fundamental questions or issues. Some of the major questions or
issues are mentioned below.
Should the CEO be involved only with management of a company, or
should he (she) be also concerned with governance?
What role should the board (dominated by outside directors) play in
formulating and reviewing a companys strategy?
What are the advantages and disadvantages of splitting chairmans and
CEOs job instead of entrusting them to one person?
Should outside directors obtain information about the companyits
management and governanceon their own bypassing the CEO?
What should be the right mechanism for boards to evaluate management,
particularly the CEO?
How does a board ensure that its members have the necessary expertise
to judge managements performance or evaluate the strategic decisionmaking process?
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Self-Assessment Questions
15. The Board is not responsible for the successful perpetuation of the
corporation.
16. The board should be an effective watchdog without undermining the
managements ability to run the business. (True/False)
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Unit 4
Shareholders role is to throw out the board if the company or the corporation
does not perform.12
Emergence and growth of the managed corporation can be traced in two
factors; first, change in the shareholding patterndispersion or distribution of
ownership among many shareholders (including the public) and, second,
emergence of a new class of professionals who were neither major stockholders
nor founders nor owners of companies. Because shareholders were dispersed,
they could not be directly involved in formulating corporate policy and strategy.
Therefore, there was the need for managers and leaders who could formulate
policies and strategies and promote organizational growth. The managed
corporation has dominated the corporate arena for decades. The managed
corporation model can be found in any modern organization; only the actual
form may vary from one organization to another.
In the managed corporation, boards and shareholders are kept away from
strategy formulation and policy making. A significant business proposal or a
major investment project may be discussed at the board level but, the managers
would be given the freedom to formulate and implement business strategies.
Board members are expected to intervene in business policies and strategies if
there is performance failure or the managers are found incompetent or corrupt.
If this happens, that is, if the directors have to get involved in corporate strategies,
may be it is time for the board to look for a new CEO.
If the major cause of corporate failure is management incompetence, the
governance system in the managed corporation may work. But, many
performance failures or crises are not results of incompetence, but are failures
of judgement. Managers tend to be biased towards strategies and decisions
which reflect their individual strengths. Managers also make mistakes. The
managed corporation model permits or ignores mistakes to go uncorrected till
they lead to major crisis or catastrophes. In the US, throughout the 1980s,
boards allowed flawed retail strategy to be followed in spite of clear evidence
that managers lacked retail skills. Some board members later admitted that it
was a mistake to allow company managements to pursue incorrect retail policies
and strategies. But, they did not intervene because they were following the
managed corporation model.
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Self-Assessment Questions
17. The governed corporation has dominated the corporate arena for decades.
(True/False)
18. Managers tend to be biased towards strategies and decisions which reflect
their individual strengths. (True/False)
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Unit 4
Source: Adapted from J Pound, The Promise of the Governed Corporation, Harvard
Business Review (MarchApril, 1995)
Pound has suggested five major changes in the managed corporation for it
to evolve into a governed corporation. First, board members should be experts,
i.e., well versed with the companyits products, structure, functioning, policies
and practicesthe industry and environmental influences and governmental
regulations; second, board meetings should focus on discussions on new policies,
decisions and strategies, and not just on reviews of past performance; third,
directors should have better access to information on products, customers,
competitors, market conditions and critical strategic and organizational issues;
fourth, directors should devote a significant proportion of their professional time
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Unit 4
Self-Assessment Questions
19. In the governed corporation, the focus is not on powernot monitoring or
controlling the managersbut, on ___________.
20. _________ has suggested five major changes in the managed corporation
for it to evolve into a governed corporation.
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Unit 4
as a governed company. This is the optimal way to serve both the stockholders
and the interest of the larger group of stakeholders.
Self-Assessment Questions
21. The starting point of both corporate strategy and governance are the
same, i.e., achievement of organizational objectives. (True/False)
22. In corporate governance, there is a growing emphasis on inclusiveness
or inclusive governance, i.e., focusing on the society, community and
environmental development. (True/False)
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Unit 4
a look at the clock and asked his secretary to hang it on the wall in his
office. He asked Khopekar to distribute the other two as desired by the
vendor. He also mentioned that the clocks could cost `50 each if bought in
bulk. As per the MDs instruction, Khopekar sent one to the VP and took
one home and put it up in his living room.
Khopekar later accepted many gifts in Gray Line which were of different
values, but always presented as costing not more than `50. Gradually, he
also stopped feeling uneasy or bad about receiving the gifts. In fact, he was
getting used to it and, also started looking forward to the New Year. He,
however, knew very well that none of the gifts were worth less than `2000.
The next new year, Natarajan, executive secretary to the MD, came to
Khopekar. He wanted to know if gifts had started coming.
Natarajan clarified that it had been the practice with the earlier purchase
managers also to accept gifts from vendors and distribute them among
important officials of the company. He cautioned against discussing the
gifts with the MD, who would be annoyed and take action against him.
Khopekar thought about integrity and ethics, but a bigger test was waiting
for him.
Within few days, a vendor came with six baskets, each with bottles of Scotch
whisky, return air tickets for two to any destination in India and three-night
stay at a five-star hotel. The total value of each of the gift baskets was not
less than `1 lakh. The MDs secretary told Khopekar that such gifts were
not unusual. Khopekar was faced with a dilemma: to get reconciled to such
practices or look for a change? It is not an easy decision to make for any
manager in todays volatile business environment.
* Based on U C Mathur, Case study 24, (Textbook of Strategic Management)
(New Delhi: Macmillan India, 2005), 337. Names have been changed because of
the sensitive nature of the subject.
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Unit 4
4.13 Summary
Let us recapitulate the important concepts discussed in this unit:
Corporate strategy and corporate governance are the two important tools
of functioning of any company. Corporate governance has more to do
with ownership of a company; corporate strategy has more to do with
management of a company. They are generally complementary to each
other, but, there can be conflicts between the two.
In companies, simultaneous focus on good corporate governance and
effective corporate strategies is important, as only this can lead to
simultaneous achievement of organizational objectives like profitability,
growth and diversification and stakeholder expectations like high return
on their capital, transparency, employee motivation and customer
satisfaction.
To resolve the conflicts between corporate strategy and corporate
governance, empowerment of the board may be a useful tool. The board,
by virtue of its position, is the single entity which can influence both
corporate strategy and corporate governance and try to strike a balance
between their conflicting demands.
Pound has distinguished between the managed corporation and the
governed corporation. The managed corporation is more like the traditional
model of a company or corporation. This is the model of governance
where the focus is on the power equations between management and
control, boardCEO relationship or strategy and governance conflict.
4.14 Glossary
Best practice: A technique or methodology that, through experience and
research, has been proven to reliably lead to a desired result.
Corporate governance: The framework of rules and practices by which
a board of directors ensures accountability, fairness, and transparency in
a company's relationship with its all stakeholders.
Corporate strategy: The overall scope and direction of a corporation
and the way in which its various business operations work together to
achieve particular goals
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Unit 4
4.16 Answers
Answers to Self-Assessment Questions
1. Corporate governance
2. Shareholders
3. False
4. True
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Page No. 99
Unit 4
5. board of directors
6. corporate governance
7. Complementary
8. reporting system
9. governance
10. Strategic, governance
11. Cadbury Committee
12. (b)
13. strategic audit
14. return on investment (ROI)
15. False
16. True
17. False
18. True
19. improving decision making
20. Pound
21. True
22. True
Unit 4
4.17 References
1. Donaldson, G. A New Tool for Boards; Strategic Audit. Harvard Business
Review, JulyAugust, 1995.
2. Harvard Business Review on Corporate Governance, 2000. Boston:
Harvard Business School Press.
3. Johnson, G and K Scholes. 2005. Exploring Corporate Strategy. 6th edn.
Pearson Education.
4. Kumar, S. 2000. Corporate Governance: A Question of Ethics. New Delhi:
Galgotia Publishing Co.
5. Lorsch, J W. Empowering the Board. Harvard Business Review, January
February, 1995.
6. Mathur, U C. 2005. Corporate Governance and Business Ethics: Text
and Cases. New Delhi: Macmillan India.
7. Pound, J. The Promise of the Governed Corporation, Harvard Business
Review, MarchApril, 1995.
Endnotes
1
Definition given by the Advisory Board of the National Association of Corporate Directors
(NACD) New Delhi, reproduced in S Kumar, Corporate Governance (2000), 3
Reproduced in U C Mathur, Corporate Governance and Business Ethics: Text and Cases
(New Delhi: Macmillan India, 2005), 4.
G Johnson, and K Scholes, Exploring Corporate Strategy, 4 th ed. (New Delhi: Prentice
Hall of India, 1999), 195.
U C Mathur, Corporate Governance and Business Ethics: Text and Cases (2005),
6163.
Unit 4
G Donaldson, A New Tool for Boards: Strategic Audit, Harvard Business Review (July
August, 1995).
10
Ibid .
11
Ibid.
12
J Pound, The Promise of the Governed Corporation, Harvard Business Review (March
April, 1995).
13
J Pound, The Promise of the Governed Corporation , Harvard Business Review (March
April,1995).
14
J Pound, The Promise of the Governed Corporation, Harvard Business Review (March
April, 1995).
Unit 5
Unit 5
Structure
5.1 Introduction
5.2 Caselet
Objectives
5.3 Definition of Business
5.4 Mission Statement
5.5 Corporate Philosophy
5.6 Corporate Objectives and Goals
5.7 Strategic Intent
5.8 Company Responsibility
5.9 Corporate Social Responsibility
5.10 Social Audit
5.11 Case Study
5.12 Summary
5.13 Glossary
5.14 Terminal Questions
5.15 Answers
5.16 References
5.1 Introduction
For formulation of corporate strategy, an organization needs to consider three
major things: first, the corporate mission and objectives; second, its internal
competence; and third, the external environment. We shall discuss corporate
mission and objectives in this unit. Internal competence and resources and the
environmental factors will be analysed in the next two units.
The starting point for the formulation of any strategy is the mission
statement of a company.
The mission statement actually starts with a definition of business of the
company. Related to mission is vision. Also related to mission statement or
development is corporate philosophy. From mission statement and corporate
philosophy follow corporate objectives, goals and also strategic intent. In
developing its mission and objectives, a company has certain responsibility to
Sikkim Manipal University
Unit 5
5.2 Caselet
No corporation functions without a strategy; and the starting point for the
formulation of any strategy is the mission statement of a company. Microsoft
Corporation, an American multinational corporation, is no exception. The
largest and most well known software corporation in the world, it is best
known for its extremely popular Windows operating system and Microsoft
Office software. The company has a mission statement:
At Microsoft, we work to help people and businesses throughout the
world realize their full potential. This is our mission. Everything we do
reflects this mission and the values that make it possible.
Objectives
After studying this unit, you should be able to:
Define what is business
Explain the terms corporate mission and corporate vision
Define what is corporate philosophy
Discuss the corporate objectives and goals of a company
Explain strategic intent and company responsibility
Explain the concept of corporate social responsibility
Discuss social audit as a tool to measure companies social performance
Unit 5
Technology
Business
definition
Market
competitivenes
Customer
segment
Unit 5
Business definition
Kodak India
Hero Cycles
Self-Assessment Questions
1. To define a companys business with precision is the job or responsibility
of the _________and _________.
2. Management thinkers like Peter Drucker feel that business definition
should strongly focus on the__________.
Unit 5
This emphasizes the need for organizations to take their mission statement
seriously and formulate it properly. What is a mission statement? Or, what is a
company mission? The mission statement of a company is variously called a
statement of philosophy, a statement of beliefs, a statement of purpose and, a
statement of business principles. A mission statement is many in one. It embodies
the business philosophy of a companys decision makers, implies the image
the company wishes to project for itself, reflects the companys self-concept;
indicates the companys principal product or service areas and, the customer
needs the company seeks to satisfy. In short, it describes the companys product,
market and technological focus; and it does so in a way that reflects the values
and priorities of the companys strategic decision makers.2
The mission statement should be as explicit or comprehensive as possible.
Some feel that the mission statement should have seven dimensions or serve
seven different purposes or objectives.
These are:
To ensure unanimity of purposes within the organization
To develop a basis or standard for allocating organizational resources
To provide a basis for motivating the use of the organizations resources
To establish a general culture or organizational climate; for example, to
suggest a business-like approach
To facilitate the translation of objectives and goals into jobs and
responsibilities and assignment of tasks to responsible segments within
the organization
To serve as a focal point for those who can identify themselves with the
organizations purpose and business
To specify organizational purposes and inspire translation of these
purposes into goals in such a way that cost, time and performance
parameters can be assessed and controlled.3
Unit 5
thrust, while the vision statement outlines the strategic path. All visionary
companies have a vision statement. The vision of Microsoft (since 1999) has
been to broadbase its outlook to empower people through great software
anytime, anywhere and on any device including the PC and an incredibly rich
variety of digital devices accessing the power of the Internet.
Most progressive companies develop both a mission statement and a
vision statement. Indian Oil Corporation (IOC) is a good example. Vision and
mission statements of IOC4 are:
Vision: Indian Oil aims to achieve international standards of excellence
in all aspects of energy and diversified business with focus on customer
delight through quality products and services.
Mission: Maintaining national leadership in oil refining, marketing and
pipeline transportation.
Vision and mission statements can be generally found in the beginning of
annual reports of companies. These statements are also seen in the corporate
or long-term strategic plans of companies. These also appear in many company
reports or documents like customer service agreements, loan requests, labour
relations contracts, etc. Many companies also display them at prominent points
or locations in company premises.
Unit 5
Unit 5
Unit 5
Activity 1
Conduct a comparitive analysis of the mission and vision statements of
any three companies of your choice.
Self-Assessment Questions
3. The ________of a company is variously called a statement of philosophy,
a statement of beliefs, a statement of purpose and, a statement of business
principles.
4. Mission is concerned more with the ________; the vision more with
the__________.
Unit 5
Unit 5
Self-Assessment Questions
5. Corporate or company philosophy is sometimes called company creed.
(True/False)
6. Generally, the corporate philosophy statements of most companies appear
quite similar. (True/False)
One need not make too much of a distinction between the two, which
may become only a theoretical exercise without much of practical relevance. It
is evident that objectives and goals have overlapping connotations. We will
generally use the two terms synonymously with the only stipulation or rider that
goals may be of longer term than objectives. Objectives can sometimes be
purely short term.
Sikkim Manipal University
Unit 5
Unit 5
Unit 5
Self-Assessment Questions
7. Corporate objectives are more focused and specific compared to
the_____.
8. Birth, infancy, youth, youth adult, adult, maturity and old age are part of
the ______.
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Unit 5
Strategic intent of a company is clear about the end or the target, but, it is
flexible with regard to the means and leaves room for creativity and improvization.
Pursuit of a strategic intent may initially create a misfit between targets or
ambitions and resources. This becomes a challenge to the top management of
a company. The management strives to bridge the gap by relentlessly building
new capabilities or strategic advantages. The essence of the strategy here lies
in creating competitive advantage faster than the target competitor or the leader.
Self-Assessment Questions
9. The phase ________indicates a stretch; it involves setting goals or targets
which demand stretching of the present resource base and capabilities
for their fulfilment.
10. The phase strategic intent was coined by ________and _________.
11. If a particular objective of a company becomes extremely focused and
directed towards a specific target, the company is showing a strategic
intent. (True/False)
12. Strategic intent does not mean challenging or overtaking the market leader.
(True/False)
Unit 5
Expectations/Claims
Stockholders
Unit 5
Business/
product-market
Company
mission
External
stakeholders
Customers
Suppliers
Creditors
Government
Union*
Competitors
General public
Objectives
Unit 5
Self-Assessment Questions
13. Corporates have responsibilities towards various stakeholders and the
society at large. (True/False)
14. The competitors, government and the general public are all ______of a
company.
Unit 5
9. McDonalds
2. Coca-Cola
10. 3M
3. Wal-Mart
11. UPS
4. Anheuser Bush
12. FedEx
5. Hewlett-Packard
13. Target
6. World Disney
7. Microsoft
8. IBM
Unit 5
Unit 5
business which should determine, along with other objectives, how to increase
or maximize profit.
Several research studies10 have been undertaken to determine the
relationship between corporate social performance and financial performance.
But, none of these studies has been able to establish the precise nature of
relationship between the two. There may be a number of reasons for this. One
reason may be that there is no significant correlation between social and financial
performance. Another reason may be that the benefits of CSR are offset by its
negative effect on profitability with no consequentially visible financial impact
on the company. Other reasons include methodological weaknesses or
drawbacks and/or problems with operational definitions or inadequacy of the
conceptual models used in the studies. A general conclusion from these studies,
however, is that certain relationship between CSR and profitability may exist,
but, the nature of the relationship is not clear.
Activity 2
Choose any five companies that are well known for their CSR practices.
You may choose the companies mentioned in the text above. Write a report
on each of the companys CSR activities.
Self-Assessment Questions
15. _________can be defined as the alignment of business operations with
social values.
16. In India, CSR initiatives are mostly designed for the upliftment of the
economically backward classes or sections of society with particular
emphasis on the rural sector. (True/False)
Unit 5
Self-Assessment Questions
17. The social performance of companies can be measured against the stated
social objectives through_________.
18. A social audit is always undertaken internally by companies. (True/False)
Unit 5
Unit 5
Convention on Climate Change. Tata Power has said that of the total power,
it would generate in the next 10 years, 25 per cent would be from renewable
energy sources. Tata Motors is collecting environmental and energy data
across its dealer and supply chain to compute their carbon footprint and
indentify opportunities for cutting down on carbon dioxide emission. This
initiative will enable sharing and deployment of ideas throughout the value
chain.
One of the most interesting innovations has come in the form of a biogasbased power plant at Taj Green Cove in Kovalam, which uses the waste
generated at the hotel to meet its cooking requirements. Indian Hotels
Management has mentioned that all of its domestic and international hotels
would now be certified by Green Globe, an international agency.
Tata Group Chairman Ratan Tata had said during the launch of Swatch, a
low-cost water purifier made form natural ingredients: We have embarked
on a group-wise initiative to create awareness and implement eco-friendly
process wherever it is possible and in fact, look at some of our older
processes to see how we can ensure that they are in compliance with the
stateof- the-art exhibits. This is going to be long and expensive journey and
we are fairly committed to it.
This summarizes well the Tata Groups initiatives to promote the green
movement.
* Mostly based on Going green: Tatas new mantra, The Times of India (Times
Business), January 4, 2010.
5.12 Summary
Let us recapitulate the important concepts discussed in this unit:
To define a companys business with precision is the job or responsibility
of the planners and strategists. Precise or correct definition of business
of a company is the foundation for the mission statement, objectives,
plans, strategies and work and resource allocations.
A mission statement is many in one. It embodies the business philosophy
of a companys decision makers, implies the image the company wishes
to project, reflects the companys self-concept, indicates the companys
principal product or service areas and the customer needs the company
seeks to satisfy.
Unit 5
5.13 Glossary
Corporate mission: The business philosophy of a company, declaring
what business the company is in and who its customers are. It provides
focus and direction for the corporate development.
Corporate philosophy: The beliefs, values, aspirations and philosophical
priorities of a company which the management or strategic decision
makers are committed to.
Corporate vision: Refers to a companys specific intentions that are broad,
all-intrusive and forward-thinking.
Organizational life cycle: A model which proposes that over the course
of time, business firms move through a fairly predictable sequence of
developmental stages.
Strategic intent: Setting goals or targets which demand stretching of the
present resource base and capabilities for their fulfilment.
Unit 5
5.15 Answers
Answers to Self-Assessment Questions
1. Planners, strategists
2. Customer
3. mission statement
4. present, future
5. True
6. False
7. mission statement
8. Organizational life cycle
9. strategic intent
10. Hamel, Prahalad
11. True
12. False
13. True
Unit 5
14. stakeholders
15. Corporate social responsibility
16. True
17. social audit
18. False
5.16 References
1. Aupperle, K E, A B Carroll, J D Hatfield. 1985. An Empirical Examination
of the Relationship between Corporate Social Responsibilities and
Profitability. Academy of Management Journal. 28 June.
2. CarrolL, A, and F Hoy. Integrating Corporate Social Policy into Strategic
Management. 1984. Journal of Business Strategy 4, Winter.
3. Drucker, P F. 1974. Management: Tasks, Responsibilities and Practices.
New York: Harper & Row.
4. Ghosh, P K. 2003. Strategic Planning and Management. New Delhi: Sultan
Chand & Sons.
Sikkim Manipal University
Unit 5
P F Drucker, Management: Tasks, Responsibilities and Practices (New York: Harper &
Row, 1974), 63.
J R Pearce, and R B Robinson, Strategic Management, 7 th ed. (Mc Graw-Hill, 2000), 27.
W R King, and D I Cleland, Strategic Planning and Policy (New York: Van Nostrand
Reinhold, 1978), 124.
An Interview with M A Pathan, Chairman, IOC, Financial Express, August 30, 1999
A Carroll, and F Hoy, Integrating Corporate Social Policy into Strategic Management,
Journal of Business Strategy, 4, No. 3 (Winter 1984).
R Alsop, Perils of Corporate Philanthrophy, Wall Street Journal (January 16, 2002).
Trying to Make a Difference, Financial Times (New Delhi: Times Publishing House, April
7, 2006).
10
11
12
C C Abt, The Social Audit for Management (New York: AMA, 1977): 44 45.
Unit 6
Unit 6
Structure
6.1 Introduction
6.2 Caselet
Objectives
6.3 Competence Analysis
6.4 Resource Analysis
6.5 Value Chain Analysis
6.6 Cost Analysis
6.7 Financial Competence Analysis
6.8 External Sources of Competence
6.9 Case Study
6.10 Summary
6.11 Glossary
6.12 Terminal Questions
6.13 Answers
6.14 References
6.1 Introduction
For effectiveness, all management strategies should be based on or be
commensurate with the internal competences of a company or its organizational
capabilities. A number of theories or models have been put forward about
internal capabilities or core competences which companies must acquire or
use to survive in todays competitive market. Another way to put this is: the
strategy a company adopts should depend on its competence level in terms
of resources.
Time and again, companies have discovered and/or experienced this,
and they have achieved results. From 1980 to 1988, Canon grew by 264 per
cent and Honda by 200 per cent. Canons personal copiers, Hondas entry into
four-wheeler market, Casios small-screen colour LCD television, Yamahas
digital pianoall were developed by respective core competencies. In India,
Greaves introduced Garuda (the three-wheeler diesel auto) making use of its
competence in diesel engines; IFB-Bosch entered the washing machine segment
making use of its fine blanking technology. Dabur, with its expertise in traditional
Indian medicine, has entered into food products (juice, honey, mint, etc.).
Sikkim Manipal University
Unit 6
6.2 Caselet
Core competence is the combination of processes and technologies that a
company possesses. It includes the knowledge and experience of
operations, the activities that bring the company high returns and the
qualities that are considered central to the success of the organization.
Core competence gives a company its competitive advantage by enabling
it to deliver value to its customers. Changing core competence requires
key skills and abilities in a new job or field of operations.
Xerox is an example of a company that diversified and adopted new core
competence to enable it to compete in a different market. In the early 20th
century the company came into being with the invention of xerography,
which was the precursor of photocopying technology. Through innovation,
the company invented Ethernet technology, which helped prepare the
foundation for the Internet of today. The shift from hard copy to digital
technology required new core competence. Any core competence
developed by a company stays with it for a long time.
Source: http://smallbusiness.chron.com/examples-changing-core-competencies18422.html
Objectives
After studying this unit, you should be able to:
Define competence of an organization and the various types of
competences
Describe resource analysis
Explain the concept and practice of value chain analysis
Analyse the financial competence of an organization through cost analysis
Discuss external sources of competence, including strategic outsourcing
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Activity 1
Now that you know what is core competence, choose any three companies
and compare their core competence. Write a comparative analyis on the
same.
Self-Assessment Questions
1. The ability to perform a task or achieve some objectives is called ______.
2. Sonys competence in miniaturization; Xeroxs competence in photo
copying; Canons competence in optics, imaging and laser control are
examples of _______competence.
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Self-Assessment Questions
5. In strategic management analysis, organizational resources can be
classified into categories:
(a) Physical and non-physical resources
(b) Financial and human resources
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Self-Assessment Questions
9. The chain of activities that an organization performs to meet customer
demand is called _________.
10. The various activities in a value chain can be divided into two broad
categories:
(a) primary and secondary activities
(b) primary and support activities
(c) high-level and low-level activities
(d) priority and non-priority activities
11. Inbound logistics, operations, outbound logistics, marketing and sales
and service are classified under
(a) primary activities
(b) secondary activities
(c) tertiary activities
(d) support activities
12. Activities that help to improve the effectiveness or efficiency of primary
activities are known as _______.
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the raw material and other input requirements and supply cost. Cost efficiency
in production processes can be achieved through better process engineering,
increase in productivity (depends partly on the technology level) and better
working capital management. Many companies have achieved cost efficiency
through these methods.
Cost competitiveness through product design need not, however, be
confined to manufacturing or production process alone. Innovative product design
can lead to cost saving through its influence on other parts of the value chain
also like distribution or after-sales service. Canon proved this in its battle with
Xerox. Xeroxs competitive advantage was built on its service and support
network. Canon designed a copier which needed far less servicing8 and, through
this, made one of the strong competence areas of Xerox largely redundant. In
the process, Canon also achieved cost efficiency by spending much less on its
service network.
Experience: Experience in any activity in an organization can be an
important source of cost advantage or cost efficiencybe it manufacturing or
any other functional area. Many studies have been conducted to establish the
relationship between cumulative experience gained in an organization and its
unit cost. The relationship is generally expressed as an inverse relationship
between cumulative output and unit costunit cost decreases as cumulative
output increases.
This is shown in the experience curve (Figure 6.5).
The experience curve is the result of two major factors, namely, the learning
effects and economies of scale. Learning effects refer to cost saving which
comes from learning by doing. Labour, for example, learns through repetitive
processes, how to perform a task more efficiently on the shop floor or in assembly
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lines. Due to this, labour productivity increases and this leads to cost reduction
or cost efficiency. Similarly, in a new production process, management learns
over time, how to manage the new operations more efficiently; and, management
efficiency eventually leads to cost efficiency. Same applies to operations like
logistics. Economies of scale as mentioned above contribute to cost reduction
by distributing fixed cost over larger output.
Learning effects, however, may die out after some time. Some feel that
learning effects are really important during the start-up period of a new process.
Even if it is a complex assembly process, workers may almost reach perfection
after a few years, and all effects on the experience curve may cease after two or
three years. Any further downward slope of the curve (that is, cost reduction) may
occur only because of economies of scale which can continue over larger output.
In a cost-conscious organization, all the four major factors, i.e., economies
of scale, supply cost, product/process design and experience may play active
roles for achieving cost efficiency. However, economies of scale and experience
effect can occur only after an organization has been in operation for sometime.
Newly launched companies or products must concentrate on product/ process
design and supply cost and try to reduce the experience cycle through a more
efficient management system.
Self-Assessment Questions
13. Cost competitiveness implies two things_______and __________.
14. Factors like economies of scale, supply cost or cost of raw materials and
inputs, product or process design, and experience or experience effect
contribute to __________in an organization.
15. The more the resources or cost, more efficient is the value creation
process. (True/False)
16. Companies that achieve cost efficiency and cost competitiveness also
achieve _________.
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2. Debt-to-equity ratio
Generally speaking, higher the values (or percentages) of the above ratios
(except debt-equity ratio), better are they as indicators of financial competence
or health of a company. The most desirable ratios for a company would depend
on factors like nature of the companys business, market or competitive situation
and the industry average. Financial ratio analysis should be carried out by
financial analysts in the company or the strategic planning group or outside
consultants. Such analysis should not be done in isolation; this should be done
in relation to other resources and competences to optimize overall internal
competence of an organization.
Financial ratio analysis, however, is not without limitations. Financial ratios
are based on accounting data, and, companies differ in their treatment of items
like depreciation, inventory valuation, reserves, tax provisions, R&D expenditures,
etc. These factors can affect comparative ratios. Therefore, conformity to industry
ratios does not automatically mean that a company is performing well. Similarly,
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deviations from industry averages also do not indicate that a company is doing
badly. For example, a high inventory turnover ratio can indicate efficient inventory
management and, a strong working capital position, but, it can also mean a
serious inventory shortage and a weak working capital position.9
Self-Assessment Questions
17. Financial ratios are computed from a companys ________statement and
balance sheet.
18. Financial ratio analysis should be done in relation to other resources and
competences to optimize overall internal competence of an organization.
(True/False)
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map depicts how proprietary a process or function or capability is; the horizontal
axis shows how common a process or function is. The less proprietary and more
common a process or capability is, the stronger a candidate it is for outsourcing.
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map, generally require more detailed analysis of the company and the industry.
An organization needs to consider such factors as substitute products, standards
and regulations to make out how these capabilities will shape in the future. A
decision for outsourcing should be based on these considerations.
The second step in the capability sourcing process is for a company to
decide how it should outsource the identified capabilities. There is a cost for
capability sourcing: there is a quality angle also. How does a company decide on
these factors? A capability assessment map (Figure 6.7) can be a good guide.
The map depicts each capability according to its cost and quality relative
to the top-performing competitors or suppliers (industry median). This map helps
a company decide which key capability gaps it should fill. For example, activities
or capabilities which fall in the upper-left segment (relatively high cost capabilities
whose quality levels exceed requirements) should be outsourced to low-cost
providerseven if it means a reduction in quality.
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The third and final step in capability sourcing is a reality check or more a
feasibility check in terms of location or physical proximity of the capability to be
outsourced. For example, if it is a tangible product or technology, physical
proximity becomes an important factor because of cost and time implications.
But, for intangibles like R&D, design, engineering, etc., physical proximity may
be much less important. A company, however, has to look into this reality or
feasibility aspect.
According to Gottfredson, Puryear and Phillips, if a company goes through
the proposed three-step process, it will have the right framework for a
comprehensive capability sourcing strategy.
Self-Assessment Questions
19. One of the commonest forms of business networking is forming ______to
achieve faster rates of product and/or process innovation.
20. In order to improve their competitive position, companies are adopting
______, that is, moving one or more of the functions in the value chain
outside.
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It is often asked, how does Southwest make high profits? The answer is to
be found, in addition to other factors, in price risk management or hedging
of aviation fuel price. Southwest has concluded hedging agreements till
2009 with hedge price not exceeding $35 per barrel for at least 25 per cent
of its annual fuel requirements. It can also exercise option for about 25 per
cent of its fuel needs for $26 per barrel. In a highly volatile crude oil/ fuel oil
market, price hedging gives very significant cost advantage to a company.
Due to its successful integrated cost management, Southwest has become
highly competitive in the airline industry. Many full service airlines have
tried to adopt Southwests cost strategy, but they have remained
unsuccessful, primarily because they have not been able to properly emulate
or integrate various cost management actions/ functions. Kelly, Southwests
CEO, said: I feel very good about our competitive position as long as we
continue to improve. In Southwest Airlines, cost management, competitive
action and growth are closely interlinked.
Integration of, and fit among, critical activities is key to sustainable
competitive advantage of all Companies, including Southwest Airlines. Porter
describes it like this:
Strategic fit among many activities is fundamental not only to competitive
advantage, but also the sustainability of that advantage. It is harder for
a rival to match an array of interlocked activities than merely to imitate
a particular ... approach.**
* Hitt et al, Management of Strategy (Cengage Learning, India Edition, 2007), 107.
** M E Porter, What is Strategy? Harvard Business Review, 74, no. 6 (1996).
Unit 6
6.10 Summary
Let us recapitulate the important concepts discussed in this unit:
For effectiveness, all management strategies should be commensurate
with internal competencies or capabilities of a company. Four major types
or levels of competence are: core competence, distinctive competence,
strategic competence and threshold competence.
Resources create competences. Resource also limits competences
because of resource crunch. In strategic management analysis,
organizational resources can be classified into four major categories:
physical resources, financial resources, human resources and intangible
resources.
Various competences and resources of an organization can be integrated
into a chain of activities which performs to meet customer demand. This
chain of activities is a value-creating process and is more appropriately
described as a value chain.
Activities in the value chain are divided into primary activitiesactivities
directly concerned with the creation of a product or customer valueand
support activities.
Price or market competitiveness of a product on business depends on
cost competitiveness, Cost competitiveness itself is a competence or
capability. Cost competitiveness implies two thingscost efficiency and
cost effectiveness.
Financial competence or financial health of an organization can be
analysed with the help of five categories of financial ratios: liquidity ratios
(relate to current assets and liabilities), leverage ratios (pertain to debts),
activity ratios (relate turnover to resource), profitability ratios (returns/
margins on investment/sales) and growth ratios (growth indicators).
Capability sourcing is becoming the new trend and it can significantly
improve competitive position.
6.11 Glossary
Competence: The ability to perform a task or achieve some objectives.
Core competence: The special or unique internal competence of a
company.
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6.13 Answers
Answers to Self-Assessment Questions
1. Competence
2. Core
3. (c) Distinctive competence
4. True
5. Intangible
6. (d) Physical, financial, human and intangible resources
7. Resources
8. resource analysis or audit
9. value chain
10. (b) primary and support activities
11. (a) primary activities
12. support activities
13. cost efficiency, cost effectiveness
14. cost efficiency
15. False
16. cost competence
17. income
18. True
19. Alliances
20. strategic outsourcing
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6.14 References
1. Aaker, D A. 1995. Strategic Market Management. 4th edn. New York:
John Wiley & Sons.
2. Gottfredson, M, R Puryear, and S Phillips. Strategic Sourcing: From
Periphery to the Core. Harvard Business Review, February, 2005.
3. Hamel, G, and C K Prahalad. The Core Competence of the Corporation.
Harvard Business Review, MayJune, 1990.
4. Hamel, G, and C K Prahalad. 1994. Competing for the Future. Boston:
Harvard Business School Press.
5. Porter, M E. 1985. Competitive Advantage: Creating and Sustaining
Superior Performance. New York: The Free Press.
6. Thompson, A A, and A J Strickland. 1994. Strategic Management: Concepts
and Cases. Texas: Business Publications.
Endnotes
1
G Hamel, and C K Prahalad, Competing for the Future, (Boston: Harvard Business School
Press, 1994).
Unit 6
M Hammer, and J Champy, Re-engineering the Corporation (New York: Harper Business,
1993).
10
11
Unit 7
Unit 7
Structure
7.1 Introduction
7.2 Caselet
Objectives
7.3 Environmental Factors
7.4 Scanning of Environment
7.5 Environment Forecasting
7.6 Environmental Opportunity and Threat Analysis
7.7 SWOT Analysis
7.8 Case Study
7.9 Summary
7.10 Glossary
7.11 Terminal Questions
7.12 Answers
7.13 References
7.1 Introduction
Companies have internal competences or capabilities that enable them to face,
among others, the external environment for formulating and implementing
corporate strategies. The external environment does not refer only to the
macroeconomic environment or broad macro-parameters like socio-economic
factors, government policy and legislations; it also includes technology, competitors,
intermediaries and suppliers; in short, all those factors or forces which together
constitute the market environment within which a company operates.
Analysis of the external environment consists of identification of
opportunities and threats, and exploiting opportunities and meeting threats based
on organizational strengths and weaknesses. Companies that do this effectively
on a regular basis become successful. Companies that ignore the environment
or do not analyse or scan the environment properly, could face disastrous results.
We have many examples of companies that ignored the changing environment
and perished as a result. Hindustan Motors and Premier Automobiles lost their
pre-eminent market position to Maruti Udyogs Maruti 800. Mahindra and
Mahindra was shaken by Marutis Gypsy petrol jeeps. Television giants like
Nelco, Weston, Crown, Bush, etc., lost to companies and brands like Onida
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and Videocon and new brands like LG and Samsung. Titan watches shook the
giant HMT. The Surf and Nirma story is well known.
7.2 Caselet
The Nirma success story of how an Indian entrepreneur took on the big
MNCs and rewrote the rules of business:
It was in 1969 that Dr. Karsanbhai Patel started Nirma and went on to
create a whole new segment in the Indian domestic detergent market.During
that time, the domestic detergent market only had the premium segment
and there were very few companies, mainly the MNCs.
Karsanbhai Patel used to make detergent powder in the backyard of his
house in Ahmedabad and then carry out door-to-door selling of his
handmade product. He gave a money back guarantee with every pack that
was sold. Karsanbhai Patel managed to offer his detergent powder for `3
per kg when the cheapest detergent at that time was `13 per kg and so he
was able to successfully target the middle and lower middle income segment.
Sabki Pasand Nirma
Karsanbhai Patel had good knowledge of chemicals and he came up with
Nirma detergent which was a result of innovative combination of the
important ingredients. Indigenous method was used, and also the detergent
was more environment friendly.
Consumers now had a quality detergent powder, having an affordable price
tag.
Source: http://toostep.com/insight/success-story-of-nirma
Objectives
After studying this unit, you should be able to:
Analyse the major factors of environment that impact a business
Explain the techniques of environmental scanning
Discuss environment forecasting
Distinguish between environmental threat and opportunity (ETOP) analysis
and SWOT analysis
Conduct organizational SWOT analysis using different approaches
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of the party in power; internal dissensions within the ruling party; strengths of
the parliamentary opposition parties; conflicting political ideologies; insurgencies
in border areas, international power alignments and alliances, etc.
Given below are two contrasting Indian examples of the impact of political
environment on business.
The progressive political philosophy of Chandrababu Naidu during his
tenure as the chief minister of Andhra Pradesh led to the creation of Cyberabad.
IT companies have found Hyderabad, nicknamed by the media as Cyberabad,
to be the most hospitable location for development of IT, mostly because of
highly supportive political climate. Chandrababu had taken keen personal interest
in IT; and, had encouraged and ensured use of IT in governance by simplifying
rules and procedures, offering concessions and building good supportive
infrastructure.
The Ayodhya-Babri Masjid episode became a political issue and provoked
violence in different parts of the country, and caused serious law and order
problems during December,1992 and January 1993. Apart from the
apprehensions of political instability, the events disrupted transport, slowed down
industrial production and growth of exports, and, also reduced government
revenue.1
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the factor. For example, inflationary trends can generally pose a serious threat
to a companys competitiveness in terms of input costs and selling prices. But a
smart company with a definite strategy may use this as an opportunity or
challenge to analyse all its cost drivers (activities which affect the cost structure)
to minimize cost and increase competitiveness. Porter (1980) has identified a
number of cost drivers:
Economies of scale
Pattern of capacity utilization
Linkages with suppliers and channels
Coordination among different activities
Interrelationships with other business units within a company
Timing of an activity
Management of institutional factors like government regulations, tax
holidays/rebates, tariffs, etc.
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Monetary
policy
Bank
rates
Physical
policy controls)
Fiscal
policy
Credit
controls
Taxes
Subsidies
Investment
and
production
Prices
and
distribution
At any point of time, the corporate tax structure, various lending rates of
banks and financial institutions, monetary controls like the bank rate, price
controls, etc., offer a particular economic or business climate. An extension of
the regulatory controls is to be found in economic or business legislation. Two
good examples of this are the Foreign Exchange Regulation Act (FERA) and
Monopolies and Restrictive Trade Practices (MRTP) Act. Given these policies
and controls, the corporate management has to match these through appropriate
strategies for cost control and effectiveness, pricing strategy, marketing
efficiency, etc.
7.3.5 Technology
Technology, as an environmental factor, influences strategic planning and
management in a number of ways.
Technological changes lead to the shortening of product life cycles and
create new sets of consumer expectations. Electronic products are a good
example. This sector is experiencing the most rapid changes today. One can
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7.3.6 Intermediaries
The primary role of intermediaries is to link the producers to the end-user market
in those cases where the latter are unable or unwilling to manage the delivery
or the distribution process.
Intermediaries play a really big role in consumer goods2, particularly in
FMCGs. FMCG majors such as Kelloggs, Heinz and Unilever (Hindustan
Unilever in India) and many other companies utilize the services of large
supermarket chains to distribute their products to households.
The selection of appropriate intermediaries is a matter of marketing choice
and strategy. A company has to take into account a number of factors while
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7.3.7 Suppliers
Suppliers to a company can be raw material suppliers, energy suppliers, suppliers
of labour and capital; and the suppliers can affect the competitive position and
business capabilities and therefore, the corporate strategy of a company.
According to Porter, the relationship between suppliers and a company
represents a power equation between them. The equation is based on, or
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governed by, the market environment, industry conditions and the extent to
which one is dependent on the other.
The buyer company has better bargaining power under the following
conditions:
The buyer is a monopolist (single seller) or a monopsonist (single buyer)
and buys large volumes relative to sellers sales.
The buyer can easily switch vendors it has a choice of alternative
sources of supplies.
The suppliers product is not very important to buyers finished products/
services.
The supplier has stronger bargaining power in the following situations:
The supplier is a monopolistic or an oligopolistic firm.
The suppliers product is a significant input to the buyers finished product.
The buyer is not an important customer of the supplier.
The suppliers products are well differentiated and it has built up significant
switching costs.
A company should evaluate the two sets of strengths or bargaining powers
and ascertain where it stands in the power equation with a particular supplier
and then decide on the choice of the supplier depending on the cost effectiveness,
indispensability, etc. This is the general or classical prescription.
But, the trend is changing. Now the slogan is: collaborate with the suppliers.
Companies are taking equity in supplier companies; some are even taking part
in the management of the vendor companies. The Japanese are leading the
way. But, even in such cases, the initial choice of the supplier may depend on
the relative power equation.
Self-Assessment Questions
1. The national income (GDP or GNP), the manufacturing sector, the services
sector, capital or financial sector, investment, savings, etc., constitute the
________environment.
2. Occupational patterns and literacy levels are also influencing _______
patterns of males and females.
3. Technological changes lead to the shortening of product _______ and
create new sets of consumer expectations.
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Strategy
Factor
Env.
Factor
Government
Policy
Rate of
Interest
Controls
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Technology
Customer Choices
and Preferences Competition
The matrix in Figure 7.2 has been constructed for six major environmental
factors and six business strategy factors. The matrix can be extended to more
number of factors (by using a computerized model) to make it more
comprehensive. Such matrix should be developed by the strategic planning
group. Establishing the impact linkages correctly is difficult and involves objective
assessment of various factors and working of linkage values as far as possible.
Judgemental factor of the planning team, however, cannot be completely ruled
out. But, once constructed, the matrix builds the right linkages between the
environment and corporate strategies or action plans. On the basis of this, the
possible outcome of a particular strategy can be more easily anticipated or
worked out.
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can be classified into some major types or categories. These are mentioned
below in terms of primary and secondary sources and internal and external
sources.
Secondary or Published Sources
1. Internal: Annual reports, corporate strategic plans, company files and
documents.
2. External: Different types of publications like books, journals, magazines,
newspapers, government publications, industry association reports and
newsletters, annual reports of competitors, etc.
Primary Sources
1. Internal: MIS, special databases, managers/employees
2. External:
Stakeholders like customers, competitors, marketing intermediaries
or channel members, suppliers; and also industry trade associations,
government agencies, etc.
Mass media like radio, television and the Internet Special studies
conducted (for the company) by consultants, market research
agencies, educational institutions, etc.
Surveillance or intelligence by ex-employees of the company,
employees or ex-employees of competitors, industrial espionage
agencies, etc.
Activity 1
Choose a company an automobile, cell phone or FMCG producer and
conduct an environmental scanning on its behalf. You will need to express
various environmental factors in terms of events, trends, issues and
expectations in an interaction matrix.
Self-Assessment Questions
5. ________is a continuous process that involves analysing changes and
sometimes even forecasting the impact of developments in the
environment.
6. Scanning is also called______by some people.
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A1
Gap
A2
Time
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1. Identify the key environmental factors or forces which should form the
basis for scenario building. For example, three such factors for scenario
building for competitive environment may be market growth rate,
competitive situation in the industry and likely move or behavior of the
market leader. Number of factors would be, in most situations, more than
three, but, this would depend on the environmental situation to be
projected.
2. Formulate or write down the key assumptions for scenario building
assumptions about the future pattern of environmental forces which have
been identified. In the above example, a relevant assumption can be that
there would be no dramatic change in the structure of the industry. It is
advisable to keep the assumptions low because complexity in scenario
building generally increases as the number of assumptions increases.
3. Understand the historical trend in environmental factors or forces which
have been used in assumptions. Also consider their impact on present
market conditions and likely future impact. This analysis is done to establish
a logic for the assumptions and, also to make inferences based on the
assumptions.
4. Build scenarios which are internally consistent. Build alternative scenarios;
may be, an optimistic future, a pessimistic future and a mainline or
mean future. Experts feel that two to four scenarios are generally
appropriate.
Some have suggested a more elaborate, step-by-step, process for
scenario development. One such sequential process is given in Figure 7.4.5
Shells long-term scenario building for the oil industry (favourable and
unfavourable) is given in Box 7.1.
Self-Assessment Questions
9. The logical starting point for environmental forecasting should be _______.
10. Achieving exactness in forecasting is always possible. (True/False)
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11. A ______is a detailed and probable view of how the business environment
of an organization may develop in the future.
12. Planners and strategists should develop _______scenarios and, should
try to indicate the most probable scenario.
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Table 7.1 Environmental Threat and Opportunity Profile (ETOP) for a Sports Cycle
Manufacturer
Environmental
Sector
Nature of impact
Market
Technological
Supplier
Economic
Regulatory
Political
Socio-cultural
International
Sector position/development
Industry growth rate for bicycles 7 to 8 per cent per
annum; growth rate for sports cycles 30 per cent;
largely unsaturated demand
Technological upgradation in the industry in progress;
import of machinery simple
Mostly ancillaries and associated companies supply
parts and components; imported raw materials easily
available
Growing affluence among urban consumers; export
potential promising
Bicycle industry a thrust area for exports
No significant factor
Customer preference for sports cycles; durable and
easy to ride
Emerging threats from cheap imports from China
Table 7.2 Environmental Threat and Opportunity Profile (ETOP) for BHEL
BHEL : ETOP
Environmental sector
Socio-economic
Technological
Supplier
Government
Competition
Impact
(+) Opportunity/() Threat
(+) Continued emphasis on infrastructural development which
inc ludes power supply for indus try, trans port and domes tic
consumption.
() Severe resource constraints.
(+) High growth envisaged in industrial production and technology
upgradation.
() Sources of technology will become scarce due to forma-tion of
technology cartels.
(+) Liberalization of technology import policy.
() Customers will become more discerning in their requirements
due to an increasing role of power plant consultants.
() Public sector will find it increasingly difficult to retain specialists
and highly qualified personnel.
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Box 7.1: Long-term Scenario Building by Shell for the Oil Industry
Every two or three years, the Central Planning Group of Shell prepares
scenarios about the future of the oil industry on behalf of the Shell Group.
The process generates two scenarios. The objective of scenario generation
is to sensitize decision makers in the group to receive signals for possible
changes in the global environment. The logic is that a more timely and
appropriate business response can take place instead of changes coming
as a surprise.
For formulating strategies for 25 years between 1995 and 2020, the Shell
Group has developed two global scenarios projecting the future of the oil
industry in two different ways. These two scenarios can be termed as
favourable or optimistic and unfavourable or pessimistic.
Favourable or Optimistic
In this scenario, economic and political liberalization increases wealth
creation in the countries which adopt them. However, big upheavals are
also experienced as long-standing barriers are dismantled, and economically
weak countries assert themselves claiming a larger role in world economic
activity and growth. High economic growth of 56 per cent is sustained in
these developing countries. But, there is slow erosion of wealth of the
developed world which produces its own problems. Big companies find
themselves increasingly challenged as cheaper capital and fewer
international barriersboth tariff and non-tarifflead to an environment of
relentless competition and innovation. This creates a high level of oil and
energy demand, and substantial new resource development and
improvement in efficiency are required to propel this growth. Growth should
be high enough so that demand does not outstrip supply, and there are no
inflationary trends. Stagflationary tendencies should also be curbed.
Unfavourable or Pessimistic
In this scenario, liberalization is resisted because people fear that they
might lose what they need mostjobs, power, autonomy, cultural identity.
This creates a world of regional, economic and cultural conflict in which
international business cannot operate efficiently. Markets are difficult for
outsiders to enter as reforms are structured to help insiders. Oil prices are
depressed because of instability and, also, uncertainty; oil prices also
suddenly shoot up as trouble flares up in the Middle East. There is increasing
divergence between rich and poor economies as many developing countries
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Self-Assessment Questions
13. The objective of environmental analysis or scanning or even scenario
building is to identify ______ and ________in the environment and
formulate strategies accordingly.
14. The preparation of an environmental threat and opportunity profile (ETOP)
of an organization was suggested by_________.
O Opportunities
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T Threats
A strength is a resource, skill, capability or any other advantage relative to
competitors and in relation to markets. A weakness is a limitation or deficiency
in resource, skills and capabilities or any other disadvantage relative to
competitors which impedes performance of an organization.
SWOT analysis can be a useful tool to analyse the extent to which strategy
of an organization and its more specific strengths and weaknesses are capable
of dealing with the changes in the business environment. And, this would decide
whether a particular factor in the environment is an opportunity or threat to the
organization with reference to the particular strategy.
For systematic SWOT analysis, major strengths and weaknesses of the
organization for the strategy should be worked out. Then, the important factors
in the environment relevant to this strategy should be identified. Finally, the
strengths and weaknesses should be matched with the environmental factors
through matching analysis or a matrix.
Some potential or likely strengths, weaknesses, opportunities and threats
are shown in Table 7.3, and a hypothetical SWOT analysis for an international
retail chain is presented in Table 7.4.
Table 7.3 Potential/ Likely Strengths, Weaknesses, Opportunities and Threats
Potential Strengths
Potential Opportunities
Unit 7
Potential Weaknesses
Potential Threats
Source: OC Ferrell, M D Hartline, and G H Lucas Jr, Marketing Strategy, 2nd ed. (Thomson South
Western,Vikas Publishing House), 2003, p. 57.
New
Technology
Major Strengths
Capacity to innovate
O
Market research
US/European markets
High cost products
T
O (Opportunity)
2
T (Threats)
1
OT
1
indicates neither opportunity nor threat
International
Exposure
O
O
O
O
O
O
O
O
O
O
O
O
T
T
T
T
O
O
O
O
T
3
3
0
T
3
3
0
T
5
1
4
O
6
0
6
Unit 7
If opportunities are equal to threats, the matter should be put to vote of the
senior/top management for decision.
The matrix in Table 7.4 can also be presented in a more clear quantitative
form by assigning numbers in places of O and T. Numbers would indicate
relating significance of opportunities and threats . Opportunities will have positive
signs; threats will have negative signs. On this basis, the matrix and the outcome
of SWOT analysis can be reformulated as shown in Table 7.5.
Table 7.5 SWOT Analysis for an International Retail Chain
Seeking Entry into the Indian Market
KEY ENVIRONMENTAL FACTORS
Strength/Weaknesses
Major Strengths
Capacity to innovate
Market research
Global base/International
brands
Major Weaknesses
New in India/Developing
countries
Existing brand suited for
the US/European markets
High cost products
O (Opportunity)
T (Threats)
OT
New
Technology
Market International
Growth
Exposure
2
3
2
2
2
2
2
2
3
2
2
2
1
1
1
2
1
5
1
4
2
7
7
0
3
6
7
1
1
7
1
6
1
11
0
11
Unit 7
Critical
internal
weaknesses
Cell 3: Supports
a turnaroundoriented strategy
Cell 1: Supports
an aggressive
strategy
Cell 4: Supports
a defensive
strategy
Cell 2: Supports
a diversification
strategy
Substanial
internal
strengths
Major
environmental
threats
Unit 7
SWOT analysis, as presented in Tables 7.4 and 7.5 and also Figure 7.5
involves subjectivity.
Judgement of the strategic planning group or SWOT analysis team plays
a very important role.
Therefore, no SWOT analysis should be taken as exact. This should be
understood as a good approximation to matching a companys strengths and
weaknesses with key environmental factors as opportunities or threats. This
should be always done with respect to a particular business (e.g., entry of an
international retail chain in India as shown above). Such analysis, however, is
an essential starting point for a more detailed and rigorous exercise on strategic
investment decisions in terms of costs and returns and organizational objectives
and priorities.
As mentioned, SWOT analysis gives the initial signalspositive or
negativefor launching of a project or product, market entry, etc. Even if initial
SWOT analysis is not favourable, i.e., threats outweigh opportunities, this does
not mean that the project has to be abandoned. This, in fact, provides basis for
re-examination of the strengths and weaknesses and the possibility of converting
some weaknesses into strengths by investing more resources and improving
skills and capabilities. This would make possible conversion of some of the
threats into opportunities so that matching improves (Figure 7.6) and the project
can still be considered on the basis of investment levels and costs and returns
analysis.
Unit 7
Activity 2
Choose a company or organization that you are familiar with and conduct a
SWOT analysis for it. Analyse the results.
Self-Assessment Questions
15. A _______is a resource, skill, capability or any other advantage relative
to competitors and in relation to markets.
16. A _________is a limitation or deficiency in resource, skills and capabilities
or any other disadvantage relative to competitors which impedes
performance of an organization.
Unit 7
Unit 7
7.9 Summary
Let us recapitulate the important concepts discussed in this unit:
The external environment consists of a large number of factors which
influence a companys business. Major environmental factors are: political
factors, economic factors, sociological factors, government policies/
controls, technology, competition intermediaries and suppliers.
Organizations should be generally concerned with relevant environment
and operating environment. The operating environment, also known as
competitive environment consists of factors in the immediate competitive
situation like customer profile, level of competition, the industry structure,
technology, any specific regulations affecting the company or industry,
etc.
Since the environment is too diverse, scanning of environment (some call
it external audit) is necessary to elicit information relevant to a particular
organization. Environmental information occurs in one or more of four
forms; events, trends, issues and expectations.
To understand the emerging or evolving environment better, some have
suggested environmental forecasting. For environment forecasting, Gap
analysis is a good starting point.
Forecasting is a hazardous exercise, and exactness in forecasting is
hardly possible. That is why many have suggested alternative scenario
building for the futuresay, optimistic, pessimistic and mean scenario.
Shells long-term scenario building for the oil industry is a good example.
For identifying opportunities and threats in the environment, organizations
should undertake environmental appraisal, i.e., assessing the environment
for clearly identifying major opportunities and threats. One method for
environment appraisal, suggested by Glueck, is preparation of an
environmental threat and opportunity profile (ETOP).
Simultaneously with environmental analysis or appraisal (ETOP or EFEM),
organizations also need to assess their internal strengths and weaknesses
to exploit opportunities and negotiate threats. This is done through SWOT
analysismatching organizational strengths and weaknesses with
environmental opportunities and threats.
Unit 7
7.10 Glossary
Forecasting: Estimate or prediction of future developments in business
such as sales, expenditures, and profits.
Gap analysis: Projections, over time, of the gap between the desired
change in strategic parameters like sales, profitability, market share, etc.,
and actual change with continuation of present strategy, that is, not
responding to changes in the environment.
Scenario: A detailed and probable view of how the business environment
of an organization may develop in the future based on the analysis of key
environmental influences and factors of change about which there is a
high degree of uncertainty.
SWOT analysis: A tool used by organizations to match their internal
strengths and weaknesses with factors of the environment.
7.12 Answers
Answers to Self-Assessment Questions
1. Economic
2. Consumption
3. life cycles
Sikkim Manipal University
Unit 7
Unit 7
7.13 References
1. David, F R. 2003. Strategic Management: Concepts and Cases, 9th ed.
New Jersey: Pearson Education.
2. Fahey, L, W R King, and V K Narayanan. 1983. Environmental Scanning
and Forecasting in Strategic Planningthe State of the Art. In The Truth
about Corporate Planning: International Research into the Practice of
Planning, edited by D Hussey. Oxford: Pergamon Press.
3. Mandell, T S. 1983. Future Scenarios and Their Uses in Corporate
Strategy. In The Strategic Management Handbook, edited by K J Abert.
New York: McGraw Hill.
4. Pearce, II, J A, and R B Robinson Jr. 2004. Strategic Management. 7th
ed. McGraw Hill/Irwin, Ch.6.
5. Porter, M.E. 1980.Competitive Strategy: Techniques for Analyzing Industry
and Competition. New York: The Free Press.
Endnotes
1
P K Ghosh, Strategic Planning and Management, 10 th ed. (New Delhi: Sultan Chand &
Sons, 2003), 106.
In many industrial markets and some consumer goods markets, intermediaries may be
absent because companies decide to deal directly with the end users. Here, we are
talking of personal selling or direct marketing.
R David, Strategic Management: Concepts and Cases (Pearson Education, 2003), 80.
T S Mandel, Future Scenarios and Their Uses in Corporate Strategy in The Strategic
Management Handbook , ed. K J Albert (McGraw Hill, 1983), 10 11.
A Kazmi, Business Policy and Strategic Management, 2 nd ed . (New Delhi: Tata McGraw
Hill, 2002), 125.
Unit 8
Unit 8
Stability Strategies
Structure
8.1 Introduction
8.2 Caselet
Objectives
8.3 What is Stability Strategy?
8.4 BCG Portfolio Model
8.5 Four Generic Strategies
8.6 Mass Customization
8.7 Strategies for Industry Leaders
8.8 Concentration Strategy
8.9 Corporate Parenting
8.10 When Best to Pursue Stability Strategy
8.11 Stability Strategies in Practice
8.12 Case Study
8.13 Summary
8.14 Glossary
8.15 Terminal Questions
8.16 Answers
8.17 References
8.1 Introduction
Definition of corporate mission, objectives or goals, analyses of internal
competences and resources and the external environment lead to the generation
of business strategies or strategic alternatives. In strategic management literature,
various corporate strategies are mentioned and analysed. Some of these strategies
are corporate-level strategies; some are business-level strategies. Some of these
strategies are more appropriate under certain circumstances than in others. All
these strategies are available to organizations to consider, adopt or pursue. All
such strategies can be broadly classified into three categories: stability strategies,
strategies for managing change and growth or expansion strategies. These are
also called master, grand, generic or basic strategies. These three strategies
along with their major elements or components are shown in Figure 8.1.
We shall discuss stability strategies in this chapter. In this, we shall analyse
portfolio models and other generic strategies, strategies for industry leaders,
Sikkim Manipal University
Unit 8
8.2 Caselet
It has been rightly pointed out that if an organization aims for growth, it may
at least achieve stability. Companies have to regularly review their
competence levels, resource base, product portfolios, cost structure or cost
management and, react or respond timely to market developments. Such
an approach has helped Maruti maintains its leadership in the market. The
year 1984 saw the beginning of the biggest success story in the Indian
automobile industry. It all started with the launch of the Maruti 800, a car
that revolutionized the car market in India. The company has not looked
back since then, having sold more than 2.5 million 800s and becoming
Indias best selling car.
Having attained leadership position, a leaders most strategic concern is to
maintain stability or defend its market position for continuing dominance in
Unit 8
the industry. Maruti, too, has not rested on its laurels several new brands
have been launched, including the Maruti 1000, Indias first sedan. Examples
of innovative initiatives include the Maruti Driving School, partnership with
State Bank of India to launch an auto finance scheme and insurance services
at low premium schemes. It is these innovations that have helped Maruti
retain its leadership in the industry and continue its success story.
Objectives
After studying this unit, you should be able to:
Discuss the concept and meaning of stability strategies
Analyse the portfolio model the BCG
Differentiate among four generic strategies and modern modifications
Analyse defensive strategies for a leader
Illustrate the concept of corporate parenting
Unit 8
Self-Assessment Questions
1. The basic approach in _________is to maintain present course; steady
as it goes.
2. In stability strategy, the focus is on _____and _______competitive
advantage consistent with present resources and market requirements.
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Unit 8
Figure 8.2 The BCG Matrix: Stars, Cash Cows, Questions Marks, Dogs
Unit 8
Activity 1
Choose a multi-business company and construct a BCG model for this
company.
Self-Assessment Questions
5. In the BCG model, BCG stands for
(a) Business contact group
(b) Boston Consulting Group
(c) Boston Communication Group
(d) Business Consulting Group
6. The BCG model is also known as _________.
7. The BCG model was originally conceived and developed in the early _____
for analysis of performance or cash flow generation of strategic business
unit.
8. In a BCG model, _______are high-share products or SBUs operating in a
low-growth market, while __________are low-share businesses in lowgrowth markets.
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market or markets. For, e.g., the Cray Corporation supplies super computers
to the aerospace and defence industries.
Unit 8
When Toyota decided to launch its new Lexus models to compete in the
luxury car market, it adopted a best-cost provider strategy and, not a low
cost strategy. Toyota took four significant steps for designing and
implementing its Lexus strategy:
1. Designing and incorporating a series of high performing characteristics
and upscale features into the Lexus models. This made these car
comparable in performance and luxury to other high-end models like
Mercedes, BMW, Jaguar, Cadillac and others in the same category.
2. Transferring the companys capabilities in making high-quality Toyota
models at low cost to making premium quality Lexus models at a cost
lower than those of luxury car manufacturers. Toyotas supply chain
capabilities and low-cost assembly know-how allowed it to incorporate
high-tech performance features and upscale quality into Lexus models
at substantially less cost than Mercedes and BMW.
3. Establishing a new price point for Lexus by using Toyotas relatively
lower manufacturing cost and beating Mercedes and BMW on pricing.
Toyota believed that with its cost advantage, it could price Lexus cars
low enough to attract price-conscious buyers away from Mercedes and
BMW and also induce dissatisfied Lincoln and Cadillac users (or
potential buyers) to move up to Lexus.
4. Establishing a new network of Lexus dealers, separate form Toyota
dealers, dedicated to providing personalized customer service
unmatched in the industry. This was a very innovative differentiation.
Lexus models have consistently been ranked among the top 10 models
in J D Power and Associates quality survey. In terms of cost and price
competitiveness, Lexus models are several thousand dollars cheaper
than those of comparable Mercedes and BMW models. This is a clear
indication that Toyota has succeeded in becoming a best cost producer
with its Lexus cars.
Source: Adapted from A A Thompson Jr, A J Strickland III, and J E Gamble (2005),
131 (Illustration Capsule 5.3).
Self-Assessment Questions
9. In Porters theory the four generic strategic options available to companies
include cost leadership, focused cost leadership, differentiation and
______.
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Unit 8
10. Porters theory is based on the concepts of ______ and mass marketing
and product proposition to be offered by different companies.
11. Differentiation strategy is based on offering superior performance.
(True/False)
12. Best-cost provider strategy is deemed to be a central strategy striking a
middle course between low-cost advantage and differentiation advantage
on the one hand and broad or mass market and narrow or niche market,
on the other. (True/False)
Unit 8
Self-Assessment Questions
13. Development of products which offer both high standards of performance
and a low price has been made possible through
(a) appropriate technology mix
(b) mass customization
(c) flexible manufacturing processes
(d) All the above
14. The usefulness of Porters model today, as a practical tool of analysis,
may be rather limited because of its
(a) simple form
(b) complex form
(c) flexibility
(d) None of the above
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problem with many organizations is that the defender often becomes complacent
and, does not realize that the enemy is making slow, but steady, inroads into
the customer base. One of the unfortunate examples of this situation is IBM.
The company built a big global business in the computer industry based on
unmatched customer loyalty. But, IBM ignored the threats, may be unknowingly,
posed by the advent of the networked PC and more powerful operating systems.
The company realized, rather late in the 1990s, that customer loyalty had been
completely eroded by competitors who were more strongly committed to fulfilling
the changing needs of customers.
Counter-offensive strategy has a different advantage. It has the advantage
of not having to respond before one measures up the real nature of the
competitive threat. Nevertheless, it is a belated response, and there is always
the risk that by waiting until you see the whites of the enemys eyes, a company
may be forced to spend massive resources to recover lost grounds. Xerox
Corporation is an example. Xerox had been forced to make large investments
in R&D, technology, manufacturing process and organizational structure during
the last few years to regain some of the lost ground in the photocopier market
to competitors such as Canon.
Retreat is sometimes a good defence. After a careful review of
circumstances, if it is evident that the competitor has the potential to overwhelm
the company, then there may be very little logic in defending a position which
will be eventually lost to the enemy. Under these conditions, the defender may
well withdraw to a more protected segment of the market; and in the meantime,
try to determine how the development of new superior product/service packages
might make a recovery of the lost market position possible at a later stage.
Lotus is a good example of this. During the 1980s, Lotus lost its dominant position
in the computer-based spreadsheet market to new software products such as
Microsofts excel package. After being acquired by IBM, Lotus is now using its
world beating Lotus Notes as a platform from where it can reposition itself as
the leading provider of Internet-based group ware communication systems.
Unit 8
Self-Assessment Questions
15. In business, _______is typically built by developing high levels of customer
loyalty.
16. When companies, after having identified a possible threat, take action
ahead of competitors, it is called________.
17. Brainstorming sessions, analogies and war games and simulations are
aids or approaches for generating _____strategies (through creativity).
18. _______involve analysis of analogous situations in other markets,
products, industries and countries.
Unit 8
product, market and environmental situations. The use of these strategies should
help companies to concentrate better in their present markets.
One of the commonest stability strategies is concentration on the current
business. An organization directs its resources to the profitable growth of a
single product, in a single market and with a single technology4 or a narrowly
defined product and market focusing on a dominant technology.5
The concentration strategy works under certain specific environmental
conditions. First is a market condition in which the demand for the product is
stable and the industry is resistant to major technological change. Paper
manufacturing, for which the basic technology has not changed for almost a
century, is a good example. A second favourable situation for concentration
strategy is when a companys product markets are sufficiently distinctive, and,
the company is strong enough to retaliate if a potential competitor plans to
invade its territory. John Deere abandoned its plans for entering into the
construction machinery business when mighty Caterpillar threatened to enter
farm machinery business, Deeres mainstay, in retaliation. A third favourable
condition for concentration growth exists when a company has stable sourcing
of inputs in terms of price, quantity and timely availability. Maryland-based Giant
Foods is able to concentrate on the grocery business largely because of its
stable long-term arrangements with suppliers of private label goods.
A fourth situation for favourable concentrated growth prevails if market
generalists are effective operators and thrive on general market segments leaving
particular pockets or segments for the specialists. For example, hardware store
chains like, Home Depot, concentrate mostly on routine household repairs and
leave special solutions to the specialists. This also gives the generalists a big
customer base. Finally, concentrated growth becomes successful if the market
is stable and, not subject to seasonal or cyclical fluctuations. Many products
like seeds, pesticides, fertilizers and agricultural equipment have a seasonal
demand and manufacturers of these products may need to diversify into other
products and markets.6
Many companies have been successful by following a concentration strategy.
We have given some examples above. Some other examples are McDonalds,
Dominos Pizza, Good year and Apple Computers. Small and medium enterprises
(SMEs ) are generally more successful with concentration strategy because they
have a clearly defined market and are mostly content with it.
Under stable conditions, concentrated growth poses lower risk than any
other strategy, but, in a changing market environment, this may not produce
desired results. Concentrating in a single-product market segment makes a
Sikkim Manipal University
Unit 8
Self-Assessment Questions
19. The _______strategy works under market condition in which the demand
for the product is stable and the industry is resistant to major technological
change.
20. _______enterprises are generally more successful with concentration
strategy.
Unit 8
On the basis of the answers to these questions, a parenting fit matrix may
be constructed to depict the positive contributions and negative effects of
parenting characteristics and SBU success factors. Such a matrix is shown in
Figure 8.7. SBU performance is presented through critical success factors
(CSFs). Critical success factors, also called key success factors, are those
which are vital for organizational success. Strategists consciously look for or
identify such factors to become successful. For example, one of the CSFs for
Tata Motors for Indica is to capture the tourist vehicle segment.
As can be seen in Figure 8.7, there are five types of business possibilities
or fit (or misfit) situations: Heartland businesses, edge-of-heartland businesses,
ballast businesses, value-trap businesses and alien territory businesses.
Unit 8
Unit 8
Self-Assessment Questions
21. The manner in which the corporate headquarters or centre manages and
nurtures individual businesses or SBUs is called________.
22. Ideal businesses in terms of parenting fit are_________.
23. _______businesses fit well with parenting characteristics but, do not
provide enough opportunities to the parent for improvement.
24. _________businesses show very little promise or opportunity because
there is a misfit between parenting characteristics and business units.
Unit 8
Self-Assessment Questions
25. Sometimes, stability strategy may even help in profit_________.
26. Stability strategy is not recommended if the environment is
_______or_______.
Unit 8
Self-Assessment Questions
27. The steel industry, cement industry and coal industry in India pursue
stability strategy because they have _______.
28. Many companies in the public sector are forced to adopt stability strategy
because of governments policy of __________.
Unit 8
L&T has been setting new challenges in defining core capabilities and core
competence. Generally speaking, core competence of the company lies in
its ability to synthesize, integrate and harmonize its diverse world-class
engineering, manufacturing, procurement, construction and fabrication skills
around turnkey projects mostly in core sectors. This is backed by a world
class vendor base, high quality technological alliances, excellent IT
infrastructure, sophisticated fabrication facilities and its people. People
L&Ts dedicated team of managers/employeesstand for one of the
companys key capabilities.
L&T implements its vision and business philosophy through effective
management approaches. In terms of structure, the company adopts
decentralized decision making and a less hierarchical system. The concept
of SBUs is actively encouraged and implemented. Budget allocations are
made in the beginning of a financial year and SBUs are assigned
responsibilities, along with necessary delegation of powers to achieve the
targets. The CEO directly gets involved only in matters like diversification,
restructuring, business divestment, etc.
Unit 8
Unit 8
8.13 Summary
Let us recapitulate the important concepts discussed in this unit:
Organizations follow stability strategies because they neither go for any
major internal changes or restructuring nor embark upon any ambitious
expansion strategies. In following stability strategies, companies pursue
certain objectives which are consistent with overall corporate
The BCG model is a growthmarket share matrix, a matrix depicting a
companys competitiveness (cash flow generation or profitability) in terms
of market growth rate and, its relative market share. The model is also
known as a portfolio matrix, a company can determine its optimal product
portfolio in terms of stars, cash cows, question marks and dogs.
Porter (1985) evolved the theory that there are four generic strategic
options available to companies cost leadership (mass market), focused
cost leadership (niche market), differentiation (mass market) and focused
differentiation (niche market).
Thompson, Strickland and Gamble have extended Porters framework to
include a fifth generic strategy, i.e., best-cost provider strategy. Best-cost
strategy strikes a middle course between the mass market and niche
market on the one hand and, low-cost advantage and differentiation
advantage, on the other.
Stability strategies are very relevant for industry leaders. Having attained
leadership position, a leaders strategic concern is to maintain stability or
defend its market position for continuing dominance in the industry.
Leaders generally employ one of the four defensive strategies: position
defence, counter-offensive, retreat and pre-emptive defence.
Concentration strategy is one of the commonest stability strategies. In
concentration strategy, an organization directs its resources to the
profitable growth of a single product in a single market and with a single
technology or, a narrowly defined product and market focusing on a
dominant technology.
Corporate parenting relates to the manner in which the corporate
headquarters or centre in amulti-business organization manages and
nurtures individual businesses or SBUs. A corporate parent may be value
adding or value destroying.
Unit 8
8.14 Glossary
BCG matrix (Boston Consulting Group model): A growth-market share
matrix, depicting a companys competitiveness (cash flow generation or
profitability) in terms of market growth rate, and, its relative market share.
Cash cows: High-share products or SBUs operating in a low-growth
market.
Dogs: Low-share businesses in low-growth markets.
Pre-emptive defence strategy: A strategy under which a company, after
having identified a possible threat, takes action ahead of competitors.
Question marks/problem children: Low-share businesses in highgrowth markets.
Stability strategy: A strategy in which companies will concentrate their
resources where the company presently has or can rapidly develop a
meaningful competitive advantage in the narrowest possible product
market scope consistent with the firms resources and market
requirements.
Strategic business unit: A product/product group unit which operates
as a separate profit centre that has its own set of market and competitors
and its own business strategies.
Unit 8
8.16 Answers
Answers to Self-Assessment Questions
1. Stability
2. Developing, maintaining
3. False
4. True
5. Boston Consulting Group
6. portfolio matrix
7. 1970s
8. Cash cows, dogs
9. Focused differentiation
10. niche marketing
11. True
12. True
13. (d)
14. (a)
15. position defence
16. pre-emptive defence strategies
17. pre-emptive
18. Analogies
19. Concentration
20. Small and medium
21. Corporate parenting
22. Heartland businesses
23. Ballast
24. Alien territory
25. maximization
Sikkim Manipal University
Unit 8
8.17 References
1. Campbell, A, M Goold, and M Alexander. 1994. Corporate Level Strategy:
Creating Value in the Multibusiness Company. New York: John Wiley &
Sons.
2. Hasperlag, P. Portfolio PricingUses and Limits. Harvard Business
Review, JanFeb, 1982.
3. Nag, A. 2008. Strategic Marketing. New Delhi: Macmillan India.
Unit 8
P K Ghosh, Strategic Planning and Management (New Delhi: Sultan Chand & Sons,
2003), 204 5.
More cash would be required to support high growth and less cash would be used to
finance low growth
J A Pearce II, and R B Robinson Jr, Strategic Management: Strategy Formulation and
Implementation (New Delhi: AITBS Publishers and Distributors, 2002), 251.
Unit 9
Unit 9
Structure
9.1 Introduction
9.2 Caselet
Objectives
9.3 Corporate Restructuring
9.4 Divestment Strategy
9.5 Liquidation Strategy
9.6 Turnaround Strategy
9.7 Managing Radical Change
9.8 Strategic Change in the Public Sector
9.9 Some Strategic Guidelines for Managing Change
9.10 Case Study
9.11 Summary
9.12 Glossary
9.13 Terminal Questions
9.14 Answers
9.15 References
9.1 Introduction
We had distinguished between stability strategies, strategies for managing change
and expansion strategies in Figure 8.1 (in the previous unit). This distinction should
be clearly understood, because, change is involved in almost all strategies,
including stability strategies and expansion strategies. However, by change, we
here mean internal organizational change. Many companies, during different
phases of organizational life cycles, reach a stage when organizational change
becomes essential for survival and growth. Analysis of such changes, and various
issues related to these, is the subject matter of this unit.
Organizations have to adopt appropriate strategies for managing the
change. Companies commonly adopt one of the four major strategies: corporate
restructuring, divestment, liquidation and turnaround strategies. Besides these,
organizations use strategies to manage radical change and also during period
of uncertainties. Companies may sometimes adopt a doomsday management
approach. Some have also suggested change during good times for progressive
companies. Some of these changes are reactive, some are proactive (Figure
9.1) We will discuss all these in this unit.
Sikkim Manipal University
Unit 9
Managing Change
Reactive
Divestment
Corporate
restructuring
Liquidation Corporate
turnaround
Proactive
Managing
radical
change
Managing
uncertainty
Doomsday
management
Change
curing
good times
9.2 Caselet
Immediately after the announcement of liberalization measures by the
Government of India in July 1991, the Tata Group in 1992 embarked on a
restructuring programme in the form of a strategic plan.
The objective was to create a system of integrated planning, rationalize
companies or businesses, create synergy among overlapping units and
consolidate holdings in the group companies. The strategic plan or the
restructuring programme aimed at reducing the existing 25 businesses and
107 operating companies to 12 businesses and less than 30 operating
units.
In 1996, the group hired McKinsey & Co to prepare a detailed restructuring
plan. As a sequel to the restructuring plan, the group has divested, over the
years, companies/businesses such as Goodlass Nerolac, Tata Oil Mills
(soaps, hair oils and other consumer products), Lakm and TISCOs (now
Tata Steel) cement division. Simultaneously, the group has strengthened
businesses like cement and tea through consolidation. Future plans of the
group include investment in new economy businesses like B2B Internet
service and cellular telephony.
Objectives
After studying this unit, you should be able to:
Analyse corporate restructuring as a strategy
Discuss restructuring in the Indian corporate sector
Sikkim Manipal University
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shipping and shoe manufacturing. The objective of Vision 2005 was to focus
on its core businesses and deliver better shareholder value. The core businesses
were re-identified as engineering projects, construction and software. As part of
the restructuring programme, the company had planned for entering into joint
ventures for cement, tractors and earth-moving equipment businesses.
Divestments are to continue for minor businesses like glass bottles and crown
caps.
Steel Authority of India (SAIL)
SAIL had made massive investments in modernization programmes undertaken
during 199293. The investments later turned out to be untimely, and also the
modernization project suffered from cost overruns and also problems of financial
cost-benefits. This had affected the financial and operations management of
SAIL. Subsequent to this, revival efforts were initiated primarily in terms of
financial restructuring of the company. Restructuring also aimed at business
restructuring focussing on the core business of SAIL, that is, steel, and
intensification of strategies for four steel plantsDurgapur, Bhillai, Bokaro and
Vizagto improve operational efficiency.
The restructuring programme also involved divestment of non-core
subsidiaries like stainless steel and alloy steel or operating them as joint ventures.
State Bank of India (SBI)
Like many other companies, including L&T and Tata Group, SBIs restructuring
plan was also induced by the liberalization measures initiated by the government
in 1991. In 1993, SBI had commissioned McKinsey & Company to prepare a
restructuring plan for the bank. Restructuring was aimed at developing an
international perspective for SBI and making it a world class bank.
Corporate restructuring consisted of both organizational restructuring and
business restructuring. The restructuring process was to focus on profitable
areas or operations to improve corporate profitability. To achieve this objective,
SBI was restructured into different banking groups on SBU model. These groups
are: corporate banking, national (retail and other commercial) banking,
international banking, and associate and subsidiary banking.
Restructuring sometimes involves a retrenchment strategy. Retrenchment
strategy means that a company is aiming at contraction of its activities or
operations through significant reduction or elimination of one or more of its
businesses to improve organizational performance or efficiency.
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Self-Assessment Questions
1. Organizational change to create a more efficient or profitable enterprise
are referred to as _________.
2. Downsizing, redesigning positions, reallocation of jobs or portfolios or
changing the reporting system is known as ________.
3. Often newer companies require more restructuring than the older ones.
(True/False)
4. A company aiming at contraction of its activities or operations through
significant reduction or elimination of one or more of its businesses to
improve organizational performance or efficiency
(a) adopts retrenchment strategy
(b) changes product portfolios
(c) changes the terms of equity pattern
(d) undertakes divestment
Unit 9
do not fit well with the companys other existing businesses or activities.4
Divestment is many a time used to raise capital for new acquisitions or
investment. Sometimes divestment becomes a forced option when an attempt
has been made to turnaround the business, but, has not been successful.
Divestment can be done in two ways: selling a business outright or spinning
it off as an independent company. Selling a business outright is the more
commonly used form of divestment.
A business becomes a good candidate for spinning off as an independent
company if it possesses sufficient resource strength to compete successfully
on its own. Spinning off business into a separate company may be done because
of some strategic reason; may be, it does not fit well with the core business of
the company. If a company decides to spin off a business, one important decision
the corporate parent has to take is whether to retain partial ownership in the
divested business. Retaining partial control is generally recommended if the
business to be divested has good profit prospects. Spinning off a business, with
or without partial ownership, may be done either by selling shares to the public
through an initial public offering (IPO) or by distributing shares of the new
company to the existing shareholders of the corporate parent.5
Selling a business outright involves finding a suitable buyer. Finding a
suitable buyer may be easy or difficult depending on the nature of the business
to be divested. It also depends on the structure, size and growth of the industry
or market. Many times, businesses are sold not necessarily because they are
unprofitable, but because of strategic or environmental reason, say, emerging
competitive threat. Parle Products sold its profitable soft drinks business to
Coca-Cola because the company did not want to get involved into a marketing
warfare with giants like Coke and Pepsi. Also, while selling a business, the
seller company should look for a buyer who finds the business a good fit with
their existing product mix or product portfolio. For example, for Coca-Cola, buying
the soft drink business of Parle Products was a perfect strategic fit. This way
the seller company also gets a good price, that is, the divestment becomes
profitable.
Divestments are common in corporate functioning of multi-business
organizations including multinational companies. From time to time, large
companies sell or spin off businesses and add or acquire new businesses in
conformity with environmental changes and organizational objectives or goals.
The underlying driving force is competitiveness. Given below are some examples
of recent divestments (Table 9.1).
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Part/business divested
Acquiring company
J M Smucker
FON Group
GE Capital Fleet Services
EchoStar Communications
Bristol-Myers-Squibb
Ralechem
Hindustan Unilever
Bunge Ltd
Electrolux
Tatas
Hindustan Unilever
Self-Assessment Questions
5. Divestment means
(a) reducing the number of employees
(b) redesigning positions
(c) reallocation of jobs
(d) selling a part of a company
6. Divestment can be done in two ways: _______or spinning it off as an
independent company.
7. Many times, profitable businesses are sold because of ______or
environmental reasons.
8. The underlying driving force behind divestment is ____________.
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Unit 9
Self-Assessment Questions
9. Closing down a company and selling its assets is known as ________.
10. In India, liquidation is governed by the _________.
11. The Companies Act stipulates appointment of a _______who handles
the liquidation process.
12. The stockholders of a company can minimize their losses by selling the
companys assets through liquidation. (True/False)
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We give here the example of SAIL, the Indian public sector steel giant. Its
losses were about `100 crore during 198283 and `200 crore in 198384. A price
rise during 198485 saw SAIL break even in that year. But, rapid increases in
coal prices and freight rates threatened a loss in 198586. The steel ministry and
SAIL management then called for another price hike. Krishnamurthy entered the
scene as Chairman, SAIL in mid-1985. He promptly lobbied against price increase
on the ground that efficiency had to be improved. Indian steel was already the
costliest in the world and any further increase in steel price would have ruinous
effects on the economy, contended Krishnamurthy. He spent several months talking
to small groups of executives, officials, staff and workers in SAIL. He estimates
that he talked to over 25,000 employees to identify operating problems, got
perception of how the company was doing and what employees thought should
be done to improve performance and turn around the company. The turnaround
strategy finally emerged from discussions at all levels.
Self-Assessment Questions
13. Organizational recovery from business decline or crisis is known as
_______.
14. Turnaround strategies are usually required for _________situations.
15. A situation in which recovery is possible but potential for future growth
does not exist is called_________.
16. Generally, there are two methods of corporate turnaround: _______and
_______.
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The management of Hastings Jute Mills (Kajaria brothers) made jute business
attractive by defying the conventional rules of jute business through innovation,
entrepreneurship and transforming the employee-management relationship. The
company has been successful in radically improving productivity and creating
innovative products which have found new use in international markets.11
The jute industry in West Bengal has, for long, been characterized by
sick units and closures. The industry represents one of the worst cases of adverse
relations between the owners and the unions which have been destroying the
jute business. Added to this are stagnant or obsolete technology and falling
market prices.
Amidst this highly hostile environment, the Kajaria brothers took over the
management of Hastings Jute Mills in 1994. In the jute industry, wages are
almost 40 per cent of the cost of production; raw material constitutes 35 per
cent; power accounts for 8 per cent; stores 7 per cent; and, other costs are 10
per cent. Kajaria brothers knew that, to be competitive, manufacturing cost had
to be slashed. They also realized that, as they themselves put: ... to improve
productivity and reduce the processing costs, we needed the cooperation of
labour, and, for this, we had to build a very different mindset.
Hastings had 14 trade unions. The first task of the new management was
to convince the trade unions and the individual workers that, unless both the
management and the unions/workers adopted a win-win attitude, the mill might
close down. The unions were initially sceptical because they always have
apprehensions about the management. But, a major breakthrough in trust
building was achieved when the company regularized about 700 ghost workers.
The goodwill and confidence created by this gesture yielded some result; the
union leaders came to the negotiating table. Their hostility gradually gave way
to understanding; both sides agreed on enhanced productivity norms and
incentive schemes.
But, the biggest achievement of the management was an innovative
training scheme for young workers. The scheme was born out of necessity. At
Hastings, about 200 workers retired every year and the annual gratuity bill was
about `1 crore. But, the company was not earning enough to spend so much.
Instead, the management promised to employ one member of the family of the
retiring worker. In addition to this, the company would train a young member of
Sikkim Manipal University
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the retiring employees family for three years. The management also guaranteed
that the new trained worker would be a regular employee of the company. This
worked well with the unions and the worker community.
The feeling of togetherness and sharing a common destiny by the
management and the workers did not come about easily. It was achieved at a
significant cost. It took four years, two strikes, a lockout and hundreds of
meetings. But, eventually, the results achieved were stupendous. Wage cost
declined from 40 per cent to 33 per cent (from 52 man-days per tonne to 42)
and a saving of `5 lakh per month. In 1998, the Indian jute industry comprised
73 composite mills of which 22 were sick, 25 per cent of installed capacity was
idle and productivity was generally low. But, at Hastings, every mill was busy
and productivity in some section of the mill was 90 per cent against laid down
norms. Turnover accelerated from about `13 crore during 199495 to `43 crore
in 199596 and to about ` 91 crore during 199697. Profits also increased
steadily from `0.9 crore during 199495 to about `3.50 crore during 199697.
Kajarias summarize their changed management success strategy at
Hastings like this: One can buy peace for some time, but, not for always. For
long-term benefits, mindsets have to change and be flexible. We could do this
because we did not inherit the thinking of the old jute dynasties.
9.7.2 Canon
Canon is the second largest global player in the photocopier business, closely
behind the market leader Xerox. Canon is today the biggest challenger to Xerox.
Since the launching of Canon as a small camera company in Japan, it has
successfully stood up to the challenge of radical change or performance
improvement to come to its present position.
Xerox was enjoying near monopoly and almost 100 per cent market share
in the global photocopier market (in 1995, it was 93 per cent). Xerox technology
was protected by over 500 patents. The company had a massive marketing and
service support organization working directly for Xerox in the US and for its joint
ventures abroadRank Xerox in Europe, Fuji Xerox in Japan and Modi Xerox
in India. The company had worldwide manufacturing infrastructure and was
one of the few companies whose brand name became generic for the product.
Photocopying was often referred to as Xeroxing.
Canon, the small camera company from Japan, entered the photocopying
business in the late 1960s. It was less than one-tenth of the size of Xerox and,
had no sales and support organization to adequately service the photocopier
Unit 9
market. It also did not have a process technology to bypass Xeroxs patent. To
make matters worse, Canons entry took place at a time when corporate giants
like IBM, Kodak and 3M were already in the market challenging Xerox. So,
most of the corporate observers were sceptical about Canons plans. One
investment analyst sarcastically remarked about Canon that a photocopier is
not a large camera.12
But, to the amazement of many, Canon rewrote the rules of the photocopier
business during the next three decades. Canon showed, in its own inimitable
way, how photocopiers were to be produced and sold to shake out the market
and progressively snatch market share from the king of photocopying. From
almost insignificant sales, the company amassed an annual turnover of over $6
billion. It even surpassed Xerox in terms of the number of units sold. Clear
evidence of such phenomenal success is visible in Xeroxing by Canon signs in
photocopying shops in different parts of the world, including India.
9.7.3 Electrolux
Electrolux is the global market leader in home appliance business. Electrolux is
a unique case of managing aggressive acquisitive growth. The companys
achievement is spectacular considering the fact that acquisitions and mergers
have a high rate of failure. Transformation of Electrolux has also been very
radical.
Electrolux made almost an insignificant beginning. In the early 1960s, it
was a small and marginal player in home appliances business. The company
had to compete with global rivals like GE in the US, Philips and Siemens in
Europe and Matsushita in Japan. Its product range was very narrow consisting
primarily of vacuum cleaners and absorption type refrigeratorssuch
refrigerators becoming increasingly uncompetitive against technologically
superior compression type refrigerators manufactured by the global competitors.
With outdated production facilities and no inhouse R&D, the company was
making losses. It was, in fact, fast approaching bankruptcy.13
Around this time, Wallenberg, Swedens most influencial business family,
took over the ownership of Electrolux. Changes were made in top management
of the company; and, the leadership of the company was handed over to Hans
Werthen, who became a management legend in Sweden.
During the next two decades, under the leadership of Werthen, Electrolux
started rewriting corporate history. Between 1962 and 1988, the company made
over 200 acquisitions in 40 countries including big names in the US, France,
Italy and Sweden. Most of the acquisitions were strategic successes. In most of
Sikkim Manipal University
Unit 9
Self-Assessment Questions
17. Turning corporates around is like implementing or managing radical
change. (True/False)
18. A company whose brand name became generic for the product is
(a) Hastings
(b) Canon
(c) Xerox
(d) Electrolux
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expectations have changednow they look for excellence and want to compete
with the best.
A common feature in managing change during good times in different
companies, like a turnaround and doomsday management, is the pivotal role of
the leaders in these companies.
Leaders become the most important change agents: Welch in GE,
Ganguly, Dutta and Dadiseth in HUL, Palmisano in IBM, Raha in ONGC, Banerjee
in GAIL, etc.
Activity 2
We have discussed strategic change in public sector enterprises in India.
Choose any two public sector companies that have undergone such changes
and carry out a comparitive analysis of the strategic changes in these
companies.
Self-Assessment Questions
19. Public sector companies are not implementing change in their
organizations. (True/ false)
20. PSEs are benchmarking themselves against the best in the private sector.
(True/False)
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Self-Assessment Questions
21. The 10 commandments for executing change were given by ________.
22. One of the first steps in engineering change is the creation of a _________.
Unit 9
The marketing and advertising strategy laid focus on the single brand
Samsung instead of several brands they were promoting earlier when each
country manager/head was following his own advertising. Samsung
established a single brand, a single-brand strategy and one global agency.
In addition to this, it had a single central budget and a uniform brand theme.
The process of change and strategic transformation faced some resistance
from traditional managers who generally suffer from inertia against change.
But, the top management was committed to the change and new strategy,
and it was carried through. The restructuring process was successful in reestablishing brand Samsung.
9.11 Summary
Let us recapitulate the important concepts discussed in this unit:
Corporate restructuring means organizational change to create a more
efficient or profitable enterprise. It may involve organizational restructuring
or business-level restructuring or financial restructuring, or, some or all of
these simultaneously.
Divestment, also called divestiture, means selling part of a companya
major division or an SBU. Divestment is usually a part of corporate
Sikkim Manipal University
Unit 9
9.12 Glossary
Corporate restructuring: Organizational change to create a more efficient
or profitable enterprise.
Corporate turnaround: Organizational recovery from business decline
or crisis.
Divestment: Selling a part of a companya major division or an SBU.
Liquidation: Closing down a company and selling its assets.
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9.14 Answers
Answers to Self-Assessment Questions
1. Corporate restructuring
2. Organizational restructuring
3. False
4. (a) adopts retrenchment strategy
5. (d) selling a part of a company
6. selling a business outright
7. strategic
8. competitiveness
9. Liquidation
10. Companies Act, 1956
11. liquidator
12. True
13. Corporate turnaround
14. Crisis
15. Sustained survival
16. Surgical, non-surgical
17. True
18. (c) Xerox
19. False
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20. True
21. Kanter, et al
22. common vision
9.15 References
1. Balogun, J, and V H Hailey. 1997. Exploring Strategic Change. London:
Prentice Hall.
2. Dumaine, B. Let the Bad Times Roll. Business Today (Reprinted from
Fortune), August, 721, 1993.
3. Ghoshal, S, G Piramal, and C A Bartlett. 2002. Managing Radical Change:
What Indian Companies Must Do to Become World Class? New Delhi:
Penguin Books.
4. Hamel, G, and C K Prahalad. 1994. Competing for the Future:
Breakthrough Strategies for Seizing Control of Your Industry and Creating
the Markets of Tomorrow. Boston: Harvard Business School Press.
5. Kanter, R, et al. 1992. The Challenge of Organizational Change. New
York: The Free Press.
6. Slatter, S. 1984. Corporate Recovery: Successful Turnaround, Strategies
and Their Implementation. New York: Penguin.
Sikkim Manipal University
Unit 9
Endnotes
1
A A Thompson Jr, A J Strickland III, and J E Gamble, Crafting and Executing Strategy:
The Quest for Competitive Advantage (New Delhi: Tata McGraw Hill, 2005), 272.
A Kazmi, Business Policy and Strategic Management , 2nd ed. (New Delhi: Tata McGraw
Hill, 2005), 208.
10
11
12
13
14
V Mahanta, and D Ganguly, Never Too Old to Rock and Roll , The Economic Times
(Corporate Dossier), August 26, 2005.
15
R Kanter, et al. The Challenge of Organisational Change (New York: The Free Press,
1992).
Unit 10
Unit 10
Expansion Strategies
Structure
10.1 Introduction
10.2 Caselet
Objectives
10.3 Ansoff Matrix
10.4 Penetration Strategy for Growth in Existing Markets
10.5 Product Development in Existing Markets
10.6 New Product Development
10.7 Market Development for Existing Products
10.8 Expansion through Diversification
10.9 Strategic Alliance
10.10 Joint Venture (JV)
10.11 Takeover or Acquisition
10.12 Merger
10.13 Integration Strategy
10.14 Case study
10.15 Summary
10.16 Glossary
10.17 Terminal Questions
10.18 Answers
10.19 References
10.1 Introduction
Securing competitive advantage, controlling market share and generating profit
are not enough. Companies have to constantly look for growth and expansion
because only this can give long-term sustainability in terms of market leadership
or position. Growth here does not mean incremental growth or change as is
understood in stability strategies; this should be more visible or distinct. Growth
or expansion may be defined as distinct increase in sales or turnover or market
share (and also profit). Different strategies can lead to growth or expansion.
These include penetration into the existing market, product or market
development, integration and diversification. Diversification can be in terms of
strategic alliance, merger, joint venture and takeover or acquisition. Corporate
Unit 10
strategists have to consider all alternative growth strategies which are available
and choose the most appropriate one based on the companys resource base,
business assets and skills and the competitive environment. We shall discuss
these and related issues here.
Before we proceed with the main analysis, it would be useful to define
market penetration, product development, market development, diversification
and integration. Market penetration takes place when an organization gains
market share. Product development means that an organization supplies
modified or new products to existing markets. Market development occurs when
existing products are offered in new markets. Diversification means entering
into new product or business and/or new markets which may also require new
resources and competence. Integration takes place when a company enters
into an upstream or downstream or parallel activity in the same product line/
flow. These concepts or strategies would be more clear when we discuss their
applications later.
10.2 Caselet
In todays competitive world, introduction of new products or new product
features has become a main source of competitive advantage. The best
example of this strategy is that of Pepsi Co. For decades, Pepsi Cola and
Coca Cola battled for supremacy in the cola market. In 1996, it seemed
that PepsiCo had lost the cola war, and the proof was everywhere. The
companys profit trailed that of its rival by 47 per cent. However, losing the
cola war was the best thing that ever happened to Pepsi. It prompted Pepsis
leaders to look outside the confines of their battle with Coke. PepsiCo
embraced bottled water and sports drinks much earlier than its rival. Pepsis
Aquafina is the No. 1 water brand, with Cokes Dasani trailing; in sports
drinks, Pepsis Gatorade owns 80 per cent of the market while Cokes
Powerade has 15 per cent.
But Pepsis strongest business lies outside drinks altogether. Over the past
ten years, the Frito-Lay division has become a powerhouse, controlling 60
per cent of the US. snack-food market. So strong is Pepsi in this arena, in
fact, that many investors no longer judge it by how it stacks up against
Coke. Most people think of Pepsi and Coke fighting it out, observes Eric
Schoenstein, an analyst at Jensen Investment Management, which owns
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shares of both. But we dont see it that way. Pepsi isnt really a beverage
company anymore: Its a food company that also sells beverages. John
Carey, manager of the Pioneer fund, which has 1.6 million PepsiCo shares,
says he bought the stock because of Frito-Lay: Theres no Coca-Cola in
that business.
Source: http://money.cnn.com/magazines/fortune/fortune_archive/2006/02/06/
8367964/index.htm
Objectives
After studying this unit, you should be able to:
Highlight alternative expansion strategies
Analyse different diversification strategies
Focus on joint venture and issues involved in it
Discuss integration strategy: vertical and horizontal
Analyse takeover or acquisition and post-takeover integration issues
As shown above, expansion strategies are always worked out in terms of products
or businessesexisting or new, and marketsexisting or new. Johnson and
Scholes (2005) have presented alternative expansion strategies in a more
specified form (Figure 10.2).
Unit 10
Self-Assessment Questions
1. Expansion strategies are always worked out in terms of _________or
_________.
2. The ________ matrix has been the basis for further research and
development in growth strategies.
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three ways, the last one, that is, new applications and users, may be the most
effective. Cadbury had shown this. Cadbury Dairy Milk Chocolate (CDM) was
the market leader. But, with a market share of already 70 per cent, winning
away customers from competitors in the slow-moving market was almost
impossible. Cadbury found the solution in new users among parents (elderly
people) who were earlier keeping away from CDM.1
The best way to identify new uses or applications is to conduct market
research or surveys. Such research or survey would include ascertaining details
about applications of competing products and brands, that is, substitutes. Cost
of such research or studies, and, also, subsequent advertising and promotion
should be taken into consideration to determine the cost effectiveness of such
programmes. Investment in research should be justified by returns in terms of
results or findings, and, applicability of the results.
Arm & Hammer conducted more than 150 market research studies to
support its programmes for development of new applications and products.
Hindustan Unilever undertakes such studies for its FMCG products on a regular
basis. And, many companies have achieved results. Arm & Hammer succeeded
in achieving ten-fold growth in its baking soda sales by persuading people to
use the product as a refrigerator deodorizer. Sales of Lipton soup increased
when it included recipes for new uses on packets/boxes and in ads that say:
Great meals start with Liptonrecipe soup mix-soup. A chemical process used
by oil fields to separate water from oil is used by water plants to eliminate
unwanted oil.
Self-Assessment Questions
3. The most obvious way for a company to grow is to increase__________.
4. An alternative strategy which may pose lesser threat from competitors
(and which may also ultimately lead to increase in market share) is to
increase the _______usage.
5. The best way to identify new uses or applications is to conduct________.
6. Product usage can be increased by
(a) the frequency of use
(b) the quantity used
(c) new applications and users
(d) All the above
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Self-Assessment Questions
7. A simple way of product development is to make additions to product
features. (True/False)
8. Developing new generation products in the same category, making the
existing products obsolete in terms of technology or usage is a common
in the ________industry.
Sikkim Manipal University
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Trial Rate
Repeat Rate
Test Outcome
High
High
Successful
Low
High
Review/Improve
High
Low
Terminate
Low
Low
Rework
Self-Assessment Questions
9. Originally a machine tool manufacturer, HMT developed ______as a new
product line.
10. To ascertain acceptability and commercial viability of a new product, it is
necessary to conduct ______before launching the product.
Unit 10
western regional market but, quickly expanded to the national market achieving
significant growth. Indica has moved from the national to the international market;
so, also, many multinational brands like Ford, Honda, Peter England, Levi
Strauss, Ray-Ban and service brands like KFC, McDonalds, Dominos Pizza,
etc.
Expanding into new market segments is another potential avenue for
growth. This can also be more challenging. Cadburys (CDM) rejuvenation is a
good example of expanding into new market segmentfrom predominantly
child market to the market for parents and elders. Johnson & Johnsons baby
shampoo was steadily losing market share till the company turned towards
adults who use shampoo more frequently. Both the Cadbury and Johnson &
Johnson examples show that the most common way to expand into new market
segments is to bring the present non-users into the fold through appropriate
promotion. Companies, should, however carefully assess market viability in terms
of competing products and brands before making investment in the expansion
programme. Federal Express (FedEx) had an unhappy experience. The company
wanted to expand into the European market. But it lacked first-mover advantage
in that market. DHL and some other courier companies had implemented the
FedExs concept much earlier. This seriously affected FedExs competitiveness
in the European market.
Self-Assessment Questions
11. Apart from geographic expansion in the existing market segment(s),
market development for existing products can take place by developing
_______.
12. Cadburys rejuvenation of _____ is a good example of expanding into
new market segment.
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Self-Assessment Questions
13. Diversification cannot take place through both new products and new
markets. (True/False)
14. The kind of diversification in which new business has commonalities with
the core business or core competence of the company is called_______.
Unit 10
have analysed the objectives or purposes or reasons for strategic alliance. Six
objectives or purposes are more commonly observed:
(a) Development of a new product: In the pharmaceutical industry, new product
development takes place on a continuous basis, and, in this, many strategic
alliances are formed between pharmaceutical companies and research
laboratories and institutions for R&D. We have already given the example
of Boeing and their Japanese partners.
(b) Development of a new technology: Development of technology is a longterm process, and, also, many times, involves considerable cost.
Collaboration leverages the resources and technical expertise of two or
more companies.
(c) Reducing manufacturing cost: Co-production, common in the
pharmaceutical industry, is a good form of strategic alliance to reduce
manufacturing cost through economies of scale.
(d) Entering new markets: This is often the objective in international business.
Many foreign companies enter into strategic alliances with some local
companies (host country) to enter into and establish themselves in that
country. Piggybacking is a common form of strategic alliance. Some of
the Japanese electronic manufacturing companies like Matsushita
Electricals, during their initial years, had entered into strategic alliances
with some US electrical or electronic manufacturers for entering into the
US market.
(e) Marketing and Sales: This is common in both national and international
business. Many manufacturers in India have marketing and sales
arrangements with companies like MMTC and Tata Exports for both
domestic and international marketing.
(f) Distribution: In pharmaceutical and other industries where distribution
represents high fixed cost, potential competitors swap their products for
distribution in the respective markets where they have well-established
distribution systems. Many such alliances exist between the US and
Japanese pharmaceutical companies.
Strategic alliances are non-equity based, i.e., none of the parties invest
any equity capital in such alliances. But, funding is involved and funding can be
by one of the parties or all of them. The nature of funding depends on the type
of strategic alliance, i.e., whether new product development, technology
development or transfer, marketing or sales, etc., and also the parties involved.
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Self-Assessment Questions
15. Cooperation between two or more organizations with a common objective,
shared control and contributions by the partners for mutual benefit is called
_________.
16. The basic objective behind all strategic alliances is to secure______or
_______advantage in the market.
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Self-Assessment Questions
17. A strategic alliance that involves equity participation by both (or all) the
parties is called a_________.
18. Joint ventures are short-term ventures formed for an definite period.
(True/False)
Unit 10
Acquired company
Hindustan Unilever
TOMCO
Tata Tea
Consolidated Coffee
Tata Tea
Asian Coffee
Deepak Nitrite
ICICI
ICICI
Anagram Finance
India Cement
Visaka Cement
Ceat Tyres
Some of the more recent acquisitions in Indian are Sahara Airlines by Jet Air
and Air Deccan by Kingfisher Airlines.
Many acquisitions also take place at international level. A select list of
acquisitions among foreign companies and international acquisitions is given in
Table 10.3.
Table 10.3 Selected Foreign and International Acquisitions
Acquiring company
Acquired company
Hewlett-Packard
Compaq Computer
Pepsico
Quaker Oats
Daimler-Benz
Chrysler Corporation
BMW
Ford
Japan Airlines
Volvo
Ford
BMW (Rover)
eBay
HomesDirect
Tata steel
Corus
Mittal Steel
Arcelor
Unit 10
Unit 10
Self-Assessment Questions
19. In________ or _______, one company takes over another organization
its presources, management and control.
20. Takeovers always tend to be unsystematic and hostile. (True/False)
10.12 Merger
A merger is a combination of two or more organizations, in which one acquires
the assets and liabilities of the other in exchange for shares or cash, or the
organizations are dissolved, and a new company is formed, which takes over
the assets and liabilities of the dissolved organizations and new shares are
issued. So, combination or merger takes place, either through acquisition or
amalgamation or consolidation. For the company which acquires another
company, it is acquisition; for the company which is acquired, it is a merger. If
both or more organizations dissolve themselves and form a new organization, it
is amalgamation or consolidation. More common forms of mergers are through
acquisition. There are many reasons why two or more organizations like to
merge. There are reasons for buyer organization; there are reasons for the
seller organization. Glueck and Jauch (1984) have identified several reasons
both for the buyer and the seller:
Why the buyer wishes to merge:
(a) To increase value of the companys stock;
(b) To make profitable investment and increase the growth rate;
(c) To balance, complete or diversify product line;
(d) To improve stability of sales and earnings;
(e) To reduce or eliminate competition;
(f) To acquire resources quickly;
(g) To avail tax concessions/benefits;
h. To take advantage of synergy.
Why the seller wishes to merge:
(a) To increase the value of investment and stock
(b) To increase revenue and growth rate
(c) To acquire resources to stabilize operations
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Unit 10
Finance
Marketing
Technology
Production
Conglomerate
100
58
20
32
Concentric-technology
100
72
72
57
Concentric-marketing
100
100
57
72
Horizontal
96
100
41
29
All categories
100
74
33
36
Source: J Kitching, Why do Mergers Miscarry? Harvard Business Review, NovemberDecember, 1967.
Self-Assessment Questions
21. A _________ is a combination of two or more organizations, in which one
acquires the assets and liabilities of the other in exchange for shares or
cash, or the organizations are dissolved, and a new company is formed.
Sikkim Manipal University
Unit 10
Unit 10
Unit 10
Self-Assessment Questions
25. _________ integration takes place when a company enters into a
downstream activity with respect to the same product line/flowfor
example, a garment manufacturer starts its own retail chain.
26. _______integration means moving upstreamthe same garment
manufacturer enters into fabric production.
Unit 10
The acquisition of Corus by Tata Steel is consistent with Tata Steels stated
objective of growth and globalization. Tata Steel has identified a number of
specific benefits that it sees from a combination with Corus. Enhanced scale
will position the combined group as the fifth largest steel company in the
world by production, with a meaningful presence in both Europe and Asia.
The powerful combination of lowcost upstream production in India with the
high-end downstream processing facilities of Corus will improve the
competitiveness of the European operations of Corus significantly. The
combination will also allow the crossfertilization of research and development
capabilities in the automotive, packaging and construction sectors, and there
will be a transfer of technology, best practices and expertise of senior Corus
management from Europe to India.
Tata Steel also believes that between the two companies, there exists a high
degree of cultural compatibility which would facilitate an effective integration
of the businesses over time. Tata Steel expects to lead the enlarged group
with a combined management team. The acquisition process shows that
Tata Steel has largely taken care of strategic fit, organizational fit and postintegration management issues and economics of the acquisition.
Unit 10
10.15 Summary
Let us recapitulate the important concepts discussed in this unit:
Different strategies can lead to growth. These include market penetration,
product or market development, diversification, integration, etc. Marketers
have to decide on the most appropriate one based on resources, business
assets and skills and the environment.
Diversification, as a strategy, can generate growth in a number of ways
product development, market development, both product and market
development or any other. Diversification may take the form of either a
new business venture of the company or strategic alliance or joint venture
or acquisition or merger.
Strategic alliance is cooperation between two or more organizations with
a common objective, shared control and resource contributions by the
partners. Strategic alliances, like all partnerships, are delicate to manage,
and, alliance partners have to share their responsibilities for smooth
operation of the alliance.
If a strategic alliance involves equity participation by both (or all) the parties,
it becomes a joint venture (JV). The JVs are long-term ventures unlike
strategic alliances which are short-term for a fixed period.
Takeover or acquisition means that one company takes over another
companyits resources, management and control, it can be friendly or
hostile.
A merger is a combination of two or more organizations either through
acquisition or amalgamation or consolidation.
Integration, both forward and backward, can be used as a strategy for
growth.
10.16 Glossary
Diversification: A growth strategy through new products and new markets.
Strategic alliance: Cooperation between two or more organizations with
a common objective, shared control and contributions (in terms of
resources, skills and capabilities) by the partners for mutual benefit.
Joint venture: A strategic alliance involving equity participation by both
(or all) the parties.
Unit 10
Takeover: (also called acquisition) when one company takes over another
organization its resources, management and control.
10.18 Answers
Answers to Self-Assessment Questions
1. Products, businesses
2. Ansoff
3. market share
4. product
5. market research or surveys
6. (d) all the above
7. True
8. Electronics
9. watches
10. test marketing
11. new market segments
12. Dairy Milk
Unit 10
13. False
14. Related diversification
15. Strategic alliance
16. Competitive, strategic
17. Joint venture
18. False
19. Takeover, acquisition
20. False
21. Merger
22. Horizontal merger
23. Conglomerate merger
24. (a) Vertical merger
25. Forward
26. Backward
Unit 10
10.19 References
1. Ansoff, H I. 1987. Corporate Strategy. Harmondsworth: Penguin.
2. Buzzell, R D. Is Vertical Integration Profitable? Harvard Business Review,
JanuaryFebruary, 1983.
3. Ghoshal, S. Integrating Acquisitions. Economic Times (Corporate
Dossier), January 1, 1999.
4. Glueck, W F, and Jauch, L R. 1984. Business Policy and Strategic
Management. 4th ed. New York: McGraw Hill.
5. Johnson, G, and K Scholes. 2002. Exploring Corporate Strategy. 6th ed.
London: Prentice Hall.
6. Porter, M E. 1980.Competitive Strategy. New York: The Free Press.
Endnotes
1
Cadburys rejuvenation of its Dairy Milk chocolate (CDM) in the Indian market during
199394 makes a very interesting story. Refer to A Nag, Strategic Marketing, 2nd ed.
(New Delhi: Macmillan India, 2006), Ch. 9.
M B Rao, Joint Venture: International Business with Developing Countries (New Delhi:
Vikas Publishing House, 1999), 2-3.
A Kazmi, Business Policy and Strategic Management, 2nd ed. (New Delhi: Tata McGraw
Hill Publishing Co., 2002), 189.
P Chandra, Financial ManagementTheory and Practice (New Delhi: Tata McGraw Hill,
1987), 660-61.
W F Glueck, and L R Jauch, Business Policy and Strategies Management, 4th ed. (New
York: McGraw Hill, 1984), 224.
Unit 11
Unit 11
Structure
11.1 Introduction
11.2 Caselet
Objectives
11.3 Definition of Industry
11.4 Industry Types and Structure
11.5 Industry Structure and Competitive Strategy
11.6 How to Conduct Industry Analysis
11.7 Identifying Competitors
11.8 Models of Competition
11.9 Porters Competitive Threat Model
11.10 Competitive Advantage Analysis
11.11 Case Study
11.12 Summary
11.13 Glossary
11.14 Terminal Questions
11.15 Answers
11.16 References
11.1 Introduction
Selection of corporate strategy by an organization should be guided by three
sets of factors: organizational mission, objectives or goals (discussed in Unit
5), internal competences and resources and the external environment factors.
Given the mission, objectives or goals based on organizational philosophy or
priorities, the choice of strategy should depend, among other things, on company
competences or capabilities (that is, strengths and weaknesses) and the
environmental factors; or, more correctly, on compatibility or balancing between
the two which is attempted through SWOT analysis. The final selection of
strategy, however, depends on some additional selection criteria including
benchmarking and best practices. These are discussed in the next chapter.
One of the most important components of the environment is competition
or competitors. This would be analysed here. As we talk of competition, we also
imply the industry to which the company belongs. Analysis of industry and
competition leads to the determination of competitive advantage or competitive
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Unit 11
11.2 Caselet
There are numerous well-documented reasons why the Japanese
automobile firms were able to penetrate the US market successfully,
especially during the 1970s. One important reason, however, is that they
were much better than U.S. firms at doing competitor analysis. David
Halberstam, in his account of the automobile industry, graphically described
the Japanese efforts at competitor analysis in the 1960s. They came in
groups. . . . They measured, they photographed, they sketched, and they
tape-recorded everything they could. Their questions were precise. They
were surprised how open the Americans were.
The goal of competition analysis is insight that influences the development
of successful business strategies. The analysis should focus on the
identification of threats, opportunities, or strategic uncertainties created by
emerging or potential competitor moves, weaknesses, or strengths.
Competitor analysis starts with identifying current and potential
competitors.This is an exercise that was successfully done by the Japanese
automobile firrms.
Source: D Halberstam, The Reckoning (New York: William Morrow, 1986), 310.
Unit 11
Objectives
After studying this unit, you should be able to:
Discuss the different industry types and structures
Analyse industry structure and competitive strategy
Show how to conduct industry analysis
Identify and analyse competitors existing and potential
Conduct competitive advantage analysis
Unit 11
Self-Assessment Questions
1. The group of firms producing products that are close substitutes for each
other are known as_________.
2. Definition of an industry should not be thought to be same as definition of
the ________in which a company wants to compete.
Unit 11
Unit 11
Self-Assessment Questions
3. The existence of a large number of small and medium units is found in
(a) Mature industry
(b) Declining industry
(c) fragmented industry
(d) Emerging industry
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Unit 11
4. An industry that has passed through transition from period of fast growth
to more modest or stable growth is known as
(a) mature industry
(b) declining industry
(c) Emerging industry
(d) None of the above
Step 2
Step 3
Step 4
Step 5
The five steps or the answers to the five questions indicate a logical process
for formulation of competitive strategy in fragmented industry. Step 1 consists
of undertaking a thorough industry and competitor analysis to identify sources
of competitive forces in the industry and positions of important competitors.
Step 2 is to identify cause or sources of fragmentation. Once the causes of
Unit 11
Unit 11
market. In such situations, the pioneer leader should be prepared for shifts in
strategy orientation including redefinition of roles of linkage agents like suppliers
and distributors or distribution channels.
Companies which enter emerging industries during the course of their
development also have a choice to make about which industries to enter. Here,
again, they often have a choice between alternative emerging industries. The
choice in such cases would depend on current returns or profitability and likely
future growth of the industry. The best alternative is one which promises highest
long-term growth and profitability.
Unit 11
Niche
Harvest
Divest quickly
Seek a leadership
position in terms of
market share
Create or defend a
strong position in a
particular segment
Manage a controlled
disinvestment using
strengths
Liquidate the
business or
investment as early
as possible
Unit 11
Unit 11
Self-Assessment Questions
5. In ________ industry, the pioneering leader faces problems as the industry
develops, competitors emerge and the course of competition becomes
unpredictable.
6. In ________ industries, the problem faced is that of competitive
overcrowding and its impact on formulation of strategy.
7. Global strategy suits companies that make highly standardized
sophisticated products. (True/False)
8. Transnational strategy is quite an easy strategy to follow. (True/F alse)
Unit 11
To conduct such an analysis, the industry analyst has to find answers to many
important questions:
What should be the starting point?
Which types of data one looks for?
Should one look for only published or secondary data?
Or, should one also generate primary data from industry observers
(participants)?
What are the analytical techniques to be used for data processing and
analysis?
Answers to these questions would make possible an appropriate industry
analysis. This is about complete or comprehensive industry analysis. If, however,
one is interested in a particular aspect of an industry, say, only industry growth,
one can also conduct a partial industry analysis with respect to the particular
object. In that case, data requirements would be less, and data processing and
analysis also would be much easier.
Porter (1980) has suggested some detailed guidelines for conducting
industry analysis. These are contained in How to Conduct an Industry Analysis
(Appendix B) in Competitive Strategy (1980). Porter discusses sources of
published or secondary data, generation or collection of primary data, various
categories of data, scheme of data processing and strategy for industry analysis.
He has also suggested a broad framework for industry analysis in terms of
categories of data and competition. The framework is shown in Box 11.1
Industry analysis should follow a number of logical or strategic steps.
These are shown below:
Step 1 : Determine or specify the objective or objectives so that there
is no lack of focus.
Step 2 : Collect and scan through available published or secondary data.
Step 3 : Identify data or information gaps for generation of primary data.
Step 4 : Generate primary data (through survey, interviews, meetings,
etc.,) to fill the data information gap.
Step 5 : Process/tabulate various data as mentioned in Box 11.1
Step 6 : Prepare a general overview of the industry using the processed/
tabulated data/information.
Unit 11
Compilation
Product lines
By company
By year
Complementary products
By functional area
Substitute products
Growth
Rate
Pattern (seasonal, cyclical)
Determinants
Technology of production and distribution
Cost structure
Economies of scale
Value added
Logistics
Labour
Marketing and Selling
Market segmentation
Marketing practices
Suppliers
Distribution channels (if indirect)
Innovation
Types
Sources
Rate
Economies of scale
Unit 11
Unit 11
Self-Assessment Questions
9. Competition analysis can be divided into two main parts: (1) identifying
the existing and potential competitors, and (2) __________.
10. Japanese automobile companies were able to penetrate the US market
successfully in the 1970s as they were much better at doing _______
than US companies.
Unit 11
Unit 11
the analysis easy and more usable from strategy formulation point of view. Let
us take the Indian detergents market. In this market, Surf (with brand extensions)
and Ariel may be placed in one strategic group; Tide, Rin, Wheel, Sunlight and
Nirma may be classified into a second strategic group; Ghadi and similar regional
brands can be in a third group; and, many local brands can be put together in
the fourth group. Each of these groups will show some distinct features or
characteristics like resource base, ability to compete, marketing skills, etc., and,
such grouping will give a company a clear strategic perspective to analyse
competition.
Unit 11
Self-Assessment Questions
11. While identifying competitors, the ________ approach analyses the
preferences of customers who make their choices among competing
suppliers of products.
12. The ________ approach for competitor identification attempts to classify
competitors into strategic groups on the basis of their competitive
strategies.
13. Primary competitors, i.e., competitors in the same product category and,
not in substitute product category, are clearly visible and more easily
identifiable. (True/ false)
14. Existing competitors are the most immediate threats to a company.
(True/False)
Unit 11
Unit 11
At the introduction stage, that is, when a new product enters the market,
it starts as a monopoly and competition is nil. As the product moves to the
growth stage, competitors start entering the market and competition begins. As
the product matures, competition intensifies and competitive rivalry reaches its
peak. Sales and profit also peak during this period. In the decline phase,
competitive pressure decreases because sales and profit start declining, and
many companies withdraw from the market or close down. Between introduction
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Unit 11
and growth, and, in the decline phase, competitive pressures are low, but,
mortality rates of products or businesses are high (Figure 11.4).
The lifespan of a product, and also speed or steepness in growth, maturity
and decline vary according to its nature or category. (This is what explains the
relative flatness (Figure 11.5) and relative steepness [of different PLC curves.)
Most electronic products have a shorter lifespan and also a steep PLC compared
to electrical or mechanical appliances. During the PLC, most markets witness
one market leader, one or a couple of market challengers and a number of
market followers. During the PLC, some niche players also develop in the market
who stay away from mainstream competition. In the toothpaste market, Colgate
is the leader, Pepsodent and Close-Up the challengers and Promise the follower.
Some say Vicco and Neem are niche players, but, there may be difference of
opinion on this.
Different studies have hypothesized different market structures, particularly
during the maturity phase, in terms of market shares of different players. These
studies indicate different types and levels of competition. The first of these studies
is by the Strategic Planning Institute, Cambridge, Massachusatts, popularly
known as PIMS Study. The second study is by Kotler, and, the third by Boston
Consulting Group (BCG). Buzzel (1981) has done consolidation and a
comparative analysis of these studies. The study results for market structures
in mature industries are summarized in Table 11.3.
Table 11.3 Market Structure in Mature Industries: Market Shares
Market Player
Kotler
BCG
Market leader
52.7
40.0
50.0
Market challengers
28.8
30.0
25.0
Market followers
11.6
20.0
15.0
6.9
10.0
10.0
Market nichers
Unit 11
are defensive warfare, offensive warfare, flanking warfare and guerrilla warfare.
Ries and Trout (1986) are among the greatest exponents of marketing warfare
based on military strategies. Principles of marketing warfare enunciated by them
are given in the following:
Principles of Defensive Warfare
1. Only the market leader should adopt a defensive strategy
2. The best defensive strategy is the courage to attack yourself
3. Strong competitive moves should always be blocked
Principles of Offensive Warfare
1. The strength of the leader is the most important consideration for mounting
an offensive attack
2. Find the leaders weakness and attack it
3. Launch the attack on as narrow a front as possible
Principles of Flanking Warfare
1. A good flanking move is made into an uncontrolled area of the opposition
2. Tactical surprise should be an important element of the strategy
3. The pursuit is as crucial as the attack itself
Principles of Guerrilla Warfare
1. Find a small segment for intermittent attack; avoid confrontation
2. However successful you may be, never act like the leader
3. Be prepared to quit/exit at very short notice
Offensive and defensive strategies signify different competitive moves
and are of almost universal application in strategic business management today.
Self-Assessment Questions
15. According to classical economic theory, markets begin as _________,
move towards ______, then to monopolistic competition and ultimately
towards pure or perfect competition.
16. In a competitive environment, businesses can be classified into four
different categories: specialized businesses, volume businesses,
fragmented businesses and _______businesses.
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Unit 11
17. The Economic Model, Life Model and War Model are models of
(a) Competition
(b) Production
(c) Marketing
(d) Business strategy
18. Music records (HMV and others) black and white TV are examples of
(a) specialized businesses
(b) stalemated business
(c) volume businesses
(d) fragmented businesses
Unit 11
Unit 11
Self-Assessment Questions
19. Ongoing battles between Coca-Cola and Pepsi is a good example of
_____ competitors.
20. Air conditioner manufacturers competing with colour televisions or music
systems or home theatres for snatching a share in fixed household income
is an example of ________ substitution.
Sikkim Manipal University
Unit 11
Unit 11
Unit 11
Self-Assessment Questions
21. A position of superiority of an organization in relation to its competitors is
called __________.
22. Various individual strategies like product strategy, pricing strategy,
promotion strategy, distribution strategy, competition strategy make up
the ________. strategy
23. According to Hamel and Prahalad (1990), advantages of companies and
businesses are based on core competence of these companies.
(True/False)
24. While securing competitive advantage, the product-making route and the
marketing route are exclusive to each other. (True/ False)
Unit 11
Neville Isdell is fully seized with the challenges that his company is facing.
He, however, claims that the system isnt broken; but, some analysts may
not agree with him. One analyst pointed out that Coca-Cola has not produced
a successful new soda since 1982. Consultant Tim Pirko has suggested
that the company should invest heavily in developing new brands. He feels
that the company needs to take some new risks, if necessary, to ensure
that the consumers again become excited about Coke products. ****
The company is also aware of it. Coca-Cola has been investing heavily to
rejuvenate the companys stronger brands, and also in new products/drinks.
During 2005, the company invested in the growing non-calorie soda market
with Coca-Cola Zero; it acquired a stake from Danone in bottled water joint
venture; it bought a majority stake in a milk drink company; it started
distributing the Rockstar energy drink. In response to all this, Pepsi gave a
big push to its new products through Pepsi One, Pepsi Lime and Propel
fitness water.
In this scenario, will Coca-Cola be able to recover lost grounds and fully
rehabilitate itself?
* The Coca-Cola company announces changes to senior management and operating
structure,www.2.coca-cola.com, March 2005.
** D Faust, Gone Flat, Business Week, December 20, 2004.
*** B Morris, Coca-Cola: The Real Story, Fortune, May 17, 2004.
**** B Morris (2004).
Unit 11
11.12 Summary
Let us recapitulate the important concepts discussed in this unit:
Competition is one of the most important components of business
environment.
Industries can be of various typesalmost each major product group
constitutes an industry. Industries can also be classified in terms of size
of the constituent units or companies, state or pace of development of the
industry, spread of the market, etc.
Various industries can be classified into five categories fragmented
industry, emerging industry, mature industry, declining industry and global
industry.
Competition can be understood better by analysing competitor actions.
More important factors which govern competitive action are objectives or
goals, size and growth, organizational culture, strengths and weaknesses,
cost structure, profitability, image and positioning, and current and past
strategies.
Various models of competition are mentioned in strategic marketing
literature. Competition takes various forms and can be of different
intensities. Different models of competition try to analyse this. Three
important models of competition are: the economic model, the life model
and the war model.
Porters competitive threat model (Five Forces Model) analyses five major
types of competitive threats a company can face in the marketplace. These
are: industry (existing) competitors, threat of substitutes, bargaining power
of buyers (backward integration), bargaining power of suppliers (forward
integration) and threat of new entrants.
11.13 Glossary
Competitive advantage: A position of superiority of an organization in
relation to its competitors
Industry: A group of firms producing products that are close substitutes
for each other
Monopoly: A condition in which there is single seller with no close
substitute product
Oligopoly: A condition in which there are few sellers
Sikkim Manipal University
Unit 11
11.15 Answers
Answers to Self-Assessment Questions
1. Industry
2. Business
3. (c) fragmented industry
4. (d) mature industry
5. Emerging
6. Mature
7. True
8. False
9. understanding and evaluating competitors
10. competitor analysis
11. customer-based
12. strategic
Unit 11
13. True
14. True
15. Monopolies, oligopoly
16. Stalemated
17. (a) Competition
18. (b) stalemated business
19. Industry
20. Generic
21. Competitive advantage
22. Corporate
23. True
24. False
Unit 11
11.16 References
1. Aaker, D A, 1995. Strategic Market Management. 4th ed. New York: John
Wiley & Sons.
2. Day, G S. 1984. Strategic Market Planning: The Pursuit of Competitive
Advantage. St. Paul, Minnesota: West Publishing Co.
3. Day, G S. 1990. Market Driven Strategy. New York: The Free Press.
4. Porter, M E. 1990. Competitive Strategy: Techniques for Analysing
Industries and Competitors. New York: The Free Press.
5. Porter, M E. 1990. The Competitive Advantage of Nations. New York: The
Free Press.
6. Thompson Jr, A A, A J Strickland III, and J E Gamble. 2005. Crafting and
Executing Strategy: The Quest for Competitive Advantage. New Delhi:
Tata McGraw Hill Publishing Co.
Endnotes
1
A Aaker, Strategic Market Management, 4th ed. (New York: John Wiley & Sons, 1995),
65.
10
11
S E South, Competitive Advantage: The Art of Strategic Thinking, The Journal of Business
Strategy, 4 (Spring 1981).
Unit 12
Unit 12
Structure
12.1 Introduction
12.2 Caselet
Objectives
12.3 Process of Strategic Choice
12.4 Strategy Selection Factors or Criteria
12.5 Selection of Final Strategy
12.6 The Strategic Plan
12.7 Preparation of Strategic Budget
12.8 Allocating and Managing Resources
12.9 Case Study
12.10 Summary
12.11 Glossary
12.12 Terminal Questions
12.13 Answers
12.14 References
12.1 Introduction
In the last unit, we moved closer to selection of strategy by an organization.
Various industry types and structures were analysed and important aspects of
competitive strategies in these industries were discussed. Most companies belong
to one of these types of industries. Competition analysis was undertaken in detail,
which enables a company to understand clearly competitor signals, moves and
actions which can pose competitive threats to companies. Finally, various factors
which determine or affect competitive advantage or disadvantage of companies
were analysed. All these give vital guidelines to companies for selection of an
appropriate strategy, or a combination of strategies, under given conditions.
The present unit is more like an extension of the previous one. We will
discuss some additional factors or criteria here. These factors or criteria should
guide a company in selecting a final strategy from among the various alternative
strategies discussed in Unit 7 (stability strategies), Unit 8 (strategies for managing
change) and Unit 9 (expansion strategies) or a combination of some of these
strategies depending on the particular company situation and the competitive
environment. These factors include the process of strategic choice, evaluation
of strategic alternatives, criteria for selection of strategy, benchmarking and
best practices and critical success factors (CSFs). We shall also discuss in this
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Unit 12
12.2 Caselet
An organization can determine whether its current capabilities represent
strengths or weaknesses in industry competition by analysing industry
structure, industry competitors, cost structure, customer needs, availability
of substitutes, barriers to entry, etc.,.A good example of this is the General
Cinema Corporation, the largest US movie theatre operator for many years.
The company reassessed that its internal capabilities in site analysis, creative
financing, marketing and management of geographically dispersed
operations were key strengths compared to major success factors in the
soft drink bottling industry. This assessment proved correct and timely for
the company. Within 10 years of entering the soft drinks bottling industry,
General Cinema became the largest franchised bottler of soft drinks in the
US. It was handling jobs for Pepsi, 7UP, Dr. Pepper and Sunkist.1
Objectives
After studying this unit, you should be able to:
Analyse the process of strategy choice or selection
Discuss strategy selection factors or criteria
Highlight different benchmarking practices
Analyse the process of activation of strategies
Discuss the process of preparation of strategic budget
Focus on allocating and managing resources
Unit 12
Unit 12
Self-Assessment Questions
1. Strategic choice is the decision which selects from among the alternative
grand strategies which will best meet the enterprises objectives.
(True/ False)
2. Companies must consider all possible alternative strategies before making
a strategic choice. (True/ False)
Unit 12
External
Financial strength
Industry strength
Competitive advantage
Environmental stability
Each of these factors can be rated on a 5-point scale (05) to determine its
relative effectiveness. Based on the relative effectiveness of these factors and
their different combinations, different strategies can be selected (See Figure 12.2).
Four quadrants in the figure represent four different postures: conservative,
aggressive, defensive and competitive. The ideal quadrant is 2 (aggressive)
where both the internal factors are strong and both industry strength and
environmental stability are high. Companies/businesses in this quadrant should
follow expansion strategies like diversification and integration. Actual or final
form of the strategy may be decided based on additional factors or considerations
(discussed later). Companies/businesses in quadrant 4 (competitive) possess
high financial strength but, low competitive advantage; environmental stability
is high but industry strength is low. Such companies/businesses should adopt
merger strategy through amalgamation or consolidation to improve synergy.
Sikkim Manipal University
Unit 12
External Factor
Financial Strength
Industry Strength
Cash flow
Growth potential
Working capital
Profit potential
Liquidity
Financial stability
Return on investment
Technological know-how
Unit 12
Leverage
Resource utilization
Ease of exit
Capital intensity
Competitive Advantage
Environmental Stability
Technological know-how
Technological change
Product quality
Competitive pressure
Demand variability
Market share
Rate of inflation
Customer loyalty
Competitors strengths/weaknesses
Entry barriers
Note: Each individual factor is rated to arrive at an average or overall score between 0
and 5 for two internal factors and two external factors.
Source: H Rowe et al., Strategic Management and Business Policy: Methodological
Approach (Massachusetts: Addisson-Wesley Publishing Co., 1982), 15556.
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Product benchmarking
Internal benchmarking
Process benchmarking
Competitive benchmarking
Functional benchmarking
Generic benchmarking
Performance benchmarking
Strategic benchmarking
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centres and franchised local dealers. The comparison between Sears and GE
shows that benchmarking efforts of the two companies should focus on
distribution network, technological capabilities, operating costs and service
facilities. Management in both companies, in fact, developed successful
strategies based on relative benchmarking. By benchmarking each other, they
have developed ways to build on relative strengths, and at the same time,
avoiding dependence on capabilities in which the other company excels.4
Comparison with key competitorsessentially process benchmarking or
competitive benchmarkingcan be very useful in ascertaining whether resources
and capabilities of an organization are competitive strengths or weaknesses.
Identification of differences (strengths and weaknesses) with competitors provide
important inputs for choice and development of strategy. Also, through
competitive benchmarking, a company can concentrate on those strategies which
it can effectively use to its advantage. Box 11.1 illustrates how UPS used
competitor comparison with FedEx to assess its strengths and weaknesses in
the package transportation and delivery industry for selection of its strategy.
Benchmarking against Success Factors in the Industry
Industry analysis (presented in the previous unit) enables a company to identify
factors which account for strategic success in a particular industry. Key
determinants of success in an industry can be used to assess an organizations
competitive strengths and weaknesses. By analysing industry structure, industry
competitors, cost structure, customer needs, availability of substitutes, barriers
to entry, etc., an organization can determine whether its current capabilities
represent strengths or weaknesses in industry competition. Porters 5-forces
model (discussed in the previous unit) of competitive levels/threats in an industry
provide a useful framework for such analysis.
A good example of this is General Cinema Corporation (see Caselet).
Many other companies have successfully benchmarked industry success factors
for development of competitive strategy. Avery Dennison is another example.
Avery Dennison used industry evolution benchmarking against 3M to create a
new successful strategy.
Best-in-class Benchmarking
Comparison with competitors or benchmarking against industry success factors
has a major shortcoming. They only help an organization to succeed or excel
within the industry. But, best methods or practices need not be confined to only
within ones own industry. These can easily exist in some other business or
industry which may be really exemplary. As mentioned earlier, organizations
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which aspire to be comparable to the best among all businesses or strive for
excellence should adopt generic or best-in-class benchmarking.
Best-in-class benchmarking is a comparison of an organizations methods
and practices or performance against the best in any business or industry and
adoption of the same. Best-in-class benchmarking urges organizations to search
for best practices wherever those may be found. In best-in-class benchmarking,
the potential for change is enhanced, and the forces and direction of change
are facilitated by locating practices or forming partnerships across industries or
sectors. For example, British Airways improved aircraft maintenance, refuelling
and turnaround time by studying the processes used in Formula One Grand
Prix motor racing pit stops.5 A police force wanting to improve the way it responds
to emergency telephone calls studied call centre operations in the banking and
IT sectors for benchmarking the response pattern.6
Best-in-class benchmarking becomes particularly relevant for service
organizations. A characteristic feature of service organizations is that improved
performance in one sectorparticularly in factors like speed and reliability
raises the general level of expectations among customers about the same (speed
and reliability) from all companies in all sectors. So, in the service sector, bestin-class benchmarking urges organizations to stretch their core competence or
develop newer capabilities to exploit opportunities in different fields or markets.
Benchmarking Practices in Indian Corporates
With the increase in competitive intensities and exposure to globalization, Indian
companies, like many others in different parts of the world, are constantly seeking
to improve their performance. Benchmarking, therefore, is becoming a logical
strategic initiative. Different companies are trying to benchmark themselves in
different ways to suit their performance requirements and benchmarking
objectives.
Benchmarking practices followed by majority of the Indian companies
can be broadly divided into three types: product or quality benchmarking,
customer service benchmarking (an extension of competitive benchmarking)
and comprehensive or combination benchmarking.
Quality benchmarking has been adopted by companies like BHEL, NTPC,
IOC, Tata Motors, JCT Electronics and Johnson & Nicholson. Companies which
have used benchmarking to improve customer service are HDFC, Infosys,
ModiXerox, Titan and Airtel, among others. These companies focus on those
practices which help them to serve their customers better. Companies like
Reliance Industries, Ranbaxy, Maruti Suzuki, Hero Honda and Honda Motors
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Self-Assessment Questions
3. A comparison with, and adherence to, prescribed norms, standards or
practices is called __________.
4. An organizations strategic capability or strategic choice is to be always
understood in _______ terms because it involves comparison with
competitors or industry norms.
5. A comparison of an organizations methods and practices or performance
against the best in any business or industry and adoption of the same is
called ________ benchmarking.
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Figure 12.3 Final Choice of Strategy: Interplay of Objective and Subjective Factors
Unit 12
Strategic plan
Activation of strategy
Implementation of strategy
Self-Assessment Questions
6. Strategic choice cannot be governed only by _______ considerations.
7. Institutionalizing the strategy and mobilizing, allocating and managing
resources for execution of strategy is known as _______ of strategy.
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Self-Assessment Questions
8. The strategic plan ________ formulation of final strategy.
9. Which of the factors are considered for activating or organizing strategy?
(a) Preparation of strategic budget
(b) Allocating and managing resources
(c) Integrating resources and organizing for success
(d) All the above
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Self-Assessment Questions
10. A strategic budget is the same as the conventional accounting budget.
(True/False)
11. In large multi-business organizations, strategic budgeting often becomes
an interactive or iterative process between the corporate organization
and the SBUs. (True/False)
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overlooking or showing lack of concern for the soft factors. They tend to forget
the fundamental fact of complementarity between the hard and soft approaches
necessary for strategic success. In practice, HR approaches and strategies in
many companies reflect adhocism because of internal and external pressures.
But, this is a very shortsighted measure/solution and invariably affects activation
and implementation of strategies. A more balanced approach is necessary.
To ensure such an approach and to be effective, HR professionals also
need to orient themselves. They should familiarize themselves with the
organizations strategic process or a particular strategic initiative and human
resource requirements in terms of competence and commitment. HR activities
or human resource management can help in the pursuit of successful strategies
in many ways. Some of the more important ones are mentioned below:
HR audit to assess resource requirements and availability in terms
of competence and also to analyse skills and capabilities of individual
managers which can form useful inputs to the future planning and
strategy building process.
Fostering team-building attitude and rewarding team work approach.
Individual incentives and rewards often undermine teamwork. But,
most strategies require a team approach rather than individual
approach.
Performance assessment of individuals and teams should have a
clear focus on strategic inputs rather than pure functional or
operational inputs. Some have suggested a 360 degree appraisal
system, i.e., appraisals from multiple perspectives or different parts
or functional areas of the organization so that the full impact of an
employees contribution to success or otherwise of a strategy can
be more meaningfully assessed.
Devising appropriate training and development programmes. Of late,
there has been a shift in focus in terms of reduction of formal training
programmes and increase in coaching and mentoring for selfdevelopment. These become important developmental inputs for
individual managers if the organizations strategies are changing
more regularly.
Institutionalization of individual competence. Individual experts or
highly competent people may leave the organization or retire. So,
one of the objectives of HR policies should be to institutionalize such
competence or expertise through proper succession planning.13
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Self-Assessment Questions
12. In allocating and managing or organizing resources, three types of
resources have to be considered: financial, human or managerial
and __________.
13. In ________ human resource management, dominant focus is on the
people, individually and collectively culture, style, behaviour, etc., and
how these help or hinder organizational strategies.
14. Many companies are using ______ solutions to optimize resource
allocation in an integrated way.
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12.10 Summary
Let us recapitulate the important concepts discussed in this unit:
Choice of a final strategy or strategies from alternative strategies available
is the most critical and the most difficult job in the strategic planning
process. Many companies go through the process of strategic choice or
decision making but not in a very organized or systematic way.
After evaluating various strategy alternatives in terms of company and
industry/market characteristics, the next step is to use appropriate selection
factors or criteria for narrowing down the choice to more specific strategies.
Two important selection factors or criteria are: SPACE technique or
approach, and benchmarking and best practices
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12.11 Glossary
Activation of strategy: Institutionalizing the strategy and mobilizing,
allocating and managing resources for execution of strategy.
Benchmarking: Comparison with, and adherence to, prescribed norms,
standards or practices.
Contingency strategies: Exceptional strategies for exceptional situations
or circumstances
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12.13 Answers
Answers to Self-Assessment Questions
1. True
2. False
3. Benchmarking
4. Relative
5. Best-in-class
6. Objective
7. Activation
8. Precedes
9. (d) All the above
10. False
11. True
12. technology or innovation
13. soft
14. Enterprise resource planning (ERP)
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12.14 References
1. Cook, S. 1995. Practical Benchmarking: A Managers Guide to Creating
Competitive Advantage. London: Kogan Page.
2. Gupta, V, K Gollakota, and R Srinivasan. 2005. Business Policy and
Strategic Management: Concepts and Applications. New Delhi: Prentice
Hall of India.
3. Hofer, C W, and D Schendel. 1978. Strategy Formulation: Analytical
Concepts. St. Paul, Minnesota: West Publishing.
4. Murdoch, A. Lateral Benchmarking or What Formula One Taught an
Airline. Management Today, November, 1997.
5. Ward, K. 1993. Corporate Financial Strategy. Oxford: ButterworthHeinemann.
6. Zadek, S. The Path to Corporate Responsibility. Harvard Business Review
(Best Practice), December, 2004.
Endnotes
1
J A Peace II, and R B Robinson Jr (2005), 17374. The bottling operations were, however,
subsequently sold to Pepsico.
F Glueck and L R Jaunch, Business Policy and Strategic Managemet (New York: McGrawHill, 1984), 279
G Johnson, and K Scholes, Exploring Corporate Strategy, 6th ed. (Pearson Education,
2005), 174.
This section is based on S Zadek, The Path to Corporate Responsibility, Harvard Business
Review (December, 2004).
S Zadek, The Path to Corporate Responsibility (Best Practice), Harvard Business Review
(December, 2004), 126-27.
Unit 12
P K Ghosh, Strategic Planning and Management (New Delhi: Sultan Chand & Sons,
2003), 290.
10
11
12
13
Unit 13
Unit 13
Implementation:
Structures and Systems
Structure
13.1 Introduction
13.2 Caselet
Objectives
13.3 Structure of an Organization
13.4 Virtual Organization
13.5 Which is the Best Organizational Structure?
13.6 Organizational Systems
13.7 Complementarity of Strategy, Structure and Systems
13.8 Case Study
13.9 Summary
13.10 Glossary
13.11 Terminal Questions
13.12 Answers
13.13 References
13.1 Introduction
In the strategic war between Hindustan Unilever and Nirma in the Indian detergent
market during the mid-1980s, which factor enabled HLL to regain its market
position or supremacy? Was it the brilliant strategic conception of product
expansions in the form of Rin, Wheel and Sunlight or the way they were
marketed? In Parle products success with the pioneering Indian mineral water
Bisleri (which was selling at `10 per litre when good quality milk such as DMS
was selling at `7 per litre), which was more important: innovative concept of
bottled water or making the product acceptable to millions of Indians? What
enabled ITC to transform the Indian rural market with the breakthrough innovation
of e-choupal? Was it the brilliant idea or the execution of it?
This brings us to a fundamental question: Is formulation of strategy more
important or its implementation? This is a continuing debate in strategic
management literature. There are exponents on either side. But, one thing is
clear: the real test of a strategy is in its implementation. Only implementation
can determine the success or failure of a strategy. Even the most perfect strategy
or plan may fail if it is not implemented properly. It is said that a technically
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imperfect plan implemented well may deliver better results than a perfect plan
which does not get off the paper.1 Many companies spend large amount of
time, energy and resources in developing a strategic plan without giving enough
thought to implementation.
Implementation of a strategy or plan depends on three sets of organizational
factors, namely, the structure of the organization, various functional areas and
operations and behavioural (people) aspects. Strategic analysts, therefore,
distinguish between three types or forms of implementation: structural and systems
implementation, functional and operational implementation and behavioural
implementation. These three forms of implementation are interrelated or
interdependent (Figure 13.1). Strategy implementation, in terms of more detailed
forms or components, is shown in Figure 13.2.
13.2 Caselet
The e-choupal initiative started by ITC was conceived to overcome some
of the challenges faced by Indian farmers such as fragmented farms, weak
infrastructure and the involvement of numerous intermediaries in the sale
and purchase of produce. The e-choupal initiative directly links the rural
farmers with ITC for the procurement of agriculture and aquaculture
products, such as soybeans, coffee, and prawns. Traditionally, these
commodities were procured by ITC and other companies from mandis (major
agricultural marketing centers in rural areas), and a long chain of
intermediaries (middlemen) was involved in buying the produce from farmers
and moving it to the mandis. Through e-choupals, these farmers can now
directly negotiate the sale of their produce with ITC.
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The e-choupal model has been quite effective, not only because of its
innovative concept but also because it has been well executed. Every echoupal centre is equipped with a computer and Internet connectivity, which
enables the farmers to obtain information on mandi prices and good farming
practices, and to place orders for agricultural inputs, such as seeds and
fertilizers. This helps farmers in improving the quality of produce and
obtaining better prices. Elected from the village itself, a literate farmer acts
as the interface between the illiterate farmers and the computer. So, although
the primary objective of the project was to bring efficiency to ITCs
procurement process, an important byproduct is the increased
empowerment of rural farmers where e-choupals have been established.
Source: http://siteresources.worldbank.org/INTEMPOWERMENT/Resources/
14647_E-choupal-web.pdf
Objectives
After studying this unit, you should be able to:
Discuss the structure of an organization and various structural types
Use the concept and tool of the virtual organization
Analyse different organizational systems
Discuss the complementarity of strategy, structure and systems
Identify the root organizational structure
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Self-Assessment Questions
1. The structure of an organization defines the _________and _______of
management in a hierarchical way.
2. The most elementary form of structure is the _______, which represents
an organization owned and managed by a single individualthe
entrepreneur.
3. A _________is based on differentiation and allocation of primary functions
such as production, marketing, finance, and HR along with certain
delegation of powers.
4. The fundamental factor in the _____is to identify independent product/
market segment which requires distinct strategies.
5. A _______is a need-based or project-based structure which does not
follow the conventional lines of hierarchy or control.
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Self-Assessment Questions
6. The ________is an organization without a formal structure and is like an
extended network.
7. The in-house resources and activities of a virtual organization are generally
(a) Large
(b) Outsourced
(c) Maximized
(d) Nil
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Self-Assessment Questions
8. The structure that works best under stable market/environmental
conditions with less need for cross-departmental coordination and
communication is
(a) functional structure
(b) Divisional structure
(c) Matrix structure
(d) SBU structure
9. The structure that is most effective under changing markets/environmental
conditions which require more innovations and faster adaptation is
(a) Functional structure
(b) Divisional structure
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actual appraisal systems are based on an appropriate mix of the two types of
factors to make the system more acceptable and reliable.
Also, relevance or suitability of the evaluation method to the corporate
strategy adopted by an organization should be considered. For example, if a
stability strategy is followed, the objective of the appraisal system should be to
focus on improving efficiency in current operations. Improvement of efficiency
in current operations, combined with initiative, can also help to achieve shortterm growth. For long-term growth, i.e., growth through expansion or
diversification, focus should be on long-term managerial characteristics of
initiative, aggressiveness, risk taking attitude, etc. The evaluation system should
lay emphasis on these factors and be structured accordingly.
Unit 13
Self-Assessment Questions
10. The planning system in any organization depends heavily on the ________.
11. The __________ is essentially concerned with the development of
individual managers and preparing them better for organizational activities
including planning, strategy making and implementation.
12. The _________system assesses managerial performance in terms of
organizational objectives, priorities, and strategies.
13. The objective of the ________system is to ensure that implementation of
strategy takes place according to plan.
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Strategy
Growth/expansion/acquisition/
divestment
Stability/controlled growth
Structure
Entrepreneurial/divisional SBU/
matrix
Divisional/functional/holding company
Participative
Directive
MIS
Decision-orientation
Efficiency-orientation
Management
development
External-focussed; need-based;
contingency
Internal-focussed; programmed
Motivation
Monetary/non-monetary
Monetary/non-monetary
Systems
Planning
Evaluation
Control
Formal/informal; direct/indirect
Predominantly formal/direct
Source: Adapted from A Kazmi, Business Policy and Strategic Management (2005),
344 (Exhibit 10.13).
Unit 13
Activity 2
Discuss the complementarity or otherwise of strategy, structure and systems
of any of these companies: L&T, Tata Steel and Crompton Greaves. Write
down your observations in a report.
Self-Assessment Questions
14. Environmental factors, strategies, structures and systems can be
combined in the form of a _______matrix.
15. The combinations of strategies, structures and systems presented in the
matrix are to be taken as more _______rather than definitive.
Unit 13
The refinery, along with two new departments, IT & Supply Chain and R&D,
came under the director (refineries); all the other five customer-centred
SBUs were to report to the director (marketing). The corporate support
functions were to remain under the direct charge of the CMD. Each SBU
was to have its own support functionfinance, HR, sales, logistics, etc.
During the process of formation of SBUs, delayering had also taken place
the number of layers in the organization reduced from seven to four.
Implementation of the new structural design involved redefinition of role
and responsibilities and redeployment of more than 2,000 personnel. New
roles had been created primarily to increase customer interface. Since the
support functions were now located within the SBUs, the new structure
included lateral linkage mechanism for better synergy.
Unit 13
13.9 Summary
Let us recapitulate the important concepts discussed in this unit:
Implementation of a strategy or plan depends on three sets of factors: the
structure (includes systems) of the organization, various functional areas
and operations, and behavioural (people) aspects.
Structure of an organization defines the levels and roles of management
in a hierachical way. One can also say that an organization structure
spells out the way tasks, functions and responsibilities are allocated for
implementing a policy or strategy.
Structural forms or types, in practice, are many more than depicted by
the four stages of organizational development. In addition to the stage of
development, structural forms are determined by corporate philosophy or
goals, organizational concepts of business or business strategy.
Ten probable structural forms are: i. entrepreneurial structure, ii. functional
structure, iii. divisional structure, iv. SBU structure, v. matrix structure, vi.
project-based structure, vii. team-based structure, viii. network structure,
ix. holding company structure, and x. intermediate structure. More common
structural forms are: functional structure, divisional structure, SBU structure
and matrix structure.
Virtual organization is one of the latest developments in evolution of
organizational structures and designs. This is an organization without a
formal structure. It is a temporary network of independent companies
suppliers, customers, even erstwhile rivalslinked by information
technology to share skills, costs and access to one anothers markets.
In the implementation of strategy, organizational structures are supported
by organizational systems. Six major systems are important from the
strategy point of view: planning system, management information system
(MIS), management development system (MDS), motivation system,
evaluation system and management control system (MCS).
13.10 Glossary
Functional structure: A structure based on differentiation and allocation
of primary functions such as production, marketing, finance, and HR along
with certain delegation of powers.
Unit 13
13.12 Answers
Answers to Self-Assessment Questions
1. levels, roles
2. entrepreneurial structure
3. functional structure
4. SBU structure
5. matrix structure
6. Virtual organization
7. (b) Outsourced
Unit 13
13.13 References
1. Jauch, L R, R Gupta, and W F Glueck. 2004. Business Policy and Strategic
Management. 6th ed. New Delhi: Frank Bros & Co.
Unit 13
G Johnson, and K Scholes, Exploring Corporate Strategy, 6th ed. (2005), 422.
10
11
L R Bittel, ed., Encyclopedia of Professional Management (New York: McGraw Hill, (1978).
12
A Kazmi, Business Policy and Strategic Management, 2nd ed. (New Delhi: Tata McGraw
Hill, 2005), 342.
13
A Phadnis, What Money Cant Buy, Business Standard (The Strategist), December, 12,
2000.
14
A Phadnis, What Money Cant Buy, Business Standard (The Strategist), December, 12,
2000
Unit 14
Unit 14
Implementation:
Functional and Operational
Structure
14.1 Introduction
14.2 Caselet
Objectives
14.3 Production Policies and Plans
14.4 Marketing Policies and Plans
14.5 Financial Policies and Plans
14.6 HR Policies and Functions
14.7 MIS/IT Policies and Plans
14.8 Alternative Business Strategies and Functional
14.9 Processes or Methods
14.10 Productivity and Efficiency
14.11 Pace or Speed of Action
14.12 People Factor
14.13 Case Study
14.14 Summary
14.15 Glossary
14.16 Terminal Questions
14.17 Answers
14.18 References
14.1 Introduction
In the last unit, we had analysed the role of structures and systems in strategy
implementation. In this unit, we shall discuss the roles of functions and operations
in the implementation of strategy. It is necessary for an organization to have the
right structures and systems; but, real implementation of strategy takes place
through major functional areas of manufacturing, marketing, finance, etc. In
each of these functional areas, operational implementation is equally important.
Functional implementation and operational implementation are complementary
to each other. One can even say that operational implementation is an extension
of functional implementation (Figure 14.1).
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14.2 Caselet
The failure of Big Bite, a much hyped product launched by Parle is an
example of how wrong balancing in a products marketing mix can lead to
marketing failure. In 198788, Parle Exports (then makers of Thumps Up,
Limca, Gold Spot) made a high profile launch of Big Bite, a kind of burger
a bun with vegetables, or chicken or mutton filling topped with different
sauces. The launch was preceded by several campaigns in Mumbai with
tantalizing punchlines. Mumbaiites responded overwhelmingly, and, in the
first month of the launch, 90 per cent of the target customers had tried Big
Bite. But, thereafter, the sales declined, and, in less than six months, it was
reduced to 10 per cent. Big Bite was a big failure, and Parle had to withdraw
the product. Follow-up research showed that Big Bite did not live up to
customer expectations. Customers found it dry compared to its nearest
rival Rolls and perceived it to be like any other burger. Their expectations
were raised by the Big Bite ads, but, the product failed to rise to those
levels. This was a case of product-promotion mismatch, and the case shows
that wrong balance in the marketing mix can lead to marketing failure.
Source: A Nag, Strategic Marketing, 2nd ed. (New Delhi: Macmillan India, 2008), 171
Unit 14
Objectives
After studying this unit, you should be able to:
Analyse functional implementation functional policies, plans and
strategies
Identify the linkage between alternative business strategies and functional
policies and plans
Identify and analyse major issues in operational implementation of strategy
Discuss the important role of people factor in implementation
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Self-Assessment Questions
1. The_________is as a tool introduced in Japan, that aims at defining,
analysing and solving quality related problems in a company through a
team approach.
2. During the post-World War II period, the concept of total quality control
(TQC) was developed in the US by ________.
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Quality
Brand
Features
Packaging
Warranties
Services
Price
List price
MRP
Discounts
Trade margin
Commission
Instalment
Credit terms
Promotion
Place
Advertising
Customer location
Sales promotion Outlet location
Personal selling Channels
Test selling
Warehousing
Publicity
Stocks
Communications Delivery
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and shelf space. In todays high intensity marketing, the retailers are virtually
flooded with POP promotions from various manufactures. More and more
companies are going for innovative displays to give their products/brands more
visibility in shelves. When Nestl had introduced Maggi noodles in 1983, they
had used a unique dispenserthe wire mesh bag. It had not only helped in
product/brand identification and focus, but, also helped the retailer. The
dispenser, hung from the ceiling helped the retailers save shelf space. Cadbury
too came up with a dispenser. Customized racks are also being used by
companies for display. Companies like Procter and Gamble, Nestl, Hindustan
Unilever, Lakme and Tips and Toes make yearly bookings for display space in
various stores.
Unit 14
The case of Big Bite cite in the caselet above is an example of how wrong
balancing in the marketing mix can lead to marketing failure.
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Self-Assessment Questions
5. Marketing policies and plans are expressed though the four Ps: product,
price, promotion and participation. (True/False)
6. The pricing policy of a company is mostly guided by the two limits unit
cost and customers perceived value. (True/False)
7. Which of these is not an element of a promotional mix?
(a) Advertising
(b) Sales promotion
(c) Personal selling
(d) Production
8. Promotion through displays in retail outlets is as a promotional tool is
known as
(a) Point-of-purchase (POP)
(b) Demonstrations
(c) customer service programmes
(d) discounts
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Short term
Long term
Internal
Nil
Retained earings
External
Short-term loans
Share capital
Banks
Equity shares
Financial institutions
Preference shares
Public deposits
Debentures
Leased assets
Fixed deposit
Trade credits
Longterm loans
Customers advances
Given the various sources of funds, a major policy decision for a company
is to secure the optimal financing mix, i.e., the right combination of internal and
external, and short-term and long-term sources of funds. Such combination or
mix is governed by a number of factors. The major factors are mentioned below.
(a) Nature of business
(b) Purpose of financing
(c) Cost of financing
(d) Financial leverage
(e) Control or interference in management
(f) Organizational ability
Because of these various factors, different companies adopt different
policies for financing mix commensurate with their business conditions. Ingersoll
Rand, for example, adopted a policy of blending internal and external sources
for financing its strategies for expansion and growth. Almost 70 per cent of the
companys post-tax profit was reinvested to reduce its dependence on external
sources (borrowed funds). This enabled the company to keep its interest costs
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Self-Assessment Questions
9. All strategy implementations, except retrenchment strategy, involve
allocation and deployment of funds or investment decisions. (True/False)
10. Fixed assets are long term in nature. (True/False)
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Self-Assessment Questions
11. There are two major methods of training: _______ and __________.
12. Human resource development is a _______process.
Unit 14
Companies are developing MIS policies and plans for its extensive
application to increase productivity in different functional areas, efficiency in
operation and to improve networking for better connectivity. Hindustan Unilever
launched a pilot project to widen its area network by connecting its distributors
and important retailers. The purpose was market research and intelligence to
source information from the market about customers, competitors and various
channel members. The company has also set up a sales force automation
system with wireless connectivity through which salespersons in the field can
collect useful retail data and send the same to the MIS centre for further analysis
and policy formulation. Reliance Fire and General Insurance Company, a
subsidiary of Reliance Industries, is using MIS/IT to improve efficiency in
operationcomplete networking of area offices, service centres and insurance
agents for instant service to the customers. Glaxo India, Corporation Bank and
RPG Enterprises have used MIS/IT in different ways.
Self-Assessment Questions
13. MIS provides vital connectivity between the organization and the
environment, and, also among various functional and operational areas
within the organization. (True/False)
14. MIS is a peripheral function in most companies today. (True/False)
Unit 14
Production
Marketing
Financial Plan
HR Plan
Back-up Action
Expand/
install plant
capacity to
support new
products
Extend and
improve product;
this is more
critical than
margin
Hire additional
production,
R&D and
sales
workers/
managers
Evaluate market
share and
review financial
position
after
two years
Stability/
Incremental
growth
Defer new
investments in
plant and
equipment
Push high
margin products/
brands
Strengthen
the balance
sheet and
maintain steady
dividends
Invest in training
programmes to
improve management skills
Continue for
few years
unless
market trend
shows high
opportunity for
growth.
Restructuring/
Retrenchment
Identify plants
to be closed on
the basis of
capacity
utilization and
obsolescence
Identify products
for divestment
those with
low sales and/
or margin
Eliminate or
reduce dividends
and manage
cash flows
Reduce and/or
redeploy
personnel on
the basis of
skills and
experience
Source: Adapted from L R Jauch, R Gupta and W F Glueck, Business Policy and
Strategic Management (New Delhi: Frank Bros. & Co., 2004), 387 (Exhibit 10.2).
For each of the major strategies and the functional plans mentioned in
the table, a set of policies has to be laid down relating to a particular area of
business. The policies will ensure that the plans are implemented as intended
and that different functional plans work towards achievement of the same
objectives. The example in Table 14.3 is an illustration of only one group of
strategies, functional plans and required policy support.
Plans and policies have to be developed by companies for all the key
functional decisions pertaining to each particular business strategy.
B. Operational Implementation
We have distinguished between functions and operations earlier in the unit.
Operations are more implementational; they give support to functional policies
and plans. Distribution is a function; transportation involved in distribution is
operation. Operational implementation, therefore, becomes as vital, if not more,
as functional implementation. And, the scope of operational implementation is
very wide because it is part of every function or functional implementation.
Operational implementation, or its effectiveness, depends on four major
interrelated factors. Some call them 4-Ps: processes, productivity, pace and
people (Figure 14.4).
Unit 14
Self-Assessment Questions
15. Functional policies and plans should be________, adaptable and strategydriven.
16. Operational implementation, or its effectiveness, depends on four major
interrelated factors, which are called the.
Unit 14
Self-Assessment Questions
17. The process called _______ links a set of value-creating activities in a
company.
18. ______systems, through appropriate software, seek to integrate the entire
business operations of a company including manufacturing, marketing
finance, HR, logistics, warehousing, etc.
Unit 14
Self-Assessment Questions
19. _________manufacturing is a productivity-cum-efficiency technique with
two primary objectives: cost reduction and inventory minimization.
20. ________ seeks to minimize the time taken for each step or work in the
assembly line or the manufacturing process.
Unit 14
Self-Assessment Questions
21. Time study is one of the latest methods of time management. (True/False)
22. _________and ________of activities are done to construct a critical path
to optimize time and resource allocation, and consequently, saving costs.
Unit 14
Self-Assessment Questions
23. People signify three categories of human resource who matter most for
strategy implementation: workers on the shop floor, operating staff and
managers. (True/False)
Sikkim Manipal University
Unit 14
Unit 14
information about its Windows 95 code till it released the new operating
system and its own new version of Internet Explorer.
During 1999, US district judge, Jackson, delivered a judgement (in US vs
Microsoft) that Microsoft had repeatedly used high-handed tactics to
pressurize customers, crush competitors and throttle competiton. Judge
Jackson cited many examples to support his conclusion/judgement.
But, Microsoft continues to use its marketing/operating muscle to sustain
its dominance. During 2001, the company curtailed its support for Java in
its release of the new Windows XP operating system because Java is
favoured by Microsofts old rival Sun Microsystems. Microsoft is also
pressurizing PC makers to follow/oblige it in different ways.
* Based on A A Thomson, A J Strickland, and J E Gamble, Crafting and Executing
Strategy (New Delhi: Tata McGraw Hill, 2005), 211 (Illustration capsule 8.2).
14.14 Summary
Let us recapitulate the important concepts discussed in this unit:
In any organization, actual implementation of strategy takes place through
major functional areas of manufacturing, marketing, finance, HR and MIS/
IT. In each of these functional areas, operational implementation is equally
important. Functional implementation and operational implementation are,
in practice, complementary to each other.
Marketing is the most vital function in an organization because it
establishes the link between the company and the market or the customers.
In marketing policies and plans, pricing is the most critical element. Pricing
policies and methods are based on the fundamentals of cost, demand
and competition.
Implementation of every strategy has financial implications in terms of
cost or investment. Financial policies and plans are, therefore, as important
or vital as production and marketing policies.
HR function in an organization may not appear as significant as production,
marketing and finance, but, its role is becoming increasingly important.
MIS/IT is a new economy function which is playing a very significant role
in planning, strategy formulation and implementation.
For effective implementation, different business strategies require different
functional policies and plans.
Sikkim Manipal University
Unit 14
14.15 Glossary
Current assets: Assets that are short term in nature and are either held
as cash or expected to be converted into cash during the accounting
period
Fixed assets: Assets that are long term in nature, have certain life and
depreciate
Functional strategy: Strategy that relates to a particular functional area
and follows from business strategy of an organization
Marketing mix: The way the four Ps or some of the Ps (depending on
the product category) are combined or blended to optimize market offerings
to increase sales and market share.
14.17 Answers
Answers to Self-Assessment Questions
1. quality circle
2. Armand Feigenbaum
Unit 14
3. (a) Paper
4. (d) almost zero
5. False
6. True
7. (d) Production
8. (a) Point-of-purchase (POP)
9. True
10. False
11. On-the-job, off-the-job
12. continuous
13. True
14. False
15. flexible
16. 4Ps
17. value chain analysis
18. ERP
19. Just-in-time (JIT)
20. Cycle time reduction
21. False
22. Charting, networking
23. True
24. True
Unit 14
4.18 References
1. David, F R. 2003.Strategic Management: Concepts and Cases. 9th ed.
Pearson Education.
2. Ghosh, P K. 2003. Strategic Planning and Management. 10th ed. New
Delhi: Sultan Chand & Sons.
3. Jauch, L R, R Gupta, and W F Glueck. 2004. Business Policy and Strategic
Management. 6th ed. New Delhi: Frank Bros. & Co.
4. Miller, A. 2002. Strategic Management. New York: McGraw Hill.
5. Nag, A. 2008. Strategic Marketing. 2nd ed. New Delhi: Macmillan India.
6. Pearce II, J A, and R B Robinson Jr. 2005. Strategic Management:
Formulation, Implementation and Control. 9th ed. New Delhi: Tata McGrawHill.
Endnotes
1
Unit 15
Unit 15
Implementation:
Behavioural and Values
Structure
15.1 Introduction
15.2 Caselet
Objectives
15.3 Leadership: Strategic Role
15.4 Leadership Styles
15.5 Is Leadership Style Portable?
15.6 Leadership Role of Top/Senior Management
15.7 Organizational Culture
15.8 Corporate Ethics and Values
15.9 Corporate Politics and Power
15.10 Power, Politics, Strategy and Implementation
15.11 Case Study
15.12 Summary
15.13 Glossary
15.14 Terminal Questions
15.15 Answers
15.16 References
15.1 Introduction
The significance of behavioural factors in strategy implementation in an
organization is clearly understandable. Organizations may plan, formulate and
implement strategies, but, it is the individualsmanagers at different levels
who actually take appropriate actions involved in implementation. So, individualrelated or individual-focussed factors or issues like leadership styles, personal
ethics and values, corporate politics, etc., become very vital. In addition to these,
cultural environment in an organizationwork styles, beliefs, shared values,
etc., is also equally important. Leadership plays a vital role in addition to
organizational culture and values. So, behavioural implementation of strategies
focusses on:
Unit 15
A. Role of leadership
Strategic role
Leadership styles
Role of top management
B. Organizational culture, values, politics
Organizational culture
Business ethics and values
Corporate politics and power
We shall analyse each of these factors below. In analysing these factors,
we shall discuss changing roles and styles of leaders, cultural web, strategy
culture relationship, cultural barriers to strategy implementation, strategy
supporting culture, organizational ethics, personal values of managers, corporate
politics, corporate power equations, etc.
15.2 Caselet
The quality and style of a companys leader is very important in determining
its growth and sustainability. Wipro was a small insignificant vegetable oil
company in 1947, which grew into a multinational conglomerate in the 21st
century. Wipro Technologies, one of the largest software companies in India,
is headed by Azim Premji (Premji), whose leadership is characterized by
sound values, integrity and professional will. It is these qualities that have
driven Premji to churn Wipro from a $2 million company to a $1.76 billion
one, serving customers across the globe. Premjis sharp strategic vision
and crisp communication skills led his team to strive for excellence. He has
been known for his modesty, simplicity and non-extravagance.
Source: J. Shalom J and Ravi L (2009), Wipros Azim Premji: Level 5 Leadership
Style? Available at http://www.ibscdc.org/Case_Studies/HRM/OB0021.htm
Objectives
After studying this unit, you should be able to:
Analyse the role of leadership in strategy implementation
Discuss whether leadership style is portable
Analyse the role of organizational culture in implementation of strategy
Unit 15
Unit 15
Self-Assessment Questions
1. A leader implements the strategy formulated by others. (True/False)
2. A leader should not delegate authority. (True/False)
Style/Characteristics
Risk taking
Technocracy
Organicity
Participation
Coercion
Source: Adapted from P Khandwala, Some Top Management Styles: Their Context
and Performance, Organization and Administrative Science (Winter, 1977), 2125.
Sikkim Manipal University
Unit 15
L N Mittal
Dhirubhai Ambani
Aditya Birla
Ratan Tata
Rahul Bajaj
Azim Premji
Unit 15
Unit 15
Self-Assessment Questions
3. Leadership _________ is a way or pattern of behaviour, which a leader
adopts in managing the affairs of the organization.
4. Skills or capabilities required to control or manage different strategic
situations are referred to as _________.
5. Skills or capabilities required to control or manage different strategic
situations are referred to as ________.
6. Skills, relationships and understanding an executive develops in course
of working with his/her team or colleagues are referred to as _______.
Unit 15
strategic leaders include members of the board of directors, the top management
team and senior managers including general manager (GM), vice-president
(VP), assistant vice-president (AVP), etc. We had discussed the role of managers
at different levels in the strategic management process in Unit 2. The focus
here is on leadership styles or qualities of the top/senior managers and the
important issues related to this.
The top/senior level managers are vested with the responsibility (under
the guidance/supervision of CEO) for formulating and implementing strategies
of the organization. The top/senior level managers take most of the strategic
initiative in the company, and, participate in the process of formulation of strategic
plans. Strategic decisions by top/senior level managers influence, to a large
extent, how far corporate goals will be achieved. Top/senior managers also
help to develop appropriate organizational structures and systems for successful
implementation of strategies. In Unit 12, we had analysed how organizational
structure and reward systems affect implementation of strategies. The top/senior
managers perform their leadership roles individually or, more often, as a team.
Unit 15
more heterogeneous a top management team is, the more varied knowledge
and experience will be at its disposal for effective interaction and decision making.
Different perspectives given by team members during meetings are likely to
increase the quality of the teams decision, particularly when a consensus or
synthesis emerges from diverse perspectives. Research has shown that greater
heterogeneity among top management team members generates healthy debate
which often leads to better strategic decisions, implementation and organizational
performance.
Unit 15
the CEO. In either case, the CEO exercises significant control over the boards
actions. Thus, the amount of discretion a CEO has in making strategic decisions
is related to the board of directors and how it oversees the CEOs actions and
the top management team. For poor performance of HP during Carly Fiorinas
leadership, the board of directors had to share part of the blame.
Activity 1
The predominant styles of eight leaders have been mentioned in the text.
Choose any of these leaders and make a detailed analysis of his functioning
style.
Self-Assessment Questions
7. The primary responsibility for providing effective strategic leadership is
vested at the top, that is, the CEO. (True/False)
8. The leadership of a company rests only with the CEO. (True/False)
9. The more _______a top management team is, the more varied knowledge
and experience will be at its disposal for effective interaction and decision
making
10. Hiring a new CEO from outside the company or industry adds _______ to
the team.
Unit 15
Unit 15
Unit 15
Self-Assessment Questions
11. The set of assumptions, beliefs, values and norms that are shared by an
organizations members is called ________.
12. ________ is a method to change organizational culture that combines
obtrusive observations, self-administered questionnaires and personal
interviews to analyse the existing organizational culture.
13. A sound organizational culture is always conducive to strategy formulation
and implementation. (True/False)
14. A change of strategy should be the first option for a company.
(True/False)
Unit 15
and corporate ethics in Unit 3. But, that was more with reference to corporate
ethics and values in the context of strategy formulation and implementation.
Organizational ethics may be generally understood to be of two kinds: (a)
professional ethics or ethics in terms of observance of rules, procedures,
systems, etc., and, (b) value ethics or ethics in terms of personal integrity of
individual managers. In terms of personal values, three types of managers can
be distinguished: the moral manager, the immoral manager and the amoral
manager. The moral manager is fully committed to high standards of ethical
behaviour both in his individual actions and in his perception of how the
companys business should be conducted. The immoral manager is openly or
clearly opposed to ethical behaviour in business, and willingly ignores ethical
principles in his management and decision making. The amoral manager believes
that business and ethics need not be mixed. He feels that it is not necessary to
introduce ethical considerations into his business practices and decisions
because business activity lies outside the purview of moral judgement. Corporate
ethics has three aspects or dimensions: development of the manager as a moral
person; influence of the organization as a moral environment; and, evolving
procedures, regulations and actions to ensure a high level of ethical performance
in general management and strategic operations and implementations.
Unit 15
Unit 15
who create and nurture the culture. It is clearly understood in such companies
that corporate strategy should be ethical in all respects and ethical behaviour
should also be reflected in strategy implementation.17
Unit 15
and achieving numbers is the key to survival. Managers had to devise clever
ways to bolster revenue and earnings even if it meant violating existing policies
and norms and doing things without the knowledge of superiors. In fact, for
generating profitable new business, out-of-ethics practices were even
appreciated and sometimes celebrated.
Unit 15
Unit 15
Self-Assessment Questions
15. Organizational ethics may be generally understood to be of two kinds
_______ and _______ ethics.
16. In the _______ approach, ethical business practices are rooted in the
organizational culture itself.
17. _________ managers are characterized by their lack of personal integrity
and disregard of ethical values.
18. In the ________ approach, companies are generally amoral, but, the
objective is to protect the company from adverse publicity.
Unit 15
Unit 15
Self-Assessment Questions
19. The ________ view of strategy development relates to the proposition
that strategies develop as the outcome of process of bargaining and
negotiation among powerful internal or external.
20. _______ power emanates from a managers knowledge, competence
and expertise acknowledged by others in the organization.
Unit 15
Mintzberg contends that the organization must ... pull apart before it can pull
together again.25 Quinn (1980) observes that most strategic decisions and
strategic thrusts in large enterprises emerge as part of an evolving continuous
political consensusbuilding with no precise beginning or end.26
All this tends to indicate that a manager cannot effectively formulate and
implement strategy without being perceptive about company politics and being
adept at political manoeuvring.27 What is important or essential is that managers
and strategists should know when to exploit power and politics, and, when to
shun them and promote harmony for achievement of organizational objectives.
Based on an understanding of the power structure, and, the nature of corporate
politics, the strategists should master support for acceptable proposals and
garner similar support for discarding unacceptable or unviable ones.
Some strategic analysts feel that power and politics have a more critical
role to play in strategy implementation than in strategy formulation. There is a
valid reason behind such thinking. Strategies are mostly formulated (planned
and finalized) by the strategic planning group under the direction of the top
management/CEO. Many functional and operational areas may not be
associated with this. But, implementation invariably involves the major functional
and operational areas. Let us take the example of diversification strategysay
launching of a new product. Three functional areasmanufacturing, finance
and marketingwill play critical roles in implementation of this strategy along
with the respective operational areas. Successful implementation of this strategy
necessitates balancing of interests of all the functional and operational areas
involved and, therefore, requires conflict resolutions (handling inter-functional
and interpersonal clash of interests), consensus building and managing
understanding or coalitions. This can be achieved only through careful and,
sometimes delicate, management of power and politics.
The strategists and managers responsible for implementation should,
therefore, take cognizance of the dominant factors in organizational politics
and power. In other words, managers should make strategic use of power and
politics in implementation. For this, 10 guidelines28 may be followed. The
guidelines recommend that managers should:
(a) Accept the inevitability of power and politics in organizational
functioning.
(b) View power and politics more as positive factors in strategic
management.
Unit 15
Self-Assessment Questions
21. According to Mintzberg (1991), corporate politics is inherently bad.
(True/ False)
22. Managers should accept the inevitability of power and politics in
organizational functioning. (True/ False)
Unit 15
through integration of the two companies and be able to compete with the
likes of Dell Computer and IBM. This was a high profile acquisition and
many such M&As were not successful in the past. Therefore, Fiorinas
decision involved a high element of risk.
The developments after the acquisition exposed the risk factor. Even after
three years of merger of Compaq with HP, the new HP could not compete
with Dell or IBM. Some analysts think that Fiorina overlooked critical
operating issues which had to be addressed, particularly to compete with
the super-efficient Dell.*
During 2004, HP fell far short of its sale and profit targets. Because of the
companys poor performance, the stock price fell and investors and other
stakeholders got worried. Many HP managers viewed Fiorinas style more
as a promotional role than as strategic leadership. Many felt that Fiorina
had a vision, but she was unable to secure necessary internal/organizational
support to fulfil the vision.** After being in HP for almost six years as CEO,
Fiorina was finally fired.
HP hired Mark Hurd as the new CEO. Mark was viewed as quiet, unassuming
and un-Carly. His approach was traditional. He was a nuts-and-bolts
operation man with apparently no clear vision. Working on short-term targets
to reduce costs without a long-term vision was not considered a good
strategy of recapturing HPs lost glory. Hurds style has been summarized
as executing, but without a long-term sense of direction.***
For HP, some have suggested a combination of (styles of) Fiorina and
Hurd. This would blend a thinker with vision and a doer who excels in
execution and operational efficiency. Both styles may be required for
strategic leadership. But, it implies dual CEO. Is it possible in practice?
* B Elgin, The Inside story of Carlys ouster, Business Week, (February 10, 2005).
** .Ibid.
*** P Burrows, and P Elgin, The Un-Carly Unveils His Plan, Business Week, June 16,
2005.
Unit 15
15.12 Summary
Let us recapitulate the important concepts discussed in this unit:
Organizations may plan, formulate and implement strategies, but, it is
the individualsmanagers at different levelswho actually take
appropriate actions involved in implementation.
Individual-related or individual-focussed factors or issues like leadership
styles, personal ethics and values, corporate politics, etc., are very
important. In addition to these, organizational culturework styles, beliefs,
shared values, etc.,is equally important or vital.
In an organization, the leader performs two strategic roles. First, he/she
is the architect of a strategyinnovates, conceives, plans and formulates
strategy; second, he/she is the implementor of strategyinitiates action
and induces/drives the employees into operation.
Leadership style is way or pattern of behaviour which a leader adopts in
managing the affairs of an organizationdirecting and motivating
managers and staff for achievement of organizational objectives.
Next only to leadership style, organizational culture plays the most
important role in the strategy implementation process of a company.
The most important characteristic of organizational culture is sharing or
common beliefs, values, attitudes, feelings, etc.
Different companies adopt different approaches to business ethics. It
depends on their prioritization of ethical practices in conducting business.
15.13 Glossary
Business ethics: A form of professional ethics that examines ethical
principles and moral or ethical problems that arise in a business
environment. It applies to all aspects of business conduct and is relevant
to the conduct of individuals and entire organizations.
Leadership style: A way or pattern of behaviour which a leader adopts
in managing the affairs of the organization.
Organizational culture: The set of assumptions, beliefs, values and
norms that are shared by an organizations members.
Triangulation: A multimethod technique for analysing and changing a
companys culture that combines obtrusive observations, self-administered
questionnaires and personal interviews to analyse the existing
organizational culture.
Sikkim Manipal University
Unit 15
15.15 Answers
Answers to Self-Assessment Questions
1. False
2. False
3. style
4. strategic human capital
5. Strategic human capital
6. Relationship human capital
7. True
8. False
9. heterogeneous
10. diversity
11. Organizational culture
12. Triangulation
13. True
14. False
Sikkim Manipal University
Unit 15
15.16 References
1. Collins, J C, and J I Porras. 1994. Built to last: Successful Habits of
Visionary Companies. New York: Harper Business.
2. Groysberg, B, A Mclean, and N Nohria. Are Leaders Portable? Harvard
Business Review, May, 2006.
Unit 15
A D Szilagyi Jr, and M J Wallace, Jr. Organisational Behaviour and Performance, 2nd
ed., (Glenview, IL: Foreman and Company, 1980), 274.
Sinha, J B P, The Nurturant Task Leader: A Model of Effective Executive, ASCI Journal
of Management (Vol. 8), 1979, 10919
M L A Hayward, et al., Believing ones own Press: The Causes and Consequences of
CEO Celebrity, Strategic Management Journal, 25, 2004.
Y Zhang, and N Rajagopalan, Explaining the New CEO Origin: Firm versus Industry
Antecedents, Academy of Management Journal, 46, 2003.
10
11
V Sathe, Culture and Related Corporate Realities (Homewood, III: Richard D Irwin, 1985),
12
13
For details, refer J Duncan, Organisational Culture: Getting a Fix on an Elusive Concept,
Academy of Management Executive (August, 1989).
14
15
16
J C Collins and J I Porras. Built to Last: Successful Habits of Visionary Companies (New
York: Harper Business, 1994).
17
18
A A Thompson Jr, A J Strickland III, J E Gamble, and A K Jain, Crafting and Executing
Strategy: The Quest for Competitive Advantage, 14th ed. (New Delhi: Tata McGraw-Hill,
2006), 287.
19
Ibid. 286.
Unit 15
20
Picking India Incs Conscience: The KPMG Business Ethics Survey, Financial Express,
(October, 1999), 5.
21
This is discussed in D Buchanan, and D Boddy, The Expertise of the Change Agent:
Public Performance and Backstage Activity (London: Prentice Hall, 1992).
22
J R P French, and B Raven, The Bases of Social Power, in Studies in Social Power, ed.
D Cartwright (Ann Arbor, MI: University of Michigan Press, 1959), 15067.
23
24
25
H Mintzberg, The Effective Organization: Forces and Forms, Sloan Management Review,
32 (Winter, 1991), 5467
26
27
A Zaleznik, Power and Politics in Organisational Life, Harvard Business Review, (48)3,
4760.
28
The guidelines are generally based on A Kazmi, Business Policy and Strategy Management
(New Delhi: Tata McGraw-Hill, 2005), 363.
Unit 16
Unit 16
Structure
16.1 Introduction
16.2 Caselet
Objectives
16.3 The Evaluation and Control Process
16.4 Evaluation and Control Criteria: Pre-implementation
16.5 Implementation Process Control
16.6 Evaluation and Control Criteria: Post-implementation
16.7 The Balanced Scorecard Approach
16.8 Organizational Controls
16.9 Six Sigma Approach to Evaluation and Improvement
16.10 Characteristics of an Effective Evaluation System
16.11 Case Study
16.12 Summary
16.13 Glossary
16.14 Terminal Questions
16.15 Answers
16.16 References
16.1 Introduction
For an organization, evaluation and control of strategy is the final stage, and, is
one of the most vital stages in the strategic management process. Through the
evaluation system, the management tries to demonstrate how well the chosen
strategy is implemented and how successful or otherwise the strategy is. If
implementation is not taking place as planned, or, if there are deficiencies in the
strategy in terms of achievement of the objectives or targets which are getting
exposed during implementation, appropriate control mechanisms have to be
put in position for taking necessary corrective actions based on the feedback
process.
In analysing the strategy evaluation and control process, we will be
discussing here all related factors and issues. We shall start with an
understanding of the evaluation and control process. We will discuss preimplementation and post-implementation evaluation and control criteria. In terms
Unit 16
16.2 Caselet
Six Sigma has evolved into a highly rigorous tool for analysis and continuous
improvement of corporate performance. Six Sigma at many organizations
simply means a measure of quality that strives for near perfection. To achieve
Six Sigma, a process must not produce more than 3.4 defects per million
opportunities. Six Sigma processes are executed by Six Sigma Green Belts
and Six Sigma Black Belts, and are overseen by Six Sigma Master Black
Belts. According to the Six Sigma Academy, Black Belts save companies
approximately $230,000 per project and can complete 4-6 projects per year.
(Given that the average Black Belt salary is $80,000 in the United States,
that is a fantastic return on investment.) General Electric, one of the most
successful companies implementing Six Sigma, has estimated benefits on
the order of $10 billion during the first five years of implementation. GE first
began Six Sigma in 1995 after Motorola and Allied Signal blazed the Six
Sigma trail. Since then, thousands of companies around the world have
discovered the far reaching benefits of Six Sigma.
Source: http://www.isixsigma.com/new-to-six-sigma/getting-started/what-six-sigma/
Objectives
After studying this unit, you should be able to:
Discuss the evaluation and control process in an organization
Identify the evaluation and control criteria: pre-implementation and postimplementation
Analyse the strategy implementation process control
Use the concept and tool of balanced scorecard analysis
Apply the Six Sigma approach to corporate evaluation and improvement
Unit 16
Unit 16
As seen in the figure, the evaluation and control system actually operates
through stages C, D and E. The evaluation process may reveal many things.
Targets or standards may not be met because those are too high or low (too
soft). All objectives and targets are based on certain assumptions. Sometimes,
assumptions may be erroneoustoo rigid or too general. In some cases, the
assumptions may have been based on pessimistic environmental scenario and
the goals and objectives may be conservative or narrow in scope. The
assumptions might have ignored the new or emerging environmental
opportunities. Under the opposite set of assumptions or scenario, the objectives
may be too ambitious or unrealistic. It is also possible that the objectives have
been achieved because the strategy has not been properly implemented; that
the selection of strategy has not been very appropriate. The strategists/
management have to ascertain which of these factors or cause-and-effect
relationships are at work.
The evaluation and control system generally operates during the process
of implementation of a strategy as shown in Figure 16.1. But, these can be
applied before and after implementation also. So, the evaluation and control
process can be analysed during three stages:
(a) Pre-implementation;
(b) During implementation; and
(c) Post-implementation.
Self-Assessment Questions
1. The evaluation and control system is a ________ process, with five
interrelated steps or stages.
2. The evaluation and control system generally operates during the process
of _____of a strategy.
Unit 16
Unit 16
Unit 16
Self-Assessment Questions
3. Which of these is an evaluation criterion for pre-implementation
assessment of strategies?
(a) Suitability
(b) Acceptability
(c) Feasibility
(d) All the above
4. Factors or aspects of strategy in which a company must excel to outperform
competitors are known as _________.
Unit 16
Unit 16
Unit 16
Unit 16
Self-Assessment Questions
5. The objective of _______ control is to identify key or critical assumptions.
6. _______ control is designed to monitor a broad range of events inside
and outside the company that are likely to threaten the course of a firms
strategy.
7. The control that is focussed on the actual process of implementation is
called __________.
Unit 16
performance criteria are expressed in relative terms or ratios. Ten major financial
and non-financial criteria may be used:
Financial
1. Return on investment (ROI)
2. Return on equity (ROE)
3. Earnings per share (EPS)
4. Price-earnings ratio
5. Profitability: profit/sales ratio
6. Profitability: relative profit growth
Non-financial
7. Market share: absolute market share
8. Market share: relative market share
9. Sales ratio: actual to target sales
10. Sales ratio: relative sales growth
We had discussed the financial ratios in Unit 6 (Table 6.1). The above
ratios and also the non-financial evaluation criteria are briefly described below.
Return on investment (ROI) is gross or net income on total investment of
a company including both fixed investment and working capital. Return on equity
(ROE) is gross or net income on equity capital. Earnings per share (EPS) is
gross or net income divided by total number of equity shares. Price-earnings
ratio is market price per share to earnings per share. Profit-to-sales ratio is
gross or net profit to total sales (these are also called gross profit margin or net
profit margins). Relative profit growth is the growth of profit of the company
relative to that of the market leader or the nearest competitor.
Absolute market share is a traditional measure or indicator of performance
of a company. But, relative market share is a better indicator of competitive
performance. Relative market share can mean two things. The first is the ratio
of market share of the company to that of the market leader; if the company is
the leader, the ratio of its share to its challenger or No. 2. The second is the ratio
of companys market share to its nearest rival or rivals (when the company is
ideally in No. 2, No. 3 or No. 4 position). Sales ratio can be either actual sales or
turnover to target sales or relative sales growth, i.e., growth in sales of the
company to that of the leader or nearest rival as explained in the case of market
share.
Sikkim Manipal University
Unit 16
1.
Return
on investment
2.
Return on equity
3.
Earnings
per share (`)
Objective/
Target
Expected
Expected
Actual
Shortfall/
Performance Performance Performance Variance
(without stategic (with stategic
intervention)
intervention)
5%
3%
5%
6%
+1%
25%
15%
25%
20%
5%
20
10
20
15
4.
100%
150%
150%
0%
5.
Profit/sales ratio
15%
10%
15%
12%
3%
6.
Relative
profit growth
140%
100%
140%
120%
20%
7.
Absolute
market share
30%
20%
30%
30%
0%
8.
Relative
market share*
80%
60%
80%
70%
10%
9.
Ratio of
actual sales to
100%
80%
100%
110%
10%
150%
100%
150%
130%
20%
target sales
10. Relative
sales growth**
*relative to the leader
As shown in the table, there can be mixed results in terms of targets and
achievements. The ideal situation would be if actual performance in terms of all
major evaluation criteria matches with targets or budgeted estimates given certain
Sikkim Manipal University
Unit 16
Unit 16
Unit 16
Self-Assessment Questions
8. Quantitative evaluation criteria or indicators of performance are always
financial. (True/False)
9. Relative market share is a better indicator of competitive performance
than absolute market share. (True/False)
10. The gross or net income on total investment of a company including both
fixed investment and working capital is called __________.
Unit 16
Unit 16
Unit 16
Activity 2
Select a large public limited company and do a balanced scorecard analysis
of the company using the balance sheet, annual report, balance sheet and
profit and loss account.
Self-Assessment Questions
11. The ______ approach combines both quantitative and qualitative criteria/
measures of evaluation and incorporates expectations of different
stakeholders in relating performance to strategy.
12. A properly built scorecard is balanced between ________ and _____
measures.
Unit 16
Unit 16
Self-Assessment Questions
13. Strategic controls are largely subjective criteria applied to ensure that the
company is adopting appropriate strategies for securing competitive
advantage. (True/False)
14. Financial control focusses on long-term financial outcomes. (True/False)
Unit 16
Unit 16
4. Improve
Brainstorming sessions
Quality tool deployment
Failure modes and effects analysis (FMEA)
Testing (piloting) the solution
Implementation planning
Culture change planning for the organization
5. Control
Statistical process control
Developing a process control plan
Documenting the process
Many Six Sigma programmes are based on an uncompromising
orientation of all business processes towards the customer. The focus is on
clear understanding of customer expectations so that appropriate methods can
be developed to improve and realign business processes for maximizing
customer satisfaction. Six Sigma implementation at Citibank is one such
example.
Self-Assessment Questions
15. The _________ approach is conventionally known for minimizing errors
or defects in manufacturing or quality improvement.
16. In some companies, Six Sigma is referred to as the new __________.
Unit 16
and follow some norms and standards. Strategic analysts have laid down certain
basic requirements which evaluation should comply with to be effective.
First, strategy evaluation process or measures should be meaningful.
These should specifically relate to the objectives/targets and the plan. There
should be clear focus and no ambiguity.
Second, strategy evaluation and control process should be economical.
This means that the process should not be made unnecessarily elaborate and
incur too much cost on evaluation itself. Use of too much of information which
may not be necessary increases cost which is avoidable.
Third, the evaluation process should conform to a proper time dimension
for control and information retrieval or dissemination. Time dimension of control
should coincide with the time span of the activity or the implementation phase.
Also, information on developments or feedback should be timely (not delayed
or provided too early) to make evaluation and control more appropriate.
Fourth, strategy evaluation system should give a true picture of what is
actually happening. The objective of evaluation is not fault finding. Sometimes,
performance may be overshadowed by external factors or the environment.
For example, during a severe slump in economic/business activity, productivity
and profitability may decline in spite of best efforts by the managers to implement
strategy. This should be analysed in the correct perspective.
Fifth, strategy evaluation process should not dominate or curb decisions;
it should promote mutual understanding, trust and common cause. All functional
and operational areas should cooperate with each other in evaluating and
controlling strategies. Strategy evaluation process should be simple and not
too complex or restrictive. Complex evaluation systems may confuse managers
and result in lack of accomplishments.14
It is true that there may not be any ideal or the only strategy evaluation
system. All organizations are unique in themselves in terms of vision/mission,
objectives, size, management style, strengths, weaknesses, organizational
culture, etc. All these together determine the exact nature of the evaluation
system, as also the implementation process, which is most suitable for the
organization. Waterman (1987) has made some useful observations about
strategy evaluation system of successful organizations:
Unit 16
Self-Assessment Questions
17. The evaluation process should conform to a proper ________ for control
and information retrieval or dissemination.
18. The strategy evaluation process should not ________ decisions.
Unit 16
16.12 Summary
Let us recapitulate the important concepts discussed in this unit:
Evaluation and control of strategy is the final stage, and, is one of the
most vital stages, in the strategic management process of an organization.
Through the evaluation system, the management tries to demonstrate
how well the chosen strategy is implemented, and how successful or
otherwise the strategy is.
Sikkim Manipal University
Unit 16
16.13 Glossary
Six Sigma: A quality-control program developed in 1986 by Motorola.
Initially, it emphasized cycle-time improvement and reducing manufacturing
defects to a level of no more than 3.4 per million.
Strategic control: process of monitoring as to whether to various
strategies adopted by the organization are helping its internal environment
to be matched with the external environment.
Strategic surveillance: A process by which a company can keep control
over organizational factors, industry factors and also major environmental
factors.
Unit 16
16.15 Answers
Answers to Self-Assessment Questions
1. step-by-step
2. implementation
3. All the above
4. (d) Critical success factors (CSFs)
5. premise
6. strategic
7. Implementation control
8. False
9. True
10. Return on investment
11. balanced scorecard
12. financial, non-financial
13. True
14. False
15. Six Sigma
16. TQM
Sikkim Manipal University
Unit 16
16.16 References
1. Jauch, L R , R Gupta, W F Glueck. 2004. Business Policy and Strategic
Management. 6th ed. New Delhi: Frank Bros & Co.
2. Kaplan, R, and D Norton. The Balanced Scorecard: Measures that Drive
Performance. Harvard Business Review, JanuaryFebruary, 1992.
3. Kaplan, R, and D Norton. Using the Balanced Scorecard as a Strategic
Management System. Harvard Business Review, JanuaryFebruary,
1996.
4. Schreyogg, G, and H Steinmann. 1987. Strategic Control: A New
Perspective. Academy of Management Review, Vol. 12 (1).
Unit 16
Johnson and Scholes (1999) and others call these critical success factors (CSFs) and
Aaker ( 1995) and others call these key success factors (KSFs).
J Dougery, T Fabregas, and others, The California Wine Industry Report, (Unpuhlished
Paper, 1991).
I I Mitroff, 'Crisis Management: Cutting through the Confusion', Sloan Management Review,
(Winter, 1988), 19.
F R David, Strategic Management: Concepts and Cases, 9th ed., (Pearson Education,
2003), 308.
W F Glueck and L R L R Jauch, Business Policy and Strategic Management, 4th edn.,
(New York: McGraw-Hill, 1984), 399402.
10
11
12
For conceptual understanding of Six Sigma and other sigmas, refer any standard textbook
on TQM or quality management.
13
These have been abstracted and adapted from J A Pearce II and R B Robinson Jr (2005),
377-78
14