MB0052

Unit-01-Introduction to Strategies
Structure:
1.1 Introduction
Objectives
1.2 Fundamentals of Strategy
1.3 Conceptual Evolution of Strategy
1.4 Scope and Importance of Strategies
1.5 Purpose of Business
Setting goals SMART
Objectives and tactics
1.6 Difference between Goals and Objectives of Business
1.7 Strategic Intent through Vision and Mission Statements
1.8 Core Competencies of Business
1.9 Summary
1.10 Glossary
1.11 Terminal Questions
1.12 Answers
1.13 Case-let
1.1 Introduction
In this unit you will study the basics of strategies that are applicable in business. A strategy
involves integrating organisational activities and assigning the limited resources within its
environment to meet the organisation goals.
Strategy is the method by which an organisation systematically achieves its future objectives. A
business cannot progress for a long term without a reliable strategy. In this unit, you will learn
meaning of business strategies, its conceptual evolution, scope and its importance, distinction
between goals and objectives, analysing strategic intent through vision and mission statements
and finding out the significance of core competencies of business and critical success factors.
Objectives
After studying this unit you should be able to:
define and explain the scope and importance of strategy
identify the purpose of business and the SMART goals
differentiate between goals and objectives of an organisation
describe the strategic intent using vision and mission statements
explain how core competencies and critical success factors of business help in strategic
decisions.
1.2 Fundamentals of Strategy
Strategy is a common direction set for the company and its various components to accomplish a
desired position in the future. A meticulous planning process results in strategy. It is the
comprehension of the goals which has logical step by step process. It defines the general mission
and vision of an organisation. It is important to consider that the decisions taken by an
organisation are likely to affect the employees, customers and competitors.
Strategy guides the organisation to achieve a long term goal. The strategy is advantageous to the
organisation through its configuration of resources within a challenging environment. It helps to
meet the requirements of market and stakeholder expectations.
Strategy is a plan that is aimed to give a competitive advantage to the organisation over rivals
through differentiation. Creating a strategy begins with extensive research and analysis. It is a
process through which senior management concentrates on top priority issues tackled by the
company to be successful in a long term.
It is the design of decisions in an organisation that sets its goals and plans to achieve it. The
organisation plans the future goals to contribute at large to its shareholders, customers and to the
society. Strategy is always improving and is amendable. It is a plan of future activities which is
aimed at the progress of an organisation. It is a set of directions to enhance the position of the
organisation in the overall market. Business strategy is the method by which an organisation
achieves and maintains its success. If an organisation cannot identify its strategy clearly then it
will struggle to survive in the competitive market. A steadfast strategy should be built to grow in
the market.
A fundamental concept is required to direct an organisation to create a sustainable and successful
plan. The organisation must understand the customer requirements and relate to its customers for
the success of business strategy. This understanding should be based on the attitude of the
organisation to progress rather than focusing on a specific competitor or on current objectives. It
is from this principle that the other objectives follow.
Business strategy is used to achieve competitive advantage. The efficient development and
implementation of strategy depends on the capability of the organisation. This includes the
ability to prepare the strategic goals and implement the plans through strategic management.
Levels of strategy
Strategy exists at different business levels. The different levels of strategies are as follows:
Corporate Strategy This is regarding the general function and scope of the business to meet the
stakeholders expectations. As it is significantly influenced by the investors in the business, it is
also called the critical level strategy.
Business Strategy This is regarding how a business competes effectively in a particular market. It
includes strategic decisions about the selection of products and meeting customer requirements.
Operational Strategy This is regarding how each part of the business is organised and delivered
to the corporate and business level. Operational strategy focuses on issues of resources and
practices of an organisation.
1.3 Conceptual Evolution of Strategy
The word strategy is derived from the Geek word strategia, and conventionally used as a military
term. It means a plan of action that is designed to achieve a particular goal. Earlier, the managers
adopted the day-to-day planning method without concentrating on the future work. Later the
managers tried to predict the future events using control system and budgets. These techniques
could not calculate the future happenings accurately. Thus, an effective technique called strategy
was introduced in business to deal with long term developments and new methods of production.
The different concepts of strategy are:
It is defined as a plan to direct or guide a course of action
It is a pattern to improve the performance over time
It is a fundamental way to view an organisations performance
It is a scheme to out-maneuver competitor
Nature of strategy
Strategy is the blend of procedures intended to meet a particular situation and to solve certain
problems. It is a combination of internal and external factors that are involved in meeting the
organisations objective. A good strategy which is effectively implemented is the key to success
of an organisation. Strategy is the capabilities of a business, its strengths and weaknesses, the
outer environment of opportunities etc. It is a plan of action that develops a competitive
advantage in business. Example - Southwest Airlines is one of the profitable air carriers in North
America. Its strategy was not imitating its rivals but implementing a different strategy
comprising low fares, frequent departures and customer service. The nature of strategy is as
follows:
Strategy is intended to grab the opportunities and face the threats provided by the external
factors.
Strategic proceedings are required for new opportunities which might arise in future.
Strategy requires systems and norms for its efficient adoption in any organisation.
Strategy provides framework for guiding the project.
Self Assessment Questions
1. _____________is the method by which an organisation achieves and maintains its success.
2. Operational strategy focuses on issues of _____________and_____________ of an
organisation.
3. _____________is regarding how a business competes effectively in a particular market.
1.4 Scope and Importance of Strategies
Strategy is prepared to achieve the mission of the company by long-term and short-term goals.
Strategy is prepared to create an understanding about how the external and internal
environmental factors affect the business activities and to make a proper selection of new
alternatives. The best option is selected keeping companys competence, risk, and business
opportunities into consideration.
Scope of strategy
The different scopes of strategies are:
To fix mission of the organisation There is a purpose behind the establishment of an organisation.
Goals are set to achieve these objectives. The mission of the organisation is achieved by the
successful achievement of the objectives. A strategy is prepared to achieve long term and short
term goals.
Example The mission of an automobile company is to launch a car running on solar energy
within the next 15 years.
To create constructive internal environment Internal environment includes financial resources,
production capacity and manpower. If the internal environment is inadequate to meet the
objectives, measures should be taken to improve it.
Example To increase the selling capacity, efficient training is provided to the salesmen to
improve marketing skills.
Analysis and assessment of external environment The external environment includes product of
competitors, trend of customers, government policy, new technology etc. An analysis should be
made on how the external environment is affecting the business activities at present and in
future. By evaluating these factors, an effective strategic plan should be developed.
SWOT analysis SWOT is a method used for assessment. The SWOT analysis is done after
analysing the internal and external environment. SWOT stands for strengths, weaknesses,
opportunities, and threats. The organisations strengths, weaknesses, opportunities and threats are
considered. These factors are related to the objective of an organisation and a proper strategy is
adopted to improve and develop the situation.
Example If an organisation has sufficient export orientation, but faces a labour problem then its
business gets affected. This is the companys weakness. If an efficient strategy is devised to
improve the situation the company can expand its export business.
To develop an overall strategy The organisation should have a clear long-term goal. For the
success of long-term and short-term objectives, a strategy is prepared.
Example To manufacture machines run by solar energy, a strategy should be planned to locate
plants to have international presence, build research department, and manufacture the machines.
To increase resources and facilities To achieve targets as per the time frame, it is important to
improve the required resources and facilities. To increase the production, it is important to
increase employees and their facilities. Proper distribution of financial and non-financial
resources is necessary to encourage employees to achieve targets.
Evaluation and control Short-term targets are evaluated on a timely and regular basis for the
success of strategy. If the activities are not progressing towards the planned goals then steps are
taken to improve it. Example Training and guidance is given to the employees to improve their
work efficiency. Some activities can be improved by controlling steps. Example Changes in
policy and methods, changes in technology, etc.
Importance of strategy
Strategy is an important feature as it facilitates a quantity of procedures and preferred outcomes
that would be difficult otherwise. Preparing a reliable strategic plan is important as it provides a
clear idea of the objectives to the employees of the organisation. A strategic plan gives the
employees a clear vision of the goals and objectives of an organisation. The formulation of
strategy influences an organisation to prepare for change and to study the prospect of change in
the estimated future. An organisation plans its capital budgeting through a logical strategy plan.
Usually, companies have limited funds therefore they must assign capital investments effectively
to obtain maximum returns from their investments.
Strategic planning in business is essential for the long term survival of an organisation. To
identify the progress of business and its success is the fundamental purpose of strategic planning.
It facilitates the opportunity to grow and increase the turn over. A business cannot progress for a
long term without a reliable strategic plan. Thus, quality time should be devoted to plan the
strategy as it demands innovative ideas and a unique key to progress. It is a crucial business
procedure from the beginning of the business as it is impossible to progress and expand in
business without a competent strategic plan.
Strategy is important because it is not possible to predict the future. In future the organisation
might have to deal with uncertain consequences which are a part of the business environment.
Strategy deals with long term progress rather than daily activities. It deals with probability of
innovations of new products or new markets to be developed in future. Strategy is created to
predict the credible behavior of customers and competitors. Strategies dealing with employees
predict the employee behavior. In contrast, an organisation without a clear strategic plan is
affected by external pressures and is less efficient in handling changes in the market. In todays
highly competitive market, an organisation without a rational strategy is likely to be overtaken by
its competitors.
Activity 1
Consider that you are the manager of a mobile phone company that is introducing a mobile
phone with new features in the market. Frame and design the basic and important strategies to
make the product successful.
Refer this link for guidance:http://www.futurelab.net/blogs/marketing-strategy-
innovation/2008/02/nokias_mobile_phone_strategy.html
4. The internal environment includes_____________, _____________ and ____________.
5. A strategic plan gives a clear vision of the _____________ and _____________ to the
employees of an organisation.
6. _____________ is a tool for auditing an organisation.
1.5 Purpose of Business
When we start a business we should know its purpose. As a business is an organ of the society,
the purpose must lie in the society. The purpose of business is to create a customer. The
foundation of a business is its customers who maintain its existence. As the purpose of the
business is to create customers, every business enterprise has two fundamental functions,
marketing and innovation.
Marketing is the management process which involves identifying, predicting and satisfying the
customer requirements.
Innovation is the development and implementation of novel product or service with the aim to
improve efficiency and competitive benefit. It is a process where product or service is innovated
to increase customer satisfaction.
The main objectives of a business are:
Survival The purpose of a business is to survive in the competitive market.
Profit maximisation To make maximum profit out of the business.
Sales growth To increase the sales and expand the business.
1.5.1 Setting goals SMART
To develop a successful project it is important to set the goals for the project. While setting
business goals, use goals that a strategy can incorporate to achieve the objective. SMART goals
are widely used in business. The acronym SMART stands for Specific, Measurable, Attainable,
Realistic and Time-based. It is a tool used to set goals to achieve planned results.
Specific Goals should be well defined, easily recognized, and convey a clear idea. It must be
fully furnished with detailed explanation of the what, when and how.
Measurable The entire goal statement is a measure of the project in a business. Concrete criteria
are established to measure the progress of a business. This is required to measure the progress,
meet the targets and achieve the goal.
Attainable To attain the goal plan, create the steps for the project and a time frame to complete
the project.
Realistic The goal should be realistic. Every objective should represent significant progress so
that the goal can be achieved.
Timely The goal should have a time frame. Setting a time frame creates a sense of urgency and
gives a focused target to work.
1.5.2 Objectives and tactics
Business objectives are concrete results that an organisation wants to achieve over a specified
period of time. There can be different objectives for an organisation like, to earn profit and to
provide quality service or goods to its customers. Objectives describe the target and ultimate goal
of the business. Objectives are clearly outlined with timelines and budgets.
Tactics are the different methods that are employed to achieve specific and measurable
objectives. It is the doing phase that follows the planning. In the strategy phase of a plan, the
managers decide how to achieve the goals. Tactics refers particularly to the action employed to
fulfill the strategy. Strategies comprise of various tactics in an organisation where many people
are involved in attaining the common goal. While strategy involves the higher ups of an
organisation, tactics involves all the members of the organisation.
Tactics are the daily activities in the business that are relatively specific. Tactics are the concrete
ways to implement strategies. Tactics include things like newsletters, press releases, advertising,
and other tools that are used for marketing the business. Tactics should not be confused with the
overall objective. Sometimes the business focuses entirely on tactics and abandons the overall
objective, this is when tactics fails. It should be the part of the overall plan for a successful
business.
Example When a team loses a game, the coach doesnt change the objective of winning the next
game. He changes his tactics by learning from the previous failure.
7. _____________ are the actual ways in which the strategies are executed
8. Every business enterprise has two fundamental functions _____________ and
_____________.
9. Objectives are clearly outlined with ___________and_____________.
1.6 Difference between Goals and Objectives of Business
In the previous section, you studied objectives of business and how it is different from tactics. In
this section we will discuss the difference between goals and objectives. For that we first need to
understand the goals of business.
Goals are statements that provide an overview about what the project should achieve. It should
align with the business goals. Goals are long-term targets that should be achieved in a business.
Goals are indefinable, and abstract. Goals are hard to measure and do not have definite timeline.
Writing clear goals is an essential section of planning the strategy.
Example - One of the goals of a company helpdesk is to increase the customer satisfaction for
customers calling for support.
Objectives are the targets that an organisation wants to achieve over a period of time.
Example - The objective of a marketing company is to raise the sales by 20% by the end of the
financial year.
Example - An automobile company has a Goal to become the leading manufacturer of a
particular type of car with certain advanced technological features and the Objective is to
manufacture 30,000 cars in 2011.
Both goals and objectives are the tools for achieving the target. The two concepts are different
but related. Goals are high level statements that provide overall framework about the purpose of
the project. Objectives are lower level statements that describe the tangible products and
deliverables that the project will deliver.
Goals are indefinable and the achievement cannot be measured whereas the success of an
objective can be easily measured. Goals cannot be put in a timeframe, but objectives are set with
specific timelines. The difference between organisational goals and objectives is depicted in table
1.6.
Table 1.6: Differences between Organisational Goals and Objectives
Goals Objectives
Are long term Are usually meant for short term
Are general intentions with broad Are precise statements with specific
outcome outcome
Cannot be validated Can be validated
Are intangible can be qualitative as Are tangible are usually quantitative
well as quantitative and measurable
Are abstract Are concrete
10. _____________are high level statements that provide overall framework about the purpose
of the project.
11. An objective describes _____________and_____________ that the project delivers.
12. Goals are _____________and the achievement cannot be measured.
1.7 Strategic Intent through Vision and Mission Statements
A strategic intent statement is a one-page document that defines the goals of an organisation for a
specific period of time in future. A strategic intent statement motivates the employees to achieve
short-term and long-term goals. This statement encourages the employees to work as a team and
to explore new methods, skills and technologies that help in achieving these goals. The strategic
intent is a particular viewpoint of the competitive position that an organisation expects to build in
the coming years. The strategy intent statement sets the organisations long-term expansive policy
directions. It gives a clear direction to the organisation for the future.
Strategic intent describes the purpose of existence of an organisation and how it will continue to
sustain its competitive benefits. It provides a clear picture about what an organisation should do
to achieve the company vision. It clarifies the vision of the organisation and motivates its
employees. It helps the management to accentuate and concentrate on the priorities. It
emphasises on developing new resources and capabilities to create future opportunities. It
influences the organisations resources and core competencies to achieve the vital goals in the
competitive environment.
Vision and Mission statements
A well-articulated strategic intent guides the development of goals and helps in inspiring the
employees to achieve targets. It also facilitates in utilising the intent to allocate resources and in
encouraging team participation. It comprises of the vision and mission statements.
Vision statement
A vision statement defines the purpose and principles of an organisation in terms of the values of
the organisation. It is a concise and motivating statement that guides the employees to select the
procedures to attain the goals. Vision statement is the framework of strategic planning. A vision
statement describes the future ambition of an organisation. A vision is the ability to view what
the organisation wants to be in future. It is prepared for the organisation and its employees. It
should be implanted in the organisation being collectively shared by everyone in the
organisation. It conveys an effective business plan. It integrates an understanding about the
nature and aspirations of the organisation and develops this conception to lead the organisation
towards a better objective. It must synchronise with the organisations principles. The ambition
should be rational and achievable.
Example - Wal-Marts vision is to become worldwide leader in retailing.
Vision statement of L&T
L&T employees shall be innovative and the empowered team will constantly create values and
attain global benchmarks.
L&T shall promote a culture of trust and continuous learning. It shall meet the expectations of
employees, stakeholders and society.
Mission statement
A mission statement is the extensive definition of the mission of an organisation. It is a concise
description of the existence and fundamental purpose of an organisation. It describes the present
potentials and activities of the organisation. It conveys the purpose of the organisation to its
employees and the public. It is vital for the development and growth of the organisation.
Mission statement is the responsibility by which an organisation aims to serve its stakeholders. It
gives a framework on the operations of the organisation within which the strategies are devised.
It describes the present capabilities, the stakeholders and the reason for existence of an
organisation. The statement distinguishes an organisation from its other competitors by
explaining its scope of activities, technologies, its products and services used to achieve the goals
and objectives. It should be practical and achievable. It should be clear and precise so that the
actions can be taken based on it. It should be unique and different to leave an impact on
everyone. It should be credible so that the stakeholders accept it.
Example -Wal-Marts mission is to provide ordinary customers the chance to buy the same thing
as rich people.
Mission statement of IBM
At IBM, we strive to be the forerunner in inventing, developing and manufacturing most
advanced information technologies, including computer systems, software, storage systems and
microelectronics.
The distinction between mission statement and vision statement is that the mission statement
focuses on the present position of the organisation and the vision statement focuses on the future
of the organisation.
13. A _____________ is a one-page document that defines the goals of an organisation for a
specific period of time in future.
14. A mission statement conveys the purpose of the organisation to _____________ and
_____________.
15. The aim of _____________ should be rational and achievable.
1.8 Core Competencies in Business
Core competencies are those skills that are critical for a business to achieve competitive
advantage. These skills enable a business to deliver essential customer benefit like the selection
of a product or service by a customer. Core competency is the key strength of business because it
comprises the essential skills. These are the central areas of expertise of the company where
maximum value is added to its services or products. Example - Infosys has a core competency in
information technology.
It is a unique skill or technology that establishes a distinct customer value. As the organisation
progresses and adapts to the new environment, the core competencies also adjust to the change.
They are not rigid but flexible to advancing time. The organisation makes the maximum
utilisation of the competencies and correlates them to new opportunities in the market. Resources
and capabilities are the building blocks on which an organisation builds and executes a value-
added strategy. The strategy is devised in a manner that an organisation can receive reasonable
profit and attain strategic competitiveness.
Core Competencies are not fixed. They change in response to the transformation in the
environment of the company. They are adaptable and advance over time. As an organisation
progresses and adapts to new circumstances, the core competencies also adapt to the
transformation.
The characteristics of core competencies are:
To provide potential access to a wide range of market
Should be difficult to imitate by competitors
Should make considerable contribution to the customers
Example - Microsoft has expertise in IT-based innovations and technologies. Customers receive
many benefits by purchasing and using Microsoft products. For many reasons including unique
skills, it is difficult for competitors to imitate Microsoft's core competences.
Resources are the key inputs of the organisations production process. These can be manpower,
financial, technological, or services. For the organisation to have core competency the resources
should be unique, beneficial and specialised in the particular field. Resources should be built on
the strengths of the organisation and not on its weaknesses.
Organisational capabilities are the ability of the organisation to identify and integrate its
resources so that it can be used in the most efficient manner. If an organisation lacks the
capability to utilise these resources productively then the organisation cannot create its core
competency. The organisation can devise strategies to either develop new resources and
capabilities or improve the existing resources and capabilities to build core competencies of the
organisation.
A company can continue to reinvest in its core competencies. When the core competencies are
advanced to those of the competitors they are called distinctive competencies. The distinctive
competencies should be unique and advanced to the competitor capacity. It should be used to
develop new product or service. Core competencies of an organisation distinguish it from its
competitors. They can help in deciding the future of the organisation. For the strategy to have the
best probability of success, it should be built on core competencies. The competencies are
enhanced continuously. They are developed through a continuous process of improvement and
enhancement.
Critical Success Factors (CSFs)
Critical success factors (CSFs) are used extensively to identify the key features that an
organisation should focus on to be successful. The CSFs are important sections of activities that
are performed perfectly to achieve the mission and objective of the business. It refers to the main
areas which ensure successful competitive performance for an organisation. Identifying the CSFs
is important as the organisation can focus on its efforts to develop its resources to meet the CSFs
and measure the success of the business. It is important for the organisation to decide in building
the essential requirements to meet the CSFs.
Critical Success Factors are associated with the strategic goals of an organisation. They also
focus on the essential areas that affect the business. The chief areas that affect the business are:
Industry - These factors result from specific industry characteristics. The organisation should
consider these factors to remain competitive.
Environmental These are the factors that are the result of environmental influences on an
organisation like the economy, competitors, and technological advancements.
Strategic - These factors are the result of particular competitive strategy selected by the
organisation.
Temporal - These factors are the result of the organisation's internal influence like challenges and
directions.
The CSFs are essential for the success of an organisation. Identifying CSFs helps to ensure that
the business is focused and thus avoids wasting effort on insignificant areas. To keep the project
on track towards common aims and goals, CSFs should be specific and should be communicated
to everyone involved.
Activity 2
ABC Company is a leading producer of microwave ovens. There are some strategic plans
considered by the management to introduce washing machines. As a manager in the
manufacturing department, identify the core competencies and critical success factors of your
company to make the product successful.
Refer this link for guidance: http://www.ameinfo.com/66915.html
16. _____________ is a unique skill or technology that establishes a distinct customer value.
17. The _____________ should be unique and advanced to the competitor capacity.
18. _____________ are used to identify the key features that an organisation should focus to be
successful.
1.9 Summary
Let us sum up what we have discussed in this unit
Strategy is the method by which objectives are systematically followed and achieved over time.
It is an action that managers take to attain one or more of the organisation goals. It involves
integrating organisational activities and assigning the limited resources within the organisational
environment to meet the organisation goals.
Strategy is an important feature as it facilitates a quantity of procedures and preferred outcomes
that would be difficult otherwise. Strategy is important because it is not possible to predict the
future. In future the organisation might have to deal with uncertain consequences which
comprise the business environment.
Tactics are the different methods that are employed to achieve specific and measurable
objectives. Goals are long term targets whereas objectives are generally achieved in short
duration.
A strategic intent statement is generally a one-page document that defines goals of an
organisation for a specific period of time in future. A strategic intent statement motivates the
employees to achieve short-term and long-term goals. It comprises of the vision and mission
statements.
Core competencies are those skills that are critical for a business to achieve competitive
advantage. These skills enable a business to deliver essential customer benefit like the selection
of a product or service by a customer.
1.10 Glossary
Intent: Committed
Tactic: Method or an approach
Competency: Capabilities, proficiency
Core: Main or most basic
1. Define strategy and explain its different levels.
2. Differentiate between goals and objectives.
3. Explain the strategic intent through vision and mission statement.
4. What are the core competencies of business?
1.12 Answers
Self Assessment Questions:
1. Strategy
2. Resources process
3. Operational strategy
4. Business, financial resources, and manpower.
5. Goals and objectives
6. SWOT
7. Tactics
8. Marketing and innovation
9. Timelines and budgets
10. Goals
11. Tangible products and deliverables
12. Indefinable
13. Strategic intent
14. Employees and public
15. Vision statement
16. Core competency
17. Distinctive competencies
18. Critical success factors
Terminal Questions:
1. Refer section 1.2 Strategy.
2. Refer section 1.6 Difference between goals and objectives of business.
3. Refer section 1.7 Strategic intent through vision and mission statements.
4. Refer section 1.8 Core competencies.
1.13 Case-let
Wal-Mart retail giants strategy
Wal-Mart is an American public corporation running a chain of discount department and
warehouse stores. In 2007, Wal-Mat was rated the largest corporation on the Fortune 500 list.
Wal-Mart has more than 6900 stores worldwide. It has operations in 13 countries and is
expanding its supplier network globally. In 2007, it reaffirmed its aim to offer its customer the
lowest price available. This strategy was demonstrated by its holiday actions planned one year
earlier. The strategy was to open the stores one hour earlier than its competitors and provide
special holiday discounts. This strategy was effective because the sales of December 2007
increased by 2.6 percent over one year while the sales of its chief competitor declined. Wal-Mart
had used an effective strategy. Though Wal-Mart has market power and an effective strategy, it is
gradually making changes in its products and approach to customers. Wal-Mart announced its
plans to open 400 in-store health care clinics by 2010. These clinics will staff a large number of
nurse practitioners and provide services to handle medical problems at low costs. Wal-Mart has
also introduced green policies which are designed to make a positive impact on the environment.
Example -Wal-Mart is promoting energy efficiency by selling long-life low-energy light bulbs.
In this way, Wal-Mart is making modifications in its strategy which helps in competing with its
competitors more effectively.
Discussion Questions
1. Explain the strategy adopted by Wal-Mart to compete with its rivals.
2. What is the new venture planned by Wal-Mart?
3. Discuss the modifications made by Wal-Mart in its strategy to compete with its competitors.
Source link
http://books.google.co.in/books?
id=jX7RXTi8MTEC&pg=PA87&dq=Wal+Mart+strategy&cd=1#v=onepage&q=Wal%20Mart
%20strategy&f=false
References
Thomas L. Wheelen, J. David Hunger (2002): Concepts in Strategic Management and Business
Policy, Pearson Education, New Delhi
E-References
http://www.coursework4you.co.uk/essays-and-dissertations/critical-success-factors.php
-Retrieved on 27 July 2010
http://tutor2u.net/business/strategy/core_competencies.htm-Retrieved on 27 July 2010
http://www.ehow.com/how_5966402_create-strategic-intent-statement.html -Retrieved on 27
July 2010
http://www.managementstudyguide.com/business-policy.htm - Retrieved on 27 July 2010
Unit-02-Strategic Management
Structure:
2.1 Introduction
Objective
2.2 Strategic Management
Need and scope
Evolution and development
Key Features of strategic management
Importance of strategic management
2.3 Role of Strategists in Decision Making
Strategists at various management levels
2.4 Types of Strategies
Corporate level
Business level
Tactical of functional level
Operational level
2.5 Limitations of Strategic Management
2.6 Summary
2.7 Glossary
2.9 Answers
2.10 Case-let
2.1 Introduction
In the previous unit, we discussed the brief concept of strategies and its relation with the mission
and vision of the organisation. In this unit you will study the concept of strategic management,
its uses in organisation, the need, scope and importance of strategic management. We will also
discuss the different types of strategies and the people involved in crafting strategic management.
As business organisations began to build their presence around the world and develop their
resources in the global scenario, strategic management also gained sufficient momentum in the
company policies, plans and procedures. Strategic Management is not just a field of study but
also a practice followed by several organisations.
Objectives
After studying this unit, you should be able to:
define strategic management and describe the need and scope of strategic management
discuss the evolution and development of strategic management
analyse the roles of strategists in decision making
classify the types of strategies
identify the limitations of strategic management
2.2 Strategic Management
Strategic management is a systematic approach of analysing, planning and implementing the
strategy in an organisation to ensure a continued success. Strategic management is a long term
procedure which helps the organisation in achieving a long term goal and its overall
responsibility lies with the general management team. It focuses on building a solid foundation
that will be subsequently achieved by the combined efforts of each and every employee of the
organisation.
2.2.1 Need and scope
Thompson Strickland, once wrote For a company to qualify as excellently managed, it must
exhibit excellent execution of an excellent strategy.
Considering the above statement, strategic management plays a key role in an organisation. A
brief description of need and scope of strategic management is as follows:
Strategic management is required to make crucial decisions in an organisation which helps in
obtaining a long term goal.
Strategic management is required in the organisation to implement any process in a systematic
approach and to allocate the resources in appropriate manner.
Strategic management is assessed to determine the most crucial issues in the organisation in such
a way that it does not harm the mission of the organisation.
Strategic management includes strategists who expertise the strategy effectively to obtain desired
result.
Strategic management commit to the organisations strengths and weakness.
Any changes in the organisation can be handled in an organised manner by implementing
strategic management.
2.2.2 Evolution and development
In the period between 1920s to 1930s, the organisation used to work on a day-to-day planning
method. The top level management in the organisation did not concentrate about the future work.
There was a need for the organisation to develop and expand globally. Only after this period, the
top level management tried to predict and analyse about the future happenings in an organisation.
The tools like budgets and control system for capital budgeting were used. However these
techniques and tools also failed to effectively emphasize the position of the organisation in the
future.
A long term planning came into picture, providing the idea of planning for the long-term. As
technology and life style of society changed, the term strategic planning came into existence
which is currently being used to describe a phase of strategic decision-making.
In mid 1930s, the first phase of business planning began in several organisations. Most of the
companies were in a single product line and the range of operation was limited. As the
organisations grew by expanding their products and increasing their geographical coverage, the
coordination and informal control became a critical issue in the organisation. Hence the need to
integrate functional areas came into existence. In order to obtain this integrated functional area in
an organisation the term planning was introduced.
The task of integration covered a lot of managerial actions such as framing strategies. Framing
helped the organisation to set actions for the top level management to make decisions.
The increasing environment changes in 1930s and 1940s emphasised the integration of
functional areas in policy changing environment and indicated the evolution of strategic
management.
The development of strategic management is based on variation, selection and retention of
planning in an organisation. The era of incremental change in an organisation always diminishes
the existing standard. Hence the strategic management is initiated to the era of incremental
change characterised by a focus on organisation environment. This attention to incremental
change reached a point of maturity with development for analysing and defining generic
strategies. The decade of advances in technology and increased boundaries among organisations,
markets and competitors paved way to an imperative need to conceive new dominant.
2.2.3 Key Features of strategic management
The five main features of strategic management are:
Strategic analysis
Strategic choice
Strategic formulation
Strategic implementation
Strategic control and evaluation
Figure 2.1 depicts the features of strategic management.
Figure 2.1 Features of Strategic Management

Strategic analysis
Strategic analysis is a process in which the management of an organisation analyses the position
of the organisation and plans the strategies for an effective growth of the organisation.
Strategic choice
Strategic choice is the process of choosing the possible course of action, and their evaluation
before formulating the strategies in the organisation.
Strategic formulation
Strategy formulation is the process of determining suitable courses of action to achieve
organisational objectives, and thereby achieve the organisational purpose.
Strategic implementation
Strategic implementation is concerned with the planning of how to apply the choice of strategy
in the organisation.
Strategic control and evaluation
Strategy control consists of processes to ensure an organisation achieves its objectives. It
compares performance with desired results and provides necessary feedback for the management
to evaluate results and take corrective measures as needed. It focuses to analyse whether the
planned strategy is being implemented and the intended results are produced. Finally, strategies
are evaluated on the basis of achieved goals and objectives. Evaluation of strategies also
indicates that strategies can be modified, rechecked, renewed and in certain situations discarded
as new strategies are required.
The three features of strategic management are often seen as sequential, but actually they overlap
and interact to implement strategic management effectively in the organisation.
2.2.4 Importance of strategic management
A rapidly changing environment in organisations requires a greater awareness of changes and
their impact on the organisation. Hence strategic management plays an important role in an
organisation.
Strategic management helps in building a stable organisation.
Strategic management controls the crises that are aroused due to rapid change in an organisation.
Strategic management considers the opportunities and threats as the strengths and weaknesses of
the organisation in the crucial environment for survival in a competitive market.
Strategic management helps the top level management to examine the relevant factors before
deciding their course of action that needs to be implemented in changing environment and thus
aids them to better cope with uncertain situations.
Changes rapidly happen in large organisations. Hence strategic management becomes necessary
to develop appropriate responses to anticipate changes.
The implementation of clear strategy enhances corporate harmony in the organisation. The
employees will be able to analyse the organisations ethics and rules and can tailor their
contribution accordingly.
Systematically formulated business activities helps in providing consistent financial performance
A well designed global strategy helps the organisation to gain competitive advantages. It
increases the economies of scale in the global market, exploits other countries resources,
broadens learning opportunities, and provides reputation and brand identification.
This section described the concept of strategic management and its need in the organisation. Next
section classifies the role of strategies in decision making in an organisation.
1. Strategic management is a systematic approach of analysing, planning and _______________
the strategy in an organisation.
2. The first phase of ______________________ began in the mid 1930s.
3. Strategic management considers the _______________ as the weaknesses of the organisation.
2.3 Role of Strategists in Decision Making
Strategists are the individuals involved in the strategic management process. They craft the
strategy to be implemented in the organisation. Strategists think, plan, and implement relevant
strategy in the organisation to obtain a long term goal. Strategists are the silent partners in
strategic literature. The role of strategists in decision making varies according to the different
management levels in the organisation.
The strategic management process requires competent individuals to ensure its success.
Therefore to craft the strategic management, strategists will analyse the position of strategic
decisions made in the organisation.
Generally top management, board of directors and planning staff are the most significant
individuals involved in strategic management process in organisations.
2.3.1 Role of strategists at various management levels
The various management levels where the roles of strategists can be seen include.
Top level management
Board of directors
Planning staff
Top level management
The overall responsibility of the organisation rests on the top level management. Top level
management relatively refers to a small group of people which includes president, chief
executive officer, vice president, and executive vice president.
The responsibilities of top level management are:
The top level management establishes an environment for the easy process of strategic
management and its success in the organisation.
The top level management ensures that the design of the process is appropriate to the unique
characteristics of the company.
The top level management is responsible for determining the need of a corporate planner. If it is
required, they appoint the planner or planners.
The top level management gets involved in planning and conducting meetings with the planners
to ensure that there is proper evaluation of plans and sets the process to receive feedback from
the planner.
The top level management delivers the results of the strategic management process to the board
of directors.
Board of directors
Most of the organisations consist of board of directors elected by stakeholders. They are
bestowed with ultimate authority and responsibility. Typically a chairperson is elected in the
board of directors who is responsible for overseeing business activities, and they form standing
committees which meet regularly to conduct their business.
The responsibilities of board of directors are as follows:
Based on the results of strategic management process, the board of directors verifies whether the
strategies are relevant to the organisation norms, organisations mission, and its long-term goals.
If the above criterion is not met, the board of directors demands re-examination of the strategic
management process for its approach to the competition in the market.
Board of directors committee audits the various components of an organisation's strategic
management process to make it more effective and efficient.
To summarise, the board of directors function as the brain and soul of the organisation.
Planning staff
Planning staff, usually called as planning staff personnel are a group of people assigned by the
top level management. They plan the levels of strategies to be implemented in a sequential order.
Planning staff are the sub-ordinate team to the top level management. Planning staff management
and top level management work flow goes hand in hand for planning and developing strategic
management.
Example - Emerald group, a publishing company insisted the top level management, board
members and planning staff to create new strategies for the company. This renewing was made in
order to increase the profits, and raise market standards. These objectives made the top level
management to analyse, plan and create strategies with the planning staff considering various
internal and external factors. The board of directors examined whether the strategies were
relevant to the objectives of the company and added suggestions to increase profits and market
standards.
In this section we analysed the roles of strategists at various level of management. Next section
introduces us to different types of strategies in the organisation.
Activity 1
Consider you are the manager of a banking organisation. How would you assign strategists at
different levels in the organisation?
Refer the link for guidance -
http://www.axisbank.com/aboutus/aboutaxisbank/About-Axis-Bank.asp
4. Strategists are the ____________ partners in strategic literature.
5. The top level management, ____________________ and planning staff are the most
significant individuals involved in strategic management.
6. The board of directors is elected by _____________________ of the organisation.
2.4 Types of Strategies
2.4.1 Corporate level
The board of directors and chief executive officers are involved in developing strategies at
corporate level. Corporate level strategies are innovative, pervasive and futuristic in nature.
The four grand strategies in a corporate level are:
Stability and expansion strategy
Retrenchment
Corporate restructuring
Combination strategies concept of synergy
Let us now discuss each of the grand strategies in detail.
Stability strategy
The basic approach of the stability strategy is to maintain the present status of the organisation.
In an effective stability strategy, the organisation tries to maintain consistency by concentrating
on their present resources and rapidly develops a meaningful competitiveness with the market
requirements.
Further classifications of stability strategy are as follows:
No change strategy
No change strategy is the process of continuing the current operation and creating nothing new.
Usually small business organisations follow no change strategy with an intention to maintain the
same level of operations for a long period.
Pause/Proceed with caution strategy
Pause/Proceed with caution strategy provides an opportunity to halt the growth strategy. It
analyses the advantages and disadvantages before processing the growth strategy. Hence it is
termed as pause/proceed with caution strategy.
Profit strategy
Profit strategy is the process of reducing the amount of investments and short term discretionary
expenditures in the organisation.
Expansion strategy
The organisations adopt expansion strategy when it increases its level of objectives much higher
than the past achievement level. Organisations select expansion strategy to increase their profit,
sales and market share. Expansion strategy also provides a significant increase in the
performance of the organisation. Many organisations pursue expansion strategy to reduce the
cost production per unit.
Expansion strategy also broadens the scope of customer groups, and customer functions.
Example Prior to 1960s most of the furniture industry did not venture into expanding their
industry globally. This was because furniture got damaged easily while shipping and the cost of
transport was high. Later in 1970s a Swedish furniture company, IKEA, pioneered towards
expanding the industry to other geographical areas. The new idea of transporting unassembled
furniture parts lead to minimizing the costs of transport. The customers were able to easily
assemble the furniture. IKEA also lowered the costs by involving customer in the value chain.
IKEA successfully expanded in many European countries since customers were willing to
purchase similar furniture.
The further classification of expansion strategy is as follows:
Diversification - Diversification is a process of entry into a new business in the organisation
either marketwise or technology wise or both. Many organisations adopt diversification strategy
to minimise the risk of loss. It is also used to capitalise organisational strengths.
Diversification may be the only strategy that can be used if the existing process of an
organisation is discontinued due to environmental and regulatory factors.
The two basic diversification strategies are:
Concentric diversification
The organisation adopts concentric diversification when it takes up an activity that relates to the
characteristics of its current business activity. The organisation prefers to diversify concentrically
either in terms of customer group, customer functions, or alternative technologies of the
organisation. It is also called as related strategy.
Conglometric diversification
The organisation adopts conglometric diversification when it takes up an activity that does not
relate to the characteristics of its current business activity. The organisation chooses to diversify
conglometrically either in terms of customer group, customer functions, or alternative
technologies of the organisation. It is also called as unrelated diversification.
Concentration Concentric expansion strategy is the first route towards growth in expanding the
present lines of activities in the organisation. The present line of activities in an organisation
indicates its real growth potential in the present activities, concentration of resources for present
activity which means strategy for growth.
The two basic concentration strategies are:
Vertical expansion
The organisation adopts vertical expansion when it takes over the activity to make its own
supplies. Vertical expansion reduces costs, gains control over a limited resource, obtain access to
potential customers.
Horizontal expansion
The organisation adopts horizontal growth when it takes over the activity to expand into other
geographical locations. This increases the range of products and services offered to the current
markets.
Retrenchment
Retrenchment strategy is followed by an organisation which aims to reduce the size of activities
in terms of its customer groups, customer functions, or alternative technologies.
Example A healthcare hospital decides to focus only on special treatment to obtain higher
revenue and hence reduces its commitment to the treatment of general cases which is less
profitable.
Different types of retrenchment strategies are:
Turnaround
Turnaround is a process of undertaking temporary reduction in the activities to make a stronger
organisation. This kind of processing is called downsizing or rightsizing. The idea behind this
strategy is to have a temporary reduction of activities in the organisation to pursue growth
strategy at some future point.
Turnaround strategy acts as a doctor when issues like negative profits, mismanagement and
decline in market share arise in the organisation.
Captive company strategy
Captive company strategy is a process of tying up with larger organisations and staying viable as
an exclusive supplier to the large organisations. An organisation may also be taken as captive if
their competitive position is irreparably weak.
Divestment strategy
Divestment strategy is followed when an organisation involves in the sale of one or more portion
of its business. Usually if any unit within the organisation is performing poorly then that unit is
sold and the money is reinvested in another business which has a greater potential.
Bankruptcy
Bankruptcy is a legal protective strategy that does not allow others to restructure the
organisations debt obligations or other payments. If an organisation declares bankruptcy with
customers then there is a possibility of turnaround strategy.
Liquidation
Liquidation strategy is considered to be the most unattractive process in an organisation. This
process involves in closing down an organisation and selling its assets. It results in
unemployment, selling of buildings and equipments and the products become obsolete. Hence,
most of the managers work hard to avoid this strategy.
Corporate restructuring
Corporate restructuring is the process of fundamental change in the current strategy and direction
of the organisation. This change affects the structure of the organisation. Corporate restructuring
involves increasing or decreasing the levels of personnel among top level, mid-level and lower
level management. It is reorganising and reassigning of roles and responsibilities of the
personnel due to unsatisfactory performance and poor results.
Combination strategies concept of synergy
Combination strategy is a process of combining - stability, expansion and retrenchment
strategies. This is used either at the same time in various businesses or at different times in the
same business. It results in better performance of the organisation.
The effect towards the success is greater when there is a synergy between the strategies. Synergy
is obtained in terms of sales, operations, investments and management in the organisation.
Example Levis & co, a jeans manufacturing company suffered corrosion in market share in 1990.
This was due to the manufacture of jeans that did not attract the younger generation. Hence there
was a change in strategies laid at the corporate level with diversification of products. This led to
the change in acquiring new resources, selling the current resources, changing the personnel at
various levels of management and analysing the competitors in the market. With these changes
the company was able to make profits and achieved success.
2.4.2 Business level
Business level strategy relates to a unit within an organisation. Mainly strategic business unit
(SBU) managers are involved in this level. It is the process of formulating the objectives of the
organisation and allocating the resources among various functional areas. Business level strategy
is more specific and action oriented. It mainly relates to how a strategy functions rather than
what a strategy is in corporate level.
The main aspects of business level strategies are related with:
Business stakeholders
Achieving cost leadership and differentiation
Risk factors
Business stakeholders
Business stakeholders are a part of business. Any operation which is affected in business also
affects the business stakeholders along with profit or loss of the business. Business stakeholders
include employees, owners and customers. Other indirect business stakeholders are competitors,
government etc. They play a very important role in ups and downs of the organisation.
Cost leadership and differentiation
Cost leadership strategy is adopted by the organisations to produce a relatively standardised
products or services to the customer. It must be acceptable to the characteristics as mentioned by
customers. Customers value the company if it adopts cost leadership strategy.
Differentiation strategy mainly deals with providing the products or services with unique features
to the customers. Differentiated products satisfy the customers needs. The unique features of the
product attract the customers more when compared to the traditional features of the products.
But cost leadership must be pursued in conjunction with differentiation strategy to produce a cost
effective, superior quality, efficient sales and a unique collection of features in the product or
services.
According to Porters generic strategy, the organisation that succeeds in cost leadership and
differentiation often has the following internal strengths:
The company possesses the skills in designing efficient products
High level of expertise in the manufacturing process
Well organised distribution channel
Industry reputation for quality and innovation
Strong sales department with the ability to communicate successfully the real strengths of the
product
Risk factors
Risk is the probability of good or bad things that may happen in the business. Risk will impact
the objectives of the organisation. The risk factors in the business strategies include two types -
external and internal risks.
External risks External risk includes various risks experienced externally like competition with
companies, political issues, interest rates, natural hazards etc.
Internal risks Internal risks include issues of employees, maintenance of processes, impact of
changes in strategies, cash flows, security of employees and equipments.
2.4.3 Tactical of functional level
The functional strategy mainly includes the strategies related to specific functional area in the
organisation such as production, marketing, finance and personnel (employees). Decisions at
functional level are often described as tactical decisions.
Tactical decision means involving or pertaining to actions for short term than those of a larger
purpose. Considering tactical decisions in functional level strategy describes involving actions to
specific functional area. The aim of the functional strategy is doing things right whereas the
corporate and business level strategy stresses on doing the right thing.
The different types of strategies at functional level are:
Procuring and managing
Monitoring and directing resources towards the goal
Procuring and managing
Procuring basically means purchasing or owning. In the management field procuring is the
process of purchasing goods or services which includes ordering, obtaining transport, and storage
for organisation use.
Most of the individual organisations set procurement strategy to obtain their choice of products,
methods, suppliers and the procedures that are used to communicate with their suppliers.
Steps involved in procuring strategy are:
Identify the need of purchase and the required quantity.
Plan the cost budget of the goods or services being purchased and the procedure of contracting
by checking the cost and requirements with various sellers.
Select the seller who is matching the cost and requirement criteria as per the organisation.
Perform the contract deal with selected seller and monitor the contract.
Close the contract once the goods or services are acquired.
Managing is the process of monitoring the strategies that are implemented in the business. Many
strategies are implemented at various levels of the business. Hence catering these strategies is
termed as managing.
Managing includes completing the task effectively in every sector of the organisation. It can be
managing employees, the external and internal factors of organisation, and the equipments.
An effective managing process strengthens the critical activities in the business such as
marketing, manufacturing, human resource planning, performance assessment, and
communications.
Monitoring and directing resources towards the goal
Monitoring and directing is the essential part of management. Monitoring means knowing what
is going on. Monitoring is also called as measuring. In an organisation monitoring includes
measuring the performance of the organisation to check whether the strategy implemented is
achieved or not.
Monitoring the resources includes monitoring the employees, the equipments, and the activities
being performed in the organisation.
It leads to risk if monitoring of the resources show a deviation from the true path as expected by
the organisation. The directing process will make path to ensure a relevant action is performed to
remove the deviation and lay all the resources on the right track. Directing process uses
principles and statement of the objectives to solve the problem which was identified during
monitoring process.
Monitoring and directing process of resources sets the organisation to work on the right track by
removing all hurdles and produces effective outcome in reaching the goals of the organisation
efficiently.
2.4.4 Operational level
Operational level is concerned with successful implementation of strategic decisions made at
corporate and business level. The basic function of this level is translating the strategic decisions
into strategic actions.
The basic aspects in operational level are:
Achieving cost and operational efficiency
Optimal utilisation of resources
Productivity
Achieving cost and operational efficiency
Achieving cost deals with achieving greater profits by reducing the cost for various resources
within the organisation to balance the expenditure and investment. Organisations must
implement cost achievement in targeted operational areas like HR, supply chain, and
procurement.
The operational efficiency comes into picture once the cost reduction is achieved with greater
profits. It deals with minimising the waste and maximising the resource capabilities.
Optimal utilisation of resources
Optimal utilisation of resources includes usage of resources in a planned manner. The usage of
resources must be cost effective. Usually the board of directors ensures that the process of
optimal utilisation of resources is implemented and monitored on a regular basis.
Planning and scheduling activities in business plays a major impact on the utilisation of
resources. The systematic planning and scheduling of activities result in utilisation of less
budgeted resources for greater profits in an organisation.
Productivity
Productivity basically means a relative measure of the efficiency of production in terms of
converting the ratio of inputs to useful outputs. Productivity is a key to success of an
organisation. Productivity growth is a vital factor for continuous growth of the organisation.
In this section, the different types of strategies were described. Next section explains the
limitations of strategic management.
Activity 2
Consider you own a software company. What factors will you consider before incorporating
strategies related to achieving cost efficiency and high productivity?
Refer the link for guidance - http://www.infosys.com/pages/index.aspx
7. The basic approach of the stability strategy is to maintain the ________________ status of the
organisation.
8. Operational level strategy is concerned with successful implementation of strategic
______________ made at corporate and business level.
9. Procuring means _______________.
2.5 Limitations of Strategic Management
Strategic management process is a long term process. Implementation of the various strategies
requires necessary changes in the present organisational set up. Most of the times, these changes
create dissatisfaction among the employees. Since employees are a part of profit and loss of the
organisation, they lay demands to the management on the impact of changes made by the
strategies. Considering these issues, the limitations of strategic management are:
Resistance to Change
Gradual or sudden changes that take place as a result of strategic management may be opposed
and resisted by employees directly or indirectly. Such resistance has to be avoided or reduced.
Dissatisfaction in employees
Dissatisfaction takes place, if the strategies implemented by management is laying barrier to the
employees needs. This attitude of dissatisfaction affects the workflow and hampers the growth of
the organisation.
Time consuming
Strategic management requires lot of time in taking up strategic decisions as it is concerned with
various levels of management in the organisation. As such, strategic objectives cannot be
achieved within short-term time period.
Non practical planning
The planning of strategic management also considers external factors to obtain a long term
objective. Once the planning is done by the top level management, the operational level planning
will be done by mid and lower level management. The rigidity of these actions creates a lack of
co-ordination and control.
It gives only a guideline
Strategic management does not guarantee success of the organisation. It only guides the
employees to work in sequence and leads them towards a particular direction. Achieving of
objectives, implementation of strategies requires employee commitment and efficiency.
Strategies are only means to achieve the goals
Most of the times; organisation is fascinated with strategies that they make strategic management
as the end result instead of making it as a means to achieve the goals.
Political pressure
The political pressure plays an important role in decision making. The strategy planning must
consider political issues such that the internal planning is done with all levels of unit in strategic
management.
Ignorance of other managerial functions
The top level management has the responsibility of framing strategic management. When
framing and implementing of strategy becomes a continuous workflow, then the top level
management will be unable to concentrate on other managerial work.
10. Dissatisfaction of employees affects the ___________ and hampers the growth in the
organisation.
11. Strategic management only ___________ the employees to work in sequence and achieve the
success in a proper direction.
12. The _________ pressure plays an important role in decision making.
2.6 Summary
Let us now summarise what we have discussed in this unit.
Strategic management is the process of executing the planned strategy in an effective and
efficient way for the growth of the organisation. Strategic management was evolved in 1920 and
1930s when it was realised the need for planning long term was crucial for the organisations
overall progress. Hence changes in society and management thinking era developed methods of
planning the strategic management process. Strategic management helps in guiding the
organisation to reach its goal.
Strategists are required to craft the strategic management. There are various strategists who take
up responsibilities at various management levels. The different types of strategies implemented
are corporate level, business level, tactical of functional and operational levels. There are various
limitations in strategic management like dissatisfaction of employees due to change in the
strategy, political pressure, non-practical planning so on.
2.7 Glossary
Strategist : An individual or a group who design and frame strategies
Stability : Consistency
Concentric : Having the same center
Resistance : Opposition
1. Define strategic management and describe the need, scope and importance of strategic
management.
2. Explain the role of strategists in decision making at various management level.
3. Illustrate the types of strategies.
4. Describe the limitations of strategic management.
2.9 Answers
1. Implementing
2. Planning
3. Strengths
4. Silent
5. Board of directors
6. Stakeholders
7. Present
8. Decisions
9. Owning
10. Workflow
11. Guides
12. Political
Terminal Questions:
1. Refer 2.2 Strategic management
2. Refer 2.3.1 Strategists at various management levels
3. Refer 2.4 Types of strategies
4. Refer 2.5 Limitations of strategic management
2.10 Case-let
Strategic Analysis in Orange Mobile Company
The evolution of mobile phones industry is rapidly growing to invent credit
card size phones from old brick size phones. The changing trend in the
market has made the companies to invent high end technology phones that
most of the teenagers enjoy. Orange mobile company, one of the mobile
industries was established in April 1994. The aim of the company was to
become the top mobile provider by making communication instinctive and
easily accessible part of daily life. The top level management in the
company applied strategy analysis for analysing the marketing competitors
across the globe in order to conceptualise a profitable plan. After analysing
the various competitors, the company decided to make strategic alliance
with worlds leading suppliers and operators. It also considered the current
scenario of the company resources in terms of employees, equipment,
finance and others. This made the company attract more customers and
outlook businesses in all areas of telecommunication. Therefore, an increase
demand of services led to the increase in sales. The next aim of the company
was to expand globally; hence it introduced strategic planning based on
marketing. Considering the global market scenario, the company
emphasised strategic planning and later strategic analysis was enhanced to
make the process effective. This process involved segmenting the market,
profiling market segments, and developing marketing strategy to each of the
market segments. Thus the company benefited in gaining profits by
systematically analysing the market scenario and expanded globally.
1. Why do you think the company introduced strategic analysis as the key
concept in gaining profits?
2. How did the company benefit through strategic analysis?
Source link -
http://ivythesis.typepad.com/term_paper_topics/2009/05/corporate-strategy-
case-study-orange-mobile-company.html
References
Fred R David (1997) Strategic Management sixth edition, Prentice hall, New Delhi
Thomas Wheelen, J David Hunger (2002) Concepts in Strategic Management and Business
Policy, Pearson education, New Delhi
E-References
http://www.misronet.com/strategic_management.html Retrieved on 23 July 2010
http://www.allbusiness.com/management/2975129-1.html Retrieved on 23 July 2010.
http://www.thezambian.com/business/b/business/archive/2004/03/09/recognising-the-need-for-
strategic-management.aspx Retrieved on 23 July 2010
http://www.hrfolks.com/articles/strategic%20hrm/essentials%20of%20strategic
%20management.pdf - Retrieved on 23 July 2010
Unit-03-Strategy Analysis
Structure:
3.1 Introduction
Objectives
3.2 Strategy Analysis and its Importance
3.3 Environmental Appraisal and Scanning Techniques
Need for environmental appraisal
Environmental Scanning techniques
Competitive and industry analysis
3.4 Organisational Position and Strategic Advantage Profile
BCG business portfolio matrix
Igor Ansoff growth matrix
McKinsey/GE growth pyramid
3.5 Strategic Management Model
3.6 Summary
3.7 Glossary
3.9 Answers
3.10 Case-let
3.1 Introduction
In the earlier units, you have studied about the features and importance of strategy management
and strategy formulation. In this unit, you will study strategy analysis. In this unit, we will focus
on environmental scanning techniques, industry analysis and competitive analysis. We will also
discuss strategic profile advantage and management planning. To understand this unit better,
prior knowledge about strategies and strategy management is desirable.
Strategy analysis is defined as a process of conducting research on the business environment
within which an organisation operates to formulate strategy. It is about analysing the present and
potential gains, opportunities, strengths, weaknesses, threats, challenges, anticipated and
unexpected changes that are either within the organisation or external factors influencing a
business. Strategy analysis guides to collect and consider the information of an organisation. It
enables to understand situations completely. Assessing the external and internal situations helps
to identify the strengths, weaknesses, opportunities and threats that the organisation may face to
reach its goals.
Objectives
After studying this unit, you will be able to:
define strategy analysis
analyse the external and internal environment
characterise industrial and competitive analysis
describe organisational position and strategic management model
3.2 Strategy Analysis and its Importance
Strategy analysis is a key aspect of strategic management. It is used to effectively plan and
implement strategy and is the first phase of the strategic management process. Each organisation
has its own objectives, goals, vision and mission. These elements form the basis for competitive
advantage for specific and measurable objective. The managers monitor and scan the
environment including the competitor analysis. Many strategies fail if the managers formulate
and implement the strategies without careful analysis of the goals of the organisation.
The importance of strategic analysis is as follows:
It gives an understanding of what drives risks, profitability and competitive advantage.
It provides a basis for forecasting future performance.
It gives an idea of how to measure the success of an organisations action.
1. ___________ is a process to formulate and implement strategy.
2. Vision, mission, goal and strategy objectives form the basis for ___________.
3. Strategic analysis forms a basis for competitive advantage. (True/False)
3.3 Environmental Appraisal and Scanning Techniques
Environmental appraisal for an organisation is important as it tunes an organisation with its
external environment. It identifies and interprets changes in the environment. Environmental
scanning is the process of formal searching to obtain information for a specific purpose, using
certain methodologies.
3.3.1 Need for environmental appraisal
The environment is a source of resource for an organisation. Resource dependence is affected by
the availability and concentration of resources. The degree of dependence is high when the
resource is scarce and when the units in the environment are highly concentrated or
interconnected. The increasing dependency on resources can be handled by changing patterns of
interdependence through mergers and diversification. Dependency can be managed by using
legal, political or social action to form an artificial environment.
An active organisation interacts with the environment for resources. Such organisations allot
substantial resources for information searching, testing and also for manipulating the
environment. An inactive organisation, on the other hand, takes whatever environmental
information comes its way, and tries to understand the environment with the given information.
3.3.2 Environmental scanning techniques
Environmental scanning is the monitoring, evaluation and circulation of information from the
external and internal environments to the key people within the organisation. An organisation
uses scanning to avoid strategic surprises, and to ensure the fulfillment of its long term
objectives. Research has found a positive relationship between environmental scanning and
profits. Figure 3.1 describes environmental scanning techniques.
Figure 3.1 Environmental Scanning

External or macro environments
Environmental scanning enables managers to be aware of many variables within an organisations
societal and task environments. The societal environment includes forces that do not directly
touch on short term activities of the organisation, but that can influence its long term decisions.
The societal forces are as follows:
Economic force - Regulates the exchange of material, money, energy and information
Technological force - Generates problem solving inventions
Political-legal force - Allocates power, regulates and protects the laws
Socio-cultural force - Regulates the values and customs of the society
The task environment includes elements that directly affect the corporation. These elements
include governments, suppliers, competitors, customers, creditors, and employee labour unions
and trade associations. The types of external scanning techniques are as follows:
SWOT analysis
ETOP analysis
PEST analysis
SWOT analysis
SWOT is an acronym for strength, weakness, opportunities and threats which are strategic
factors of an organisation. SWOT analysis not only results in the identification of organisations
distinctive competencies, but also identifies the opportunities that the organisations are unable to
take advantage of, due to the lack of appropriate resources.
Strengths
The strengths of an organisation are its resources and capabilities that can be used as a basis for
developing a competitive advantage. Examples of such strengths are as follows:
Patents
Strong brand names
Good reputation among customers
Cost advantages from proprietary know-how
Exclusive access to high grade natural resources
Favourable access to distribution networks
Weaknesses
The absence of certain strengths may be considered as weaknesses. Example - Lack of a patent
can be considered as a weakness. Each of the following factors may be considered as a
weakness:
Lack of patent protection
Weak brand name
Poor reputation among customers
High cost structure
Lack of access to the best natural resources
Opportunities
The external environment analysis may disclose certain new opportunities for profit and growth.
Few examples of such opportunities are as follows:
Unfulfilled customer needs
Arrival of new technologies
Relaxing of regulations
Removal of international trade barriers
Threats
Alteration in the external environment may also present threats to the organisation. Some
examples of such threats include the following:
Shift in consumer choice, it takes them away from the organisations product
Emergence of substitute products
New regulations
Increased trade barriers
Example - An opportunity to provide products like refrigerator or services like online ticket
booking, that can improve consumers lifestyle increases the demand for the companys product.
The Threat could be a new competitor in the market with advanced technology as it makes the
existing product out-of-date.
The SWOT matrix - Organisations should concentrate to develop a strategic plan that fits in the
organisations strength and upcoming opportunities. In rare cases, the organisation overcomes a
weakness by planning itself for a compelling situation. The SWOT matrix is shown in Figure
3.2.
Figure 3.2 SWOT Matrix

The SWOT matrix can be explained as follows:
S-O strategies follow the opportunities that suits the companys strength
W-O strategies overcomes weakness to follow opportunities
S-T strategies find ways to use the organisations strength to reduce external threats
W-T strategies determines a defensive plan to prevent the organisations weakness from
becoming liable to external forces
Environmental threat and opportunity profile (ETOP) analysis
ETOP analysis provides a summary of the environmental factors that are most critical to the
organisation. A general process of environmental analysis or scanning is as follows:
Monitoring or identifying environmental factors An organisation identifies all the factors that
affect business. This includes the system of the organisation, internal structure, strategies adopted
and the culture of the organisation. From a business point of view, external environmental
components that are closely linked to the business, such as customers, competitors, suppliers and
stakeholders are also identified.
Scanning, selecting and grouping relevant factors The strategist has to select the environmental
factor that has the most effect. This procedure paves way for environment analysis and
forecasting.
Defining variables for analysis Selected environmental factors are listed as variables. Variables
form the basis of measurement in ETOP. Variables can be compared, grouped and predicted to
get a clear picture.
Using different methods, tools, and techniques for analysis Some methods of analysis are
scenario building, benchmarking and networking.
Scenario building presents the overall picture of its total system with affecting factors.
Benchmarking is used to compare organisations strengths and weaknesses with the standard.
Networking assesses organisational systems outside its environment to find the strengths and
weaknesses, opportunities, and threats of an organisation.
Analysing environmental factors and forecasting
Collecting relevant information from selected areas and identifying variables forms the
foundation of the analysis. Analysing the information to predict the future is the main objective
of this step.
Designing profiles
After evaluating the environmental factors, they are recorded into profiles. Internal factors are
recorded in Strategic Advantages Profile (SAP) and external factors are recorded in
Environmental Threat and Opportunity Profile (ETOP).
Strategic positioning and report writing
After analysing the business environment, the strategist prepares a report. The report presents
issues and strengths of the business environment in a systematic process. In conclusion, a
strategist or a manager first identifies the significant environmental factors and then analyses
them using different tools and techniques to find out the actual situation.
PEST analysis
The Acronym PEST stands for Political, Economical, Social, and Technological. According to
Kotler, PEST analysis is a useful strategic tool for understanding market growth or decline,
business position, need for Environmental Appraisal, potential and direction for operations of an
organisation.
Political - The first aspect of PEST analysis is a study of the political factors. Political factors
impact the organisations in many ways. Political factors can create benefits and opportunities for
the organisations. On contrary, they can also place responsibilities and duties on organisations.
Political factors that have an impact on organisations are the following:
Legislation on employment laws
Voluntary codes and practices
Environment regulations
Trade restrictions and tariffs
Tax policy and political stability
Economical - The second aspect of PEST analysis is a study of the economic factors. All
organisations are affected by national and global economic factors. Inflation rate, exchange rate,
interest rate and economic growth affect customers and organisations. A successful organisation
responds to economic conditions and stakeholder actions.
The status of labour market reflects the availability of particular skills at national and regional
level. Labour costs are influenced by inflation, general trends in the other industries and the role
of trade unions.
Social - The third aspect of PEST focuses on the forces within the society such as cultural and
demographic features. Organisations should be conscious of demographic changes such as
population, age distribution and prosperity of region, health consciousness, and safety factor.
Organisations must be able to present products and services that complement and benefit the
lifestyle of the consumers. If organisations do not respond to the changes in the society, the
demand for their product or service reduces.
Technological - The fourth aspect of PEST is technology. Technology has largely changed
business operations. Technological factors lower the barriers for entry into the market, reduce
production time and influence outsourcing decisions. Some technological factors are the
following:
Research and Development
Automation
Technology incentives
Rate of technological change
Activity 1
Visit a company and scan and assess the external environment to determine the strategic factors
that pose Need for Environmental Appraisal opportunities and threats.
Refer the link for guidance - http://economictimes.indiatimes.com/opinion/interviews/We-used-
slowdown-as-an-opportunity-to-grow-Cognizant/articleshow/6464944.cms
4. The strengths of an organisation are its resources and capabilities that can be used as a basis
for developing a ________________.
5. ________________ provides a summary of the environmental factors that are most critical to
the company.
6. ________________ creates benefits and opportunities for organisations.
Internal environment
Scanning and analysing the external environment for opportunities is not enough to provide a
competitive advantage to an organisation. Analysts concentrate within the organisation, to
identify internal strategic factors (critical strength and weakness) that determine the organisations
capability to take advantage of opportunities and avoid threats.
Value chain analysis
Michael Porter introduced the concept of value chain analysis in his book, The Competitive
Advantage. Each organisation has its own internal value chain of activities. Michael Porter
suggested that the value chain of an organisation can be split into primary activities and support
activities.
Figure 3.3 describes value chain analysis.
Figure 3.3 Value Chain Analysis

Primary activities are those that are concerned with creating and delivering the end product.
Operations - The raw goods acquired are converted into the final product. Value is added to the
product at this phase as it moves through the production line.
Outbound logistics - Once the products have been produced, they are ready for distribution to
distribution centers, wholesalers, and retailers.
Marketing and sales - Marketing ensures that the end product is targeted to the right customer
group. The marketing process establishes an effective strategy
Services - After the products are sold, the organisation has to offer support services. This may be
in the form of customer support, guarantees and warranties.
With the above mentioned activities, it is essential for the organisation to develop the
competitive advantage that Porter described in his book.
The support activities aid the primary activities in helping the organisation achieve its
competitive advantage.
Procurement - This section supplies raw material for the organisation and obtains the best price
and quality.
Technology development - An organisation should be technology driven. The organisation uses
technology to reduce production cost, which in turn adds value, and to develop new products
through research and development.
Human resources - The organisation has to recruit and train the right people to succeed in their
objectives. The organisation has to encourage its employees and pay them the market price if
they are expected to stay with the organisation and add value to it during their period of
employment.
Firm infrastructure - The organisation needs to ensure that its financial structure, legal structure
and management structure works efficiently and helps the organisation move forward.
The value chain includes the whole organization. It looks at, how primary and support activities
can effectively work together and help the organisation gain a superior competitive advantage.
Financial and non-financial analysis
Financial analysis is done to identify possible financial strengths or weaknesses. It is a part of
SWOT analysis. A review of financial ratios helps assess the organisations overall situation and
pinpoint problems. Some of the important financial ratios are the following
Liquidity ratio
Profitability ratio
Activity ratio
Leverage ratio
Non-financial analysis is designed to explain certain relationships in a non-financial way. These
are not satisfactorily explained in terms of finance (referring to value) in traditional accounting,
but are expressed descriptively. Some of the non-financial ratios are:
Employees Attrition or turnover operational
Assets
Customer Number of customers retained and new ones added
Supplier
Core competency
Core competencies are those skills that are critical for an organisation to achieve competitive
advantage. The core competencies are very unique to the particular organisation and to the
particular industry, in which the organisation operates. Since the competencies are always skill-
based, competitors cannot copy such skills as it is very difficult or impossible. This gives an
unbeatable competitive advantage to the organisation. So the goal for management is to
concentrate on competencies that influence competitive advantage.
The Work of Hamel and Prahalad
The idea of core competency was coined by Prahalad and Gary Hamel. They stated that an
organisation may develop a key area of expertise which is unique and critical to the growth of
that organisation. Organisations should use and develop their core competencies. The three tests
to identify core competence are:
Provide potential access to a wide variety of market
Should make a significant contribution to the benefits of the end products
A core competence should be difficult for the competitor to imitate
Core competencies are now more applicable than before. It depends on how the organisations
take advantage of the central idea of the concept and reach greater heights in terms of building
core competencies. The business organisations will become very complex in the coming years.
They have to build such competencies to succeed in a highly competitive global environment.
Example in a small town called Vellore in the south Indian state of Tamil Nadu, there is a famous
deemed university called the Vellore Institute of Technology (VIT). Its founder, Mr.
Vishwanathan, has adopted a unique model of building formidable core competencies. He has
made huge investments in creating world-class infrastructure, which has attracted the best minds
as students not only from various parts of India, but also from other countries of the world,
including developed countries like Canada, and several African nations. What has really mattered
is that, the quality of teaching has improved, as VIT has been able to attract high-calibre teachers
from all over the country. The national and international seminars that has been conducted very
regularly, has opened up many vistas of knowledge, and opened up many doors, in the
international arena through very innovative tie-ups with foreign universities.
Resource audit
A business needs the right resources and capabilities to utilise opportunities and to react to
threats from its external environment. The resource audit recognises the resources available to a
business. Some of these can be owned. Example - Plant and machinery, brand names, retail
outlets, whereas other resources can be obtained through partnerships, joint ventures or supplier
arrangements with other businesses.
Quality management and benchmarking
Quality management can be summarised as a set of functions to determine quality policy and
implement it through quality planning and quality assurance. Quality management is committed
to customer satisfaction and continuous improvement.
Quality management aims to reduce costs and improve quality. It is used to implement an overall
low-cost and a differentiation business strategy. We can find quality management program in
organisations where top managers move beyond a defensive and tactical orientation to embrace a
developmental orientation.
Quality management emphasises on prevention, and not on correction. There is inspection for
quality, but the emphasis is on improving the process to prevent errors and deficiencies. Thus,
quality improvement teams are formed to identify problems and suggest how to improve
processes that cause problems.
Benchmarking
Benchmarking is a process of systematic evaluation of organisational processes and performance
to create new standards or to improve process. The purpose of benchmarking is to evaluate and
understand the current position of a business organisation with reference to best practices and to
identify areas and means of performance improvement.
Benchmarking must be a constant, integral part of an ongoing improvement process with the
goal of keeping abreast of improving best practices.
Balanced Score Card (BSC)
The Balanced Score Card (BSC) is a framework that allows organisations to manage and
measure the delivery of their strategy. This concept was introduced by Robert Kaplan and David
Norton in 1992. Kaplan and Norton identified four basic perspectives that cover the main
strategic focus of an organisation. The idea was to use this model as a template for planning
objectives and measures in each of the perspectives.
The four perspectives identified by Kaplan and Norton are as follows:
Learning & growth perspective - This perspective includes human capital, organisational capital,
organisational culture, information capital, skills and training, leadership, systems and databases.
Internal process perspective - This perspective refers to internal business processes. It covers
internal operational goals and outlines key processes to deliver customer objectives.
Financial perspective - This perspective covers the financial objectives and allows managers to
pursue financial success and shareholder value.
Customer perspective - This perspective covers customer objectives such as customer
satisfaction, market share goals, and product and service attributes.
3.3.3 Competitive and industry analysis
Industry refers to a group of companies producing a similar product or service. Industry analysis
refers to an in-depth examination of key aspects within an organisation task environment. Both
societal and task environments must be monitored to detect strategic factors that have an impact
on the success or failure of organisations.
Competitive analysis
Competitor analysis is an important step in strategic planning. The organisation conducts a
competitor analysis to evaluate its position among competitors. While planning an organisations
strategy, managers must consider the strategies of the organisations competitors. The factors to
consider while conducting competitor analysis are as follows:
Who the competitors are
Competitors strategies and planned actions
How competitors react to the actions of the organization
How to influence competitive behavior to the firms advantage
Porters framework
The aspects of a competitor on which the Porters framework is based on are:
Competitors objective
Competitors assumption
Competitors strategy
Competitor capabilities
Objectives and assumptions are aspects that drive the competitor. Strategy and capabilities are
about what the competitor does or is capable of doing.
Porters Five Force model
Michael E. Porter developed the Five Force Model in his book, Competitive Strategy. Porter has
identified five competitive forces that influence every industry and market. The level of these
forces determines the intensity of competition in an industry. The objective of corporate strategy
should be to revise these competitive forces in a way that improves the position of the
organisation.
Figure 3.4 describes forces driving industry competitions.
Figure 3.4 Forces Driving Industry Competitions

Forces driving industry competitions are:
Threat of new entrants - New entrants to an industry generally bring new capacity; desire to gain
market share and substantial resources. Therefore, they are threats to an established organisation.
The threat of an entry depends on the presence of entry barriers and the reactions can be
expected from existing competitors. An entry barrier is a hindrance that makes it difficult for a
company to enter an industry.
Suppliers - Suppliers affect the industry by raising prices or reducing the quality of purchased
goods and services.
Rivalry among existing firms - In most industries, organisations are mutually dependent. A
competitive move by one organisation may result in a noticeable effect on its competitors and
thus cause retaliation or counter efforts.
Buyers - Buyers affect an industry through their ability to reduce prices, bargain for higher
quality or more services.
Threat of substitute products and services - Substitute products appear different but satisfy the
same needs as the original product. Substitute products curb the potential returns of an industry
by placing a ceiling on the prices firms can profitably charge.
Other stakeholders - A sixth force should be included to Porters list to include a variety of
stakeholder groups. Some of these groups include governments, local communities, trade
association unions, and shareholders. The importance of stakeholders varies according to the
industry.
Activity 2
Consider a company, SLN Building and Architect Fabricators which is a leader in new building
designs and fabrication. Assume you are the manager and asked to identify Porters Five Force
factors to determine the ultimate profit potential from your markets, how will you do it?
7. ________________ describes the activities that take place in a business and relates them to an
analysis of the competitive strength of the business.
8. ________________ is a group of companies producing a similar product or service.
9. The objective of benchmarking is to________________ of a business or organisation.
3.4 Organisational Position and Strategic Advantage Profile
Strategic Advantage Profile (SAP) shows the strength and weakness of an organisation.
Preparation of SAP is very similar to ETOP analysis. The five functional areas in most
organisations are production or operation, finance or accounting, marketing or distribution,
human resource and corporate planning, and research and development. These functional areas
are listed to identify their relative strengths and weaknesses in SAP. Very similar to the ETOP
analysis, positive, neutral, and negative signs are denoted and brief description is written in SAP
profile. Each functional area is very broad and has many constituents.
3.4.1 BCG portfolio matrix
The BCG matrix is a portfolio management tool used in product life cycle. BCG matrix is often
used to highlight the products which get more funding and attention within the company. During
a products life cycle, it is categorised into one of four types for the purpose of funding decisions.
Figure 3.5 below depicts the BCG matrix.
Figure 3.5 BCG Growth Share Matrix
Question Marks (high growth, low market share) are new products with potential success, but
they need a lot of cash for development. If such a product gains enough market shares to become
a market leader, which is categorised under Stars, the organisation takes money from more
mature products and spends it on Question Marks.
Stars (high growth, high market share) are products at the peak of their product life cycle and
they are in a growing market. When their market rate grows, they become Cash Cows.
Cash Cows (low growth, high market share) are typically products that bring in far more money
than is needed to maintain their market share. In this declining stage of their life cycle, these
products are milked for cash that can be invested in new Question Marks.
Dogs (low growth, low market share) are products that have low market share and do not have
the potential to bring in much cash. According to BCG matrix, Dogs have to be sold off or be
managed carefully for the small amount of cash they guarantee.
The key to success is assumed to be the market share. Firms with the highest market share tend
to have a cost leadership position based on economies of scale among other things. If a company
is able to apply the experience curve to its advantage, it should able to produce and sell new
products at low price, enough to garner early market share leadership.
Limitations of BCG matrix:
The use of highs and lows to form four categories is too simple
The correlation between market share and profitability is questionable. Low share business can
also be profitable.
Product lines or business are considered only in relation to one competitor: the market leader.
Small competitors with fast growing shares are ignored.
Growth rate is the only aspect of industry attractiveness
Market share is the only aspect of overall competitive position
3.4.2 Igor Ansoff growth matrix
The Ansoff Growth matrix is a tool that helps organisations to decide about their product and
market growth strategy. Growth matrix suggests that an organisations attempts to grow depend
on whether it markets new or existing products in new or existing markets. Ansoff's matrix
suggests strategic choices to achieve the objectives. Figure 3.6 depicts Ansoff growth matrix.
Figure 3.6 Ansoff Growth Matrix

Market penetration - Market penetration is a strategy where the business focuses on selling
existing products into existing markets. This increases the revenue of the organisation.
Market development - Market development is a growth strategy where the business seeks to sell
its existing products into new markets. This means that the product is the same, but it is marketed
to a new audience.
Product development - Product development is a growth strategy where a business aims to
introduce new products into existing markets. This strategy may need the development of new
competencies and requires the business to revise products to appeal to existing markets.
Diversification - Diversification is the growth strategy where a business markets new products in
new markets. This is an intrinsically riskier strategy because the business is moving into markets
in which it has little or no experience.
For a business to adopt a diversification strategy, it should have a clear idea about what it expects
to gain from the strategy and an honest assessment of the risks.
3.4.3 McKinsey/GE growth pyramid
The McKinsey/GE matrix is a tool that performs a business portfolio analysis on the Strategic
Business units in an organisation. It is more sophisticated than BCG matrix in the following three
aspects:
Industry (market) attractiveness - Industry attractiveness replaces market growth. It includes
market growth, industry profitability, size and pricing practices, among other possible
opportunities and threats.
Competitive strength - Competitive strength replaces market share. It includes market share as
well as technological positions, profitability, size, among other possible strengths and
weaknesses.
McKinsey/GE growth pyramid matrix works with 3*3 grids while BCG matrix is 2*2 matrixes.
External factors that determine market attractiveness are the following:
Market size
Market growth
Market profitability
Pricing trends
Competitive intensity/rivalry
Overall risk of returns in the industry
Opportunity to differentiate products and services
Segmentation
Distribution structure (e.g., retail, direct, wholesale)
Internal factors that affect competitive strength are the following:
Strength of assets and competencies
Relative brand strength
Market share
Customer loyalty
Relative cost position (cost structure compared to competitors)
Distribution strength
Record of technological or other innovation
Access to financial and other investment resources
Figure 3.7 depicts Mckinsey/GE growth pyramid.
Figure 3.7 McKinsey/GE Growth Pyramid

10. _______________have higher market value.
11. Market development is a________________ where the business seeks to sell its existing
products into new markets.
12. ________________replaces________________ in Mckinsey/GE Growth matrix.
3.5 Strategic Management Model
Strategic management model is generally known as strategic planning model. A strategic
planning model is selected to devise and implement the strategic management plan of a particular
organisation. However, it has been proved that no strategic planning model is perfect. Every
company regularly designs its own strategic planning model by choosing a model and
transforming it as the company proceeds to formulate its strategic management plan procedures.
Organisations can choose from a large number of strategic planning model options that are
available.
Components of a strategic management model
In the 1970s, a large number of organisations followed a recognised strategic planning model.
According to this model, strategic planning is a calculated process where the top management
formulates the strategy of the company and passes it on to the lower levels in the company for
application. The steps involved in strategic planning model are as follows:
Environmental scanning analysis - It is basically a blend of PEST analysis and SWOT analysis.
Internal analysis studies conditions within the company.
Strategy formulation - It the process of determining suitable courses of action to achieve
Strategy implementation - It is concerned with the planning of how to apply the choice of
strategy in an organisation.
Strategy evaluation and control - It consists of processes to ensure an organisation achieves its
objectives. It compares performance with desired results and provides necessary feedback for the
management to evaluate results and take corrective measures as needed.
13. Strategic management model is as ________________.
14. ________________ is the process of determining suitable course of action to achieve
15. Strategy implementation is concerned with the planning of how to apply the choice of
strategy in organisation. (True/False)
3.6 Summary
Let us sum up what we have discussed in this unit.
Strategy analysis is defined as a process of conducting research on the business environment
within which an organisation operates to formulate strategy.
The environmental scanning techniques are external and internal. External scanning techniques
include SWOT, ETOP and PEST analysis. Internal scanning techniques include value chain
analysis, core competence, resource audit, quality management, benchmarking, and financial and
non-financial analysis.
Industry competitive analysis is a driving force of an organisations strategy and analyses the
effects how business managements act or react in their sectors. The organisation performs a
competitor analysis to evaluate its position among competitors.
Strategic Advantage Profile (SAP) shows the strength and weakness of an organisation.
Preparation of SAP is parallel to ETOP analysis. The five functional areas in most organisations
are production or operation, finance or accounting, marketing or distribution, human resource
and corporate planning, and research and development. Each functional area is very broad and
has many constituents.
Strategic management model, also known as strategic planning model is selected to formulate
and implement the strategic management plan of a particular organisation.
3.7 Glossary
Scanning : Having a check
Appraisal : Assessment
Macro : Large
1. What are the types of environment scanning techniques? Explain PEST analysis.
2. Explain value chain analysis.
3. Define Core competency.
4. Describe Porters five force model.
5. Explain Ansoff growth matrix.
3.9 Answers
1. Strategy analysis
2. Competitive advantage
3. True
4. Competitive advantage
5. ETOP
6. Political factors
7. Value chain analysis
8. Industry
9. Understand and evaluate current position
10. Cash cows
11. Growth strategy
12. Market attractiveness and market growth.
13. Strategic planning model
14. Strategic formulation
15. True
Terminal Questions:
1. Refer 3.3.1 External and internal environment scanning techniques
2. Refer 3.3.2 Value chain analysis
3. Refer 3.3.2 Core competency
4. Refer 3.3.2 Porter five force model
5. Refer 3.4.2 Ansoff growth matrix
3.10 Case-let
SWOT Analysis of Wal-Mart
Wal-Mart Stores, Inc. is the world's largest retailer, with $256.3 billion in
sales in the financial year ending 31 January, 2004. The company has 1.6
million employees worldwide through more than 3,600 facilities in the
United States and more than 1,570 units.
Strengths
Wal-Mart is a powerful retail brand. It has a reputation for its value for
money and wide range of products in the same store.
Wal-Mart has grown significantly over the recent years. It has experienced
global expansion.
The company has a core competence involving its use of own Information
Technology to support its international logistics system. IT also supports
Wal-Mart's efficient procurement.
It has a focused strategy for human resource management and development.
People are vital to Wal-Mart's business and it invests time and money in
training people.
Weaknesses
Wal-Mart is the world's largest grocery retailer. Despite its IT advantages, it
could be weak in some areas due to the huge span of control.
Wal-Mart may not have the flexibility to focus on specific competitors as it
sells many products (such as clothing, food, or stationary).
Though the company is global, it has its presence in relatively few countries
worldwide.
Opportunities
Wal-Mart can take over, merge with, or form strategic alliances with other
global retailers, focusing on specific markets such as Europe or China.
The stores are present only in few countries. Therefore, there are enormous
opportunities for future business in expanding consumer markets, such as
China and India.
New locations offer opportunities to exploit market development. They vary
from large super centres to local malls. Wal-Mart has the opportunity to
continue its current strategy to open large super centres in the new location.
Threats
Being number one makes Wal-Mart the target of competition, locally and
globally.
As a global retailer, it experiences political problems in the countries it
operates in.
Severe price competition is a threat. The cost of producing many consumer
products leads to lower manufacturing costs. Manufacturing cost has
dropped due to outsourcing to low-cost regions of the world. This has led to
price competition, resulting in price reduction of few products.
Discussion Questions:
1. Discuss the strengths and opportunities of Wal-Mart.
2. Explain the emerging threats and challenges that Wal-Mart might have to
face in the near future and in the long term.
3. If Wal-Mart starts its operations in India, what may be the positive and
negative factors that can influence its strategies?
Source link - http://marketingteacher.com/swot/walmart-swot.html
Reference
Thomas L. Wheelen and J. David Hunger: Concepts in Strategic Management and Business
Policy, Pearson Education.Inc (2002)
E-References
http://finance.mapsofworld.com/strategic-management/model.html- Retrieved on 28/7/2010
http://www.learnmarketing.net/valuechain.html - Retrieved on 28/7/2010
http://www.managementstudyguide.com/competitor-analysis.html - Retrieved on 27/7/2010
http://www.quickmba.com/strategy/swot - Retrieved on 27/7/2010
http://tutor2u.net/business/strategy.html - Retrieved on 29/7/2010
Unit-04-Strategy Formulation and Implementation

Structure:
4.1 Introduction
Objectives
4.2 Strategy Formulation
Systematic approach to strategic decision making process
Strategic choice approach
4.3 Process in Strategy Formulation
Henry Mintzbergs contribution to strategic planning
4.4 Strategy Implementation and its Stages
Organisational structure and systems
Resource procurement
Integration of functional plans, operational plans and coordinating activities
Building core competencies and critical success factor
4.5 Reasons for Strategy Failure and Methods to Overcome
Major reasons for strategy failure
Effects of strategic failures
Methods to overcome strategy failure
4.6 Strategy Leadership and Strategy Implementation
Features of strategic leadership
Importance of strategic leadership in strategy implementation
4.7 Strategic Business Units (SBUs)
Meaning and features of SBUs
Functions or roles of SBU
Benefits of SBU to the parent company/MNCs
4.8 Summary
4.9 Glossary
4.11 Answers
4.12 Case-let
4.1 Introduction
We have discussed about strategic management and strategic analysis in the previous units. In
this unit we will discuss about strategy formulation and strategy implementation in detail.
The corporate world is in the process of global transformation. Strategy management takes a
view of this changing corporate terrain. It attempts to show how various firms irrespective of the
size can be more effective in the present and future business world. Strategic formulation and
strategy implementation are the two aspects of strategic management which smoothen the
management process effectively.
Apart from strategic formulation and strategic implementation, you will learn about strategic
decision making, strategic choice, and strategic leadership, causes of strategic failure and
concept of SBUs in this unit.
Objectives
define strategy formulation and its processes
explain strategy implementation and its stages
analyse the reasons for strategy failure and the methods to overcome it
describe strategy leadership and its importance in strategic implementation
explain the concept of SBUs
4.2 Strategy Formulation
Strategy formulation is the development of long term plans. It is used for the effective
management of environmental opportunities and for the threats which weaken corporate
management. Its objective is to express strategical information to achieve a definite goal.
The following are the features of strategy formulation:
Defining the corporate mission and goals
Specifying achievable objectives
Developing strategies
Setting company policy guidelines
Strategic formulation involves effective strategic decision making and strategic choice, which are
discussed in the following sections.
4.2.1 Systematic approach to strategic decision making process
Strategic decision making is a tool to do business in a smarter way. It enhances a managers
abilities to obtain insight of strategic decision making problems and to do justice by extracting
their decision making skills. An individual takes the first step towards decision making by
dividing decision problems into more manageable fragments and explicitly considering the
possible options.
Effective decision making involves the following six steps which are shown in the table 4.1:
Table 4.1 Steps of Strategic Decision Making Process
As a strategist, you must do the following to create
a constructive environment:
i. Establish the objectives Define what you want to
achieve.
ii. Agree on the process You must focus on the final
decision, which is made after establishing the
objective.
1) Creating a iii. Involve the right people Make sure you have the
constructive right team of people.
environment
iv. Allow opinions to be heard Encourage
participants to contribute in discussions, debates
and analyse.
v. Need to ask the right question Ask yourself
whether you are questioning the right issue or not.
vi. Use creativity tools from the beginning Apply
creativity by thinking from a different perspective
and angle.
2) Generating good When you generate alternatives, you force yourself
alternatives to view the problem from different angles, which in
turn gives you effective results. Some of the
techniques are as follows:
i. Brainstorming It is an effective process which
develops creative solutions to problems and
enhances the productivity of the organisation.
ii. Generating ideas from a large number of people
Everybodys ideas must be heard and given equal
weightage, irrespective of the persons position or
power within the organisation.
iii. Inviting others Asking outsiders to join the
discussion.
When you are satisfied with your collection of
realistic alternatives, you can evaluate the
feasibility, risk and the implications of each choice.
Few factors that need to be considered when the
alternatives are explored are as follows:
i. Risk In decision making, there is usually some
3) Exploring the chosen degree of uncertainty, which leads to risk. By
alternatives evaluating it, you can determine whether the risk is
manageable or not.
ii. Implications Another way to look at your options
is to consider the potential consequences of each
alternative.
iii. Validation Exploring the resources leads to a
validity check of the product.
After you have evaluated the alternatives, choose
4) Choosing the best the best among the available choices. Take your
alternative valuable time to do so.
You must be sure that common errors have not crept
5) Checking and into the decision making process, so check your
confirming your decisions properly. This includes methodical testing
decision of the assumptions and thoroughly reviewing the
same.
6) Communicate your After you have made your decision, it is important
decision and move to to explain it to others and start implementing it.
action
Issues involved in taking difficult strategic decisions
Taking strategic decisions is not an easy task all the times. There could also be scenarios when
we are not confident about the positive result of the decisions being made. Few examples of the
issues involved in taking difficult strategic decisions are:
Uncertainty - A problem occurring in the production and distribution planning of a product for a
series of time period due to uncertain probability distribution of future sales of the product
Complexity - You are a jury member and must decide the guilt or innocence of an accused. Due
to complexity in your decision making, you become emotionally attached to irrelevant opinions,
rather than listening thoughtfully to the fact and deciding the case on its merits
High-risk consequences - In 1984, Gavilan Computers faced bankruptcy due to strategic decision
failure
Irrelevant alternatives - In 1987, the owner of the Shoreham plant located at Long Island Sound,
New York, had wasted $5.5 billion on bricks, mortar, fuel rods and interest as the operating
license had not been granted
Interpersonal issues - An individual is not interested in playing a business game and ignores
playing with the team as he has an out of game disagreement with a fellow member, then it
affects the whole team to take a proper strategic decision.
Effective decision making process has the following merits:
A broadened perspective of managing complex decisions
Designing more effective decision processes
Transforming risk into opportunity and thinking strategically
You will not miss the important factors which help you to make better decisions by taking an
organised and right approach. The next section deals in outlining a process that will help you
improve the quality of your decisions.
4.2.2 Strategic choice approach
Strategic choice is an ongoing process in which planned management system plays a significant
role. The main objectives of any management are survival, growth and profitability, which it
achieves through effective strategic choices. The features of strategic choice are as follows:
Focusing on decisions and judgments made in a particular planning situation
Highlighting judgments involved in handling uncertainties
Creating a framework which explicitly balances present and future decisions
Creating a framework for communication and collaboration between different people with
different backgrounds and skills
1. Strategy formulation is the development of ____________ range plans.
2. _________________ influences the strategy formulation to a considerable extent.
4.3 Process in Strategy Formulation
In this section, we will discuss about the strategy formulation process. The main processes
involved in strategy formulation are as follows:
Stimulate the identification - Identifying useful information like planning for strategic
management, objectives to achieve the goals of the employees and the stakeholders.
Utilisation and transfer of useful information as per the business strategies - A number of
questions arising during utilisation and transfer of information have to be solved The questions
that arise during utilisation and transfer of information are the following:
Who has the requested information?
What is the relationship between the partners who holds the requested information?
What is the nature of the requested information?
How can we transfer the information?
4.3.1 Henry Mintzbergs contribution to strategic planning
We will learn about Henry Mintzbergs contribution to strategic planning in this section. Henry
Mintzberg is a well-known academician and generalist writer who has written about strategy and
organisational management. His approach is broad, involving the study of the actions of a
manager and the way the manager does it. He believes that management is about applying human
skills to systems, but not systems to people. Mintzberg states certain factors as the reason for
planning failure. The factors are as follows:
Processes - The elaborate processes used in the management such as creation of bureaucracy and
suppression of innovation leads to strategic planning failure.
Data - According to Mintzberg, hard data (the raw material of all strategists) provides
information whereas soft data (the data gathered from experience) provides wisdom which
means that soft data is more relevant than the hard data.
Detachment - Mintzberg says that effective strategists are people who do not distance themselves
from the details of a business. They are the ones who immerse themselves into the details and are
able to extract the strategic messages from it.
In 1993, Henry Mintzberg concluded that planning is a formalised procedure to produce a
coherent result in the form of an integrated system of decisions. The objectives must be explicitly
labeled by words after being carefully decomposed into strategies and sub-strategies.
3. The main processes involved in strategy formulation are ___________ and ______________.
4. Henry Mintzberg believes that management is about ______________.
4.4 Strategy Implementation and its Stages
Strategic implementation plays a significant role in the smooth functioning of systematic
management. A task is not completed until it is implemented properly. We can define the
implementation process as a link between the projects or resources and their action plans. It
finally helps us in strategic evaluation.
A broad implementation plan drives the strategic implementation, which in turn, drives an
individual project action plan. The action plan follows a hierarchy of tasks, realistic time tables,
by means of identifying proper human resource, performance measures and evaluation systems.
We will discuss strategy implementation in the following three aspects:
Organisational structure and systems
Resource procurement
Functional and operational plans
4.4.1 Organisational structure and systems
The motive of explaining the structures is that every structure has its own set of hierarchical
levels and every level functions in a different manner. Every level has its own set of plans that
are executed accordingly for proper strategic implementation. The three forms of common
organisational structure are as follows:
Tall
Flat
Hierarchical
Tall structure - The tall structure comprises a managing director at the top level and managers at
the subsequent next level. The staff follows the managers. Figure 4.1 depicts the tall structure in
an organisation.
Figure 4.1: Tall Structure

The features of tall structure are as follows:
There is a narrow span of control which means that the employees can be closely supervised
There is a clear progression and promotional ladder
Flat structure - The flat structure comprises a managing director at the top level which follows
the manager at the next level and staffs at the subsequent level. Flat structure has fewer levels,
but has more people in each level compared to tall structure, which is hierarchical with more
levels of authority. Figure 4.2 illustrates flat structure of an organisation.
Figure 4.2: Flat Structure

The features of flat structure are as follows:
There is better team spirit
There is lesser bureaucracy and easier decision making
Hierarchical structure - Hierarchical structure forms a hierarchy of levels. It is arranged in a tree-
like manner. Figure 4.3 depicts the hierarchical structure in an organisation.
Figure 4.3: Hierarchical Structure

The features of hierarchical structure are as follows:
Authority and responsibility is clearly defined
Employees are very loyal to their organisation
Corporate culture and values
When we discuss about organisational structure we must know about corporate culture, which is
explained in details in unit 6.
Corporate culture is called the character of an organisation, as it includes the vision of the
companys founders. The value of corporate culture influences the ethical standards and the
managerial behaviour within a corporation.
4.4.2 Resource procurement
The term resource procurement means acquiring resources. Procurement is a collection of steps
used in the acquisition of goods and services. You work towards acquiring items that you desire.
You get a better understanding of the real cost involved in managing goods or services by
understanding the steps involved in procurement.
The following are some of the procurement steps:
Recognition of need for goods/services - Before acquiring a service you must be sure about
recognising your requirement for the goods/services.
Qualify the specifics of the services - Let us illustrate it with an example. Suppose you need a
new transport medium. Further thought may yield the fact that a car would be the most effective
and useful type of vehicle. You need to determine the cost and the feature of the car available.
Evaluation of potential suppliers - You must know more about the vendors who can supply goods
or services that meet all the specifications.
Taking possession of the desired good or service - This ensures that the item is in compliance
with all the claims made by the supplier to the customer.
Resource procurement follows immediately after project detailing, procedural issues and
resource allocation. These processes are described in detail in the next section.
Project detailing, procedural issues and resource allocation follows a hierarchy as shown below
in Figure 4.4.
Figure 4.4: Resource Procurement Processes

Project detailing
Project detailing is the first step towards resource procurement process. The steps involved in it
are as follows:
1. Analyse the needs
2. Find the right designer
3. Establish priorities
4. Perform a mock-up
5. Implement the feedback
6. Perform test
7. Prepare the final design
8. Implement marketing and promotions
9. Plan for updates or changes
Procedural issues
Procedural issues follow the next step towards resource procurement process. The features of
procedural issues are as follows:
Setting up guideline development groups
Defining the scope of the groups
Scheduling time for events
Setting up proper strategic planning process for every group
Resource allocation
The resource allocation process deals with two steps. They are as follows:
1) Breaking up the project and extracting the task
2) Assigning the task to the resources
You will have a better understanding of the process with the help of the example in figure 4.5.
Figure 4.5: Understanding the Resource Allocation Process

The table 4.2 assigns task to resources named A, B, C, D and E.
Task Resource
Preparation of manuals A
Preparation of CDs B
Coding in C++(Module1) C
Module2 D
Testing of codings E
Table 4.2: Allocation of Resource to Individuals

4.4.3 Integration of Functional plans, operational plans and coordinating activities
We have various units in a management system. Example - Everyone in the organisation has their
own set of functions to play including the managing director, the manager, the staffs etc. The
functional plan in strategic implementation decides what a functional unit has to do whereas
operational planning decides on the way to perform functions. Let us illustrate the difference
with an example.
Kodak made a strategic decision to enter into the digital photography business when the
traditional film market started to decline. To survive in the market, they made some strategic
decisions about the opportunities of the product and formulated an operational plan.
In the above example, the motive of Kodak was its functional plan and the action was its
operational plan. There must always be coordination between the functional and operational plan
in a management process.
4.4.4 Building core competencies and critical success factors
Core competence is a management tool that enables an organisation to deliver a unique value to
its customers. Building up core competency becomes essential to gain competitive advantage
because advantages originating from the product-price-performance-tradeoffs are almost short-
term especially when technology keeps on changing. The profits earned by the various business
units can only last through competencies.
The benefits of core competencies are as follows:
Designs competitive positions and strategies
Helps employees to understand management priorities
Decides where to allocate resources
Enhances image and builds loyalty of custom
A company interested to develop its core competencies should consider:
Creating an organisational road map that sets goals for competence building
Encouraging communication standards and involvement in core capability development
Preserving its core strengths
Critical Success Factor
Critical Success Factor (CSF) is the critical factor required to ensure proper success in a
business. CSF is a variable element. Therefore we can determine success through the CSFs by
determining the central achievement of the organisations future.
The types of CSFs are as follows:
Industry CSF - It results from respective industry characteristics. Example The AMSAR future
airborne program among Thomson in France, GEC in the United Kingdom and Dasa in Germany
is an example of the industrial CSF. Resources and experiences were shared effectively and
duplication of efforts was avoided because the quality of relationships improved between the
different teams of the industries.
Strategy CSF - It results from the chosen competitive strategy of the business. Example The
energy efficiency of Wipro has improved by 19%, which is from 335 units of electricity per
employee per month (pepm) to 274 units over the last five years. It was due to the transition
towards green buildings, centralised cooling and energy efficient computing equipment used by
it.
Environmental CSF - It results from economic or technological changes. Example - According to
the strategy, Amazon executed a contextual tracking technology which enabled it to monitor
people when they visit its campus and track their activities.
Temporal CSF - It results from the internal organisational needs and changes. Example Coca cola
implemented temporal CSF due to the issues related to foreign exchange. The temporal features
are income earned at average exchange rate etc.
The five key sources of CSFs are as follows:
The industry - An industry has its own unique CSFs. Some of the CSFs are successfully coping
with technical issues, focused performance measures, enhancing ties, effective utilisation of
resources etc.
Competitive strategy and industrial position - A firm's position in the industry, its strategy, its
resources and capabilities will define CSF. Example - In 2005, Caterpillar defined a new strategy
which defined specific CSFs to its firm. These include developing proper organisational culture,
quality control and focus on resource cost.
Environmental factors - It includes industry regulation, political development, economic
performance of a country and population trends. Example - If a company establishes its business
and has just acquired a business license, it will face few industrial adaptation issues to establish
its business.
Temporal factors - Temporal factors are linked with some specific temporary events. Example -
A firm which builds its business in the international market needs a core group of executives in
its new markets. Thus, its CSF is to build an executive group in a specific market.
Managerial position - The primary source of CSF is managerial position. Manufacturing
managers have the CSFs of product quality, inventory control and cash control.
The key aspects of a company while working on its CSFs can be listed as follows:
Develop a mission statement
Develop high level goals
Develop a hierarchy of goals and their success factors
List the requirements, problems and assumptions
Implement analysis matrices
Implement problems versus requirements matrix
Obtain results of the analysis
5. Resource procurement comes after three processes______________, _____________ and
_________________________________.
6. Core competence is a management tool that enables the business to deliver a ____________.
4.5 Reasons for Strategy Failure and Methods to Overcome
A decline in productivity occurs due to failure of strategy. Let us discuss one such incident with
HP, one of the technology giants. HP was unsuccessful in its competition with IBM, Dell, Sony
and others. HP had issues in enterprise computing. What do you think were the reasons for its
downfall? Why did strategic planning failed? Externally, it appeared that the major reason for its
failure was due to the lack of trust and support among employees. Nevertheless, HP overcame its
strategic failures and has grown since then in a sustainable manner. In this section, we will
analyse the internal reasons for strategic failure.
4.5.1 Major reasons for strategy failure
There are various reasons which lead to strategic failure and that ultimately affects the
management system. Some of them are as follows:
Improper communications - Failure in communicating the vision and strategic objectives to the
stakeholders means that the developers of the strategy are not disclosing enough information to
the others. If the expectations and the opinions relating to a matter are not communicated
properly, there will not be sufficient growth in the environment. The final outcome is a result of
strategic failure.
Lack of effective leadership - Leadership plays an important role in successful strategies. Lack of
a true motivating leader hampers the management system. This results in improper resource
allocation, poor follow-through, inadequate checks, misaligned goals, strategies, etc.
No plan behind the idea - Those of you who have attempted to execute thin plans can relate to
the term strategic initiative. But it is not strategic or initiative at all. Inadequate planning means
undeveloped intentions that lead to strategic failures.
Passive management - Passive management is characterised by assuming that, work progresses
by itself without any action. When the management relaxes without updating the process
constantly, the whole management process loses steam. Consequently the implementation phase
lacks enough follow-up.
Lack of motivation and personal ownership - People want to create a difference in comparison to
others. They do not understand the purpose and objective of the organisation and this leads to
employees lacking goal and losing the vision of the organisation. In simple words they lack
motivation. Employees need to understand that achieving the goals of the company supports their
personal goals.
4.5.2 Effects of strategic failure
Strategic failures affect the root of the strategic management system. A major effect is the
financial crisis of the organisation. The consequences of financial crisis are the following:
Gradual declination in the growth of the organisation
Systemic instability
Fewer employment opportunities or increased salary cut-offs
Loss of reputation in the global market
4.5.3 Methods to overcome strategic failure
There must be minimal strategic failures in an organisation for the management process to be
effective. The important methods required to overcome strategic failures in an organisation are as
follows:
Defining your system value - A value is a belief that is meaningful to you. Every individual has
their own personal values whether they are consciously aware of it or not. To succeed you must
know the importance of certain factors in business and in life.
Defining your vision - A competitive vision helps you succeed and extract the most from your
business relationships.
Defining your mission - Defining the mission elaborates the process that helps you develop your
mission statement. It also assists you in identifying your personal goals and objectives.
Live from choice - You must develop the ability to accept rejections. Firmly believing in your
choice helps in consciously choosing the results you desire.
Change management and strategic planning - Change management minimises strategic failure. It
deals with changes in management in terms of organisational and individual level. You must also
follow a proper strategic plan.
Employees and managing workers - Workers rarely start off with a mastery of all their duties.
The new employees can learn from their mistakes and this makes them better performers in
future.
Create a plan and take substantial action - Always remember the statement, If you fail to plan,
you plan to fail, by Svetlana Simakova. Top performers understand that success is about taking
actions. You must always create a plan with result based outcomes.
Turn-around - A downward trend in a business helps in identifying the mistakes and finding its
solution.
Replacement of the committee with a mastermind group - Surround yourself with excellence
from which you can seek objective advice, motivation, group synergy and different perspectives
to accomplish the most important goals. In a mastermind group, the plan belongs to the group,
and each person's participation is essential to the success of the group.
7. The major effect of strategic failure is the __________________of the organisation.
8. Strategic failure leads to decline in __________________ of an organisation.
4.6 Strategic Leadership and Strategic Implementation
Strategic leadership refers to the potential to express a strategic vision and to motivate others to
acquire that vision. It is the ability to influence organisational members and to execute
organisational change.
Let us discuss the types of leadership. Figure 4.6 depicts the three types of leadership.
Figure 4.6: Types of Leadership

Direct Leadership - This is typically in organisations where subordinates are in direct contact
with their leaders. Direct leaders are linked with their subordinates and influences organisation
through the development of subordinates. An example of direct leadership is given in figure 4.7.
Figure 4.7: Direct Leadership
Organisational Leadership - In organisational leadership, the leaders reach out to far more people
and can even influence several thousands of people. Unlike direct leaders, organisational leaders
are not able to interact directly with their subordinates and need other staff to help them lead
people. The hierarchy of organisational leadership is illustrated in figure 4.8.
Figure 4.8: Organisational Leadership

Strategic Leadership - These leaders usually lead large organisations and influence thousands of
people. The role of a strategic leader is to establish organisational structure, allocate resources
and communicate the strategic vision of the organisation.
In the next section we will discuss about strategic leadership features. To be a strategic-leader,
you must understand the corporate priorities, objectives and imagine the future of the company.
You have to decide your own role and responsibility in that journey. In addition, an effective
strategic leader guides and influences the skills of team members simultaneously.
4.6.1 Features of strategic leadership
A strategic leader possesses the following qualities:
Loyalty and compassion - Effective leadership should be loyal and compassionate to vision of
the team.
Judicious use of power - Strategic leaders utilise power wisely. They must push their ideas
gradually along with the other members in the team.
Wider perspective or outlook - Strategic leader have a wider perspective of vision and they act
accordingly.
Motivation and reliability - Strategic leader have motivating qualities and are also reliable.
Skillful communication - A leader shares views with the team members. Effective
communication brings effective understanding among the team members.
Quality of understanding the moods and emotions - A strategic leader must understand the moods
and emotions of his team members. He must communicate his sentiments with the employees.
4.6.2 Importance of strategic leadership in strategy implementation
We know that weak leadership destroys the soundest of strategies. The factor that distinguishes
successful strategy implementation from failed attempts is the competent leadership at the top.
The change has to be from the top, which means that the leader leads from the front. Without
sound leadership, an organisation loses its way. Problems of implementation are issues which
deal with how leaders influence behaviour, change the course of events and overcome resistance.
Leadership is essential in implementing decisions successfully. Example We recognise the
importance of leadership when we vote for our political leaders. We realise the importance of the
best candidate.
9. Strategic leadership is the potential to express ________________.
10. The factor that distinguishes successful strategy implementation from failed attempts is the
____________ leadership at the top.
11. Match the leadership types with its distinguished feature:
Set A
a) Direct leadership
b) Organisational leadership
c) Strategic leadership
Set B
i) Requires staff support
ii) Utilises power wisely
iii) Sub-ordinates are in close contact
4.7 Strategic Business Units
In this section we will study about Strategic Business Units (SBUs).We define SBU as the
autonomous divisions in an organisation which deals with specific business concerns.
4.7.1 Meaning and features of SBUs
SBU is a business tool whose main concept is to serve a clear and defined market segment with a
defined strategy.
The features of SBU are as follows:
SBU contains all the needs and corporate capabilities of its organisation.
There is managerial and capital resource allocation for serving the overall interest of the
organisation.
SBU segments the activities of the company in a strategic manner and allocates resources
competitively.
For an organisation to have an SBU, it must fulfill the following criteria:
Possess different missions
Set up original plans
Have a definable group of competitors
Administer resources in key areas
4.7.2 Functions or roles of an SBU
The SBUs have their own set of functions and roles. The following are the roles of an SBU:
Encourages new ways of thinking and acting as a separate autonomous unit
Reduces the affect of bureaucracy in the organisation
Follows the corporate strategic plan but differs in significant aspects. Planning steps include
mission, market opportunity analysis, target market evaluation, marketing program and impact
analysis.
The table 4.3 describes the advantage and disadvantage of an SBU.
Table 4.3: Advantage and disadvantage of SBU
Advantages Disadvantages
Reduces problems associated with
sharing resources across functional Distortion of information occurs
areas
Difficulty in maintaining a uniform
Responses quickly to the corporate image
environmental changes
Gives too much emphasis on short
Increases focus on products and term performances
markets
4.7.3 Benefits of SBU to parent company/MNCs
An MNC realises parenting advantages in certain factors like global scale and scope efficiencies,
regional differences, global risk diversification etc. The SBU adds value through parenting
advantages by defining its roles and strategic priorities.
The benefits to the parent company are as follows:
Optimisation of the competitive advantages lies within the companys global network of business
units and people.
Reforming the business model and achieving the objective
Serving a defined external market where it can conduct strategic planning in relation to products
and markets
Activity 1
XYZ, a software company with growing competition, wishes to launch a new product in the
market. Imagine that you are a team leader who was given this responsibility. How well can you
handle the situation with proper strategic planning?
Refer the link for guidance:
http://managementhelp.org/plan_dec/str_plan/basics.htm
12. SBU is _______________________which deals with specific business concerns.
13. The SBU adds value through __________________________by defining its roles and
strategic priorities.
4.8 Summary
Strategic formulation process defines the corporate mission, developing strategies and setting
companys policy guidelines. Strategic decision making enhances managers abilities to obtain
insight of strategic problems. Strategic choice creates a framework which explicitly balances
present and future decisions.
Henry Mintzberg, who concluded that planning is a formalised procedure to produce a coherent
result, also stated certain factors as the reason for planning failure such as processes, data and
detachment.
Strategy implementation is vital in organisational structure, resource procurement, functional and
operational plans of the organisation. Core competence enables the business to deliver
fundamental customer benefits by creating an organisational road map and preserving core
strengths. Critical success factors are required to ensure success in a business by developing
analysis matrices and reviewing the results.
The reasons for strategic failure are lack of motivation, lack of effective leadership etc. It leads to
growth declination and organisational instability. The methods to overcome strategic failures are
creating a proper plan, taking necessary actions etc.
SBUs are the autonomous units which serve a clear market segment with a defined strategy. It
controls the strategic factors of the parent company.
4.9 Glossary
Stakeholders: Person/group that has direct or indirect share in an organisation. Ex- customers,
directors, employees, investors
Bureaucracy: Administration which controls an organisation operated by certain group of
officials.
Autonomous: A self governing body which works independently
1. Explain the steps in making an effective decision.
2. What is strategic formulation and what are its processes?
3. Illustrate the three aspects of strategic implementation.
4. What is core competence? Describe its significance.
5. What are the reasons of strategic failure? Explain the methods to overcome it.
6. Define strategic leadership and its features.
7. What are SBUs? What are its benefits to MNCs?
4.11 Answers
1. Long
2. Strategic decision making
3. Simulating the identification, transferring useful knowledge
4. Applying human skills to system
5. Project details, procedural issues, resource allocation.
6. Fundamental customer benefit
7. Financial crisis
8. Productivity
9. A strategic vision
10. Competent
11. a-iii; b-i; c-ii
12. An autonomous unit
13. Parenting advantages
Terminal Questions:
1. Refer 3.2.1 Steps for effective decision making
2. Refer 3.3 Strategic formulation processes
3. Refer 3.4 Aspects of strategic implementation
4. Refer 3.4.4 Significance of core competencies
5. Refer 3.5 Reasons of strategic failure
6. Refer 3.6.1 Features of strategic leadership
7. Refer 3.7 Strategic Business Units
4.12 Case-let
Ups and downs of Subhiksha retail store
Let us discuss the case of Subhiksha retail store which started with one store
in 1999 and had grown to over 1000 stores by the end of 2007. It was
founded by R Subramaniam. It had ICICI Ventures and Wipro as its
investors.
However, it faced strategic failure and battled for survival. The following
are few of the reasons for the strategic failure in Subhiksha:
Expansion against consolidation The availability of free capital made the
employees implement many ideas to expand the business without actually
taking into account the outcome of the previous work.
Lack of focus - Lack of focus diverts the main objectives of the company. In
the end, the company forgets what it really wants to do.
Poor inventory management Subhiksha had a bad history of credit defaults
which led to supply breakages. This resulted in high inventory.
The following actions should have been undertaken:
Constant watch over the business
Disciplined administration with proper focus
Implementation of intellectual processes to avoid strategic failure
1. What are the factors that lead to strategic failure of Subhiksha?
2. Apart from the given measures, what other measures do you think that
should have been taken to prevent strategic failure?
Source link
http://www.scribd.com/doc/11968427/Subhiksha-Case-Study
Reference
Wheelen T and Hunger D (2002) - Concepts in Strategic Management and Business Policy,
Pearson Education.Inc.
E-References
http://www.1000ventures.com/business_guide/strategy_formulation.html - Retrieved on
27/07/10
http://www.netmba.com/strategy/process/ - Retrieved on 27/07/10
http://www.virtualsalt.com/crebook6.htm - Retrieved on 28/07/10
http://findarticles.com/p/articles/mi_m4256/is_n3_v21/ai_17154315/ - Retrieved on 29/07/10
http://www.wisegeek.com/what-is-strategic-leadership.htm - Retrieved on 01/08/10
http://www.wisegeek.com/what-is-strategic-leadership.htm - Retrieved on 02/08/10
http://www.llrx.com/features/sbu.htm - Retrieved on 07/08/10
Unit-05-Strategic Control and Evaluation
Structure:
5.1 Introduction
Objectives
5.2 Strategy Evaluation
Requirements of strategy evaluation
Importance of effective strategy evaluation
Barriers of strategy evaluation
Strategy evaluation methods
5.3 Strategic Control
Guidelines for effective strategic control
5.4 Difference Between Strategic Control and Operational Control
5.5 Concept of Synergy and its Meaning
Organisations ability to achieve synergy
Impact of synergy on business inputs and outputs
5.6 Key Stakeholders Expectations
5.7 Summary
5.8 Glossary
5.10 Answers
5.11 Case-let
5.1 Introduction
In the previous units, we have learned that organisations plan, formulate and implement
strategies to increase productivity and achieve their objectives. But, how would the organisations
judge the efficiency of the new strategic measures? If the current strategy is not generating
expected results, how would we be able to mould it to fit our requirements? We can overcome
these challenges only when we are able to evaluate and control the strategies.
Performance is the result of the activities which were introduced in the strategy of the
organisation. Strategic evaluation and control is the process of comparing the actual performance
of the organisation with the desired performance. In case of undesired results, remedial actions
are taken to control the issues that led to the negative performance of the organisation. Strategy
evaluation and control is the final major element of the strategic management model.
In this unit, you will learn about operational control and differences between strategic control
and operational control. It covers the evaluation of organisations ability to achieve synergy and
the key stake holders expectations.
Objectives
After studying this unit you will be able to:
describe strategy evaluation and strategic control
distinguish between strategic and operational control
analyse organisations ability to achieve synergy
evaluate the key stake holders expectations
5.2 Strategy Evaluation
The core aim of strategic management succeeds only if it generates a positive outcome. Strategic
evaluation and control consists of data and reports about the performance of the organisation.
Improper analysis, planning or implementation of the strategies will result in negative
performance of the organisation. The top management needs to be updated about the
performance to take corrective actions for controlling the undesired performance.
All strategies are subject to constant modifications as the internal and external factors
influencing a strategy change constantly. It is essential for the strategist to constantly evaluate the
performance of the strategies on a timely basis. Strategic evaluation and control ensures that the
organisation is implementing the relevant strategy to reach its objectives. It compares the current
performance with the desired results and if necessary, provides feedback to the management to
take corrective measures.
Strategic evaluation consists of performance and activity reports. If performance results are
beyond the tolerance range, new implementation procedures are introduced. One of the obstacles
to effective strategic control is the difficulty in developing appropriate measures for important
activities. Strategic control stimulates the strategic managers to investigate the use of strategic
planning and implementation. After the evaluation, the manager will have knowledge about the
cause of the problem and the corrective actions.
The five step process of strategic evaluation and control is illustrated in figure 5.1.
Figure 5.1: Strategy Evaluation and Control Process

Retrieved from Concepts in Strategic Management and Business Policy by Thomas L.Wheelen,
J.David Hunger (2002), Pearson Education, New Delhi.
Recognise the activity to be measured Top management including the operations manager has to
specify the implementation processes and the results that are to be evaluated. The processes and
results must be compared with the organisations objectives in a consistent manner. The strategy
of all the important areas must be evaluated irrespective of the difficulty. However, focus should
be on the most significant elements in a process. Example The process that accounts for the
highest proportion of expense, the greatest number of problems etc.
Create the pre-established standards Strategic objectives provide a crystal view of the standards
to measure performance. Each standard defines a tolerance range for acceptable deviations.
Standards can also be set for the output of intermediate stages of production along with the final
output.
Measure actual performance Actual performance must be measured on a timely basis.
Status of actual performance If the results of the actual performance are within the tolerance
range, the evaluation process stops here.
Take remedial action If the actual performance result exceeds the tolerance range, corrective
actions must be taken to control the deviation. The following questions must be answered:
i) Is the variation, a minor or temporary fluctuation?
ii) Are the procedures being implemented appropriately?
iii) Are the procedures appropriate to the achievement of the desired standard?
5.2.1 Requirements of strategic evaluation
Information of strategic evaluation activities needs to be economical, crisp, clear and concise. It
should be directly related to the organisations objectives. It should provide valuable information
to the managers about the activities over which they have control and authority. Strategic
activities should provide well-timed information. At times, managers need this information on a
regular basis.
Strategic management should provide an accurate picture of the current activities of the
organisation. Example In a severe financial dip, profit ratio will fluctuate irrespective of the hard
work of the employees and the managers. Strategic evaluation should deliver action oriented
reports rather than information oriented. These reports should be directed to those individuals
who are influenced to take corrective measures.
This process should not dictate the decision but rather promote reasonability, faith and mutual
understanding between the personnel and the organisation. Strategic evaluation needs active
participation and cooperation of all the departments in the organisation. Strategic evaluation
should be simple, manageable and encourage to achieving the common goal. Strategic evaluation
is rewarding only when it is effectively used.
It is more difficult to organise and develop cooperation between different departments and
functional areas in large organisations. So, they need highly structured and in depth strategic
evaluation system. Small companies just need a brief report of evaluation as their familiarity and
internal communication within the organisation to gather and evaluate information from local
environment is at ease. The key to an effective strategic evaluation lies in the managers ability to
convince participants. Strategic evaluation system differs for every organisation depending on its
objectives, strengths, challenges, size, management style etc.
5.2.2 Importance of effective strategic evaluation
The strategic-evaluation process with constantly updated corrective actions results in significant
and long-lasting consequences. Strategy evaluation is vital to an organisations well-being as
timely evaluations can alert the management about potential problems before the situation
becomes critical. Successful strategists combine patience with a willingness to take corrective
actions promptly, when necessary.
The process of evaluating the implemented strategy is explained in Figure 5.2.
Figure 5.2: Evaluation Process of an Implemented Strategy

Retrieved from Concepts in Strategic Management and Business Policy by Thomas L.Wheelen,
J.David Hunger (2002), Pearson Education, New Delhi.
Frequent strategic evaluation activities can control the negative consequences of the
environmental complexity and instability issues. Success today does not guarantee success
tomorrow! However, the frequencies of strategic evaluation performed were surprisingly found
to be vice-versa in stable and unstable industries. Management in dynamic industries seems to
have performed fewer strategic evaluation activities when compared to those in stable industries.
Lindsay and Rue concluded that forecasting is more difficult under complex and unstable
environmental conditions. So, strategists may see less need for frequent evaluation of their long-
range plans.
5.2.3 Barriers of strategy evaluation
The critical part of strategic evaluation is the measurement of actual performance. The two
noticeable barriers of effective strategic evaluation are lack of clear objectives and incapability of
the management to provide well-timed and justifiable information. It is very difficult to take
operational decisions without clear objectives and well-timed and justifiable information.
However, the use of well-timed and justifiable standards does not guarantee efficient
performance. The most common negative side effects of strategy evaluation are:
Short term arrangement Most of the top executives reveal that they neither analyse the long term
implications of current strategic operation nor the current operational impact of the strategy on
the organisation. The reasons behind this sort of behaviour are:
The top management dont realise its importance.
They believe that short term considerations are sufficient and more important.
Lack of time to conduct a long term analysis.
No real justification is available for the first and last reasons for not conducting long term
evaluations. Short term strategy evaluation is always good; however certain strategies can be
evaluated only on a long term basis. Example Strategies based on the financial position of the
company requires information about annual turnover of the company and profit and loss
statements of the past years.
Goal displacement Improper analysis and measurement of performance can result in the decline
of the overall corporate performance. The term goal displacement is given when the activities to
achieve the goals gain more importance when compared to the actual goal. The two types of goal
displacement are:
Behaviour substitution It is used when wrong activities are being rewarded. This phenomenon
refers to replacing the activities that do not contribute to the goal with the activities that lead to
goal accomplishment. Managers tend to pay more attention to the behaviours that are clearly
measureable.
Sub-optimisation This phenomenon is about the situation when a unit optimises its goal
accomplishment which detriments the performance of the organisation as a whole. One divisions
attempt to accomplish its goals might cause other divisions to fall behind and results in a
negative effect on the performance of the organisation as a whole. Example An organisation has
limited time to submit an order for 500 refrigerators. It informs the employees to work extra
hours to submit the order in time. At the end of the project, the organisation is able to submit the
order in time. However, it hampered the quality of the product with a direct impact on the quality
control system of the organisation.
The three most widely used techniques for international performance evaluation are return on
investment, budget analysis and historical comparisons. Most corporate companies still follow
the same evaluation methods for their foreign and domestic operations. However, return on
investment may create issues when it is applied to foreign operations due to factors like foreign
currencies, variations in prices and tax laws etc. International transfer pricing is mainly used to
minimise taxes that varies for different countries.
5.2.4 Strategy evaluation methods
The methods to evaluate strategies through Return on Investment (ROI) and Earnings Per Share
(EPS) are becoming outdated these days. Analysts recommend a broad range of methods like
stakeholder measures; shareholder value and the balanced score card approach to evaluate the
performance of the strategy. The current trend supports increasing use of non-financial and
complicated financial measures of corporate performance.
Stakeholder measures
Stake holders have their own set of criteria to determine the performance of the organisation.
These criteria have a direct or indirect impact of the corporate activities on the stake holders
interests. The top management should establish measures to keep a track of their concerns. It is
mandatory to analyse and meet the needs of stake holders to maintain the legitimacy and
sustainability of the business.
Share holder value
It is difficult to measure an organisations economic value with accounting numbers like return on
investment, return on equity and earnings per share as they are never stable. Share holder value
can be defined as The present value of the predictable future stream of cash flows from the
business plus the value of the company if liquidated. The value of a corporation is the value of its
cash flows discounted back to their present value, using the businesss cost of capital as the
discount rate.
The most popular methods to measure the share holders wealth are:
Economic Value Added (EVA) - EVA measures the difference between the pre-strategy and post-
strategy value of a business. It is the difference between the after-tax operating income and the
total annual cost of capital. The total cost of capital is the multiplicative amount of total
investment in assets of an organisation and the weighted average cost of capital.
EVA = after tax operating income (total cost of capital)
Positive EVA indicates that the strategy is generating positive value for the shareholders and vice
versa.
Market Value Added (MVA) MVA is the difference between the market value of an organisation
and the capital contributed by the shareholders and lenders. The process to calculate MVA is as
follows:
Calculate the total amount of capital that is invested in the organisation.
Reclassify the investments that are made for the future earnings of the organisation (e.g., R & D).
This provides the firms total capital.
Using the current stock price, sum up the value of all the outstanding stocks that adds to the
companys debt. This is the companys market value.
The firms MVA is positive if its market value exceeds the total capital. This means that the
management is creating wealth. Negative MVA means that the management is destroying wealth.
Balanced scorecard approach
Robert Kaplan and David Nortons approach of balanced scorecard is especially useful when the
non-financial assets contribute 50 to 80 percent of a firms value. The balanced scorecard is also a
collection of procedures used to analyse difficulties. This approach focuses on four major areas
of performance to avoid information overload. These four areas are as follows:
Financial
Customer
Internal business perspective
Innovate and Learning
In addition to measuring the current financial performance, the balanced scorecard evaluates the
organisations efforts for future development with process, customer, and learning and growth
metrics. The term scorecard indicates quantified performance measures and balanced indicates
that the system is balanced between:
Short term objectives and long term objectives
Financial and non-financial measures
Lagging and leading indicators
Internal and external performance perspectives
The balanced scorecard illustrates, communicates and aligns the strategy throughout the
organisation, along with measuring the strategic performance.
Activity 1
Consider that you are a strategy manager in a fishing company. The company is running in huge
loss. Try to evaluate the reasons for the loss and the measures that can be taken to control it.
Refer this link for guidance
http://www.oecd.org/dataoecd/1/10/45497984.pdf
1. The evaluation process stops if the results of ________________ are within the tolerance
range.
2. The most popular methods to measure shareholders wealth are ________________ and
______________.
3. Information of the strategic evaluation activities needs to be elaborate and over informative.
(True/False).
5.3 Strategic Control
Strategic control is established to focus on the resources used in the performance (input),
activities that generate the performance (behaviour) and the result of actual performance
(output). Strategic control involves tracking the strategy as it is being planned, implemented and
take necessary actions when it indicates any negative performance.
Example - Consider an air conditioner fixed inside a room. The air conditioner registers a
specific temperature to the thermostat. When the thermostat senses an increase in temperature,
the motorised fans circulate conditioned air to ensure that the temperature of the room is
maintained. In this example, strategic control is related to the method by which the target
temperature is maintained.
An effective strategic control should ensure that strategic aims are translated into effective action
plans that are designed and monitored to achieve these aims. The three types of strategic control
are:
Feedforward/input controls These focus on input resources like knowledge, skills, abilities,
values and motives of employees.
Concurrent/behaviour controls These take place when an activity is in progress. They guide on
how the strategic activities need to be performed through top management orders, standard
operating procedures, policies, and rules. The managers must harmonise resources and
capabilities within the different departments of the organisation.
Feedback/output controls These focus on the end results of the behavior controls to achieve the
objectives and performance targets. These are more appropriate when the connection between the
activities and results is not clear.
Input, behaviour and output controls are not interchangeable. Input controls are more appropriate
when it is difficult to measure the end result and when there is no clear cause between the
behaviour and performance of the organisation. Behaviour controls are more appropriate in
situations when the performance results are hard to measure but the cause-effect relationship
between the activities and results is clear. Output controls are used in situations when the
performance results are achievable but the causeeffect connection between the activities and
results is unclear.
5.3.1 Guidelines for effective strategic control
The top management should not forget that controls are established to follow strategies. The
guidelines for effective strategic control are:
It should contain only the most important information.
It should examine only meaningful activities and results.
It should be well-timed.
It should use long-term and short-term controls.
It should be able to identify the activities that do not fall within the tolerance range.
It should determine the rewards for meeting or exceeding standards.
4. Strategic control is about tracking the strategy as it is being _________, implemented and
takes necessary actions when it indicates any negative performance.
5. Behaviour control focuses on resources like knowledge, skills, abilities, values and motives of
employees. (True/False)
6. Input, behaviour and output controls are not interchangeable. (True/False)
5.4 Difference between Strategic Control and Operational Control
Internal control of business units is known as operational control. Operational control is the
allotted authority to exercise command over subordinates. It includes organising forces,
allocating tasks, selecting objectives, and giving authoritative directions that are necessary to
achieve the mission. These controls are introduced to ensure that daily activities within the
organisation are reliable to meet the objectives and goals of the organisation. Remedial action is
taken when the performance does not meet the standards. It involves activities like training,
motivating, leadership, discipline, inter-relationship of the departments, synergy within the
organisation and so on. The difference between strategic control and operational control is list in
Table 5.1.
Table 5.1: Difference between Strategic Control and Operational Control
Strategic Control Operational Control
It was designed for the growth of the It was designed from the need to
organisation. control the management system.
It focuses on the performance of It focuses on the performance of the
resources used to achieve the goals of human resource of the organisation.
the organisation. Hence, it requires a Hence, it does not require as much
vast analysis of the strategy that is analysis as of strategic control.
introduced in the organisation.
It requires more information from the
external sources as strategic decisions It is mostly limited to the information
are mostly taken in regards with within the organisation.
external factors when compared to
internal operating factors.
These standards are based on the past
These standards depend on the performance of similar operations
external factors. that are currently being performed.
Strategic control data concentrates on Operational control data are subjected

to immediate decisions that have
the performance result of the future. immediate impact.
Strategic decisions are concerned with Operational decisions are concerned

analysing the accuracy of the decision with the quantitative value of
premise. conclusions.
It depends on unpredictable factors It focuses on recent events on a
that might emerge externally or weekly, monthly or quarterly basis.
internally in business environment.
7. Operational control is designed for the _____________ activities of the organisation.
8. The data of ___________ control concentrates on the performance result of the future.
9. _____________ control focuses on the recent events.
10. ____________ control is mostly limited to the information within an organisation.
5.5 Concept of Synergy and its Meaning
What made Disney so successful? Was it possible only due to creativity and innovations? Its
success also lies in the ability of its managers to identify and take advantage of every possibility
to achieve synergy. Walt Disney was an entrepreneur with creative skills. He involved other
people to overcome his limitations and deliver quality products. The integration of innovative
people with diversified ideas has been the key factor for the success of Disney.
It is obvious that a team consists of people from different cultures and with different ideas. The
combination of such different people results in innovative activities making a good impact on the
organisation. Synergy is the interaction of two or more forces to increase the value of the outputs
and assets with their combination. It often results in merging and acquisitioning. The term
synergy is derived from the Greek word syn-ergos, meaning working together.
In synergy, separate departments within an organisation cooperate and interact to become more
productive when compared to individual performance. The concept of synergy results when the
management views the organisation as a unified, decisive system. This approach allows a
manager to look at the organisation as one entity, and a part of the external environment.
Synergy is said to exist for a divisional corporation if the ROI of each division is greater than the
sum of each independent division.
Synergy can be positive or negative depending on the consequences of combined efforts.
Negative synergy generally occurs in groups, committees and other joint ventures for various
reasons. Example The pressure to conform, informal allowance of an individual to dominate and
control the group. It is a result of poorly managed joint efforts.
5.5.1 Organisations ability to achieve synergy
Implementing management experience and expertise at different situations can result in
management synergy. Situations may appear similar but requires different management
strategies. Personality clashes and other situational differences may be the challenges of
management synergy. Effective transfer of managerial skills and experience varies for different
managers.
Combining multiple products, business lines or markets is an attempt of the organisation to
achieve synergy. Another means of achieving synergy is to acquire related products. A
representative gains broader thoughts by working on two products rather than working on a
single product.
Mergers and acquisitions are examples of corporate-level strategies designed to achieve positive
synergy. Grouping employees into teams and broadening the organisations product or market
mix is an attempt to achieve synergy. Downsizing and divesting may result in negative synergy.
5.5.2 Impact of synergy on business inputs and outputs
According to Goold and Campbell, synergy can take place in 1 to 16 forms. Some of them are:
Shared know-how Combined units often benefit by sharing knowledge or skills. This is
leveraging of core competencies.
Coordinated strategies Aligning business strategies of two or more business units may provide a
corporation significant advantage by reducing inter-unit competition and developing a
coordinated response to common competitors.
Shared tangible resources Combined units often saves money by sharing resources, such as a
common manufacturing facility or R&D labs.
Economies of scale or scope Coordinating the flow or products or services of one unit with that
of another unit can reduce inventory, increase capacity utilisation and improve market access.
Pooled negotiating power Combined units can combine their purchases to gain bargaining power
over common suppliers to reduce costs and improve quality. The same can be done with common
distributors.
New business creation Exchanging knowledge and skills can facilitate new products and services
by extracting discrete activities from various units and combining them into a new unit or by
establishing joint ventures among internal business units.
11. Combining multiple products, business lines or markets is an attempt of the organisation to
achieve _____________.
12. Synergy is always positive and does not have any negative influences. (True/False)
13. Downsizing and the divestiture may result in ________________.
5.6 Key Stakeholders Expectations
In the previous units, we have discussed the need to meet the key stake holders expectations.
Stake holders and shareholders might suggest the same idea but they are not the same. Share
holders are the individuals who purchase the shares of an organisation only to gain profits. Stake
holders are the individuals or organisations who are exposed to direct impact of any changes
made in the organisation. Example - Consider an organisation that has many investors. The
investors are not concerned about the policies and rules introduced in the organisation as long as
they are making profit whereas the employees of the organisation are directly exposed to the
impact of changes made in the rules and policies within the organisation and also the profits and
losses of the organisation. Here, the investors are the share holders and employees are the stake
holders of the organisation. The stake holders may also include share holders, government,
communities, suppliers and contractors, etc.
In every organisation, you may also find important stake holders who do not support a project
and concentrate on preventing any progress as they do not find the project to be good or
desirable. Satisfying the expectations such stakeholders is an important factor for the success of
an organisation.
Key stake holders can be defined as Key Stakeholders are a subset of Stakeholders who can
leave a direct impact on the organisation and can influence the success or failure of the
organisations activities.
It is therefore very significant to analyse the expectations of key stake holders without which it is
very difficult to meet or exceed their expectations.
Key stake holders analysis
It is very important to conduct a stake holder analysis to identify the key stake holders, evaluate
their interests and the impact of their interests on the project. This analysis also helps to identify
the appropriate forms of stake holders participation. Finally, it helps to identify the problems of
the project caused by the interests of the stake holders and identify the conflicts of interests.
Stake holders should always be analysed at the beginning of the project irrespective of the count
of the stake holders. It often consists of sensitive and undiplomatic information. Much of their
motives could be hidden or revealed partially. However, there could also be few benefits in
uncovering such interests and motives. A team approach in the analysis is more effective than an
individual approach.
The time spent on the analysis depends on the type and scale of the project and complexity of the
issue. The analysis of key stake holder should include an evaluation of each stake holders
influence and their importance to projects success. It should also identify the risks that will affect
the project and its success.
An effective way to analyse the stake holders is to draw a stake holder table. A stake holder table
should include the following information.
List and identify all potential stake holders.
Identify the different unconcealed and hidden interests of the stake holders that could affect the
objectives of the project.
Briefly analyse the impact of their interests on the project.
Specify the relative importance of each stake holders interests.
Manage stake holders expectations
Stake holders maintain a wide range of roles in an organisation. Irrespective of their roles and
responsibilities, they carry a significant amount of importance on the end result of a project. The
various positions held by them often create disparities between their individual needs, priorities
and interests. The interests could either be positive by benefiting to the success of the project or
negative by hampering either the process or the result of the project.
Effective communication is thus very important to ensure that their needs are satisfactorily met.
Project managers and stake holders should work together to meet the objectives of the project.
This will help to constantly track their interests and manage to satisfy their needs. People feel
aligned, committed and motivated when they are in well-managed relationships. As the project
starts, formulate a communication strategy that recognises how, when and what to communicate
to each stake holder group.
Articulation of the required activities is another major factor to manage stake holders
expectations. It is mandatory to articulate the right information at the right time. Be crisp and
clear about the expectations of your relationships. Spending a long time buried in the details with
stake holders will not benefit either of the parties. It is always better to be realistic with the stake
holder expectations. Ensure that the stake holder understands your expectations and the cause of
it.
It is always complicated to manage stake holders and especially, it is more complicated when
you need to manage multiple stakeholders. We need to create a data on our ability to measure
how the project and the stake holders are meeting each others expectations.
14. As the project proceeds, draw a ______________ strategy that recognises how, when and
what to communicate to each stake holder group.
15. Share holders are the key stake holders of an organisation. (True/False)
16. Stake holders should always be analysed at the beginning of the project. (True/False)
17. Spending a long time buried in the details with stake holders will benefit both the parties.
(True/False)
5.7 Summary
Let us briefly review the concepts that we have discussed in this unit.
Strategic evaluation and control ensures that the organisation is implementing the relevant
strategy to reach its objectives. It compares the current strategic performance with the desired
results and provides the necessary feedback to the management to take corrective measures, as
required.
An effective strategic control should ensure that the strategic aims are translated into effective
action plans that are designed and monitored to achieve the three aims namely input, behaviour
and output controls.
Internal control of business units are known as operational control. These controls are introduced
to ensure that daily activities within the organisation are reliable to meet the objectives and goals
of the organisation. Remedial action is taken when the performance does not meet the standards.
Synergy is the interaction of two or more forces to increase the value of their outputs and assets
with their combination.
Stakeholder analysis helps to understand the problems affecting the project, raised from the
interests of the stake holders and identify the conflict of interests.
5.8 Glossary
Synergy : Combined effect
Lagging : Delayed, too slow
Operational : Functional
Concurrent : Simultaneous, synchronized
Sub-optimisation : Achieving average or less than average
1. Describe strategic evaluation with its requirements and importance.
2. Explain the barriers and methods of strategic evaluation.
3. Summarise strategic control and classify its types.
4. Differentiate between strategy and operational control.
5. Illustrate synergy and its impact on business inputs and outputs.
6. Explain how to analyse and manage key stake holder expectations.
5.10 Answers
1. Actual performance
2. EVA and MVA
3. False
4. Planned
5. False
6. True
7. Internal
8. Strategy
9. Operational
10. Operational
11. Synergy
12. False
13. Negative synergy
14. Communication
15. False
16. True
17. False
Terminal Questions:
1. Refer 5.2.1 Requirements and importance of strategy evaluation
2. Refer 5.2.1 Barriers and methods of strategy evaluation
3. Refer 5.2.2 Strategic control and its types
4. Refer 5.4.1 Difference between strategy and operational control
5. Refer 5.5.2 Impact of synergy on business inputs and outputs
6. Refer 5.6 Key Stakeholders Expectations
5.11 Case-let
Strategic control of Onida
Onida was founded in 1981 and started assembling television sets by 1982
in its own factory. The company had also started manufacturing other
household appliances like air-conditioners, washing machines, DVDs and
home theatre systems.
Onida brand mascot, The Onida Devil and its punch line, Neighbors Envy
Owners Pride is still fresh in the memories of people. Onida initiated its
advertising campaign on the platform of envy, to endorse its television range
when possessing a television set was considered a luxury in the 1980s. A
green-horned devil with a long pointed tail was representing all its ad
promotions till the 1990s. The Devil helped Onida to gain a brand name and
substantial market share to become one of the top three television brands in
the country. Mirc Electronics, the owner of Onida brand decided to abort the
Onida Devil from representing in its ad campaigns in 1998. The reason
behind it was that the brand mascot no longer appealed Indian customers.
Onida failed to gain powerful positioning after changing the tagline and
mascot. Ownership issue was another factor that majorly hindered the
sustainability of Onida. There was no influencing brand promotion or new
product launches since 2004.
Factors that hindered Onida as a brand are:
Internal management issues The fight in the family over the control of the
Onida group was the major factor for the failure of Onida. The fight has
severely affected the share and marketing of Onida. Onida tried to recover
after the successful re-launch of the brand and the return of the Devil. But
the family disputes did not support the ailment of Onida.
Frequent change in ad campaigns Onida gained a major success due to
branding. But the change in the advertising agency changed the brand
elements. When the brand was changed from O&M to Avenues, the tagline
Neighbors Envy, Owners Pride and the Devil was removed. The brand has
never recovered since. When the agency was changed to Reinfusion again, it
changed things and Devil had returned in a new avatar with a new tagline,
Nothing but the truth. The new arrangement did not make things better.
Aging customer base The consumers of Onida have grown older and the
brand has failed to connect itself to the current generation. Even the Onida
devil is not helping it either.
1. What were the factors that affected the recovery of Onida?
2. What would be the steps of effective strategic control to handle the
negative performance?
Source link - http://www.mbaknol.com/category/management-case-studies/
Reference
Thomas L. Wheelen, J. David Hunger (2002): Concepts in Strategic Management and Business
Fred R David (1997) Strategic Management sixth edition, Prentice hall, New Delhi
E-References
http://www.managementstudyguide.com/strategy-evaluation.htm - Retrieved on July 29, 2010.
http://www.strategic-control.24xls.com/en105 Retrieved on July 30, 2010.
http://www.strategic-control.24xls.com/en118 Retrieved on July 30, 2010.
http://www.impactfactory.com/gate/registered/managing_stakeholders_training/registeredgate_1
612-7101-78873.html Retrieved on August 05, 2010.
Unit-06-Business Policies
Structure:
6.1 Introduction
Objectives
6.2 Overview of Business Policies
6.3 Importance of Business Policies
6.4 Definitions of Policy, Procedures, Process and Programmes
6.5 Types of Policies
6.6 Business Policy Statements
Different parts of policy statement
6.7 Corporate Culture
Features of corporate culture
Role of corporate culture in strategy implementation
Hindrances due to corporate culture
6.8 Summary
6.9 Glossary
6.11 Answers
6.12 Case-let
6.1 Introduction
This unit gives an overview of business policies. In this unit you will study the importance of
business policies and the differences between policy, procedure, process and programmes. You
will also study about different types of policies and business policy statements. This unit also
identifies the features of corporate culture and its implementation in strategy implementation.
To study about business policies we first need to know the meaning of policy in an organisation.
Policies are developed to assist the organisation to achieve its objectives efficiently. Business
policy deals with the daily activities that are vital for the effective running of an organisation.
Objectives
define and explain business policy, procedures, process and programmes
identify the need of business policies
explain different types of policies
discuss the importance of business policy statements
illustrate the role of corporate culture in strategy implementation
6.2 Overview of Business Policies
Business policies are the instructions laid by an organisation to manage its activities. It identifies
the range within which the subordinates can take decisions in an organisation. It authorises the
lower level management to resolve their issues and take decisions without consulting the top
level management repeatedly. The limits within which the decisions are made are well defined.
Business policy involves the acquirement of resources through which the organisational goals
can be achieved. Business policy analyses roles and responsibilities of top level management and
the decisions affecting the organisation in the long-run. It also deals with the major issues that
affect the success of the organisation.
Features of business policy
Following are the features of an effective business policy:
Specific- Policy should be specific and identifiable. The implementation of policy is easier if it is
precise.
Clear - Policy should be clear and instantly recognisable. Usage of jargons and connotations
should be avoided to prevent any misinterpretation in the policy.
Uniform Policy should be uniform and consistent. It should ensure uniformity of operations at
different levels in an organisation.
Appropriate Policy should be appropriate and suitable to the organisational goal. It should be
aimed at achieving the organisational objectives.
Comprehensive Policy has a wide scope in an organisation. Hence, it should be comprehensive.
Flexible Policy should be flexible to ensure that it is followed in the routine scenario.
Written form To ensure uniformity of application at all times, the policy should be in writing.
Stable Policy serves as a guidance to manage day to day activities. Thus, it should be stable.
1. _____________ are developed to assist the organisation to achieve its objectives efficiently.
2. Procedures are written in an_____________ format.
3. _____________occurs at all levels of an organization.
6.3 Importance of Business Policies
A company operates consistently, both internally and externally when the policies are
established. Business policies should be set up before hiring the first employee in the
organisation. It deals with the constraints of real-life business.
It is important to formulate policies to achieve the organisational objectives. The policies are
articulated by the management. Policies serve as a guidance to administer activities that are
repetitive in nature. It channels the thinking and action in decision making. It is a mechanism
adopted by the top management to ensure that the activities are performed in the desired way.
The complete process of management is organised by business policies.
Business policies are important due to the following reasons:
Coordination - Reliable policies coordinate the purpose by focusing on organisational activities.
This helps in ensuring uniformity of action throughout the organisation. Policies encourage
cooperation and promote initiative.
Quick decisions - Policies help subordinates to take prompt action and quick decisions. They
demarcate the section within which decisions are to be taken. They help subordinates to take
decisions with confidence without consulting their superiors every time. Every policy is a guide
to activities that should be followed in a particular situation. It saves time by predicting frequent
problems and providing ways to solve them.
Effective control - Policies provide logical basis for assessing performance. They ensure that the
activities are synchronised with the objectives of the organisation. It prevents divergence from
the planned course of action. The management tends to deviate from the objective if policies are
not defined precisely. This affects the overall efficiency of the organisation. Policies are derived
objectives and provide the outline for procedures.
Decentralisation - Well defined policies help in decentralisation as the executive roles and
responsibility are clearly identified. Authority is delegated to the executives who refer the
policies to work efficiently. The required managerial procedures can be derived from the given
policies. Policies provide guidelines to the executives to help them in determining the suitable
actions which are within the limits of the stated policies. Policies contribute in building
coordination in larger organisations.
4. The policies are articulated by the _____________.
5. _____________ helps in ensuring uniformity of action throughout the organisation.
6. Policies help in _____________ as the executive roles and responsibility are clearly identified.
6.4 Definitions of Policy, Procedures, Process and Programmes
An organisation achieves its goals through different methods. They are policy, procedure,
process and programmes.
Policy
Policy is a predefined course of action set up by top level management to provide guidance
towards business strategies and objectives. It identifies the fundamental activities and provides
strategic ways to handle different issues. It recommends the manner in which the objectives are
achieved.
Procedure
A procedure is a specific method to achieve a goal. It consists of a series of steps to be followed
regularly or in a cycle to achieve the end result. An organisation has a set of methods to manage
different matters like training, auditing etc. It provides a clear and understandable plan of action
required to implement the policy.
Process
A process is a specific event in a series of business activities. The event changes the state of data
or product and generates an output (e.g., receiving orders, updating information, setting budget
etc.). Business process occurs at all levels of an organisation.
Programmes
A programme lays down the principle steps to attain a specific objective. It sets a time limit for
each stage. They are concrete methods to accomplish a task. It identifies the resources to be used,
the steps to be taken, the timeframe for the steps and the role assigned to each person to attain the
specified objective. Programmes provide a sequence of activities in an order in which it has to be
implemented. A main programme can be supported by several derived programmes. Example To
manufacture a new product several programmes may be used. They can be machines, raw
material, technical staff, etc. A sequence is created to prioritise the work and each work is
scheduled to ensure that it is completed within the time limit.
Differences between policy, procedure, process and programmes
In the previous topic we discussed the definition and meaning of policy, procedure, process and
programmes. Now we will analyse how each concept is different from the other.
Policy is general in nature and identifies the company rules. Policy explains the reason for
existence of an organisation. Policy shows how rules are enforced and describes its
consequences. It defines an outcome or a goal. They are described by using simple sentences.
Policies are guidelines for managerial actions. It is a planned way to handle certain issues in the
organisation. It is framed by the top level management. Policies are a part of the strategies of the
organisation.
Procedure identifies the specific actions and explains when an action needs to be taken. It
describes emergency procedures which include warnings and cautions. It is systematic way of
handling routine actions. Procedure defines the means to achieve the goals. Procedures are
written in an outline format. It is generally detailed and rigid. It is a part of tactical tools.
Process is a set of activities conducted by people to achieve organisational goals. Process defines
the method in which the work is done. It is a long term rule that drives an organisation.
Programme is a concrete scheme of activities designed to accomplish a specific objective. It
provides step by step approach to the activities taken to achieve the goals. Programming helps in
developing an economical way of doing things in a systematic manner.
7. A _____________ is a specific event in a series of business activities.
8. _____________provides a sequence of activities in the order in which it is implemented
9. _____________ is a systematic way of handling routine activities.
6.5 Types of Policies
Policies provide a backbone for organisational behaviour. The different types of policies in an
organisation are:
General and specific policies - General policies are stated in a wider range to broaden the
limitations of the organisation. They are used by middle level managers and cover a large part of
the organisation. Example -Preference to local supplier in purchases. On the other hand, specific
policies are designed to limit the freedom of action. They are for the guidance of the lowest level
managers. They are used for conducting day to day activities in a specific department. Example
Submission of leave application.
Written and implied policies Written policies are declared in writing. Example Health and safety
policy statement. Implied policies depend on the conduct and behaviour of the top level
executives. When policy is not written on a particular topic, subordinates interpret the actions of
their superiors and make decisions. Example A promotion based on seniority is an implied policy
even if it is not expressed in writing.
Originated, imposed and appealed policies Originated policies are formulated by top level
managers on their ideas to guide the action of their subordinates. These policies are written and
incorporated in the policy manual. Imposed policies are formulated from the influence of
external factors like trade unions, government policies, laws and such other factors. Appealed
policies are formulated on the request of subordinates. An appeal can be made by the
subordinates to deal with a particular circumstance that is not incorporated in the earlier policies.
Organisational and functional policies Organisational policies covers the overall policies of an
organisation that are formulated by the top level management. They are also called as the basic
policies as they are used consistently throughout the organisation. Functional policies are
intended for specific departments of business. They are derived from the organisational policies.
Example- Sales policy, production policies so on.
Activity 1
Food Mart, a leading supermarket has opened a new retail outlet in an area which already has
two retail outlets of other companies. Consider that you are the manager of this store. Design the
business policies that you will implement to increase the sales of the store and compete with
other stores.
Refer this link for guidance
http://www.thehindubusinessline.com/2009/05/12/stories/2009051251970100.htm
10. _____________are intended for specific departments of business.
11. _____________are formulated by top level managers on their ideas to guide the actions of
their subordinates.
12. _____________are formulated from the influence of external factors.
6.6 Business Policy Statements
Every organisation has a business policy statement. Policy statement is a formal document that
outlines the methods in which an organisation intends to perform the activities and operate in
specific circumstances. It describes how a policy is administered. The purpose of a business
statement is to display the condition of the business in a condensed form rather than in an
elaborate record form. The policy statements vary widely depending on the size and business of
the organisation. A small organisation may not have written policy statements in the beginning of
the organisation. A written policy is introduced as the organisation expands. The requirement for
formal policies increases according to the growth of the organisation. These policies ensure
stability and neutrality to all the employees.
Generally, companies with top-down management pattern tend to delegate the policy making.
The boards of directors create policies for the executives and the executives and managers create
policies for their subordinates. Large companies have different policies for different groups of
employees. The policy may vary for different levels in the organisation. In the recent years, the
organisation structure has become compact and companies are now involving employees in
policy decisions. A good policy statement provides guidelines to the supervisors for dealing with
issues that arise time to time.
The policy statement should be clear, concise and well written. A vague policy leads to
confusion. The information is arranged in a clear and readable form as it is used by the
management and people outside the management such as stockholders, banker and investors
.Simple words should be used so that statements are interpreted as they are intended. It should
convey the procedure for important matters like hiring, salary, benefits, etc.
Example In the human resource department of an organisation, one policy statement may focus
on the dress code of employees because the organisation wants to project a certain image to its
customers. Another policy statement may deal with sick leaves for the employees. The same
organisation may have a policy statement for the marketing department which describes the
companys marketing policies.
Ability to write an effective policy statement has a major impact on the future of the
organisation. The following are the steps to develop a policy statement:
The first step in developing a policy statement is to gather information. The information should
be customised into a policy that is specific and useful to the organisation.
The policy statement should have simple words and the concept should be understood by all
departments regardless of their functionality. The policy should cover all exceptions and
questions.
A pilot group is selected to review the policy. This group tests and focuses on questions. It is also
reviewed by those who are responsible to enforce the policy. The policy statement is then
rewritten based on the feedback received from each level of the organisation.
Before publishing, a legal review of the policy is conducted to make sure that all legal
implications of controversial nature are deleted or rephrased.
It should be decided whether the implementation of the policy requires employee signatures or it
will be added to the current policy manual without signatures. The policy that has legal
implications such as privacy policy statement needs employee sign off on the statement. The
copy of this statement is retained for records.
The policy statement is included in the employee handbook and is updated every six months.
This ensures that the policy is updated regularly and is handed out to the employees at
orientation.
Illustrative Reading:
Considerations while writing a Safety Policy Statement
Employers have to plan, formulate and implement such safety policies that ensure safety and
security of their employees at the workplace. The first step to implement safety procedures at
workplace is to draft a safety policy statement. According to the Occupational Safety and Health
Administration (OSHA), the safety policy statement should be written specifically to that
particular organisation. Every organisations structure varies with respect to the manufacturing
process and other business activities, work culture, infrastructure within and outside business
operation and several other factors. It is difficult to arrive at a standardised safety policy
statement that is applicable to all organisations.
The general guidelines to be followed while writing a safety policy are:
Identify the risks associated with your workplace. Certain risks are common
to many businesses, such as fire or medical emergencies. However there are
specific risks associated with the particular business. Example -If the
employees operate heavy machinery, risks involved with specific pieces of
equipment or work injuries should be considered.
Conduct a meeting with employee and senior management to address the
different types of risks.
Write the introduction of the safety policy statement in a simple and clear
language. Describe the reasons for the policy and discuss the goals of the
policy. Educate the employees about the safety concerns and craft a plan of
action in case of emergencies or accidents.
Focus on each safety risk that is identified and discuss different methods to
handle the risk such as exiting the building, calling the fire department and
such other action plans. Use clear and practical steps that are easy to
remember and follow.
Explain the activities that the employees must routinely follow to keep the
workplace safe and secure. These simple steps include daily cleaning of
common areas to prevent accidents or spread of diseases. Regular testing of
fire and smoke detectors is another important long-term step.
Adapted from the link - http://www.ehow.com/how_6494410_write-safety-
policy-statement.html#ixzz0x7gwtmFx
6.6.1 Different parts of policy statement
The policy statement is in written form and is signed and dated by the owner or person who
controls the business. It is subjected to regular revision according to circumstances. The three
principle parts of a policy statement are as follows:
General statement of intent - The first part of the policy statement gives an overview of the
policies and the reason for their formation. This outlines the companys overall relation with the
management. It should include reference to responsibility of directors and employees.
Organisation - The second part of the policy statement is a description of whom the policy
applies to, who has the responsibility to monitor the implementation of policy and to whom and
how appeals should be forwarded in case of disagreements. This part is concerned with people
and their duties.
Arrangements - The third part of policy statement outlines the entire policy. It describes how the
policy is applied, what is exempted from the provisions of policy statement, how long the policy
will be in effect.
Example - The privacy statement of HP informs the users about the privacy practices and the
various ways available for the user to collect the online information and it is used. The privacy
statement is available on the home page and at the bottom of every HP Web page. The privacy
statement applies to all HP-owned websites and domains and the websites and domains of
wholly owned subsidiaries. HP gives the users the choice of receiving a variety of information
that complements HP products and services. The users can subscribe to receive product and
service specific information and also choose to receive HP general communications.
13. _____________is a formal document that outlines the methods in which an organisation
intends to perform the activities.
14. The information in the policy statement is arranged in a _____________ and _____________
form.
15. Companies with _____________ management pattern tend to delegate the policy making.
6.7 Corporate Culture
Corporate culture is the common set of attitude, values and standards that are accepted among
organisational members. It summarises the appropriate conduct for employees. A well-defined
culture assists the members of an organisation to understand what is expected from them and
what they can expect from the organisation. It provides information about the organisation and
conveys a sense of identity to its employees, customers and to the public. It is unique to every
organisation and is derived from the organisations history, the owners personality and various
tasks handled by the organisation. The culture of the company is communicated to the
stakeholders to make them aware of the companys culture. Both external and internal factors
influence the corporate culture. The internal factors influencing the corporate culture are hiring,
human resources etc. The external factors influencing the corporate culture are the technology,
competition etc. Effective corporate culture is marked by high levels of productivity, creativity
and commitment. This results in achieving higher quality and profitability. Corporate culture has
two main ideas in common - beliefs and values. Beliefs are assumptions about reality and are
derived by experience. Values are concepts about principles that are essential to be cultivated.
People also share common norms that are the expected standards of behaviour in an organisation.
Beliefs, values and norms are shared to create corporate culture.
The corporate culture can be strong or weak. A strong culture is deeply embedded in the
organisation and in its employees. Corporate culture is hard to change and if an amendment is
made, it takes years to reflect the change. Strong culture facilitates successful strategic
implementation. In a strong culture, there is a shared idea of practices and standards that
enhances the performance of the employees and helps in achieving the common objective. While
making changes in corporate culture, developed organisations should consider the roots of the
organisation, as employees tend to resist the changes that are blended in the organisation.
A weak culture is found in smaller organisations where it can be changed easily as it is not
instilled in the organisation. In a weak culture, employees do not take ownership and few
principles are followed. Such culture has little or no contribution to the strategy implementation
of the organisation.
Example - If the culture is built by taking care of customer issues and empowers the employees
to take authority, it encourages execution of a strategy that supports exceptional customer
service.
6.7.1 Features of corporate culture
Corporate culture refers to the values and behaviours that are followed in an organisation. It sets
a tone for ethical behaviour, decision making, risk taking and communication that are used
within a specific group of employees and in the entire organisation. The different features of
corporate culture are:
Innovation and risk taking - One of the main characteristics of corporate culture is innovation
and risk taking. The risk taking is intended at calculated risk. Taking risks means that the chances
of returns are higher. Another aspect of corporate culture is innovation. The organisation can
either be a pioneer or a follower. Pioneering can take risks but it can have an innovative outcome
for the organisation.
Attention to detail - Attention to detail defines the companys importance to precision and detail
in workplace. This is an important aspect as the employees are expected to have a higher
attention to detail which is crucial to the success of an organisation.
Outcome orientation - Some organisations concentrate on results rather than processes. It is the
business model of each organisation that decides that the focus is on outcome or the process.
This describes the outcome orientation of an organisation.
People orientation - Every organisation should decide the amount of management focus on its
employees. Some organisations are employee oriented and focus on creating better work
environment for its employees. Whereas, there are organisations that treat employees like work-
machines.
Team orientation - An organisation performs better in teams than compared to individual efforts.
Thus, every organisation takes effort to create team that has complimentary skills and can work
effectively together.
Aggressiveness - Every organisation puts down a level of aggressiveness with which the
employees work. Some organisations like Microsoft are known for their aggression and
marketing strategies.
Stability - Some organisations believe that the key to progress is by constant change and
innovation, while some organisations focus on stability. The management of such organisations
ensures stability of the company. The corporate culture gives an identity to an organisation .It
helps in building unity among the employees as they share the common organisational culture
and incorporate it in the spirit of teamwork.
6.7.2 Role of corporate culture in strategy implementation
Corporate culture is the phenomenon that distinguishes good organisations from bad ones. Well-
managed organisations have unique culture that is responsible for their ability in implementing
strategies successfully. Every corporation has a culture which often has subcultures that have
strong influence on the activities of the managers. The ability of an organisation to perform
strategy implementation depends on the strength of the organisations culture.
When the corporate culture is strong, it facilitates the smooth implementation of strategy as it
helps in better communication, decision-making, cooperation and commitment. When an
organisation conducts its business according to the set of principles and values which is
communicated to the employees by the management, it is considered as a strong culture.
There are positive effects of corporate culture. Example - The founder of Wal-Mart, Sam Waltons
concern and respect for the staff from the foundation of the company creates an environment of
trust that continues to this day. Walton used to meet the staff, calling them by their first name and
encouraged change to sustain the competitive edge.
When the corporate culture is weak, it obstructs the implementation of strategy by creating
resistance to change. When few values and behavioural norms are followed with many
subcultures existing within an organisation, the culture is considered to be weak. In such
organisations the employees have low commitment and loyalty.
Strategic implementation is about change management. Amendment of values is required
frequently for strategy implementation. A sensible redesigning of corporate culture and making
systematic changes in the organisation can help to modify the values of the organisation. During
the strategy development process the managers ensure that the new strategy matches with the
existing restrictions imposed by the corporate culture.
During the strategy implementation phase, the manager creates and maintains coordination
between the strategy and culture. Corporate cultures are rigid and making a change is difficult.
Different techniques are used to develop an effective corporate culture which includes
encouraging informality, tolerating mistakes, acting as community cultural centers etc. The
suitable techniques used by the managers are a purpose of degree of change develops new
strategic policy. If the strategy implementation is a continuation of the routine change, it is
implemented within the existing corporate culture. Major changes in corporate culture are
needed for drastic changes in strategy. Such changes can take years to implement. Corporate
culture can strongly influence the effectiveness of strategy implementation. When the employees
understand the importance of the values and beliefs of the organisation they act accordingly. It
motivates employees to achieve the organisational objectives. Therefore, for a successful
strategic implementation the corporate culture is considered and developed to match the strategic
plan.
6.7.3 Hindrances due to corporate culture
The corporate culture has both positive and negative effects. The hindrances due to corporate
culture are:
Cultural difference - The corporate culture is established by considering the fact that each person
is different and thus the corporate culture is unique. It reflects the peoples thoughts and actions.
This makes it difficult to react quickly to the changing conditions and make alterations in the
culture. There are chances of conflicts in the corporate culture in the case of mergers. Thus, it is
important for the organisations to agree on the method by which decisions are carried out. A
conflict in decisions can hamper the growth of the organisation. It can take years to modify the
culture in larger organisations.
Loss of jobs - The merging of companies is the fusion of companies and also some workplaces
with different corporate culture. The merging is followed with firing of employees and merger of
organisational units. When a new technology is introduced or when mergers take place few
people become redundant as they see it as a threat to their professional career. Many companies
tend to lay off employees because of the training expenses.
Existence of subcultures - There is a possibility of developing subcultures in the corporate
culture. Within organisation, subcultures can lead to major deviations from the developed
corporate culture and it extends the duration to achieve the organisations goal. This affects the
organisational strategy, goal implementation and loyalty, which can lead to crisis in an
organisation.
Communication breakdown - The organisation merger is accompanied by merger of
organisational units. This leads to communication breakdown between employees, conflicts at
workplace, formation of groups, and unwillingness to co-operate. A consistent change in the
organisation hierarchy can cause communication breakdown because employees cannot keep up
with the demands of different individuals. This communication breakdown can lead to
misunderstanding and conflicts.
Activity 2
Consider that you are the manager of a company that has merged with a smaller company. The
strategy of your company is to combine the marketing departments of both the companies to
increase the sales. Design a corporate culture that you will incorporate to implement the strategy
to achieve the target of the organisation.
Refer the link for guidance - http://www.allbusiness.com/business-planning/business-
structures/786081-1.html
16. _____________is the common set of attitude, values and standards that are accepted among
organisational members.
17. _____________, _____________, and _____________ are shared to create corporate culture.
18. _____________ is about change management.
6.8 Summary
Business policies are the instructions laid by an organisation to manage its activities. It identifies
the range within which the subordinates can take decisions in an organisation.
The need to formulate policies is to achieve the organisational objectives. Policies serve as a
guidance to administer the activities that are repetitive in nature.
Procedure is a specific method of achieving a goal. It consists of a series of steps to be followed
consistently or in a cycle to achieve the end result. A process is a specific event in a series of
business activities. A programme lays down the principle steps for attaining a specific objective.
It sets a time limit for each stage.
In an organisation there are different types of policies like general and specific, written and
implied, originated and imposed and organisational and functional policies.
Policy statement is a formal document that outlines the methods in which an organisation intends
to perform the activities and operate in specific circumstances
Corporate culture is the common set of attitude, values and standards that are accepted among
organisational members. It provides information about the organisation and conveys a sense of
identity to its employees, customers and to the public.
6.9 Glossary
Decentralisation : Transfer from central to local, regionalization
Implied : Understood
Imposed : Compulsory, forced
Hindrances : Barriers
1. Define and explain business policy, procedures, process and programmes.
2. Identify the importance for business policies.
3. Explain different types of policies.
4. Describe the importance of business policy statements.
5. Describe the strategic role of corporate culture in business.
6.11 Answers
1. Policies
2. Outline
3. Business process
4. Management
5. Coordination
6. Decentralisation
7. Process
8. Programmes
9. Procedure
10. Functional policies
11. Originated policies
12. Imposed policies
13. Policy statement
14. Clear and readable
15. Top down
16. Corporate culture
17. Beliefs, values and norms
18. Strategic implementation
Terminal Questions:
1. Refer section 6.4.1 Definitions of policy, procedures, process and programmes
2. Refer section 6.3 Importance of Business Policies
3. Refer section 6.5 Types of Policies
4. Refer section 6.6 - Business Policy Statement
5. Refer section 6.7.2 Role of corporate culture in strategy implementation
6.12 Case-let
HP way
A new type of corporate culture called "The HP way was coined by the two
founders of HP, Bill Hewlett and Dave Packard. They developed a
management style which had never occurred before in any organisation. HP
never adopted the hire and fire process. In 1974, the U.S economy faced
crisis and many people were unemployed. HP adopted the four-day
workweek option to avoid layoffs. This was a unique measure in corporate
US. The two founders of HP believed in individuals motivation to work and
treated the employees as family members. Hence, it was a custom to call
each other by their first name. The two founders were known as Bill and
Dave. The HP employees participated in stock options and were paid
additional premiums known as profit sharing. These measures helped the
employees to identify their work and to encourage them. Extensive
employment benefits like scholarship for the employees children was also
included.
As the company grew larger, the founders, Bill and Dave decided to write
down the company's objectives which would serve as guidelines for decision
making. These objectives are still valid. Some of the objectives are profit,
customers, growth, people, management, and citizenship. These objectives
are achieved through teamwork.
Today, HPs strategy comprises of the "Management by Wandering around"
which means informal communication within the company, and "Total
Quality Control" which aims at producing highly quality products. The HP
way is considered as a model for corporate culture in many countries.
1. Explain the corporate culture adopted by HP.
2. What are the measures taken by HP to motivate and encourage its
employees?
3. Discuss the main objectives of HP.
Source http://www.silicon-valley-story.de/sv/hp_way.htmlThe HP Way - an
example of corporate culture for a whole industry
E-References
http://books.google.co.in/books?id=KugzwXlElNkC&printsec=frontcover&dq=R+Joseph:
+Business+Policy+and+Environmen
t
&
hl=e
n
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ei=yNtkTOeWIYX0tgOHhdirD
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&sa=X&oi=book_result&ct=result&resnum=1&ved=0CDIQ6AEwAA#v=onepage&q&f=false -
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id=LNL4Aw71kzk
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pg=PA3
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dq=business+policy+statemen
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hl=e
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ei=k3laTLawOY_4sAPVi_F
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&sa=X&oi=book_result&ct=result&resnum=1&ved=0CDIQ6AEwAA#v=onepage&q=business
%20policy%20statement&f=false - Retrieved on 4 August 2010
http://www.ehow.com/about_5349245_importance-policies-procedures.html#ixzz0umSaEjL9 -
http://www.managementstudyguide.com/business-policy.htm - Retrieved on 4 August 2010
Unit-07-Business Policy and Decision Making

Structure:
7.1 Introduction
Objectives
7.2 Factors Considered Before Framing Business Policies
7.3 Steps Involved in Framing Business Policies
7.4 Policy Cycle and its Stages
7.5 Implementation of Policy Change
Steps involved in implementing policy change
7.6 Role of Policies in Strategic Management
7.7 Business Policy and Decision Making
7.8 Summary
7.9 Glossary
7.11 Answers
7.12 Case-let
7.1 Introduction
In the previous unit we discussed about policy, procedures, and business policy statements. We
also discussed the need and scope of business policies. Business policy defines the boundary
within which the decisions can be made in the organisation. They act as guidelines to the
organisation to govern its actions.
In this unit, you will study concepts of business policy and decision making and the factors
considered before framing business policies. This unit also covers the steps involved in framing
business policy, implementation of policy change, the role and interdependency of policy and the
strategy.
Objectives
explain the factors considered before framing business policy
describe the steps involved in framing business policy
explain policy cycle and implementation of policy change
analyse the role of policies in strategic management
assess the interdependence between policy and strategy
7.2 Factors Considered Before Framing Business Policies
The management process includes planning, implementation and evaluation of strategies in most
of the organisations. To obtain an effective process in the organisation, the management defines
the policies that assess the operating environment by forming a sphere to make decisions in the
organisation.
Following are the factors considered before framing business policies:
Resources of the organisation - Resources can be defined as the physical and virtual entities in
the control of the management that can be utilised to obtain the organisations objectives.
Resources include existing resources and expected future resources.
The different resources in the organisation are:
The property possessed by the organisation
The human resources in the organisation
Inventories of product and material
The other intangible resources are:
Knowledge of the business and the environment
Skills and capabilities of the employees in the organisation
The resources of the organisation must be analysed to frame the business policies to ensure that
the decisions taken in the organisation with respect to resources lies within the boundary of the
policies.
Economic conditions The growth rate of economy in the country lays a heavy impact on the
organisations effort. If the economy of the country goes down even the organisations economy
decreases. The major economic factors to be considered are the current stage of business cycle,
interest rates that influence business policies.
Competition The competitive environment in the organisation is major and relies on the efforts
and success of the organisation. The current status of the organisation in the market must be
obtained to frame business policy. This specifies the position of the organisation in the
competitive market.
The three types of competitions are:
Competition among the organisations which produce similar products
Organisations produce products that are substitute of another product
The general competition that arise between the organisations like consumer goods, acquiring
customers etc
Political and legal forces Political influence plays a major role in the organisations growth. Some
of the laws enforced by the government restrict the business activities and protect consumers
rights. Hence before framing the business policy, the political and legal forces must be
considered such that it does not harm the business activities in future.
Technology Technology is the key aspect of the organisation. It includes the use of machinery,
processes and products. The advancement of the technology leads to increase in the cost of the
machinery and requires training for the employees. Hence technology factor affect the business
policy in terms of cost. Therefore it is required to consider technology before framing business
policy. As technological environment keeps changing and is very dynamic, a certain degree of
flexibility must be considered to pick up the gaps in the near future. Policy makers should also
consider regular up-gradation of technologies used in the business and obsoleteness of existing
technologies.
Internal environment of the organisation The shaping of business policy also depends upon the
internal environment of the organisation. The internal environment includes the organisations
production, finance and the employees activities. It is necessary to analyse the vision, mission,
strength, weakness and the co-ordination between the departments in the organisation. The
business policy can be framed based on these factors.
In this section we discussed the various factors to be considered before framing business policy.
Next section deals with the steps involved in framing the business policy.
1. The growth rate of ___________________ in the country lays a heavy impact on the
organisations effort.
2. The shaping of business policy depends upon the _____________________ of the
organisation.
3. Technology includes the use of _______________, processes and products.
7.3 Steps Involved in Framing Business Policies
Policy formulation is the process of designing the policy. The major function of designing the
policy relies upon the managers. Policy framing is one of the phases of strategic planning in the
organisation. It is based on the underlying objectives of the organisation. Framing and
monitoring the policy is one of the critical tasks in the organisation.
The process of framing policies consists of the following steps:
Definition of purpose The first step towards framing policies includes the process of identifying
the objectives and the philosophy of the organisation. The purpose is to select the guidelines for
measuring the performance based on the organisations strengths and weaknesses, its available
resources and the personnel. The basic concept of the business activities is defined in this phase.
Example The perception of the garment company is to develop the finest cloth at less cost.
Adding to such a conceptual view, the company must define the purpose in terms of guidelines
needed for measuring the performance and obtaining the desired targets.
Preparation of strategic intelligence This step involves analysing the internal environment of the
organisation. The strategic intelligence is the process of detailed description of what the
company is and assessing its sphere of operations. The prediction of the future happenings
including the opportunities and risks must be known because it lays heavy impact on the
companys position in the market.
Policy alternatives Alternating policies must be identified and analysed once the objectives of the
organisation are defined. The managers recognise the problems faced by the organisation and
discover the alternative policies. This step is the central phase of framing a policy. A list of policy
alternatives is generated by considering the probabilities of the problems faced by the
organisation.
Example Inventory systems in Das n Das Company
The Das n Das Company invested on control systems to avoid taking decisions on the routine
matter regarding the orders, timings of production, etc. In such a situation, many factors are
considered by the top level management to increase the production rate and the size of orders.
Hence meetings are held to discuss the implementation of the policy that suits the best.
The top level management introduced an alternative to the inventory control policy that consisted
of determination and evaluation of various conflicting factors. The policy is adopted to represent
a balance between the internal factors like employees, resources and the production.
Policy analysis This step involves analysing the alternative policies and examining its
contribution towards the objectives of the organisation. An alternative policy is based on the
consequences to be faced by the organisation. The elements of policy analysis process include
evaluating the consequences of various alternatives and their effects on the objectives of the
organisation.
Strategic choice It is the process of selecting the policies that is best suited for the organisation.
This is done by the top level management. The policies act as guidelines to fulfill the
organisations purpose. Establishing the specific policies represents the strategic commitment
towards achieving the objective of organisation.
Policy review Policy review is the process to evaluate whether the framed policy is matching the
organisational performance. A periodical review of policies is necessary to maintain the policies
up to date.
This section explained the various steps involved in framing business policies. The next section
defines policy cycle and describes the stages of policy cycle.
4. Policy formulation is the process of designing policy. (True/ False)
5. Strategic analysis is the process of selecting the policies that is best suited for the organisation.
(True/ False)
6. The major function of designing the policy relies upon the managers. (True/ False)
7.4 Policy Cycle and its Stages
Policy cycle is the process of analysing, planning, designing, and implementing the policies in
the organisation. Every organisation typically has high and low level policies. The high level
policies govern the entire company in all circumstances. They mainly deal with the organisations
needs. It forms a standard and does not lend procedures. The low level policies deal with a set of
specific circumstances. It helps in creating procedures to govern the organisation in specific
situations.
These policies are necessary to govern the organisation. Hence it must be reviewed and reshaped
as the objectives of the organisation changes. The policy cycle is necessary to implement this
process.
Stages of policy cycle
The policy cycle consists of the following stages:
Setting the policy agenda
Policy agenda is the process of describing the sequence of business activities in the organisation
and planning the measures to frame a policy. A list of factors is considered which includes
processes, resources, revenue etc. The top level management organises committee meetings to
discuss these factors and make a detailed planning for framing a policy.
Writing policy
It is the process of drafting the policy for the organisation. The policy is drafted based on the
various factors discussed in the meetings. A separate team under framing business policies is
responsible for writing policies. The policy statements must be clear, concise and easily
implemented in the organisation. The policies are created in such a way that it does not lead to
controversies. The drafted policies adhere to the organisations objectives.
Implementation of policy
The implementation process is necessary to effectively communicate the drafted policies. This
phase makes the policy visible to the employees in the organisation. An environment of
compliance is achieved between the organisation norms and the employees only if the employees
are aware of policies in the organisation. Generally, employees view the policies as restrictions.
Hence, implementing the policies systematically reduces the negative perception of the
employees.
Policy implementation tasks are:
Policy legitimating The proposed policy must obtain authenticity from the team implementing
the policy.
Constituency structure The policy must be marketed in such a way that it promotes the
relationship between the beneficiaries.
Resource allocation The resources that are supporting the implementation of policy must be
acquired or reallocated depending on the implementation of the strategy.
Organisational design and modification The existing organisation must be re-engineered or
modified according to the new policy.
Resource mobilisation The resources in the organisation must be redirected to provide the
capacity to conduct action as per the implemented policy.
Enforcing policy
Enforcing policy is the process of applying the drafted policies in situations that are in
compliance between the organisation and the employees. The top level management has the clear
responsibility for enforcing the policies. If the employees are found exploiting the policies then
the organisation has powers to impose penalties to the employees. Hence enforcing policies
develops responses to the problems faced in the organisation without hampering the
organisations success.
Reviewing the policy
Reviewing the policies is the process of checking whether the policies are matching the business
activities in the organisation. This phase includes re-examining the existing policies. All the
policies must be reviewed on daily basis. If any errors are found that are not compatible to the
organisations views then it is reverted to the policy drafting team to re-draft. Reviewing policies
ensures that they reflect the business realities of the moment.
Updating policy
If any changes are made in the process of the business activities then the existing policies also
must be changed. The review team holds the responsibilities of updating policies. If the policies
are not updated then the organisation experiences issues with various factors in the organisation.
Figure 7.1 given below depicts the policy cycle.
Figure 7.1: Policy Cycle

Activity 1
Consider you are the manager of an automobile company which suffers depression in profits due
to huge competition in the market. Plan a suitable policy that brings immediate profits to the
company and increases market share.
Refer the link for guidance - http://www.tatamotors.com/
7. The ________________ phase includes the process of making the policy visible to the
employees in the organisation.
8. _______________ is the process of describing the sequence of business activities in the
organisation and planning the measures to frame policies.
9. The _________________ process is involved in applying the drafted policies in situations that
are incompliance between the organisation and the employees.
7.5 Implementation of Policy Change
The Implementation of policy change creates a space for understanding the need for policy
change. The change in the organisations resources such as human resource, privacy issues, safety
concerns, finance, etc affects the policy change. Implementing policy change enforces the
employees to adhere to the new policy implemented in the organisation. The policy decision
makers are the key persons to implement new ideas. They hold meetings with the top level
management and other employees to explain the benefits of policy change in the organisation.
The decision makers evaluate the need for policy change, draft the relevant changes and
confirms with the top level management before implementing it.
7.5.1 Steps involved in implementing policy change
Now, lets see the steps involved in implementing policy change:
Step 1 The first step involves analysing the existing policy in the organisation. The decision
makers collect the necessary data required for implementing policy change from the top level
management. They assess the various internal and external factors with the existing policy and
plans for new policy according to the changes in the organisation. During this phase only the
policy decision makers are aware of updating new policy. Once the planning is completed it is
shared with rest of the personnel in the organisation.
Step 2 In this step the top level decision makers select a subordinate group of decision makers
for the new policy. They seek help from various departments including accounts, human
resource, and administration to gather the necessary data required for decision making. The top
level decision makers hold the authority to alter the existing policies and create a new one
according to the changes in the organisation. Hence they form a routing committee to guide the
subordinate decision makers team in the decision making process.
Step 3 This step involves gathering data about the changes that relates to taxation, research on
new tax laws. It also includes extracting the information about the enforcement of the strategies
in the competing organisations.
Step 4 The top level management initialises to form a policy developing team after the decision
makers informs regarding the policy change. This team will work as subordinates to the decision
makers team and drafts the policy according to the information gathered by the decision makers.
The policy developing team identifies where and whom the policy applies and drafts a specific
and simple policy.
Step 5 This step deals with developing the detailed policies based on the underlying principles of
the organisation. It includes the values and benefits for the policy change. The decision makers
plan to explain the enforcement of the new policy in the organisation.
Step 6 Once the new policies are developed by the policy development team, the next step
involves in presenting the proposed policy change to the top level management for the approval.
The top level management verifies whether the new policy is adhering to the strategies in the
organisation and checks for the uniformity between the policies and the organisations objectives.
Once the top management is assured of the benefits of new policies then it sanctions for the
release of policies.
Step 7 The top management approval is obtained when the new policy is ready for release. The
copies of the new policies are published and distributed to all the internal stakeholders.
Example Tata Motors, an Indian automobile company, is a pioneer in manufacturing cars in
India. The company progressed in manufacturing various models of cars. The unique features,
compatibility and the pricing of the cars increased its demand in the market. It also helped in
gaining profits. The company formulated new policy to progress more towards technology. At
present, the pricing is affixed after the cars are manufactured. But as per the new policy, the price
of car and its components are affixed in advance and then the manufacturing process would take
place.
This policy made the company incorporate changes like tying up with local manufacturers,
creating rural employment and setting up domestic plant location. These factors helped in
minimising the cost and increase the production.
This section described the implementation of policy change and its stages of implementation.
The next section explains the role of policies in strategic management.
10. The policy ________________ are the key persons to implement new ideas.
11. The policies are developed more clearly based on the underlying _______________ of the
organisation.
12. The policy decision makers hold the ____________ to alter the existing policies and create a
new one according to the changes in organisation.
7.6 Role of Policies in Strategic Management
Business policy plays a vital role in strategic management. The different roles of policies in
strategic management are:
Business policy interrelates to the objectives of the organisation. Strategic management is the
process of directing the human resource and the management in achieving the organisational
objectives. Hence policies act as guidelines in framing the decisions that are vital to the directing
principles of the strategic management.
Policies have to be accepted to make the decisions. It means all the internal stakeholders must
follow the policies in the organisation. The policies are altered according to the framed
strategies. Policies govern and control the managerial actions.
Strategies depend upon the physical factors to achieve the objectives of the organisation. The
employees work according to the policies in the organisation. Hence the business policy acts as
the linkage between physical resources and personnel to help in achieving the objectives of the
organisation.
Business policies judge the current status of the organisation which is running according to the
strategies. It assists in evaluating the various business activities in the organisation.
The strategic management sets the rules in achieving goals while the policies support the
organisation to face any uncertainty situations that occur in the future. Successful future of the
organisation completely depends on the clearly defined policies.
Strategies are implemented in accordance to the government rules. Hence the policies are laid
abiding to the factors of the government and help the work to flow smoothly in the organisation
without hampering the objectives of the organisation.
Policies assist the top level management to frame strategies based on the policy.
Policies have to be incorporated so that is implemented successfully and effectively.
Example Business policy of DSS & co, India
DSS & Co., a software company is aiming for globalisation so that it can contribute to the
market through original technology and efficient workforce.
Business policy of DSS & Co., The intention of our company is to help the society with the
business motto, Leaders in contributing the best. We, as a company are introducing high level
expertise in embedded technology and making widespread efforts in introducing a new media for
linkage between the technology and the people. This business policy ensures an environment to
learn new technology for the companys internal stakeholders and thus, can pursuit in
contributing the technology effectively to the society as one entity.
Business aims of DSS & Co. Our greatest aspiration is to shape a new business sector by
introducing the new embedded technology. Aim of the company is to provide maximum support
to the various technologies without hampering the company ethics, strategies and bringing
harmony between planning, development, manufacturing and sales.
In this section the role policies in strategic management was described. The next section deals
with interdependency between policy and strategy.
Activity 2
Consider a silk manufacturing company and explain the role of privacy policy implemented
within the strategies of the company.
Refer the link for guidance - http://www.fibre2fashion.com/banarassilkmfg/
13. Policies are unacceptable statements for decision making. (True/ False)
14. Business policy acts as the linkage between physical factors and personnel. (True/ False)
15. Business policy does not interrelate to the objectives of the organisation. (True/ False)
7.7 Business Policy and Decision making
Whenever any business policy is framed, it has to be observed by the decision makers as feasible
and beneficial for the organisations growth and success. Just because a policy is in place, it
doesnt mean that it will help business decisions. Therefore, business policies have to be framed
after a careful scrutiny and then decided whether such policies are needed or not.
Once policies are in place and implemented, it should further help in functional and operational
decisions without causing any ambiguities or delays in procedures. Policies should act as guiding
light to lead the organisation and business strategies in the right path.
A change in policy or amendments done to existing policies should also be considered in
decision making before implementing them. Further, it should not cause any major disruptions in
the internal environment.
Policy making decisions together with strategic decisions must provide clarity, flexibility and
assistance to other business decisions.
Interdependence between policy and strategy
Business policies and business strategies requires compatibility. A policy should not hinder
strategic decisions and in the same way, a strategy should not restrict policy decisions. Both have
to be complementary to each other.
For example, if a companys policy states that it can have suppliers from any country of the world
and then later a cost-cutting strategy is formulated to have only the best suppliers from a
particular country, this will contradict with the policy. It will limit the companys reach even if
cost is reduced.
The interdependency between policy and strategy is a seal. The strategies are developed with
collective ideas of how they must be recognised. The existing policies within strategic
framework explain how they contribute to achieve the desired results. The terms strategy and
policy are used in different ways, and in sometimes are even interchangeable.
Strategy is the process of determining the goals and methods to achieve them. Strategy consists
of various methods in achieving the goal. The organisation utilises strategic direction as one of
the methods. The strategic direction illustrates the desired future and identifies the need of it. It
portrays the measures to be considered to achieve the desired goal. It acts as guiding principles
that provide framework and coherence to the action.
Policy acts as a method to move in the direction planned by the strategic direction planning team.
Numerous policies are framed in the organisation. The collaborative work effort of the policies
results in delivering the specific strategic outcomes. Policy design process involves in identifying
methods to achieve strategic objectives. Selecting the most suitable policy and evaluating the
impact of policy mainly lies with the top level management. The interdependency between
policy and strategy provides effective outcomes to the organisation.
Separation of strategy and policy generates the risk of making strategic objectives unachievable.
This leads the policy to develop authority from their prolonged existence rather than contributing
to the customer needs. The integration ensures that strategies implemented use the most suitable
policies. Different policies may be framed but applying them in working together achieves the
desired strategic outcomes.
16. Strategy is the process of determining the ________and methods to achieve them.
17. The separation of strategy and policy generates the risk of obtaining unachievable
_____________ objectives.
7.8 Summary
Let us now summarise what we have discussed in this unit.
Business policy is the guidelines for making decisions and acts as boundary for the personnel
and various resources in achieving the objectives. The various factors involved before framing
policies are resources of the organisation including human resource, property possessed by the
organisation, inventories, financial sector, political and legal forces, and internal environment of
the organisation.
Policy formulation is the process of designing the policy. There are many steps involved in
framing policies which include definition of purpose, preparation of strategic intelligence, policy
alternatives, policy analysis, policy review etc. The policy cycle explains the systematic stages
involved in creating a policy. The policy cycle consists of setting the agenda, writing,
implementing, enforcing, reviewing, and updating the policy.
The implementation of policy change creates a space for understanding the need for policy and
explains the benefits after implementing the policy in the organisation. Business policy plays a
vital role in strategic management. It helps in effective decision making of the strategies in the
organisation. Policies act as the guidelines in achieving strategic objectives. The interdependency
between the policy and strategy leads the organisation to work in an effective and efficient
direction and helps to successfully achieve the desired outcomes.
7.9 Glossary
Agenda : Schedule, outline
Legitimating : Authenticated, validity
Mobilisation : Utilisation
Harmony : Agreement, synchronisation
Ambiguity : Confusion, no clarity
Amendments : Revision, corrections, improvements
Disruption : Disorder, trouble
1. Describe the various factors to be considered before framing policies and explain the steps
involved in framing policies.
2. Describe policy cycle and the different stages of policy cycle.
3. Explain the implementation and steps involved in policy change.
4. Illustrate the role of policies in strategic management and the interdependency between policy
and strategy.
7.11 Answers
1. Economy
2. Internal environment
3. Machinery
4. True
5. False
6. True
7. Implementation
8. Policy agenda
9. Enforcing
10. Decision makers
11. principles
12. Authority
13. False
14. True
15. False
16. Goal
17. Strategic
Terminal Questions:
1. Refer 7.2 and 7.3 Factors to be considered before framing policies, steps involved in framing
policies
2. Refer 7.4 and 7.4.1 Policy cycle and stages of policy cycle
3. Refer 7.5 and 7.5.1 Implementation of policy change, steps involved in implementing policy
change
4. Refer 7.6 and 7.7 Role of policies in strategic management and interdependency between
policy and strategy
7.12 Case-let
Policies adopted by Wipro to achieve SIX SIGMA
Wipro started from an old oil mill as vegetable oil manufacturing company
in 1947. Later in 1975, Mr. Azim Premji took over the company and set up
Wipro Fluid Power to manufacture hydraulic and pneumatic cylinders.
Wipro entered into the technology sector in 1979, developed computers in
1981.and it was the first in the line of Indian computer manufacturing
company. Later in 1980s, it invested in developing software packages by
collaborating with United States companies and earned a lot of profit in
information technology. The sustained growth in information technology led
the company to become pioneers in R&D service providers.
Later the company introduced the six sigma methodology to enable effective
decision making based on metrics and measurements of the processes. The
central idea of six sigma was to systematically assess and eliminate the
defects in the process and to achieve zero defects processes. The six sigma
concept is related to all the areas including project management, market
development, and resource utilisation. Human resource was one of the
sectors to incorporate six sigma methodologies. This process of human
resource planning is implemented by top level management and they
formulate various policies related to it.
- The human resource policies incorporated by Wipro are: Manpower
planning The basic purpose of manpower planning was to have an accurate
estimation of the required manpower with the relevant skill requirements.
- Recruitment and selection Recruitment is the process of selecting the
qualified candidates to work in the organisation. Wipro incorporated
recruitment process which consists of written test, technical interview and
HR interview. It also recruits 40 percent of employees from campus
recruitment.
- Training and development The term training refers to acquiring knowledge
and upgrading skills. The talent transformation division in Wipro handles
the training and development process. It conducts induction training which
will cover the aspects of software development skills required in the
workforce. It also focuses on business development skills based on the
departmental need.
- Performance appraisal The company incorporated this policy to measure
and assess the employee performance and to provide feedback and support
to achieve effective and qualitative process targets.
- Promotion and transfers It is the process of advancement of the employees
rank in the hierarchy system of organisation. It is the positive appraisal for
the good performance of the employee. Transfer is the lateral movement of
the employees to different section, department etc. The purpose of transfer is
to utilise workforce and increase the versatility of employees.
- Employee welfare It refers to the means of providing the employees with
comforts in terms of education, medical, housing, canteen facilities,
recreation activities, organising sports, insurance policy, club membership
so on.
The company benefited with systematic flow of recruitment process and
efficient work force in the company that lead to the satisfaction of the
employees and in achieving the companys objectives.
1. Explain the policies incorporated in six sigma methodologies with context
to human resource planning process.
2. Classify the benefits of employee welfare policy.
Note:
Six Sigma is a business management strategy that uses quality management
tools and aimed at achieving consistent quality in manufactured products.
The concept of six sigma was originally developed by Motorola Company in
early1980s. Six Sigma is a set of practices designed to improve
manufacturing processes and remove defects or errors. It has widespread
application in many industrial and manufacturing sectors throughout the
world.
Source link
http://www.scribd.com/doc/16606524/Project-on-Wipro
E References
http://www.dadalos.org/politik_int/politik/policy-zyklus.html - Retrieved on 1 August 2010
http://www.bizmanualz.com/blog/policy/the-policy-cycle.html - Retrieved on 1 August 2010
http://www.ehow.com/way_5717242_strategic-decision-making-business-
policy.html#ixzz0vWLIWu - Retrieved on 1 August 2010
http://www.usaid.gov/our_work/democracy_and_governance/publications/ipc/rn-4.pdf -
Unit-08-Business Continuity Plan
Structure:
8.1 Introduction
Objectives
8.2 Concepts of Business Continuity Plan (BCP)
8.3 Relevance and Importance of BCP
8.4 Steps in Business Continuity Plan
Initiation
Business impact analysis (BIA)
Disaster readiness strategies
Develop and implement the plan
Maintenance and testing
8.5 Business Impact Areas
8.6 BCP and its Influence on Strategic Management
Positive effects of BCP on strategic management
Negative effects of BCP on strategic management
8.7 BCP and its Influence on Policy Making
8.8 Contingency Planning
Concepts
Implementation
Benefits and limitations
Best practices
8.9 Summary
8.10 Glossary
8.12 Answers
8.13 Case-let
8.1 Introduction
In this unit you study the concept of contingent planning and Business Continuity Plan (BCP).
This unit will explain to you the steps involved to develop a BCP and its business impact areas. It
also discusses the influence of BCP on strategic management and policy making.
Business continuity plan (BCP) is a process followed by an organisation to survive in an event
that causes disruption to normal business processes. BCP not only includes major disasters (e.g.
loss of a building due to natural calamities, fire accident etc) but also routine interruption (e.g.
hard disk crash due to virus, major power interruption etc).In such cases BCP ensures that critical
operations continue to be available.
Objectives
explain BCP and its importance
illustrate the procedures to implement BCP
summarise BCPs influence on strategic management and policy making
describe the critical aspects of contingency planning
8.2 Concepts of Business Continuity Plan (BCP)
According to the Business Continuity Institute, a Business Continuity Plan (BCP) is defined as:
A document containing the recovery timeline methodology, test-validated documentation,
procedures, and action instructions developed specifically for use in restoring organisation
operations in the event of a declared disaster. To be effective, most Business Continuity Plans
also require testing, skilled personnel, access to vital records, and alternate recovery resources
including facilities.
BCP is a collection of procedures which is developed, recorded and maintained in readiness for
use in the event of an emergency or disaster.
1. BCP restores business organisation in the event of an emergency or disaster. (True/False)
2. BCP is a collection of ___________ and ___________ to be used in event of disaster.
3. BCPs require testing. (True/False)
8.3 Relevance and Importance of BCP
Every organisation is at risk due to natural disasters like flooding, hurricanes or earthquakes, or
any common causes of systems disasters. Sometimes it can also be due to human interference
like hacking or virus attack. Business Continuity Planning is important to the continued success
of an organisation. They are critical for the continuous operations in all types of businesses.
Every company needs a detailed contingency plan that ensures continuous business operations in
case of any unforeseen, difficult or catastrophic event occurs. Recently most of the organisations
rely on technology to do business and give more importance to IT and communication services.
They become highly vulnerable to loss of information and service a result of catastrophe.
BCP is very important due to the following reasons:
Advanced planning
Threats
Advanced planning
Many companies have realised that it is not sufficient to implement a generic BCP. For an
efficient response, with respect to continuous operations, it must adopt to specific risks and
catastrophic situations which could range from major building loss to local system failure.
Organisations must plan for the recovery of critical business functions, using priorities and
timescales that were obtained from assessed risks and accompanying data. BCP must cover the
requirements of IT, data and voice communications as well as of essential personnel and offsite
locations. In today's scenario, it is no longer sufficient for an organisation to recover its
technology and communications infrastructure but it must also have accessible people and
accommodations in which they can work.
Threats
Natural disasters are not the only threats to a business operation. Corporate espionage organised
crime, hacking, whacking packet sniffing etc are some of the man-made disasters. Hackers could
destabilise an organisation's entire operation. To respond to this threat, it is important to use
results generated from risk analysis and management activity to undertake focused, organisation-
specific security testing, including vulnerability assessment and penetration testing of the
network infrastructure.
Where an event causes a company to close down its entire network, it is critical to ensure that
employees and other users still get access to their data and applications as quickly and securely
as possible. To accomplish this, companies can organise various information management
solutions by implementing network management procedures.
In spite of giving attention to Business Continuity Planning following recent terrorist activities,
organisations are still failing to put strategic contingency plans in place. Gartner, an analyst firm
estimates that only 35% of the organisations have a comprehensive disaster recovery plan in
place and fewer than 10% have crisis management, contingency, business recovery and business
resumption plans. This is an alarming statistic.
Example for corporate espionage and organised crime An employee of Ellery Systems Inc.
resigned and took the computer software codes with him. The codes had a potential market value
of billion dollars. As they didnt implement BCP, Ellery systems went out of business and its
employees lost their jobs. Millions of dollars invested and many years of hard work were lost.
4. Every company needs a detailed ___________that ensures continuous business operations in
case of any unforeseen.
5. ___________ could destabilise an organisational entire operation.
6.Business Continuity Plans must cover IT, data, ___________, essential personnel and
___________.
8.4 Steps in Business Continuity Plan
The BCPs senior management committee is responsible for the initiation, planning, approval,
testing and audit of the BCP. The BCPs senior management committee also implements the BCP,
coordinates its activities, supervises its creation and reviews the results of quality assurance
activities. These steps are discussed below:
Initiation
Business impact analysis
Disaster readiness strategies
Develop and implement the plan
Maintenance and testing
8.4.1 Initiation
The senior management initiates the project and conducts the meeting to review the following:
Establish a business continuity planning committee The senior management identifies a team and
discusses the business continuity planning project with them. The management forms a team and
clearly defines the roles of project team members.
Draw up business continuity policies The team establishes the basic principles and framework
necessary to ensure emergency response for resumption and recovery, restoration and permanent
recovery of the organisational operations and business activities during a business interruption
event.
8.4.2 Business impact analysis (BIA)
BIA is the most important element of the continuity plan. BIA reveals the financial and
operational impact of a major disruption. BIA report describes the potential risks specific to the
organisation. It will provide the organisation with the following details:
The identification of time sensitive business operations and services.
An analysis of the organisations financial status and operational impacts.
The time-frames in which the time-sensitive processes, operations and functions must resume.
An estimation of the resources necessary for successful resumption, recovery and restoration.
The BIA will provide a basis and cost justification for risk management, response, recovery and
restoration.
8.4.3 Disaster readiness strategies
The disaster readiness strategies include the following activities:
Define business continuity alternatives Using the information from BIA, the project team should
assess the alternative strategies that are available to the organisation and identify two or three
strategies that are more credible.
Estimate cost of business continuity alternatives Based on these strategies, the organisation
develops the budgetary plan. The resumption timeframe plays an important role in examining
which elements may require pre-positioning.
Recommend disaster readiness strategy - Based on the needs of the business and evaluation of
alternatives, the project team should develop recommendations of strategies to provide funds for
implementation. Prepare a formal report based on the findings of the BIA for the strategy
alternatives that were developed and analysed Take approval from senior management to proceed
with the project.
8.4.4 Develop and implement the plan
Develop and implement the plan includes the following activities:
Emergency response and operations It establishes a crisis management process to respond to
these incidents.
Develop and implement a business continuity plan The plan describes specifically how to deal
with the incidents. It should focus on the priorities of overall business continuity strategy.
Apply business unit plans for each department Describe the roles that each department has to
perform in the event of an emergency. Example It should detail the actions that the IT department
will have to carry out if IT services are lost.
8.4.5 Maintenance and testing
Maintenance and testing includes the following activities:
Establish a plan exercise program BCP should develop and schedule the exercises to achieve and
maintain high levels of competence and readiness. Document the objectives of each exercise and
it should include the measurement criteria. Evaluate the results of each exercise against pre-
stated values and document the results along with proposed plan enhancement.
Awareness and training plans It should ensure that the personnel is aware of the importance of
business continuity plan and can operate effectively in case of an event .Review the effectiveness
of awareness training and identify the need for further training.
Sample emergency response exercises Emergency response exercises should be ongoing. The
exercises can be repeated using alternate setup and it should involve whole organisation within a
particular facility that may be affected by a system disaster.
Audit and update the plans regularly It should regularly audit the plans to check if it meets the
needs of the organisation and ensures that the documentation remains accurate and reflects any
changes inside or outside the business.
Activity 1
Computer World is a hardware manufacturing company of computer components. Consider you
are a project head of BCP committee of the company. You are asked to develop a BCP which
includes restoration of critical mainframes with vital data at the backup site in case of any
interruptive event. Design a BCP as per the requirement.
Refer the link for guidance
http://www.continuitycentral.com/feature0696.html
7. BIA reveals financial and ___________ impact due to a major disruption.
8. An estimation of the resources is necessary for successful resumption of recovery and
restoration. (True/False)
9. Regular auditing of plans is not required. (True/False)
8.5 Business Impact Areas
Today disasters or disruptions to business are real. The disasters affect normal life and business
organisation whether it is natural or man-made. The impact area in business is customer service,
internal operations, legal/statutory and financial. Most of the organisations depend heavily on
technology and automated systems. A disruption even for few days causes severe financial loss
and threatens the survival of the organisation. The primary objective of BCP is to protect all the
parts of its operations during disasters.
Business impact areas can be classified as:
Technical impact factors
Business impact factors
Technical impact areas
Technical impact factors are aligned with the traditional security areas of concern;
confidentiality, integrity, and availability. The goal is to estimate the scale of the impact on the
organisation if the vulnerability were to be determined. The technical impact factors are:
Loss of confidentiality It includes loss of critical or sensitive data.
Loss of integrity It includes the degree of data.
Loss of availability It includes loss of vital services. The services could be primary, secondary or
complete loss of all services.
Business impact factors
Business impact factors are common areas for many organisations, but this area is even more
unique.
Financial damage It has an effect on annual profit, loss of major accounts and in some cases, the
organisation becomes bankrupt.
Reputational damage It has effect on stakeholders, loss of major clients or customers, loss of
goodwill and, brand name is affected.
Loss of privacy It has several consequences. Loss of sensitive personal information leads to
action under privacy and identity protection and regulation. The loss of commercially sensitive
information or intellectual property may result in legal liabilities.
10. Loss of confidentiality includes loss of critical or ___________.
11. Reputation damage effects on stakeholders. (True/False)
12. Loss of information ___________or intellectual property may result in legal liabilities.
8.6 BCP and its Influence on Strategy Management
Strategy Management refers to the formation of vision and direction of an organisation, setting
mission statements, identifying markets to achieve the objective of an organisation.
BCP is concerned with the determination and selection of alternative operating strategies to be
used to maintain the organisations critical activities. BCP strategy ensures that its activities are
aligned with and supports the overall business strategy.
8.6.1 Positive effects of BCP on strategy management
A BCP strategy has both positive and negative effects on the organisation. The positive effects of
BCP on strategic management are as follows:
Structural problems within an organisation can be recognised and resolved. Few structural
problems are as follows:
Bad organisation of workflow
Processes moving away from their original purpose within the organisational model
A clear understanding of processes within an organisation can be obtained by a business impact
analysis within a BCP. This enhances process optimisation program which results in expenditure
reduction in BCP.
The BCP program addresses Backlog Trap problem. Backlog Trap is the combined restart of the
current work and the previous backlog, in situations where severe backlogs happen due to
interruptions for various reasons.
The BCP program assists in simplifying the processes of recovery from an event.
BCP program overcomes the effects of organisations hierarchy at all levels which was affected
by an event.
BCP program identifies the mission critical activities of an organisation. This allows the service
level to be monitored in the organisation.
A good BCP program will identify the vital records to be stored within the organisational budget.
Mission critical activities along with BCP program has to focus on the protection of physical and
logistical securities.
8.6.2 Negative effects of BCP on strategy management
The negative effects of BCP on strategic management are as follows:
Change in the BCP program may introduce other risk which has to be identified, assessed and
controlled. In some cases it is beyond the design stage.
The cost of implementing and testing a BCP program is high.
Relocating and accommodating recovery team members lead to logistical difficulties.
More time is required to set up facilities, although it is within the recovery time frame of BCP
program.
The whole BCP program is time consuming.
13. A good BCP program fails to identify storage for vital records within the organisational
budget. (True/False)
14. Logistical difficulties are associated when relocating and accommodating recovery team
members. (True/False)
15. The cost of implanting and testing a___________ is high.
8.7 BCP and its Influence on Policy Making
BCP policy is a set of policies and procedures for formalising business continuity program. It
provides guidelines for developing, maintaining and exercising BCPs. The purpose of BCP
policy is to ensure that the organisation has a response to major disruptions. Most of the
organisations are embracing BCP policy as a management principle.
Organisation performs a series of iterative activities to formulate a BCP policy. The steps to
formulate BCP policy are as follows:
Ensure that the BCP program supports the objectives and culture of the organisation
Decide on the scope of BCP program
A project should be initiated to enable the organisation to develop a Policy and undertake the
activities required to implement it.
The contents of BCP policy are as follows:
Introduction
Precursors
Purpose
Concepts and assumptions
Process
Methods and techniques
Outcomes and deliverables
Review
Introduction The BCP policy of organisation provides the framework around which the BCP
capability is designed and built.
Precursor It gives an organisational understanding of BCM and its importance.
Purpose The purpose of a BCP is to provide a documentation of the principles to which the
organisation aspires and against which its performance is audited.
Concepts and assumptions Though the senior management of organisation owns a BCP policy, it
is assumed that the BCP team will actually produce and review it.
Process The process to develop a BCP policy are as follows:
Identify and document the elements of a BCP policy.
Identify the relevant standards, regulations and legislation that are needed to be included in the
BCP policy.
Identify any good practice guidelines or other organisations policies that could acts as a
benchmark.
Review and conduct gap analysis of the organisations current BCP policy and external
benchmark policy or new BCP policy requirements.
Develop a draft of a new or amended BCP policy.
Review the draft BCP policy against the organisational standards for policies or similar related
activities.
Circulate the draft policy for consultation.
Amend the draft BCP policy based on consultation feedback.
Agree the sign-off of the BCP policy and a strategy for its implementation by the organisations
executive / senior management.
Publish and distribute the BCP policy using an appropriate version control system and
techniques.
Methods and techniques The methods and techniques of developing a BCM policy are as
follows:
Review of organisations current BCP policy, industry goods and professional bodies
Research on external sources for guidance (e.g. regulatory, legal etc).
Personnel communication with industry and professional bodies to understand current and
developing BCP issues.
Identification and adoption of components of a BCP policy of another organisation that is
considered as good practice.
A current review of internal and external policies to derive core components of a new or
amended BCP policy.
Outcomes and deliverables The BCP policy will include the following as a reference in
subsidiary document:
The organisations definition of BCP
A definition of the scope of the BCP program
A documented BCP operational framework
A documented BCP operational framework for the management of the organisations BCP
program also includes responsibilities
A documented set of BCP principles, guidelines and minimum standards
Implementation and maintenance plan for the policy
Review Even though all organisational policies are reviewed on an on-going basis, a formal
review of policy is likely to be activated by a change in the external environment in which the
organisation operates. Such changes could be regulatory.
16. ___________ provides guidelines for developing, maintaining and exercising BCP.
17.BCP policy is a set of policies and procedures for formalising business continuity program.
(True/False)
18. Research on external sources for guidance is one of the methods in BCP policy. (True/False)
8.8 Contingency Planning
Contingency planning is a planning strategy that deals with uncertainty by identifying specific
responses to possible future conditions. Contingency planning realises that future is impossible
to predict, so it is best to have a variety of flexible and responsive solutions available. It is an
alternative course of action that can be implemented in the event when a primary approach fails
to function as it should. Contingency plans allow the businesses and other entities to quickly
adapt to the changing circumstances.
8.8.1 Concepts
Contingency plans are developed by identifying possible failure in the usual flow of operations
and strategies. Contingency plans should overcome these failures and continue with the functions
of the organisation. Organisations create contingency plans to achieve the objectives that are
listed below:
Day to day operations of the organisation continue without a great deal of interruption or
interference.
Backup plan is capable of remaining functional as long as it takes to restore primary plan.
Emergency plan minimizes inconvenience to customers, allowing the organisation to continue
providing good and services.
8.8.2 Implementation
Contingency plans can be practically applied to any level of organisation as a part of planning
process. It involves the following steps:
Identify the objectives and targets
Identify various strategies that help to achieve objectives and targets.
Evaluate the costs and benefits of each strategy, and rank them according to cost-effectiveness or
benefit/cost ratios. The ranking can take other significant factors into account such as
implementation and other additional benefits.
Implement the required strategies to achieve the targets. It generally starts with the most cost
effective and easy to implement strategies, and working down the list to more costly and difficult
strategies.
After they are implemented, assess the programs and strategies with regard to various
performance measures, to ensure that they are effective.
Evaluate overall results with regard to targets to decide if the additional strategies should be
implemented.
Activity 2
Consider you are the new Contingency planner. Identify certain contingency situations and
develop a contingency plan for the organisation that will help in facing those contingencies when
they occur.
Refer the link for guidance - http://www.drj.com/new2dr/w3_001.htm
8.8.3 Benefits and limitations
Contingency Planning tends to reduce costs, improve efficiency, and increase the range of
possible solutions compared with more rigid planning.
Benefits
As strategies and programs are only implemented if actually needed, so it can be adjusted to
reflect future conditions. Some of the benefits of contingency planning are as follows:
Maintains customer support due to excessive system downtime.
Recovers of vital and or critical business data such as client records, customer data etc.
Ability to validate data flow and integrity.
Decreasing of employees stress and increases in morale.
Protects key revenue generating projects.
Decreases operational expenses.
Limitations
The Contingency plan is a special type of system that many professionals find complex and
difficult to work. It has to be kept in readiness to perform in the needed situation. It is expected
to provide an orderly, efficient means for reaching a particular result. Some of the limitations of
Contingency plan are as follows:
Too complicated - The documentations are not detailed enough for those who need to use them
when they are invoked. There are several plans where there is so much detail contained within
them but the core information is lost under different categories and levels of incident in the end.
Poor assumptions Most of the contingency planning fails because of a bad assumption of the
staff that put it together. Example - Why should it be assumed that there could be one incident
affecting the organisation at any one time, it can be more also. When identifying their key
threats, there is also a danger of assuming that we will get by, or even someone else will do that.
Narrow plans A contingency plan needs to take the threats to the operation in all aspects of an
organisation into account. Plans are too operational, i.e. only including the threats to specific
projects and locations, such as IT, human resources and finance. Clearly, neither of these
approaches led to the contingency plan documentation being worthy of the name, and each time
the organisation needed a significant re-think.
Not process driven Many plans have a specific solution in place for dealing with a specific
incident, normally a fire, power failure, IT failure and more recently flu pandemic. The problem
with this method is that the organisation is essentially unprepared for any other incident, unless
the actual incident exactly matches the planned potential incidents. Contingency plans need to
focus on processes and generic threats such as a building being unusable, lack of power, lack of
telecommunications or a significant proportion of staff being unavailable.
Lack of tested contingency plans Only by testing a plan in actual conditions, it is possible for an
organisation to identify the improvements that are needed, and the limitations inbuilt within the
plan. Organisations must test their contingency plans before they are needed to ensure they work,
and that they are prepared to move on to the next level of response when necessary.
Outdated Any contingency plan document needs to be updated to ensure that it remains relevant
in the time of crisis.
8.8.4 Best practices
A best practice is a process that is believed to be more effective when applied to a particular
instance. Best practices are good practices. Contingency Planning is considered virtual in any
planning process. It reflects least cost planning principles, and all significant impacts are
considered. Some of the best practices for contingency planners are as follows:
Consider the widest possible range of possible solutions.
Identify which solution helps to address which type of problems.
Identify the full cost, benefits and ease of implementation of each possible solution, and rank
them based on cost effectiveness.
Establish potential implementation plans for each individual strategy, so they are ready to be
quickly deployed as needed.
Alternative to best practice policies, some business organisations follow the practice of Worst-
case scenarios. A worst case scenario is assumed upon which plans and actions have to be
formulated and undertaken by the planners and the appointed staff.
Worst case scenarios are crafted by experts and then how the responsive team tackles the
situations is noted, loopholes are observed and feasible solutions are collected. Simulation
programs, zero-sum games in game theories, brainstorming sessions and other applications can
help in dealing with worst case scenarios. Facing worst case scenarios guides the business in its
survival and helps it to be on the survival mechanism.
19. ___________ is planning strategy that deals with uncertainty by identifying specific
responses to possible future conditions.
20. Contingency plans should overcome the failures and continue the function of the
organisation. (True/False)
21. ___________ is capable of remaining functional as long as it takes time to restore primary
plan.
8.9 Summary
BCP is a collection of procedures and information which is developed, recorded and maintained
in readiness to be used in the event of an emergency or disaster.
Steps to implement BCP include business impact analysis (BIA), the most important element of
continuity plan. BIA reveals financial and operational impact due to a major disruption. BIA
report describes potential risks specific to the organisation.
Business impact areas include technical and business impact factors. Technical impact factors are
aligned with the traditional security areas of concern; confidentiality, integrity, and availability.
The goal is to estimate the scale of the impact on the organisation if the vulnerability were to be
exploited. Business impact factors are common areas for many organisations, but this area is
even more unique.
BCP policy is a set of policies and procedures for formalising business continuity program. It
provides guidelines for developing, maintaining and exercising BCPs. The purpose of BCP is to
ensure that the organisation has a response to major disruptions.
Contingency planning is a planning strategy that deals with uncertainty by identifying specific
responses to possible future conditions. Contingency planning realises that future is impossible
to predict, so it is best to have a variety of flexible and responsive solutions available.
8.10 Glossary
Mission critical activities : Activity, process, equipment, applications so on which is critical to
daily operations of an organisation
Whacking : Use of wireless network without authorisation to obtain information
Espionage : Use of illegal means or deceptive practices to gather information.
Gap analysis : The process to compare its actual performance with the expected performance to
ensure if it is meeting expectations and using its resources effectively.
1. Define business continuity plan.
2. Discuss the steps involved in BCP.
3. Explain strategic business model and the levels of strategy management.
4. Describe the contents of BCP policy.
5. What are the limitations of contingency planning?
8.12 Answers
1. True
2. Procedure and information
3. True
4. Contingency planning
5. Hackers
6. Voice communication and offsite location
7. Operational impact
8. True
9. False
10. Sensitive data
11. True
12. Commercial sensitive data
13. False
14. True
15. BCP program
16. BCP policy
17. True
18. True
19. Contingency planning
20. True
21. Backup plan
Terminal Questions:
1. Refer 8.2 - Concepts of Business Continuity Plans
2. Refer 8.3 - Steps in Business Continuity Plans
3. Refer 8.5 - BCP and its Influence on Strategic Management
4. Refer 8.6 - BCP and its Influence on Policy making
5. Refer 8.7 - Contingency Planning
8.13 Case-let
Business Continuity at Wipro
Wipro is a leading IT company in India and Middle East. It offers integrated
IT solutions and is backed by a strong quality process. It has vast experience
in managing global clients across various business verticals. The case study
highlights Business Continuity Plan - B.
Wipro in India has a low risk advantage and it has a multi location
advantage due to the following setup:
Development Centers across 5 cities in India.
Multiple facilities in each city
Offsite development centers
Robust communication network
The site risk mitigation activity of Wipro includes:
Ability to commence work in alternate sites
Defined business continuity process
Defined backup methodology
Quality processes through Veloci-Q
Wipro has planned for secure resources. They are as follows:
Majority of locations are on outskirts of the city. This ensures safety from
events happening in the city
A well executed physical security policy for all locations
It has an independent power generating stations for back up, with in-house
storage of fuel for up to two weeks in all locations.
All the locations are fully functional for 24 hours
All the offices are fully interconnected, enabling faultless inter-office
transfer of information.
Wipro has a robust communication network and it is manifested through:
Design redundancy
Service provider redundancy
Mode of communication- land/satellite
Full ISDN dial-up as a back up
Managed network
The network in Wipro has three kinds of links. The links are as follows:
Intercontinental It has twin links to all international offices and one
terrestrial link with AT&T. It has one satellite link with MCI WorldCom.
Intercity - All the offices are connected via multiple links which are located
in different cities. All the links are terminated in Bangalore in two different
offices. The links are combination of terrestrial, satellite and microwave.
Last mile This facility is provided by Department of Telecommunications,
Government of India
Wipros voice net advantages are as follows:
It provides a parallel means of communication
Facilitates voice and video
Wipro data network is reliable
Promotes productivity by integrating all Wipro offices
It has in-house and independent management of network
According to Wipro, possible causes to service interruption are:
Hardware failure
Loss of data/software
Failure in communication link components
Loss of power supply
Loss in accessibility of ODC location
The following mechanisms are followed in case of eventuality:
Server hardware failure Servers are identified as critical and non critical.
Critical servers are configured for redundancy of power supply etc.
Redundancy reduces the impact of server failure.
Loss of data/software - Adequate back ups are maintained to recover loss of
project data. Each project has daily backups of work progress. There is also
a weekly backup and the backups are tested once in six months. Copies of
the backups are maintained in secured offsite location with fire-proof
storage rooms.
Failure in communication link components Routers and connection hubs are
checked to rectify the problems. It has fully configured backup routers.
There are alternate links, in case of failure of a dedicated link.
Loss of power supply It has a power plant which provides uninterrupted
power supply. The UPS system of ODC provides a backup of 20 minutes of
power supply to avoid loss of data.
Temporary loss of accessibility to ODC location Critical work begins at
alternate site with alternate communication line. Teams are selected to work
on customer premises to continue critical activities.
The client site risk mitigation activities are:
Incremental backup of the work in progress
Weekly backup of database
Clients option to use Santa Clara port in USA to ensure communication with
Wipro, India
Offsite development centers in Reading (UK), Phoenix and Toronto
Note:
ODC Offsite development centre
Veloci-Q Integrated Quality framework
Voice net Private voice network of Wipro
1. Explain the multi location facility of Wipro.
2. What are the causes of interruption?
3. Explain client site risk mitigation activities of Wipro.
Source link -
www.wipro.com/corporate/.../pdf.../Wipro_Business_Continuity.pdf
E - References
http://www.4service.com/importance_of_business_continuity_planning.asp - Retrieved on
10/8/2010
www.allhandsconsulting.com/toolbox/BCP_2-07a.PDF - Retrieved on 10.8.2010
www.thebcicertificate.org/.../GPG2008-2%20Section%206%20FINAL.pdf - Retrieved on
13/8/2010
www.continuitycentral.com/feature0211.htm - Retrieved on 18.8.2010
http://www.galaxyvisions.com/business_continuity_design.php - Retrieved on 10/8/2010
http://www.oregon.gov - Retrieved on 13/8/2010
http://www.vtpi.org/tdm/tdm123.htm - Retrieved on 13/8/2010
http://www.wisegeek.com/what-is-a-contingency-plan.htm - Retrieved on 13/8/2010
Unit-09-Business Investment Strategies

Structure:
9.1 Introduction
Objectives
9.2 Business Plan and Business Venture
Strategies for creating a business plan
Setting up new business venture
9.3 Business Investment Strategies
Investment strategies for new businesses
Investment strategies for existing businesses
Problems due to faulty and poor investment strategies
Internal methods to rectify faulty investment strategies
9.4 Summary
9.5 Glossary
9.7 Answers
9.8 Case-let
9.1 Introduction
In this unit we will discuss business investment strategies which are defined as the definite
procedures that guide an investor to choose the investment portfolio. A well-planned investment
strategy is essential before taking any investment decisions. A business strategy is largely
dependent upon long-term goals and the risk involved during investment.
This unit also covers the various business plans of organisation, effects of business ventures and
faulty investment strategies including the ways to handle faulty investment strategies.
Objectives
define business plan and business venture
analyse the different investment strategies adopted by businesses
describe the ways to rectify faulty and poor investment strategies
9.2 Business Plans and Business Venture
This section explains about the strategies for creating a business plan and establishing business
ventures.
A business plan is a complete internal document that summarises the operational and financial
objectives of a business. It also contains the detailed plans which show how the objectives are
being accomplished.
An accurately made business plan helps to allocate resources properly, to handle unforeseen
complications like financial crisis and to make good business decisions.
On the other hand, business venture is a start-up enterprise which is formed with expectations
and plans of achieving financial gain. Once the need of the organisation is identified, it can be
started by a small investor that has valuable resources and time. Other investors involve
themselves by providing support for further development of the venture once the business is
created. In the case of establishing a business venture, a formal business plan is written to outline
the purpose and mission of the business for the future use.
9.2.1 Strategies for creating a business plan
This section describes the strategies for creating a business plan. Every entrepreneur creates a
business plan and its completion will determine the feasibility of the plan. The strategies for
creating a business plan are as follows:
Define your business vision You must clear the following queries while defining the business
vision:
Who is the customer?
What business are you in?
What do you sell (product/service)?
What is your plan for growth?
What is your primary competitive advantage?
Make a list of your goals You must create a list of goals after proper research. In case of a start
up business, more effort must be put on the short-term goals.
Certain things must be kept clear before setting up your goal. They are listed below:
What do you want to achieve?
How much growth you want to achieve?
Describe the quality and quantity of the service and the customer satisfaction levels?
How would you describe your primary competitive advantages?
Understanding the customer Understanding the customer is essential for a perfect business plan.
You must understand the customer in terms of the following factors:
Needs The following customer requirements should be understood clearly:
What unmet needs do your customers have?
How does your business meet those needs?
Problems Customers buy things to solve their specific problems. Always be specific about the
advantages of the product/services of your business which resolve the customers problems.
Perceptions Always try to know the perception of the customer. Clarify the doubts of the
customer regarding your profession and the products/services of your business.
Learn from your competitors You can learn a lot about the business and the customers by looking
at the business of your competitors. Always get the answers of the following questions which
will assist you in learning from your competitor and focusing on your customer.
What do you know about your target market?
What competitors do you have?
How are competitors approaching the market?
What are the competitors weaknesses and strengths?
How can you improve upon the competitions approach?
Resolving financial matters Several questions might arise when we need to make financial
decisions. They are as follows:
How will you make money?
What is the profit potential of your business?
You can resolve the financial issues by taking smart strategic investment decisions.
Identify your marketing strategy Identifying the marketing strategy is another essential skill
which you must have. The following are the four steps to create a marketing strategy for your
business:
Identify all the target markets
Qualify the best target markets
Identify the tools, strategies and methods
Test the marketing strategy and tools
9.2.2 Setting up new business venture
Deciding a location for the business is one of the strategic decisions. A good location is essential
to make the business successful. So the location needs to be chosen carefully. The business
location will vary based on the kind of business/service. Certain factors effect a new business
venture which includes manpower, transportation, arrangement of service providers like office
maintenance, security etc.
Example - A retail business must be located in a commercial area with adequate facilities like
parking space, proper transportation etc.
Role played by a proper business venture in business profits
A proper business deals with three factors. They are planning, mobilising resources and
execution of the plan. A proper business venture ensures that your plan creates the kind of
business you want to establish.
The roles played by a proper business venture in business profits are as follows:
Attracts a business partner and assist in getting financial support from a bank or a private
investor.
Improves distribution channels by extending market positions.
Diversifies product offerings by developing new technologies and utilising the resources.
Profits in terms of a local and overseas business venture
All businesses involve risk. Profit of a company depends upon its risk appetite and the way it
handles the risk in a strategic manner. However there are differences in the establishment of a
company in a local venture and in an overseas venture. The differences are in terms of logistics,
exchange, risk, vendor and buyer commitments. All these factors together influence the business
profits of the company.
A firm which plans to invest in a local and overseas venture has to make a series of strategic
decisions based on the following factors:
Present and future market opportunities
The availability of resources like skills, experience, financial support, production and marketing
capabilities, manpower etc
Proper objectives of the company
A company must face risks and challenges to earn profits. The ways of handling those risks and
challenges with positive strategic investment plans create a difference between a developed and a
developing company irrespective of the venture. But investing a business in an overseas venture
has more challenges than a business in a local venture.
1. _________________ and _____________________ are vital initial steps for a beginner to
start his business.
2.A business plan is a complete _____________ document which contains the detailed plans to
accomplish the objectives.
3.Profit of a company depends upon its ____________________.
9.3 Business Investment Strategies
In this section, we will explain the various strategies of investment for new and existing
businesses. Some elementary ideas which will help you to make effective business investments
are:
Use of income to eliminate debt
Reinvestment of funds to nurture the business
Investment in other businesses
Investment is defined as the commitment of money or capital (e.g. purchasing assets, keeping
funds in a bank account etc) to generate future returns. A proper understanding of the investment
strategies and a thorough analysis of the options helps an investor to create a portfolio that
maximises returns and minimises exposure to risks.
Following are the ways to invest successfully:
Leave a margin of safety Always leave a margin of safety in your investments to protect your
portfolio. The following are the two ways to incorporate the above principle in your investment
selection process.
Be conservative in your valuation assumptions
Only buy assets dealing at substantial discounts to your conservative estimate.
Invest in business which you understand Invest in a business in which you have a thorough
understanding of the customers, products/services etc.
Make assumptions Make assumptions about your future performance by recognising your own
limitations. Never purchase the stock until you understand the industrial economy and able to
forecast the future of the company with certainty.
Measure your success Evaluate your performance by the underlying measures in business.
Have a clear disposition towards price The more you pay for an asset in relation to its earnings,
the lesser is your return value. So have a clear outlook towards the price.
Allocate capital by opportunity cost Allocate investments/assets to the choice which has been
opted as the best among several mutually exclusive choices.
9.3.1 Investment strategies for new businesses
A new business always involves a certain amount of risk and money. Risk might arise during
development, execution, administration and making profit.
The following are the factors which affect the investment strategies of a new business:
Accurate addressing of subjects in the guide It involves choosing the right name for the
company, drawing up the first business plan, thoroughly updating the taxation advices and
banking and insurance tips.
Developing certain character traits Determination and originality are the key traits to survive in a
business. You must have the ability to organise your time and sincerely arrange the requisite
effort in your work during the early days.
Be focused and alert during sudden declination with immediate solutions Success can never be
guaranteed in a business, but your aim must be to minimise the complicated elements. Setting up
a new business always deal with certain risks, common pitfalls and financial crisis. You must be
focused towards such disaster at any time with immediate solutions.
Available resources Resources can be in the form of manpower, raw materials etc. Starting up a
business can be a discouraging prospect. Availability of resources influences the proliferation of
the new business.
Activity 1
Imagine you are starting up a business which deals with manufacturing of school bags. What will
be your strategies for the development of your business?
Refer the link for guidance - http://rru.worldbank.org/documents/DonorGuidance.pdf
9.3.2 Investment strategies for existing businesses
An existing business needs to implement the investment strategies for a constant and enhanced
proliferation. The factors implemented by an existing business are as follows:
Targeting long-term revenue growth
Driving profits by revenue synergies
Enhancing geographical footprints
Increasing exposure to develop markets globally
Consistent growth by acquisition activities
Example Krafts acquisition of Cadbury depicts the investment strategy of an existing business.
Kraft Foods Inc (KFT) is the worlds second largest food company and the largest in North
America. Kraft implemented its investment strategies to be one among the global powerhouses in
the world market.
9.3.3 Problems due to faulty and poor investment strategies
Faulty and poor investment strategies decline the growth of any organisation. It mainly occurs
due to the poor planning process in an organisation. Certain factors which lead to faulty
investment strategies are as follows:
Lack of training
Poor documentation
Lack of consultation
Unnecessary meetings and reports
Faulty parts/goods
Replacing staff frequently
Poor filing/knowledge management
Storage and warehousing errors
The problems that arise due to faulty and poor investment strategies are as follows:
Increase in cost due to redesigning and maintenance of faulty products/services
Distribution problems
Faulty time management
Reduction of growth due to lack of competition with the business competitor
The ultimate results of faulty investment are heavy financial loses and enhanced risks.
9.3.4 Internal methods to rectify faulty investment strategies
In this section we will explain the methods to rectify faulty investment strategies. Some of the
methods are as follows:
Internal transformation
Corporate restructuring and reorganisation
Financial restructuring
Divestment strategy
Expansion strategy
Diversification strategy
Vertical and horizontal integration strategy
Building core competencies and critical success factors
Frequent assessment report assists in detecting the problems associated with faulty investment
strategies in an organisation.
Internal transformation
Internal transformation takes place in an organisation to sustain constant growth, survival and
maintain profitability. It includes corporate restructuring, downsizing of employees etc. The
following are the reasons for internal transformation of a company:
Pressure on owner to decrease costs
Overstaffing
Large and complicated company structure
Low flexibility of staff
Financial instability
The main objective of a company which adopts internal transformation is to increase efficiency
by reaching the standards in the global market. This is achieved by holding high quality level of
productivity.
The essential components of a successful business transformation are as follows:
Achievement
A new level of sustainably high performance emerges
Extraordinary and unexpected results appear throughout
Improved synergy
Collaboration naturally occurs across all levels
Creativity and innovation flourishes
Aliveness
Employees flourish as they openly express their passion, commitment and creativity towards
work.
Growth and development occurs both personally and professionally
Shared future
The entire organisation unites to accomplish the future and live consistently with core values
We will now discuss the two internal transformation processes in the following section.
Corporate restructuring and re-organisation
Layoffs and employee termination
Corporate restructuring and re-organisation
Corporate restructuring and re-organisation are the corporate management tools for the act of re-
organising and restructuring the operational, ownership and other structures of a company. Their
purpose is to enhance the productivity of the organisation. Corporate restructuring and re-
organisation is required by the company when it is unable to clear its debts.
Corporate restructuring deals with the following factors:
Correction of inadequate authority patterns
Creation of a more focused diversification strategy
Augmentation of strategic control
Reduction of trust on bureaucratic control through reduced corporate staff
Development of the performance of the firm and shareholder wealth
Restructuring plans include merger and acquisitions, capital reduction, debt rescheduling, rights
of secured and unsecured creditors, shareholders' rights, administrative costs etc. A firm's
restructuring process also includes discontinuation of business processes, closing several plants,
making extensive employee cutbacks, etc.
Layoffs and employee termination
Layoffs typically point to a lack of work for the employee, usually caused by economic
conditions or shifts in the production of the organisation. Layoffs mean that the employee would
be eligible for rehire or to be brought back to its position if conditions change or improve in the
organisation.
On the other hand employee termination/downsizing/right-sizing means that the employee is
terminated from job without any chances of reappointment in the organisation. The reasons for
payoffs and downsizing are poor performance of the employee, violation of rules of the
organisation etc.
If layoffs and downsizing are used repeatedly without a thoughtful strategy, it can destroy the
effectiveness of the organisation. The following are the reasons which depict how layoffs and
downsizing influences the growth of the organisation:
Employee layoffs allow the organisation to cut costs while preserving the relationship with its
most critical and valuable employees.
It motivates and maintains positive morale of the employees who survive the layoffs. It creates a
better workplace and increases productivity as the future outcome.
Employee downsizing and layoffs prepares the dismissed employees to rectify their mistakes and
minimise the damages in the workplace.
Financial restructuring
All businesses must focus towards financial matters in order to remain operational and to grow
sustainably over the time. From this perspective, we define financial restructuring as a tool which
ensures that the corporation is making the most efficient use of available resources and also
generating the highest amount of net profit.
Financial restructuring is the re-organisation of the financial assets and responsibilities of a
corporation to create the most beneficial financial environment for the company. The reordering
of corporate assets and liabilities help the company to remain competitive even in a depressed
economic condition.
Sometimes restructuring process happens during allocation of resources for a new marketing
campaign or the launch of a new product line. It is also carried out as a means of eliminating
waste (e.g. improper budget, faulty time management etc) from the operations of the company.
This ultimately reduces the costs without impairing the ability of the company.
Financial restructuring is also implemented to continue operations in an organisation. This
happens when sales decline and the corporation do not generate a consistent net profit. A
financial restructuring process includes a review of the costs associated with each sector of the
business, identifying ways to cut costs, reduction or suspension of obsolete production facilities
etc.
Driving forces of restructuring are as follows:
Globalisation of organisation, consumer preferences, supply chains and financial flows
Rapid technological changes
Changing capital ownership
Changing expectations and value systems
Growing direct foreign investment
Changing demographics
Objectives of restructuring are as follows:
Optimising management processes
Enhancing performance
Reducing costs
Increasing productivity
Increasing sales and improving services
Controlling costs
Maximising utilisation of critical resources
Divestment strategy
Divestment is a form of economising strategy used by businesses when they downsize/right-size
the scope of their business activities. Divestment is commonly the result of a growth strategy and
it involves the elimination of a business portion. When the product demands changes and firms
alter their strategies, some portions of the business do not perform according to the
management's expectations. Such an operation is a prime target for divestment, placing the
company in a much stronger competitive position.
The following are the reasons which make an organisation to divest:
Too small market share Firms may divest when their market share is too small for them to be
competitive or to provide the expected rates of return.
Availability of better alternatives Firms may also decide to divest because they see better
investment opportunities. Due to the scarcity of resources, organisations divert resources from a
marginally profitable line of business to one where the same resources can be used to achieve a
greater rate of return.
Need for increased investment Firms sometime reaches a point where it needs to invest largely in
equipment, advertising, research and development, etc. Rather than investing in the management
resources, the firm may elect to divest that portion of the business.
Lack of fit strategy A common reason for divesting is that the acquired business is not consistent
with the image and strategies of the firm.
Legal pressures to divest Firms may be forced to divest operations to avoid penalties.
The implementation of divestment strategies by a firm occurs to eliminate unrelated, unprofitable
and unmanageable operations in the firm. The following are the ways by which a firm
implements divestment strategies:
Developing a portion of the business and allowing it to operate as an independent business entity.
Selling a portion of the business to another organisation.
Closing a portion of the firms operations.
Expansion strategy
Expansion strategy is a business strategy in which business proliferation is achieved by
increasing the stores/services and productivity. It deals with opening several branches in different
physical locations while still maintaining the current business locations.
The four types of expansion strategy are as follows:
Legal restructuring
Franchising
Strategic alliances
Mergers and acquisitions
Table 9.1 explains the various types of expansion strategy.
Table 9.1: Types of Expansion Strategy
Legal Strategic alliances Mergers and
Franchising
restructuring acquisitions
These are most
intensive in terms of
Strategic alliances time and resources
Legal expand without required. So they
restructuring Expanding transformation .It are most difficult to
allows product business without is strategically implement. These
and market much financing beneficial to both involve high risks
expansion by and strict quality the parties. It and delicate cultural
growing existing controls. ranges from loose issues that require
operations. alliances to front- careful execution of
end alliances. change
management.
The following are the ways by which the expansion of an organisation occurs:
Market concentration Market concentration is required to expand the business. During market
study you must look for certain factors like availability of resources, business of the competitors
etc.
Innovation You can find ideas to upgrade new products, features or related services from
customers, employees and suppliers. Tactics for introducing new products within existing
markets are:
Replacement of products
Introducing additional features
Introducing completely new items by extending the brand
Penetration If your local market have saturated then you need to reach out to new buyers. Few
ways of penetrating into a new market are as follows:
Segmentation Segmentation is the process of dividing a large homogenous market into clearly
identifiable segments having similar needs or demand features.
Geographic outreach Penetrating geographically according to the need of the business.
Export Proper export of product is necessary to expand the business. It enhances the ties with the
client. The following are the ways by which we can enhance export:
Register with database
Get assistance from the experts
Attend trade shows
Get financial aid
Diversification The most radical and risky among all the organisational growth strategies is the
diversification process. It deals with the requirement of new capital investment, new product
development and a new business plan. We will discuss next about diversification strategy in
detail.
Diversification strategy
Diversification is one of the major expansion strategies and considered as most risky; therefore it
requires proper research before implementation. Accuracy in determining the target fragment is
the key to a successful diversification strategy of a company. Several methods are available for
the implementation of diversification strategy in an organisation. The most common among them
are acquisitions and joint ventures.
The diversification strategy is a corporate strategy planned to increase profits by increasing sales
volume. The sales volume is increased by launching new products and identifying new market
fragments.
Diversification strategy can be applied at the business unit and corporate level. In case of
business unit level, the strategy can be implemented by introducing a new segment related to the
existing business unit. Whereas, in corporate level the target area is a new business unit which is
not related to the existing business unit.
Types of diversification strategy
Diversification strategy of a company includes several plans like development of new product,
licensing of new technologies, etc. There are three different types of diversification strategies
which are explained as follows:
Concentric diversification In concentric diversification strategy, the technology used in the
industry remains the same, but the marketing plan changes to a significant extent. It requires
similarities in the technologies between the two business ventures. Technical knowledge in
respective domain is the advantageous factor for such a strategy.
Horizontal diversification In horizontal diversification strategy, the applied technology is not
related to the existing business of the company. Although the existing products are not related to
the new venture, the current customer base is taken into consideration.
Lateral diversification The lateral diversification strategy focuses on the products which are not
related to the existing line of products. The only exception in this strategy lies in the fact that the
company targets a new segment of customers.
Advantages of diversification strategy
Diversification helps company to achieve their potential in developing the economy.
In case of concentric diversification, a strong brand name helps in influencing the new products
belonging.
Diversification strategy helps the company in spreading their customer base.
Diversification strategy helps in enhancing the product portfolio of the company by introducing
better products in the market.
Vertical integration and Horizontal integration strategies
Vertical integration is a business strategy that seeks to possess and control all the activities
including production, transportation and marketing of a product.
There are three types of vertical integration strategy. They are backward vertical integration
strategy, forward vertical integration strategy and balanced vertical integration strategy.
A backward vertical integration strategy is implemented when a company establishes
subsidiaries to supply product inputs.
A forward vertical integration strategy controls the distribution and marketing of a product.
A balanced vertical integration strategy is a strategy in which a firm owns the subsidiaries that
produce inputs and also distributes outputs.
Benefits of vertical integration strategy are:
Reduces transportation costs
Improves supply chain coordination
Captures upstream or downstream profit margins
Expands core competencies
Facilitates sound investment
Factors favouring vertical integration strategy are:
Taxes and regulations on market transactions
Obstacles to the formulation and monitoring of contracts
Sufficiently large production quantities
Horizontal integration strategies
The horizontal integration strategy involves the incorporation of companies which produces the
same types of goods or operating at the same stage of the supply chain process.
Growth of the organisation due to horizontal integration strategies can be achieved by internal or
external expansion through mergers and acquisitions of firms which increases its market share.
Example A car manufacturer merging with another car manufacturer to increase its market shares
in the market.
Benefits of horizontal integration strategy are:
Achieves economies of scale by selling more of the same product
Achieves economies of scope by sharing resources common to different products
Market power increases
Building core competencies and critical success factors
As we have already discussed in the previous units that building core competencies and critical
success factors help in the smooth functioning of the management process in an organisation.
Building core competencies and critical success factors rectifies the faulty and poor investment
strategies to a significant extent.
Core competencies are the characteristics of an organisation. An organisation can utilise core
competencies as a tool to develop and provide superior services.
On the other hand, critical success factors ensure proper success in the business by determining
the central achievement of the future of that organisation.
Developing core competencies and critical success factors rectify the faulty investment strategies
in the following ways:
Better human resource planning
More effective training programs
Help with outsourcing options
Guidance for development or change
Developing vision of the whole organisation
4. Investment is defined as the _____________________ of money in order to generate future
returns.
5. Faulty and poor investment strategies ______________ the growth of any organisation.
6. Internal transformation is one of the methods to rectify faulty investment strategies.
(True/False)
7. Controlling costs is a part of which strategy?
8. Downsizing means that the employees are terminated from job but can be rehired if the
conditions change in the organisation. (True/False)
9. Financial restructuring is the ________________ of the financial assets and responsibilities of
a corporation.
10. Divestment strategy is commonly the result of a ______________.
11. Franchising is type of expansion strategy. (True/False)
12. Diversification is the most _____________ strategy.
13. The three types of vertical integration strategies are ______________, _________________
and _______________.
9.4 Summary
A business plan is a complete internal document that summarises the operational and financial
objectives of a business. It contains the detailed plans which show how the objectives are being
accomplished. The strategies for creating a business plan are defining the business vision,
making a list of goals, understanding the customers, learning from the competitors and resolving
financial matters.
A business venture is a start-up enterprise which is formed with expectations and plans of
achieving financial gain. The business venture varies according to the kind of business or
service. A proper business venture attracts a business partner and improves distribution channels.
Investment is defined as the commitment of money or capital like purchasing assets, keeping
funds in a bank account etc in order to generate future returns. The problems which lead to faulty
and poor investment strategies are lack of training, poor documentation etc. Faulty and poor
investment strategy increases distribution problems, increases cost, reduces growth etc.
The methods to rectify a faulty and poor business strategy are internal transformation, financial
restructuring, divestment strategy, diversification strategies, vertical and horizontal integration
strategies, building core competencies and critical success factors. The motive behind the
rectification is to attain sustainable growth, survival and to maintain profit in an organisation.
9.5 Glossary
Venture : Endeavor or undertaking
Obsolete : Entity which is currently not in use or outdated
Restructure : Rearrange
Diversify : Expand and bring variety
Divest : Disassociate or separate
1. Describe the strategies to create a business plan.
2. What are the roles played by a proper business venture in business profits?
3. Describe the ways to successfully invest in an organisation.
4. What are the factors which lead to faulty investment strategies in an organisation?
5. Explain the methods to rectify the faulty investment strategies in an organisation.
9.7 Answers
1. Creating a plan, establishing business venture
2. Internal
3. Risk appetite
4. Commitment
5. Decline
6. True
7. Financial restructuring
8. False
9. Re-organisation
10. Growth strategy
11. True
12. Risky
13. Forward, backward, balanced
Terminal Questions:
1. Refer 9.2.1 Strategies for creating a plan
2. Refer 9.2.2.1 Role played by a proper business venture in business profits
3. Refer 9.3 Investments
4. Refer 9.3.3 Problems due to faulty and poor investment strategies
5. Refer 9.3.4 Internal methods to rectify faulty investment strategies
9.8 Case-let
Investment strategy failure of KBC Bank
About the company The KBC Group was established through the merger of KBC Bank
& Insurance Holding Company and its parent company Almanij in 2005.
KBC Bank is a financial service group which is dynamic in banking and insurance
sectors. The companys operations consist of retail and commercial operations which
are located in Belgium, seven other Western European countries and Central Europe.
Strategy of KBC KBC wanted to become one of the leading providers of commercial,
private and retail banking services in both Central and Eastern Europe. KBC had been
using Microsoft Visual Basic 6.0 initially, but later used beta version of Microsoft
Visual Studios Team System and Team Foundation Server to improve application
building methodologies, increase productivity and accelerate application deployment.
Challenges of KBC KBC had been expanding into new banking markets as well as in
software development operations to reduce development costs. Some of the challenges
faced by KBC in their investment strategies are as follows:
Misunderstood messages Misinterpretation occurred in the system requirement
instructions and in projects due to language and cultural differences. Sometimes these
problems were not detected. Code reworking must have been executed properly to
resolve the problems.
Delayed responses Due to the difference in time zone, project managers did not always
have the most recent versions of project source code. It delayed them to hand over the
assignments with correct project information.
Limited progress checks As the team leaders and developers worked in different time
zones, it was difficult for the management to check daily progress updates. This often
resulted in loss of productivity for both developers and team leaders.
Lessons learned by KBC
KBC found that Microsoft Visual Studio Team System helped in its development
process. They developed solutions to create an orderly workflow in its organisation by
centralising and updating its project assets and using offshore software development
process. It also facilitated project managers to spend less time on project management
problems and enough time while meeting the needs of the business users. As a result of
this the IT department had been able to reduce the costs, deliver applications faster,
and increase ownership of their projects. KBC also took time to negotiate the
favourable terms with Microsoft in the beginning.
Key benefits from Microsofts beta version are:
Increased developers and managers productivity
Improved software quality
Improved deployment efficiency
1. What were the challenges faced by KBC in its investment strategies?
2. What were the key benefits from Microsoft Visual Studio beta version to KBC?
Source link http://www.microsoft.com/casestudies/Case_Study_Detail.aspx?
CaseStudyID=201311
References
Wheelen T and Hunger D (2002) Concepts in Strategic Management and Business Policy,
Pearson Education.Inc
E-References
http://www.valueexpectations.com/blogs/kraft-foods-inckft-acquisition-analysis-cadbury-plc-
cby09102009 - Retrieved on 7/8/2010
http://business.gov.in/doing_business/oversea_opp.php - Retrieved on 9/8/2010
http://articles.bplans.com/starting-a-business/business-start-up-strategy/73 - Retrieved on
10/8/2010
http://www.thinkingmanagers.com/business-management/business-strategy.php - Retrieved on
11/8/2010
http://www.quickmba.com/strategy/vertical-integration - Retrieved on 11/8/2010
http://www.ehow.com/how_2243220_determine-investment-strategy.html - Retrieved on
16/8/2010
Unit-10-Strategies for Multinational Corporations

Structure:
10.1 Introduction
Objectives
10.2 Multinational Corporations (MNCs)
Definition
Features
10.3 Benefits of MNCs
To the company
To the nations where it operates (domestic nations)
10.4 Limitations of MNCs
10.5 Business Strategies of MNCs
Globalisation scenario Vs domestic country scenario
10.6 Techniques Employed by MNCs to Manage Markets
Franchising
Management contracting
Contract manufacturing
Licensing
Direct investments
10.7 MNC, TNC and Global Companies
Definition of TNC and global companies
Difference between MNC, TNC and global companies
10.8 Summary
10.9 Glossary
10.11 Answers
10.12 Case-let
10.1 Introduction
This unit gives an introduction to Multinational Corporations (MNC). It identifies the benefits
and limitations of MNCs and discusses the business strategies for MNCs. This unit lists the
techniques used by MNCs to manage market. It also discusses the difference between MNC,
TNC and global companies.
A multinational corporation is a firm that is structured in such a way that the business is
conducted across several countries and is organised in global product divisions. In this unit you
will also study strategies suitable for MNCs.
Objectives
define MNC and list its features
describe the benefits, limitations and business strategies of MNCs
list the techniques used by MNCs to manage markets
differentiate between MNC, TNC and global companies
10.2 Multinational Corporations (MNCs)
A multinational corporation is a business organisation that has its facilities and assets in more
than two countries other than its home country, the purpose being to successfully manage
production and deliver products and services. These companies have offices and factories in
different countries and have a centralised head office to co-ordinate global management. The
multinational corporations originated in the early twentieth century and flourished after World
War II. During the early stages, the international business was conducted in the form of
enterprise that was owned individually or in partnership. As the organisation grew, the need for
capital increased and the corporations began to displace private firms. Some MNCs required
resources and supplies like oil, minerals etc from other countries. Other firms entered the
international market in search of markets to absorb the excess domestic production. These
corporations had a separate legal identity which limited the liability of the owners. These
companies help to create jobs and improve technology in countries that are in need of such
development. Most of the multinational firms are American, Japanese or European. Major
multinational corporations are Coca-Cola, Nike, Wal-Mart, Honda, BMW, McDonalds, Nestle,
and Unilever so on.
10.2.1 Definition
A multinational corporation (MNC) is an enterprise operating in different countries but is
managed from one home country. The main company which controls other business units from
the home country is called as parent company. The other countries where MNC operates are
termed as host nations or domestic countries. MNC normally functions with headquarters based
in one country and other offices in other countries. The corporations sphere of activity is spread
over other countries. Generally, any firm that obtains a quarter of its revenue from operations
outside its home country is regarded as MNC. The common model of MNC is the positioning of
the headquarters in one country and production facilities in more than one country. This model
helps the company to take advantage of producing goods and services in an area where the cost
of production is lower. In economic terms, an organisations advantage in establishing a
multinational corporation is an increased market share. The cultural barriers create unpredictable
hindrances when companies set up offices and production plant in different countries. The
organisations technical expertise, personnel and strategies are usually transferred from country to
country.
10.2.2 Features
Giant size Multinational corporations are huge in size. Their sales, assets and profits run into
crores. Example -The sales of the Wal-Mart, Ford Motors, and Vodafone are more than the GDP
of many nations.
International operations The activities of multinational corporations are spread over many
countries. The headquarters of the corporation is located in one country and their branches are
scattered in different countries of the world. The headquarters of the corporation is usually called
the parent company and its branches are called the subsidiaries. The parent company has 51 per
cent to 100 per cent shares in its subsidiaries. It has full control over the subsidiaries.
Centralised management - The degree of agency cost can differ with the management style of the
MNC. A centralised management style can reduce managerial cost as it allows the managers of
organisation to control foreign subsidiaries and thus reduce the power of subsidiary managers.
Transfer of resources The parent corporation of the MNC transfers its techniques, resources, raw
materials, and managerial ability to the subsidiary companies operating in other countries.
Varied activities Multinational corporations are involved in different types of activities. These
corporations are engaged in consumer goods industries, service sector, export-oriented industries,
etc. In India major investments are made in computers, financial services, and
telecommunications.
Multinational ownership The shares of MNCs are bought and sold at international level. Citizens
of many countries have share in the capital of MNCs.
Multinational management Multinational corporations are managed at international level. The
managing board consists of experts of different countries.
Huge financial resources Multinational corporations have huge financial resources. The capital
base is large and it runs in millions.
Advanced technology Multinational corporations use modern and advanced technology. The
research and development (R&D) activities of MNCs are excellent. Huge amount is spent for the
research and development department. MNCs like Toyota, Ford, etc spend huge amount annually
on the R&D. Capital intensive technology is used in these corporations.
Marketing superiority Multinational corporations have the benefit of marketing superiority
because of well reputed brands, international image and experience of launching new products in
different countries.
1. A _____________is a firm that is structured in such a way that the business is conducted
across several countries.
2. The headquarters of the corporation is usually called the _____________and its branches are
called the _____________.
3. Multinational corporations are managed at _____________ level.
10.3 Benefits of MNCs
MNCs have certain unique advantages in their operations that are not benefited by domestic
oriented companies. The international success of MNCs is mainly because of the ability to
capitalise the advantages. The advantages widely depend on the nature of individual corporations
and the type of their business. Benefits are
10.3.1 To the company
Superior technical knowledge The most important advantage of MNCs is the patented technical
knowledge which enables them to compete internationally. Large MNCs have access to advanced
levels of technology which are either developed or acquired by the corporation. These
technologies are patented. It can be in the areas of management, services or production.
Extensive application of these technologies gives a competitive advantage to the MNC in
international market, as it results in efficient, low-priced, hi-tech products and services that
dominate a large international market. This results in efficient production and services like that
of IBM or Microsoft.
Large size of economy Generally, MNCs are large like Wal-Mart and ExxonMobil which has
sales larger than the gross national products of many countries. The large size gives the
advantage of significant economic growth to the MNCs. The higher volume of production leads
to lower fixed costs per-unit for the companys products. Competitors, whose volume of
production of goods is smaller, must raise the price to recover the higher fixed costs. This
situation implies to capital-intensive industries like steel, automobiles etc., in which fixed costs
form a major proportion of total costs. Example MNC like Nippon Steel of Japan can sell its
products at lower prices than those of companies with smaller plants.
Lower input costs due to large size The production levels of MNCs are large and thus the
purchase of inputs is in large volumes. Bulk purchases of inputs enable the corporation to
bargain for lower input costs and obtain considerable amount of discount. Lower input costs
means less expensive and more competitive products. Example Nestle, which buys huge
quantities of coffee from the market, can bargain for lower prices than small buyers can. Wal-
Mart sells products at lower prices relative to its competitors due to bulk purchasing and efficient
inventory control. By identifying which product sell effectively, Wal-Mart combines low-cost
purchasing with efficient inventor to achieve competitive advantage in retail market.
Ability to access raw materials overseas By accessing raw materials in foreign countries, many
MNCs lower the input and production costs. In many cases, MNCs supply the technology to
extract raw materials. Such access can give MNCs monopolistic control over raw materials
because they supply technology in exchange for monopolistic control. This control enables them
to supply or deny raw materials to their competitors.
Ability to shift production overseas Another advantage of MNCs is the ability to shift the
production overseas. MNCs relocate their production facilities to take advantage of lower labour
costs, raw materials and other incentives offered by the host countries. They take advantage of
the lower costs by exporting lower-cost goods to foreign markets. Many MNCs have set up
factories in low-cost areas like China, India, Mexico, etc.
Brand image and goodwill advantage Most of the MNCs possess product lines that have created
a good reputation for quality, value and service. This reputation spread to other countries through
exports and promotion and adds to the goodwill or brand image of the company. MNCs are able
to influence this brand image by standardizing their product lines in different countries. Example
Sony PlayStations do not have any modifications for different countries and the parent factory
produces standardised products for the world market. Brand names like Sony help the company
to charge premium prices for its products, because the customers are ready to buy quality
products at premium prices.
Information advantage MNCs have a global market view with which it collects, analyses, and
processes the in-depth knowledge of worldwide markets. This knowledge is used to create new
products for potential market niches and expand the market coverage of their products. The
MNCs have good information gathering capabilities in all aspects of their operations. Through
this information network, the MNC is able to forecast government controls and gather
commercial information. The network also helps in providing important information about
economic conditions, changing market trends, social and cultural changes that affect the business
of MNCs in different countries. With these information MNCs can position themselves
appropriately to contingencies.
Managerial experience and expertise The MNCs function in large number in different countries
simultaneously. This enables them to integrate wealth for valuable managerial experience. This
experience helps them in dealing with different business situations around the globe. Example
An MNC located in Japan can attain knowledge of Japanese management techniques and apply
them successfully in a different location.
10.3.2 To the nations where it operates (domestic nations)
MNCs bring advantage to the countries in which they operate. The benefits of MNCs to the
nations where it operate are:
Economic growth and employment An MNC comes to a country with more amount of money to
invest than any local company. The countries from where the MNCs operate are also called host
countries. It brings inward investment to the host countries. This helps in boosting the national
economy. Example Constructing new plants requires resources like land, capital and labour. It
provides employment to a large number of people which helps in dealing with the unemployment
problem in the host countries. The inward investment can help in generating wealth in the local
economy because it increases the spending ability of the people by providing them employment.
As the MNCs provide employment to the people, they pay taxes to the local government. The
people have more money to spend which provides market for local companies to sell their goods.
The MNCs also attracts other smaller firms to the area where it is located. These firms provide
different services to the MNCs.
Skills, techniques and quality human capital The MNCs bring with them new ideas and new
techniques to improve the quality of production. This helps in improving the quality of human
capital in the host country. The MNCs employ local labour and train them in new skills to
improve productivity and efficiency. Example Sunderland is one of the most productive car
manufacturing plants in Europe. The workers had to get used to different ways of working that
were used in other British firms. This can be a challenge and can also lead to improvement in
productivity. The skills that the workers build up can be passed on the other workers which help
in improving the supply of skilled labour in that area.
Availability of quality goods and services Generally, production in a host country is aimed at the
export market. However, in some cases, the inward investment can gain access to the host
country market to avoid trade barriers. Availability of quality goods leads to improved quality in
other related industries. Example The UK has access to high quality vehicles at cheaper price;
this competition has led to improvement in prices, working practices and quality in other related
industries.
Improvement in infrastructure The MNCs invest in a country for production and distribution
facilities. In addition to this, the company might also invest in additional infrastructure facilities
like road, port and communication facilities. This can benefit the entire country.
4. An advantage of MNCs is the _____________ which enables them to compete internationally.
5.By accessing raw materials in foreign countries many MNCs lower the _____________ and
_____________ costs.
6.MNCs are able to influence this brand image by _____________their product lines in different
countries.
10.4 Limitations of MNCs
The limitations of MNCs are as follows:
Business risks MNCs are subjected to several serious risks that are not endured by domestic
companies. The MNCs conduct business in different countries. Hence they deal with currencies
of other countries which are at risk to fluctuations in exchange rates. Major variations in
exchange rates can affect the entire profit drastically. In the long run, MNCs have to deal with
the risk as it is unavoidable. In the short run, market mechanisms like currency swaps and
forward contracts allow MNCs to minimise the movement of exchange rates for a particular
business transaction.
Host country regulations MNCs operating in different countries are subjected to numerous host-
country regulations. These regulations vary from country to country and are usually different
from the home country. It is a difficult task for the MNCs to familiarise with these regulations
and modify its operations to ensure that no violations are made. Another problem is that the
regulations are often changed and such changes can have adverse implications on the MNCs.
Example A country can restrict the import of certain raw materials. Such regulations can have
major effects on the production levels of the MNC.
Direct legal systems The legal system of every country is different from each other. MNCs
operate under different legal systems of different countries. In some countries, the legal
processes are complicated and not understood by non-natives. Some legislation can even prohibit
a particular business activity that the MNC would regard in its home country.
Political risks The host countries are sovereign entities .The political risk increases in countries
whose governments are unstable and tend to change frequently. The MNC is unable to do
anything if a host country is determined to take actions that are unfavorable to its interest.
Operational difficulties As the MNCs work in a wide range of business environment, it creates
considerable operational difficulties. There are unwritten business practices and market
conventions that exist in host countries. It is difficult to conduct businesses if the MNC is not
familiar with such conventions. Usually, the normal process of business is quite contrary to a
countrys business practices.
Cultural differences Cultural differences lead to major problems for MNCs. The executives are
not able to perform well because they are unable to adjust to the local culture, both personally
and professionally. Similarly, the local managers of MNCs have trouble dealing with the home
office of an MNC due to cultural differences. Inability to respond properly to local culture has
led to failure of products of MNCs. Misinterpretation of local culture and social norms often
create problems between MNCs and their local customers, government officials and business
associates.
Activity 1
Consider that you are the manager of an MNC which is planning to construct a steel plant in
another country. Identify the factors which you will consider before constructing the plant in that
country.
7. Major variations in _____________ can affect the entire profit drastically.
8. In the short run, market mechanisms like _____________and forward contracts allow MNCs
to minimise the movement of exchange rates.
9. Inability to respond properly to _____________has led to failure of products of MNCs.
10.5 Business Strategies of MNCs
MNC follow different business strategies to be accepted in host country.
10.5.1 Globalisation scenario Vs domestic country scenario
The business strategies of MNCs are mainly based on two scenarios, globalisation and domestic
country scenario.
Globalisation
Globalisation is the process of integration of the world community into a common economical or
social system. The first phase of globalisation is to integrate the population of the world
economically. The advantage of this phase is to reduce the geographical inequalities by
distributing jobs and business opportunities all over the world. The market equilibrium between
under developing and developed countries is obtained by currency exchange rate. It implies that
global markets as medium of multinational exchange are bound to local places and regional
areas. They are based on significant differences in culture, political and economic space. With
strategy implementation they are required to integrate cultural differences by utilising them as a
The globalisation scenario is a linear systematic process which progresses depending on each
countrys market structure. A global strategy aims to standardise some elements of the marketing
mix across the world, while customising others. The right approach would be to identify the
various value chain activities within the marketing function and decide which of these should be
performed on global basis and which can be localised. Some activities are modifiable to uniform
global approach while others involve high degree of customisation. Within an activity, some
parts can be globalised and others performed locally. A global strategy enables the customers to
have similar needs and with the same products, the organisation is able to reach all customers in
different countries. The organisation has a centralised control with less scope of decision making
authority in the local level. Global markets are international markets where products are
standardised. Example Companies like Sony and Panasonic adopt global strategy. A global
strategy is effective when differences between countries are less. The effective strategy is to
integrate and co-ordinate activities across the borders.
Domestic country scenario
The nature of doing business in a domestic market economy is different. The firm identifies its
potential market, locates the available resources, hire personnel, develop a marketing plan and
identify retail outlets. The firm establishes management controls and feedback system. Many
MNCs conduct both domestic and global marketing decisions that have given rise to the term
Glocalisation. Example Wal-Mart is an organisation that is familiar with high-level domestic
environmental factors that influence the marketing decisions. Technology plays an important part
in the decision making in an organisation. The international sales in countries can be generated
with the help of Internet. This helps in taking decisions efficiently and quickly. In a domestic
country scenario, the control is generally decentralised and the decision making is performed on
a local level. They formulate strategies which focus strictly on their domestic market. The
strategy involves responding to local needs and designing products tailored to individual
countries.
10. _____________ is the process of integration of the world community into a common
economical or social system.
11. In a domestic country scenario, the control is _____________.
12. Globalisation scenario is a _____________ process which progresses depending on each
countrys market structure.
10.6 Techniques Employed by MNCs to Manage Markets
There are different techniques by which MNCs manage market. They are as follows:
10.6.1 Franchising
Franchising is the process of granting the franchisee permission to use a name, method, process
or trademark. The firm helps the franchisee with the operations like supplies of raw materials and
operations of franchise. The franchisor usually has a large degree of control over the quality of
the product. The payment scheme in franchising is that the franchisee pays an initial amount and
a proportion of its sales or revenue to the franchising firm. The prime examples of franchising
companies are service industries and restaurants like McDonalds, KFC, Hilton and Disney in
Japan. Only companies that are successful in domestic market consider franchising
internationally. Franchise comes with their need to make slight changes or adaptations in the
standardised product or service. Example Some ingredients in restaurant franchises should be
adapted to suit the tastes of the local customers, which might be different from the original
customers.
10.6.2 Management contracting
Management contracts are the contracts under which the firm rents its expertise or knowledge to
a government or company. This method is often used in foreign markets with a new facility when
an operation is in trouble. Under this agreement, firms provide services of overseeing all details
in the startup facilities, including design and construction. These projects are large in scale like
production plants. The problem faced in the operations is duration time of the contract which
takes long payout schedule and carries greater risk in currency markets. Other problems are an
increase in potential competition as overseas capacity is increased by new facilities.
10.6.3 Contract manufacturing
Contract manufacturing is a method which firms use to enter the foreign market. In contract
manufacturing, an MNC sets a contract with a local firm to provide manufacturing services.
Instead of establishing its own production locations, the MNC subcontracts the production. This
can be done in many ways. In one case, the MNC enters into full production contract with a local
plant producing goods that will be sold under the original manufacturers name. In another case,
the MNC enters into contracts with another firm to provide partial manufacturing services, such
as parts production.
The advantage of contract manufacturing is to expand supply or production expertise of the
contracting firm at minimum cost. Example - Nike, the worlds leading shoe manufacturer,
distinguishes between product development and marketing on one hand and shoe and clothing
manufacturing on the other. The shoe and clothing manufacturing is contracted out to
independent plants in developing countries like China, Thailand and Indonesia mainly for cost
saving reasons. Mobile phone vendors like Ericsson, Philips and Motorola have applied the same
process to manufacture handsets. The production of handsets is outsourced to Asian companies
such as the Singapore-based Flextronics, on a contractual basis, retaining control of research,
design, marketing and branding. The main advantage of not owning their own factories is the
flexibility to increase or decrease the production according to the extreme fluctuations in demand
without a long-term investment or increase in labour force.
10.6.4 Licensing
Licensing is a process, in which a firm (licensor) grants some type of rights like rights to a
process, a patent, a program, a copyright, or expertise to a foreign entity (licensee). In licensing,
the licensee buys the assets of another firm in the form of know-how or R&D. The licensor
grants these rights exclusively to one licensee or non-exclusively to several licensees. The
licensor receives profits in addition to the profits generated from operations in domestic markets.
It is a low investment and low-risk alternative that is a useful option in countries where
regulations limit market entry or where tariffs make export, a non-viable strategy. This strategy is
preferred when the host country is culturally distant from the parent country or there is a little
prior experience of the host country. A licensing agreement gives the authorisation to produce
and sell their product for a specified period of time in return for a fee to a corporation located in
the host country.
10.6.5 Direct investments
In a direct investment, a firm invests directly within foreign boundaries and makes a real
commitment of its capital, personnel and assets beyond domestic frames. This commitment of
resources substantially increases the profit potential of an MNC by providing greater control
over costs and operations of the foreign firm. It is also accompanied by an increase in risks
involved in operating in a foreign country. In a direct investment, the returns and risks are shared
between parent companies and the subsidiaries. MNCs make direct investments for two main
reasons. The first is to gain access to larger markets and the second is to take advantage of cost
differentials in overseas market that arise from available economies of scale and prospects for
developing countries. Both reasons enhance the profitability.
Activity 2
Consider that you are a manager of an MNC which is setting up a restaurant
chain in a new country. The aim of the MNC is to customise the menu and
ambience of the restaurant according to the taste of the local people. Identify
the different ways in which you will make the venture successful.
Refer this link for guidance - http://www.oppapers.com/essays/Mcdonalds-
Marketing-Strategy/367142?topic
13. _____________is the process of granting the franchisee permission to use a name, method,
process or trademark.
14. _____________ are the contracts under which the firm rents its expertise or knowledge to a
government or a company.
15.In _____________ a firm invests directly within foreign boundaries and makes a real
commitment of its capital.
10.7 MNC, TNC and Global Companies
MNC, TNC and global companies are enterprises that manage production or delivers services in
more than one country. They can be also referred as international corporations.
10.7.1 Definition of TNC and global companies
TransNational Corporation (TNC)
TNC is an enterprise comprising of entities in more than one country which operates under a
system of decision-making that permits rational policies and a common strategy. The entities are
linked by ownership in such a manner that one or more of them can have a significant influence
over others and share knowledge and resources with the others. It is important to select a parent
company for an associate enterprise. A TNC does not specify majority control, thus it is possible
for an enterprise to be an associate of more than one TNC. Some TNCs are active in more than
one industrial sector. There are tables covering corporate data. The enterprise is treated as
associates of the parent company that has the highest percentage of ownership. Such TNCs are
listed in active status in the tables containing corporate data in the sector in which it is most
predominant among activities. While identifying such companies, attention is paid to the strategy
of each subsidiary, including their products or services.
MNC operate directly in the foreign country by setting up partners and through the ownership of
assets located abroad. Example Nokia is currently the largest manufacturer of mobile phones in
the world. Though their marketing strategy is worldwide and their products are uniform in
nature, the company is considered as transnational. This is because of the conscious effort they
put in understanding the different needs of their customers across the world. Nokia has a team of
design researchers, sociologists, psychologists and experts, who travel to different places across
the world to find out peoples requirements and different ways of improving their product. All
TNC could be considered as MNCs but not all MNCs are TNC.
Global companies
Global companies are firms that plan the activities on a global basis. Operating in major
countries of the world benefits in savings, activities like R&D, operations, marketing and
finance.
10.7.2 Difference between MNC, TNC and global companies
MNC are firms that have investments in other countries, however they do not have a coordinated
product offerings in each country. They are more focused on adapting their products and services
to each local market.
TNC are complex organisations whose investments are in foreign operations. They have a central
corporate facility but delegate decision-making, R&D and marketing control to each individual
foreign market.
Global companies are companies that have invested and are operating in many countries. The
marketing of their products is through the use of the same coordinated brand in all markets.
Usually, one corporate office is responsible for the global strategy. The importance is on quantity
and cost management.
16. _____________are companies that have invested and are operating in many countries.
17. _____________ have investments in foreign operations.
18. _____________operate directly in the foreign country by setting up of partners and through
the ownership of assets located abroad.
10.8 Summary
A multinational corporation (MNC) is an enterprise operating in different countries that is
managed from one home country. MNC functions with headquarters that is based in one country
and other offices in different countries.
Different features of an MNC are large size, international operations, centralised management,
transfer of resources, multinational ownership, huge financial resources, advanced technology
and marketing superiority.
The advantages of MNCs are the patented technical knowledge which enables them to compete
internationally. Large MNCs have access to advanced levels of technology which are either
developed or acquired by the corporation. The large size gives the advantage of significant
economic growth to the MNCs.
MNCs conduct businesses in different countries. Hence they deal with currencies of other
countries which are at risk of fluctuations in exchange rates. These regulations vary from country
to country and are usually different from the home country. MNCs operate under different legal
systems of different countries. Cultural differences lead to major problems for MNCs.
Different techniques of MNCs to manage market are franchising, management contracts,
licensing and direct investments.
TNC are complex organisations whose investments are in foreign operations. They have a central
corporate facility but delegate decision-making and marketing control to each individual foreign
market. Global companies are companies that have invested and are operating in majority of the
countries around the world.
10.9 Glossary
Goodwill : Reputation usually of a company
Infrastructure : Arrangements and facilities
1. Define MNC and list its feature.
2. List the benefits of MNC to the host country.
3. Explain the limitations of MNCs.
4. Describe the techniques used by MNCs to manage market.
5. Differentiate between MNC, TNC and global companies.
10.11 Answers
1. Multinational corporation
2. Parent company, subsidiaries
3. International
4. Patented technical knowledge
5. Input, production
6. Standardising
7. Exchange rates
8. Currency swaps
9. Local culture
10. Globalisation
11. Decentralised
12. Linear systematic
13. Franchising
14. Management contracts
15. Direct investment
16. Global companies
17. TNC
18. MNC
Terminal Questions:
1. Refer section 10.2.1 Definition of MNCs
2. Refer section 10.3.2 Benefits of MNCs to the domestic nations
3. Refer section 10.4 Limitations of MNCs
4. Refer section 10.6 Techniques used by MNCs to manage market
5. Refer section 10.7.2 Difference between MNC, TNC and global companies
10.12 Case-let
Global presence of Nestle
Nestle is the worlds leading food processor. It is a multinational corporation based in Vevey,
Switzerland. The company operates in over 86 countries around the world. The company started
in mid 1800 with two factories. In early 1900s, the two factories merged and expanded their
operations. There manufacturing facilities expanded to Europe, the US and Latin America. Since
then, the company has continued to grow because of product development and market
expansion. At present, Nestls product line includes instant drink, dairy products, chocolates, ice
creams, etc. In addition, the company also manufactures pharmaceutical products and runs
restaurants in the US and Europe. Nestl aims to produce healthy and nutritious products which
are shown in its advertising slogan, Good food. Good life. The company is transforming itself
from leading food company to the worlds leading food, nutrition and health and wellness
company. The R&D is currently focusing in producing more healthy and nutritious products. The
companys importance on health is continued by focusing on the bottled water market. Nestle
announced its bottled water joint venture with Coca-Cola in Indonesia. This joint venture will
help to increase Nestls global bottled water presence. The company is present in 130 countries
across the world and had 77 brands.
1. What are the main areas of focus for Nestle?
2. Which is the latest venture of Nestle?
3. What is the slogan of Nestle? Could you identify some more slogans of the Nestle products?
Source link - http://books.google.co.in/books?
id=F71bBzuVnYkC&pg=PA324&dq=Switzerland-nestle-
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Reference
Thomas L.Wheelen, J.David Hunger (2002): Concepts in Strategic Management and Business
E References
id=xbm8BUKGu7MC&printsec=frontcover&dq=International+business:
+theory+and+practic
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w&sa=X&oi=book_result&ct=result&resnum=2&ved=0CDMQ6AEwAQ#v=onepage&q=mnc
%20advantages%20and%20disadvantages&f=false - Retrieved on 14 August 2010
http://leeiwan.wordpress.com/2007/06/18/difference-between-a-global-transnational-
international-and-multinational-company - Retrieved on 16 August 2010
http://encyclopedia2.thefreedictionary.com/Multinational+Corporation - Retrieved on 16 August
2010
Unit-11-Strategic Alliances
Structure:
11.1 Introduction
Objectives
11.2 Strategic Alliances
Need
Benefits
Different stages involved in strategic alliance
11.3 Types of Strategic Alliances and Business Decisions
Joint venture
Mergers and acquisitions
Collaborations and co-branding
Technological partnering
Contractual agreements
Outsourcing
Other methods
11.4 Problems Involved in Strategic Alliances
11.5 Summary
11.6 Glossary
11.8 Answers
11.9 Case-let
11.1 Introduction
In the previous unit we discussed strategies for multinational corporations which included
benefits, limitations, and techniques applicable to MNCs. In this unit you will study strategic
alliances, its need, benefits, and steps in formulating strategic alliances. It also consists of various
types of strategic alliances and problems involved in it.
Objectives
After reading this unit you should be able to:
define strategic alliances and comprehend the need for it
explain the benefits of strategic alliances
summarise the stages of strategic alliances
classify the types of strategic alliances and business decisions
describe the problems involved in strategic alliances
11.2 Strategic Alliances
Strategic alliance is the process of mutual agreement between the organisations to achieve
objectives of common interest. They are obtained by the co-operation between the companies.
Strategic alliance involves the individual organisations to modify its basic business activities and
join in agreement with similar organisations to reduce duplication of manufacturing products and
improve performance. It is stronger when the organisations involved have balancing strengths.
Strategic alliances contribute in successful implementation of strategic plan because it is strategic
in nature. It provides relationship between organisations to plan various strategies in achieving a
common goal.
The various characteristics of strategic alliances are:
The two independent organisations involving in agreement have a similar idea of achieving
objectives with respect to alliances.
The organisations share the advantages and organise the management of alliance until the
agreement lasts.
To develop more areas in alliances, the organisations contribute their own resources like
technology, production, R&D, marketing etc to increase the performance.
According to Faulkner (1995) Strategic alliance is the inter-organisational relationship in which
the partners make substantial investment in developing a long-term collaborative effort, and
obtain common orientation.
11.2.1 Need
The need for strategic alliance is:
The new economy enables the organisations to use business policy to gain competition in market
share, technologies, partners resources etc.
The fast growing organisations extensively rely on forming alliances so that it enables the
organisations to add and balance resources among them. This helps the organisations to grow at a
faster rate in technology and operations.
Strategic alliances are required to increase productivity ratio. When two organisations involve in
manufacturing the desired product, it helps in saving time for the individual organisations.
An increasing desire of global operations requires strategic alliances to converge the industry in
many international markets.
The intention for geographic expansion makes the organisations to enter into alliances for
reducing the cost and manufacturing more innovative products.
Example Cisco accelerated the collaboration across departmental and corporate boundaries due
to the changing nature of work. The focus was on the network based collaboration that required
tight integration of the application stack with networks, communications, and mobility. This
made Cisco develop relationship with several leading IT solution providers and vendor
organisations.
11.2.2 Benefits
The organisation can enter into strategic alliances for the following benefits:
Gaining resources and capabilities
Strategic alliance is the opportunity for the organisation to achieve its objectives that lacks in the
areas of knowledge, technology, and expertise. The resources and capabilities are shared among
the organisations to increase the productivity. These capabilities and resources can be used by the
organisation for its own purposes in future.
Ease of market entry
The advancements in telecommunications and computer technology have made the organisations
to alliance with foreign organisations. This benefits the organisation in terms of economies of
scale and increment in marketing and distribution. The organisations enter into strategic alliance
with international firm to reduce the cost of production. It also provides a strategic partnership to
overcome many obstacles like entrenched competition and hostile government regulations.
Shared risks
Risk sharing technique is another common way of a mutual arrangement that specially occurs
when the market has newly launched. If there are any ambiguities or unsteadiness in a specific
market, sharing risks will become a significant factor. The aggressive nature of business is to
launch a new product in the market as well as, developing a well planned association is one of
the processes to minimise the firm's risks.
Shared knowledge and expertise
Organisations are competent in some areas and lack expertise in other areas. Such organisations
form strategic alliance and gain knowledge and expertise in the lacking areas. The intangible
resources gained by the organisation can not only be used in joint venture but also in other
projects. The knowledge gaining includes the learning to deal with government regulations,
manufacturing process and methods to acquire resources.
Easier access to target markets
It is difficult to introduce a new manufactured product in the market since it is exposed to various
obstacles. The organisation experiences entrench competition, hostile government, expensiveness
etc. There are risks of direct financial losses due to improper analysis of the market situation
before releasing the product. Therefore the organisations choose strategic alliance as the entry
mode to overcome such problems and reduces the entry cost.
Example Flexera, a software organisation licensed an enterprise optimisation solutions, a
component of strategic solution. It helped the companies and the government institutions that
used applications based on management to gain continuous software compliance.
Winning the political obstacle
The organisations experience difficulties in introducing a new product in other countries due to
the political obstacles. Therefore the organisations form alliances with foreign organisations to
introduce new products. This reduces the political factors and strict regulations imposed by the
national government and also help in increasing economic standard of the country.
Achieving synergy and competitive advantage
Synergy and competitive advantage act as the elements that lead businesses to greater success.
Being an individual organisation, it might not be strong enough to achieve these elements. Hence
the organisations enter into alliance and combine individual strengths to achieve success more
effectively.
The organisations indulging in strategic alliance benefits in various forms like cooperation in
sharing the production facilities, sharing of knowledge, skills and technology, marketing,
financing for projects etc
11.2.3 Different stages involved in a strategic alliance
Following are the different stages of strategic alliances:
Strategy development
Partner assessment
Contract negotiation
Alliance operation
Alliance termination
Figure 11.2 illustrates the stages of strategic alliances.
Figure 11.2 Stages of Strategic Alliances

Strategy development
It is the process of identifying the objectives of forming alliances, analysing the advantages of
entering into alliances, observing the major issues, challenges and development of resource
strategies for production.
Partner assessment
This process involves selecting the appropriate partner to join into alliance. The main elements
the organisation focuses in selecting the partner are; analysing the partners strength and
weakness, framing appropriate strategies, managing the partners needs and understanding the
partners motives. These make the organisations under alliance to coordinate in an efficient
manner to achieve effective production.
Contract negotiation
It is the process of determining the two partys realistic objectives such that a high calibre is
formed in negotiating between the two organisations. It defines the contribution of the parties
towards achieving the goal. The process also includes penalties for poor performance and
highlights the negotiation procedures that are clearly stated and understood if any controversies
occur between the organisations.
Alliance operation
This phase involves the commitment of senior management in the organisation towards forming
alliance. It is the process of identifying the calibre of available resources dedicated to the
alliance. According to the strategic priorities the budgets are linked with resources and
performance of the alliance is measured.
Alliance termination
It is the process of ending the alliance between the organisations when the objectives are met. All
the transactions, meetings, financial venture and agreements of the organisations are terminated
if both the organisations agree to terminate the alliance. This termination can either be positive or
negative. If the organisations achieve its common goal, then the alliance terminates in a positive
manner. But if the objective or the goals of the organisations are not met, then it ends with
negative attitude.
The advantages of implementing the strategic alliance are learning unknown technologies from
partner and implementing it elsewhere, ability of the participating organisations to concentrate on
activities that matches their capabilities in the best way, sufficiency and suitability of resources
and competencies of organisation for its survive in the market.
This section described the need, benefits and stages of strategic alliance. Next section deals with
different types of strategic alliances.
Activity 1
Consider yourself to be the manager of a software company. Frame an alliance with any other
company to introduce new business, and expand the business in other region to earn profits.
Refer the link for guidance http://www.Microsoft.com/presspass/press/2007//oct07/10-
24facebookpr.mspx
1. Strategic alliance is the process of ____________________between the organisations to
achieve objectives of common interest.
2. ________________and competitive advantage act as the elements that lead businesses to
greater success.
3. ___________________ is the process of identifying the objectives of forming alliances.
11.3 Types of Strategic Alliances and Business Decisions
The mutual agreements between the organisations can take a number of forms and are increasing
their common goals to get upper hand over their competitors.
The different types of strategic alliances are listed below:
11.3.1 Joint venture
Joint venture is the most powerful business concept that has the ability to pool two or more
organisations in one project to achieve a common goal. In a joint venture, both the organisations
invest on the resources like money, time and skills to achieve the objectives. Joint venture has
been the hallmark for most successful organisations in the world. An individual partner in joint
venture may offer time and services whereas the other focuses on investments. This pools the
resources among the organisations and helps each other in achieving the objectives. An
agreement is formed between the two parties and the nature of agreement is truly beneficial with
huge rewards such that the profits are shared by both the organisations.
The advantages of joint venture are:
A long term relationship is built among the participating organisations
It Increases integrity by teaming with other reputable and branded organisations
Helps in gaining new customers
It helps in investing little money or no money
It provides the capability to compete in the market with other organisations
Reduces production time as the organisations are into join venture
More new products and services can be offered to the customers
The disadvantages of joint venture are:
Sometimes the organisations deal with wrong people, thereby losing investments
The organisations do not have the opportunity to take up decisions individually
There are risks of disputes among the organisations that lead to poor performance
If the organisation enters into joint venture agreement with unprofessional selfish organisation,
then it increases the risk of hurting business reputation and devastating customers trust.
Example The China Wireless Technologies, a mobile handset maker is getting into an agreement
with the Reliance Communications Ltd (RCom) to launch its new mobile. The joint venture
between the two companies is to gain profits and provide affordable mobile phones to the market
that consists of advanced features and aims to earn eight billion dollars in the next five years.
The new mobile consists of dual SIM smart phone with 3G technology at a cheaper rate.
11.3.2 Mergers and acquisitions
Merger is the process of combining two or more organisations to form a single organisation and
achieve greater efficiencies of scale and productivity. The main reason to involve into mergers is
to join with other company and reap the rewards obtained by the combined strengths of two
organisations. A smart organisations merger helps to enter into new markets, acquire more
customers, and excel among the competitors in the market. The participating organisation can
help the active partner in acquiring products, distribution channel, technical knowledge,
infrastructure to drive into new levels of success.
With the perception of the organisation structure, here are a few types of mergers. The different
types of mergers are:
Horizontal merger The horizontal merger takes place when two organisations competing in the
same market join together. This type of merger either has a maximum or minimum effect on the
market. The minimum effect could also be zero. They share the same product line and markets.
The results of the mergers are less noticeable if the small organisations horizontally merge.
Consider a small local drug store that horizontally merges with another small local drug store,
then the effect of this merger on drug market would be minimal.
But when the large organisations set up horizontal merger, then higher profits are obtained in the
market share providing advantages over its competitors. Consider two large organisations that
merge with twenty percent share in the market. They achieve forty percent increase in the market
share. This is an added advantage of the organisations over its competitors in the market.
Vertical merger This involves the union of a customer with the vendor. It is the process of
combining assets to capture a sector of the market that it fails to acquire as an individual
organisation. The participating organisations determine the intentions of joining forces that will
strengthen the current positions of both the organisations and lay basis for expanding into other
areas. The purpose of a vertical merger is to build the strengths of the two organisations for an
effective future growth. In order to explore new methods of using existing products to create a
new product line for wider markets, it is also important to consider the assets like property,
buildings, inventories and cash assets. The vertical merger involves careful planning.
Market-extension merger It is the process of merging two organisations that sell same products in
different geographical areas. The main purpose of this merger is to make the merging
organisations to achieve higher positions in bigger markets and ensure a bigger base for client.
Product-extension merger Most of the organisations execute product extension merger to sell
different products of a related category. They serve the common market. This merger enables the
new organisations to pool their products to serve a common market.
Conglomerate merger This merger involves organisations alliance with unrelated type of
business activities. The organisations under conglomerate merger are not related either
horizontally or vertically. There are no important common factors among the organisations in
terms of production, marketing, research, development and technology. It is the union of
different kinds of businesses under one management organisation. The main purpose of this
merger is to utilise financial resources; enlarge debt capacity and obtaining synergy of
managerial functions. The organisations do not share the resources; instead it focuses on the
process of acquiring stability and using resources in a better way to generate additional revenue.
Acquisition is the process of purchasing an organisation by another organisation, either through
the purchase of its shares or assets.
Massive growth can only be achieved in less time by buying other organisations. Acquisitions
have become the major entity for growth in market these days. Most of the organisations choose
to grow by acquiring other organisations to increase market share, gain access to new
technologies, achieve synergies in the operations, to develop distribution channels, and to obtain
control of undervalued assets. There are many risks in acquisition like clashes in the culture of
organisation, key employees may leave, synergies may fail to emerge, assets may be less valued
than perceived etc. Table 11.1 distinguishes between mergers and acquisitions.
Table 11.1 Distinction between Mergers and Acquisitions
Mergers Acquisitions
When one organisation takes over
It happens when two similar another and clearly states itself as the
organisations proceed to become a new owner, such purchase is called
single organisation. acquisition.
The acquiring organisation swallows
Both organisations stocks are the business of acquired organisation
submitted and new stock is issued. and the acquiring organisation stock
continues to be traded.
When the organisations deal is
The term purchase is also called as unfriendly, it leads to purchasing of
merger when the top level managers the other organisation. It is termed as
with similar interests join together. acquisitions.
Example Transocean and Example Google acquired Postini to
GlobalSantaFe, the top oil drilling introduce services of message
companies, merged to consolidate security, archiving, encryption, and
their position in a fast-growing policy enforcement.
market.
Mergers and acquisitions are often similar. In many cases, a larger firm may acquire a relatively
less powerful organisation and force it to announce the process as merger. But in reality, an
acquisition has taken place. Most of the firms declare it as merger to avoid disputes and negative
impression.
11.3.3 Collaborations and co-branding
Collaboration is the process of cooperative agreement of two or more organisations which may
or may not have previous relationship of working together to achieve a common goal. It is the
beginning to pool resources like knowledge, experience and sharing skills of team members to
effectively contribute to the development of a product rather working on narrow tasks as an
individual team member in support to the development. Such collaborations are the foundation
for concepts like concurrent engineering or integrated product development.
Collaboration is a win-win methodology. It means that both the organisations insist upon each
other to gain equal profits with no negative attitude of acquiring each others possessions.
Effective collaboration can be obtained by the following actions:
The organisations must get involve in the process from the beginning and avail the necessary
resources for collaboration.
The work culture in the organisation must encourage teamwork, cooperation and collaboration.
There must be effective team work and cooperation among the employees of both the
organisations to achieve the goal.
Systematic approach of product development process must be based on sharing of information,
technology etc.
Co-branding involves the process of combining two or more brands into a single product or
service. It is becoming a positive way to associate different brands and develop a strong brand in
the market. It creates synergy among the various brands. An organised co-branding strategy leads
the co brand partners to a win-win situation and helps in realising large demands in the market.
The co-branding agreement includes the important aspects such as rights, obligations, and
restrictions that are abiding to both the organisations. It also includes important provisions and
the needs must be carefully drafted to provide clear guidelines to the involved organisations. The
organisations form co-branding to accomplish many goals which include expansion of
customers, obtain financial benefits, respond to the needs of customers, strengthening its
competitive position, introducing new product with strong image and to gain operational
benefits.
It is more frequently used in the field of fashion and apparels. It can also be used for promoting
campaigns, using cartoons on T-shirts, logos, distributing through branded retailer etc.
Example The sportswear giant Nike formed co-branding agreements with Philips consumer
electronic products. The Philips electronic products will contain Nikes logos and it is mainly
marketed in United States since the market share of Philips is not much impressive. The newly
introduced digital audio player and portable CD players of Philips will be unveiled with the Nike
logo to enhance profits in the market share in United States.
11.3.4 Technological partnering
It is the process of associating the technologies of two different companies to achieve a common
goal. The two organisations work as co-owners in business and share the profits and losses. The
technologies of individual organisations are shared to achieve desired outcome. The required
resources like knowledge, machinery, and expertise are collaborated between the organisations.
Example The software giant, Infosys Technologies Ltd. has entered into partnership with US
based NVIDIA, GPU inventor and the world's visual technologies giant. The purpose of this
partnering is to develop NVIDIA CUDA (Compute Unified Device Architecture). This
technology is viewed as the next big revolution in the field of technology in lending high
performance in computing. The software helps the developers of various applications to tap into
the previously uncultivated power of the GPU. This will enable certain applications to achieve
high performance. The capacity of CUDA is expected to multiply fifty times the performance of
existing computing and reduce the run time to advance the user enterprise.
11.3.5 Contractual agreements
It is the process of agreement with specific terms between two or more organisations which
guarantee in performing a specific task in return for a valuable benefit. The contractual
agreement is the heart of business dealings. It is the most significant areas of legal concern and
involves variations in certain situations and complexities.
The organisations require analysing fundamental factors before involving in contractual
agreements.
The elements to be analysed are:
It is necessary to identify the type of offer being laid by the organisation to make an agreement.
The acceptance of the information involved in offer which results in meeting the market needs.
The organisations are required to recognise the strong commitment towards the contractual
agreement.
Systematic scheduling of the process involved in manufacturing product without any hindrances
to both the organisations.
Discover the terms and conditions for manufacturing the product and the guarantee of the
organisations in fulfilling it.
The contract agreement includes several documents such as letters, orders, offers and
counteroffers.
There are various types of contractual agreements. They are:
Conditional It is based on occurrence of an event.
Joint and several The organisations promise to perform together but still they possess individual
responsibilities.
Implied The judicial court will determine the contract between the organisations based on
circumstances. The parties will be able to buy all manufactured products, enter into a contract to
supply others requirements, or renewal of the existing contract.
11.3.6 Outsourcing
It is the process of entering into a contract with an organisation or a person to perform a
particular function. Most of the organisations outsource the work in numerous ways. The
function being outsourced is considered as noncore to the organisation.
The external firms that provide outsourcing services are called as third parties or it is commonly
called as service providers. The concept of outsourcing existed from the era of work
specialisation. Usually organisations adopt this concept to carry out narrow functions such as
payrolls, billing, and data entry. Since most organisations lack in many resources, it outsources
these processes to other organisations which consists of specialised tools, facilities and trained
personnel.
The four stages involved in the process of outsourcing are:
The first phase involves strategic thinking for developing the organisational philosophy about the
role of business activity outsourcing.
The second phase is the process of evaluating and selecting the appropriate outsourcing projects
and choosing the potential location for the work force.
Third phase is the process of contractual agreement such that the business activities are worked
legally in terms of pricing and service level agreement (SLA) terms.
The final phase is to outsource management to refine the present working relationship between
client and outsourcing service providers.
Example Tatvasoft is an Indian outsourcing company that offers software development services
to its clients in United States, Canada and Australia. They provide software outsourcing services
and solutions with the focus on secure, scalable, and reliable business systems. The key benefits
of outsourcing are cost efficiency, availability of trained staff, flexible manpower utilisation, and
risk minimisation.
11.3.7 Other methods
The various other methods in forming strategic alliances can include the following:
Affiliate marketing It is the process of revenue sharing between the website owner and the online
merchant. This process includes the website owner to advertise the merchants products or send
the potential customers to the merchants website. It provides added advantage to both the
website owner and the merchant, since the website owner earns money in advertising and the
merchants products are advertised globally instead of self marketing. Example amazon.com was
the pioneer of affiliate marketing in promoting various products of the merchants.
Technology licensing It is the contractual agreements where trademarks intellectual property and
trade secrets are licensed to an external organisation. The main disadvantage of licensing is the
loss of control over the technology. When it belongs to other organisation, there are chances of
exploitation.
Product licensing This is similar to technology licensing. The only difference is that it deals with
manufacturing and selling of certain products. The organisations owning the product license is
provided with an opportunity to sell products within certain geographical area. The license
allows selling the products within the prescribed boundary.
Franchising It is a quick process of achieving a successful objective nationwide. The
organisation pays certain amount of fee in setting up franchise and agrees to constant payments
so that the process is financially risk-free for the organisation.
Sharing R&D The organisations set up strategic alliances to venture into research field. The main
purpose of the organisations is to embark in the field of research and development to form a new
entity.
Distributors Most of the organisations market their products by outsourcing it to various
companies. These companies act as distributors where each one is located in different
geographical areas. This ensures the effective distribution of products and provides employment
opportunities in the various geographical areas.
In this section, we have studied the different types of strategic alliances. The next section
explains the problems related to strategic alliances.
Activity 2
Consider you own a fashion apparel company. How will you merge the company with other
branded company for earning profits and achieving success in markets?
Refer the link for guidance - http://www.articlesbase.com/marketing-articles/adidasreebok-
merger-1983240.html
4. The process of combining two or more organisations to form a single organisation is called
merger. (True/False)
5. Collaboration is the process of cooperative agreement of two or more organisations to work
together in achieving a common goal. (True/False)
6. Affiliate marketing is the process of revenue sharing between the website owner and the
customer. (True/False)
11.4 Problems Involved in Strategic Alliances
There are numerous problems related to strategic alliances. Some of them are:
One of the organisations suffers benefits due to incoherent goals
Lack of trust between the organisations lead to poor performance in achieving the desired goal
The existence of conflicts between the organisations due to internal issues like personnel and
resources causes problem to the strategic alliance
Lack of commitment between the organisations leads to termination of the alliance contract
Many organisations experience the risk of sharing too much knowledge with the partner
organisation to become a competitor
Reduces the possibility of future opportunities of getting into agreement with partners
competitors
7. The lack of trust between the organisation leads to _______________.
8. The conflicts between the organizations are due to internal issues like personnel,
_______________.
9. The organisation suffers benefits due to ___________________.
11.5. Summary
Let us now summarise what we have discussed in this unit
Strategic alliance is the process of mutual agreement between the organisations to achieve
objectives of common interest. They are achieved by the co-operation between the organisations.
It involves individual organisations to modify its basic business activities and join the agreement.
The main characteristic of strategic alliances is that organisations have similar idea of achieving
objectives and sharing of resources to increase the performance. By adopting this concept, the
organisation benefits with gaining resources, sharing risks, achieving synergy, winning political
obstacle and such other.
The different stages in forming strategic alliance are strategy development partner assessment,
contract negotiation alliance operation, and termination.
Strategic alliances has many forms like mergers and acquisitions, joint venture, collaboration and
co-branding, outsourcing, contractual agreements and other ways such as affiliate marketing,
product and technology licensing, franchising, and distribution relationship.
11.6 Glossary
Alliance : Agreement or coalition
Affiliate : Associate or partner
Conglomerate : Business Corporation
1. Define strategic alliances and explain its need and benefits.
2. Describe the different stages in framing strategic alliances.
3. Classify the various types of strategic alliances.
4. Explain the problems related to strategic alliances.
11.8 Answers
1. Mutual agreement
2. Synergy
3. Strategy development
4. True
5. True
6. False
7. Poor performance
8. Resources
9. incoherent goals
Terminal Questions:
1. Refer 11.2, 11.2.1, 11.2.2 Strategic alliances, need and benefits
2. Refer 11.2.3 Different stages
3. Refer 11.3 Types of strategic alliances and business decisions
4. Refer 11.4 Problems involved in strategic alliances
11.9 Case-let
Strategic alliance between Infosys and Microsoft
Infosys Technologies Ltd, an IT transformation leader is constantly in the verge of
developing the best technology to help its customers meet their business goals. The
company has set its mind in inventing a new technology for all the automobile dealers,
those who share the inventory information and other resources in an easier manner. It
wanted to offer a cloud based solution so that it would be simple to organise the data and
easy to scale up. To create this venture, the company required cloud based database which
originated with Microsoft SQL data services. Hence Infosys decided to form alliances with
Microsoft to create solution for automobile dealers which can replicate to meet the similar
integration needs for healthcare, hospitals, insurance and other vertical industries.
The implementation of technology is based on the web and Star standards. The SQL Data
Services (SDS) offers highly scalable and internet-facing distributed services for storing
and processing relational queries. The technology helps the developers to create new
application with REST and SOAP based web protocols. These services are built on robust
Microsoft SQL database and Windows Server technologies providing high quality output
and security.
The SDS and REST of Microsoft provided the robust cloud based database to support hub
based integration. The relevant resources were shared among the companies to work
effectively.
The company obtained the best platform such that it could build its cloud based solution
which was inexpensive. The scalability option made the company implement new
participants to the cloud based solution.
Both the organisations earned profits from this venture and expanded their growth towards
providing more solutions to its customers.
1. Why do you think Infosys formed an alliance with Microsoft?
2. How did Infosys benefit from the alliance?
Source link -
http://www.microsoft.com/casestudies/Case_Study_Detail.aspx?CaseStudyID=4000002880
References
Thomas Wheelen, J David Hunger(2002) - Concepts in Strategic Management and Business
Policy, Pearson education, New Delhi
E-references
http://www.articlesbase.com/law-articles/forming-a-strategic-alliance-key-issues-472002.html -
http://www.smallbusinessnotes.com/operating/leadership/strategicalliances.html - Retrieved on
12 August 2010
http://infosky.wordpress.com/2007/03/06/five-potential-benefits-of-strategic-alliance/ - Retrieved
on 12 August 2010
http://www.marketingminefield.co.uk/traditional-marketing/strategic-alliances/types.html -
Unit-12-Role of Creativity and Innovation in Business

Structure:
12.1 Introduction
Objectives
12.2 Creativity
Components
Stages in creativity
12.3 Innovation
Components of innovation
Types of innovation
12.4 Creating and Building Creative and Innovative Business Culture
12.5 Business Practices Adopted to Promote Creativity and Innovation
Brainstorming sessions
Mind mapping and mind revolution
Out of the box thinking
Rewarding best ideas
Using metaphors/jargons/slogans
Other methods
12.6 Importance of Creativity and Innovation in Business
12.7 Challenges Involved in Creativity and Innovation
Feasibility, time frame and practicality of the ideas
Cost involved in implementing ideas
Technical aspects involved in innovation
Acceptance of innovation in the market
12.8 Summary
12.9 Glossary
12.11 Answers
12.12 Case-let
12.1 Introduction
In this unit you will be introduced to creativity and innovation. You will study how organisations
are involved in the process of building and developing a creative and innovative business culture
and also how business practices are adopted to promote creativity and innovation. In this unit,
you will also study the importance and challenges involved in managing creativity and
innovation within an organisation.
Creativity can be defined as an act of turning new and imaginative ideas into reality. Creativity
includes two processes - thinking and then producing. If a person has ideas, but doesn't act on
them, then he is imaginative but not creative. Creativity is promoted in organisational cultures
that value independent thinking, risk taking, and learning.
Innovation can be described as an action or implementation of new ideas which results in gain or
profit. Organisations must create an environment that encourages creativity which in turn may
lead to innovations. This involves bringing multi-talented groups who work in close
collaboration by exchanging knowledge, ideas and shaping the future of organisation.
Objectives
After studying this unit you should able to:
explain creativity and the stages of creativity in business
describe innovation and the various types of innovation in business
analyse the process to build a creative and innovative business culture
characterise innovative methods adopted to promote creativity and innovation
12.2 Creativity
According to The Courage to Create written by Rollo May, creativity is defined as, Creativity is
the process of bringing something new into being...creativity requires passion and commitment.
Out of the creative act is born symbols and myths. It brings to our awareness what was
previously hidden and points to new life. The experience is one of heightened consciousness-
ecstasy."
Creativity is a core competency for managers. Corporate creativity is characterised by the ability
to recognise the world in a new way, to find hidden patterns, to make connections between
apparently unrelated phenomena, and to generate solutions. Creating solutions to problems and
the ability to create new products or services for a changing market are a part of the intellectual
investment that gives a competitive edge to an organisation.
12.2.1 Components
Creativity is a process that can be managed and a skill that can be developed. It requires practice
and an encouraging environment to flourish. Business leaders are adopting the principles and
practices of art and design to help in building creativity in their organisations.
The components of creativity are as follows:
Forging It is to gather information. Information can be gathered by exploring the environment,
getting educated on ideas and developing the abilities and talents.
Reflecting It is to generate ideas. Reflecting the ideas can be done by questioning the information
which is gathered, thinking, pondering and brainstorming and using your imagination.
Adopting It is to accept or implement ideas. Ideas can be adopted by selecting among the
generated ideas, borrowing ideas from others, and inventing innovative ideas.
Nurturing It is to improve the ideas. Ideas can be improved by evaluating an idea and
simplifying a complicated idea.
Knuckling down- It is to never give up the ideas. Knuckling down means marketing the ideas,
dealing with critics, maturing with courage and patience, and survive the success.
12.2.2 Stages in creativity
The steps discussed below are used by many artists, creatives, and problem solvers, both
individually or in a group set as a logical framework to research, develop, and implement their
ideas from the beginning to end. The steps in creativity are as follows:
Preparation Based on study and observation, a problem or an issue can be identified and defined.
Incubation It involves working on the issue or the problem.
Illumination It is a moment when a new concept or solution is finally emerging. It is an outcome
of the ability to make a new connection between extensive and varied elements of knowledge.
Verification It is checking for the applicability and appropriateness of the solution for the
originally observed problem or an issue.
Example A graphic designer has to design a project for a client. The preparation stage will
include collecting data about the company (client) and its audiences. In incubation stage, he will
formulate creative options and design the project. The illumination stage will include
brainstorming and writing down the ideas on a paper. In the verification stage, he checks for
applicability and appropriateness of ideas for his project
Activity 1
Consider you are the project manager of a creativity team. Develop an implementation plan for
ideas generated by your team
Refer the link for guidance - http://www.jpb.com/creative/ciip.php
1. Creativity requires ___________and commitment.
2. Reflecting the ideas requires questioning, pondering and ___________ using your
imagination.
3. ___________ is based on study and observation.
12.3 Innovation
Innovation is the production or implementation of ideas. Innovation can be described as an
action or implementation which results in an improvement; a gain, or a profit. The National
Innovation Initiative (NII) defines innovation as "The intersection of invention and insight,
leading to the creation of social and economic value."
12.3.1 Components of innovation
Innovation involves the whole process from opportunity identification, invention to
development, prototyping, production, marketing and sales, while entrepreneurship only needs to
involve commercialisation.
The components of innovations are as follows:
Implementation
Creativity
Implementation It is to put ideas into practice. Implementation is made up of three aspects; idea
selection, development and commercialisation. Organisations need processes, procedures and
frameworks for achieving implementation. Some organisations in spite of having all right
processes, procedures and frameworks, are yet to be innovative.
Creativity Creativity is less straight forward than implementation. Creativity is not about
establishing a new process or structure. People think differently to be creative and behave
differently to be innovative.
12.3.2 Types of innovation
Innovation is defined as using new ideas to apply current thinking in different ways that results
in a significant change. The types of innovation are as follows:
Architectural innovation This innovation defines the basic configuration of the product and the
process. It will establish the technical and marketing agendas that will guide subsequent
developments.
Market niche innovation This innovation involves development of new marketing methods for
the existing products. It provides the scope for improvement in product design, product
promotion, and pricing.
Regular innovation This innovation involves the change that is applied on established technical
and production competence of the existing markets and customers. The effect of these changes is
to develop the existing skills and resources.
Revolutionary innovation This innovation disrupts and renders established technical and
production competence that out of date, yet it is applied to existing markets and customers.
Self Assessment Question
4. Components of innovation are___________ and ___________.
5. Innovation is the production or implementation of ideas. (True/False)
12.4 Creating and Building Creative and Innovative Business Culture
Managers who want to create an innovative business culture must first understand the steps of
the creativity. To promote business innovation; managers should commit to the following
business practices, and incorporate them in the culture; by training personnel in the practices and
then giving promotions and rewards to those who cultivate them successfully.
Business practices used to create and build a creative and innovative business cultures are as
follows:
Select the most promising innovators, but encourage unexpected surprises Managers must select
the most promising idea generators and provide them with extra resources. This will give room
to the innovators to produce ideas and results. Managers should train other personnel, so that
they understand the stages of creativity. The managers must evaluate personnel based on their
ability to promote new ideas and guide them to implement it.
Create buffer zones for the most innovative people This means to build a protective cosset around
the creative people or innovative teams within an organisation. This eliminates other work
pressures and policies that might discourage their creativity. It ensures that tools and resources
are provided to creative people which enable them to work without interference.
Give room to innovators to play Innovators collect data for their project. During the incubation
stage, the activities that seem not to be working will allow the deeper parts of brain to solve the
problem and make new connections. For a typical result oriented manager, this can be hard
especially when the creative team is working to create a new business process. The key to let
people have room to play is to desist from judgment of their activities or methods.
Resist the temptation to look for immediate results It is true that deadlines can encourage the
creative team to focus on ultimate illumination, but overusing the deadline interferes with the
creative process. A close communication with the manager and the creative people working on a
project can develop a deadline based on their understanding. This will not hinder the process.
Commitments to drive the best ideas to implement Innovators rarely promote their ideas. The
managers who want to encourage innovation in an organisation must act like a first line filter.
This enables him to test the best ideas and solutions and choose the right one which is fruitful.
Then the innovator must commit to internal marketing of the project to build coalition that will
bring new ideas into reality. This is important not only to reap the rewards of innovation, but to
encourage other innovators that their best efforts can be adopted in the organisation.
Self Assessment Question
6. Managers should promote business practices.(True/False)
7. ___________are protective cossets around the creative people within an organisation.
12.5 Business Practices Adopted to Promote Creativity and Innovation
Innovation can be viewed well in the context of businesses. Every organisation has a unique
method to handle challenges and adopt modernisation. The practices that are generally adopted
by organisations to promote creativity and innovation are:
Brainstorming
Mind mapping and mind revolution
Out of the box thinking
Rewarding best ideas
Using metaphors/jargons/slogans
Other methods
12.5.1 Brainstorming
Brainstorming is an effective way to generate lots of ideas on a specific issue. It determines
which idea is the best solution. Brainstorming is performed in a relaxed environment. Relaxing
in free environment will make the people to stretch their minds further and produce more
creative ideas. A brainstorming session requires a facilitator, a brainstorming space and
something on which to write ideas, such as a white-board or a software tool. The facilitator's
responsibilities include guiding the session, encouraging participations and writing down the
ideas.
Brainstorming works best with a varied group of people. Participants can be from various
departments across the organisation and have different backgrounds. In certain areas, outsiders
can bring fresh ideas that can inspire the experts. The traditional approach of brainstorming is
effective because it is more energetic and collaborative which allows the participants to build on
each others ideas.
Creativity and relaxation exercises or other fun activities can help participants to relax their
minds before the session, so that they will be more creative during the brainstorming session.
12.5.2 Mind mapping and mind revolution
Mind mapping is a technique that allows you to make the best use of your brain power. This
technique is more productive as it harnesses the full potential of the creative skills. It helps you
to convert the random thoughts; generated when you are most creative into linear thoughts, when
communicating it.
Mind-mapper is software that accelerates mind-mapping. It is a graphic based method of taking
notes and brainstorming. It helps to organise the thoughts and arrange the random ideas like a
tree-diagram. Mind-Mapping does not constrain the creative inclinations as it is in outline
method.
A mind map uses lines, words, images, colours and sounds to stimulate your brain. The four
important characteristic of mind map are as follows:
The central image represents the subject.
The main ideas of the subject branch out from the central image as main branches.
Minor ideas are linked to the main ideas.
All the branches are connected to form a nodal structure.
A mind map can be used for both taking making notes. It opens up a creative process and
provides gestalt for the whole subject while making notes. You can use images, combination of
words, icons, pictures, colours, sounds and any other images that fit into organising and
structuring ideas.
Example - Boeing Aircraft uses a 25-foot long mind-map to facilitate a team of aeronautical
engineers to learn within a few weeks that would have otherwise taken years. An estimation of
$10 million was saved by using mind-map.
Mind revolution is used for creative purpose. It relies on the following three conscious thought
movements:
Going to extremes When facing a challenge, you have to deal with these six questions; what,
where, when, why, who and how. These questions provide an insight of what would happen if
things were going to extremes. Example You can ask what would happen if there is no staff, zero
capital etc.
Establish relationship between things Look for rational connections that no one has thought of.
The inventions of Einstein, Archimedes were based on connections that no one else would think
of.
Construct the thought Most of ideas or concepts are inserted in a group of ideas. This will lead to
new ideas or concepts.
12.5 3 Out of the box thinking
Out of the box thinking can be defined as a thinking that moves in diverging directions so as to
involve a variety of aspects which leads to novel ideas associated with creativity. It describes
non-conformal creative thinking. The 'box', implies rigidity and symbolises constrained and
unimaginative thinking. This is in contrast to open the mind for unrestricted 'out of the box' or
'blue-sky' thinking.
Peter Drucker introduced the successful cases of out of box thinking to the management world.
He argued that by focusing on end results, you allow employees to create their own means to
achieve the results. This will avoid micromanagement and encourages development of new
process which represents improvement in old process. The adoption of Duckers practices and
principles has been extremely widespread and enormously successful in various organisations.
Example In early days, Xerox Corporation was a small company in Rochester, New York. It was
marked distinctive and almost singular out of box thinking. Haloid Company (predecessor of
Xerox) was manufacturer of photography papers, and it had considerable difficulties for being
competitive for a long period. Its president, Joe Wilson and his associate Lonowitz decided to
invest heavily on xerography technology. Indeed they agreed to create a new industry and they
named it as Xerox.
12.5.4 Rewarding best ideas
Rewards are motivational tools. Creativity and innovation can be rewarded in personal and
creative ways. They need not be big. In fact, big rewards are often less effective than small
rewards. Highly creative people are not motivated by money. Find out what exactly excites the
personnel in the organisation and reward them accordingly for their new ideas.
The organisation has to reward and celebrate the incremental success not only for achieving a big
goal but also to motivate the employee till the project meets the deadline. It has to establish
incremental milestone and have small celebrations for achieving them. The types of rewards are
as follows:
Recognition It can be including in top-thinkers list or a thanking call from the CEO.
Small gifts for every idea Small gifts for ideas can be extremely powerful for motivating
creativity.
Slightly bigger rewards for more creative ideas It motivates the people to stretch their minds and
produce more creative and effective ideas.
The organisation has to ensure that the personnel are aware of rewarding choices. Reward is one
of the biggest motivators for participating in an ideas campaign. Some organisations even adopt
the reverse approach like rewarding the worst and most bizarre ideas, just to make their
employees think in different ways.
12.5.5 Using metaphors/jargons/slogans
Metaphor is a figure of speech and does not literally represent real things. A simple turn of
metaphor opens a whole new world of perception. Poets and writers have mastered the art of
awakening the imagination.
Using metaphors
Metaphor is the application of words or phrases to an entity or a concept that it does not literally
denote. It establishes a kind of creativeness that has the potential to spark quantum leaps in
thinking. This kind of leaping generates insight and discovery.
In fact, a well placed metaphor is like a successful merger between companies. Sometimes good
things can happen when two similar, but different entities enter into a relationship with each
other. Example If you are struck in a desert, what would you prefer to have; a 20 page report
telling you where the water is or a map?
Metaphor is the map and it guides you to find a solution on your own ability. A picture or an
image is worth than thousand words and if chosen consciously, it stretches the imagination and
bifurcate the limitations of ordinary business logic.
Using jargons
Jargon can be described as a technical language used by a particular profession, group or trade. It
is used as barrier to keep outsiders from understandings within an organisation. Jargon is used by
groups that have similar interests. Some commonly used jargon terms of NASA are countdown,
all systems go, and lift off.
Jargon is an important aspect that promotes business culture .Each organisation has its own
jargon terms to promote their business. Jargons in an organisation give a person, a sense of
belonging to a specific group. It makes the communication easier within the employees of an
organisation.
Using slogans
Slogans are the unsung heroes of an organisation in the business world. Slogans represent an
organisation, a new product, or a client's website .A creative slogan reflects the details and
personality of an organisation. The personalised slogans of an organisation can separate ones
business from its competitors. Organisations can have in-house slogans meant only for its
employees and workers as well as marketing or advertising slogans that represent companys
products, brands and image.
Examples for slogans Dell Computer Get More out of Now, Hitachi Inspire the Next, Nokia
Connecting people
A clear slogan is very important to its effectiveness Costumers should be able to understand the
message quickly and without doubt. The hunt for creativity need not sacrifice clarity and
simplicity. A clear, simple slogan will always be remembered.
12.5.6 Other methods
Different companies will have different methods and techniques to promote and maintain
innovative or creative culture in the organisational environment. These methods could be simple
and silly or sophisticated ones.
Example 3M encourages its employees to spend their 15% of working time on the projects they
like, for the betterment of the company. In case of initial success of the project, 3M provides
funds for further development.
Intrapreneurship is a method of practicing entrepreneurship by the employees within an
organization American Heritage Dictionary defines an intrapreneur as A person within a large
corporation who takes responsibility of turning an idea into a profitable finished product
through assertive risk-taking and innovation. Intrapreneurs are people who continuously look for
ways to create value for the organisation. They are more valuable to an organisation.
Example Genesis Grant is an intrapreneurial program of 3M.This program provides finances to
the projects that might not get funds through normal channels. Genesis Grant offers $85,000 to
innovators to work on their projects.
Entrepreneurship is the practice of getting on a new business or reviving an existing business by
pooling resources to exploit new found opportunities. Gartner defines entrepreneurship as The
creation of new organisation. Merriam Webster dictionary defines an entrepreneur as one who
organises, manages and assumes the risk of a business. The basic difference between
intrapreneurship and entrepreneurship is shown in the table 12.1.
Example- John Warnock and Charles Geschke were the founders of Adobe. They both were
employees of Xerox, and they were upset because their new product ideas were not encouraged.
They quit Xerox and began their own business. Currently, Adobe has an annual turnover of over
$3 billion.
Table 12.1 Difference between Intrapreneurship and Entrepreneurship
Intrapreneurship Entrepreneurship
Intrapreneurs innovate on behalf of an Entrepreneurs innovate for
organisation themselves.
Intrapreneurs must be selected or Entrepreneurs select themselves
recognised by an organisation
Resources are given to intrapreneurs Entrepreneurs have to find their own
for their innovations resources.
Intrapreneurship involves creativity, innovation, the ability to take risk and has to look at things
in novel ways. He/she will have the capacity to take risk and to accept failure as a learning point.
An intrapreneur visualises like an entrepreneur looking out for opportunities which will profit the
organisation. Intrapreneurship is a novel way of making organisations more profitable where
employees think about entrepreneurial ideas. It is in the interest of an organisation to encourage
intrapreneurs. Intrapreneurship is an important method for companies to reinvent themselves and
improve performance.
8. Brainstorming works best with an individual. (True/False)
9. Slogans represent an organisations new product. (True/False)
12.6 Importance of Creativity and Innovation in Business Management
Creativity is a powerful tool that can improve the performance of an organisation in an amazing
way. Organisations are building creativity and innovation training programs. The training
programs work best in teams than an individual. The importance of creativity and innovation in
business management are as follows:
Keeping minds open for new opportunities One of the lynchpins of creativity is that you keep an
open mind and evaluate all the options opened for you. This does not mean that you have to
change but that you are looking for new opportunities. In the modern business environment, none
of us can afford to be complacent. Creativity provides us with many techniques for helping
people to see things in a new way and to break complacent mindsets.
Securing competitive advantage Creativity and innovation can provide competitive advantage to
an organisation. This is because intangible assets are difficult for competitors to copy or imitate.
The assets are the employees ability to generate ideas and combine them so that there are number
of possibilities. Idea generation, combination and transfer of tacit knowledge can occur
throughout any business.
Creativity is a part of a successful innovation strategy Innovation is implementation of creativity.
Without creativity only incremental innovation can take place and only in a small way in an
organisation. If you are considering new products, new markets or both, creativity will help you
to adopt new mindsets.
Improving organisational culture The main driver for creativity are intrinsic motivation, tools
and techniques, existing knowledge and experience. If you are going to embrace creativity in
some way, then you will have to create a program that directly or indirectly addresses the main
drivers. If your organisation has a culture of creativity then there will be a high intrinsic
motivation. High intrinsic motivation is a desire and the HR department in an organisation is
linked as it improves performance and low staff turnover. The other aspects of creativity such as
improved communications and increased trust; will contribute to improve organisational culture.
Removing strategic barriers Strategic barriers exist mainly because of mindsets and lack of
seeing any other course of action apart from the current one. A rigid culture prevents an
organisation from responding to a rapidly changing marketplace or to new business opportunities
Changes attitude towards risk In a creative culture, individuals need to stretch their work and
move out of their own comfort zone. The increased emphasis on exploration and assessing
opportunities means that activities can be undertaken with less risk (as increased knowledge
equals less risk) and the projects previously considered risky might become possible. A cultural
shift that encourages collaboration decreases organisational risk due to the sharing of knowledge
and ideas.
Improves learning and knowledge transfer The creativity culture of organisation actively
encourages interaction. This does not mean a noisy workplace with large groups gathered around
the coffee machine. Face to face dialogue should replace email.
10. ___________is a powerful tool that can improve the performance of an organisation in an
amazing way.
11. The creativity culture of organisation actively encourages ___________.
12. Increased emphasis on exploration and assessing opportunities means that activities can be
undertaken with more risk.(True/False)
12.7 Challenges Involved in Creativity and Innovation
The universal availability of technology has created a highly competitive global marketplace and
fueled the growth of robust, knowledge-based economies. Many business forecasters predict that
creativity and innovation are the most important factors in establishing and maintaining a
The big challenges for companies over next generation are:
Adaptability It is how you build things that can transform itself into the work.
Innovation It is how you mobilise the imagination of each individual in your organisation.
Engagement It is how you create an organisation that engages emotionally and intellectually for
making people to apply their capabilities at work.
Hostility Some managers do not encourage innovations and react negatively to new ideas
because of differences in the organisation. In some cases, idea generators are poor team players
and it is a one man show for them. Such hostile activities are harmful for an innovative
organisation.
Isolation Isolating people is one of the biggest barriers in innovation. Organisations should
encourage communication and collaborative approaches among the employees. It gives energy
and support to the ideas in their early stages.
12.7.1 Feasibility, time frame and practicality of the ideas
The process of creating a new idea has four stages. They are as follows:
Gather stimuli When struggling for ideas for a new product, instead of sitting and thinking, get
out and open your mind. The process of exposing your mind to new thoughts will fuel new ideas
spontaneously.
Multiply stimuli After gathering stimuli, you need to multiply them through free association.
When you multiply the stimuli, entirely a new way of exploration is opened before you. The
opportunities for this multiplication is unlimited
Create customer concepts Use the multiplied stimuli as basis for inspiring ideas and target you
customer. At this stage, dont focus on any other thing other than the customer as this will make
you more alert on creating new ideas.
Optimise practicality Focus on converting customer oriented ideas into practical concepts. These
concepts needs to be designed, developed and delivered profitably .Feasibility is a driving force
at this stage, but customers satisfaction is more important than the benefits. An idea that is mere
feasible is more dangerous. Customers care about what is offered to them. They dont care how
much of hard work goes in for an idea. Organisations must give more priority to customers than
the feasibility. In case you are modifying the customer concept, preserve 80% of the
modifications for customer benefit and this dramatically increases practicality.
12.7.2 Cost involved in implementing ideas
Organisations have to implement ideas within its budget. The cost of implementation of ideas
can be addressed in brainstorming sessions. Brainstorming session includes people from every
department and provides an opportunity to estimate the cost of implementing ideas.
Implementation of ideas can be made creative and cost saving which is more transparent and
reduces the resistance. Implementing cost saving ideas includes evaluation the following criteria:
How much will it save Fixing a financial value helps to decide which idea has to be implemented
first.
Problems faced by cost saving Some cost saving ideas are simple to implement, others may
cause inconvenience or some may even increase the price. Consider the effects before
implementing any idea.
Effect on the quality when implementing on cost saving, make sure youre not reducing the
quality of a product or service which will affect the sales of the product.
12.7.3 Technical aspects involved in innovation
Implementation of innovation involves technical aspects. Innovators must possess technical and
analytical skills to encounter the technical problems that may arise when implementing an idea.
Managing the technical aspects of innovation and creativity is related to managing personnel and
organisational changes. Organisational change focuses on the changes in policies, direction and
culture of the organisation.
Managing technical aspects of innovation and creativity involves an environment which provides
tools for learning, flexibility and change. It should also provide implementation support for new
cutting edge programs. It should be useful to leaders to provide new insights into situations
required to make organisational improvements from their insights. It is important for leaders to
recognise and support ideas of others and those of themselves.
12.7.4 Acceptance of innovation in the market
Implementation of innovation is associated with market growth, so that implementation and
innovation reinforces each other. The organisations should focus on the customers within the
target market. Organisation has to emphasise on latest innovative characteristics and functional
features of the product. It should focus on marketing communication as this enables the
customers to understand the benefit of these features.
As the innovation gains acceptance, organisation should focus on other customers who were not
included in target market growth. They should emphasise the acceptance of the product gained
and its proven performance record. Example iPod, iPhone and iPad are the latest and successful
innovations of Apple.
However, there are instances when new innovation has failed in the markets as the consumers
have rejected it completely.
Example 3M invented colour copy machine in 1972 when there were no colour printers. As there
were no colour prints to copy, colour copy machines of 3M had failed.
Activity 2
Consider you are the project leader of a creative team and you face problems while
implementing an idea. How will you solve the problems?
Refer the link for guidance - http://www.jpb.com/selfimprovement/cps.php
13. Organisations must give more priority to customers than feasibility.(True/False)
14. Organisational change focuses on the changes in policies, ___________and culture of an
organisation.
12.8 Summary
Creativity can be defined as an act of turning new and imaginative ideas into reality. Creativity
includes two processes; thinking and producing.
Innovation can be described as an action or implementation of new ideas which results in gain or
profit. The methods adopted to promote business culture are selecting promising innovator,
creating buffer zones, giving room to play, restating temptation for immediate results and
committing to drive best ideas.
Best practices are adopted to promote creativity and innovation in an organisation.
Creativity and innovation is important in an organisation because it opens up mind for new
things, secures competitive advantage, improves knowledge transfer, removes strategy barriers
etc.
12.9 Glossary
Buffer : Shield or cushion for protection
Metaphor : Representation or a simile
Entrepreneurship : Starting an own enterprise
Isolation : Being or working alone without any involvement
1. Define and explain the stages of creativity.
2. Define and explain the types of innovation.
3. Discuss the best practices adopted to build business culture.
4. List the business practices adopted to promote creativity and innovation.
5. Explain the challenges involve in creativity and innovation.
12.11 Answers
1. Passion
2. Brainstorming
3. Preparation
4. Implementation and creativity
5. True
6. True
7. Buffer zone
8. False
9. True
10. Creativity
11. Interaction
12. False
13. True
14. Direction
Terminal Questions:
1. Refer 12.2 Creativity
2. Refer 12.3 Innovation
3. Refer 12.4 Creating and Building Creative and Innovative Business Culture
4. Refer 12.5 Business Practices Adopted to Promote Creativity and Innovation
5. Refer 12.7 Challenges Involved in Creativity and Innovation
12.12 Case-let
Ideas at GE Healthcare
GE-Healthcare is unit of General Electric (GE) and it is the leading
manufacturer of diagnostic imaging products. It has a range of products and
services that includes medical imaging and information technologies,
medical diagnostics, patient monitoring systems, drug discovery, and
biopharmaceutical manufacturing technologies. GE Healthcare approached
the students of the Art Center College of Design in Pasadena, California.
They came up with user friendly healthcare concepts for Africa. They are as
follows:
The akuaba radio bracelet It allows instant communication among patients,
midwife and clinics.
A non-invasive scanner It detects malaria by looking through the skin of a
patients hand.
A fetal ultrasound belt It has in-built sensors which would reduce the
training required for technicians.
The problem
Every year, GE Healthcare sells CAT scans, X-ray technique machines and
ultrasound testing instruments worth $15 billion. It categorises its products
based on better and faster readings. GE needs to focus on human side
emotions. For this, it needs to study the cultures round the world. It turned to
the students of the Art Center College of Design in Pasadena, California for
insight and inspiration. This was the first time GE turned to students for
ideas.
Research
Art center formed three teams of eight students.GE asked students to
address the challenges of expanding healthcare into rural Africa. The teams
had students majoring in design, transportation and the environment to work
on this project.
Prototypes
In remote regions of Africa, the mothers-to-be have problems in commuting
to hospitals due to lack of infrastructure. The radio bracelet would alert a
midwife when pregnant patient is in trouble. The radio bracelet was
designed based on West African jewellery. It was decorated with
indentations which resembled rituals of Africa, hence named Akuaba, a
word associated for fertility in West Africa.
The mothers-to-be faced complications due to transportation from remote
region to acute care hospitals. Radio bracelet idea won praise for addressing
major problems in developing countries.
Currently malaria is diagnosed with a needle prick and blood test. This
would scare some patients and could delay treatment until results are
received from labs. A non-invasive malaria scanner detects the disease by
looking through the skin of a patients hand. The scanner would have
paintings based on African culture.
Ultrasound machines currently requires skilled technician to detect probe
over abdomen. The ultrasound belt would be wrapped like a blanket around
a womens belly. Multiple imaging sensors woven into the blanket and it
should be placed correctly. This design reduces the training required for the
technician .It is a big advantage in countries where technicians are in short
of supply.
By sponsoring for the projects of students, GE got a fresh perspective and
ideas for many of its products.
1. What are the innovative concepts of GE for Africa?
2. What are the prototypes of existing GE products?
Source link
http://www.businessweek.com/magazine/content/07_11/b4025417.htm
E-References
http://www.creativityatwork.com/articlesContent/whatis.htm - Retrieved on 23.8.2010
http://www.creativequotations.com/fq-intro.htm - Retrieved on 23.8.2010
http://www.freeworldacademy.com/newbizzadviser/fw3.htm - Retrieved on 24.82010
media.wiley.com/productdata/excerpt/85/.../0470847085.pdf Retrieved on 23.8.2010
http://www.mindmapperusa.com/whats_mindmapping.htm - Retrieved on 24.8.2010
www.schulersolutions.com/business_creativity___innovati.html - Retrieved on 23.8.2010
Unit-13-Business Ethics and Corporate Social Responsibility

Structure:
13.1 Introductions
Objectives
13.2 Ethics and Values
Meaning, definition and codes of ethics
Importance of business ethics and business values
13.3 Ethical Conduct and Unethical Conduct
13.4 Impact of Ethical Conduct
Business policies
Business strategies
13.5 Corporate Social Responsibilities (CSR)
Features of corporate social responsibility
Roles played in terms of ethical conduct
13.6 Business obligations
Sources of business profits
Obligations vested on business undertakings
Balancing business profits with social, moral and ethical responsibilities/obligations
13.7 Social Audit and Corporate Governance
13.8 Summary
13.9 Glossary
13.11 Answers
13.12 Case-let
13.1 Introduction
You have studied in earlier units about strategic intent, vision and mission statements of
organisations. In order to achieve these, an organisation cannot ignore or avoid business values
and ethical principles. In this unit, you will study ethical codes followed in organisations, its
corporate social responsibilities and business obligations. You will also come across several
disciplinary actions undertaken by an organisation while introducing and maintaining the
business ethics, corporate social responsibility (CSR), brief overview on social audit and
corporate governance.
Ethics and corporate social responsibility are essential factors which influences business
undertakings and its functional operations. Business ethics are referred as moral rules and
regulations governing the business world to guide in making effective corporate decisions.
Corporate Social Responsibility (CSR) means operating a business that meets or exceeds the
ethical, legal, commercial and public expectations. CSR focuses in maintaining the effective
business features in an organisation.
Objectives
define the ethical codes of conduct
compare between the ethical and unethical codes of conduct
describe CSR
explain why profit making should not be the only concern of business organisations
describe social audit and corporate governance
13.2 Ethics and Values
This section explains business ethics and business values followed by an organisation to
maintaining consistent growth in an organisation. Business ethics is the behaviour that an
organisation holds firmly in its daily dealings with the world. The ethics of an organisation is
specific from others. Good business ethics should be a part of every business organisation. If a
company does not adhere to its business ethics properly and breaks the laws, they usually end up
being charged for penalty.
Values are the image of, what an organisation stands for and are the basis for the behaviour of its
members. Values provide the basis for judgements about the important factors essential for an
organisation to succeed.
There is a relation between ethics and values. Values determine the right and wrong act in an
organisation, whereas doing the right or the wrong act is termed as ethics.
13.2.1 Meaning, definition and code of ethics
Ethics is defined as the rules or standards which govern the conduct of an individual or an
organisation. The ethical behaviour of an employee depends upon the factors such as the
individuals ethical philosophy, ethical decision ideology, individual perceptions, beliefs and
attitudes, so on.
Organisations can manage ethics in their workplaces by establishing an ethics management
program. Basically an ethics management program conveys corporate values; suggest policies to
guide decisions, etc. It includes extensive training and evaluation of the practices. A corporate
ethics management program is made up of values, policies and activities which influence the
behaviour of the organisation. The greater the potential risk, the more important are the ethical
practices in an organisation.
Benefits of developing ethical standards in an organisation are as follows:
Reduces risks and cost in an organisation
Protects the organisation from unethical employees and agents
Enhances performance, productivity, and competitive position
Expands access to capital, credit and foreign investment
Cultivates strong teamwork and productivity
Manages values associated with quality
Promotes a strong public image
Increases profits and sustains long-term growth
The following are the characteristics of an organisation which are integrated with ethical
standards:
A clear vision and image of integrity exists throughout the organisation
The mission and vision of the organisation is possessed and represented by the top management
Policies and practices of the organisation are aligned according to the vision of the organisation
The organisation has different dimensions which are of proper ethical values
The roles of ethics management program are as follows:
Establishing ethics committee at the board level
Establishing ethics management committee
Assigning an ethics officer
Code of ethics
The code of ethics is the written guidelines issued by an organisation to its management which
assists in conducting its actions according to the ethical standards.
Every organisation needs to develop the code of ethics. The prime goal of the code of ethics is to
focus on the top ethical values needed in the organisation and to avoid potential ethical
dilemmas.
The following are the guidelines to develop the code of ethics in an organisation:
Reviewing the values that must adhere to the relevant laws and regulations in an organisation
Reviewing the values which produce the best traits of a highly ethical and successful product or
service
Identifying values that address the current issues in the workplace
Identifying values which needs to undergo proper strategic planning
Considering the ethical values that are appreciated by stakeholders
Collecting the high priority ethical values in the organisation. Ethical values include the
following features:
Trustworthiness honesty, integrity, promise-keeping, loyalty so on.
Respect autonomy, privacy, dignity, courtesy, tolerance, acceptance so on.
Responsibility accountability, pursuit of excellence, so on.
Care compassion, consideration, giving, sharing, kindness, so on.
Justice and fairness procedural fairness, impartiality, consistency, equity, equality, and due
process so on.
Civic virtue and citizenship following laws, community service, and environment protection so
on.
Composing the code of ethics and associating examples with each value which reflect the idea of
each value.
Phrasing the terms which indicates that all employees are expected to obey the rules to the values
stated in the code of ethics
Obtaining the reviews from key members of the organisation
Announcing and distributing the new code of ethics
Updating the code, at least once a year
13.2.2 Role of business ethics and business values
Business ethics and business values play a significant role in maintaining standards of an
organisation. The following are the roles played by them:
Maximises profit The importance of ethics in business can be understood by the fact that ethical
businesses tend to make more profits than the others. The reason for this is that the customers of
the business which follows ethics are loyal and satisfied with their services and product
offerings. Thus business ethics create loyalty in customers and maximises the profits.
Efficient utilisation of business resources In an organisation, if the top management officials
follow ethical business practices like not appreciating bribe, not cheating the customers,
investors and suppliers etc, then the employees are expected to follow the same practices. This
will result in better and efficient utilisation of the business resources.
Creates goodwill in the market An organisation, which is well known for its ethical practices
always creates goodwill in the market. Investors or venture capitalists always want to invest in a
trustable business. The shareholders also remain satisfied with the practices of an ethical
business.
1. Ethics is defined as the ____________________ which governs the conduct of an individual.
2. Values provide the basis for ______________ about important factors.
3. The code of ethics is the ________________ issued by an organisation to its management.
13.3 Ethical and Unethical Conduct
The difference between ethical and unethical conduct in a business environment arises due to the
respective proper and improper execution of ethical codes and standards by the management.
We will discuss the various principles of ethical conduct followed in an organisation:
Observing high standards of honesty, integrity and fairness in dealing with the client
Acting for the best interests of the clients
Taking reasonable care to maintain fair judgments in performing professional activities
Improving the professional competence
Obeying all applicable laws, rules, regulations and the code of ethical standards
The unethical conduct in an organisation is the result of violation of the above mentioned
principles. The organisation faces the following outcomes because of unethical conduct:
Increased risk which might severely damage the companys brand and image
Decreased productivity
Increased misconduct and conflict
Decreased performance levels of the employees
Decreased probability of reporting the misconduct and unethical behavior of the employees
Increased dysfunctional behaviours in the organisation such as under delivering, over promising,
not giving credit to others, lowering goals, misrepresenting results, etc.
Decreased value or reputation of the company in the market
Activity 1
Suppose you are the project manager of a company and you have identified few members
behaviour as unethical. What are the necessary actions you would take to increase the
productivity of the team as well as deal with the unethical behaviour?
Refer the link for guidance:
http://www.allbusiness.com/management/154159-1.html
4. Way of _________________of ethical codes creates the difference between ethical and
unethical conduct.
5. Improving professional competence is an unethical conduct. (True/False)
6. Unethical conduct decreases _________________ and increases ______________ in an
organisation.
13.4 Impact of Ethical Conduct
In this section, we will discuss about the impact of ethical conduct in implementing business
policies and business strategies in an organisation. The ethical conduct has a positive impact on
employee behaviour and employee perceptions which assists in building a strong ethical culture
Each organisation is different with unique goals, strategies and risk profiles. In addition, every
organisation is at different stage in the evolution of its codes of conduct, ethics and compliance
programs. To have a positive impact on its culture, an organisation must vary the codes to meet
its particular needs and to align with its overall business strategies.
Some of the measurement tools which help an organisation in the analysis of ethical conduct are
as follows:
Employee surveys
Interviews and reviews
Independent audits
Helpline analysis
13.4.1 Impact of ethical conduct on business policies
Business policies are the guidelines developed by an organisation to govern its actions. A
business policy defines the scope within which decisions can be taken by the subordinates of an
organisation. A business policy must be clear, specific, reliable and flexible.
The impact of ethical conduct in implementing business policies in an organisation are as
follows:
Assists in fulfilling the applicable laws
Helps in providing a safer work place
Treats employees with respect and dignity
Protects the confidential information of the client
Avoids conflicts of interest
Projects a positive image of the organisation
Acts ethically in handling and reporting data
13.4.2 Impact of ethical conduct on business strategies
Many organisations have officially adopted a code of ethical conduct and statement of company
values. The board of directors and top executives of the organisation should make sure that the
ethical standards and corporate values are observed in crafting the organisations strategy. Ethical
principles and core values in actions and decisions should be followed by every member in the
organisation. The ethical conduct should be incorporated in the business strategy and should be
practiced in the day to day activities. It is necessary to observe the ethical principles sincerely.
Unethical strategies are incompatible with the concept of socially responsible business
behaviour.
According to Robert Haas, the Chairman of Levi Strauss, an organisation should have its ethical
principles. It should be capable of making profits and making the world a better place to live.
Example - Levis does not conduct business with those who violate their stringent standards of
work environment and ethics. In 1993, Levis Corporation pulled its business worth millions, out
of the Chinese market in protest of human rights violations.
7. Ethical conduct has a _____________ impact on employee behaviour and employee
perceptions.
8. An independent audit is a measurement tool which helps in the analysis of ethical conduct in
an organisation. (True/False)
9. Business policies are the _______________ developed by an organisation to govern its
actions.
13.5 Corporate Social Responsibilities (CSR)
Corporate Social Responsibility (CSR) is the continuing obligation of a business to behave
ethically and contribute to the economic development of the organisation. It improves the quality
of life of the organisation. The meaning of CSR has two folds. On one hand, it exhibits the
ethical behaviour that an organisation exhibit towards its internal and external stakeholders. And
on the other hand, it denotes the responsibility of an organisation towards the environment and
society in which it operates. Thus CSR makes a significant contribution towards sustainability
and competitiveness of the organisation.
CSR is effective in number of areas such as human rights, safety at work, consumer protection,
climate protection, caring for the environment, sustainable management of natural resources, and
such other issues. CSR also provides health and safety measures, preserves employee rights and
discourages discrimination at workplace. CSR activities include commitment to product quality,
fair pricing policies, providing correct information to the consumers, resorting to legal assistance
in case of unresolved business problems, so on.
Example TATA implemented social welfare provisions for its employees since 1945.
13.5.1 Features of CSR
CSR improves the customer satisfaction through its products and services. It also assists in
environmental protection and contributes towards social activities. The following are the features
of CSR:
Improves the quality of an organisation in terms of economic, legal and ethical factors CSR
improves the economic features of an organisation by earning profits for the owners. It also
improves the legal and ethical features by fulfilling the law and implementing ethical standards.
Builds an improved management system CSR improves the management system by providing
products which meets the essential customer needs. It develops relevant regulations through the
utilisation of innovative technologies in the organisation
Contributes to countries by improving the quality of management CSR contributes high quality
product, environment conservation and occupational health safety to various regions and
countries.
Enhances information security systems and implementing effective security measures CSR
enhances the information security measures by establishing improved information security
system and distributing them to overseas business sites. The information system has improved by
enhancing better responses to complex security accidents.
Creates a new value in transportation CSR creates a new value in transportation for the greater
safety of pedestrians and automobiles. This is done by utilising information and technology for
automobiles. The information and technology helps in establishing a safety driving assistance
system.
Creates awareness towards environmental issues CSR serves in preventing global warming by
reducing the harmful gases emitted into the atmosphere during the process of business activities.
13.5.2 Roles played in terms of ethical conduct
CSR plays a significant role in maintaining ethical conduct in an organisation. The following are
the roles played by CSR:
Improves the relationships with the investment community and develops better access to capital
and risks
Enhances ability to recruit, develop and retain staff
Improves the reputation and branding of the organisation
Improves innovation, competitiveness and market positioning
Improves the ability to attract and build effective and efficient supply chain relationships
Improves relationships with regulators
Reduces the costs through re-cycling process
Enhances stronger financial performance and profitability through operational efficiency gains
10. CSR is the continuing ___________ by an organisation to behave ethically.
11. CSR denotes the responsibility of an organisation towards the environment and the society in
which it operates. (True/False)
12. CSR do not improve the relations with the investment community. (True/False)
13.6 Business Obligations
Every business operates to earn profit. Profit is defined as the income earned by a company in a
certain period of time. There are two types of profit namely gross profit and net profit. Certain
amount of risk is involved while earning profits. In this section we will discuss the sources and
obligations of business profits.
13.6.1 Sources of business profits
A business needs several factors to earn profits. It starts with a proper plan which includes proper
research of the market, availability of raw materials research of the competitor, research of the
local laws and setting goals. The next step is the execution of the strategic plan with proper
adherence to the ethical standards and business values. A companys income should be more than
its expenses to earn profits. In other words, we can say that a companys revenue generated from
selling its products, services, share value, net asset worth should exceed the input costs of its
raw-materials, labour, production, and other functional costs or expenditures.
Companies have to mandatorily prepare financial statements and maintain accounts to show
transparency in its financial position and business transactions. Profit and loss statements and a
balance sheet are prepared and published annually as per the Companies Act Regulation.
13.6.2 Obligations vested on business undertakings
Business obligations are the ties which bind an organisation to pay or to do something agreeable
by the laws and customs of the country in which the obligation is made. Obligations in terms of
business are the duties of an organisation towards the upliftment of the people and the country.
Organisations also have to essentially take care of the interests of its stakeholders and employees.
A portion of the business profits may be retained back so as to cycle the funds within the
business.
There are various obligations of a business. Following are some of the business obligations in
terms of social, ethical, moral and environmental way:
Social business obligations
The sense of principles and morality regarding social and community issues may be referred to
as the social obligations.
Business is about the relationships with people and community. But in the current world,
businesses follow limited obligation towards social issues. Social responsibility is demonstrated
by the determination of the organisation to treat customers, employees and investors fairly and
honestly. There are several social issues that affect the current business workplace, but ethical
standards play an important role in business decision making in an organisation.
Factors which enhance social business obligations are as follows:
Implementing punishable act towards corruption or any illegal act in an organisation
The employer-employee relationships must be stable.
Although an organisation might succeed, but it must respect ethical values, people and
community.
The quality and loyalty of companys workforce must not change
The higher officials must possess the following qualities like honesty, responsibility, consistency,
dignity etc.
Example The reasons for the death of employees who inhale fumes from chemical spill in a
factory is the negligence of social obligation that failed to provide safety and security for its
employees.
Moral business obligations
Moral obligation is a responsibility of balancing various needs of an individual by accurate
understanding of the right or wrong actions using the acquired knowledge by an organisation.
Moral responsibility is based on the relationships among friends, neighbours, co-workers and
family members. The vital components of moral responsibility are deeply rooted in the structure
of every society and are a part of social life.
Wars, gang violence, toxic waste spills, corporate fraud, manufacture of unsafe and defective
products, failure of legislative bodies, financial waste by governmental agenciesc are the
outcomes of poor moral obligations of an organisation.
Collective moral responsibility of a business deals with appropriate arrangements of the
widespread harm and misconduct by different groups.
Example The emergence of HIV infection and AIDS has refocused the interest of moral
obligations in preventing the transmission of such communicable disease by the medical
institutes of the nation.
Ethical business obligations
In the time of rapid technological and social change, a business organisation must help their
employees to develop a new understanding of ethical values. Many ethical conflicts have arisen
around the business world in the past. An organisation has certain responsibility towards
reducing unethical issues. Example Worldwide inequality of income can result in unethical
practices such as the child labour; monopoly suppliers can exploit the consumers, etc.
Building ethical obligations in an organisation is highly significant for a business. A company
owes an ethical obligation to the individuals and groups who are responsible for the success of
the company. There are four groups of people who are generally responsible for the success of a
business. It includes employees, customers, community and shareholders.
Ethical obligations in an organisation include the following ethical duties with different values,
assumptions and social constructions of the employment relationship.
Example Infosys has developed its corporate social responsibility by establishing social
rehabilitation and rural upliftment programme, educational system upliftment programme, etc.
The company could fulfill its CSR due to its ethical obligations.
Environmental business obligations
Environmental management has become immensely important in modern period as the volume
of environmental administration and regulations has increased considerably. All businesses like
offices, shops etc. have to meet legal environmental obligations.
It is always essential to develop ways to improve the surrounding environment performance by
reducing costs and unnecessary wastes. A risk evaluation must be carried out as a part of an
overall review of the environmental impact. Local authorities are responsible for the
environmental regulation practices, particularly for lower risk businesses such as offices and
shops. The main environmental regulators include the environment agency in England and
Wales, the Scottish environment protection agency and the environment and heritage service in
Northern Ireland.
Some of the issues in terms of environment management are as follows:
Managing waste products - You must minimise packaging of substances to a greater extent.
Packaging is appreciated only when it meets the environmental standards and can be recovered
or reused later. Larger packaging producers need to register with their environmental regulator
and meet the recycling and recovery targets. You must store and dispose of waste properly. You
must use a waste-disposal contractor who is empowered to treat and handle the waste and
disposes at a site that has a permit.
You must implement extra controls on hazardous waste and also on the storage of potentially
harmful substances such as chemicals.
Controlling pollution and contamination - You need an environmental permit if your business
activities produces significant air pollution. You must be ensured that the emissions are not
produced in abundance which might cause a nuisance to the neighbours.
You must have the approval from your water company to discharge any trade effluent like liquid
waste and the like. You must have approval from your environmental regulator before
discharging any trade effluent or solid waste into the surface water or groundwater. Also
prevention of the accidental contamination of groundwater due to harmful contaminants is
essential.
Companies producing dangerous substances which can cause pollution must notify the regulator,
carry out a risk assessment task and produce a major accident handling plan for the effective
environment management.
Most organisations are following Go Green initiatives to support environmental issues and
reduce pollutions of any kind.
13.6.3 Balancing business profits with social, moral and ethical responsibilities/obligations
Organisations like Starbucks have selected activities that address stakeholder concerns. It has
formalised its initiatives in official documents such as company brochures and annual reports.
They have a website devoted to social responsibility. Starbucks is concerned with the
environment and integrates its policies throughout all aspects of operations to minimise their
environmental impact. Starbucks sponsors literacy programs and holiday gift drive for seriously
ill children. Social responsibility should be inherent in an organisations strategy to aid the well-
being of society. The organisation can contribute to the society only when it makes profit. Hence,
when an organisation is profiting, social responsibility can be considered as greatest concern.
Example The Vermont ice cream donates 7.5 percent of their profits to charity.
Infosys actively participates in welfare of the local community. It contributes one percent of its
profits every year to Infosys Foundation which is a not-for-profit trust. The foundation focuses
on the healthcare of the poor and underprivileged in rural areas.
13. Business profits must be earned with proper adherence to the ethical standards and business
values. (True/False)
14. Ethical obligation is one of the business obligations. (True/False)
15. An organisation should follow the environment management process as an environment
obligation. (True/False)
13.7 Social Audit and Corporate Governance
Auditing is the process of mapping and evaluating a task. In order to carry out an audit, you must
note the skills of the individual performing the task and then identify the gap that needs to be
filled.
Social audit is an auditing process whose purpose is to consider the impact of a business on the
surrounding community, environment, economy and the people.
The importance of social audit in a business is:
Reputation and image-building By highlighting some of the positive factors that has resulted
from proper business activities, you can develop a positive image and reputation of the
organisation.
Enhancing corporate social responsibility A social audit shows how well a company is fulfilling
the corporate social responsibility.
Tendering the opportunities Some organisations might ask you to undertake a social audit if you
carry out the work on behalf of the organisation.
Boosting morale of the employees Staff and volunteers are the inherent part of the audit process
and it can be a motivating factor for them to be involved in a social audit process.
Making a difference An organisation exists for a social purpose. A social audit helps in
understanding whether you are succeeding in making a real difference in the market or not. It
helps in identifying the proper outcomes of the work.
Measuring employees impact Before you can measure the impact of your organisation, you need
to map out your influence in the organisation. Only then you can continue to ask yourself the
difference you have developed in the organisational growth.
The following are the areas in which social auditing is performed:
Individuals and their well-being
Community and its social capital
Environment and economy
The following are the methods to perform a social audit:
Identify key areas to assess the community, economy and environment.
Agree appropriate indicators and draw a plan to obtain such information.
Use appropriate supporting tools.
Carry out your audit in a participatory way.
Check its legalisation by an external assessor.
Corporate Governance
Corporate governance is the reflection of the business culture, policies, relationship with the
stakeholders and the organisations commitment to its values. It refers broadly to the rules,
processes and laws by which a business is operated, regulated and controlled properly. Well
defined and enforced corporate governance provides a structure that works for the benefit of
every individual and is concerned over the accepted ethical standards and best practices followed
in an organisation.
Corporate governance is influenced by the internal factors like officers, stockholders, nature of a
corporation, etc. and the external factors like consumer groups, clients and the government
regulations.
Good corporate governance is the key to the integrity of corporations, financial institutions and
markets. It is also essential to the healthy economy and the stability of the organisation. One of
the outcomes of poor corporate governance is financial crisis in the organisation.
Example Infosys has been a pioneer in benchmarking its corporate governance practices and
considered as the best in the world.
The following are the features of a company which has good corporate governance:
A culture based on the foundation of a sound business ethics and business values
Satisfying the long-term strategic goal of the owners while considering the expectations of all
key stakeholders in the following ways:
Considering and caring the employees interests in past, present and future
Maintaining excellent relationship with both customers and suppliers
Considering the needs of the environment and the local community
Maintaining proper fulfillment in terms of legal and regulatory requirements under which the
company is carrying out its activities.
16. Social audit considers the impact of a business on the ___________.
17. Social audit is performed in a community environment. (True/False)
18. Corporate governance is influenced by the _______________ and ___________ factors.
13.8 Summary
Let us sum up what we have discussed in this unit:
Business ethics are the rules or standards which govern the conduct of an organisation and the
individuals employed in that organisation. Organisations can manage ethics in their workplaces
by establishing an ethics management programme. The code of ethics is the written guidelines
issued for the management by its organisation to help in conducting ethical standards. Business
ethics and business values maximises profit, creates goodwill in the market.
The difference between the ethical and unethical conduct in a business environment arises due to
respective proper and improper execution of the ethical codes and standards by the management.
Proper ethical conduct has positive impacts in business policies and strategies.
Corporate Social Responsibility (CSR) is the continuing obligation by a business to behave
ethically and contribute to the economic development which improves the quality of life in the
organisation. CSR is effective in a number of areas such as human rights, safety at work,
consumer protection, climate protection etc.
Social audit is an auditing process whose purpose is to consider the impact of a business on the
surrounding community, environment, economy and the people. The importance of social audit
can include building good reputation of the organisation, boosting employee morale so on.
Corporate governance is the reflection of the business culture, policies, relationship with the
stakeholders and the organisations commitment to its values. Good corporate governance is the
key to the integrity of corporations, financial institutions and markets.
13.9 Glossary
Obligation : Responsibility to perform some task
Craft : Ability to do something
Upliftment : To strengthen a condition
Dysfunction : Deviation of a process from its original behaviour
1. What is code of ethics? Describe the guidelines to develop it in an organisation.
2. Explain the various principles of ethical conduct followed in an organisation.
3. What are the impacts of ethical conduct in implementing business policies in an organisation?
4. Explain CSR and its features.
5. Describe the various business obligations with examples.
6. What is social audit and corporate governance?
13.11 Answers
1. Standards
2. Judgments
3. Written guidelines
4. Execution
5. False
6. Productivity, misconduct
7. Positive
8. True
9. Guidelines
10. Obligation
11. True
12. False
13. True
14. True
15. True
16. Community
17. True
18. Internal, external
Terminal Questions:
1. Refer 13.2.1 Meaning, definition and code of ethics
2. Refer 13.3 Ethical Conduct and Unethical Conduct
3. Refer 13.4.1 Impact of ethical conduct on business policies
4. Refer 13.5 Corporate Social Responsibility
5. Refer 13.6 Business Profits
6. Refer 13.7 Social Audit and Corporate Governance
13.12 Case-let
Corporate social responsibility of Amway
About the company Amway is one of the worlds largest organisations which
deal with direct sales. It had over 3 million Independent Business Owners
(IBOs) across 80 markets and territories worldwide. It is a family-owned
business which has a strong emphasis on family values. As a family
company, Amway is committed to play a vital role in improving the lives of
children across the globe. In this way, the company was able to show its
dedication to the support of global causes.
Responsibility of Amway The vision of Amway is to help poor children, and
people so that they could live a better life. Amway executed its vision by
providing a low cost and low-risk business opportunity based on selling
quality products. Amway succeeded in establishing corporate social
responsibility by careful strategic planning. It involved many stakeholders to
get the right strategy.
Objectives of Amway
Amway set out the following objectives for its strategy:
Building loyalty and pride among IBOs and employees
Enhancing its reputation as a caring organisation
Making a real difference to human lives
Communicating the strategy
A proper and clear communication helps in executing the strategy. The
media of communication used by Amway are as follows:
Face-to-face communication
Printed material
Public relation material
Email communication
Online activities
1. What were the objectives of Amway in establishing corporate social
responsibility?
2. What were the media of communication used by Amway to establish
CSR?
Source link -
http://ideas24x7.wordpress.com/2008/01/17/case-study-corporate-social-
responsibility-amway/
References
Wheelen T and Hunger D (2002) Concepts in Strategic Management and Business Policy,
Pearson Education. Inc.
E-References
http://managementhelp.org/ethics/ethxgde.htm - Retrieved on 22/08/10
http://www.evancarmichael.com/tags/unethical-conduct.html - Retrieved on 22/08/10
http://www.ethics.org/files/u5/LRNImpactofCodesofConduct.pdf-Retrieved on 23/08/10
http://investor.gartner.com/phoenix.zhtml?c=99568&p=irol-ethical-Retrieved on 23/08/10
http://www.damicon.com/resources/Web_Enabled_Strategy.pdf-Retrieved on 24/08/10
http://ideas24x7.wordpress.com/2008/01/17/case-study-corporate-social-responsibility-amway/ -
Retrieved on 24/08/10
http://www.megaessays.com/viewpaper/94765.html - Retrieved on 24/08/10
http://www.iisd.org/pdf/2007/csr_guide.pdf - Retrieved on 25/08/10
http://tutor2u.net/business/strategy/corporate-social-responsibility-introduction.html - Retrieved
on 25/08/10
Unit-14-Challenges in Strategic Management
Structure:
14.1 Introduction
Objectives
14.2 Strategic Management as an Organisational Force
Key challenges
Global competitiveness
14.3 Dealing with Strategic Management in Various Situations
Strategic change and flexibility
Uncertainty
Crises and chaos
Economic cycles
Ethics and social welfare
Environmental issues
14.4 Strategic Management Implications and Challenges
Liberalisation, Privatisation, Globalisation (LPG)
E-commerce and e-business
Innovation and technology
Information management and knowledge driven strategy
14.5 Summary
14.6 Glossary
14.8 Answers
14.9 Case-let
14.1 Introduction
In the previous unit, we discussed the various ethical codes of conduct involved in business
policies and strategies. Every organisation big or small will be interested in long-term growth
and success of the business. Most organisations have taken aid of strategic management concepts
and undertake their business accordingly. In this unit, you will learn organisational challenges
faced in strategic management, issues related to managing the strategic position of business and
its implications and LPG concepts.
Objectives
describe strategic management challenges faced by an organisation and classify the issues related
to managing strategic position
explain the implications and challenges of strategic management
examine the different types of challenges such as dealing with uncertainties, crises, chaos and
other situations
14.2 Strategic Management as an Organisational Force
The field of strategic management has significantly improved in gathering information about the
operational and financial performance. Earlier, the strategic management was limited to
elementary analysis which was often supported by qualitative data. At present, it has created a
framework in many technological and business process methodologies. The challenges of
strategic management are dynamically changing problems of commerce and internal growth
which has initiated the development of more comprehensive and realistic measures to increase
the performance. The challenges are identifying consistent data, bridging the gap by quality
management tools, and customising the tools to save money and time.
14.2.1 Key challenges
Each and every organisation faces certain challenges irrespective of the industry. The key
challenges of an organisation are:
Growth The increasing impact of economic and social behaviour has made the organisations to
improve its quality, service and responsiveness either in saturated or declining markets. The
organisations must emphasise that current share price, earnings per share, revenues and market
share reflects the growth of the organisation. The growth of the organisation can be improved
with respect to quality, service to its constituencies, influencing their business activities with
efficient personnel and facilities etc.
Value The organisation must follow certain values that act as foundation to growth. The
organisation benefits by enhancing relationships among business activities according to the
changing environment. The critical elements in improving the value of organisation are,
understanding the nature of values, its evolution, and consequent growth opportunities.
Focus Focusing on the specific objective is difficult in the present era. The innovation of new
technology, society and social factors result in diversification of objectives. Hence its a great
challenge for organisations to focus on particular objective and avoid diversification.
Change The organisation adopts change when it expands its business activities in different fields.
To meet the needs of the customers, the change is deployed in terms of resources, technology,
internal environment etc. It is a challenge to the organisations to overcome many obstacles that
emerge due to the changes made. Organisations need to invest more to implement change. Hence
the organisations must compete more creatively while maintaining continuity in the existing
business activities.
Future The future of the organisation depends on long term goals and plans. The uncertainties
and risks are associated with organisations future view which creates need for hedges against
downsides, while being focused on upside of the organisation.
Knowledge It acts as the medium to address the challenges in organisation. Most of the
organisations face difficulties in transforming data, information and knowledge into actions to
produce desired results. It involves understanding the role of information and knowledge to solve
problems; and decision making in different domains. Archiving knowledge is required to meet
the needs of the customers.
Time It is a big challenge to the top level management of the organisations. Time is one of the
important resources in the organisation. Transformational leadership includes devoting personal
time for creating things that values more. It is a classic challenge for top management to
maintain time in all business activities.
14.2.2 Global competitiveness
The nature of competitiveness depends on the organisations globalisation potential. A well
designed strategic management helps the organisation to attain global competitiveness. It also
helps in obtaining various advantages from the following sources:
Efficiency The organisational efficiency lays a heavy impact on the global competitiveness. The
various factors that increase the efficiency are economies of scale for access to more customers
and markets, utilising other countrys resources such as labour and raw materials; extending the
product life cycle by selling old products to under developed countries and implementing new
products according to the growing technology.
Strategies First mover and the only provider of a product in the market, have an advantage of no
competition in the market when it was introduced, a monopolist can gain higher profit than in a
competitive market place. The first mover establishes a market position which can help to retain
a dominant market share and higher margins than later entrants. Global competitiveness is
attained by cross subsidisation between countries. This helps in exploiting business opportunities
across nations to achieve goals. Thus, cross subsidisation between countries is important to
achieve global competitiveness.
Risks The organisations face the risk of diversifying the business activities. This happens due to
the disassociation of business cycle among the various countries. It also leads in diversification
of the operational activities due to labour problems and social problems like earthquakes and
wars. Therefore the organisations must implement a systematic business cycle such that it does
not hamper the business process globally.
Learning The organisations working globally has an advantage of broadening the learning
aspects due to diversity in operating environments. Learning latest technologies and methods
increases global competitiveness by attracting more customers and enduring latest outputs in
meeting the customers needs. Hence, learning paves way for global competencies.
As the global competition strengthens, the managers will be more cautious of their ability to
identify, cultivate and utilise distinctive competencies that helps the growth of the organisation.
Example Intel was established in 1960 and initially had all its operations in Silicon Valley even
though its products are sold worldwide. As the cost of manufacturing semiconductor has
increased, the company began to shift some labour, low skill activities offshore. But later as the
high technology cluster in Silicon Valley developed, the company started moving more of its
activities by establishing low cost centers in United States for manufacturing purposes. Intel
faced hardships in recruiting skilled personnel to new locations. It planned to train new engineers
in United States and relocate them to Intels facilities in Ireland.
In this section we discussed the strategic management key challenges and its global
competitiveness. Next section deals with various issues in dealing with strategic management.
Activity 1
Consider you are the manager of a steel manufacturing company. Over a period of time, you feel
your company is experiencing losses due to the presence of many competitors in the market.
What steps would you plan to gain profit and expand globally?
Refer the link for guidance - http://www.globalsteel.ie/content/index.php
1. The field of strategic management has significantly improved in gathering information about
the _____________and financial performance.
2. The organisation must follow certain _______________ that act as the foundation to growth.
3. A well designed ______________ helps the organisation to attain global competitiveness
14.3 Dealing with Strategic Management in Various Situations
As the organisations environment improves dynamically, there is need for improving the
systemic ability of the organisations to identify and respond to strategic changes. It is difficult for
the organisations to deal with contemporary situations due to high investments. To survive in
market, the organisation deals with situations like strategic change and flexibility, uncertainties,
economic cycles.
14.3.1 Strategic change and flexibility
Strategic change refers to non-routine, non-incremental and discontinuous change which alters
the overall direction and components of the organisation. The strategic change becomes
necessary in many areas like organisational internal environment, diversification, technological
changes, and change of personnel and so on. The term strategic flexibility is referred as the
systemic ability of an organisation to change strategically.
Issues in dealing with strategic change
The large scale changes in the world makes many organisations to undergo major strategic
reorientation. These reorientations involve changes in products, services, markets, organisational
structures, and human resources.
The various issues in dealing with strategic change are:
Cultural problems The culture in the organisation mainly refers to values, objectives, beliefs and
interpretations. The difficult task for top management is to decide the culture to be incorporated
in order to make employees work for the betterment of the organisation. It depends on the type of
sharing values, assessing objectives, commitment of the employees towards the organisation and
the interpretations of past and current events. Hence it becomes difficult for the organisations to
deal with strategic change in less period of time.
Political problems The major political problem is allocating the power and resources. The
decisions made by the top management include compensation programs, career decisions, budget
decisions, and internal power structure of the organisation. Great deal of time and attention is
given to the strategic political issues during the process of acquisition, altering the relationship
between unions and management, change of key executive officer etc. The political orientation in
organisation and the flow of changes can lead to low levels of trust, pessimism etc.
Technical problems This problem arises when there is a lack of technical expertise in the
organisation. The framing of strategies and sudden implementation of new strategy requires
expertise to handle the changes and implement them in the organisation. It requires
implementation of new concepts that brings changes in the internal environment of the
organisation.
The various methods to manage strategic change are:
External interface The complexity in the organisational environment increases due to the
immediate changes in strategic management. The task of identifying and predicting the pressures
becomes more difficult. Hence the development of new environment scanning and data
processing capabilities becomes necessary to manage the external interface changes.
Mission It is possible to shift goals in times of relative environmental stability and excess
resources. But when there is economic, political and social pressure, the clear statement of
organisational mission is required to guide the organisation in strategic decisions.
Strategy In the multiple levels of organisations there is need for development of strategic plan
with various operational objectives. Installing such a process requires t a new set of management
techniques and processes.
Managing organisational mission/strategy processes This process involves developing new
processes which will realistically engage the relevant interest groups when planning and decision
making becomes more complex.
Task The change in the strategies leads to introduction of new tasks and technologies in the
organisation. Hence this results in employing new professionals, or training and development of
existing employees.
Prescribed networks Alterations are required in various sectors like communication networks and
authority to deal with new tasks and technologies. The introduction to new tasks requires
planning and prescribes necessary communication networks. It includes specifications of
communication, assigning tasks and reporting processes.
Organisational process The internal network communication, problem solving and decision
making are the responsibilities of the organisation. It is imperative for managers to understand
and utilise consensual decision making approaches.
Role of flexibility in strategic management
The strategic flexibility presents a revolutionary and comprehensive view of central role. It helps
to redefine strategies, coordinate with new kinds of modular organisations, and enable new
approaches to manage knowledge assets and guidelines for organisational learning.
Flexibility is a necessity to cope with complexity and dynamics. The role of flexibility supports
various processes of competence building and leveraging. The flexibility effects are concerned
with the dynamics of future knowledge acquisitions, applications and responses to new internal
and external developments.
Strategic flexibilities create competencies which refer to overall competency in terms of specific
processes in the organisation. It depends on the specific organisational flexibility to respond to
the diversifying conditions such as evolving market demands, technology, logical change and
competitive developments. The various modes of competencies are:
Cognitive flexibility for alternative strategic logics It refers to developing alternate ways for
creating value in the market. It depends upon the organisations ability to identify market needs,
define new products to satisfy the needs, design supply chain and distribute channels for
realising new products in the market.
Cognitive flexibility for alternative management processes It is the ability to conceive new
management processes for implementing new strategic initiatives. It helps in identifying and
accessing new kinds of resources needed to perform strategic logic, devising organisational
designs, defining appropriate controls for monitoring and motivating new value creating
processes. It depends upon strategic managers to experiment new forms of coordination with
existing management structure and processes or frame alternative approaches to work effectively.
Coordination flexibility to configure and deploy resources The coordination flexibility depends
on the alternative chains of resources that are required to carry out alternative strategic logics.
The middle managers are responsible to identify, acquire, configure, and deploy effective
tangible and intangible resources.
Flexibility of resources to be used in alternative operations This mode involves ability to use
resources in alternative ways and constrain it by intrinsic resources in the organisation. The
various forms of resource flexibilities include upgrading to higher performance levels, scalability
to increase capacity, and extendibility to add new functionalities.
Operating flexibility in applying skills and capabilities to available resources This mode refers to
the use of resources in operating conditions. The operating flexibilities depend on human skills
and capabilities of the employees. The use available resources determine the reliability and
efficiency for organisation to endure production and delivery of its products. This mode
determines robustness of the operations in the firm by operational strategic options.
Quinns incremental model
Quinns incremental approach is based on the assumption of the need for incremental processes
and the primary mode used in strategy settings. According to James Brien Quinn, most of the
large organisations emerge with iterative process in realising the probes of future, experiments,
and learn from a series of incremental commitments rather than global formulations of total
strategies.
The incremental processes must be used in setting a strategy to integrate the psychological,
political and informational needs of an organisation. The total strategy is largely defined by
development and interaction of certain subsystem strategies. Each of these subsystems has its
own peculiar timing, sequencing and power necessities. Due to many uncertainties, managers
find difficult to predict the precise process for a major subsystem to evolve. Strategic managers
in bigger organisations recognise these problems and develop subsystem and total enterprise
strategies in a logical and incremental manner. It helps the strategic leaders to:
Improve the quality of information used in corporate strategic decisions.
Deal with personal resistance and political pressure if a strategic change encounters.
Create organisational awareness, understanding, and psychological commitment for effective
implementation.
Reduce uncertainties and allow interactive learning between organisation and its various
environments.
Improve the quality of strategic analysis and choice by involving relevant people and avoid
incorrect decisions.
Quinns approach includes appreciative impact upon people and culture and practically searches
better ways to take up right decisions.
14.3.2 Uncertainty
The framing of strategies is concerned with future. The organisations face differing degrees of
uncertainties. Considering the first step to be analysing competitive strategy, an organisation
must understand the sources and key characteristics of uncertainties. Different types of
uncertainties arise from various sources. Few types of uncertainties are:
Demand uncertainty It mainly depends on the size of the market and arises when demand size of
market is relatively less for marketing manufactured products. Hence organisations must have
experts who project different demand markets widely.
Supply uncertainty It arises due to the internal operations and external developments in
technology, changes in supplier terms or contracts, sudden withdrawal or termination of supply,
shortage and so on.
Competitive uncertainty and externalities It includes unpredictable circumstances arising within
the organisation. It also concerns the nature of competitors, and their strategies. Uncertainties
may result from the effects of external environment such as social pressure or government
intervention.
14.3.3 Crises and chaos
Organisations consider crises as the problem that disrupts the way in which organisation
conducts business, attracts media when negative situation occurs, etc. Crises and chaos arises due
to various reasons like internal leadership, resource sharing, employee appreciation, etc. Usually
low profit earning organisations often face these problems. Few types of crises are:
Sudden crises This happens due to a sudden disruption occurred in the organisation without any
warning and likely to generate a new coverage to media. Some of them are, business related
accidents, natural disasters, sudden death of an important person, workplace violence etc.
Smoldering crises It is defined as a serious problem which is generally not known to the
organisation. It may generate negative news coverage and could result in large amount of
penalties. Some of the smoldering crises include indications of significant regulatory actions,
government and media investigations and customer allegations.
To overcome crisis and chaos, the organisations require strong flexible strategic process. It has to
incorporate various methods like promptly reacting to crises, maintain honest relationship with
media and customer, establishing good contact groups, and relationship with the employees.
14.3.4 Economic cycles
Economic cycle refers to recurring and fluctuating levels of economic activity experienced over
a long period of time. It is also called as a business cycle. The four stages of economic cycle are
economic expansion, slowdown, recession and recovery. These phases depend upon changing
employment, industrial productivity, and interest rates.
Figure 14.1 depicts the variations of economic cycle.
Figure 14.1 Economic Cycle

Source: Adapted from http://www.investopedia.com/articles
Initially, economic cycles were considered to be extremely regular, with predictable durations.
But in todays business world, it is widely known to be irregular with varying frequencies,
magnitude and duration. It provides large degree of unpredictable fluctuations. The government
plays an important role to smoothen the economic cycle and reduce its fluctuations.
During the expansion stage, organisations expand in all sectors and the demand for the products
increases. But if the economy swelters, there is a chance of danger in demand pull and cost push
inflation. Similarly during an economic slowdown, the rate of economic growth decreases but
continues to grow at a slower rate without falling into outright recession. The recession phase
leads to a fall in the level of national output, decline in employment, downfall in business profits,
decrease in capital investments, stocking heavy price discounting, reduced inflationary pressure
and decline in demand for imports.
14.3.5 Ethics and social welfare
The organisations confront ethical and social welfare issues due to wide range of reasons like
potential conflict between goals of enterprise and individual managers and fundamental rights of
key stakeholders, stockholders, customers, employees, suppliers, competitors, communities and
the general public. Ethical issues also rise due to the problems that relate to formulating vision,
mission and objectives. It also occurs during the process of strategic change. All stakeholders in
the organisation expect their right of action to be performed effectively.
14.3.6 Environmental issues
Awareness of environmental issues is universal and has been reviving recently. Many
international marketing conferences have included special papers on environmental issues in
their sessions. Environmental issues are in diverse disciplines as economics, sociology, education
and psychology.
Several factors such as managerial duties, the role of organisational culture to bring
environmental internal stakeholders' awareness, organisational involvement in environmental
issues, training and concern, implementation of environmental motivation and organisational
innovations are very important for the success of organisational environmental strategy.
In this section, we discussed the various issues in strategic management. Next section deals with
strategic management implications and challenges.
4. The term strategic flexibility is referred as the systemic ability of an organisation to change in
strategically important ways. (True/False)
5. Smoldering crises occurs due to a sudden disruption occurred in the organisation without any
warning (True/False)
6. Supply uncertainty arises due to internal operations and external developments in the
technology. (True/False)
14.4 Strategic Management Implications and Challenges
The strategic implications of increasing globalisation are profound. Managers cannot ignore
opportunities. The various implications are liberalisation, privatisation and globalisation.
14.4.1 Liberalisation, Privatisation, Globalisation (LPG)
The process of liberalisation privatisation and globalisation are contributing to the increasing
applications of strategy management in organisations. The reasons to implement LPG are as
follows:
Excess consumption of revenue resulting in heavy government borrowings
Over protection to industry and growing inefficient usage of resources
Mismanagement of firms and organisations
Mounting losses of public sector enterprises
Low foreign exchange reserves
Burden of national debt and inflation
Liberalisation
Liberalisation refers to relaxation of government restrictions in the areas of social and economic
policies. The relaxation of trade regulations reduces tariffs and moderates other restrictions on
the flow of goods and services among various countries. Challenges of liberalisation are:
The advent of globalisation has changed the view of market and organisations ability to do
business. This is essential to be competitive. Organisations have to think of a global market
instead confining to a local or national market. This may need redefining the organisational
structure. Organisations may have to create many divisions to manage the international
management instead of single division for local markets.
As organisations become global, strategic management become increasingly important to track
international developments and position the organisation for long term competitive advantage. It
may necessitate creating a shift to a horizontally managed interactive organisation. In other
words, organisation has to quickly adapt to changes by learning from other organisations.
Privatisation
Privatisation refers to transfer of service functions or assets from public to private ownership and
the opening of certain closed areas to private sector entry. Privatisation can be achieved in many
ways like franchising, leasing contracts and divesture.
Privatisation will help in reducing the burden on financial reserves. It will modernise and
diversify the public sector units and increases profit. It makes public sector unit more
competitive. It will improve the quality of decision making, because those decisions will be
made without political interference. Privatisation may help in reviving sick units which have
become a liability on the public sector. It encourages monopoly in big businesses and results in
unequal distribution of wealth. It may result in loop-sided development of industries in the
country. The limited resources of the private individuals cannot meet some of the vital tasks
which may alter the character of economy. Privatisation offers both opportunities and threats to
economy.
Globalisation
An industry's potential for globalisation is driven by economic, environmental, and competitive
factors in the market. Market trends determine the customers' acceptance to a global product;
economic factors determine whether pursuing a global strategy can provide a cost advantage;
environmental factors checks whether the necessary supporting infrastructure is available; and
competitive factors provide a spur to action.
The term globalisation refers to the integration of national economies into international economy
through trade, foreign direct investment, capital flows, migration, and spread of technology.
Some of the globalisation drivers include technological, political, market, cost, and competitive
drivers.
Organisational factors can strengthen or weaken a business's attempt to globalise. The four
factors affecting the ability of an organisation to develop and implement global strategy are
organisational structure, management processes, people, and culture. The dimensions of
globalisation are market participation, product standardisation, activity specialisation, uniform
market positioning, integrated competitive strategy, and the ability of organisation to implement
different global strategy elements.
14.4.2 E-commerce and e-business
Electronic commerce refers to a broad range of online business activities of various products and
services. It also pertains to any form of business transactions in which parties interact
electronically rather than by physical exchange or physical contact. It is usually associated with
buying and selling over the internet and conducting transactions involving transfer of ownership
or rights to use goods or services through a computer mediated network.
E-business is used to enhance ones business. It includes any process that an organisation
conducts, over a computer mediated network. It can be defined as transformation of an
organisations process to add additional customer value through application of technologies and
computing paradigm of new economy.
The processes enhanced in e-business are as follows:
Production process It includes procurement, ordering and replenishing of stocks, processing of
payments, web-sites for suppliers, and production control processes.
Customer focused process It includes promotional and marketing efforts over the internet,
processing of customers purchase orders and payments, and customer support.
Internal management process It includes employee services, training, internal information
sharing and recruiting. Electronic applications enhance information flow between production and
sales, improving sales and productivity.
Example Amazon.com is a virtual bookstore. It does not possess any physical stores. It is posting
an annual sales rate of approximately $1.2 billion equal to about 235 Barnes & Noble
superstores. Due to the efficiency in selling books over the web, Amazon has spent only $56
million on fixed assets, while Barnes & Noble has spent $118 million for 235 superstores. This
point proves that it is profitable for the organisations to run business through e-commerce rather
than running business in traditional brick and mortar stores.
14.4.3 Innovation and technology
There is a tendency to think that innovation is only about scientific or technological advances.
The technological aspects of innovation focus on creating new ideas and conceiving future
innovation. Governmental and non-governmental policy reports about innovation address to
technological aspects, and recommend additional funding for science, technology, engineering,
and mathematics (STEM) to enhance international competitiveness around the globe.
Innovation requires a variety of factors working together in a balanced way. In macro level,
regulations, market structures, financial institutions, and other aspects must be in harmony to
enhance innovation. The demand, supply, and financing of innovation should also be balanced.
The micro level factors are technological and organisational. The technological aspects refer to
resources and processes in R&D, strategies for exploiting scientific breakthroughs, production
and distribution aspects. Organisational aspects refer to managing people to ensure that they are
capable and willing to innovate, and ensure that the processes are efficient and result effectively.
The enforcement of intellectual property rights provides exclusive right over the innovation of
various products for a certain period of time. It helps the organisations to grow in terms of
economic, cultural and social aspects. Intellectual property rights prevent others from copying or
unfairly gaining from inventors creativity and investment. The various forms of intellectual
property include patents, designs, trademarks, copyrights, geographical indications, and trade
secrets. Patents are provided for innovation in field of science and technology. Design is an idea
or a concept of shape, configuration, and pattern applied to an article.
Trade Marks are the symbol in the form of a word or label applied to a product. It reveals the
origin of the product. The trade mark enables the customer to distinguish the products of
different manufacturers. The main criterion for obtaining a trademark registration is its
originality. Example - Coca Cola Company adopted relationship with a soft drink, and Sony
applied to electronic goods etc. Copyright is the right to copy and make use of literary, dramatic,
musical, artistic works, cinematographic films, records and broadcast.
The intellectual property rights are governed by the law. There are specific laws to protect
intellectual property management and it varies across the globe. The justification and
enforcement of rights is confined to a single nation which provides such rights and cannot be
extended beyond the region. To secure patents, designs, trademark and copyrights, separate
applications has to be filed as per law and rules of a country. The theft and illegal use of the
property results in economic loss to an organisation. It creates a massive drain on national
economies. Piracy and counterfeiting are responsible for the loss of tax revenues. Customers are
harmed by unsafe counterfeit products that can pose significant health and safety risks.
The remedies for violation or infringement of intellectual property rights include civil and
criminal remedies. Civil remedy provides compensation to the intellectual property right holders.
Criminal remedy includes warrants which ensure sufficient punishment for illegal activities.
The universal availability of technology has fueled the growth of robust and knowledge-based
competitive global marketplace. The business forecasters are predicting that creativity and
innovation will be the most important factors to establish competitive advantage. The major
challenges over next generation are:
Adaptability It is the process of building an environment that suits various conditions.
Innovation Mobilising the imagination of each individual in the organisation.
Engagement It is the process of creating an environment that emotionally and intellectually
makes individuals to apply their capabilities at work.
14.4.4 Information management and knowledge driven strategy
Information management strategy refers to managing any kind of information. Documentation
management is also considered as information management. Knowledge management is a
process in which an organisation generates value from their intellectual and knowledge based
assets. Generating value for the organisational information involves both people and technology
components.
Information management is a business process and business practices that strengthens the
creation and usage of information. The challenges of information management for an
organisation are as follows:
Large number of dissimilar information management systems
Less integration or coordination between the information systems
Competitions between information management systems
No clear strategic direction for overall technology environment
Limited resources to deploy, manage and improve information systems
Lack of clarity in major organisational strategies and directions
Activity 2
Consider you own a large software company. Evaluating the current market scenario, how will
you gather information about the performance of your software products?
7. ___________refers to relaxation of government restrictions in the areas of social and
economic policies.
8. The technological aspects of _______________focus on research to create ideas.
9. Match the terms with its feature:
Set A
a. Knowledge management
b. Information management
c. Intellectual property management
Set B
i) Strengthens information usage
ii) Subject to laws and rights
iii) Generates value from information assets
14.5 Summary
Let us now summarise what we have studied in this unit.
The field of strategic management is significantly grown in all aspects of organisation. The major
challenges in strategic management are related with growth, value, change, organisational
development, leadership skills and several other factors. The dynamic changes in organisational
environment improve systemic ability to identify and respond to strategies.
How an organisation deals with business ups and downs, how it faces uncertainties, chaos and
crises, how it reacts to economic cycles and external pressures is dependent on how effectively
strategies are framed and implemented. It also depends how much flexibility organisation allows
on its strategic management process.
The strategic management implications and challenges depend on liberalisation, privatisation,
globalisation, e-commerce and e-business, innovation and technology, and many others.
14.6 Glossary
Crises : Calamities or emergencies
Chaos : Disorder or confusion
1. Explain the strategic management challenges and its global competitiveness.
2. Classify the various situations in dealing with strategic management.
3. Explain liberalisation, privatisation, and globalisation concepts, and describe the various
implications and challenges of strategic management.
14.8 Answers
1. Operational
2. Value
3. Strategic management
4. True
5. False
6. True
7. Liberalisation
8. Innovation
9. a-iii; b-i; c-ii
Terminal Questions:
1.Refer 14.2, 14.2.1, 14.2.2 Strategic management as an organisational force in meeting
challenges, key challenges, global competitiveness
2. Refer 14.3 Dealing with strategic management in various situations
3. Refer 14.4, 14.4.1, 14.4.2, 14.4.3, 14.4.4 Strategic management implications and challenges
14.9 Case-let
Dealing with strategic management issues in Coca Cola Company
The Coca Cola Company is a leading manufacturer of non-alcoholic
beverages in the world. The company licenses various brands including
packaged drinking water, juice, tea, energy and sport drinks. The company
believes that the customers are life of their business. They intend to connect
with future customers through providing quality products by incorporating
skilled employment for production and quality control, high quality
materials for production, updating technology etc. The company
experienced various strategic issues like language, culture, politics,
economic and governmental interference, labour, market research,
advertising, financial and transportations.
Hence to overcome all these issues, the company implemented strategic
alternatives to follow multi domestic strategies in manufacturing their
products independently in different countries. The products are
manufactured based on different strategies on internal and external
environment of the country. The company also implemented the e-
commerce system for selling products. So, it makes the customers easy to
order soft drinks using internet facilities. Implementing new methods made
the organisation to grow with strong distribution network, provide strong
brand products, and led to low cost business operations.
1. Discuss the issues resulting in downsizing of the company.
2. Why do you think it is necessary to implement new strategies in the
company?
Source link - http://www.scribd.com/doc/17320846/Strategic-Management-
Issues-of-Multinational-Companies-MNCs-A-Case-Study-on-CocaCola-
Company
E-References
http://www.ehow.com/way_5519790_challenges-strategic-management.html - Retrieved on
26/08/10
id=JjX_8u1AtjE
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pg=PA1
9
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dq=essential+challenges+in+strategic+managemen
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hl=e
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ei=PLx0TNjtBob_ngfH74WKB
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&sa=X&oi=book_result&ct=result&resnum=2&ved=0CDgQ6AEwAQ#v=onepage&q=essential
%20challenges%20in%20strategic%20management&f=false - Retrieved on 27/08/10
http://faculty.business.utsa.edu/kshimizu/Publication/Preparedness%20%28AME
%202004%29.pdf - Retrieved on 26/08/10
Unit-15-Recent Trends in Strategic Management

Structure:
15.1 Introduction
Objectives
15.2 Strategic Thinking
Influence of strategic thinking
Critical success factors
15.3 Organisational Culture and its Significance
Influential factors
Redesigning of organisational culture
15.4 Organisational Development and Change
Sustainable competitive advantages
Paradigm shift from shareholder to stake holder concept
15.5 Change Management
Principles of change management
Approaches to change management
15.6 Models of Leadership Styles and its Roles
Leadership styles and model of effectiveness of influence
Creating and leading learning organisations
15.7 Strategic management in a new globalised economy
15.8 Summary
15.9 Glossary
15.11 Answers
15.12 Case-let
15.1 Introduction
In this unit we will discuss the recent trends in strategic management. Current competitive
environment does not have a standard fixed model due to changing environment. Fast transitions
create moral and ethical dilemmas in an organisation. These factors have a direct impact on our
personal lives and the organisational environment. With the available changing factors, the
management of an organisation is forced to implement some reliable methods which can
maintain a constant environment within the organisation.
In this unit, you will come across the concepts of strategic thinking, change management,
organisational culture, organisational development, leadership styles, strategic failures, and
globalised economy influencing the strategic functioning of an organisation.
Objectives
define strategic thinking
describe organisational culture and development
explain the change management process
describe the models of leadership styles
analyse the aspects of globalised economy in strategic management
15.2 Strategic Thinking
Strategic thinking is the concept of broad innovative thinking on a daily basis to achieve overall
goals in the team and organisation. It focuses on finding and developing unique opportunities to
create values by enabling a stimulating and creative dialogue among the people. It develops an
effective synergy of people working together in an organisation to achieve a common goal in a
better and superior way. Strategic thinking occurs at all levels of an organisation from managers
to production supervisors, sales executives to financial planners and analysts, so on.
Features of strategic thinking are as follows:
Clarifying the direction and vision of the organisation along with its critical success measures
Identifying relationships that support the whole organisation and its vision
Identifying influential points within the organisation
The following are the characteristics of strategic thinkers:
Having broader boundaries to think, plan, perform, analyse and evaluate a task
To be passionate and energetic in their work
To be life-long learners and risk takers
Executing the vision of the organisation
Developing extraordinary objectives towards the growth of the organisation
15.2.1 Influence of strategic thinking
Strategic thinking assists you to face the challenges in building strategy and accurately assessing
the competition in an organisation. It extracts and applies the latest strategic insights and the
approaches. Strategic thinking helps in creating consistent and effective strategies for the
strategic plan.
Features adopted by an individual through proper strategic thinking are as follows:
Develop abilities to observe the challenges in the organisation
Apply new concepts and skills
Increase an individuals and organisations competency
Find value in the learning experience
Earns motivation and modify the functions
15.2.2 Critical success factors
Critical success factors are defined as the key features that have a direct and important influence
on the effectiveness and efficiency of an organisational programme. The critical success factors
for strategic thinking are as follows:
Use of wider boundaries for thinking, planning, executing and evaluating the task
Precise thinking about what is to be done for the task and how to execute the task
Prepare all objectives satisfying the ideal vision and mission of an organisation
The critical success factors for strategic thinking are inter-linked. Critical consequences arise
even if one of the factors is ignored. One of the critical consequences is the creation of risky
objectives.
Activity 1
Suppose you are a deputy manager of an established company which manufactures steel. As a
strategic thinker, what will be your strategies to increase the export business of your company?
Refer the link for guidance -
http://www.1000ventures.com/business_guide/strategy_implementation.html
1. Strategic thinking assists in enhancing the ______________ of the people working together in
an organisation to achieve a common goal.
2. Strategic thinkers have broader boundaries to think, plan, perform, analyse and evaluate.(True/
False)
15.3 Organisational Culture and its Significance
Organisational culture is a collection of organisational values and norms shared by the personnel
in an organisation. It controls the way of interaction among the people and the stakeholders.
Organisational values are the beliefs dealing with the kinds of goals and appropriate standards of
behaviour of personnel to achieve the goals. Organisational values develop organisational norms
and guidelines prescribing appropriate behaviour of employees in particular situations and
control the behaviour of personnel towards each other. Organisational culture is the most critical
factor determining an organisation's capacity, effectiveness, and longevity. Increased
competition, globalisation, mergers, acquisitions etc. have created a greater need for
organisational culture.
15.3.1 Influential factors
A proper organisational culture is essential for the growth of an organisation. The important
factors of an organisational culture are as follows:
Focuses and influences the nature of human behaviour
Clarifies the importance of creating appropriate methods which encourage people to work
together for a desired outcome
Contributes significantly to the organisation's brand image and brand promise
Creates energy and momentum in an organisation
Improves the cultural effectiveness of an organisation
Creates greater synergy among the people and increases productivity
15.3.2 Redesigning of organisational culture
An organisational design includes the structure, processes and behaviours practiced in an
organisation which holds the key for the progress of business strategies.
The redesigning of organisational culture means redesigning of the organisational values and
norms for the enhanced productivity of the organisation. Redesigning occurs in divisions,
individual functional groups etc. The benefits of redesigning are faster delivery of results, more
efficient working practices and sustained positive behaviour of the people.
Redesigning occurs when there is a problem with the current process. The driving forces for the
change initiative are poor results and decline in growth of the organisation.
The redesigning programme methodology includes the following steps:
Strategic assessment An initial strategic assessment and analysis of needs is performed to
increase profitability and success of the organisation.
Defining the criteria Criteria are the refined conditions as needed in the organisation.
Defining the options Several possibilities of cultural structure is mapped according to the goal,
irrespective of the dependency on the defined criteria.
Model possibilities Conducting modeling of criteria and options using a decision analysis tool
that weighs all the criteria against the options to produce the most and least preferred solutions.
Defining new behaviours - Process of assessing new behaviours are available in the
organisational structure and defining the best choice needs to be adopted to develop redesigning
of the organizational culture.
Implementation Implementation process is performed to map the new roles and responsibilities,
to create resolution of team and to create agreement and resolution on planning, decision-
making, resource allocation, consolidation of data, knowledge transfer etc.
3. Organisational culture is a collection of __________________ and _______________that are
shared by the personnel in an organisation.
4. Redesigning of a process occurs when there is a problem with the current state in an
organisation. (True/False)
15.4 Organisational Development and Change
Organisational development is a complex strategy which is proposed to change the beliefs,
attitude, values and culture of an organisation to adapt new challenges. Organisational
development is a key element managed by top officials in strategic management. It allows better
usage of resources and drives everyone to attain the companys objectives. It helps to improve the
performance of the teams and departments in an organisation.
The key reason for implementing organisational development method is to improve the
performance of the personnel in the organisation.
Diagnosing organisational development process involves the following steps:
1. Planning for the goal
2. Deciding the need
3. Gathering senior management data
4. Gathering the staffs data
5. Giving priorities to the feedback
6. Perform the action plan
7. Implementing the process
8. Reviewing the process
The characteristics of an organisational development process are as follows:
Focusing on the culture of an organisation
Encouraging relationship between the organisational leaders and members
Focusing on the social issues of an organisation
Focusing on universal change in an organisation
Focusing on imparting problems and solving skills to the organisation
15.4.1 Sustainable competitive advantages
Sustainable competitive advantage is the central fact of a corporate strategy in an organisation. It
is an advantage that enables a business to survive against its competitors in the market over a
long period of time.
A firm acquires a sustainable competitive advantage when it has value-creating products,
processes and services that cannot be duplicated by its competitors. To have a sustainable
competitive advantage, an organisation needs to create an offer or positioning in the market that
clearly reflects the organisational competitive advantage.
Innovation gives a sustainable competitive advantage to an organisation only when it is
performed on a continuous basis and supported by a leadership team. A brand gets recognition if
its innovation is successful, which could be a competitive advantage over your competitor. This
could also strengthen the relationships with clients and sustainably benefits the organisation
.Innovation process also helps a company by improving its core competences.
Example MySpace implemented different innovative practices to target the younger crowd. This
led to its sustainable growth.
15.4.2 Paradigm Shift from shareholder to stake holder concept
Modern period has a wider variety of options for implementing a business. These options include
the primary objective of profit maximisation. However, the variety of options also includes the
goals relating to earnings per share, total sales, measures of employee welfare, environmental
protection and many others.
Shareholder and stakeholder maximisations have been a considerable discussion topic in strategy
literature over the past 15-20 years. The stakeholder view will gain more grip in the upcoming
years.
A major reason for increasing acceptance of stakeholder concepts in setting business objectives
is the fact that businesses are affected by the environment in which it operates. A business is
linked with customers, suppliers, government agencies, special interest groups etc.
According to stakeholder theory, the aim of a firm is to maximise its value by taking interest in
stakeholders including supplier, customer, and employee and also considering the shareholders.
It shifts the maximisation problem from individual utility maximisation (in the interest of
shareholders) towards joint utility maximisation (balancing the different concerns of various
interested parties). On the other hand, the basic idea behind the shareholder maximisation model
is that a firms sole purpose is to maximise only the shareholders value.
5. Organisational development focuses primarily on the human and ___________side of the
organisation.
6. _________gives an organisation a sustainable competitive advantage.
15.5 Change Management
Change management is an organised approach to deal with change, from the viewpoint of an
organisation and an individual. The term change management has three different characteristics
which are adapting, controlling and effecting changes. In an organisational level, change
management means defining and implementing methods or technologies to deal with changes in
the business environment and achieve profit from changing opportunities.
Change usually arises from the development of new products, entry of new competition, changes
in political, economic and social framework, change in customers preferences and technology.
Successful adaptation to change is essential for an organisation as organisations and its
employees come across unavoidable changing conditions that cannot be controlled. An
organisation succeeds when it effectively deals with change. Changes in the business
environment are fluctuations in economy, threats from a competitor and changes in the
workplace such as new policies or technologies. A structured methodology is established to deal
with the changes in business environment. Change management deals with developing a vision
for better alternative and strategies to implement the change in an organisation.
15.5.1 Principles of change management
The principles impact effective application of change management. The principles of change
management are:
Senders and receivers Every change can be considered from a sender and a receivers view. A
sender provides information about the change. A receiver obtains information about the change.
Change agent is a person who directly or indirectly causes change. A change agent can initiate
change, manage change process and assist others in understanding the need for change. Example
A change agent may work within an organisation or cause a change at some phase in the
business. The sender and receiver concept is significant to the actions taken by change
management teams and business leaders in the change management process. Usually executives,
project teams and supervisors are the senders of important messages. They follow an established
communication plan to share information about the change. These communication activities are
part of the organisational change management.
Resistance and comfort Change management business leaders often underestimate the level of
comfort in the current state. The natural reaction to change is resistance. Every individual has a
limit for how much change they can adapt. This is based on some factors such as their personal
history, current changes at work and the extent of change. Moreover, there are some employees
who resist every change. There are situations when individuals can relate to change with their
self-interest and belief system, but uncertainty of success can block the change.
Authority for change The successful way to implement business change is active executive
authority. Lack of strong executive authority can increase the resistance to change. An effective
sponsorship of change leaders can help in the success of the change.
Incremental versus radical change Change management activities should be scaled based on the
nature and size of the change. Change can be classified into two types, incremental change and
radical change.
Incremental change In this change environment, a change takes place over a long period of time.
The objectives of the change are small improvements for a successful business process. These
changes are driven by focusing to improve important business areas. Examples of programs that
have incremental change are quality improvement methods like Six Sigma. Example -Marketing
that affects an organisation positively is an incremental change.
Radical change In this change environment, immediate change is required over a short time
period. These changes are intended to create major performance improvements in business
processes. The business change is not always an improvement on current processes; it can be a
replacement of processes with something new. Initiatives that create radical change are business
process reengineering, mergers and acquisitions. Example Microsoft Windows 95 was a radical
change over the previous version that is Windows 3.1 operating system.
Change management process is most effective when it is flexible and implemented to fit the
particular business need.
Change is a process The concept of change as a process is well incorporated in change
management. The managers can adapt the strategies and techniques by allotting certain time
periods for the changes. The managers should not implement change in a single meeting or
event. Effective change management programs will engage employees in the process, focused on
results and effectively incorporate employee feedback in business solution.
15.5.2 Approaches to change management
The role of a change agent is to sustain the organisations current performance and maintain its
future performance. This is done by supporting employees to work efficiently according to the
changes implemented and by increasing employees abilities to manage future change. The
change agent may be an employee of the organisation who is trained in organisation
development theory and techniques. The change agent will be responsible for the overall change
effort. This role may be performed by different people at different situations.
The different approaches to change management are:
Behavioural approach
Cognitive or intellectual approach
Psychodynamic approach
The behavioural approach to change management is to motivate and align workers according to
the change effort by rewarding them. Time and effort is taken to ensure that the right reward
strategy and performance management system is practised.
The intellectual approach supports the use of goals and is built on the behavioral approach by
focusing on the outcomes. This approach involves focusing on building a positive attitude. The
probability of achieving goals is greater when the goals are clear. Well written and clearly
articulated goals are easier to achieve.
The psychodynamic approach is used by the managers who want to understand the reactions of
their team members during the change process. This approach helps the manager to gain an
understanding of peoples reaction.
7. _____________is an organised approach to deal with change, both from the viewpoint of an
organisation and an individual.
8. Every change can be considered from the point of view of a _____________and a
_____________.
15.6 Models of Leadership Styles and its Roles
Leadership is the ability of motivating a group of people in achieving a common goal. A leader is
a person in the group who possesses the personality and skills to motivate others. There are
different models of leadership styles.
The leadership style depends on the situation which includes the life cycle of an organisation,
interaction with the subordinates, etc. The following are certain queries that need to have
solutions before implementing a leadership style:
What type of leadership style are you going to implement?
Will the chosen style be the best for the employees in your team?
You should have an ability to adapt your style to different situations to achieve the maximum
effectiveness. Excellent leaders take different approaches to match its various needs in different
circumstances.
15.6.1 Leadership styles and model of effectiveness of influence
The following leadership styles implemented by leaders under different circumstances indicate
its model of effectiveness on influence:
Autocratic leadership In autocratic leadership, leaders have complete power over their team
members. Team members have little opportunity to make suggestions even though it favours the
team or the organisation. Most people dislike being treated in this manner. Therefore, autocratic
leadership leads to increase levels of absenteeism and staff turnover. Examples of autocratic
leadership style can be found in real world people like Bill Gates and John F Kennedy.
Bureaucratic leadership Bureaucratic leaders follow rules rigorously and ensure that their staffs
also follow the procedures accurately. Bureaucratic leadership is an appropriate style which
involves serious safety risks like working with machinery, toxic substances, etc. Example
Bureaucratic leaders are found in large corporations such as General Electric, General Motors
etc. Charles Sorensen (executive in Henry Ford's empire), Harry Bennett (executive in Ford's
empire) are bureaucratic leaders.
Charismatic leadership In charismatic leadership, leaders adds a lot of passion in their team and
are very energetic in driving the members forward. However, charismatic leaders tend to believe
more in themselves than in their team. Charismatic leadership carries huge responsibility and
needs a long term commitment. Examples of charismatic leaders are Winston Churchill, Bill
Clinton, Mother Teresa, and Adolf Hitler.
Democratic leadership or participative leadership A democratic leader invites team members to
contribute in decision making process. This increases job satisfaction among the team members
and motivate them to work hard. Example of participative leader is Donald Trump who is a U.S
born businessman.
Laissez-faire leadership Laissez-faire is a French phrase describing leadership in which the
leaders leave their team members to work on their own. This leadership has effective outcomes
when the leader regularly communicates with the team about the work. Moreover, laissez-faire
leadership is effective when the team members are experienced and skilled in their work. Adam
Smith is an example of laissez-faire leader. His books gained significant importance in modern
capitalism.
People oriented leadership or relations oriented leadership In people-oriented leadership, leaders
are totally focused on organising, supporting, and developing the people in their teams. It is a
participative style which encourages good teamwork and creative collaboration. Late Dave
Longaberger is an example of people-oriented leader. He built the Longaberger Company which
is a direct sales organisation known for its line of quality baskets.
Servant leadership It describes a leader who is not often recognised. A leader who simply leads
to meet the needs of the team within an organisation is a servant leader. Famous examples of
servant leaders include George Washington, Mahatma Gandhi and Cesar Chavez.
Task oriented leadership Task oriented leaders focus only on completing their tasks and are
autocratic in nature. They actively define the work, put structures in place, plan, organise, and
monitor the tasks. Task-oriented leaders do not think much about the well-being of their teams. It
declines the motivation of the employees. Dolly Parton, a great entertainer in music and movies
is an example of task-oriented leader.
Transactional leadership Transactional leadership starts with the idea that the team members
totally agree to obey their leader when they accept a job. The leaders have the right to punish
their team members if the work does not meet the pre-determined standard of the organisation. It
is basically a type of management style rather than a true leadership style. It has serious
limitations on performing creative works. Examples for transactional leadership are Joseph
McCarthy and Charles de Gaulle.
Transformational leadership People with this type of leadership style are true leaders who
constantly inspire their teams with a shared vision of the future. Mahatma Gandhi, Martin Luther
King Jr. and Walt Disney are some examples of transformational leaders.
15.6.2 Creating and leading learning organisations
A successful organisation falters when it faces fast changes in the markets and technologies. A
learning organisation seeks to create its own future and assumes that learning is a continuous
creative process for its members. It adapts and transforms itself according to the needs and
aspirations of the people.
The following are the disciplines of a learning organisation:
Systemic thinking By systemic thinking, a learning organisation observes a bigger picture of the
future and plans accordingly.
To be personal mastery Focusing to be the best and attempting to commit in the careers to
facilitate potential realisation.
Implementing mental models This discipline begins with self-thinking, finding genuine belief
structures and understanding the influence of discipline in life.
Building shared visions Visions cannot be imposed on others and building shared vision
promotes a long term commitment of growth in an organisation.
Enhancing team learning Modern organisations operate on the basis of teamwork. It develops the
ability to create desired results in an organisation.
Learning organisations are healthier places to work because of the following reasons:
Collects independent thoughts
Increases the ability to manage change
Improves quality
Develops a committed work force
Encourages the people
Extends recognised limits
The process of creating a learning organisation is as follows:
Creating a communication system A communication system is created to facilitate the exchange
of information. The use of technology alters the workplace by enabling information to flow
freely and provides universal access to strategic information. It is also important in simplifying
complex concepts to make it more understandable across the departments.
Developing an atmosphere that garners learning An atmosphere that encourages learning is
developed and maintained.
Creating a vision for the organisation With the help of all the employees, a vision of the
organisation is created and a mission statement is written.
Establishing training and awareness programs Behaviour of the employees are improved through
training and awareness programs. It develops the skills of the employees.
Integrating human and technical systems The companys culture is changed by integrating human
and technical systems.
Emphasising team learning by initiating new practices New practices are introduced to highlight
team learning as it helps to meet the challenges of a workplace.
Allowing employees to question key business practices and assumptions Employees are allowed
to question the business practices and assumptions followed in the organisation. It introduces
new ideas.
Developing workable expectations in the organisation Developing workable prospects are
necessary in an organisation. In order to build a learning organisation, a sound leadership
development process must start at the top level of the organisation.
Leading the learning organisation
A learning organisation requires a new sight of leadership. Leaders make key decisions and
energise the team. In a learning organisation, leaders play the role of designers, stewards and
teachers. They are responsible for building an organisation where people frequently expand their
capabilities to understand the complexities, clarify visions, etc.
The three aspects of leadership leading a learning organization are as follows:
Leader as a designer An organisations policies, strategies and systems are the key areas of
designing, but a leader goes beyond those key areas. A leaders task is to design learning
processes whereby people can productively deal with the critical issues and develop their
mastery in learning disciplines of an organisation.
Leader as a steward A leader becomes a steward of the vision of an organisation and their task is
to manage the vision for the benefit of the organisation. Leaders have to respond to other
members vision and should change their vision when it is necessary.
Leader as a teacher Leaders in a learning organisation focus on the purpose and systemic
structure of the organisation. Leaders cultivate an understanding among the employees about the
motive of the organisation. Leaders not only teach people on how to achieve the vision, but also
promote learning.
9. Servant leadership is not a type of leadership style followed by leaders. (True/False)
10. Task-oriented leaders focus only on getting the job done and they can be autocratic.
(True/False)
15.7 Strategic Management in a new Globalised economy
The term global economy means an integrated world economy with free and unrestricted
transnational movement of goods, labour and services. It refers to free movement of capital
across countries. To understand the concept of a global economy, we first need to understand
globalisation. Globalisation is the integrated global network for trade, capital flows, technology
etc. It benefits all countries across the world and also works towards the betterment of economy
as a whole.
A global economy is considered as a world economy with a combined market for all the goods
produced across the world. It gives an opportunity to domestic producers to expand and raise
production according to global demands. It provides an opportunity to domestic customers in
choosing from a wide variety of imported goods. A global economy aims to downsize prices of
all products globally. Example -A computer would cost the same in both the USA and India if
identical units of goods are purchased. The reduction in the level of tariff restrictions enhanced
free flow of goods between the developed and the developing countries. The arrival of Multi-
National has been due to the direct impact of globalisation. A global economy has the advantage
of raising productivity and income across the world and globally improving the standard of
living.
Important aspects of globalised economy are:
Globalised economy spreads international trade in goods and services
The high integration of financial markets is impacting on the performance of the industrial sector
Foreign direct investment is becoming an essential factor in the global process of industrial
restructuring and in the development of global industries
Multinational corporations constitute a main direction for global economy
Globalised economy facilitates close linkage between trade and direct investment
Multinational origin of product components, services and capital is characterised by contracting
agreements among firms
Location strategies of multinational firms are influenced by the comparative advantage of
countries
Enhances global competition
Interdependence of various dimensions in globalisation such as direct investment flows,
technology transfers, capital movements so on.
Strategic management in a new globalised economy
Strategic management in globalised economy is the strategy through which the organisation sells
its goods and services outside its domestic market. Implementing strategic management in
globalised economy is important as the international markets yield new potential opportunities.
Generally, an organisation innovate products in its home-country market. Then demand for the
product develops in other countries and are exported by domestic operations. Increased demand
of the products in foreign countries encourages the organisation to invest in foreign operations.
In some industries, technology drives globalised economy because of the necessity to reduce
costs to lowest level.
The three dimensions of strategic management in a globalised economy are:
Strategy context Every strategy background is unique and flexible to analysis in terms of
policies, structure and boundaries. With increasing globalisation, the traditional ways of
approaching strategy context has also changed. The world market has few barriers and
manufacturing capacity is increasingly mobilised. More enterprises are entering global market
such as multinational corporations. Due to the fast changes and innovations, organisations have
to develop and manage multiple business models simultaneously. While corporate strategy
requires multiple business models, each business model requires a different strategy. Integrated
global demand and supply chains require different degree of collaboration among stakeholders.
Strategy content Strategy content is the product of strategy process. This is expressed in
documented plans as the four levels of the organisation which are functional, business, corporate
and network levels.
Strategy process Due to the realities of global economy, the strategy process in seriously
challenged. The strategic thinking is emerging as creative and intuitive. Strategies are formed
incrementally through various forms of interactions inside and outside the organisations. In a
new economy, organisations are able to experiment with radical new business models and
gradually change existing business models. Experimenting is necessitated by radical changes in
the environment. Open-sourcing and other types of cross-boundary collaboration in ideas and
processes help discover new potential.
11. A _____________ is considered as a world economy with a combined market for all goods
produced across the world.
12. Every _____________ is unique and amendable to analysis in terms of policies, structure and
boundaries.
15.8 Summary
Strategic thinking is an innovative thinking process on a daily basis about the overall goals of the
team and organisation.
A collection of organisational values and norms that are shared by the employees in an
organisation is termed as Organisation culture.
Organisation development is a complex strategy which is intended to change the beliefs,
organisation structures, systems so on, the purpose being adapting to new challenges. Change
management in organisations refers to an organised approach dealing with change.
The different leadership styles are like autocratic leadership, bureaucratic leadership. A learning
organisation assumes that learning is a continuous creative process for its employees.
The term global economy means an integrated world economy with unrestricted transnational
movement of goods, labour and services, it reduces the trade barriers, facilitates close linkage
between trades. Implementing strategic management in globalised economy is important as
international markets yield new potential opportunities.
15.9 Glossary
Autocratic : Dominating and dictatorial
Bureaucratic : Administrative and rigid
Cognitive : Related to mental processes and thinking abilities
Steward : Helping agent
1. What is strategic thinking? Explain the influence of strategic thinking on the management.
2. Explain the influential factors of organisational culture.
3. What is sustainable competitive advantage? Describe the stakeholder concept.
4. What is change management? Describe the principles of change management.
5. Explain the different leadership styles.
6. What are the important aspects of strategic management in a globalised economy?
15.11 Answers
1. Synergy
2. True
3. Organisational values, organisational norms
4. True
5. Social
6. Innovation
7. Change management
8. Sender, receiver
9. False
10. True
11. Global economy
12. Strategy context
Terminal Questions:
1. Refer 15.2 Strategic thinking
2. Refer 15.3.1 Influential factors of organisational culture
3. Refer 15.4 Organisational development and change
4. Refer 15.5 Change management
5. Refer 15.6 Models of leadership styles and its roles
6. Refer 15.7 Globalised economy and its aspects
15.12 Case-let
Change Management in DELL
DELL was founded by Michael Dell with a simple concept of selling
computer systems directly to customers. Dell Corporation adopted change
management to sustain its growth as a market leader in mobile computing.
Dell Corporation established its broad leadership by acquiring other strong
mobile computing companies and their products, which were later combined
into a new, larger company. To strengthen the position of different Dell
products, training was provided to the employees, company operations were
improved and new technologies were introduced. This resulted in creating a
distribution network for both the local and international Dell products. If the
market is dominated by other mobile computing companies, Dell
Corporation concentrates on the development of superior sections with its
various Dell products. There was a time when the management of Dell
Corporation imposed cost-cutting activities. During this period, Dell
Corporation concentrated on its customer service to ensure that the
organisation continues to earn profit. To implement this change, Dell
Corporation hired consultants to collect data about staff and customer
attitudes. The evaluation showed a substantial difference between what the
staff provided and what the customer actually needed. Therefore, another
management initiated a change in the system from staff oriented to customer
oriented organisation through the creation of Customer is king culture
within the organisation. The employees took time to get adjusted to the
changes imposed by the management. The organisational structure of Dell
Corporation also changed. Personnel at different managerial levels of the
organisation directly reported to the CEO and profit centers were created.
This structural change enhanced the staff integration and communication
within the organisation. The performance related pay was introduced by the
management based on the appraisal system. The change management helped
in enhancing the competitiveness of Dell Corporation.
1. Why did Dell adopt the change management technique?
2. Discuss how the change management helped in improving
competitiveness of Dell Corporation.
Source link - http://ivythesis.typepad.com/term_paper_topics/2009/09/dell-
change-management.html
References
Wheelen T and Hunger D (2002) - Concepts in Strategic Management and Business Policy,
Pearson Education.Inc.
E-References
http://www.slideshare.net/Jack78/strategic-thinking-4366922 - Retrieved on 27/08/10
http://www.slideshare.net/Jack78/strategic-thinking-4366922 - Retrieved on 27/08/10
http://www.hsbcglt.com/hsbcglt/careers/hr_strategy/organizational_changes.html - Retrieved on
28/08/10
http://www.new-paradigm.co.uk/Org-Dev.htm - Retrieved on 28/08/10
http://www.businessballs.com/changemanagement.htm - Retrieved on 29/08/10
http://economics.about.com/od/globalizationtrade/l/aaglobalization.htm - Retrieved on 30/08/10
Acknowledgement, References & Suggested Readings

David R Fred (1997) Strategic Management sixth edition, Prentice hall, New Delhi
Wheelen L. Thomas, Hunger David J. (2002): Concepts in Strategic Management and Business

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Unit-01-Introduction to Strategies

Figure 2.1 Features of Strategic Management

Figure 3.1 Environmental Scanning

Figure 3.2 SWOT Matrix

Figure 3.3 Value Chain Analysis

Figure 3.4 Forces Driving Industry Competitions

Figure 3.6 Ansoff Growth Matrix

Figure 3.7 McKinsey/GE Growth Pyramid

Unit-04-Strategy Formulation and Implementation

Figure 4.1: Tall Structure

Figure 4.2: Flat Structure

Figure 4.3: Hierarchical Structure

Figure 4.4: Resource Procurement Processes

Figure 4.5: Understanding the Resource Allocation Process

Table 4.2: Allocation of Resource to Individuals

Figure 4.6: Types of Leadership

Figure 4.8: Organisational Leadership

Figure 5.1: Strategy Evaluation and Control Process

Figure 5.2: Evaluation Process of an Implemented Strategy

Strategic control data concentrates on Operational control data are subjected

Strategic decisions are concerned with Operational decisions are concerned

Unit-07-Business Policy and Decision Making

Figure 7.1: Policy Cycle

Unit-09-Business Investment Strategies

Unit-10-Strategies for Multinational Corporations

Figure 11.2 Stages of Strategic Alliances

Unit-12-Role of Creativity and Innovation in Business

Unit-13-Business Ethics and Corporate Social Responsibility

Figure 14.1 depicts the variations of economic cycle.

Figure 14.1 Economic Cycle

Unit-15-Recent Trends in Strategic Management

Acknowledgement, References & Suggested Readings

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