Corporate Policies & Practices

ADL 15

Corporate Strategy is a difficult and contentious subject amongst writers and practitioners with differences ranging ocean wide and the depth fathomless.

ACeL

PREFACE

Corporate Strategy is a difficult and contentious subject amongst writers and practitioners with differences ranging ocean wide and the depth fathomless. However, steering clear of the myriads of controversies, this book at- tempts to explain the relevant concepts, techniques, frameworks etc; in a simple, lucid and systematic way.

The terms strategic management and business management, corporate strategy and business strategy and corporate policy and business policy have been used synonymously over a period of time by a plethora of writers, consultants, academics and industry experts. Our concern being corporate strategy, we explore the management of business as a strategic process in three parts, spanning the following phases:

Strategy formulation

Strategy implementation

Strategy evaluation and control

The strategy formulation phase consists of strategic analysis and strategic choice. In strategic analysis we examine the firm's external environment to determine how effectively it can exploit the opportunities or deal with the threats posed by the environment. The firm's internal strengths and weaknesses are also assessed with a view to determine how these can be used to develop competitive advantages. In strategic choice various alternative solutions to the problem are generated, assessed and the best one chosen.

The strategy implementation phase deals with making the strategy work by designing the structure to suit the strategy and developing appropriate plans and policies.

The strategy evaluation and control phase involves determining, through feedback mechanism, whether the strategy is working and the corrective steps taken to make it work.

A final chapter on present and future trends in corporate strategy dwells on key strategic issues such as collaborative networks and knowledge management. It also sheds light on information technology as a vehicle for harnessing knowledge and fuelling e-business growth.

This work on “ Corporate Strategy” is the part of” Amity Business Series” of Amity School of Distance Learning (ASoDL) has been

written for easy comprehension. It is aimed to prove basic insight into the subject in a very simple and to the point manner. It is hoped that this will generate due interest and motivate students further learn the subject in greater depth and practice this in their professional life.

Table of Contents

PARTONE : INTRODUCTION TO CORPORATE STRATEGY

Chapter 1 : NATURE OF STRATEGIC MANAGEMENT

Chapter 2 : STRATEGIC PLANNING

PART TWO : STRATEGY FORMULATION

Chapter 3 : THE PROCESS AND THE PLAYERS

Chapter 4 : MISSION AND OBJECTIVES

Chapter 5 : ENVIRONMENTAL APPRAISAL

Chapter 6 : organizationAL APPRAISAL

Chapter 7 : STRATEGIC ALTERNATIVES

Chapter 8 : STATEGIC CHOICE

PART THREE : STRATEGY IMPLEMENTATION

Chapter 9 : THE PROCESS

Chapter 10 : ALLOCATION OF RESOURCES

Chapter 11 : STRUCTURAL IMPLEMENTATION

Chapter 12 : FUNCTIONAL IMPLEMENTATION

Chapter 13 : BEHAVIORAL IMPLEMENTATION

Chapter 14 : EVALUATION AND CONTROL

Chapter 15 : CORPORATE STRATEGY - PRESENT AND FUTURE TRENDS

Chapter 1. NATURE OF STRATEGIC MANAGEMENT

1.1 CONCEPT OF STRATEGIC MANAGEMENT

The term strategy is derived from the Greek word 'strategos ' which means 'generalship' i.e. the science or art of planning and directing large scale military movements and operations. In business parlance strategy may be defined as a stream of management decisions that determine the purpose and direction of the enterprise. These .management decisions serve as a route map to guide the enterprise towards its desired destination as specified in its mission statement.

Examples of strategic decisions include:

Financing of business ( e.g. equity or loan capital)

Pricing of products to gain competitive advantage in the market place

Diversification, acquisition and divestment

Restructuring of organization

Retrenchment of employees

Recognition of trade unions

1.2 LEVELS OF STRATEGY

Large businesses generally devise strategies at three levels:

Company (Corporate) level

Division / subsidiary level

Functional level

Fig 1.1 illustrates the type of strategies planned at different management levels in firms with multi-business-units

Fig 1.1 Different Levels of Strategy

Corporate level strategies integrate and coordinate all the firm's activities and are the responsibility of senior management . They define the very nature of the business ,the lines of activity (product / service) that the firm should pursue and the overall allocation of resources. Corporate strategies essentially cover long term business planning and embrace such aspects as risk analysis, investment appraisal, statistical forecasting , acquisition and divestment and integration of marketing with all other functions of the firm.

Divisional strategies flow from corporate strategies. The creation of Strategic Buisness Units ( SBU) ensures that the operations of divisions or other subsidiaries conform to corporate plans.

A strategic business unit ( SBU) is an operating division of a firm which serves a distinct product / market segment or a well defined set of customers or a geographical area. Each SBU sets its own strategy within the framework of the overall corporate strategy. The overall corporate strategy helps the SBUs to specify * their scope of operations based on the extent of resources allocated to each.

Functional strategies are derived from divisional strategies and are concerned with specific operational areas such as marketing, production, finance and human resources. These strategies are planned and implemented at themiddle management level through functional policies.

In small businesses or those which engage in a single product or serviceline i.e. Single SBU firms the corporate level strategy serves the whole business. This strategy is implemented at the middle management level through functional policies. Fig 1.2 depicts the above relationship.

Fig 1.2 Strategy Level - Single SBU Firm

1.3 EVOLUTION OF STRATEGIC MANAGEMENT

Glueck traces the development of strategic management as arising from the use of planning technique by managers. In most businesses in earlier times the focus of the manager's job was on day to day planning. As businesses began to expand the managers found it difficult to coordinate operations due to increased complexity and rapid changes in the environment. Hence they tried to anticipate the future through preparation of budgets and control systems such as capital budgeting and management by objectives (MBO). Though budgeting provided financial control it lacked emphasis on the future. Hence long- range planning appeared. This product first generation plans i.e. a single plan for the most likely future.

Today's approach is called ' Strategic Planning' which focuses on second generation planning i.e. analysis of business and the preparation of several scenarios for the future. Contingency strategies are then formulated for each of the likely future scenarios. Strategic planning helps to formulate strategy. It is a part of the wider process of strategic management which deals with aspects of implementation and control of the chosen strategy.

Hofer refers to evolution of strategic management in terms of four paradigm shifts. These include :

'Ad- hoc policy making '. This was resorted to in the mid 1930s by the early entrepreneurs dealing in a single product, limited customers

and narrow markets.

Planned policy formulation replaced ad-hoc planning as businesses began to expand and a need was felt to integrate functional areas in

a rapidly changing environment.

'Strategy' paradigm emerged in the early 1960s in response to rapid environmental changes which triggered the need to examine the

basic relationship between businesses which had become increasingly complex and their environments.

The ' strategic management ' paradigm came about in the 1980s. It focussed on two broad areas, namely, the strategic approaches and

methods of business firms and the responsibilities of general management. It generated revolutionary thinking in the field of general

management.

According to Toffler, futuristic organizations would “ no longer be responsible simply for making a profit or producing goods but for simultaneously contributing to the solution of extremely complex ecological, moral, political, racial, sexual and social problems."

1.4 STRATEGIC MANAGEMENT PROCESS

Strategic management has been defined in several ways. Glueck has referred to it as a " stream of decisions and actions which lead to the

development of an effective strategy or strategies to help achieve corporate objectives. “ The strategic management process is depicted in a

model shown at fig 1.3.

Fig 1.3 Strategic Management Process

As may be seen from the fig the phases of the model are as follows:

Strategy formulation. This involves defining mission, purpose and objectives of business; scanning the environment for threats and

opportunities assessing the internal organization for strengths and weaknesses; evaluating various strategic alternatives and choosing

the strategy.

Strategy implementation. This involves allocation of resources; design of suitable organization structure to meet needs of strategy;

formulation of various plans and policies in functional areas of finance, marketing, production and personnel; behavioural aspects such

as leadership styles and climate, corporate values and culture, business ethics and social responsibility.

Strategy evaluation. This involves evaluation of organizational performance to enable control of the strategy implementation process.

Chapter 2. STRATEGIC PLANNING

2.1 CONCEPT OF STRATEGIC PLANNING

Strategic or corporate planning means a systematic determination of what to do in the future in order to fulfill the organization's mission and achieve its objectives It can commence once the firm's mission and core objectives have been formulated.

The basic: purpose of strategic planning is to protect the organization against environmental threats and hence ensure its long term survival. It enables management to combat environmental influences through formulation and implementation of corporate strategies. Strategic planning should lend a sense of purpose to the management. It should create a common understanding among different levels of management of the key or critical issues affecting the business. It should compel management to clarify its priorities, develop criteria for monitoring performance and think ahead in a systematic way.

2.2 NEED FOR STRATEGIC PLANNING

Henry Fayol (1841 -1945) used the analogy of a sailing ship to justify the usefulness of business planning. Whilst winds and foul weather can force a ship to alter course it is necessary to have:

Navigational devices and firm intentions about the best course to follow

The maximum amount of information on the tides, currents, seasonal variations in weather etc, and

Contingency plans for alternative routes in the event of icebergs, hurricanes and so on making impossible the realisation of the original intentions.

Otherwise the vessel will simply drift and never reach its pre-determined position.

2.3 STRATIEGIC PLANNING PROCESS

The main steps in the strategic planning process are

Recognition of the need to plan

Analysis of the situation. This may cover aspects such as organization's strengths and weaknesses, environmental constraints and

resource limitations

Determination of possible alternative courses of action

Selection of the best or optimum alternative. In volatile business environment the choice may be subjective as strategist's value system

such as his risk orientation may come into play

Implementation of the plan. This may involve possible structural change, detailed allocation of tasks and resources, coordination of

activities, over- coming resistance to change etc.

Monitoring the results. This may involve changes to the plans in case actual outcomes vary significantly from planned outcomes.

2.4 TYPES OF PLANNING SYSTEMS

The planning system selected should relate directly to the needs of the organization. The system may be formal or informal, quantitative or intuitive or a combination of both or have a short, medium or long term horizon.

Planning systems evolve naturally with growth in the organization's operations. Initially the firm may engage in basic financial planning only i.e. prepare annual budgets and functional plans in respect of specific projects.

As the operations expand the management automatically veers into strategic thinking. It begins to scan and analyze its environments,

prepare forecasts, establish procedures for resource allocation, analyze strategic actions of rival firms, assess its own competitive position etc. Having analyzed the environments and its own strengths and weaknesses the firm then establishes definite procedures for evaluating strategic alternatives. Finally an overall corporate plan emerges by combining the various ad-hoc planning activities. Typically with each stage of evaluation the degree of formalization of procedures increases and the firm responds by trying to make the processes more flexible and creative.

a) Formal and informal planning procedures

Formal planning procedures establish set rules for determining plans and lend consistency to the process. Typically a formal corporate planning system would cover such areas as organization's objectives, plans for converting opportunities and combating threats, risk-projections, evaluation criteria, forecasts task allocation etc.

The informal planning system on the other hand is characterised by flexibility and is perceived as 'user-friendly'. The organizations who follow such a planning procedure become more adaptive and responsive to change. However as the procedures are not documented a large amount of information remains in the head of individual executives. The implementation of the plans could suddenly get disrupted in case they choose to resign or fall ill.

b) Operational planning

Operational planning is concerned with managing the day to day affairs of the organization. It is basically lower level planning and is performed by middle level executives and supervisors. These managers are guided by certain policies, procedures, rules, targets and budget. All operating managers in different functional areas implement their respective plans in terms of attaining their targets or sub-goals as derived from the organisional objectives.

Apart from focussing on functional plans, operational planning concerns itself with such aspects as scheduling, internal coordination, budgets and administration, schedules and project networks, recruitment and redundancy, formulating advertising campaigns etc.

c) Strategic planning and strategic management

The current trend as exemplified by Steiner, Miner and Gray is to consider the terms strategic planning, long range planning and corporate

planning as synonymous for all practical purposes. Each of these processes involves assessment and analyses of an organization's external

environment and its internal capabilities with a view to conceiving its mission, setting objectives and framing policies, plans and procedures

for implementation. In consequence these planning techniques result in stream of actions which are designed to implement a strategy.

Fig 2.1 Major Elements of the Strategic or Corporate Plan

Whilst strategic planning deals with issue of strategic formulation only strategic management is an all encompassing process and covers

aspects of implementation and control of strategy as well.

d) Contingency planning

organizations prepare contingency plans to cater for emergent or extraordinary situations. These contingent situations may be caused by problems such as strike, adverse government legislation, machine breakdowns, major fires, loss of major customer or supplier etc. At the strategic level contingency plans take into account catastrophies such as major industrial accidents, natural disasters, acts of terrorism etc.

The steps involved in formulation of a contingency plan are:

Identification of possible contingent situations that may affect the overall business. Minimal importance may be attached to

contingencies which are likely to have low impact or are least likely to occur.

Assessment of risk level and formulation of appropriate risk strategy. In determining the risk strategy top management may be guided by

their risk orientation i.e. risk taking or risk averting ability.

Formulation of the contingency plan. The plan should clearly designate people who will take control in the various emergency situations.

The plan should also clearly specify the priorities as also the specific task, responsibility and authority delegated to each person.

e) Top-down/ Bottom-up planning

Top-down planning involves strict supervision of the entire planning process by the top management of the firm. This approach has two alternate forms. The top management may either determine and hand down the plans to lower levels without the latter's participation in their formation or it may initially express broad guidelines or expectations and subsequently issue concrete action plans. Some firms prefer the bottom-up approach. In this the departments formulate their own plans and the corporate plan is thereafter built on the basis of the recommendations of these units. Certain key plans, notably plans for new products, restructuring of organizations, joint ventures etc may not get assigned to individual departments. These are generally prepared by the central planning unit of the firm. .

Top-down planning facilitates coordination and control of activities and decisions can be made quickly. Its disadvantage is that it can result in domination by people who are ill equipped for the task. The bottom-up approach on the other hand ensures not only participation but commitment to plans at the lower levels. Its disadvantage is that junior managerial employees may not have the expertise to formulate sensible plans. Also their plans, though creative and innovative in their own eyes, may be unrealistic from point of view of strategic management of the entire firm.

In practice a blend of both the top-down and the bottom- up approaches may emerge with regular interaction between top management and operating units. The implementation of a plan will involve:

Allocation of responsibility for various tasks

Preparation of budgets

Scheduling activities

Coordination of work

Identifying points when progress will be evaluated

Establishing procedures for review and alteration of plans in the event circumstances change.

2.5 PLANNING TECHNIQUES

a} Gap analysis

The gap analysis technique is a measure of the organization's potential. It is a formal assessment of evaluation of the strategy currently being

implemented. The need for assessment arises when a new strategy or change to the existing strategy is proposed. The new proposal is

considered in relation to the gap between the expected outcomes of continuing with the existing strategy and the desired outcomes which

could result in the future if the new strategy were to be implemented. The fig. 2.2 below shows the gap analysis. The time period when

assessment of existing strategy is initiated is-.indicated by point A. The point B represents the future time period for considering the gap

between the expected outcome of following the existing strategy and the desired out- come which may result if the new strategy is

implemented

Fig. 2.2 Strategic Gap Analysis

The assessment of the gap will be influenced by such factors as the strategic planner's perception of the gap i.e. whether it is significant or not, his belief that it can be reduced and last but not the least the motivation to reduce it.

The gaps between potential and performance could occur due to the following:

Planned market share not being achieved

Shortfall in development of distribution outlets and intermediaries

Heavy expenditures in R & D failing to yield desired profits

Decline in profits, return on capital employed and asset growth

Deterioration in quality and customer care.

b) Benchmarking

Benchmarking is an effective tool in building competitive advantage. The process involves the setting up of benchmarks or standards to assess an organization's own performance and at the same time compare it with that of its competitors. Benchmarking is of three types -internal, external and functional.

Internal benchmarking compares performance of divisions, departments etc. within the same organization against common standards. External benchmarking compares an organizations' total performance against that of its competitors. The typical areas of comparison would include profitability, market share, price -earning ratio etc. Functional benchmarking involves comparison of the organization's performance in a specific functional area with other firms. The benchmarking technique will succeed provided the bench- marks established are truly based on industry best practice. Also the information available on competing business should be comprehensive and reasonably accurate.

c) Performance indicators

These are measures of an organization's performance and can be either result-oriented or effort-oriented. Some examples of results- based performance measures are:

Sales volumes and revenues

Rates of return on investments

Market share

Growth of assets

Average inventory levels

Examples of effort-oriented measures are:

Number of prospective customers contacted

Number of complaints resolved

Development of relationships with suppliers

Improvement in relations with trade unions

Extent of absenteeism

Research and development effort.

The choice of performance indicators will depend on the organization's mission and objectives, its size i.e. number o{ divisions, departments, S.B.Us etc. and the activities which 'are critical to the success of the businesses. The indicators selected may be quantitative or qualitative and the performance measured against standards which are defined by maximum and minimum values of key variables.

Examples of performance standards include:

Average sales revenue per month, quarter etc.

Percentage of defective goods produced

Productivity of each worker and overall productivity of organization

Number of documents processed in a given time period.

d) Network methods

A network is a schematic description of all activities involved in a project and shows all the interconnecting links between events. .The network assists in scheduling, coordinating and controlling work. It is used to determine the completion times of key activities and the project as a whole. The two main methods in network analyses are the Critical Path Method (CPM) and the Project Evaluation Review Technique (PERT). Whilst conceptually both the methods are similar the difference lies in that the CPM assumes individual activity times as predetermined and constant whereas the PERT uses three alternative times for each activity i.e. optimistic, pessimistic and most likely.

2.6 organization PLAN

The overall plan document of an organization will cover the following aspects:

An overview of the total corporate plan.

The strategic plan. This will specify details of any expansion , divestment, restructuring etc. plans , if envisaged.

The functional plans. These cover plans in respect of production , marketing . financial , human resources, R & D etc.

Contingency plans.

Divisional and departmental plans.

Project plans.

Budgets.

Resource mobilisation .

Targets and definite time frames for achieving each target.

Chapter 3. THE PROCESS AND THE PLAYERS

3.1 THE PROCESS

The strategic formulation process is said to commence when a corporation conceives of its mission. The process consists of several interrelated tasks which result in the formulation, implementation and evaluation of the corporate strategy of the firm. These tasks include

Defining the mission and business

Setting the corporate objectives

Carrying out environmental appraisal

Performing internal appraisal of the firm

Evaluating strategic alternatives

Making the strategic choice

3.2 THE PLAYERS

a) Role of board of directors

The ultimate legal authority of an organization is vested in the Board of directors. The Board is responsible to the stockholders for the following important duties :

Ensuring managers' actions are directed towards achieving corporate objectives.

Approving major financial and operational decisions i.e. choosing capital structures, obtaining loans, approving large- scale expenditures, assessing risk of default by major customers etc.

Selecting senior managers ( who are not directors ).

Supporting new strategists, attracting resources and protecting the organization from outside threats.

b) Role of top management

The top managers of a firm are responsible for the survival and success of the organization. These may be the Board Chairman, CEO, Managing Director / President, Deputy Managing Director / Vice- President, Executive Director etc. The CEO's role is the most crucial as he, apart from managing the day to day operations of the firm, is the chief visionary responsible for conceiving the mission, setting the objectives and formulating and implementing the strategy. The senior management are typically evaluated against the overall financial performance of the business ( ROCE, share price, market share etc) and on their abilities as individuals to establish a strategic direction for the enterprise. Evaluation criteria might involve qualities of leadership, team building, employee and investor relations and the successful management of specific projects.

c) Role of SBU executives

In case of firms organised into SBUs, the SBU managers may formulate strategies in respect of their individual units based on the overall corporate strategy. They endeavour to achieve the corporate objectives through efficient deployment of the resources allocated.

d) Role of corporate planning staff

Large business firms provide their chief executives with a corporate planning staff. These staff specialists provide support services in areas of new business opportunities, allocation and use of capital and their resources, marketing research etc. They perform the corporate intelligence function and rarely ever participate in the strategic choice process.

e) Role of middle level managers

Middle level managers are primarily concerned with operational matters. Their' participation in the strategic management process is largely confined to implementing functional strategies. However, their expertise may be sought for providing data or ideas which can affect future strategic choices at the top management levels.

f) Role of consultant

Many organizations do not have a corporate planning department. The reason may be their small size, financial constraint or infrequent requirement. These firms; hire professionals, individuals or agencies, for consultancy work. The consultants offer a range of business services which include corporate planning and strategy. Many consultants today offer expertise in the area of business portfolio restructuring.

g) Stakeholders

Stakeholders are people or groups with a vested interest in the performance of the firm. They include shareholders, customers, creditors, suppliers, competitors, employees, trade unions, local and national government etc.

Each stakeholder has invested something in the firm in the form of work, finance or other resources. Hence he expects a reward from the organization and will exert his influence to obtain the same. The nature and extent of re- ward will depend on his status as a major or minor stakeholder.

Some examples of expectations of various stakeholder groups are:

Customers want low prices, high quality products and services and extensive; guarantees.

Shareholders desire high dividends and appreciation in share's market price.

Suppliers are concerned with prompt settlement of bills, less stringency in delivery periods etc;

Employees demand high wages and job security.

Fig 3.1 provides a detailed listing of the common expectations of various stakeholder groups:

Fig. 3.1 Stakeholders' Expectations

Chapter 4. MISSION AND OBJECTIVES

4.1 MISSION AND BUSINESS DEFINITION

The corporate mission statement describes the firm's basic purpose i.e. why it exists, how it sees itself, what it wishes to do, its beliefs and its long term aspirations.

The mission statement therefore informs every one of the corporate vision and purpose, the firm's core values and its role in society. It should also provide a good statement of the business definition of the firm by specifying the products, functions and markets it expects to serve. A clear business definition provide a better focus when top management considers various strategy alternatives with respect to products, services or markets.

Examples of few mission statements include:

Reliance Industries: " To become a major player in the global chemicals business and simultaneously grow in the other growth industries like infrastructure".

Tata Information Systems: " To be India 's most successful and most respected IT company".

Ranbaxy : " To become a $ 1 billion research based global pharmaceutical company".

4.2 OBJECTIVES

Objectives are ends which the organization strives to achieve in order to fulfill its mission. Examples of objectives include:

Increase in the market share

Growth in profits

Quality products or services to customers

Service to society

Objectives should be specific, measurable, attainable and time bound. They provide standards against which to measure organizational performance.

When expressed in specific terms objectives become goals.

4.3 FORMULATION OF OBJECTIVES

The objectives of a firm are formulated by the top management. The following factors influence the formulation of objectives:

The forces in the environment which are represented by the firm's stakeholders. These comprise the owners, shareholders, government,

trade unions, competitors and suppliers.

The enterprise's resources. Larger firms have more resources to combat forces in the environment.

The internal power relationship amongst the top managers. The extent of support management enjoys of others in the organization e.g.

employees, stockholders etc will determine the degree of influence.

The past objectives of the firm. These are generally taken as a reference by top managers to set current objectives. The changes to the

past objectives may be incremental in nature depending on the competing claims presented by the stakeholders.

Chapter 5. ENVIRONMENTAL APPRAISAL

5.1 THE ENVIRONMENT

The word environment literally means conditions and circumstances surrounding and affecting people's lives. To a business firm environment means the sum total of conditions, events and influences that surround and affect it.

The environment in which a business firm exists may either be internal or external. The internal environment refers to all factors (players) within an organization which could provide strengths or weaknesses of a strategic nature.

The players in the internal environment comprise of stakeholders i.e. owners, shareholders, competitors, to and the influences exerted by them are further discussed in chapter 6. The external environment on the other hand consists of various forces which may either present an opportunity or pose a threat to the firm. Typically these external forces exist in the following sectors:

Political

Social

Demographic

Economic

Supplier

Technology

Physical

5.2 SWOT ANALYSIS

SWOT is the acronym for 'strengths, weaknesses, opportunities and threats'. Typically strength and weaknesses exist within the organization whereas opportunities and threats are normally encountered in the external environment. A few examples of areas where opportunities may be present are:

International market

Mergers or acquisition of competing firms

Introduction of new products/ services

Development of new markets or penetration of existing ones

Control of distribution network

Improvement of relations with suppliers

A few examples of areas where threats may emerge are:

Competitors

Government legislation

Technical obsolescence

Sudden changes in customer preferences

Over-dependence on main supplier or major customer

Upheavals in physical environment

Volatility in or collapse of the stock market

A few examples of sources of strengths and weaknesses existing within the firm are:

Customer relations

Production efficiency

R & D skills (e.g. new product development)

Quality control and quality assurance ~ Distribution network

Advertising and sales promotion

Market research facilities

Cash flow management

organization culture

Human resources potential

Corporate image. social responsibility and brand equity

5.3 EXTERNAL ENVIRONMENT

The various forces comprising the external environment of a firm are discussed below:

a) Political environment

A country's political system defines the manner in which its industry is organised. In a socialist country there is much state intervention and control. Under capitalism market forces dominate.

In most countries central, state and local governments have enacted laws which affect the way in which business operates. The laws relate to such matters as wages, price control, product quality, restrictive trade practices, equal employment opportunities, workers' safety and health, environmental protection etc.

Government legislation may therefore affect strategic choices of business firms. Some examples of increases in business opportunities as a result of government actions are:

Government departments are large purchasers of goods and services.

Government helps firms to survive and grow through subsidies, tax concessions etc.

Government protects domestic industry from 'unfair' foreign competition i.e. large scale dumping of goods.

b) Social environment

The values and attitudes of society, in general, and customers, in particular , can affect a business firm's strategy. These values get reflected in lifestyle changes and hence affect the demand for products and services.

The buying and consumption habits of people, their language, customs and traditions, tastes and preferences and educational level also create opportunities or pose threats to business. Social environment of business also imposes demands of social responsibility on firms. Today business is being asked to take on the responsibility of improving the quality of life in our society.

c) Demographic environment

Demographic factors such as size, growth rate, age and sex composition of the general population also affect the market for goods and services.

The countries with high population growth rates represent a growing demand for products. Labour shortage and rising wages encourage development of automation and other labour-saving technologies. The governments of developing countries experiencing population explosion, however, encourage labour intensive methods of production. A heterogeneous population with its varied preferences, tastes, beliefs, values etc. will create mixed demand patterns and hence call for different marketing strategies.

d) Economic environment

A country's economic state determines the business strategies adopted by firms. Some of the economic factors which affect business are the stage of economic development, level of economic resources, level of income, distribution pattern of income and assets etc.

In communist countries where economies are centrally planned the state plans, controls and regulates the economy. In free market economies the .factors of production (land, labour, and capital) are privately owned and production occurs at the behest of the enterprise. The mixed economies under which both state and private sectors co-exist experience a mixed degree of state participation .The nationally important or strategic industries are owned by the state.

In countries which attract large foreign investments and incomes are steadily rising the business prospects are bright. In some developed

countries the economies have reached saturation levels and replacement demand accounts for a major portion of the total demand for many consumer durables. In developing countries, on the other hand, replacement demand is negligible.

The stage of the business cycle i.e. whether economy is in a state of depression, recession, recovery or prosperity can affect attainment of a firm's objectives and result in success or failure of strategy.

The monetary policies (interest rates) and fiscal policies (tax rates for firms) also have a major impact on a firm's fortunes.

e) Supplier's environment

The cost and availability of all the factors of production i.e. raw materials, sub-assemblies, capital, energy etc. are affected by the nature of relationship between the firm and the supplier.

The power the supplier has to raise prices and reduce the firm's profits will depend on the following factors:

whether he is the sole supplier

whether substitute materials are available

whether he is able to control the channel ahead i.e. integrate forward

whether the buyer firm can integrate backward i.e. purchase or control the supplier.

f) Competitor's environment

The state of competition needs to be continually monitored for presence of the following factors:

entry and exit of competitors

substitutes for existing products and services

relative market share of competitors

major strategic initiatives adopted by competitors

The entry of new competitors will depend on the type and number of barriers to entry. Some of the barriers to entry could be scarcity of raw materials, economies of scale, product differentiation, access to marketing channels and likely response of existing firms.

The availability of cheaper substitutes of same or better quality for firm's products may erode its competitive edge.

Strategic changes initiated by one competitor firm can pose a threat or opportunity and trigger matching responses throughout the industry. The stepped up competition could be on the basis of price, quality, service etc.

Any of the above factors may critically affect attainment of firm's business objectives.

g) Technological environment

The term technology means the utilization of materials and processes necessary to transform inputs into outputs. Understanding technology requires knowledge and operating a technology requires skills.

New technologies affect materials, processes, work locations and organizational forms. They benefit some people by providing jobs, higher incomes and a variety of goods; they harm others by creating technological redundancy.

Technical changes affect the product or service lifecycle. Initially the product has high sales growth, then it matures and finally it declines. At times it may become necessary to invest in research and development to improve a product so that its life cycle can be extended or to replace it near the end of its lifecycle.

Advanced technologies require highly educated and trained personnel. These technologies require new work patterns, incentive systems and fresh attitudes towards acceptance of change.

The recent advances in technology such as the internet, mobile telephony, video-conferencing arid genome research are likely to have a major impact on firms in the I.T. and related industries in the near future. The strategists in these businesses can ill afford to ignore such revolutionary changes in the technology environment as they may offer major opportunities for the achievement of objectives or threaten the existence of the firm.

h) Physical environment

A survey of the physical or natural environment would cover such aspects as natural resources, ecology, climate, location etc.

Business firms depend on different kinds of natural resources. The cost and steady availability of natural resources, raw materials and energy constitute important strategic considerations whilst deciding on the location of the new plant or shifting of the existing one.

The climate is another aspect of the natural environment which is of interest to business firms whose products are climate dependent.

In the present day most societies are concerned about ecology and environmental pollution in particular. Hence governments actively intervene in issues relating to protection of wildlife and ocean wealth. Also green issues such as atmospheric pollution which has caused severe depletion of the ozone layer. Hence business firms are concerned about government legislation and the role of environmental activists on such issues.

The location of manufacturing plants and distribution warehouses is an important consideration for firms dealing in bulky products or mainly in exports business. Such firms prefer locations near ports to reduce transportation and freight costs.

The above vital aspects of the physical or natural environment which can affect the business prospects of a firm are considered during the strategy formulation process.

5.4 ENVIRONMENTAL SCANNING TECHNIQUES

Environmental scanning is normally carried out by means of a search of verbal and written information, spying, forecasting, MIS etc.

The sources of verbal and written information include:

Mass media such as radio and television

Firm's documents, files, MIS, employees etc.

External agencies such as the government, trade associations, marketing intermediaries, customers etc.

Formal studies by consultants, educational institutions, market research agencies etc.

Spying through services of professional agencies, one's own employees and former employees of competitors.

Secondary sources of information such as newspapers, magazines, trade journals, government publications etc.

A wide range of methods and techniques are used in conduct of environmental survey and forecasting in strategic planning. As the main purpose of environmental survey is forecasting the future state of environmental factors, most of the techniques are based on the statistical methods used in forecasting. Some of the techniques like scenario writing however are qualitative in nature and are used to predict the future through application of informed judgment and intuition. Some of the techniques commonly used are discussed in the subsequent paragraphs.

5.5 MODEL BUILDING

A model reduces an issue to just a few key variables. In model building a number of assumptions are made about the nature of the problem. The model when constructed will predict events and describe circumstances in which they happen. Schematic models use graphs, charts etc. to help management predict the future and run an organization in the most efficient way.

Mathematical models are analogues of relationships between variables seeking to identify cause and effect and hence to predict values for forecast (dependent) variable. A typical example is the sales forecast determined by such variables as product price, competitor's price, growth in consumer incomes etc. The forecast will change once the values of those independent variables change.

5.6 STATISTICAL (QUANTITATIVE) TECHNIQUES

Some of the commonly used statistical techniques are:

Regression Analysis whereby a dependent variable is said to be determined by a number of independent (causal) variables.

Trend extrapolation in which researchers fit best fitting curves (linear, quadratic etc.) through past time series to use for extrapolation.

Trend correlation in which researchers correlate various time series in the hope of identifying leading and lagging indicators that can be used for forecasting.

5.7 QUALITATIVE TECHNIQUES

A few important qualitative techniques are explained below:

The Delphi method. This method is based on seeking opinion of experts rather than on numerical extrapolation and statistical technique.

It takes advantage of the knowledge and experience of experts who offer opinions over several rounds till a consensus emerges.

The Multiple Scenarios technique. This method requires researchers to build pictures of alternative futures, each internally consistent

and 'having a certain probability of occurring. The process of building scenarios is meant to stimulate contingency planning.

The Brainstorming technique is a process wherein participants are encouraged to be open, inventive and as imaginative as possible.

The issue is discussed from different angles and ideas allowed to build by themselves. The ideas generated during such sessions are

separately evaluated from point of view of costs, benefits and implications.

The Morphological Analysis (MA) technique is an extension of the brain storming process. In this additional dimensions are added to the

original idea to generate still further ideas. Each idea is then critically evaluated leaving only the best for critical investigation.

Problems in forecasting

Business forecasting is an extremely difficult and notoriously unreliable exercise due to the following reasons:

The firm has no control over many variables such as taxes, interest rates, and consumer incomes etc. which are determined by government policies These policies can change unexpectedly.

It is difficult to predict consumer tastes and preferences with any degree of certainty. These can change suddenly.

Technological changes are difficult to forecast.

An abrupt disruption of the existing supply and distribution channels can take place.

In view of the above factors it is not possible for all firm's forecasts to be accurate and there are bound to be winners and losers in any truly competitive market. However, to the extent that a firm's forecasts are accurate its strategies will be well founded and its business will succeed.

5.9 ENVIRONMENTAL DIAGNOSIS AND ETOP

Environmental diagnosis refers to the decisions made by the firm's managers after assessing the information on opportunities and threats collected during the environmental survey. The managers need to decide from the available data which information to believe and which to ignore.

The purpose of environmental scanning is to ensure that a firm's strategic response to changes in the environment is timely and appropriate.

The Environmental Threat and Opportunities Profile (ETOP) is a comprehensive profile of all the opportunities and threats present in the environment which are specific to the firm. The profile is developed from the various information gathered during the survey of various environmental sectors such as political, economic, social, technological etc. The information is diagnosed and placed is such a way that the impact of environmental trends in terms of opportunities and threats is easily understood. The environmental trends on diagnosis are generally categorised as positive, negative or neutral developments and serve as an importance reference for top management in the

planning of strategies.

A summarised version of the ETOP is also presented to the top management to aid in decision-making during the strategy selection phase. Their decision will largely be guided by their perception of the gap between the expected and desired results. The quality of the diagnosis preformed by the managers will depend on the following factors:

Experience of the managers

Motivation level

Risk orientation

Time pressure and stress level

Team spirit and cohesiveness amongst the managers

Power play amongst the managers

Power of stockholders, suppliers, major customers etc.

Nature of environment i.e. stable, hostile, volatile etc.

An example of a summarized ETOP in respect of a hypothetical company in the pharmaceutical business is shown in Fig 5.1.

Fig 5.1 ETOP of a Hypothetical Firm

As may been seen from fig. 5.1 the firm faces potential threats from rival companies which are larger in size, from government's safety and anti-pollution laws which will add significantly to costs and on erratic supply of raw materials. The export market presents an excellent opportunity which the firm can suitably exploit. It should consider exports as a thrust area considering the favourable trends in the government and social sectors. To reduce competition and improve its market share it can consider adopting strategy of expansion through

the merger or acquisition route. The benefits likely to accrue are increased size, economics of scale and synergies in operations, distribution, R&D etc.

Chapter 6. ORGANIZATIONAL APPRAISAL

The scanning of the environment enables the firm to spot not only potential threats posed by the environment but also the opportunities available in it. However prior to deciding on which opportunity to select the firm must first assess its own capabilities with a view to judge whether it is competent to exploit such an opportunity. To this end the firm needs to carry out the following internal appraisal :

Assess its strengths and weaknesses in different functional areas

Assess its competitive advantages

An understanding of its strength and weaknesses helps the organization to select suitable opportunities and formulate appropriate strategies to meet its objectives. In case the appraisal reveals a capability gap then measures can be taken to address the shortcoming such that the desired objectives can be met.

6.1 ASSESMENT OF STRENGTHS AND WEAKNESSES IN FUNCTIONING AREAS

The organization assesses its strengths and weaknesses in the following functional areas:

Marketing

Finance

Production and Operations

Research and Development

Corporate Resources and Personnel

a) Marketing

The following factors are considered while assessing whether a firm is strategically stronger in marketing than its competitors:

Extent of market share established

Market share of competitors

Quality of product and customer services

Life cycle stage of various products

Effective pricing strategy for product and services

Consumer perception of the products and services

Effective and efficient sales force

Effective and efficient market research system

Effective and efficient distribution channels

The firm's strengths in one or more of the above areas will add to its ability to compete effectively. Whilst some firms may be inclined towards adopting an approach characterised by low pricing, high promotion and wide distribution others may opt for high prices, high quality and exclusive clientele. In case a weakness is observed in any area such as the existing product line then product improvement, new product development or acquisition may be attempted to cover the gap. A gap in 'positioning' would first require ascertaining the consumer's perceptions. It could then be filled up either by modifying the product to fit their perceptions or changing the product's position in their minds.

Products have been compared to living organisms in the sense that they are born, mature, decline and eventually die. A profitable firm which has all its products in the mature stage will lose its competitive edge once the decline commences. Hence it is vital that firms keep innovating and expanding their product line with new products.

Pricing is an important factor and much depends on the consumer's perception of the product's attributes vis a vis its image, quality and reliability. In case the perception is positive the consumer may be willing to pay a price higher than what the competitor is offering.

In today's competitive market good brand management constitutes a definite advantage and firms are frequently exercising choices of either allocating separate brand names to individual products or establishing a generic 'family' brand covering all versions of their products. The latter approach is cost effective especially where the products fall in the similar usage category (e.g. cosmetics), or have a common customer

group or a common channel of distribution. It also facilitates introduction of new products as no additional advertising or promotion costs are incurred.

The supply chain management linking the manufacturer to the distributor and retailer is another area which if effectively managed can give the firm an advantage over its competitors. In assessing the distribution function for strengths the firm would need to consider such factors as the cost of the channel ( size of the customers' orders, salaries of sales team, inventory holdup costs etc.), extent of control over distributors and retailers, reliability of distributors and retailers and geographic coverage.

The effectiveness of the electronic media as an instrument for achieving sales and advertising objectives of large business houses especially those dealing in consumer goods has been amply demonstrated by the colossal expenditures incurred by these firms on a continual basis. This form of advertising establishes a firm's products in the minds of the target customer group, promotes brand loyalty and improves the corporate image. If efficiently and effectively managed advertising can constitute a distinct advantage for the firm.

Some of the techniques that can be used for analysing strengths and weaknesses in the marketing area are:

Marketing audit

Market share analysis

Marketing cost analysis

Product line profit analysis

Sales force productivity analysis

Consumer satisfaction index

Brand monitoring surveys

b) Finance

The following factors are considered whilst assessing strengths and weaknesses in the financial areas:

Financial performance in terms of profitability and productivity

Low cost of capital in relation to competitors

Efficient cash flow management

Balanced capital structure

Quality of relationship with owners, shareholders and credit agencies

Efficient working capital and capital budget/system

Efficient tax planning procedures

Efficient internal audit and accounting system

Firms can have some strategic advantages in respect of one or more of the above listed factors. The strengths usually result in greater financial 'slack' or reserves which allow the firm to be flexible and adaptable. A comfortable financial ' slack ' allows the firm to exercise greater choice whilst considering various strategic options.

The competence of the firm's financial executives will largely determine whether the various financial systems designed and currently in force are operating efficiently and effectively. Some of the techniques that can be used to assess financial performance are explained in the subsequent paragraphs.

Liquidity Ratios

These indicate a firm's ability to meet its short term obligations such as current liabilities including long term debt which is near maturity. Current assets relate to inventories, sales, accounts receivable and cash. The cash is used ' to reduce current liabilities. A commonly used liquidity ratio is the current ratio which is given by:

Current Ratio = Current Assets / Current Liabilities

Too large a current ratio is not desirable as it would imply inefficient use of resources.

In case of slow moving or obsolescent inventories which could indicate inability of the firm to meet its short term debt, the quick ratio is used

to assess its state of liquidity. The quick ratio is given by :

Quick Ratio = ( Current Assets - Inventories ) / Current Liabilities

Leverage Ratios

These ratios indicate the source of a firm's capital i.e. whether owners or outside creditors. The term leverage is used to denote the multiplying of profits or losses when using capital with a fixed rate of interest. The amplification of profits or losses is viewed in relation to the equity held by the common share-holders. The most commonly used ratio is given by :

Leverage Ratio = Total Debt / Total Assets

Another leverage ratio which indicates the extent to which sources of long term financing are provided by creditors is given by :

Leverage Ratio = Long Term Debt / Equity

Activity Ratios

These ratios reflect how efficiently and effectively a firm is using its resources. The asset turn over ratio which indicates how effectively financial managers are employing their total assets is given by :

Asset Turnover = Sales / Total Assets

The fixed asset turnover on the other hand measures the turnover of the plant and equipment and is given by:

Fixed Asset Turnover = Sales / Net Fixed Assets

The inventory turnover ratio is another commonly used activity ratio. The ratio is given by:

Inventory Turnover = Sales / Inventory

As inventory holding are normally carried, at cost, the numerator sometimes used is cost of goods sold' in lieu of 'sales'.

The ratio of accounts receivable turnover is a measure of the average collection period. Too high a ratio indicates poor debt recovery. The

blocking of the capital in account receivable also carries the risk of bad debts. A very low ratio, on the other hand, could .imply loss of sales due to the stringent credit terms. These ratios are given by:

Accounts Receivable Turnover = Sales / Account Receivable

Average Collection Period = 360 / Accounts Receivable Turnover

Profitability Ratios

These ratios are a reflection of the overall management of the firm's resources. The various profitability ratios are given by:

Profit (net) = Net Earnings / Sales

Return On Investment (ROI) = Net Earnings / Total Assets

Rate Of Return (ROR) = Net Earnings / Net Worth

c) Production and operations

An appraisal of this function would cover the following aspects:

Plant capacity and overall productivity

Efficient planning and control systems

Age of the machines and equipment and whether they are functioning efficiently

Availability and cost of raw materials and sub-assemblies

Capability of engineering staff especially design and quality control personnel

Cost of production in relation to competitors

Efficient inventory control system

Effective maintenance policy

Advantageous plant location

Degree of vertical integration

In the production and operations function the firm could derive competitive advantages through development of efficient planning and control systems, improvement in productivity, efficient utilisation of plant capacity and by suitable location of its plant.

Some of the techniques which could be employed to assess performance in this area are:

Analysis of plant capacity utilisation

Analysis of cost production

Analysis of inventory

d) Research and development

The Research and Development function can provide competitive advantage through development of new or improved products, materials and processes. The resulting efficiencies can lead to substantial cost advantages and in turn significantly add to firm's profitability.

The various factors for assessment in the area are:

State of laboratories and testing facilities for undertaking research

Quality and experience of technical staff

Development capability for new products, materials and processes

Ability to meet customer requirements for product improvement e.g. creative packaging, product and material utility etc.

Work culture whether conductive to creativity and innovation.

Top management support in terms of resource allocation

A firm's R&D capability carries immense potential and can lead to several competitive advantages. In time these advantages could develop into the core competence of the firm and influence its ultimate destiny. A core competence provides a long-term competitive superiority to the firm. Whilst competitive advantage results from functional strength and can be imitated, core competence has lasting roots in technology and R&D. To acquire core competence firm's must invest heavily in technology and R&D and develop proprietary products which give them long term advantages. (para 6.2 also refers)

The management of firm engaged in the computer and pharmaceuticals industries places much greater emphasis on R&D activities as compared to firms in many other industries. This is reflected in comparatively higher resource allocations to R&D in their budgets. While some firms may prefer to innovate with new products and materials others may be inclined towards developing new' applications or improvements to the existing product line. The track record of a firm in developing new products or registering patents will influence its future strategic decisions i.e. whether to expand its R&D base further or continue at existing level.

e) HRM and corporate capabilities

A firm's success or failure largely depends on its ability to select, train, motivate, develop and manage its human resources. The role of the top management in efficiently and effectively managing its human resources will be a critical factor in the firm's achieving its mission and key objectives.

Some of the important considerations to be assessed in this area are:

Corporate image, prestige and value systems

Quality, expertise and experience of firm's personnel

organization climate, structure, systems and procedures

Personnel policies concerning staffing, appraisal and promotion and training and development

Quality of relations with government and trade unions

Adequate of resources in terms of money, men, materials, technology and facilities etc. and their efficient deployment

Effective management information and computer systems

A firm with strengths in one or more of the above areas will be better poised to handle competition in its respective industry. The top management should view employees as assets to be used strategically. They should be closely involved with the organization and their commitment level should be raised to correspond with that of the firm's requirements and key goals.

Most firms today have a HR specialist in the senior management team or on its board of directors. Human -resource managers are expected to create value for the firm through improvements in such areas as productivity, quality, creativity and development of corporate skills. The possession of an HR strategy, in fact, signifies the importance the firm attaches to the HR function. The policy should aim to create shared values, a common work culture, easily understood targets and a simple work allocation system. Employees should be encouraged to be innovative, quality conscious, flexible and adaptable to change.

In today's technology ridden business world it would be inappropriate not to mention the impact of Information Technology (IT) in corporate planning and decision making. Information technology can be a competitive advantage in the following ways:

Links firm to its customers and suppliers

Helps management in planning and implementing strategies

Improves quality management e.g. TQM relies heavily on computerized production and IT

Facilitates business re-engineering

Enables firm to respond quickly to changes in environment

Facilitates integration of marketing with production

Improves general management control by facilitating monitoring of key performance indicators

A firm's management therefore needs to identify critical areas in which it's IT strengths lie and can generate a competitive advantage. It may

be interesting to note that information itself can be used to derive a competition advantage. A well managed information system can playa

crucial role in:

Competitor analysis

Provision of databases for corporate planning

Environmental scanning

SWOT analysis

Management of customer and supplier relationships

6.2 ASSESSMENT OF COMPETITIVE ADVANTAGE AND CORE COMPETENCE

The internal appraisal of the firm, which is intended to assess the strengths and weaknesses of the firm in various functional areas, also helps to identify its competitive or strategic advantages. A competitive advantage means a superior or distinctive competence in some functional area relative to the competition. The functional area could be marketing, production, finance, technology etc.

A competitive advantage is a distinctive business strength which results in a cost or differentiation advantage for the firm. On the other hand, every strength need not be a competitive advantage. Only a strength that is superior or distinctive relative to competition can be a competitive advantage.

The competitive advantage enjoyed by a firm at a given time can be imitated by its competitors. Hence, in order to retain its competitive edge a firm must possess some enduring strength which cannot be easily imitated by its competitors. This core strength can be a competency in technology/process engineering capability of an extraordinary kind or any other expertise. It lies at the root of the businesses/products of the

firm and stronger competitive advantages can emerge from it

Competitive advantage appraisal needs a sharper focus than strength and weaknesses analysis. Strength can be mostly located through internal appraisal whereas identifying competitive advantages requires internal as well as external appraisal i.e. industry and competition analysis. The industry and competition analyses techniques help to compare firm's strengths and weaknesses with that of its competitors in terms of market share, customer services and satisfaction, brand image etc. These techniques are further explained in chapter 7.

6.3 THE SEVEN 'S' FRAMEWORK

The seven 'S' framework was developed in 1980 by Mckinsey & Co. The framework is a model of how organizations achieve success. Management consultants have used the technique to reappraise firms planning to implement new growth strategies,

The framework provides a checklist for thinking about what makes a business tick. It advocates examination in seven base areas, all beginning with' S' :

Strategy -a means to achieve an end i.e.; organizational objectives

Structure- a system for assigning tasks and delegating authority

System - organizational systems consisting of planning, control, information, motivation, appraisal and development which help to implement strategy

Skills- competence and capabilities of the organization's personnel

Staff – organization's personnel

Style -organization's leadership and administrative skills

Shared value -refer to mission-derived objectives, goals and values which organization's personnel strive to achieve

6.4 STRATEGIC ADVANTAGE PROFILE (SAP)

The international appraisal of the firm locates its strengths and weaknesses in different functional areas. The external appraisal of the competition and industry' structure enables a firm to pinpoint which of its distinctive strengths can be built into competitive advantages.

Based on the findings, a comprehensive strategic advantage profile (SAP) or competitive advantage profile (CAP) can be drawn. The SAP is a detailed document which categorizes each of the functions or factors into several sub- factors. For example the marketing function can be disaggregated into price, product or promotion sub-factors and potential strengths and weaknesses in each of these areas assessed and graded. A summarised version of the detailed SAP is generally prepared for reference of top management to enable strategic decision making.

An example of a summarised SAP applicable to a hypothetical company in the consumer goods business is given at fig. 6.1 by way of illustration.

Fig. 6.1 SAP of a Hypothetical Consumers Goods Firm

As may be observed from fig. 6.1 the firm has definite strengths in the financial and corporate management areas. The management needs to adopt a more proactive strategy to combat the emerging competition through product innovation, pricing strategy, aggressive promotion etc. A venture into the export market can also be considered. The weaknesses in the production function could be translated in competitive advantages through progressive replacement of old machinery with 'state of the art' equipment and stabilizing relationships with suppliers. This is a strategic imperative and should be planned over the short or medium term.

Chapter 7. STRATEGIC ALTERNATIVES

When considering strategic alternatives a crucial factor that is examined is the mission definition - the business the firm is in or wants to be in.

7.1 STRATEGIC ALTERNATIVES AND BUSINESS DEFINITION

Derek F. Abell has defined business as comprising of the following three dimensions:

customer groups (segmentation of market according to customer types)

customer functions (utilities provided by products to satisfy customer needs)

alternative technologies (functions / processes adding value to the business) .

The choice of products / services will depend on several factors. Should the line offered be broad/ narrow? Are products to be of high or low quality? What is offered in terms of customer utility? The alternative strategies can be considered once the business definition with regard to products or services is clarified.

The choice of markets will depend on the territories, channels and customer types to be served. Should the market served be local, regional or international? To appoint wholesale or retail distributors? To serve individual customers, industrial firms or government agencies?

The issue of function (or technologies) involves adding value to the business. At each stage from creation to delivery to the end user processes may be included to add value. The business definition should clarify what stage the firm will' focus on i.e. specialization in only one stage or complete vertical integration.

Once the initial choice of product, market and functions has been determined various strategic alternatives can be considered to continue, change or improve efficiency in the above dimensions of business.

7.2 GRAND STRATEGIES

The various strategies which a firm can adopt are classified into four categories: stability, expansion, divestment (or retrenchment) and combination. These are referred to as grand or generic strategies. The basic features of these categories are described in the subsequent paragraphs. Fig. 7.1 shows the four grand strategic alternatives along with variants of the expansion strategy.

Fig. 7.1 Strategic Alternatives

a) Stability strategy

The stability grand strategy is adopted when a firm seeks to improve its functional performance in the business dimensions of customer groups, customer functions and alternative technologies- either singly or jointly. In other words the firm's products, markets and functions will remain the same and the emphasis will be on improving functional efficiencies through better deployment and utilization of resources. The

strategy aims at maintaining the firm's present position in the present product- market. The expectation is that the desired objective in terms of income and profits will be achieved through such incremental improvements in functional efficiencies. The stability strategy is adopted when the environment is perceived to be relatively stable or pursuing an expansion strategy is considered too risky.

b) Expansion strategy

The expansion strategy is adopted when the firm seeks sizeable growth and attempts to substantially expand the scope of its customer groups, customer functions and alternative technologies -either simply or jointly. Expansion involves a redefinition of the business through addition of new businesses or enlargement in scope of the existing businesses.

The firm adopts an expansion strategy when:

The environment presents expansion opportunities which it decides to exploit.

An increase in its size will create competitive advantage and lead to in- creased market &hare.

It expects to derive advantage of economies of scale from the experience curve.

As seen in the fig. 7.1, the expansion strategy has two broad variants -the intensification and the diversification strategies. In intensification, the firm achieves growth within the current businesses whereas in diversification it attempts growth by entering new businesses which are outside the existing portfolio.

There are different variants within both the intensification and the diversification strategies. Intensification can be pursued through market penetration strategy, market development strategy and product development strategy. Diversification also has three variants and can be pursued through vertically integrated diversification, concentric diversification and conglomerate diversification. Each of these strategies is discussed in greater detail in a subsequent part of the chapter.

c) Retrenchment strategy

Retrenchment or divestment strategy is adopted when a firm desires to significantly reduce or abandon the scope of either its customer groups, customer functions or alternative technologies. The strategy seeks to redefine the business of the firm through partial or total dropping of products, markets, functions.

The retrenchment strategy is adopted when:

Environmental threats loom large and the firm wants to shed unprofitable business

Resources from loss making businesses are required to be diverted to profitable ones to ensure their stability

Products/processes become obsolete.

Competition turns aggressive or industry suffers from over capacity. Retrenchment strategies are further discussed in the chapter.

d) Combination strategies

Firms engaged in several businesses adopt the grand strategies of stability, expansion and retrenchment either simultaneously across different businesses or at different times in the same business. The combination strategy is adopted when no single one can meet the requirements of various businesses. As the businesses may be part of different industries each will require a different strategic response.

The adoption of a combination strategy becomes necessary when a firm's products are in different stages of the lifecycle. Environmental factors also compel use of such a strategy. In times of economic prosperity, expansion may be the grand strategy to follow. In recession, however, some industries farewell while others suffer. At such times combination strategy makes sense for a multi-industry firm.

7.3 APPROACHES TO GRAND STRATEGIES

There are several variations of the four generic grand strategies. Glueck has proposed four dimensions along which the grand strategies can be defined. The dimensions refer to various approaches for carrying out a grand strategy. The dimensions are internal and external, related and unrelated, horizontal and vertical ( backward and forward ) and active and passive.

The four grand strategies when considered along with their dimensions give rise to 32 different types of strategies ( 4 grand strategies x 4

dimensions x 2 types of each dimension ). These when considered along with the three dimensions of business definition ( customer groups, customer function and alternative technologies ) give rise to a total of 96 strategic options. Whilst strategic alternatives may abound not all of them may be feasible to adopt. Strategists generally restrict their choices to a few major strategic alternatives.

7.4 DIMENSIONS OF GRAND STRATEGIES

The various approaches for carrying out grand strategies are explained below:

a) Internal / external dimension

A firm adopts the internal dimension approach when it decides to pursue a strategy entirely on its own. The external dimension approach is followed when the strategy is pursued in association with another firm.

b) Related I unrelated dimension

The related dimension approach involves adopting a strategy related to the existing business definition of the firm i.e. in terms of its existing products, markets and functions. However when the strategy adopted is unrelated to the existing business definition the external dimension is said to operate.

c) Horizontal / vertical dimension

When a firm decides to adopt a strategy aimed at serving addition products and markets which complement the existing business definition it is said to pursue the horizontal dimension approach. However when strategy aims at expansion or contraction of existing business definition through use of alternatives technologies then the vertical dimension is said to operate.

d) Active I passive dimension

The active dimension approach is followed when a firm adopts an offensive strategy in anticipation of environmental threats and opportunities. However when a defensive strategy is adopted in response to environmental threats and opportunities then the passive dimension approach is said to be followed.

7.5 INTENSIFICATION STRATEGIES

The intensification strategy is a variant of the grand strategy of expansion. It approaches expansion via the internal dimension. It aims at strengthening the firm's product/market position in its existing business. This strategy is best explained by Ansoffs product -market expansion grid. Fig. 7.2 shows the grid.

Fig. 7.2 Ansoff's Product - Market Expansion Grid

As may be seen from the figure the intensification strategy can be achieved through three routes: market penetration, market development and product development. The fourth alternative is diversification. This involves new products and new markets and is outside the scope of intensification.

a) Market penetration strategy

Through this route the firm tries to achieve growth through existing products in existing markets i.e., it tries to increase its market share by

penetrating deeper into the same markets with the same products.

b) Market development strategy

The firm pursues this strategy to achieve growth through existing products in new markets. As in market penetration strategy the firm stays with the same product but seeks new markets/market segments/new uses. The strategy can be implemented either by expanding the market territory and gaining new customers or by devising new uses for the existing products and gaining new customers on that basis.

c) Product development strategy

This strategy is pursued to achieve growth through new products in existing markets. The term new products here means improved products or substitutes serving the same needs. Unlike the market penetration and market development strategies where the firm stays with current products in this case the firm develops improved products satisfying the same market.In other words the firm adheres to its current product mission and does not introduce any new products as that would amount to diversification.

7.6 DIVERSIFICATION STRATEGIES

Diversification is another variant of the grand strategy of expansion. It is a set of strategies that involves all the dimensions of strategic alternatives. It may involve the internal or external, related or unrelated, horizontal or vertical and active or passive dimensions either singly or jointly. In simultaneously departing from both familiar products and familiar markets and entering new markets with new products, diversification expands the firm's portfolio of businesses.

Diversification is adopted due to the following reasons:

Firm seeks growth in assets, income and profits.

Firm seeks flexibility in portfolio to reduce vulnerability of other businesses.

Firm has surplus resources from existing businesses which after meeting needs of intensification can be used for diversification.

Firm after fulfilling its original mission recasts same into a new one with more ambitious growth.

Any firm that desires to adopt a diversification strategy must ensure it possesses the required managerial competence. As it will be venturing' into different fields, the management of these businesses will require right corporate leadership, competent executives, skilled workforce and an efficient structure and systems.

a) Forms of diversification

Diversification is classified into four broad categories:

Vertically integrated diversification

Horizontal diversification

Concentric diversification

Conglomerate diversification

Fig. 7.3 shows the diversification matrix linking various products / function types to different forms of diversification strategies.

b) Vertical integration

In this form of diversification, firm takes up businesses that are related to its existing business. In other words it starts making products that serve its own needs. Vertical integration is of two types- backward and forward integration. Backward integration occurs when a firm undertakes new activities affecting the supply of its inputs i.e. towards the raw material stage. Forward integration involves activities which affect the nature of distribution of the firm's output i.e. towards end users. By way of example a firm supplying only shoe uppers integrates backwards by setting up a tannery to produce its own leather for making soles. In terms of forward integration it commences to assemble the entire shoe and perhaps even take up the distribution of the product as well.

c) Horizontal integration

In this form of diversification the firm persists in the same type of products at the same level of production or marketing process. This strategy is implemented via the merger takeover or joint venture routes. The underlying compulsions may be to expand and take on competition in another territory, increase market share and benefit from economies of scale. By way of example a cosmetics firm taking over its competitor firm is said to integrate horizontally.

d) Concentric diversification

This is also a form of related diversification. The strategy aims at linking the new business to the existing business in terms of process, technology or marketing. Concentric diversification is different from vertical integration in that the latter strategy involves new products which are within the firm's existing process- product chain whereas in case of the former there is a departure from the vertical linkage. Concentric diversification is of three types:

i) Marketing and technology related

A firm introduces a similar type of product or service through use of related technology. For example a firm manufacturing plastic toys decides to make other plastic items such as furniture or cutlery and sells through the same distribution channel.

ii) Technology related

A firm introduces a new type of product or service vith the help of related technology. For example a bank provides capital financing to large industrial clients and offers routine banking services to individual customers (savings account / current account operations).

iii) Marketing related

A firm provides similar types of products with help of unrelated technology. For example a firm manufacturing washing machines makes domestic appliances such as geysers and ovens to the same customer type.

e) Conglomerate diversification

This strategy involves pursuing businesses which are unrelated to its current business definition either in terms of customer groups, customer functions or alternative technologies. The new businesses / products are totally unconnected with the existing ones. For example a tobacco i.e. cigarette manufacturing company diversifies into the software or hotel construction businesses.

f) Merits I demerits of diversification strategies

As seen from the preceding paragraphs diversification can be related or unrelated to the current businesses. The vertical integration and the concentric diversifications constitute the related category whilst conglomerate diversification falls in the unrelated category. Diversification related to the current businesses normally poses a lesser risk as there will be sharing of skills and competencies and greater synergy among the businesses. The merits and demerits of each of the diversification strategies are listed in fig. 7.4

7.7 MERGERS AND ACQUISITIONS

As stated previously merger and acquisition (or takeover) strategies represent forms of horizontal diversification. They approach expansion via the external dimension route. Whilst mergers take place when the objectives of both the buyer and seller firms are matched acquisition results when one firm decides to acquire another either with consent of other firm (friendly takeover) or against the wishes of the other firm (hostile takeover).

A merger is the combining of two or more firms. It takes place when one firm acquires the assets and liabilities of other in exchange for stock or cash or both firms are dissolved, their assets and liabilities are combined and new stock is issued. For the firm which acquires another it is an acquisition and for the firm which is acquired it is a merger.

There are many reasons why a firm may desire to merge, these are grouped under buyer's and seller's motives:

a) Buyer's motives for merging

To increase value of firm's stock

To increase growth rate of firm

To stabilize firm's earnings and sales

To balance or fill out the product line

To reduce competition by purchasing the competition

To acquire a needed resource instantly e.g. latest technology

To increase efficiency and profitability through synergy

To avail tax benefits

b) Seller's motives for merging

To increase value of owner's stock and investment

To increase firm's growth rate

To acquire resources to stabilize operations and make them more efficient

To deal with top management problems of succession, dissension etc.

Prior to a merger taking place the following important issues come up for consideration:

The match between the objectives of the two firms

The extent of synergy that is likely to develop as a result of the strategic advantages (skills, resources etc.) possessed by each

Valuation of seller firm, sources of merger financing etc.

Management control post-merger. The transformation in size, structure, staff etc.of the merged firm could present control difficulties which could threaten its smooth functioning

7.8 JOINT VENTURE STRATEGIES

Mergers and acquisitions can occur through absorption i.e., when one firm takes over another or through consolidation i.e., when two or more firms combine to form a new firm. A joint venture is a special case of consolidation in which two firms engage in a temporary partnership or 'consortium' for a specified purpose.

Joint ventures occur when two firms desire to derive benefits of synergy by combining their strategic advantages and distinctive competencies. These may also occur when participating firms jointly decide to share the business risk or overcome such problems as import quotes, tariffs etc. Joint ventures present an effective strategy for joint sharing of risks, expertise and costs. They result in increasing market share, redefining competition and in some cases importing the latest technology. Some firms also opt for joint ventures abroad to overcome restrictive legislation at home or to avail of business opportunities present in the international market.

7.9 SYNERGY

A major reason for entering into mergers and acquisitions is pursuit of synergy with the newly created firm. Synergy occurs when two or more activities or processes complement each other so that the total output is significantly greater than what it would be if the activities were undertaken individually. In other words making two plus two equals five.

Synergy exists when strengths of two firms more than compensates for their joint weaknesses. Sales synergy occurs when several products have the same salesmen, warehouses, distribution channels and advertising. Operating synergy occurs when firm deals with many products. This leads to higher utilisation of facilities and personnel and the spreading of overheads. Investment synergy results when many products use common facilities in factory, R&D, machinery, equipment etc. Management synergy occurs from management experience of both firms in handling problems in different locations /industries.

7.10 DIVESTMENT, TURNAROUND OR LIQUIDATION

The retrenchment strategy is implemented through divestment, turnaround or liquidation. It is pursued when a firm experiences the need to reduce its products, markets or functions. The strategic decisions focus on functional improvement through reduction of activities in business units with negative cash flow.

The retrenchment strategy involves redefining of the business by divesting a major product line or an SBU. The firm may also curtail some market territories and / or reduce its function. For example when a firm decides to sell its entire output to a single customer it permits that firm to carry out its distribution function. In other, words it becomes a 'captive company'. Some of the conditions which make it necessary for a firm to follow the retrenchment strategy are given below:

Firm's performance is poor i.e. negative profit and cash flows.

Firm has failed to meet its objectives and is under pressure from stake-holders to improve performance

Firm has developed internal weaknesses such as aging machinery, high employee turnover, managerial incompetence and perceives itself as incapable of dealing with environmental threats.

Firms perceives better opportunities else whereto utilize its strengths

Turnover strategy maybe implemented by the existing CEO and its management team, by seeking services of a turnaround specialist or consultant or by replacing the existing team including the CEO. Whilst improving internal efficiency, work culture and morale may be considered as crucial turnaround factors. The firm would also need to focus on financial and strategic issues. A focused strategic plan involving analysis of competition and industry analysis, review of marketing and production plans and the implementation of strategic plan through targets feedback and corrective actions.

Divestment strategy may be implemented through outright sale of the business unit or by selling a portion of the unit as an independent firm. In the latter option the selling firm would retain partial ownership / control.

A liquidation strategy, which involves closing down a firm and selling its assets, may be implemented in planned way. A planned liquidation ensures a systematic sale of assets, such as real estate, buildings, machines etc. to ensure maximum benefits to the firm and its shareholders.

The divestment and liquidation strategies are the hardest strategies to follow as the firm's management perceives these as an admission of

failure. In view of the serious implications in terms of loss of employment for workers and other employees these strategies are only

considered for adoption when all other strategic options have been exhausted.

Chapter 8. STRATEGIC CHOICE

Glueck has defined strategic choice as the decision to select from among the alternative grand strategies considered the strategy which will best meet the enterprise objectives. The decision involves focusing on a few alternatives, considering the selection factors, evaluating the alternatives against these criteria and making the actual choice.

It may be noted that strategic choice is an analytical as well as judgmental task. To perform the task the firm relies heavily on its marketing research and marketing information systems. This is so because strategic choice finally boils down to choice of products and markets that the firm will play in.

8.1 CRITERIA FOR STRATEGIC CHOICE

The following criteria for optional strategy choice have been proposed by Kenneth Andrews in his book, 'The Concept of Corporate Strategy':

Is strategy chosen clearly identifiable? Is it clear to those who have to deal with it subsequently?

Does the strategy fully exploit the opportunities present in the environment?

Is it consistent with the resources of the firm arid its competitive advantages and core competences?

Is the chosen level of risk feasible?

Is it appropriate to values and aspirations of the firm?

The selection factors can be classified as objective and subjective factors. The objective factors which are based on analytical techniques are also referred to as rational, normative or prescriptive factors. The subjective factors, on the other hand, are qualitative in nature and based on personal judgement. These factors are also referred to as intuitive or descriptive factors. The strategic alternatives generated are analyzed on the basis of the objective and subjective selection factors.

8.2 EVALUATION OF STRATEGIC ALTERNATIVES

The process of evaluation of strategic alternatives begins by limiting the choice of alternatives to a few which are considered feasible. This is done either by focusing on the business definition or analysing the strategic gap analyses. In considering the business definition the firm can review the present status of its business products, markets and functions and strategize on the future position it would like to be in. Alternatively it can set objectives for a future time period and then work backwards to ascertain where it would reach with the current level of efforts. The difference between the desired and expected performance will indicate the strategic gap. The perception of the strategists on the nature of the gap will determine the type of strategy to be chosen i.e. stability, expansion or retrenchment.

Once the alternatives have been limited to a reasonable few, the evaluation process can commence. This involves a careful analysis of both types of selection factors i.e. subjective and objective. There is no fixed method used by strategists. The process is generally an iterative one. The selection factors are the main evaluation criteria and these need to be considered together as singly neither will provide a comprehensive perspective on which to base the strategic choice.

The evaluation of the strategic alternatives will provide to the firm a clear and definite direction to enable strategic decision making. The final strategy or set of strategies selected for implementation will need to be documented into a strategic plan which will include such aspects as budget .for resource allocation, performance evaluation criteria, contingency strategies etc.

8.3 OBJECTIVE FACTORS

Some analytical techniques which are used to consider objective factors are the portfolio analysis, SWOT analysis and industry and competition analysis. It may be recalled that the SWOT and industry and competition analyses were discussed in chapters 5&6 respectively.

a) Portfolio analysis

The portfolio analysis, also commonly referred to as the corporate portfolio analysis, is a set of techniques that are used by a firm as a part of its internal appraisal. They help the strategists in assessing the status/ health of individual businesses in the firm's portfolio. These techniques are generally used by multiple SBU firms for competition analysis and corporate strategic planning. Some of the techniques commonly used are the Boston Consulting Group (BCG)matrix, the General Electric Company (G. E.) matrix and Hofer's product- market

evaluation matrix.

To enable better appreciation of the portfolio techniques it is necessary to understand the concepts of experience curve and product life cycle which are used in the portfolio approach.

b) Experience curve

Studies conducted by the Boston Consulting Group in the 1970s revealed that production costs generally fell by at least 20 percent whenever a business's output doubled. The finding implied that increasing the market share should be a primary strategic objective.

The experience curve effects are referred to as cost reduction and efficiency increases which are achieved as a result of a business acquiring experience in a project, function or activity. These effects differ from economies of scale as they are the outcome of longer experience rather than a greater volume of output. The costs reduce as a result of the following factors:

The acquisition of know-how.

The substitution of capital for labour

Labour stockholding

Higher labour productivity

Better design of equipment or processing

Specialization of tasks ( enhanced experiences from undertaking narrowly specified duties) .

The acquisition of greater experience in a particular technology leads to development of expertise in related fields. This in turn, can promote further technical advances. The experience curve effects represent a barrier to the entry of new firms to an industry because" new firms without experience would face higher costs than the established businesses. The forecasting of experience curve effects influence a firm's pricing decisions. The firm may assume that a low price will lead to high volume production, which in turn will generate learning and contribute to increased efficiency. Thus profitability will rise and the market share will expand. The quantification of expected experience curve effects can also help price new products which have been manufactured in the past.

c) Product life cycle (PLC)

Products have been likened to living organisms in that they are conceived and born, mature, decline and eventually die. The introductory phase is marked by high expenditures towards market research, test marketing, launch tests etc. Financial losses can result in this early phase. The first customers are likely to be younger, better educated and more affluent than the rest of the population. They will get drawn by the novelty of the product. Technical problems may occur and many potential customers, anticipating this, may postpone the purchase. No competition is experienced during this stage. Advertising is normally the most important element of the marketing mix as the purpose is to create product awareness and brand loyalty.

During the growth stage conventional customers begin to purchase the product. As competition will appear during the stage, advertising should attempt to broaden the product's appeal and reinforce customer loyalty.

Once the product enters the maturity phase the aim should be to stabilize market share and make the product attractive to new market segments through improvements in design and packaging. The emphasis should be on additional features, improved quality and. wider distribution. Most customers by now may have either tried the product or decided not to buy it. As competition intensifies suitable strategies relating to extra promotional activity, price cutting to improve market share or finding new uses for the product may have to be pursued.

The last phase of decline occurs when the market gets saturated. This happens when consumer tastes alter or the product becomes technically obsolete. Sales and profits fall. The product's life should now be terminated as any additional time, effort, and resources spent to revitalize it will go waste.

d) BCG matrix

In a multi -SBU firm some businesses may be having a high market share and high profitability whilst others may be having a low market share and making losses. In respect of some businesses the industry may have an attractive growth rate while in case of others it may be very poor. The firm's strategists, therefore, have to carry out an in- depth evaluation of the health / performance of each of its businesses as well as the performance of the relevant industry as a whole.

The BCG matrix enables the firm to undertake the process of evaluation of the industry growth and the relative position of the firm in the industry. The matrix, shown in fig. 8.1 classifies the businesses of the firm into the four following categories:

Stars

These products or SBUs operate in a high growth market and require large amounts of cash to maintain their position. Being in the growth phase of the PLC they are leaders in their business and generate large amounts of cash. The cash in and out position, however, is more or less in balance. Stars are good prospects for expansion.

Cash cows

These operate in a low growth market. They do not need heavy investments and generate a lot of cash. Cash cows provide fund for overhead, dividends and investments in lagging businesses such as stars and the question marks. As they are in the mature phase of the PLC, limited expansion only may be considered.

Dogs

These are products or divisions with low growth and a low market share. Their profits are poor and they need cash to survive. They are normally in the late maturity or declining phase of the PLC. They should be divested or liquidated.

Question marks

These are high growth-low market share products or businesses. Their cash generation is poor and they need a lot of cash to maintain or enhance their market share. As they operate in a high growth market it is easier to gain market share for them than for the dogs. A firm that obtains an early lead can benefit from the experience curve through cost advantages and market leader- ship. It can also create entry barrier for new firms. A firm that expects a domi- nant market share can expand and get quickly converted into a star. Failing that it should divest at the earliest opportunity.

Fig. 8.1 BCG Growth - Share Matrix

e) G.E matrix

The G.E. matrix also referred to as the multi-factor portfolio planning matrix is shown in fig. 8.2:

Fig. 8.2 GE Matrix

The G.E matrix is used by firms to rate their businesses against two main parameters i.e. industry or market attractiveness and business strength. The industry attractiveness is a product of several factors such as industry potential, its current size, rate of growth, structure and profitability. The firm's business strength is a product of such factors as its current market share, growth rate, ability to compete on price and quality, corporate image, brand image etc.

As may be seen from the figure the upper left zone, the lower right zone and the central diagonal zones represent businesses which are strong, weak and medium respectively in terms of the overall attractiveness. On the basis of these ratings the businesses can be correctly located in their respective cells and appropriate strategic alternatives adopted to either expand, maintain and build or retrench them.

The G.E. model is all encompassing in that it takes into account overall industry attractiveness of which industry growth, as considered by BCG model, is only one component of it. Similarly the G.E. model considers all dimensions of a firm's business strength and not only the relative market share as in the case with the BCG model. The G.E. model therefore is an expanded version of the BCG model.

f) Hofer's product I market evaluation matrix

Hofer and Schindel have criticized the BCG analysis as they claim that growth rate is not always linked to profitability and that market share cannot be easily defined. They have also pointed out inadequacies in the GE model which they say does not accurately represent new businesses in new industries that are just starting to grow.

As a remedy to the above two models, Hofer in his -15 cell matrix, as shown in fig. 8.3, has analyzed businesses in terms of their competitive

position and stage of product / market evaluation. The circles in the figure represent the sizes of the industries involved and the pie wedges

within them the market shares of the firms. These circles are to be plotted for present and future businesses.

Fig. 8.3 Hofer's Product / Market Evaluation Portfolio Matrix

As may be seen in fig. 8.3, business A represents a product / market with a huge growth potential and needs large investments i.e. expansion to grow and increase market share. Business C represents a ' cash cow' which generates surplus cash that can be used for development of A. Business B is probably a ' dog' being in a relatively weak position and may need to be retrenched. Business D appears to be heading for total decline and can be considered for divestment.

g) Industry and competition analysis

Industry and competition constitute a major component of the firm's environment. An analysis of this component is an essential prerequisite to strategy formulation. The industry analysis reveals the industry attractiveness and firm's competitive position within the industry. The analysis provides information on the number of players in the industry, their market shares and installed capacities and their relative strength within the industry. It also indicates the strength of the competitive forces in the industry and industry profitability / attractiveness. By analysing industry and competition a firm is able to determine its own competitive position within the industry.

The growth potential and the profitability of the industry are the main parameters for assessment of industry attractiveness. All industries are not equally attractive and do not offer equal opportunities for sustained growth and profitability. A firm has to assess whether a particular industry is growing, stagnant or in a stage of saturation. Also what are the limits to growth and the level of profitability- high, medium or low. Based on its assessment of industry attractiveness the firm can strategize regarding the industries it should enter and the ones it should avoid.

The firm's competitive position within the industry also helps to evolve strategy. The task of strategy is to place the firm in a favourable .position with respect to the competition. Basically, this means designing products and services which are superior to those of the competitors. In any industry some firms are more profitable than others due to their stronger competitive position. Hence a firm has to build a competitive advantage in order to gain a higher market share in the chosen industry.

An analysis of industry broadly covers such aspects as industry environment, structure, attractiveness, performance, practices and emerging / future trends. Specifically, the following factors need to be examined:

Industry demand, products and their characteristics, level of technology etc.

Industry environment whether it is fragmented, emerging, declining or global in nature.

Industry structure i.e. number of players and their relative market shares and the state of competition (monopoly, oligopoly etc.)

Entry barriers in the industry in terms of economies of scale, product differentiation, capital needs, cost advantage of the players.

Experience curve of the players, access to the distribution channels, government policy etc.

Industry performance with regard to production, sales, profitability and technological advancement.

Industry practices in areas of marketing such as product, price, promotion, and distribution and R&D policies.

Forecasting emerging / likely future pattern of the industry with regard to its attractiveness / profitability.

Most aspects of competition analysis gets covered in industry analysis as competition and competitive forces are an integral part of the

industry structure. Michael E. Porter gave a new thrust to the concept of competition in his model, shown in fig. 8.4 which classifies

competitive forces into five categories.

Fig. 8.4 Porter's Five Forces Model of Competition

As seen in fig. 8.4 these five forces, which shape competition and determine profitability in an industry, are the threat from the new entrants, bar gaining power of customers, bargaining power of suppliers, rivalry among established players and the threat from substitute products or services. The strength of these forces may vary from industry to industry and also within a given industry over time. These forces deeply influence industry attractiveness / profitability as the elements of cost and investment which are needed to become a player in the industry are controlled by them.

A firm should understand these forces in the industry and how they are likely to affect it. It has to devise a strategy to enable it to take a competitive position from where it can defend itself best against these forces. Thus the aim of any strategy will be to either build defenses against competitive forces or locate positions in the industry where these forces are the weakest.

h) Value chain concept

The value chain concept also conceived by Michael E. Porter , can be applied to advantage in competitor analysis. Basically value chain is a tool for identifying ways in which value can be created by a firm. However, firms also use the concept for assessing their competitive position within the industry by comparing their own value chain with that of their competitors. Fig. 8.5 gives us a diagrammatic representation of the value chain concept.

Fig. 8.5 The Value Chain

As seen in the fig. 8.5, Porter identifies nine distinct activities which create value in any firm. These consist of five primary activities and four support activities. The five primary activities are :

Inbound logistics i.e. bringing materials into the business

Operations i.e. product design, manufacturing etc.

Outbound logistics ( sending the products out )

Marketing and sales

Service

The four support activities are:

Firm's infrastructure

Human resources

Technology development

Procurement

The four support activities occur in each of the primary activities of the firm also. For example the support activity of human resource management is carried out in each of the primary activities as well. The primary and support activities together generate a vast matrix of value creating activities in the firm. Value creation depends not only on how well each department performs but also on how well they coordinate their activities and create maximum possible value for the firm.

In analysing the value chain of the competitor, the firm identifies its strengths and weaknesses and then formulates its own strategy to exploit the rival's weaknesses and defend itself against his strengths.

i) SWOT analysis

The issues of environmental appraisal and organizational appraisal were discussed in detail in chapters 5&6 respectively. The SWOT technique was also explained in chapter 5. The two profiles, ETOP and SAP, now can be merged and analyzed to narrow down the strategic alternatives to ones which are feasible.

By way of illustration SWOT profile, of a hypothetical firm in the software business is shown in fig. 8.6

Fig. 8.6 SWOT Profile of a Hypothetical Firm

Based on the information given in the fig. 8.6 it may be seen that the firm has definite strength in the functional areas of corporate capabilities and resources. The environment shows the domestic market to be sluggish. As government policies are favourable and the international market shows potential, the firm should intensify marketing efforts to attract orders from abroad. The expansion strategy appears to offer a feasible approach as firm possesses strengths in corporate competence and financial and personnel resources

Firm may also consider suitable mergers or acquisitions, as a part of the expansion strategy, provided substantial synergy benefits are likely to accrue. Any strategy formulated through the SWOT analysis technique will depend on certain other factors as well. A strategy of expansion will only be selected provided top management has an inclination for risk-taking. Prior to making a strategic choice various subjective factors will need to be considered when analysing the feasible alternatives that emerge from the SWOT analysis.

8.4 SUBJECTIVE FACTORS

Many executives have little or no preference for sophisticated decision making techniques. They invariably rely on assumptions and the collective wisdom of the group. The group deliberates on strategic issues and once a consensus position begins to emerge, the CEO endorses the position. In due course the consensus position, after some modifications, becomes policy. These policies evolve from a process of creating commitment. The creeping commitment approach to strategic decision making can also be traced to other subjective factors. These are explained in the subsequent paragraphs.

a) Managerial perceptions of external dependence

Firms depend on various stakeholders, such as owners, competitors, customers, government and community for their survival and prosperity. The more dependent a firm is on these external forces the less its flexibility in exercising strategic choice.

External dependence is only a constraint to the extent it is perceived to be one. It need not always restrict alternatives. A firm can adopt proactive strategies to reduce dependence rather than allow it to control its choice-making. For example consider dependence on a supplier. If the gap in performances is perceived to be significant due to this factor, the firm can find new suppliers or vertically integrate to produce the input or it can enter into a merger or joint venture to reduce the dependence. Hence, managers need not limit themselves or their strategies due to external dependence factors.

b) Managerial attitude to risk

Managerial attitudes toward risk vary depending on the stakes involved. The strategic decision maker may adopt one of the three postures

i.e., risk neutral, risk averter or risk taker. The three postures are represented in fig. 8.7.

Fig. 8.7 Risk Postures

In fig. P1 and P2 represent the probability of taking the decision while the ordinate is the stakes. As may be seen, for the same probability it takes a lot of stakes for a risk averter to be induced to take any decision while a risk taker is doing it easily.

Risk attitudes also vary depending on industry volatility and environmental uncertainty. In case of very volatile industries, managers should possess a high risk orientation otherwise they will not be able to function.

Risk attitudes also vary depending on the internal conditions. A firm which is financially weak and dependent on external financing is unlikely to undertake risky projects. The managerial risk perception will differ depending on whether the firm's future is at stake or there is little to lose. In case the preference is for balancing risk then stability strategy will be pursued in major SBU's with expansion in an odd unit. However if risk is deemed necessary then managers are likely to discard stability as a viable option.

c) Managerial awareness of past strategies

The strategic gap analysis involves a review of current strategy of a firm at a given point in time to assess whether continuation of the strategy will lead to expected attainment of the desired objectives. In case the gap is perceived to be small, past strategy is generally continued with.

In large firms managers prefer only incremental changes to past strategies which are under implementation rather than major shifts. This is so because commitment in terms of resources having already been made any shifts to new areas will render these resources including personal redundant. However, sudden or rapid changes in the environment may necessitate appropriate modifications to the current strategies or even their replacement with new strategies. The strategic change is more likely to take place when new managers from outside are brought in. It is least likely to occur when new managers are promoted from within or the existing management continues at the helm.

The product life cycle can influence a firm's commitment to past strategies. In case of products or services which are in the maturity or decline stages the need for reassessing past strategies will be more critical than for those which are in the introductory stage.

d) Managerial power relationships

Power or politics influence managerial decision making in a firm. The importance of the decision, the time pressure, the degree of uncertainty and the style of the, decision maker will influence the approach towards decision making i.e., analytical, political or intuitive. An analytical decision is made after considering all alternatives along with their consequences and choosing the alternative which offers the maximum gain. In political decision making the manager attempts to merge the competitive demands of various stakeholders such as owners, customers, suppliers, competitors, government etc. His aim is to achieve a compromise through mutual adjustment and negotiation so that the decision has support and can be implemented politically. A intuitive decision maker is opposite of the rational decision maker. He relies heavily on habit or experience, gut feeling, reflective thinking and instinct. His decision making is guided by an intuitive 'feel' rather than hard core analysis.

The power of lower level staff also influences strategic decision-making. Subordinates can decide to withdraw proposal for strategic change or provide analytical data which supports their own proposal. Also for a strategy to be a success it has to be first implemented and lower level

managers have the power to make or break a strategy.

e) Managerial perception of CSFs and distinctive competencies

Ohmae treats critical success factors (CSFs) or key factors for success as a business strategy for competing wisely in a industry. A firm's strategic choice is influenced by the perception its strategists have of the match that exists between CSFs arid the firm's distinctive competencies. If the CSFs in the relevant industry are high product quality, superior R&D and efficient distribution then the firm has to assess whether it possesses significant strengths or competencies in these areas. If it does then it can consider entering the industry or pursue other alternatives.

8.5 organizationAL CULTURE

The choice of strategy has to be compatible with the company's culture. A firm with a history of conservative operations cannot suddenly be goaded into rapid expansion. This would not be in tune with .its slow growth and quiet style. A firm's culture and style can be changed through strategy, however this would require a systematic and planned approach.

8.6 THE TIME DIMENSION

The timing of decisions and time pressures are factors which affect not only the strategic decision process but also the quality of the decision. Due to pressure of time strategists may be unable to gather sufficient data or consider an adequate number of alternatives. This may lead to impulsive or poor quality decisions.

The timing of decisions such as when to make strategic choice or when to start implementing strategy could be dictated by environmental conditions. A particular strategic choice can be made when no other alternative appears as attractive, adequate resources are available within the firm and a favourable trend exists in the environment.

The sudden actions of competitors can trigger matching strategic responses from a firm. Conversely if a firm expects that a particular strategy will provoke an aggressive response from the competitor then it should only pursue such strategies if it has the capability to counter.

8.7 CONTINGENCY STRATEGIES

Contingency strategies are necessary as a backup in situations where the occurrence of an event or its timing can not be predicted. The examples of such scenarios include:

Onset. of next economic recession

Loss of a major customer or supplier

Entry of aggressive new competitor

Major systems failure e.g., firm's entire computer system

Strikes by distributors

Natural calamities

The preparation of contingency plans enables to firm to react quickly to changes in future environments, even though, it is not known when they will occur. Contingency plans involve simulations, scenario building and what if type of analysis. The process of contingency planning consists of the following steps:

Identification of key environmental factors likely to affect firm's performance (the criteria applied should be the probability of their happening and their potential to damage the firm),

Identification of key environmental factors likely to affect firm's performance (the criteria applied should be the probability of their

happening and their potential to damage the firm),

Formulating a draft plan based on the most probable assumptions

Modifying the plan assuming that some of the less probable events will occur

Finalization of plan including variations of the assumptions underlying the plan contingency planning carries a major advantage in that

firm's responses

To chance events can be predetermined and actions decided in a calm and unhurried manner after due consideration of the

consequences

8.8 STRATEGIC PLAN

The strategic or corporate plan is a part of the total organization plan (chapter2, para2.6 refers). It contains comprehensive information on the chosen strategies and the manner in which these are to be implemented within the organization. The document will cover the following aspects:

Mission , business definition and objectives

Assessment of environmental opportunities and threats and the critical success factors

Assessment of firm's strengths and weaknesses

Strategy chosen along with the assumptions underlying it

Contingency strategies along with conditions under which they are to operate

Budget specifying allocation of resources for strategies and a time schedule for their implementation.

Criteria for evaluating performance and success of strategy

The strategic plan document once approved is communicated to the firm's middle management who will be responsible for its

implementation. Many firms formulate their corporate plans to coincide with their national plans i.e., five year plans. The document is also

meant to apprise the general public what the firm symbolizes and what it aspires to achieve in tile future.

Chapter 9. THE PROCESS

As stated earlier, prior to making strategic choice, past strategic actions of the firm are taken into consideration. Strategists prefer to adopt strategies which can be implemented within the existing structure and resources. Only those incremental changes are introduced over a period of time which will help to bridge the strategic gap and achieve the desired outcomes.

As regards the forward linkage between strategy formulation and implementation, the new or modified strategy selected may necessitate changes to the organizational structure, functional policies and/ or leadership style.

As strategies are only a means to an end i.e. accomplishment of firm's objectives, these have to be activated through implementation. The task of implementation includes allocation of resources, possible redesign of structure, formulation of functional policies and a review of the existing leadership styles.

Strategies lead to plans. Depending on the type of strategy envisaged i.e. stability, expansion, retrenchment etc suitable plans will need to be formulated. For example, an expansion strategy will lead to new company acquisition plans. The plans prepared will then be translated into different kinds of programs. These programs will include various goals, policies, procedures, rules and steps to be taken to execute the plan. The execution of the programs will require shoring up through allocation of funds. A typical program may involve complete redesign of the packaging of an entire product line. The programs generally comprise projects which are time based and for which the costs are provided through capital budgeting. Examples of typical project include erection of new plants, or modernization of existing ones, relocation of a factory in a distant site, construction of a housing complex etc.

Broadly the following activities comprise the strategy implementation process:

Resource allocation

Structural implementation

Functional implementation

Behavioural implementation

The above activities are not performed in sequence. Some may be carried out at the same time, others repeated at different times and still others performed only once.

Chapter 10. ALLOCATION OF RESOURCES

10.1 APPROACHES TO RESOURCE ALLOCATION

Resource allocation involves the acquisition and earmarking of various resources such as physical, technical, human and financial for strategic activities planned to accomplish a firm's objectives.

The sources generally tapped for acquisition of funds may be internal or external. Internal financing is through reserves, retained earnings etc whilst external funds sources are bank credit, fixed deposits from public, equity etc. The short term finance is used for working capital requirements and the long term finance for capital investments.

The allocation of resources maybe decided at the corporate level i.e. by the Board of Directors and or the CEO. This is referred to as the top- down approach. In the bottom-up approach resources are allocated after seeking recommendations from operating personnel functional departments. A third approach involves allocating resources through the budgeting process in which allocations are drafted, modified and finalized jointly.

The various methods employed for allocation of resources:

a) BCG model

In the BCG model a firm's various businesses or SBUs are assessed as either cash cows, stars, question marks or dogs. The cash surplus generated from cash cows can be diverted to maintain the question marks or invested in stars to help convert them into cash cows.

b) Product life cycle

A product life cycle comprises the introduction, growth, maturity and decline stages. During the introduction and growth stages a product may need to be propped up with additional resources which may have to be diverted from those products which are in the maturity phase and generating s urplu s cash.

c) Capital budget

The capital budget is critical as it involves plans for acquiring and distributing capital for large scale investments. Capital expenditures for mergers, new product lines, increase in plant capacity etc. are catered for in this budget. As capital expenditure plans have a long term perspective the capital budget is considered an important planning tool for successful implementation of strategy.

d) Zero- based budget

The zero based budget approach involves starting from ab initio i.e. the budget of each department is critically set at zero. The department or unit projects a new allocation at the start of each and every period. The intended activities have to be specified each time and the expected costs re- estimated. The zero- base approach attempts to overcome the problem of managers who indulge in excess expenditure to enhance future allocations. The drawback is the large amounts of time managers spend in periodic assessment of cost and repeated presentation of budget proposals.

10.2 Strategic budgeting process

The allocation of resources is generally achieved through a mix of the top-down and bottom-up planning approaches. The process involves planning at both the corporate and SBU levels. The allocation plans are shuttled back and forth till a negotiated final set of budgets is produced which gives force to the overall plan.

Fig. 10.1 Strategic Budgeting Process

As seen in the fig. 10.1 the strategic budgeting process is a five stage process involving the following:

In stage one, top management initiates the budgeting process by stating the firm's objectives. It also provides the sales forecast which

guides production planning, materials planning, personnel planning, marketing (sales promotion and advertising) planning, capital

planning, cash flow analysis etc.

In stage two, central planning unit or budget department of firm provides the format and related information to the units for preparing a

budget.

During stage three, each unit prepares a preliminary budget. The previous year's budget is taken as a reference to prepare the budget

for the next year. The resources required to accomplish the strategy are clearly specified by each unit.

During stage four, the budget department critically examines each unit's preliminary budgets in the light of the unit's past performance.

Based on its recommendations the top management approves the budgets if they conform to past performance, expected revenues and

the firm's strategy.

In the, last stage summary budgets are prepared. The projected receipts and expenditures are first worked out arid subsidiary budgets

prepared. Subsidiary budgets include the operating budget which projects material, labour and overhead costs, the financial budget

which projects cash receipts and disbursals, the capital budget which projects new construction, major additions/ re-structuring etc. The

summary budget, which is essentially a profit and loss or income statement, considers the costs of all subsidiary budgets and gives a

final projection of profit/ loss. In case the budgets meet the firm's objectives, top management approves them or changes are effected

after discussion with concerned units.

The resource allocation process should be strictly tied to the strategic direction of the firm. Otherwise it can result in internal strife. If retrenchment strategy is in the best interests of the firm then any negotiations to protect a unit can only be at the expense of another unit which needs cash injection for its sustenance and growth. The unit so deprived will perceive itself as having been' let down' by its manager. This can have a major negative impact on the performance of the concerned unit, the career of its manager and the overall work environment.

Chapter 11. STRUCTURAL IMPLEMENTATION

11.1 ORGANIZATION STRUCTURE

The term 'organizational structure' is referred to as the system for dividing a firm's total work into units and allocating these units to people and departments. This structure defines the framework within which the activities occur. When structuring a firm, management needs to consider such aspects as departmentalization, levels of authority, specialization, supervision, centralization decentralization, sizes of departments, grouping of activities, extent and nature of delegation etc. An outline of the main steps involved in determining the structure of a firm are shown in fig. 11.1

Fig. 11.1 Determination of organization Structure

11.2 STRUCTURE AND STRATEGY

Structure follows strategy in the sense that once a strategy has been selected the organizational framework of the business will usually have to be changed in order to implement that strategy. For example expansion may lead to divisionalisation which creates more levels in management hierarchy and wide spans of control of managers. Diversification strategy can increase the number of departments or divisions in a firm. In high-tech firms it is important that structure follows strategy as structure needs to keep pace with the latest innovations in technology. Also organization's structure must be flexible and capable of quick adjustments in case of environmental changes.

On the other hand the structure of a firm can influence its strategy formulation process. This is so because a firm's structural form (line and staff, matrix, market or product departmentation etc.) can affect internal communications, interpersonal relations and other strategic perspectives. Firms with organization systems based on advanced information technology can use the latest IT trends to support and hence influence the strategy formulation process.

The issue of strategy versus structure is further elaborated in the subsequent para 11.4 of chapter.

11.3 BASIC STRUCTURES FOR STRATEGY

A firm should ensure that its structure is appropriately designed. Its total activities should be grouped into meaningful units and duplication of efforts or excessive specialization avoided. It is judged to be more effective when its strategy is properly implemented with the right organization structure.

The basic forms organizational structures are explained below:

a) Entrepreneurial structure

This is the primitive form of structure. It is adopted by small firms dealing in a single product or service and covering local markets only. The

owner who is also the boss takes all decisions whether operational or strategic in nature. Fig. 11.2 shows the entrepreneurial structure form.

Fig. 11.2 Entrepreneurial Structure

b) Functional structure

In the functional type of organization the boss groups the employees by the type of work or activities the organization performs. These

activities are classified as production functions, marketing functions, finance functions etc. Fig. 11.3 shows the functional type of structure.

Fig. 11.3 Functional Structure

The functional structure leads to economies of scale and specialization. These result in increase in organizational efficiency. The disadvantage of the functional structure is that it often creates difficulties in coordination and integration of units. It also creates line- staff conflicts.

c) Divisional structure

The divisional structure evolved as firms began to grow by expanding the variety of functions performed. In this form of structure the work is

divided on the basis of the type of products made, type of customers served or territorial locations. Separate divisions or groups are created

for each type. The functional structure may still operate within each division; Fig. 11.4 shows the divisional type of structure.

Fig. 11.4 Divisional Structure

The divisional structure maximizes coordination of sub- units and increases speed of response to environmental changes. The drawback of this type of structure is that the divisional level goals assume greater importance than the overall objectives of the firm.

d) Matrix structure

The matrix organization is a combination of the project and functional patterns of departmentalization. Authority flows vertically within functional departments while authority of project managers flows horizontally crossing vertical lines. Thus matrix organization is created when project management is superimposed on a stable hierarchical functional structure. Fig. 11.5 depicts the matrix organization.

Fig. 11.5 Matrix Structure

The matrix structure has two forms, the adaptive and the innovative. The structures are adopted by firms whose products change frequently and are short- lived. In the adaptive form the project groups are temporary and are scrapped once the project is completed. Some firms adopt the innovative structure. They divide themselves into current business groups and innovation groups. The innovators invent and pretest products and services. The products once ready for the market are transferred to the current business units. This form attempts to combine the desirable features of the functional, divisional and adaptive forms of organizations.

The matrix structure makes the firm more responsive to crises and change. The functional vertical relationships and the inter-dependent horizontal relationships lead to operational flexibility. The disadvantage is that conflicts between project groups and functional groups arise. It requires a high degree of coordination of a number of specialized skills. Also project personnel fear that completion of a project may lead to discharge rather than reassignment to a new project.

11.4 CHOOSING ORGANISA TIONAL STRUCTURE

There is no best form of organizational structure. A structure that fits the organization's environment and its internal characteristics is considered the best for that organization. The organization's environmental factors such as degree of competition, dependence on stakeholders etc and its internal factors such as size, technology, product lines etc affect and are affected by the strategy.

In general the functional structure is more suited for stable environments which place less demand on inter- departmental coordination and

innovation. The divisional structure, however, is more suited for changing environments which require faster response, more coordination and communication, and innovation.

If the strategy is to expand through a merger or acquisition then the increase in size will require a changed structure. In case of lagging

businesses, the strategy will be to retrench, in which case some units may be dropped from the structure. The earlier question of strategy

following structure or vice- versa again surfaces. Suffice to say that the process is circular. Structure does impose certain restrictions on

strategy change. However, if major strategic changes affect firm's environmental and internal variables then structural change becomes

unavoidable. Generally firms endeavor to implement most strategies by retaining the broad structure and only fine tuning or altering the

administrative system within the structure.

Chapter 12. FUNCTIONAL IMPLEMENTATION

12.1 DEVELOPMENT OF PLANS

Apart from structural review, the implementation of strategy also requires development of functional policies. These provide direction to middle management on how best to make use of the resources allocated. They guide middle managers in devising operational plans and tactics to make the strategy work.

Policies are only guides to action. They do not provide prescriptions on how to handle specific situations such as introduction of a specific product or dismissal of a particular worker. They are general guidelines which help managers to make certain choices.

Policies are developed to ensure that strategic decisions are implemented, there is basis for control and coordination and time spent in decision making is reduced. Hence policies should specify what is to be done, who is to do it, how it is to be done and when it should be finished. A follow up mechanism should be indicated to ensure that decision taken will be implemented.

The process involved in establishing policies is quite similar to that used in strategy formulation and choice. Firm's environmental factors, internal politics and power play, all affect the policy making process as the policies decided Will ultimately influence the distribution of resources. Also internal resistance to change, coalition building and conflicts between units are likely to occur during the development of policies.

Specialists in each functional area develop plans and policies. The functional areas have traditionally been classified as production, marketing, finance and personnel. The all pervasive influence of I.T. in modern day businesses demands policy making in this area as well. Some of the major functional policy issues which are critical to effective implementation of strategy are listed in the subsequent paragraphs.

12.2 MARKETING POLICIES

Marketing plans and policies will address issues such as nature and quality of pricing, promotion, and distribution and product lines. These will also clearly specify the tactics to be employed to counter competition.

a) Products and markets

Some key issues which need to be addressed in this area are:

Expansion in related products or in new markets?

If new products are to be introduced- how many and when?

If expansion into new markets- which customer groups to target or geographical territories to enter?

Branding -allocate separate brand names to individual products or establish a generic' family' brand covering all types of products?

Emphasis on quality- appearance, reliability, durability etc.?

b) Pricing

A number of pricing options can be adopted:

Penetration pricing- low price is combined with aggressive advertising to capture large market share.

Skimming- high/ price policy suitable for established top quality products.

PLC pricing- initially high pricing to cover development and advertising costs. The price is systematically reduced in later stages of cycle to broaden product's appeal.

Loss leading- selling a product at less than its production/ purchase cost to attract customers.

Incentives such as discounts, mode of payment, credit terms etc also influence pricing policies.

c) Distribution

Efficiency and effectiveness of distribution channels.

Type of channels to be used- direct .to consumers, producer to retailer or producer to wholesaler?

Intensity of distribution, number of sales outlets to be opened depend on demand and dispersion of customers.

Choice of distributors. Such factors as reliability, warehousing capacity, competing lines etc are considered in choosing distributors.

Extent of control that can be exercised over the channel.

d) Promotion

The promotion mix consists of advertising, personal selling, sales promotion and publicity. The aspects considered include:

Selection of advertising media.

Frequency of appearance and timing of ads

Selection of promotional techniques such as free samples to enter new markets, reduced- price offers to encourage repeat- purchase, money- off coupons to attract customers to the premises etc.

Use of direct marketing techniques such as direct mail, telephone, catalogues etc.

The marketing policies should not only mesh with overall corporate strategy but also be consistent with other functional policies. For example price is critical in relation to volume-cost-profit conditions which affect production and the financial position. Hence integration of functional policies is crucial to achievement of firm's objectives.

12.3 FINANCIAL POLICIES

The financial plans and policies provide guidelines on sources and utilisation of capital. These will also establish accounting procedures for inventory and the accounting methods to be used (LIFO, FIFO etc) for valuation of assets. Specifically the aspects covered by financial policies include:

Capital structure mix i.e. proportion of short- term debt, long- term debt, preferred and common equity.

Efficiency and effectiveness of resource utilisation in terms of capital in- vestments, fixed asset acquisition, current assets, loans and advances, dividend policy etc.

Maximizing market valuation of the firm.

Extent to which internally generated profits are reinvested within the firm.

Guidelines on decisions regarding leasing versus buying of fixed assets.

Relationship with credit agencies' such as banks and financial institutions.

Financial policies are formulated within the framework of corporate strategy. For example when evaluating proposals for investments in projects, managers will select high risk projects if expansion is the desired strategy. If retrenchment strategy is being preferred then low risk projects will be selected.

The successful implementation of financial policies will enable a firm to:

Replace capital assets when necessary

Pay loan and debenture interest when it falls due and repay the capital on maturity

Accumulate adequate reserves to meet contingencies

Facilitate steady long term growth

Ensure ready availability of funds at the lowest cost.

12.4 PRODUCTION AND OPERATIONS POLICIES

These policies will address such aspects as:

Present capacity, number of shifts, overtime etc.

Whether augmentation of capacity is required in the short I long term; location of new facilities.

Inventory safety level. Also adequacy and reliability of suppliers.

Emphasis on quality control and use of techniques such as SQC.

Emphasis on maintenance with regard to investments on replacement or maintenance of plant and equipment.

Introduction of new technology and processing systems

Sourcing of inputs- single supplier or multi-sourcing.

To make or buy items- based on cost comparison of purchase costs versus making costs

Production and operations policies will be established keeping in mind overall corporate strategy. If expansion strategy is desired through internal means then firm should have adequate capacity to support such expansion. If retrenchment is being considered then production volume will need to be reduced to avoid build- up of inventories. In the area of make or buy decisions if retrenchment is the preferred strategy then cost tradeoffs of making versus buying will play an important role. If expansion strategy is desired for new products a firm may either opt for buying special products to complete the line or make them itself.

Thus production and operations policies must not only be properly coordinated but should match well with marketing policies to ensure that strategy is correctly implemented.

12.5 R & D POLICIES

The R & D function concerns acquisition of new technical knowledge in areas of new products, processes, materials and working methods. It is very clearly interlinked with the production and marketing functions. Some of the activities may be initiated by the marketing department on identification of new consumer demands or by the production department which may seek new methods of manufacture.

Some of the key issues which influence formulation of R & D policies:

Focus on product or process improvements.

Emphasis on basic research or commercial development

Purchase of patents and know how from extemal sources.

Invent new products in -house or outsource their development.

R & D budget -costs and benefits. Evaluation of R & D.

In case the past record of the R & D department has been satisfactory then the firm's top management will encourage R & D efforts through higher budgetary allocations. R & D plays an important role in strategy making especially if a firm has developed competitive strengths or core competencies in the field. Hence R & D is used as a potent strategic tool by firms to reduce or eliminate competition in their industry.

12.6 HRM POLICIES

HRM policies are normally formulated after the other major functional policies have been determined. The firm must first decide its strategic objectives, specify its production and marketing policies, organization structure and operational plans and then address the issue of how best to manage the human resources required to implement the chosen options. The HRM plans and policies are formulated to provide such guidance. Specifically the areas covered include:

Adequacy of work force and extent of hiring and retraining

Methods of recruitments -advertising or personal contact ?

Types of people required in terms of skills, attitudes and performance capabilities.

Methods of selection -informal interviews or psychological testing?

Maintenance of work force -motivation and reward systems i.e. payment policies, incentive plans etc.

Training and employee development capabilities.

Labour relations - work rules, discipline etc.

Management succession programs.

HR policies are affected by firm's environmental factors, internal and external, and these need to be considered during the formulation stage. Some of the external factors are:

Legal framework -laws on collective bargaining, right to strike, employee participation in management etc.

Political factors- government legislation and attitude of political party in power towards industrial relations and employment matters.

Economy -unemployment, inflation rates etc.

Social trends -quality of work life, employment opportunities for women, attitude towards work and working hours etc.

Technological environment -changes in working methods, computerization and I.T., technological innovations etc.

The internal factors which influence HR policy making are degree of centralization, present state of morale, nature of workforce ( skills, education etc. ), attitude of owners towards employee relations etc.

HR plans and policies are framed on the basis of strategic choice. In case retrenchment is the chosen strategy then difficult policy decisions regarding laying off or termination need to be considered. Some firms formulate a long term HR plan as an integral component of the strategic plan. This requires forecasts of human resource needs. The assessment of firm's environmental factors, both internal and external, is necessary to progress such planning effort.

12.7 IT POLICIES AND CORPORATE STRATEGY

IT policies need to derive from firm's corporate strategies as a whole. The selection and development of IT systems should relate directly to firm's objectives. However the process being circular IT policies in turn also assist in formulation of corporate strategy. IT plans and policies should lead to an efficient administrative system, effective decision making, efficient use of resources and high productivity levels within the firm. Some of the benefits which can accrue from proper implementation of IT policies are as follows:

Improving operational efficiency

Accurate and efficient monitoring of competitors' activities through sophisticated environmental scanning techniques

Customers relations -seeking new customers and maintaining relation- ships with existing customers through CRM technique

Maintain efficient and continual links between each element of the supply chain i.e. manufacturer, distributor, retailer and consumer

Integrating marketing with production. For example enabling firm to service niche markets via product differentiation and flexible manufacturing

Facilitating formulation of high caliber strategies through use of advanced techniques for environmental scanning, construction of scenarios and SWOT analysis

IT plans and policies significantly affect the overall strategic options available to the firm and playa crucial role in the implementation of corporate plans. Corporate strategy should focus on integrating IT into all aspects of the firm's operations to ensure that end objectives are met. Irrespective of the strategy chosen, IT plans and policies have implications for a wide range of issues such as individual tasks and responsibilities, appraisal, accountability, control and coordination systems, working practices, recruitment and training needs, reward systems, management decision making procedures etc.

12.8 INTEGRATION OF POLICIES

The functional plans and policies devised need to be integrated well so that the tasks required to implement a given strategy can be accomplished. Glueck has referred to the following issues which affect integration of functional policies:

Internal Consistency. All functional policies must be consistent with one another. In case the policies are at cross purposes,

implementation of strategy will be affected. For example manufacturer of perfumes may opt for a marketing policy characterised by high

quality, high price arid exclusive up market distribution. The production and personnel policies would need to be consistent with the

marketing strategy i.e. manufacture on order only, wide range of perfumes and packaging styles, skilled and highly paid workers.

Trade offs. As policy decisions in one functional area may impact on other areas trade offs become necessary to avoid suboptimisation.

In the example of the perfume manufacturer, operational efficiency would demand mass production with lesser product variety and not

production to order and many models. Thus as a part of the integration process, sacrifices in some functional area may become

unavoidable.

Intensity of linkages. The need to link or coordinate activities of various departments is crucial to the functional policies integration

process. If required necessary specialization units may be set up to ensure the needed communication and coordination. For example a

firm engaged in specialized high quality technical products would require strong linkage between the R&D and production departments

as the business is ,capital intensive and manufacturing costs are high.

Timing of policies. The functional plans and policies devised must ensure that lead times within each area are compatible before

implementing the plans. The marketing department must coordinate and confirm product delivery schedules before promising same to

customers. A mismatch could easily result in disgruntled customers and loss of image for the firm.

Chapter 13. BEHAVIOURAL IMPLEMENTATION

As stated in chapter 8 strategic choice is influenced by such subjective factors as decision styles, attitude to risk and internal power play between the strategists. The strategy implementation process is also affected by the behaviour and attitude of the strategists. The chief strategist plays a key role in both the above processes through exercise of leadership and administrative skills. Other organizational factors such as corporate culture, corporate values and ethics and firm's sense of social responsibility also significantly influence implementation of strategy.

13.1 LEADERSHIP IMPLEMENTATION

Leaders are important to an organization as they help it cope with change. They ensure that plans and policies formulated are implemented as planned. Leadership implementation is effected in following ways:

13.2 CHOICE OF LEADER

The successful implementation of strategy chosen will need to be ensured by selecting the right strategist in the right place at the right time. The criteria employed will include such factors as education, abilities, experience, temperament and personality. The belief that leaders tend to be made, not born, is now widely accepted in the business world, as is the need for leadership as well as administrative skills among managers. To compete and grow in global market places firms must concentrate on being creative and innovative and to achieve this they will need people-centered leaders, not the old style authoritative managers.

The firm must ensure the match between the strategy chosen and the CEO. For example if a merger or acquisition is on the cards then a competent manager must be available to assume leadership. If the new unit is to be integrated into the existing structure then the skills and styles must fit the current business. If a firm moves from a stable strategy to one of expansion then the strategist must be qualified and experienced enough to lead the diversified new product lines.

As regards managerial responsibility the tasks and decisions should be assigned based on their criticality and urgency. Critical and urgent strategic decision making should be the prerogative of the CEO. Divisional or functional managers should be responsible for urgent but less critical decisions whereas senior level staff may deal with critical but less urgent issues.

13.3 LEADERSHIP STYLE AND CLIMATE

The right climate of managerial values and leadership style is essential if a firm is to carry out effective implementation of the chosen strategy. The term climate here means the nature of leadership, motivation, decision, communication, control processes and the development of a corporate culture.

The strategic objectives determine the nature of leadership styles and characteristics. If the objective is to expand in new product/ market areas then desirable leadership style could be entrepreneurial and risk taking. However, if the objective is profitability then the desired attributes could be conservative, balanced approach, neutral on risk etc. The manager's ability to adapt to new roles will determine how effective he will be able to handle tasks of strategic importance.

As regards climate let us examine how it affects various aspects of the administrative system:

Leadership processes. Do superiors behave in a manner that encourages subordinates to voice their views freely? Is there a climate of

mutual trust and confidence?

Motivational processes. Do employees work under threat of punishment or for economic rewards? Is their sense of responsibility high or

low? Do they work as a team?

Decision processes. Is decision making concentrated at the top level only? Is it rational and analytical? At what level do the employees

participate?

Communication process. Is it a two way communication? Are the means formal or informal verbal exchanges?

Control process. Is the control concentrated at the top or is there wide- spread responsibility? Is it too tight or too loose?

13.4 CORPORATE CULTURE

This is a dimension of climate that leaders help to develop. The culture of an organization consists of customary ways of doing things and its members' shared perceptions of issues that affect the organization. A firm's culture evolves gradually. It affects:

Leadership styles

Individual perceptions of colleagues and situations

Assumptions about how work should be performed

Attitudes towards what is right or wrong

organizational culture may be innovative, conservative or a mix of the two. It creates norms of behaviour, attitude and perception, myths, feelings etc. Charles Handy has classified culture into the following four types:

Power culture. This type of culture is common in small entrepreneurial organizations. The organization is dominated by either a very

powerful individual or a dominant small group. Strategic decisions and many operational ones are made by the centre and very few are

devolved to other managers. Such an orgaanisation's ability to respond to environmental change becomes limited.

Role culture. This type of culture is common in traditional bureaucracies such as government departments. The task of management in a

role culture is to manage procedure. There is usually a high degree of decentralization and the organization is run by rules and laid -

down procedures. These organizations respond slowly to change due to slow decision making process.

Task culture. This type of culture is found in firms engaged in projects. The tasks are non repetitive in nature and work teams are

flexible, multi- disciplinary and consist of experts. Strategic planning tends to concentrate on the task in hand.

Person culture. In this type of culture the members of the organization work for their own benefit. This type of culture can be found in

learned or professional societies, religious organizations, trade unions etc;

To change the existing culture of an organization may require injection of new staff, incentive schemes for acceptance of new working methods, whole hearted management support of new ideas etc.

13.5 organization DEVELOPMENT (0D)

organization development is an aspect of leadership implementation that involves change processes. It is defined as a 'large range effort to improve an organization's problem-solving and renewal processes through a more effective and collaborative management of organization culture'. To implement change consultants use a variety of techniques which include survey feed- back, confrontation meetings, team building sessions, transactional analysis etc.

Kurt Lewin has suggested three stages for overcoming resistance to change:

Unfreezing -getting rid of existing practices and ideas that stand in the way of change. Awareness of the need and benefits of change can be introduced through the OD techniques mentioned above.

Changing -teaching employees to think and perform differently

Refreezing -establishing new norms and standard practices. Refreezing involves the consolidation and stabilization of the new change.

13.6 LEARNING organization

The term 'learning organization' is sometimes applied to firms operating in turbulent environments. They train and develop their employees on a continual basis for the purpose of introducing new working methods and systems. These firms are better able to cope with environmental and other change because they can accommodate unpredictability. They are characterized by motivational leadership,

efficient internal communications, marketing orientation and an enquiring organizational climate that constantly challenges the status quo. These firms develop adaptive capabilities in a world of increasing complexity and rapid change. Peter Senge in his book 'Fifth Discipline' defines a learning organization as 'a group of people who are continually enhancing their capabilities to create their future'.

All the above components of leadership implementation affect successful implementation of strategy. The culture and climate dimensions place exceptional demands on strategists committed to implementing change through exercise of administrative and leadership skills. A firm's strengths and weak- nesses in these areas can make or break its strategy.

13.7 CORPORATE VALUES

Corporate or core values are of paramount importance when building a lasting firm .Collins and Pornas define corporate values as 'the organization's essential and enduring tenets -a small set of guiding principles; not LO be confused with specific cultural operating practices; not to be compromised for financial gain or short term expediency'.

Values run deep. They are timeless guiding principles that drive the way a firm operates. A firm's goals, specific targets that help to realize a vision are not values. The mission or purpose, the fundamental reason for a firm's existence is not a value. Also values should not be confused with vision which is a picture of the intended future. All the above have their place in a successful firm but values are the foundation on which these others are built

Corporate values are the fundamental beliefs on which a firm is built. They are the essence of a firm's identity.They are long lasting and serve as a beacon for firms to chart their business course. John Kotter, reflecting on corporate culture and values, says, 'At a deeper level, Corporate culture is about the implicit -shared values among a group of people -about what is important, what is good and what is right'. Values and norms are truly invisible and often a firm's employees are not very aware of their culture or of the role they play in helping to maintain it. However every firm does have its own culture and its own set of values. Sometimes these are not clear to outsiders or even to those within. Value driven business firms must articulate their values clearly so that the stakeholders understand what the organization stands for.

13.8 ETHICS, BUSINESS AND SOCIETY

No organization can isolate itself from the society within which it operates. Business provides goods and services to the general public which, therefore, has a vested interest in how it behaves. Customers demand quality, fair prices, prompt delivery, good after sales service etc. Suppliers expect quick settlement of bills, shareholders high dividends and employees better wages and working conditions. Occasionally these requirements conflict and firm's managers have to take ethically contentious decisions on the basis of social norms and attitudes of the society in which they live.

a) Ethics

Ethics concerns the study of moral principles and how individuals should conduct themselves in social affairs. Ethical considerations in decision making involve the decision taker's personal feelings about what in his subjective opinion is 'good'.

The question of what represents ethically proper business behaviour is complex because ethical standards vary over time and among cultures and nations. Managers of firms are also members of a society. When they purchase goods for their own personal use they expect certain standards to apply and it would be inconsistent of them not to feel obliged to adopt similar standards in their own business affairs.

In resolving ethical problems managers may adopt two approaches. Either the manager sets for himself a code of conduct i.e. predetermines strict moral principles and adheres to them always or he consciously decides to vary his behaviour according to the demands of particular situations. The former approach lends consistency to a manager's behaviour but he runs the risk of being labelled as obstinate and unsympathetic. The latter approach though flexible is resented and may lead to retaliation by those affected by a manager's ethical inconsistency.

b) Ethics and strategy

Ethical issues play an important role in strategic management. Some of these issues are listed below:

Power and responsibility are interlinked. Senior managers of large corporations can hurt or promote interest of a large section of employees or entire communities.

Consumers are increasingly judging the worth of a firm by the manner in which it tackles ethical and, environmental issues.

Cultural influences of societies in which managers reside affects their moral thinking and consequently their strategic decision making.

Certain business practices are considered unethical throughout the world. These include 'dumping' of products, deliberate violation of laws concerning consumer protection, environmental pollution, employees' health and safety, equal opportunities etc.

A strategist's personal professional ethics therefore plays a crucial role during the strategy formation process. Most strategists develop a philosophy of some sort which helps them to determine hierarchies of professional objectives, identify good and bad occurrences and evaluate the 'righteousness' of various courses of action. In time they evolve their own criteria against which they assess particular situations.

13.9 SOCIAL RESPONSIBILITY

Corporate social responsibility demands that firms behave as 'good citizens' while pursuing purely commercial goals. The term 'public good' may have several meanings but most people agree that firms should conduct themselves on the basis of certain fundamental principles. Some of the commonly accepted principles are:

Concern for the quality of life including life at work

Concern for the physical environment

Fair reward for effort and enterprise

Interest and involvement in activities of the wider community

No misrepresentation in advertising or fraudulent activities

No unfair discrimination in hiring, promotion or dismissal of employees

Compliance with laws and established customs of the community.

A number of grey areas exist in the field of corporate social responsibility. Some of these are:

Private firms compete with each other for market share. In the process successful businesses acquire bigger market shares white others either go into liquidation or are taken over by remaining firms. At what point in its development should a successful firm stop expanding and instead stabilize its market share to avoid giving the impression that it is monopolistic?

Large, profitable firms contribute immense revenue for the state and provide community with goods and income from employment. Should the state in recognition of above favour the business community when drafting legislation?

In case of consumers being ignorant of the risks attached to use of certain products, should this lack of knowledge be exploited?

Should a foreign company utilize child labour in host countries where such a practice is permitted? In other words are social responsibility standards transferable between countries?

Some strategists are against corporate involvement in local communities due to the following reasons:

It leads to business assuming a disproportionately influential role in local affairs.

It creates over dependence of the community on the business firms.

There is no such thing as ' free lunch'. Ultimately the expenditures are recovered through higher prices which affects consumers of the goods.

Many large, profitable firms, however, opt to behave in socially responsible ways as cooperation and support of the community is Vital to their long - term survival and commercial success. Some of the benefits that accrue from such involvement are:

Projection of a 'green' image which is good for business and. leads to higher sales.

Sponsorship of charitable and community events attracts valuable publicity.

Firm's image as a good employer helps to attract and retain high caliber workers.

Use of energy conservation and anti pollution environmental methods, leads to reduced production costs and increased corporate efficiency.

The foregoing paragraphs amply illustrate how several issues concerning behavioural implementation i.e.; leadership styles, corporate culture, corporate values, ethics and social responsibility significantly affect the strategy formulation and implementation processes. Whilst the extent of influence exerted by each of these factors may vary, collectively they carry much potential which can cause success or failure of

a strategy. Therefore strategists can only afford to ignore them at their own peril.

Chapter 14. EVALUATION AND CONTROL

Strategy evaluation and control process has three aspects. These are:

Establishing standards and targets for the strategic objectives and plans.

Monitoring activities and comparing actual with target performance.

Implementing measures to remedy deficiencies.

Basically control links input to output and provides feedback to the management. The firm's corporate plan specifies goals and functions/ tasks of various units/ departments and mechanisms are required to ensure effective implementation of the plan. An effective controls system results in the following benefits:

Improves operational efficiency

Facilitates management of change

Develops a common culture with the firm

Helps in introduction of modem management techniques (TQM, Just-in- Time etc.)

The basic features of the strategy evaluation and control system are shown in fig. 14.1 below:

Fig. 14.1 Strategy Evaluation and Control System

14.2 FACTORS INFLUENCING PROCESS

The players involved in strategy formulation also playa crucial role in the strategy evaluation and control processes. These include the Board of Directors, the CEO, senior and middle level managers, the audit committee and the financial analysts.

The strategic evaluation process faces certain constraints. The first being how much control to exercise -too strict or too loose. Next is the reliability and validity of measurement techniques and lastly the resistance to evaluation experienced with in the firm. The control process continually monitors strategy in the context of organizational and environmental change and takes necessary steps to adjust the strategy to the new requirements.

14.3 STRATEGIC CONTROL

The three basic types of strategic control are:

Premise Control- This involves monitoring the external environment and the internal organization for changes which affect key

assumptions of strategy. Depending on the assessment, strategists may decide on the nature or timing of corrective action. External

environment changes may involve government legislation, competitor policies etc. organizational factors may include resignation of top

executives, significant R&D development etc.

Implementation Control- The purpose of this type of control is to assess whether plans, programmes and projects are actually steering

the firm towards accomplishing its strategic objectives. The commitment of re- sources and monitoring their efficient utilization is an

important aspect of this control. If strategy involves marketing a new product then evaluation of customer response during pre-testing

stage becomes a critical function of implementation control. The result of the pre-test may be used by strategists to continue with or opt

for alternate product launch.

Strategic Alert Control-This type of control system is linked to contingency planning. The environment is continuously scanned for

occurrence of sudden and unexpected events which have a profound impact on strategy and immediate remedial measures are applied.

Such events could be a natural disaster (earthquake, floods etc.), fall of a state or central government, lighting industrial strike, dramatic

turnaround in a competitor's strategy etc.

In addition to the above a broad surveillance of the environment is also carried out through a firm's information and intelligence systems. Such surveillance augments the efforts of the other control systems in monitoring and identifying internal/ external events for their potential impact on the strategy in force.

14.4 STRATEGIC VERSUS OPERATIONAL CONTROL,

The purpose of strategic control is to continually assess environmental changes to identify events that may affect firm's strategy. The two techniques normally used to evaluate strategic control are strategic momentum control and the strategic leap control. The strategic momentum control is used by firms which operate in relatively stable environments. The technique focuses on maintaining the existing strategic momentum through management of the key success factors. Using this technique strategists also evaluate their own strategy by comparing it with that adopted by other firms. The strategic leap control technique is used by firms operating in relatively unstable environments. The technique requires firms to adapt by making strategic leaps in response to environmental change. The firm identifies key strategic issues and synergies through computer-based simulation modeling of the organization and its environment. Thereafter several future scenario are developed and likely strategic responses are formulated for each of them.

Operation control on the other hand is aimed at allocation and use of firm's various resources. The evaluation techniques for this type of control system are based on internal analysis rather than environmental scanning. These include financial analysis ratio, budgetary control, network techniques such as PERT and CPM, management by objectives (MBO) etc. MBO is a process that involves evaluation of a firm's performance against objectives which are established through mutual consultation between managers and employees. Since the objectives are set with participation of employees their commitment to achieving same is assured.

14.5 PERFORMANCE INDICATORS

The performance standards are normally set after analysis of the strategic tasks in key functional areas. If the strategic task is further penetration of existing markets then increase in sales revenue would be the key indicator for evaluating enhanced market share.

The performance indicators may be result- oriented or effort -oriented. Examples of results based performance measures are:

Sales volumes and/ or revenues

Rate of return on investment

Average inventory levels held

Market share

Growth of assets

Some examples of effort based performance indicators are:

Number of potential customers contacted (may not lead to sales)

Number of complaints processed

Extent of relationships with suppliers

Efforts made to improve industrial relations

Rate of absenteeism

Frequency of reports submitted to higher management

Research and Development activities (may not have led to tangible results)

Certain performance indicators cannot easily be measured in quantitative terms. These are corporate social responsibility, ethical behaviour, employee's personal development etc.

14.6 organizationAL SYSTEMS

The firm's various organizational systems provide vital support to the strategic evaluation and control process. The role played by these systems is explained in brief:

Information system -The various reports generated through the management information system (MIS) help to keep track of the actual

performance of different units and the firm as a whole.

Control system -The preceding paragraphs have explained in sufficient detail the role of the control system in enforcing strategic

behaviour so that the firm moves towards achieving its declared objectives. It only needs to be added that strategists try and ensure

integration of both the formal (direct) and informal (indirect or social) controls as both are considered vital to making the strategy work. If

the chosen strategy is expansion, somewhat informal controls may be preferred for speedy implementation. However to implement a

stable strategy which requires short-term efficiency of operations, use of more formal controls may become necessary.

Appraisal system -The system makes use of quantitative and subjective factors to assess performance of units as well as their

managers. The methods used to appraise will depend on the nature of the strategy chosen. Expansion strategies aim at long term

improvements whilst a stability strategy will focus on efficiencies in current operations. The common performance appraisal methods

used are rating scale and ranking method etc.

Motivation system -The system aims to stimulate positive behaviour so that firm's employees will be encouraged to achieve its strategic

objectives. Finns introduce a system of incentives, both monetary (salary, bonus, ESOP etc.) and non-money (reward, recognition etc.).

The nature and scale of incentives will depend on firm's capacity to pay, its culture, similar industry practices, statutory obligations etc.

Development system -The system encompasses various stages covering recruitment of personnel, education and training of managers

to impart required knowledge, skills and altitudes, career planning and grooming of managers for top positions and the development of

the organization through planned interventions to make it more responsive and adaptive.

Planning system -The role of the planning system is basically confined to the strategic formulation process. However as forward linkages

do exist between formulation of strategy and implementation of plans, planning managers do get involved in the implementation process.

In some firms strategic planning is a centralized function performed by staff specialists only. 'The packaged plans are passed on to the

line managers for implementation. In other firms the overall corporate strategy is formulated at the top whilst responsibility for SBU level

strategy formulation and implementation is decentralized and vested with the respective SBU heads. The centralized system is

considered suitable for the entrepreneurial business whilst the decentralized system is better suited for the divisional form of

organization. The latter planning system fosters greater responsibility on SBU heads and assures their commitment to the strategic

plans.

Chapter 15. CORPORATE STRATEGY - PRESENT AND FUTURE TRENDS

15.1 INTRODUCTION

Strategy management is a comparatively young multi-disciplinary field of study. Strategists, in formulating their theories and analytical frameworks, delve deeply into such diverse fields of study as organizational theory, human resource management, economics, accounting and finance and marketing.

One of the most complex issues which continues to engage strategists even today is why certain businesses achieve competitive advantage through superior performance. In the 1980s Porter and others presented the view that competitive advantage resulted from competitive positioning of the organization in its environment, based upon highly systematic planning. This view, however, was challenged in the 1990s, by Prahlad and Hamel, Kay and others, who believed that in a turbulent business environment strategy can be developed incrementally and that competitive advantage depends upon the ability of the business to build core competencies which cannot easily be replicated by competitors.

15.2 DEVELOPMENT OF STRATEGIC MANAGEMENT

Some strategists advocate a planned or prescriptive (also called deliberate) approach to strategic management whilst others believe strategy should evolve incrementally i.e. the emergent approach.

The other issue that has been a subject of debate is whether competitive advantage results from competitive position of the business in its industry or from business specific core competencies.

Fig. 15.1 shows the development of strategic management in the light of the different strategic approaches. These approaches are discussed in the subsequent paragraphs.

Fig. 15.1 Development of Strategic Management

15.3 PLANNED OR PRESCRIPTIVE STRATEGY

The planned approach involves analysis of business and its environment, setting of well defined corporate and business objectives and formulation, selection and implementation of strategies which allow objectives to be achieved (Chapter 1, para 1.4 also refers). The approach has been criticized as being rigid as it lacks flexibility required to combat change in a volatile environment. The planned or prescriptive approach is often linked to the competitive positioning approach.

15.4 EMERGENT OR INCREMENTAL STRATEGY

The emergent approach adopts the position that strategy must be evolved incrementally over time (chapter8,para8.4c also refers). For businesses operating in rapidly changing environments, strategy will tend to evolve as a result of the interaction between stakeholders and between the business and its environment. The emergent approach results in increased organizational flexibil- ity. It can promote organizational learning by providing an internal culture for managers to think and act creatively rather than act within the rigid frame- work of planned strategy. The drawback of this approach is that it may result in lack of purpose in strategy. Also there being no explicit objective the evaluation of performance becomes difficult.

15.5 COMPETITIVE POSITIONING

The competitive positioning approach dominated strategic management in1980s.The analysis of competitive position begins with Porter's five forces framework (Chapter 8 para 8.3g refers). The framework is used to analyse the nature of competition in the organization's industry. This is followed by selection of the appropriate grand or generic strategy together with value chain analysis (Chapter 8 para 8.3h refers). The above approach ensures support to a strategy based on either differentiation or cost leadership.

The approach was criticized in the 1990s as it over emphasized the role of the industry in determining profitability and undermined the importance of the individual business. Despite the criticism it has been widely acknowledged that Porter's work has given strategic management many of its most practical and applicable analytical tools.

15.6 RESOURCE OR CORE COMPETENCE-BASED STRATEGY

The 1990s also witnessed the rise of what is known as resource or core competence based strategic management. The major difference to the competitive positioning approach is that importance has been given to the role of the individual business in achieving competitive advantage. According to Prahlad and Hamel a core competence is some combination of resources, skills, knowledge and technology which distinguishes an organization from its competitors in the eyes of the customers. This distinctiveness results in competitive advantage.

The critics of the approach say that it lacks the well developed analytical frameworks of the competitive positioning approach and undermines the potential importance of the business environment in determining success or failure.

The approach also emphasizes organizational learning, knowledge management and collaborative business networks as sources of competitive advantage.

15.7 INTEGRATED APPROACH TO STRATEGY

The prescriptive and competitive positioning approaches are often seen as related to each other because they both adopt a highly structured view of strategic management. Similarly the emergent and competence based approaches are often linked to each other because of their shared focus on organizational knowledge and learning.

On the other hand the prescriptive and emergent approaches are often viewed as being diametrically opposed just as in the case with the competitive positioning and competence based approaches. The fact, however, is that these approaches are in many ways complementary as they only reflect different perspectives of the same situation. The contribution of each approach to an integrated understanding of strategic management is summarized below :

Planned / prescriptive approach -a degree of planning is essential to give direction to the firm's strategy and to help evaluate its performance

Emergent / Incremental approach plans need to be flexible to enable firm's to learn and adapt to environment changes

Competitive positioning approach-highlights the importance of the environment and provides useful frameworks/ tools for analyzing business in the context of its industry

Resource / competence based approach-highlights the importance of the business and helps in identifying sources of competitive advantage which are specific to the firm.

In the light of the above, strategy must be both inward and outward looking i.e., planned and emergent. By integrating the

approaches a better appreciation of competitive advantage and strategic management, as a whole, can be gained.

15.8 FUTURE THINKING IN STRATEGIC MANAGEMENT

The two prominent areas of interest which are currently engaging the minds of academics and will continue to do so in the near future are collaborative management and knowledge management. Let us consider these separately.

a) Collaboration and competitive behaviour

In recent years a lot of research has been conducted to determine the extent to which collaboration between businesses (as opposed to competition) helps in attainment of competitive advantage.

The competence based approach suggests that business should concentrate upon developing core competencies so as to achieve competitive advantage. Any activities which are not considered as core should be outsourced to other organizations. However, rather than relinquishing complete control to outside sources it may be beneficial to form some sort of alliance or network with them. The advantages of such collaborative networks are:

Allows firms to focus on their core competencies and core activities

Allows firms to combine core competencies and derive benefits of synergy

Improves flexibility and ability to respond

Reduces bureaucracy and allows flatter organizational structure

Increases efficiency and reduces costs

Makes it difficult for competitors to imitate Collaboration can be of the following types:

Horizontal- firms are generally at the same stage of the value system and are often competitors

Vertical- firms are at different stages of the value system (this includes collaboration with suppliers, distributors and customers).

The formation of collaborative network involves:

Identifying core competencies

Identifying non-core activities for outsourcing

Achieving the internal and external linkages in the value/ supply chain to enable effective coordination of activities and enhance responsiveness

Collaboration can provide a variety of benefits such as linking of core competencies of collaborating firms, sharing of resources and technology, better control of suppliers, better access to customers, and reduced competition as also risk. The problems which can arise from collaboration are mismatch in objectives and changing requirements of the firms, cultural differences and coordination and integration problems.

15.9 VIRTUAL ORGANISA TIONS

A virtual organization may be defined as a network of linked businesses who coordinate and integrate their activities so effectively that they give the appearance of a single business organization. The above coordination and integration has been facilitated by the advancements made in information and communications technology (ICT).

ICT linkages enhance a firms potential for building competitive advantage. They increase flexibility and efficiency and make it difficult for competitors to replicate the activities of the network. The linkages to suppliers and customers also improve as also information flows required for strategic decision making.

15.10 organizationAL LEARNING AND KNOWLEDGE MANANGEMENT

organizational learning and knowledge management involve the creation, development and dissemination of knowledge within the organization. The knowledge can be:

Explicit knowledge whose meaning is clearly stated and the details can be recorded and stored (e.g. procedures)

Implicit or tacit knowledge -which is often unstated and difficult to record and store. It is based on individual experience and helps to build core competence and competitive advantage (e.g. understanding of a particular technology)

It is the role of the knowledge management to ensure that the above forms of individual knowledge become organizational learning.

15.11 TYPES OF organizationAL LEARNING

Peter Senge (1990) clarified learning in leading organizations into two types

Adaptive learning-which focuses on change in response to environment al developments

Generative learning -which focuses on building new competencies or identifying / creating opportunities for leveraging existing

competencies in new competitive areas.

15.12 EFFECTIVE KNOWLEDGE MANAGEMENT

Knowledge management is concerned with the creation of new knowledge, storage and sharing of knowledge and the control of knowledge. It is an important element in building core competencies which must be distinctive and difficult to imitate.

Knowledge management can be successful or effective if the following are overcome:

Barriers to learning and knowledge creation

Difficulties in storing and sharing knowledge, especially tacit knowledge.

Difficulties in valuing and measuring knowledge.

In respect of the above issues it may be concluded that strategic management is fundamentally concerned with understanding the nature of competitive advantage and the means by which it is acquired and sustained. The different approaches discussed provide alternative methods for understanding the means by which strategy is formulated are implemented. A degree of planning is required but, equally, strategy may also emerge incrementally. As currently seen future developments in strategic management are likely to focus on collaborative networks and knowledge management for producing competitive advantages.

The issue of future trends in strategic management would certainly be incomplete without reference to the subject of Information Technology ( I. T. ) as a vehicle for harnessing knowledge and fuelling business growth. Let us, therefore, view the latest concepts in strategy formulation in the area of e- business.

15.13 E- BUSINESS STRATEGY FORMULATION

Some of the challenges faced by firms engaged in e- business are:

Ascendancy of buyers. The internet provides buyers with wide access to information and a platform to make their voices heard to

sellers. In other words they can "aggregate". Buyers can create powerful buying blocks by pooling in their purchases, with each

individual added the unit cost for all decreases.

Networking- based increasing returns model. Network effects mean that as more units are sold the value of each unit becomes higher.

One major way to bring about network effect is by setting a standard. Physical as- sets are no longer the primary driver of competitive

advantage and 'profit- ability. Instead intangible assets like high quality customer service and intellectual capital are increasingly

becoming the source of value. Investment in intangibles will produce the greatest returns.

There is an absolute need for speed in continually bringing innovations to the market and quickly scaling them up. Once the increasing

returns phenomenon starts even the swiftest of followers will find it difficult to keep pace. Even where increasing returns do not playa

role, time to market will make the difference and the race for scale will be relentless.

15.14 KEY SUCCESS FACTORS IN E- BUSINESS

Some of the key factors which will significantly affect success in e- businesses are :

Shift to customer- centricity. In e- business the customer will be at the center of strategic thinking. Firms must embrace ' pull' strategies

i.e. focus on constant adaptation of the product/ service mix to meet evolving customer desires.

Enhance customer value propositions. Firms must exploit every capability of the web to deliver more value than found in real world

stores and make a buyer's experience far from commoditized.

Create rich relationships with customers. The surest way to maximize profitability is to retain important customers through strong

relationships. In e- business a company can nurture customer relationships by accumulating knowledge about them through past

transactions and solicited input, and using that to enrich the buying experience.

Today CRM (Customer Relationships Management), a management tool which embraces above aspects, is being increasingly adopted by leading firms throughout the world.

LIST OF MODEL QUESTIONS

ANALYTICAL QUESTIONS

1. Explain through appropriate illustrations the following terms in the con- text of corporate policy: a) Mission b) Objectives c) Goals

2. At what different levels does strategy operate? How is the coordination of strategies achieved?

3. What are the phases in the strategic management process? What is meant by 'muddling through' in strategic decision-making

4. Assuming yourself to be the CEO of an organization relate the difficulties you would face in choosing and setting the objectives of your organization

5. Differentiate clearly between the external and internal components of environment?

6. What is SWOT analysis?

7. Specify the conditions under which each of the following strategies is adopted: a) Stability b) Expansion c) Retrenchment d) Combination

8. Write a comprehensive note detailing the different type of grand strategies and the dimensions along which they may be defined?

9. Explain each of the following types of concentric diversification: a) Marketing and technology related b) Technology related c) Marketing related

10. A business that did not previously bother with corporate strategy has. decided to formulate a strategy. Write a report to the CEO of this business suggesting the main factors that need to be considered during the formulation of its strategy statement

11. How can the concept of experience curve help in exercising strategic choice?

12. In what way is the concept of product life cycle helpful in making strategic choice?

13. Explain the following terms in BCG matrix: a) Stars b) Question marks c) Cash cows d) Dogs

14. What do functional plans and policies relate to? Why are they important to strategic management?

15. Explain the following terms: a) Corporate culture b) Corporate climate c) Business ethics

16. Why is strategy evaluation important? What are the barriers faced in evaluation?

17. a) Describe the evaluation process for operational control

b) Distinguish between operational control and strategic control

18. There is no such thing as'' The Learning organization" per se because all the characteristics of the so called Learning organization are nothing more than examples of conventional good management practice. Discuss the statement.

19. a) What problems might emerge from inadequacies in a firm's organizational structure. b) In what sense does" structure follow strategy” ?

20. a) Explain the concept of corporate social responsibility? b) What is meant by aligning social responsibility to strategic management?

OBJECTIVE TYPE QUESTIONS

Tick mark the most appropriate (only one) answer...

1. Objectives when stated in specific terms become a) targets b) rules c) aims d) goals

2. A good mission statement invariably includes the firm's a) vision b) business definition c) corporate plan d) strategy

3. A broad term which includes goals, procedures, rules and steps to be taken in putting a plan into action is a) project b) plan c) budget d) program

4. An Executive Assistant has a generalist orientation and excellent communication skills. He assists the a) CEO b) Chairman c) Executive Director d) Company Secretary

5. Good strategies give rise to good a) policies b) procedures c) tactics d) projects

6. Strategy operates at three levels: Corporate, divisional/SBU and a) regional b) functional c) plant d) local

7. The terms long range planning, corporate planning and ________ are used synonymously a) contingency planning b) strategic planning c) short term planning d} project planning

8. Contingency planning comes into operation due to changes in a firm's a) organizational set-up b) external environment c) board of directors d) CEO's dismissal

9. The implementation of functional policies is the main role of a) junior managers b) senior managers c) supervisors d) middle managers

10. The definition of business along the three dimensions of customer groups, customer functions and alternate technologies was given by a) Abell b) Glueck c) Porter d) Mckinsey

11. Planning covering a period of 3 to 5 years is referred to as a) operational planning b) short term planning c) medium term planning d) long term planning

12. Strategy mostly follows structure in firms which a) are start-ups b) have been in existence for some time c) are in export business d) implement multi-strategies

13. The functional structure promotes a) good coordination b) narrow specialisation c) line-staff harmony d) inefficient distribution of work

14. A matrix structure violates the principle of a) unity of command b) unity of direction c) scalar chain d) centralisation

15. The definition of strategy as a " unified, comprehensive and integrated plan designed to assure that the basic objectives of the firm are achieved" was given by a) Igor Ansoff b) Alfred Chandler c) William.F .Glueck d) Kenneth Andrews

16. The adaptive form of structure is referred to as a) entrepreneurial b) functional c) matrix d) divisional

17. Business firms undertake SWOT analysis to assess the a) internal environment b) international environment

c) national environment d) internal and external environment

18. Concentric diversification involves taking up activity that is a) related to the existing business definition of the firm b) unrelated to the existing business definition of the firm c) related to the existing business definition of the competitor d) unrelated to the existing business definition of the competitor

19. Merger and acquisition strategies basically involve a) internal dimension of expansion b) backward integration c) external dimension d) forward dimension

20. Firms adopt stability strategy because a) it is a conservative approach b) divestment strategy is not feasible c) the environment faced is relatively stable d) advarltage may accrue from the experience curve

21. The experience curve is a commonly used concept in a) SWOT analysis b) Corporate portfolio analysis c) Orgarlisational structure analysis d) Environmental analysis.

22. The PLC curve exhibits the relationship of sales with respect to time as the product passes through a) Introductory stage b) Growth stage c) Declining stage d) All stages

23. The BCG matrix enables assessment of individual businesses on the basis of industry growth rate and a) Firm's overall growth rate b) Competitor's growth rate. c) Relative market share d) Industry's growth rate

24. Stars' operate in a high- growth industry and have a) high market share b) low market share c) high cash generation d) low cash generation

25. In terms of product life cycle ( PLC ), products in the late maturity or declining stage are referred to as a) Stars b) Dogs c) Question marks d) Cash cows

26. The five forces model of competition which helps to determine the intensity of industry competition and profitability was developed by a) Mintzberg b) Porter c) Kotler d) Ansoff

27. The only responsibility of business is to perform its economic functions efficiently and provide goods and services for society and

earn maximum profits. The above view has been propounded by which of the following luminaries: a) P.F. Drucker b) D.F. Abell c) Adam Smith d) A. Ginsberg

28. Capital budgeting is used by firms to allocate resources for a) Mergers b) Takeovers c) Joint ventures d) New projects or products

29. A leader ensures effective and smooth implementation of strategy by overcoming a) Line and staff conflict b) Barriers to communication c) Communal tension d) Resistance to change.

30. In the strategic evaluation and control process, operational control is exercised through a) Momentum control b) Premise control c) Action control d) Leap control

31. Albert S. King traces the historical development of leadership theories and identifies nine revolutionary eras. The focus on traits and qualities refers to which of the following areas a) Influence b) Behaviour c) Personality d) Culture

32. Historical perspective of evolution of business policy is viewed in terms of four paradigm shifts. The last paradigm which emerged in the 1980s is a) ad-hoc policy making b) strategic management c) planned policy formulation d) strategy

33. Mckinsey's seven US " framework denotes seven policy areas that affect long term organizational success. Of these "skills" refers to a) managers' skills in motivating employees b) workers' skills in absorbing new technology c) organizational and individual capabilities d) managers' skills in decision making

34. The price of a product is determined by a) producer b) consumer c) retailer d) competitor

35. In a firm the most important strategist responsible for formulation and evaluation of strategy is the a) Board chairman b) Executive director c) CEO d) SBU head

36. The marketing mix is said to consist of 4 Ps i.e; product, pricing, promotion and place. The term' place' is also referred to as a) warehousing b) retailing

c) distribution d) company showroom

37. The management function of directing is performed through exercise of leadership functions of a) planning and organizing b) staffing and motivating c) coordinating and communicating d) leading and motivating

38. The term 'organizational culture' implies a) climate of an organization b) shared values and beliefs amongst employees c) corporate vision and mission d) none of the above

39. The term 'strategy' is derived from the geek word 'strategos' which means -: a) generalship b) leadership c) victory d) none of the above

40. A joint venture involves a combination of two or more companies into one company through. a) absorption b) merger c) takeover d) consolidation