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STRATEGIC MANAGEMENT - I

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YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITYDnyangangotri, Near Gangapur Dam, Nashik 422 222, Msharashtra

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YASHWANTRAO CHAVAN MAHARASHTRA OPEN UNIVERSITY

Vice-Chancellor : Dr. M. M. SalunkheDirector (I/C), School of Commerce & Management : Dr. Prakash DeshmukhState Level Advisory Committee

Dr. Pandit Palande Dr. Suhas Mahajan Prof. V. V. MorajkarHon. Vice Chancellor Ex-Professor Ex-ProfessorDr. B. R. Ambedkar University Ness Wadia College of Commerce B.Y.K. College, NashikMuaaffarpur, Bihar Pune

Dr. Mahesh Kulkarni Dr. J. F. Patil Dr. Ashutosh RaravikarEx-Professor Economist Kolhapur Director, EDMU,B.Y.K. College, Nashik Ministry of Finance

New Delhi

Dr. A. G. Gosavi Dr. Madhuri Sunil Deshpande Dr. Prakash DeshmukhProfessor Professor Director (I/C)Modern College, Shivaji Nagar, Pune Swami Ramanand Teerth Marathwada School of Commerce & Management

University, Nanded Y.C.M.O.U., Nashik

Dr. Parag Saraf Dr. S. V. Kuvalekar Dr. Surendra PatoleChartered Accountant Sangamner Associate Professor and Assistant ProfessorDist. AhmedNagar Associate Dean (Training)(Finance ) School of Commerce & Management

National Institute of Bank Management , Y.C.M.O.U., Nashik

Pune

Dr. Latika Ajitkumar AjbaniAssistant ProfessorSchool of Commerce & Management

Y.C.M.O.U., Nashik

Author Editor Instructional Technology Editing &

Programme Co-ordinator

1) Prof. Vaibhav Khandelwal Dr. A. G. Gosavi Dr. Latika Ajitkumar AjbaniProfessor Assistant ProfessorModern College, Shivaji Nagar School of Commerce & ManagementPune Y.C.M.O.U., Nashik

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CONTENTS

Unit 1 Business Policy 1-16

1.0 Introduction 1.1 Objectives 1. 2 Business Policies 1.3 The Genesis of Business Policy 1.4 Evolutionbased on Managerial Practices 1.5 Essentials of Business Policy 1.6 Objectives of Business Policy 1.7Why Create Business Policies? 1.8 The Importance of Business Policy 1.9 The Purpose of BusinessPolicy 1.10 Characteristics of a Good Policy 1.11 Summary 1.12 Key Terms 1.13 Questions andExercises 1.14 Further readings

Unit 2 Strategy : Concept, Definition, Levels, Forms and Issues 17-32

2.0 Introduction 2.1 Objectives 2.2 Concept of Strategy 2.3 Defining and Explaining Strategy 2.4Levels at which Strategy Operates 2.5 Forms of Organizational Strategy 2.6 Strategic Decision-making2.7 Issues in Strategic Decision-making 2.8 Schools of Thought on Strategy Formation 2.9 Summary 2.10Key Terms 2.11 Questions and Exercises 2.12 Further Reading and References

Unit 3 Strategic Management 1 33-46

3.0 Introduction 3.1 Objectives 3.2 Concept of Strategic Management 3.3 Definitions of StrategicManagement 3.4 History of Strategic management 3.5 Levels at which Strategy Operates 3.6 DifferentLevels of Strategy 3.7 Forms of Organizational Strategy 3.7.1 Corporate Strategy 3.7.2 Business Strategy3.7.3 Operational Strategy 3.7.4 Functional Strategy 3.7.5 Grand Strategy 3.8 Importance of StrategicManagement 3.9 Summary 3.10 Key Terms 3.11 Questions and Exercises 3.12 Further Reading andReferences

Unit 4 Strategic Management 2 47-60

4.0 Introduction 4.1 Objectives 4.2 Strategists and their Role in Strategic Management 4.2.1 Role ofBoard of Directors 4.2.2 Role of Chief Executive Officer (CEO) 4.2.3 Role of Entrepreneurs 4.2.4 Roleof Senior Management 4.2.5 Role of SBU-Level Executives 4.2.6 Role of Corporate Planning Staff 4.2.7Role of Consultants 4.2.8 Role of Middle-level Managers 4.2.9 Role of Executive Assistant 4.3 StrategicManagement process 4.4 Strategic decision making 4.5 Social & Ethical Issues in Business 4.6 Types ofbusiness ethics issues 4.7 Ethical problems occur in business 4.8 Summary 4.9 Key Terms 4.10 Questionsand Exercises 4.11 Further Reading and References

Unit 5 Strategy Formulation 61-78

5.0 Introduction 5.1 Objectives 5.2 Formulating Strategy 5.2.1 Steps of Strategy formulation 5.3 Formulatingobjectives 5.3.1 Understanding Vision 5.3.2 Defining Vision 5.3.3 Benefits of Having a Vision 5.3.4 TheProcess of Envisioning 5.4 Mission 5.4.1 Understanding Mission 5.4.2 Defining Mission 5.4.3 How isMission Statements Formulated? 5.4.4 Characteristics of a Mission Statement 5.5 Goals and Objectives5.5.1 Roles of Objectives 5.5.2 Characteristics of Objectives 5.5.3 Issues in Objective-Setting 5.5.4 WhatObjectives are Set? 5.5.5 How is Objectives Formulated? 5.6 Summary 5.7 Key Terms 5.8 Questionsand Exercises 5.9 Further Reading and References

Unit 6 Environmental Scanning 79-90

6.0 Introduction 6.1 Objectives 6.2 Characteristics of Environment 6.3 General and Relevant Environment6.4 Environmental Scanning 6.4.1 Factors affecting Environmental Scanning 6.4.2 Identifying theEnvironmental Factors 6.4.3 Structuring Environmental Appraisal 6.4.4 Approaches to EnvironmentalScanning 6.4.5 Sources of Information for Environmental Scanning 6.4.6 Methods and Techniques Usedfor Environmental Scanning 6.4.7 Pitfalls in Environmental Scanning 6.5 Summary 6.6 Key Terms 6.7Questions and Exercises 6.8 Further Reading and References

Unit 7 Internal and External Environment 91-110

7.0 Introduction 7.1 Objectives 7.2 Factors of External Environment 7.3 Internal Environment 7.4 SWOTAnalysis 7.4.1 Role and Importance of SWO Analysis 7.5 Resource Audit 7.6 Core Competence 7.7Strategic and Competitive Advantage 7.8 Value Chain Analysis 7.8.1 Analysis 7.8.2 Usefulness of theValue Chain Analysis 7.9 Summary 7.10 Key Terms 7.11 Questions and Exercises 7.12 Further Readingand References

Unit 8 Strategic Planning – Concept, Process, Forms, Merits andLimitations 111-125

8.0 Introduction 8.1 Objectives 8.2 Concept and Features of Strategic Planning 8.3 The Need forPlanningand Significance of Planning 8.4 Merits of Strategic Planning 8.5 Strategic planningprocess 8.6 Strategic Alternatives 8.6.1 Top Down or Planning Down 8.6.2 Bottom Up or Planning Up8.6.3 Negotiative or Negotiated 8.7 Planning style, structure, and style of management 8.8 Non- StrategicPlanning 8.9 Summary 8.10 Key Terms 8.11 Questions and Exercises 8.12 Further Reading andReferences

Unit 9 Strategic Choices and Alternatives 127-140

9.0 Introduction 9.1 Objectives 9.2 Strategic Alternatives 9.3 Generating strategic alternatives 9.4Classifying strategic alternatives 9.5 Classification based on the desired rate of growth 9.6 StrategicChoice 9.6.1 International Strategy 9.6.2 Multidomestic Strategy 9.6.3 Global strategy 9.6.4 TransnationalStrategy 9.7 Cultural Aspects of Strategic Choice 9.8 Summary 9.9 Key Terms 9.10 Questions andExercises 9.11 Further Reading and References

Unit 10 Strategy Implementation – Concept, Issues, Steps and Problems

141-154

10.0 Introduction 10.1 Objectives 10.2 Concept of Strategy Implementation 10.3 Issues involved instrategy implementation 10.4 Stages in implementing strategy 10.5 Resource allocation 10.6 Stepsinvolved in Resource Allocation 10.7 Factors affecting Resource Allocation 10.8 Problems in resourceallocation 10.9 Summary 10.10 Key Terms 10.11 Questions and Exercises 10.12 Further Reading andReferences

Unit 11 Functional Implementation 155-168

11.0 Introduction 11.1 Objectives 11.2 Nature of Functional Strategies 11.3 Functional Plans and Policies11.4 Financial Planning 11.5 Manpower Planning 11.6 Summary 11.7 Key Terms 11.8 Questions andExercises 11.9 Further Reading and References

Unit 12 Organizational Structure 169-181

12.0 Introduction 12.1 Objectives 12.2 Structural Mechanism to implement strategy 12.3 Matchingorganizational structure with business strategy 12.4 Stages of development of organizational structure 12.5Summary 12.6 Key Terms 12.7 Questions and Exercises 12.8 Further Reading and References

INTRODUCTION

Unit 1 Business Policy

Structure

1.0 Introduction

1.1 Objectives

1. 2 Business Policies

1.3 The Genesis of Business Policy

1.4 Evolution based on Managerial Practices

1.5 Essentials of Business Policy

1.6 Objectives of Business Policy

1.7 Why Create Business Policies?

1.8 The Importance of Business Policy

1.9 The Purpose of Business Policy

1.10 Characteristics of a Good Policy

1.11 Summary

1.12 Key Terms

1.13 Questions and Exercises

1.14 Further readings

1.0 Introduction

Each and every organization is formed with a purpose – either to make

profit or nonprofit, the ideologies on which it is to be directed are closely related to

the purpose of an organization. These ideologies in business dialect are commonly

called “Policy”. Policy, according to Kale aye (1998), denotes a future course of

action of intent towards the activities of an organisation. He opined that than an

expression of intent there is more to the meaning of policy. To him, there is usually

the meaning that policies should express the beliefs of the organisation, the things

that are right to do and the courses of action which it must to take in the organization.

This clarifies that policies on the same subject can be so different in each and

every organization. There are certain guidelines required in every business which

are to be fixed in policy. Policy is a decision rule, not a decision (Ackoff 1993).

Ideologies in business parlance are commonly known as policy. Towards the

activities of an organization policy denotes a future course of action of intent. In

order to prepare you for all the associated ideas about the concept in business

management in this upcoming unit you will be introduced to the meaning of business

Business Policy

Strategic Management - I

NOTES

1

policy .The reasons why business policy is necessary will also be explained.

Further, how business policy is implemented in an organization will also be discussed.

Note :

Different nomenclatures/ Terms of Strategic Management such as long

range planning, Business Policy, Corporate Planning have evolved over a period

of time – All these address the ways in which a business firm must position itself

for sustainable growth while interacting simultaneously with the customers and

changing business environment. Business policy refers to the process of formulating

and implementing strategies and evaluating the outcomes. The term business policy

is now replaced by the expression strategic management.

1.1 Objectives

At the end of this Unit, you should be able to:

· Explain business policy

· State the requirement for business policy

· Describe business policy implementation in organization

1. 2 Business Policies

Definition of Policy

When the word policy is mentioned what comes to your mind? As specified

in the introduction previously, policy is defined as a decision rule not a decision.

For instance, only skillfully qualified accountants for senior accounting post should

be appointed. It is a decision when such a person is appointed. The general guideline

for decision making is considered as a policy. The objectives, the mode of thought

and the body of principle underlying the activities of an organization is defined as

policy by Kalejaye, A (1998). According to Fagbemi (2006) a policy refers to

what an organization or a person intends to do or does. What business organization

aims to do is therefore called Business policy. To deliver services to meet the

needs and expectations of the goals of the organization it aims at supporting the

organization. In decision making policies are plans in that they are general statements

or understandings that guide or channel thinking. Not all policies are “statements”;

in actual business situation they are often just implied from the action of managers.

The president of a company (organization), for example may strictly follow-perhaps

for convenience rather than as policy-the practice of promoting from within; the

practice may be understood as policy and carefully monitored by subordinates.

Weighrich & Koontz (2005) to be candid, it is mandatory upon the managers to

ensure that subordinates do not understand as minor managerial decisions that are

not intended to serve as patterns. To create awareness and direction to the

management of any organization, business policy is a guide and roadmap. It

Business Policy


NOTES

2

Check Your Progress

1. What to you understand bythe term policy?

publishes the rights and duties of different steps of the ladder, horizontal and

vertical- of the different capital, be human resource engagement, finance utilization

etc. It ensures that the organization delivers a better end product within a

framework. It inspires, promotes and improves performance fulfillment in an

organization. Along the corporate objectives and goal policy provides the foundation

for vision and mission statement of the business organization. Along with their

relationship with their clients/customers policy enables the business to be judged

and given an image by the way that carry out their responsibility. It is the

‘barometer’ of playing by the rule and gives purpose to the strategy thrust of the

organization.

Business Policy

The boundary within which subordinates can take decisions in an

organization is what business policy explains. It explains that if there is a problem

the employees at the lower level of management have the control to take decisions

without consulting the top management every time. Thus boosting the overall

efficiency and productivity it saves a lot of time for the organisation and increases

the speed of decision making

They are a set of processes which have been defined by the organisation

which govern its conduct. Within which the decisions have to be made they set

the limit. Through which organizational goals can be achieved they are also worried

with obtaining resources.

It authorizes the lower level management to deal with the problems and

issues without consulting top level management every time for decisions. To govern

its actions business policies are the guidelines developed by an organization. The

limits within which decisions must be made are defined. Acquisition of resources

with which organizational goals can be achieved is what business policy also

deals with.

Rama Rao (2010) gave some useful definitions of Business Policy as follows:

(1) A business policy is an implied general guide setting up limitations that

supply the general limit and direction in which managerial action will take

place.

(2) A business policy is one, which emphases attention on the strategic

distribution of scarce resources. Theoretically talking while planning is the

limit of distribution, strategy is the direction of such resource allocation.

(3) In the prevailing economic and social conditions a business policy signifies

the best thinking of the company management as to how the objectives

may be achieved.

(4) By those responsible for decisions and their implementation a business

policy is the study of the nature and process of choice about the future of

independent enterprises.

NOTES

Business Policy

Check Your Progress

Define the term policy.

Strategic Management - I 3

(5) The purpose of a business policy is to permit the management to relate

properly the organization’s work to its environment. Business policies are

guides to action or channels to thinking.

Features of Business Policy

Every business, small or big, Government or Private needs to have policies.

The policies guide the objectives through a right path:

· Policies are the guidelines which help in achieving predetermined goals.

· Policies may be in writing or they may be in oral or verbal form.

· Policies are developed taking into account the resources and capabilities of

the organization.

· Policies are dynamic – i.e. they are subject to change – depending upon the

changes in the environment.

· Policy can be developed for the whole organization or specific policy may be

developed for specific functional area of the organization.

1.3 The Genesis of Business Policy

Outlining the history of business policy, Kazmi (2006) stated that it can be

traced back to 1911, intended providing general management capability when the

Harvard Business School introduced an integrative course in management. Since

1908 (Christensen, et. al., 1982 cited in Kazmi, 2006), this course was based on

case studies which had been in use at the School for instructional purposes.

However, with the publication of two reports in 1959 the real motivation for

introducing business policy in the prospectus of business schools (as management

institutes or departments are known in the United States) came. Sponsored by

the Ford Foundation, the Gordon and Howell report had suggested a capstone

course of business policy which would “…give students an opportunity to pull

together what they have learned in the separate business fields and utilize this

knowledge in analysis of complex business problems” (Kazmi, 2006). Sponsored

by the Carnegie Foundation, the Pierson report and published simultaneously, had

made a similar recommendation.

In 1969, a regulatory body for business schools, the American Assembly of

Collegiate Schools of Business made the way of business policy a mandatory

requirement for the purpose of acknowledgment. Business policy has become an

essential part of management education curriculum in the last two decades. From

the United States to other parts of the world the practice of including business

policy in the management curriculum has spread. The contents of the course,

teaching methodology and so on vary from institution to institution. But basically,

business policy is considered a capstone integrative course offered to students

who have already been through a set of core functional area courses. Though

new titles such as strategic management, corporate strategy and policy and so on

Business Policy

NOTES

Check Your Progress

1. Explain the term businesspolicy.

Strategic Management - I4

are now used extensively for the course the term “business policy” has been used

traditionally. The discussion has so far been related to the academic status of the

business policy course. In practice, however, the growth has been along diverse

lines.

1.4 Evolution based on Managerial Practices

Arising from the use of planning techniques by managers has viewed the

development in business policy by Kazmi (2006). Managers, till recently, tried to

anticipate the future through the preparation of budgets and by using control systems

like capital budgeting and management by objectives starting from day-to-day

planning in earlier times .Long-range planning came into use as these techniques

were not able to emphasis the role of the future adequately. Strategic planning

soon replaced long-range planning, and later, by strategic planning – a term that

is presently being used to define “the process of strategic decision making”. The

theoretical framework for business policy courses today is formed by strategic

management.

Historical Perspective of the Evolution of Business Policy

Hofer et al., (1984) have viewed the evolution of business policy in terms

of four paradigm shifts. In the development of the subject, business policy, these

shifts may be considered as four overlapping phases for the sake of convenience.

It is interesting to note that, as a field of study, the development of business policy

has closely followed the demands of real-life business. He expands the first phase

which can be traced to the mid-1930s, rested on the paradigm of ad-hoc policy-

making. Due to the nature of the American business firms of that period the need

for policy making aroused. The first, which had originally commenced operations

in a single product line catering to a unique set of customers in a limited geographical

area, expanded in one or all of these three dimensions. As expansion took place

and the need to integrate functional areas arose informal control and coordination

became partially irrelevant. To guide managerial action this integration was carried

by framing policies. Policy-making became the prime responsibility of previous

entrepreneurs who later expected the role of senior administration. Planned policy

formulation replaced ad-hoc policy-making due to the increasing environmental

changes in the 1930s and 40s in the United States. The emphasis shifted to the

integration of functional areas in a rapidly changing environment based on the

second paradigm.

Since the needs of a business could no longer be served by policy-making

and functional area addition increasing complexity and accelerating changes in

the environment made the planned policy paradigm irrelevant. There was a demand

for a critical look at the basic idea of business and its relationship to the environment

by the 1960s .In the early sixties the idea of strategy fulfilled this requirement and

the third phase, based on a strategy paradigm emerged. The current thinking – is

based on the fourth paradigm of strategic management which emerged in the

NOTES

Business Policy

Check Your Progress

Explain the origin ofbusiness policy.


eighties. The connection of two broad fields of enquiry: the strategic process of

business firms and the responsibilities of general management was the preliminary

focus of strategic management.

1.5 Essentials of effective Business Policy

The must have following features for effective business policy-

a. Specific- Business policy should be specific. If the boundary does not lie

down exactly, then it creates complications in implementation.

b. Clear- Policy must be unmistakable leaving no scope for multiple

clarifications. Everybody should get the same understanding of the policy.

c. Uniform- Throughout the organization Policy must be uniformly applied.

In the organization this creates a sense of equality. It might create resentment

among the workers if the policy is not uniformly applied.

d. Goal oriented- Policy should be associated with the goals of the association.

e. Simplicity- Business policy should be simple so that it is easily understood

by all in the organization.

f. Comprehensive - A policy must be comprehensive so that it covers as

large part of the organisation as possible.

g. Flexibility versus Stability- The nature of every policy should be flexible.

But this doesn’t mean that there should be modification every now and

then. But it is vital that it’s flexible enough to meet the changing demands

of the organisation. The purpose of devising the policy will be lost if it is too

flexible while if it is too rigid, it may hamper the growth of the organisation.

1.6 Objectives of Business Policy

In terms of information, skills and attitudes the objectives of business policy

have been stated which could be derived from the purpose of business policy.

1. Knowledge

1. The various concepts involved in business policy have to be understood by the

beginners. In the functional area courses too, many of these concepts, like,

strategy, policies, plans, and programmes are encountered. In the context of

business policy, it is imperative to understand these concepts.

2. To an understanding of business policy, knowledge of the external and internal

environment and how it affects the functioning of an organization is vital. A

learner can understand the environment in which a firm operates through the

tools of analysis and diagnosis.

3. Information about the environment helps in the determination of the mission,

Business Policy

NOTES

Check Your Progress

Enumerate the historicalperspective of evaluationof business policies.

Check Your Progress

Enlist the essentials ofeffective business policies.


objectives, and strategies of a firm. The manner in which strategy is formulated

is appreciated by the learner.

4. The most difficult part of strategic management is the implementation of

strategy. The learner will be able to visualize how the application of strategic

management can take place through the knowledge gained from business policy

5. It is an enlightening experience for the learners to learn that the problems in

real-life business are unique and so are the solutions. The knowledge component

of such an experience stresses the general approach to be adopted in problem-

solving and decision-making. It is possible to deal with a wide variety of situations

with a generalized approach. In terms of knowledge the development of this

approach is an important objective to be achieved.

2. Skills

1. The accomplishment of knowledge should lead to the development of skills so

as to be able to apply that which has been learnt. Such an application can take

place by an analysis of case studies and their interpretation, and by an analysis

of the business events taking place around us.

2. In a given case or incident the study of business policy should allow a student

to develop analytical ability and use it to understand the situation.

3. The skill of identifying the factors relevant in decision-making should be led

by the study of business policy. The study of the strengths and weaknesses of

an organization, the fears and opportunities present in the environment, and

the proposal of suitable strategies and policies form the essential content of

general management decision-making.

4. The above objectives, in terms of skills, increase the intellectual ability of the

learners and empower them to link theory with practice. In managerial decision-

making where a large number of factors have to be considered at once to

suggest appropriate action such ability is important.

5. Case analysis leads to the development of oral as well as written communication

skills as a part of business policy study.

3. Attitude

1. The inculcation of an appropriate attitude among the learners should be led by

attainment of the knowledge and skill objectives .Generalist is the most

important attitude developed through this course. The generalist attitude enables

the learners to approach and assess a situation from all possible angles.

2. A generalist is able to function under conditions of partial ignorance by using

his or her conclusion and instinct by acting in a comprehensive manner. Typically,

only a glimpse of the overall situation is provided by case studies and the

frustrating situation of working with less than the required information is faced

by case analyst. Especially in the area of long-range planning, experience has

shown that managers have to work with incomplete information. A generalist

would go ahead with whatever information was available whereas a specialist

NOTES

Business Policy


would tend to postpone or avoid a decision under such condition. In this way,

he or she acts more like a practitioners rather than a perfectionist.

3. Information and suggestions are important to possess a liberal attitude and be

receptive to new ideas for a general manager. With regard to techniques

dogmatism should be replaced with a practical approach to decision-making

for problem-solving. In this way, a general manager can act like a professional

manager.

4. When faced with a problematic situation it is important to have the attitude to

‘go beyond and think’. The hallmark of a general manager is developing a

creative and innovative attitude that refuses to be bound by precedents and

stereotyped decisions.

1.7 Need to create a Business Policy

No matter what the size of the business, business policies can be simple to

write and implement, while adding structure to the great things you are already

doing. Specifically, business policies:

· Drive strategic planning, and help set hopes and performance objectives.

· Lead to more well-organized internal operations.

· Build mutual understanding of expectations and challenges. Engage and align

the values of stakeholders.

· Ensure responsibility and create transparency.

· Encourage ethical and responsible decision-making.

· Measure and diminish risk.

· Having established written policies that staff can refer to creates consistency,

clarity, streamlines new staff orientation and provides an understanding of the

goals and culture of the company.

· Result in time savings: proactively thinking about how specific situations and

issues will be handled eliminates having to discuss and debate how to handle

issues every time they come to the forefront.

· Meet legal requirements; to guide the actions of their staff and management

some laws require employers to adopt certain policies. Example: Discrimination/

Harassment Policy.

Business Policy

NOTES

Check Your Progress

1. Explain the objectives ofbusiness policies.

2. State the need of businesspolicies.


1.8 The Importance of Business Policy

Kazmi (2006) opined that as a course in the management curriculum

business policy is important and as a component of executive development

programmes for middle-level managers who are preparing to move up to the

senior management level. The needs of management students as well as those of

middle-level managers are fulfilled by study of business policy. We shall consider

three areas where this course proves to be beneficial to highlight the importance

of business policy.

Understanding the Business Environment

Business policy helps to create an understanding of how policies are

formulated regardless of the level of management a person belongs to. This helps

in creating an appreciation of the complexities of the environment that the senior

management faces in policy formulation. Managers become more receptive to

the ideas and suggestions of the senior management by gaining an understanding

of the business environment. Such an attitude on the part of the management

makes the task of policy implementation simpler. Managers feel themselves to be

a part of a greater design when they become capable of relating environmental

changes to policy changes within an organization. This helps to lessen their feeling

of isolation.

Understanding the Organization

While a person is at the middle level of management business policy presents

a basic framework for understanding strategic decision-making. Such a

framework, combined with the experience gained while working in a specialized

functional area, enables a person to make preparations for handling general

management responsibilities. In a variety of ways this benefits the organization.

Like most other areas of management, business policy brings the benefit of

years of distilled experience in strategic decision-making to the organization and

also to its managers. Case study – which is the most common educational tool in

business policy – provides illustrations of real life business strategy preparation

and application. Improvement in job performance can also be led by understanding

business policy. A person is enabled to understand the linkage between the different

sub-units of an organization and how a particular sub-unit fits into the overall

picture as a middle level manager Managerial functions like coordination and

communication, and also for the avoidance of inter-departmental conflicts it has

far reaching implications.

Personal Development

For personal development study of business policy offers considerable scope.

The different sub-units within an organization have a varying value and importance

at different times is a fact of organizational life. May be due to increasing

competition it often happens that a company which has followed a production

orientation as a matter of policy gradually shifts emphasis to marketing. In the

changed situation, colleagues in marketing have more opportunities than compared

to the executives within the production departments. In this case, it is beneficial

NOTES

Business Policy


for an executive to understand the impact of policy shifts on the status of one’s

department and on the position one occupies. Due to policy shifts and retrenchment

is inevitable, in extreme cases many positions may become redundant. Business

India cautions executives, especially those who work for multinationals. It says

“….. persons who have devoted their lives working for one company suddenly

find bewildering changes at head offices in the UK and US”, and adds that Dramatic

impact on individuals is caused because of reorganization and changes at the top

level. “To be shut down worldwide or to be sold off to another company is too

common for divisions of a company”. Business policy enables executives to avail

an opportunity or avoid a risk with regard to career planning and development

with proper understanding.

A study of business policy provides an adequate grounding for understanding

the macro factors and their impact at the micro level while making a career

choice. An executive is better placed to identify the growth areas by gaining an

understanding of such an impact. For illustration, A career in the computer industry,

especially in software, would offer better personal growth opportunities than, say,

the steel industry in the existing business situation in India. To understand the

senior management’s lookout business policy offers a unique perspective to

executives. With such an understanding the chances that a proposal made by or

an action taken by an executive will be appreciated by senior managers is decidedly

better.

The theoretical framework provided in the form of the strategic management

model is an interesting by-product of the course of business policy. The applicability

of this model is not limited to businesses alone. Organizations like, services,

educational institutions, family, government, public administration, and to many

other areas it can be applied. In fact, the model provides powerful insights for

dealing with policy-making at the macro level as well as at an individual level

through self-analysis. The fact that it offers advantages to an executive from

multiple sources is the importance of business policy. An executive gains an

understanding of the business environment and the organization he or she works

in apart from intangible benefits. Such an understanding can help considerably in

career planning and development.

1.9 The Purpose of Business Policy

‘Business policy’ is a term related with the combined management course,

which is generally studied in the latter part of the degree or diploma, and is headed

by the study of functional area courses in finance, marketing, operations and

personnel (Kazmi, 2006). To develop a generalist approach in management student

a business policy course seeks to integrate the knowledge gained in various

functional areas. In viewing organizational problems in their totality such an

approach is helpful. Awareness can be created about the consequences that an

action taken in one area of management can affect other areas independently,

and on the organization as a whole.

Business Policy

NOTES

Check Your Progress

Explain the importance ofbusiness policies.


The perspective adopted in business policy is not the same from that adopted in

the functional area courses. For example, a marketing problem is viewed as an

organizational problem and not viewed purely as a problem of ‘marketing’. As a

system consisting of a number of sub-systems a course in business policy helps in

understanding a business. Any action taken in one sub-system has an impact on

other sub-systems, as well as the system as a whole. To adopt such a systems

approach to decision-making is of vital importance for the top management in any

organization. By avoiding the narrow perspective generally adopted by the

specialists, and to deal with business problems from the viewpoint of the senior

management business policy helps a manager to become a generalist.

Marketing problem is apparently the problem of declining sales volume.

However, an analysis of the problem will show that its roots may probably lie

anywhere in the organization. Rising level of competition, inefficient distribution,

faulty sales promotion, inappropriate recruitment policies, misdirected training,

inadequate sales promotion, limited commission to sales personnel, falling quality

standards, a decrease in the variety of products offered, outdated design,

underutilization of capacity, demotivating credit policies and so on are may be due

to declining sales volume. Due to factors not necessarily within the control of the

marketing department a problem which apparently seemed to be a marketing

problem. A solution to the problem would necessitate misbehaving the artificial

boundaries between the functional areas, each of which is looked after by a team

of authorities. These specialists, are unaware and ill-equipped to deal with all the

problem in whole due to their background, training and, possibly, loyalty to their

disciplines. They cannot come up with long-term solution but the short-term

solutions are only like first-aid to a victim when a thorough diagnosis and treatment

is required to mitigate the misery. On the other hand, better qualified to deal with

organizational problems and can come up with solutions that will have a lasting

effect is a generalist. We can say that the purpose of business policy is three-fold

on the basis of the above discussion;

1. In various functional areas of management integrate the knowledge gained;

2. To agree a generalist approach to problem-solving, and

3. To understand the complex inter linkages operating within an organization

through the use of a systems approach to decision-making and relating these to

the changes taking place in the external environment.

G. Sudarshan Reddy in his book on strategic management has given following

purposes of business policy:

1. Business Policy helps in developing the clear objectives.

2. It directs the organization towards the achievement of organization goals by

developing clear objectives.

3. Provides clarity in subordinate tasks, responsibilities, powers and limitations.

4. Helps subordinates and managers to take timely decisions and also improves

operational performance.

NOTES

Business Policy


5. Facilitates effective coordination and control by effective delegation of authority.

6. Builds employee enthusiasm and loyalty towards an organization.

7. Improves organization’s image/ Goodwill in public due to fair and consistent

business policies.

1.10 Characteristics of a Good Policy

Sound policies usually contain a combination of the following characteristics:

(1) Objective oriented

(2) Top Management Support and Promise

(3) Intellectual Input

(4) Consistency and Long-term in Nature

(5) Suitability

(6) Connected to Staff

(7) Honest Purpose and Application

(8) Balanced Clarification

(9) Arrangement with Objectives

Goal Oriented – Future action and intent is a common characteristic of policy. It

usually describes a goal or destiny which is there to be achieved. In addition, for

the people in the organization it implies a conviction in a set of beliefs which is

considered “right”. The manner a policy is expressed and the detailed procedures

which stem from it all point in the same direction and do not allow individual

actions to follow a different direction. It is probably a wrongly formulated policy if

the actual procedures and wording do not imply belief in a course of action.

Top Management Approval and Commitment – In practice, making

contributions and references on policy issues may be the function at the lower

levels of management in the organisation, but it is the trademark of policy that it is

accepted and permitted by the top management. The responsibility may be delegated

to a top executive committee this may be Board of Directors and Managing Director.

Primarily responsible for policy making and setting long-term objectives are

Directors and top managers. There is every possibility that all segments of the

organisation will move to the same direction toward the set objectives once the

series of policies are approves at the top.

Intellectual Input – Policies are concerned about the future activities deemed

to be just and right for the organization therefore policy requires a high level of

intellectual and intelligent inputs. Policies must be able to withstand pressures,

opposition and challenges from all parts of the organisation and its environment

which may see and treat the policies differently. A policy may be less effective

Business Policy

Check Your Progress

State the purpose ofbusiness policies.


NOTES

and may even fail to provide the framework for enduring decision making without

a high degree of thorough analysis and deep thought of reasoning during formation.

Consistency and Long-term in Nature – Usually, policy makers have thought

through all aspects of a particular policy concluding into dependable and continuing

policy thereby making frequent adjustments difficult. It creates confusion when

there are constant changes in the course of action and direction of an organisation

resenting and even generally derails all things that sound policies are trying to

achieve. Although for practical purposes; long-term policies are sub-divided into

short-term but practically, almost all policies are long term in nature.

It is worthy of note that there could be circumstances in which refinement

and revision might be required; in essence, they are intended to create a continuum

against which day-to-day standards and decisions can be made.

Acceptability – Everyone is marked by the persistence and understanding of

employees who want to know why the policy is made or changed is the degree of

acceptance of organization policy. Regarding policy honest reasons must be

forthcoming and management needs to provide supervisors with sufficient

information to satisfy queries. There is danger in withholding information which

often leads to gossip and speculation in an organisation as this can be disorganizing,

because increased friction between management and employees, upset and strain

relationships through general suspicion and uncertainty.

Communicated to Staff - Communication to members of the organization is

important as soon as policies are formulated and ratified. The mission and objectives

of the organization should be discussed and everyone must be aware of it; hence,

in communicating policies to the members of the organization there should be no

exception. In channeling policies throughout the organization appropriate channels

must be used, so that nobody is left out. This, of course, will strengthen relationship

in the organisation and inspire the staff to reach higher heights.

Genuine Intention and Application - To declare policy for prestige purposes,

such as publicity and then fail to put the policy into practice is very common for

management. To ignore and dump the declared policies is management’s intention

in these circumstances. In some cases, in wrong and negative ways some managers

apply policies, hiding under one excuse or the other for not carrying out some

course of action. These types of policies are seldom put into writing and where it

is in written form; they are usually wrongly worded in such unclear manners that

will distort to fit in with any course of genuine action at the line. These types of

policies must be evaded; every policy of the management must be treated with all

the importance it deserves and must be sincerely applied to the intended course of

action.

Balanced Interpretation – Managers do rigidly conform to principles and

procedures without due regard for the human elements of the organisation and

emerging pressing issues while correctly interpreting policies. In human society

and ever changing complex environment something more than correctness is

required; all these factors, when weighed carefully, might well provide a more

balanced interpretation which would relegate to the background the narrow correct

NOTES

Business Policy


ones. The real art of managing and supervising which cannot be attributable to

abuse of policy is little of flexibility to accommodate the emerging factors and

balanced interpretation of policies.

Alignment with Objective – All policies must follow parallel courses of action

which are directly related to objectives. Collective effect is lost and disorder

would prevail if they cross or oppose objectives. The cause of problems and poor

results rather than faults in the stated policy is misunderstandings and confusion.

To avoid misunderstanding especially at the lower level of management hierarchy

these identified dangers highlight the need for careful checking of uncertainty in

policy.

1.11 Summary

• A future course of action of intent towards the activities of an organization

is denoted by policy.

• In decision making policies are plans in that they are general statements or

understandings that guide or channel thinking.

• The boundaries within which subordinates can take decisions in an

organization is defined as business policies.

• Business policies allow the employees at the lower level of management to

have the power to take decisions when there is a problem without consulting

the top management every time.

• Specific, Clear, Uniform, Goal oriented, Simplicity, Comprehensive, Flexibility

versus Stability are the must have features for an effective business policy.

• Understanding the Business Environment, Understanding the Organization

& Personal Development are three important reasons for forming a business

policy.

• Sound policies usually contain a combination of the following characteristics:

Objective oriented, Top Management Support and Promise, Intellectual Input,

Consistency and Long-term in Nature, Suitability, Connected to Staff, Honest

Purpose and Application, Balanced Clarification, Arrangement with

Objectives.

1.12 Key Terms

1. Business policy : the scope or spheres within which decisions can be

taken by the subordinates in an organization.

2. Strategic decision making : is an ongoing process that involves

creating strategies to achieving goals and altering strategies based on

observed outcomes.

Check Your Progress

1. State the features of goodpolicies.

2. State the characteristics ofgood policies.

Check Your Progress

Define the term businesspolicy.

Business Policy


NOTES

3. Attitude : is an expression of favor or disfavor toward a person, place,

thing, or event


1. Explain a Business Policy.

2. What are the main purposes of Business Policy?

3. Why does a business form policy?

4. What are the different features of business policy? Discuss each one of

them with the help of suitable instances.

5. What are the aims set for a business policy course in terms of knowledge,

skills and attitudes?

6. Explain the features of Good Policy?

7. State the significance of business policies?

8. Explain the beginning of Business Policies?

Multiple Choice Questions

1. The origin of business policy can be retraced to

A) 1930 B) 1911 C) 1880 D) 1972

2. BCG in bcg matrix stands for

A) Boston Calmatte Group

B) British Consulting group

C) Boston Corporate Group

D) Boston Consulting Group

3. Which of these is not a reason why some firms do no strategic planning?

A) Laziness

B) Competitive leadership

C) Honest difference of opinion

D) Poor reward structures

4. The means by which long-term objectives will be achieved are

A) Mission statements

B) Strategies

C) Vision statements

D) Long-term goals.

NOTES

Business Policy


Ans. - (1 – B), (2 – D), (3 – B), (4 – B).

1.14 Further readings

Kazmi, C. (2006). Business Policy and Strategic Management, 15th Edition, (New

Delhi: Tata McGraw-Hill Publishing Company Limited), ISBN: 0-07-044470-6,

pp. 1 – 23.

Christensen, C.R., et. al., Business Policy – Text and Cases, 5th edn, (Homewood:

3rd Richard D. Irwin, 1982), quoted from preface. Gordo, A. and J.E. Howell,

Higher Education for Business, (New York: Columbia University Press, 1959), pp.

206 – 07.

Glueck, W.F. and L.R. Jauch, (1984), Business Policy and Strategic Management,

4th edn, (New York: Mc Graw-Hill, pp. 4-5.

Hofer, A, et. al., Strategic Management – A Casebook in Policy and Planning, 2nd

edn, (Minnesota: West Publishing, p. 8.

Business Policy


NOTES

Unit 2 Strategy : Concept, Definition, Levels,Forms and Issues

Structure

2.0 Introduction

2.1 Objectives

2.2 Concept of Strategy

2.3 Defining and Explaining Strategy

2.4 Levels at which Strategy Operates

2.5 Forms of Organizational Strategy

2.6 Strategic Decision-making

2.7 Issues in Strategic Decision-making

2.8 Schools of Thought on Strategy Formation

2.9 Summary

2.10 Key Terms


2.12 Further Reading and References

2.0 Introduction

The concept of strategy and the procedure of strategic management will

be our prime objective to understand in this unit. We shall also focus on the roles

that different strategies play in strategic management. Undoubtedly the most

significant concept in business policy and strategic management is the concept of

strategy. We present a set of definitions of strategy given by the authorities in the

field and derive the main characteristics of strategy.

The levels at which strategy operates is what we will learn in the next unit.

We shall also explain how strategies can be formulated at different levels in an

organisation.

We shall also try to indicate how strategy is alike conventional decision

making and yet how it differs in its coverage, reach and depth in the nature of

strategic decision making.

Check Your Progress

What do you mean byStrategy?

NOTES

Strategy : Concept, Definition,Levels, Forms & Issues


2.1 Objectives

At the end of this unit, you should be able to:

• Explain the meaning, significance of and the need for strategy

• Explain the scope of strategy

• List and discuss criteria and steps involved in the preparation of strategy

• Explain the influences on strategy choice

• Explain the characteristics and advantages of strategy formulation

• Classify and explain various forms of organizational strategy.

2.2 Concept of Strategy

Strategy is derived from the Greek word “strategia” which means the

methods to stop or defeat the enemy. Thus it is a term which is fundamentally

linked with military science. To denote the techniques used to achieve business’s

objectives is very commonly used in business. To achieve predetermined goals

and objectives keeping in mind the short and long term competitive pressures

strategy includes willpower and evaluation of all possible paths and choosing the

best path.

To reduce uncertainty of the environment and to deal with increasing

complexity of the business is the main purpose of formulating a strategy.

Kazmi (2006) gave the following illustrations/examples of strategy in action:

• After divesting a major stake in ITC, Rollatainers is contemplating an

expansion strategy. Rs 500 crore at present, is likely to touch Rs 1000 crore

in the next five years, the combined turnover of Rollatainers and ITC’s

packaging division.

• TTK Prestige is part of the diversified TTK Group. It is concentrating on

its core strength of manufacturing and marketing of kitchenware. Which

markets multi-cooking systems is its US-based subsidiary Mantra Inc.

• As part of its diversification strategy, Singer India, which has been associated

with sewing machines, is entering the white goods and colour television

market.

• Birla Trans Asia Carpets is a sick unit from the Yash Birla group. It is

attempting a turnaround strategy by retrenching three-fourth of its

employees, importing synthetic carpets and tiles, and exporting to the US

carpet markets. As it is faced with excessive manpower and high interest

costs.

• Experiencing low profitability owing to the various problems faced by the



NOTES

NBFCs in India is Kotak Mahindra Finance Limited which is a major non-

banking finance company. It is planning to adopt a divestment strategy in

wholesale corporate lending and focusing on new growth areas, such as

wealth management, retail, insurance, and information services.

2.3 Defining and Explaining Strategy

Management is an art as well as science (Kazmi, 2006). Derived from

practice are many of the concepts used in building management theory.

Management studies draw upon the practical experiences of managers in defining

concepts unlike the pure sciences which have their foundation in experimental

research. Before taking its shape in the present form of strategic management

business policy is rooted in the practice of management and has passed through

different phases. Alfred D. Chandler was one of the earliest contributors to this

young subject.

Alfred D. Chandler (1962)

Environment, strategy, and organizational structure are interrelated was a

comprehensive analysis made by Chandler. In the United Stated he analyzed the

history of organizational change in 70 manufacturing firms. While doing so,

Chandler defined strategy as: “The determination of the basic long-term goals

and objectives of an enterprise and the adoption of the courses of action and the

allocation of resources necessary for carrying out these goals” (Chandler, 1962

cited in Kazmi, 2006). Note that Chandler refers to three aspects:

• Willpower of basic long-term goals and objectives

• To achieve these objectives adoption of courses of action; and

• For adopting the courses of action allocation of resources necessary

Kenneth Andrews (1965)

At Harvard Business School Andrews belong to the group of professors

who were responsible for developing the subject of business policy and its

dissemination through the case study method. Andrew defines strategy as: “The

pattern of objectives, purposes, goals, and the major policies and plans for achieving

these goals stated in such a way so as to define what business the company is in

or is to be and the kind of company it is or is to be” (Andrews, 1965 cited in

Kazmi, 2006). It is a way of stating the current and desired future position of a

company, and the objectives, purposes, goals, major policies and plans required to

take the company from where it is to where it wants to be, is the definition referred

to be ‘business definition’.

Igor Ansoff (1965)

In the field of strategic management Professor Ansoff is a well-known

authority and has been a creative writer for the last three decades. He explained

the concept of strategy as: “The common thread among the organisation’s activities

and product-markets ….that defines the essential nature of business that the

Check Your Progress

What do you understand bythe term strategy?

NOTES



organisation was or planned to be in future” In one of his earlier books, Corporate

Strategy (1965) (Ansoff, 1965).

The unity of approach that exists in varied organizational activities including

the products and markets that define the present and intentional nature of business

is what Ansoff stressed on.

William F. Glueck (1972)

Glueck was another well-known author in the area of strategic management,

who was at the University of Georgia a distinguished Professor of Management

till his death in 1980. He defined strategy exactly as: “A unified, comprehensive

and integrated plan designed to assure that the basic objectives of the enterprise

are achieved” (Glueck, 1972). ‘Unified’ means that the plan joins all the parts of

an enterprise together; ‘comprehensive’ means it covers all the major aspects of

the enterprise, and ‘integrated’ means that all parts of the plan are compatible

with each other, were the three adjectives which Glueck has used to define a plan

making the definition quite adequate.

Henry Mintzberg (1987)

iA noted management thinker and prolific writer on strategy is Mintzberg

of McGill University. Strategies are not always the outcome of rational planning

is what he advocates. They can emerge from what an organisation does without

any formal plan. He defines strategy as: “a pattern in a stream of decisions and

actions” (Mintzberg, 1987). Mintzberg distinguishes between intended strategies

and emergent strategies. The plans that managers develop, is what Intended

strategies refer to while The actions that actually take place over a period of time

are emergent strategies. An organisation may start with a deliberate design of

strategy and in this manner end up with another form of strategy that is actually

realized.

Michael E. Porter (1996)

To the development of the concept of strategy Michael Porter of the Harvard

Business School has made invaluable contributions .Some of his popular ideas are

competitive advantage, the five-force model, generic strategies, and value chain.

He opines that the core of general management is strategy, which he elaborates

as: “….developing and communicating the company’s unique position, making

trade-offs, and forging fit among activities” (Porter, 1996).

Customers’ needs, customers’ accessibility, or the variety of a company’s

products and services is what strategic position is based on. Choosing activities

that are different from those of the rivals, or to performing similar activities in

different ways is what is related to company’s unique position. When the activities

that a firm performs are incompatible however, a sustainable strategic position

requires a trade-off. Formation of this fit’s among the different activities done to

ensure that they relate to each other.

It must be noted that the different approaches referred to above to define

strategy cover nearly a quarter of a century. This is an indication of what aStrategic Management - I20

NOTES


complex concept strategy is and how various authors have attempted to define it.

To place it in alternative way, as there are experts there are as many definitions.

The approach may be changed by the same author that they had earlier adopted.

Witness what Ansoff said 19 years later in 1984 (his earlier definition is of 1965):

“Basically, a strategy is a set of decision –making rules for the guidance of

organizational behavior” (Porter, 1996).

The analysis of various definitions of strategy given by expert reveals the following:

• Strategy is the determination of basic long term goals and objectives of an

organization.

• It helps in determining the course of action to achieve the predetermined

goals and objectives.

• It refers to allocation of necessary resources for implementing the course

of action.

• It is a set of decision making rules which have a common thread.

• It is a course of action which is either planned and/ or emerged.

• It (Strategy) is a central understanding of the strategic management process.

• It recognizes/ enables to know which of the actions of the competitors need

critical attention.

• The time horizon of strategy is typically long term. Involves long term

decisions.

• Strategy involves substantial capital cost.


Yet interesting and challenging concept the explanation of strategy, varied

in nature, depth and coverage, offer us a glimpse of the difficulty involved in

understanding this daunting. The different levels at which strategy can be formulated

we shall learn about this in this section. With regard to either products/services,

markets or technology it is very common to find many companies, or a group of

companies, working in different business lines. Here are a few illustrations:

• Animal feeds, beverages, oils and dairy fat, soaps and detergents, and

specialty chemicals are several businesses in which Hindustan Levers, and

the honored multinational subsidiary is in.

• Sundaram Clayton and its associate companies – Harita Grammar, Sundaram

Fasteners, TVS Suzuki, TVS Electronics and TVS Whirlpool – operate in

technology areas as diverse as brake and signal systems for railways, two-

wheelers, computer peripherals, and electrical appliances.

• In the fields of cargo, chemicals, containerization, lubricants, packaging,

project consultancy, tea exports, and international business Balmer Lawrie,

Check your Progress

1. What important features ofthe term strategy you canderive from the definitionsof expert?

2. How can the term strategybe defined in simple terms?

NOTES



a public sector company, has a diversified portfolio of businesses.

• The Flow more group of companies manufactures pumps for irrigation, a

range of engineering products, turbines, castings, specialized conversion

equipments, and has recently started the manufacture of polyester films. It

also offers engineering consultancy services for power projects and

environmental engineering.

A single strategy is not only inadequate but also inappropriate for many

companies, such as those illustrated above. At different levels there is a need for

multiple strategies. Many companies are organized on the basis of operating

divisions or, simply, divisions in order to segregate different units or segments,

each performing a common set of activities. These divisions may also be known

as profit centers or strategic business units (SBUs). “Any part of a business

organisation which is treated separately for strategic management purpose” is

defined as an SBU (Whittington, 1993).

Generally, SBUs are involved in a single line of business. Strategic business

area (SBA) is a complementary concept to the SBU, valid for the external

environment of a company. It is defined as “a distinctive segment of the

environment in which the firms does (or may want to do) business” (Drucker).

Under a corporate umbrella a number of SBUs, relevant for different SBAs,

form a cluster of units. , While common functions are grouped under the corporate

level, each one of the SBUs has its own functional departments, or a few major

functional departments. These different levels are exemplified in the figure stated

above. In this figure two types of levels are depicted. One relates to the

organizational levels and the other to the strategic levels. The corporate, SBU

and functional levels are those of the organizational level. The corporate, SBU

and functional level strategies are those of the strategic levels.

Covering the various functions performed by different SBUs corporate

level strategy is a primary plan of action. The aims of the company, distribution of

resources and coordination of the SBUs for optimal performance are what mainly

the plan deals with.

SBU level (or business) strategy is a comprehensive plan providing objectives

for SBUs, allocation of resources among functional areas, and coordination between

them for making an optimal contribution to the achievement of corporate level

objectives.

Functional strategy deals with a relatively restricted plan providing

objectives for a specific function, allocation of resources among different operations

within that functional area, and coordination between them for optimal contribution

to the achievement of SBU and corporate level objectives. Occasionally companies

plan at some other levels too apart from the three levels at which strategic plans

are made. Firms often set strategies at a level higher than the corporate level.

These are called the societal strategies .A societal strategy is a generalized view

of how the corporation relates itself to society in terms of a particular need or a

set of needs that it strives to fulfill based on a mission statement. Assume a

corporation decides to provide alternative sources of energy for society at anStrategic Management - I22

NOTES


optimum price and based on the latest available technology. With regard to the

businesses it can take up on the basis of its societal strategy, the corporation has

a number of alternatives. Among other alternatives it can either be a manufacturer

of nuclear power reactors, a maker of equipments used for tapping solar energy,

or a builder of windmills. The choice is wide and being in one of these diverse

fields would still keep the corporation within the limits set by its societal strategy.

Corporate- and business-level strategies derive their rationale from the societal

strategy.

At lower levels also some strategies are required to be set. One step down

the functional level, a company could set its operations-level strategies. There

can be number of operating strategies in each functional area. These would deal

with barely defined and highly precise area. For example, a functional strategy at

the marketing level could be subdivided into sales, distribution, pricing, product

and advertising strategies. Whether sales or advertising, activities in each of the

operational areas of marketing, could be performed in such a way that they

contribute to the functional objectives of the marketing department. Finance,

production and personnel departments are interlinked in functional strategy of

marketing. Under the SBU-level all these functional strategies are operated. Under

the corporate-level strategy different SBU-level strategies are put into action

which, in turn, is derived from the societal-level strategy of a corporation. A

corporation, its constituent companies, their different SBUs, the functions in each

SBU, and various operational areas in every functional area are synchronized

and a perfect match is imagined among all the strategies at different levels. An

organization moves ahead towards its objectives and mission like a well-oiled

piece of machinery if perceived in this manner. Such an ideal, though extremely

difficult – if not impossible of attainment – is the intent of strategic management.


The various forms of strategies according to Hill and Jones (2004), including

the strategies as identified and discussed below:

Corporate Strategy

To carry out values and performance objectives of a company these

strategies are formulated. The lower the organizational level these plans become

more specific and detailed. To render the goals defined by the organization with

minimum risk, corporate strategy is the art of using organizational resources.

Corporate strategy also involves marshalling the available resources for definite

missions and planning alternative strategies in anticipation of changing contingencies

and creating flexible conditions in structure and employee attitudes favourable

towards achieving the corporate goal. A company’s general posture in the broad

economy is defined as corporate strategy. Within the domestic movie exhibition

industry, business strategy outlined the competitive posture of its operations. But

to increase the likelihood, more specific guidelines are needed for the business’s

operating components that these strategies will be successful.

Check Your Progress

Explain the stages ofStrategy operate.

NOTES



Business Strategy

Business strategy refers to the aggregated strategies of a single business

firm. In other words, business strategy is a strategy designed to position the strategic

business unit in a diversified corporation. In order to achieve a sustainable

competitive advantage each firm formulates a business strategy.

Operational Strategy

In the theory of management by objectives by Peter Drucker (1954) the

concept of operational strategy was popularized and encouraged. For the everyday

operational activities in the organization this is needed. It cannot create a budget

but it must operate within the budget. Operational level strategies are informed by

business level strategies which, in turn, are informed by corporate level strategies.

Functional Strategy

For a key functional area within a company, functional strategy is the short-

term game plan. By providing more specific details about how key functional

areas are to be managed in the near future such strategies clarify grand strategy.

Giving specific, short-term guidance to operating managers, functional strategies

clarify the business strategy.

Functional strategies must be developed in the key areas of marketing,

finance, production, operations, research and development, and personnel. They

must be consistent with long-term objectives and grand strategy. By organizing

and activating specific subunits of the company (e.g., marketing, finance,

production, etc.) to pursue the business strategy in daily activities functional

strategies help in implementation of grand strategy.

Grand Strategy

Grand strategies which are also identified and named master business

strategies are intended to provide basic direction for strategic actions. Therefore,

they are seen as the basis of coordinated and sustained efforts directed toward

achieving long-term business objectives. More frequently than not, grand strategies

indicate how long-range objectives will be achieved. A comprehensive general

approach that guides major actions thus can be defines as a grand strategy.

For achieving major long-term objectives such as sole business attention,

market growth, product development, modernization, horizontal integration, vertical

integration, joint venture, concentric change, multinational change, retrenchment/

turnaround, divestiture and insolvency, principal grand strategy could serve as the

foundation. Several grand strategies are used by company which is involved with

numerous industries, businesses, product lines, or customer groups. Discussed

below with examples are such grand strategies to indicate some of their relative

strengths and weaknesses.

Check Your Progress

1. State the forms oforganizational strategy.

2. Mention and discuss thevarious forms oforganizational strategy.


NOTES


2.6 Strategic Decision-making

The problems met in decision-making are experienced by all managers in

the course of their day-to-day activities as specified above. Strategic tasks on the

other hand are by their very nature multifaceted and diverse. Performing strategic

tasks in decision-making is, therefore, a tremendously hard, complex and, at times,

interesting and mysterious process.

Strategic Decision-making at Zodiac Clothing

One of the strongest brands in shirts and ties in India is Zodiac, with its

‘classic business statement’. Anees Noorani, the managing Director of Zodiac

Clothing Company, answered an interviewer’s queries on the prospects for his

company and the intended strategy. In branded garments Zodiac is aiming at a

growth of 20 percent in the topline (premium) segment and 35 percent in the

bottom-line segment .The reason for the strategic decision to set these objectives

is that the Indian markets are now ready for branded garments. Retailing is on the

rise as foreign brands have made an entry into the market. The company is

perceived to have the necessary infrastructure in terms of manufacturing,

distribution and logistics to take advantage of the emerging opportunities. From a

dominant position in the export market it is now focusing on the domestic market.

The company’s reverse backward integration is another significant strategic

decision. This means that Zodiac no longer wants to produce fabric for its garments.

It wishes to have the flexibility of outsourcing for a changing product mix dictated

by fashion. It has abandoned its plans for manufacturing cloth for its garments

motivate by this logic. Rather, it would like to extend its product range to producing

branded trousers.

Source: Adapted from “We expect to grow at 20 percent”, an interview, Business

Standard (The Smart Investor), September 13, 1999, p. 16

To make a choice regarding the courses of action to adopt is the basic

thrust of strategic decision-making in the process of strategic management. Thus,

most features of strategy formulation rest on strategic decision-making. The

fundamental strategic decision relates to the choice of a mission. The basic worries

in strategic management in other words, are the answers to questions like ‘what

is our business? What will it be?, and what should it be?’ .The senior management

is faced with alternatives regarding the different benchmarks to measure

performance with regard to objective-setting . The senior management chooses

from among a number of strategic alternatives at the level of choosing a strategy,

in order to accept one exact course of action which would make the company

achieve its objectives and realize its task.

As pointed above, there are numerous events when the senior management

has to make important strategic decisions apart from the fundamental decisional

choice .Environmental threats and opportunities are plentiful; that the senior

management focuses its attention on only a few of hose.; the Senior management

considers only a limited number at any given time similarly, there are many company

strengths and weaknesses. With honor to resource allocation, strategic choice is

faced by the management from among a number of alternatives that it could

NOTES



assign resources to. Thus, strategic management forms the core of strategic

decision-making.

2.7 Issues in Strategic Decision-making

It is difficult to perform as strategic decision-making is a multifaceted

process. It is unintelligible; it cannot be analysed and explained easily. Decision-

makers are not able to describe how which strategic decisions are made in exact

manner. Strategic decision-making is incomprehensible like the working of the

human mind. And rightly so, for it is based on complex mental processes which

are not exposed to the view. Henry Mintzberg says while commenting on the

nature of strategic decision-making that “the key managerial processes are

extremely complex and secretive, drawing on the vaguest of information and

using the least articulated of mental processes. These processes seem to be more

relational and universal than ordered and consecutive, and more intuitive than

intellectual ….”

For these reasons, however painstakingly formulated, no theoretical model

can satisfactorily represent the different proportions of the process of strategic

decision-making. We can still attempt to understand strategic decision-making by

considering some important issues related to it in spite of these boundaries. We

shall deal with six such issues below:

1. Criteria for decision-making :

Objective-setting is required in the process of decision-making .To measure

the efficiency and effectiveness of the decision-making process these objectives

serve as benchmarks. In this way, objectives serve as the standards for decision-

making. There are three major perspectives regarding setting criteria for decision-

making:

(a) Maximization is the first concept. It is created on the thinking of economists

who consider objectives as those attributes which are set at the highest

point. The behavior of the firm is oriented towards achieving these objectives

and, in the process, maximizing its returns.

(b) The second interpretation is based on the concept of satisficing. This

imagines setting objectives in such a manner that the firm can achieve

them realistically through a process of optimization.

(c) The third perspective is that of the concept of instrumentalism. The behavior

of a firm is complex and the process of decision-making according to this

view, which includes objective-setting, is essentially a continually-evolving

political consensus-building. The firm moves towards its goals in small,

logical and incremental steps through such an attitude.

2. Rationality in decision-making :

Rationality means exercising a choice from among various substitute courses

of action in such a way that it may lead to the accomplishment of the purposes in

Check Your Progress

Explain the term strategicdecision making.


NOTES


the best possible manner in the context of strategic decision-making. Those

economists who support the maximizing criterion consider a decision to be rational

if it leads to profit maximization. Rationality takes into account the constraints

under which a decision-maker operates is believed by Behaviorists, who are

supporters of the satisfying concept. The achievement of objectives depends on

the bargaining process between different interested partnership groups existing in

an organization these are the view of instrumentalists, and therefore a rational

decision-making process should take all these interest into consideration.

3. Creativity in decision-making :

A decision must be innovative and diverse to be creative. A creative strategic

decision-making process may considerably affect the search for alternatives where

novel and untried means may be looked for and adopted to achieve objectives in an

exceptional manner. Creativity is sought to be developed through techniques such

as brainstorming and mannerism is normally associated with individuals. You may

recall that one of the attitudinal objectives of a business policy course is to develop

the ability to go beyond and think which, in other words, is using creativity in strategic

decision-making.

4. Variability in decision-making :

Two decision-makers may reach totally different conclusions is a common

observation that given an identical set of conditions. This often happens during

case discussions too. They may arrive at different conclusions, depending on the

differing perceptions of the problem and its solution on a case that may be analyzed

differently by individuals in a group of learners. This happens due to inconsistency

in decision-making. There are no set methods that can be applied in strategic

decision-making it also advises that every condition is distinctive.

5. Person-related factors in decision-making :

There are a host of person-related factors that play a role in decision-making.

Some of these are age, education, intelligence, personal values, cognitive styles,

risk-taking, and creativity. In strategic decision-making characteristics like age,

information, brainpower, risk-taking ability, and creativity are generally supposed

to play a positive role. In strategic decision-making, intellectual style which enables

a person to assimilate a lot of information, interrelate complex variables, and develop

a combined view of the condition is especially helpful. In matters of social

responsibility and business ethics, values, enduring prescriptive beliefs, are culture-

specific and important – issues that are important to strategic management.

6. Individual versus group decision-making :

There are individual differences among decision-makers owing to person-

related factors. In strategic decision-making these differences matters. An

organisation, as it owns special characteristics, operates in a unique environment.

To undertake strategic decision-making decision-makers understands an

organisation’s characteristics and its environment are in a vantage position. As

strategic decision makers, individuals such as chief executives or entrepreneurs

play the most vital role. Individuals come together in groups for the purpose of

NOTES



strategic decision-making as organizations become larger and more multifaceted,

and face an increasingly turbulent environment.

The formation of strategies is led by strategic decision-making. Let us now move

ahead to study the different viewpoints on strategy on the basis of an understanding

of the nature of strategic decision-making and the questions related to it.

2.8 Schools of Thought on Strategy Formation

In the midst of an evolutionary process is the subject of strategic

management. Several strands of thinking are developing in the course of its

development which is gradually leading to a meeting of views. This is an understated

sign of the growing of this subject. We now have a wealth of insight into the

complexities of strategic behavior – the observable characteristics of the manner

in which an organisation performs decision-making and planning functions with

regard to the issues that are of strategic importance to its survival, growth and

profitability .Managerial activity is the core of Strategic decision-making; strategic

behavior is its appearance, while the consequence is the formation of strategy.

Here, in this section, over a period of time we reside upon the compendium of

various viewpoints to strategic formation. In the field of strategy several persons,

among who are the notables, have contributed to the formulation of these

viewpoints. Into the development of the concept of strategy meaningful insight is

offered by the reader. From whose writings these perspectives have been adopted

here, indeed, Mintzberg and his associates, call them the ten (10) schools of thought

on strategy formation.

Under three groups the schools of thought can be classified as below:

The Prescriptive Schools

1. Where strategy formation is a process of conception school should be

designed

2. Where strategy formation is a formal process school should be planned

3. Where strategy formation is an analytical process school should be

positioned.

The Descriptive Schools

4. Where strategy formation is a visionary process, entrepreneurial school

5. Where strategy formation is a mental process, reasoning school

6. Where strategy formation is an emergent process, learning school

7. Where strategy formation is a negotiation process, power school

8. Where strategy formation is a collective process, cultural school

9. Where strategy formation is a reactive process, environmental school

Check Your Progress

1. What are the issues instrategic decision making?

2. Discuss the various issuesin strategic decisionmaking.


NOTES


The Integrative School

10. Where strategy formation is a process of transformation, configuration

school.

Description and explanation of each school of thought is given below

1. In the late 1950s and 60s design school, which perceives strategy formation

as a process of conception developed. Strategy is seen as something exclusive

which is in the form of a planned viewpoint under this school. The process of

strategy formation is guided by CEO as the main architect. The process of strategy

formation is simple and casual and based on conclusion and thoughtfulness.

2. In the 1960s the planning school, which perceives strategy formation as a

formal process developed. Strategy is seen as a plan divided into sub strategies

and programs under this school. Planners play the lead role in strategy formation.

The procedure of strategy formation is official and thoughtful.

3. In the 1970s and 80s, the positioning school, which perceives strategy

formation as an analytical process was developed. On the basis of an analysis of

the competition and the industry in which they operate, under this school, strategy

is seen as a set of planned generic positions chosen by a firm. Analysts play the

lead role in strategy formation. The process of strategy formation is logical,

methodical and measured.

4. In the 1950s, the entrepreneurial school, which perceives strategy formation

as a visionary process got developed. Strategy is seen as the result of a individual

and exclusive perspective often aimed at the creation of a niche under this school.

Entrepreneur/leader plays the lead role in strategy formation. The process of

strategy formation is impulsive, impracticable, and mostly thoughtful.

5. In 1940s and 50s, the cognitive school, which perceives strategy formation

as a mental process developed. Strategy is seen as a separate concept that is the

outcome of a mental perception under this school. Thinker philosopher plays the

lead role in strategy formation .The process of strategy formation is psychological

and developing.

6. From the 1950s through the 1990s, the learning school, which perceives

strategy formation as an emergent process has had a legacy. Strategy is seen as

a pattern that is exclusive under this school. The learner within the organization

whoever that might be plays the lead role. The process of strategy formation is

developing, casual and chaotic.

7. During the 1970s and 80s, the power school, which perceives strategy

formation as a negotiation process developed. Strategy is seen as a political and

obliging process or pattern under this school. Any person in power (at the micro

level) and the whole organization (at the macro level) plays the lead role in strategy

formation. The process of strategy formation is chaotic, consisting of fight, violence

and collaboration. At the micro level the process of strategy formation is developing

while at the macro level it is careful.

8. In the 1960s, the cultural school, which perceives strategy formation as a

NOTES



collective process developed. Strategy is seen as an exceptional and shared

viewpoint under this school. Collectivity displayed within the organization plays

the lead role in strategy formation. The process of strategy formation is conceptual,

forced, shared and thoughtful.

9. In the late 1990s and 1970s, the environmental school, which perceives

strategy formation as a reactive process, developed. Strategy is seen as something

general occupying a specific position or place in relation to the environment under

this school. Environment as an entity plays the lead role in strategy formation.

The process of strategy formation is inactive and compulsory, and hence,

developing.

10. During the 1960s and 70s the configuration school, which perceives strategy

formation as a transformation process, developed. Strategy is viewed in relative

to a precise background and therefore could be in a form that corresponds to any

process visualized under any of the other nine schools under this school. Any

actor identified in the other nine schools may play the lead role. The process of

strategy formation is integrative, discontinuous and consecutive. In addition, the

process could join the fundamentals pointed out under the other nine schools of

thought.

2.9 Summary

• Strategy is derived from the Greek word “strategia” which symbolizes the

ways to break or overthrow the rival. Therefore it is a term which is

fundamentally connected with military science.

• Before taking its shape in the present form of strategic management, business

policy is entrenched in the practice of management and has passed through

changed phases.

• SBUs are involved in a single line of business. Strategic business area

(SBA) is a complementary concept to the SBU, valid for the external

environment of a company.

• SBU level (or business) strategy is a comprehensive plan providing objectives

for SBUs, distribution of resources among useful areas, and harmonization

between them for making an optimal contribution to the achievement of

corporate level objectives.

• A functional strategy refers to a relatively restricted plan providing objectives

for a specific function, distribution of resources among different operations

within that functional area, and coordination between them for optimal

contribution to the achievement of SBU and corporate level objectives.

• In performing strategic tasks, decision making is, therefore, an extremely

difficult, complex and, at times, fascinating and mysterious process.

• To make a choice regarding the courses of action to be adopted is the basic

thrust of strategic decision-making, in the process of strategic management

Check Your Progress

State the Schools ofThought on StrategyFormation.


NOTES


2.10 Key Terms

1. Strategy: A method or plan chosen to bring about a desired future, such

as achievement of a goal or solution to a problem The Integrative School .

2. The Integrative School: Configuration school where strategy formation

is a process of transformation.

3. The Prescriptive Schools: Design school where strategy formation is a

process of conception

4. Strategic Decision-making: One of the essential parts of creating and

running a small business is creating a mission or vision for the business and

a set of goals the company aims to achieve.


1. Describe strategic decision-making in your own words.

2. List and explain any four of the various schools of thought on strategic

formation that you know.

3. Meaning of strategic management?

4. Describe various definitions of strategy?

5. Discuss the numerous problems in strategic decision making.


1. The action stage of strategic management is called strategy formulation.

A) True B) False

2. The process of conducting research and gathering and assimilating external

information is called:

A) Mission Development

B) Long range planning

C) Industry analysis

D) Lobbying

3. Which is not Schools of Thought on Strategy Formation?

A) The Integrative School

B) The Descriptive Schools

C) The Prescriptive Schools

D) The Analytical Schools

NOTES



4. Strategic decision-making is a complex process.

A) True

B) False

Ans. - (1 – B), (2 – C), (3 – D), (4 – A).


Dilworth, J. (1983). Production and Operations Management: Manufacturing and

Non Manufacturing, 2nd ed., New York: Random House, Inc.

Gupta, C.B. (1995). Corporate Planning and Policy, New Delhi: Sultan Chand and

Sons. Hill, C. W. L. and Jones, G. R. (2004). Strategic Management; an Integrated

Approach, Sixth Edition, Indian Adaptation, New Delhi: Biztantra, An Imprint of

Dreamtech Press.


Delhi: Tata McGraw-Hill Publishing Company Limited), ISBN: 0-07-044470-6,

pp. 1 – 23.

Pearce and David (1987). Strategic Planning and Policy, New York: Reinhold

Pearce II and Robinson Jr. (1998). Strategic Management: Strategy Formulation

and Implementation, Third Edition, Krishan Nagar, Delhi: All India Traveller

Booksellers.


NOTES


Unit 3 Strategic Management 1

Structure

3.0 Introduction

3.1 Objectives

3.2 Concept of Strategic Management

3.3 Definitions of Strategic Management

3.4 History of Strategic management


3.6 Different Levels of Strategy


3.7.1 Corporate Strategy

3.7.2 Business Strategy

3.7.3 Operational Strategy

3.7.4 Functional Strategy

3.7.5 Grand Strategy

3.8 Importance of Strategic Management

3.9 Summary

3.10 Key Terms



3.0 Introduction

In the earlier two units we focused on business policy, strategy and strategic

decision making. We also deliberated on issues in strategic decision making. We

discussed various schools of thought on strategy formation. Now in this unit we

proposed to study ‘Strategic Management’ which is wider and fresher concept of

managing organization strategically. The study will also take care of all the features

of managerial difficulties, the procedure of solving them and the many variables

that function in problem solving environment.

NOTES

Strategic Management 1


3.1 Objectives


• Describe Strategic Management and discuss the Process of Strategic

Management;

• List and explain the Phases in Strategic Management;

• Enumerate and deliberate the Elements in Strategic Management Process;

• State and discuss the Models in Strategic Management Process, and

• Explain the term “Strategists” and their Roles in Strategic Management

3.2 Concept of Strategic Management

The process of preparation of vision, defining objectives, strategy

construction, application and implementation of the strategy and occasionally

inspecting whether any improvements are needed to attain predefined goals is

defined as Strategic management.

Strategic management is defined by Morden as “Strategic management is

worried with the character and way of the enterprise as a whole. It is concerned

with basic choices about what the enterprise is now, and what it is to be in the

future. It regulates the purpose of the enterprise. It provides the outline for choices

about people, management, customers or clients, jeopardy, finance, capitals,

products, systems, skills, site, struggle, and time. It regulates what the enterprise

should be accomplished of attaining, and what it will not choose to do. It will

control whether and how the organization will add value, and what form that

added value should take.”

The purpose of strategic management is to keep the organisation completely

in tune with the existing environment thus we can see that strategic management

is a continuous and a monotonous process. A firm should be supple enough to

answer to the changes, or else it will lose its significance in the market since the

business environment keeps on changing quickly. Strategic management is cross-

functional in nature meaning that no sole section has control over the designing of

the strategy which is an important aspect. Any strategy is always an outcome of

the collaboration of all the departments and they have to work together to create

a plan and then to implement it. Working in a team allows the managers to look

outside their own sections and concentrate on a larger image of the where the

firm presently is and where does it expect to go in the future.

Strategic management is also a never ending process. At a specific period

of time it might so happen that some parts of the overall plan receives more focus

than the other parts, but bosses must always concentrate on some or the other

feature of strategic management.



NOTES

Check Your Progress

Define the term Strategicmanagement.

3.3 Definitions of Strategic Management

“A stream of decisions and actions which leads to the development of an

effective strategy or strategies to help achieve corporate objectives” is defined at

strategic management by Glueck (1984).The end result of strategic management

is a strategy or a set of strategies for the organization as visualized by Glueck

(cited in Kazmi, 2006).

Hofer and others (1984) consider strategic management as “the process

which deals with the fundamental organizational renewal and growth with the

expansion of strategies, structures, and schemes essential to achieve such renewal

and growth, and with the organizational systems needed to effectively manage

the strategy formulation and implementation processes”.

Firstly, within the overall strategic management process these authors include

two sub-processes., Structures, and systems are established to achieve the

objectives of organizational renewal and growth through the formulation and

application sub-processes strategies. Secondly, the managing of the organizational

systems which are required for strategic management is also considered as strategic

management process. For example, the administrative arrangements essential

for the formulation and implementation of strategies would also be included.

Strategic management is “a systematic method to a major and gradually important

responsibility of general management to position and relate the firm to its

environment in a way that will assure its continued success and make it secure

from surprises” is defined by Ansoff (1984). In this definition for the purpose of

achieving the objective of continual achievement and remaining safe from

environmental surprises through the adoption of a systematic approach to general

management the emphasis is on the environment-organization relationship.

Strategic management as “the formulation and implementation of plans

and carrying out of activities relating to the matters which are of vital, pervasive

or continuing importance to the total organization” is defined by Sharplin. This is

an all-encompassing view of strategic management and considers all plans and

activities which are important for an organisation.

Note that all the four definitions that we have quoted above are from the

early 1980s – the period when strategic management was being recognized as a

separate discipline which deals with the fundamental issues related to the existence,

growth and profitability of organisations.

The last definition, that we quote next, is of a current source and highlights

the basics in the process of strategic management. It states that the fulfillment of

stakeholders of the organization is the main end. Groups or individuals who can

meaningfully affect or be affected by an organization’s activities are known as

stakeholders. “The process through which organizations examine and study from

their internal and external environments, create strategic way, make strategies

that are planned to help attain established goals, and implement these strategies,

all in an effort to satisfy key organizational stakeholders” is defined by Harrison

and St. John (1998) as strategy management.

NOTES



We observe that defined strategic management is defined differently by different

authors. In the way it is defined and understood yet there are several common

elements. Either decision-making and planning, or a set of happenings connected

to the preparation and execution of strategies to achieve organizational objective

is considered as strategic management. The emphasis is on those general

management tasks which are vital to relate the organisation to the environment in

such a way that its objectives may be achieved in strategy management.

3.4 History of Strategic management

The progress of the discipline of strategic management can be traced down

into the following stages:

Industrial Revolution

In this period of time, dominance was seen in the command and control

model of business management. Most of the firms were either owned by an

individual or were family owned in this period of time. For the survival of the firm

and also perhaps the owner, it was considered vital to be in control of the strategy

of the firm. Being in command of decision making was considered to be critical

for complete control over the business as there was no differentiation between

the ownership and the management of the business. The business culture also

supported this kind of management structure in that period of time.

Where decisions and orders from the top were connected to the people at

the bottom without seeking any advice or views of the other members of the

organization this type of structure essentially followed a top down approach of

decision making. Completely eliminating competition and records was the focus

in this period; time clearly shows that laws and rules were devised to protect

specific firms and individuals.

Until the time monopolies and oligopolies were allowed to operate this type

of strategic model worked well. However, this model began to lose its relevance,

with the incorporation of anti-trust legislations and the consequent breaking down

of the monopolies and oligopolies.

World War II and the immediate post war period

Only command and control was the believable model in World War II due

to security considerations. In military strategic decision making, this was dissimilar

from the earlier war on account of the scale of operations involved in it which led

to important changes. Transportation of material involved in the war was a huge

logistical task which required military organizers to go beyond the traditional

approach of management since the war fumed not just between number of

countries but also across multiple continents. Acquiring deep understanding of the

competition new techniques of managing men and material along with had to be

developed.

Number of military strategists became a key part of business organizations

post war period. Techniques like PERT and CPM began to be applied in business,

Check Your Progress

1. What do you understand byStrategic Management?



NOTES

which was used in the war period to determine the timing and relationship of

future decisions. However, the discipline of strategic management saw little

academic growth with the emphasis on the ability of the management to influence

decision making in the long run.

The period of 1960s

When A.D.Chandler, Jr. famously came out with his concept that “structure

follows strategy” this period saw a renewed academic interest in the discipline of

strategic management. He was able to accomplish that managements of these

firms made number of strategic decisions first and then shaped a structure to

attain the objectives set out while framing the strategy through his study of number

of major U.S firms. Kenneth Andrews in 1965 came up with the idea that to

create a strong strategic management process, it is significant for any organisation

to assess its strengths and weaknesses in a follow up to Chandler’s work. This

would allow the firm to create its own distinct competencies according to Andrews.

The period of 1970s

This period was marked by several external events like the Arab oil crisis,

Vietnam War and competitive devaluation of exchange rates which caused huge

turmoil in the business world as well. This period of uncertainty made academicians

and practioners believe that the future success of strategic planning will depend

on its ability to be flexible and being able to respond quickly to important changes

in the planning assumptions. This period also saw some key fluctuations in the

organization of business along with these geo-political changes. This was a era of

geographical and product divergence. From being attentive only on limited products

and one country to being multi-dimensional dealing in multiple products and layouts

these changes necessitated a re-orientation in strategic management.

The period of 1980s

Due to breakdown of Soviet Union and growing domination of U.S. this

decade saw major transformation in the global world order. Economic order changed

as there was change in the political order as well with communist economies

breaking down and capitalism leading the order. There was also a change in the

economic focus to Japan, Asia and Latin America. The old days of command and

control both within the organisation as well as in the marketplace are gone, soon

organization began to realize that and time has come to listen to employees and

customers. Where in a complete management and production layer was eradicated

number of firms began a process of reducing. Which allowed firms to function

with reduced number of employees with identical productivity or sometimes

even more than what they were operate upon this was accompanied by major

enhancements in technology. All these factors led to substantial changes in how

businesses organised themselves.

The period of 1990s

In the strategic management discipline this period saw a whole crowd of

academic developments. On the concept of “core competence” Gary Hamel and

C.K Prahlad in the year 1990 published their ideas that in the improvement of

NOTES



competitive position of the firm wherein they argued that any organisation has

some basic essential capabilities and identification and strengthening of these

competencies aid. Strategy is a dynamic process where there is a need for constant

review and renewal was referred by Michael Porter in the year 1994. Markides

looked at the procedure of diversification to improve competitive position in 1995.


Varied in nature, depth and coverage, the definition of strategy, offer us a

hint of the difficulty involved in understanding this daunting, yet interesting and

challenging, concept. The different levels at which strategy can be expressed we

shall learn about in this section.

To find many companies, or a group of companies, working in not the same

business lines with regard to either products/services, markets or technology it is

very common. Here are a few

Illustrations (Kazmi, 2006) :

• The venerable multinational subsidiary, Hindustan Levers, is in numerous

businesses, for example animal feeds, beverages, oils and dairy fat, soaps

and detergents, and specialty chemicals.

• Operating in technology areas as diverse as brake and signal systems for

railways, two-wheelers, computer peripherals, and electrical appliances are

Sundaram Clayton and its subordinate companies – Harita Grammar,

Sundaram Fasteners, TVS Suzuki, TVS Electronics and TVS Whirlpool.

• A public sector company, Balmer Lawrie has a diversified collection of

businesses in the fields of cargo, chemicals, containerization, lubricants,

packaging, project consultancy, tea exports, and international business.

Such as those demonstrated above, for many companies, a single strategy

is not only insufficient but also unsuitable. At different levels the necessity is for

multiple strategies. Many companies are arranged on the basis of working divisions

or, simply, divisions In order to segregate different units or segments, each

performing a common set of activities. These divisions may also be identified as

profit centers or strategic business units (SBUs).

Check Your Progress

1. Discuss the history ofstrategic management.

Check Your Progress

Explain the Levels at whichStrategy Operates.



NOTES

3.6 Different Levels of Strategy

Source: Kazmi, C. (2006). Business Policy and Strategic Management, 15th

Edition, (New Delhi: Tata McGraw-Hill Publishing Company Limited), ISBN: 0-

07- 044470-6, pp. 1 – 23.

In a single line of business generally SBUs are involved. Strategic business

area (SBA) is a balancing concept to the SBU, valid for the external environment

of a company. It is defined as “a distinctive segment of the environment in which

the firms does (or may want to do) business”. Under a corporate umbrella number

of SBUs, relevant for different SBAs, form a cluster of units. While common

functions are assembled under the corporate level each one of the SBUs has its

own useful subdivisions, or a few major useful departments. These different levels

are demonstrated in the figure stated above. Two kinds of levels are depicted in

this figure. One relates to the organizational levels and the other to the strategic

levels. The corporate, SBU and functional levels are those of the organizational

levels. The strategic levels are those of the corporate, SBU and functional level

strategies.

Corporate level strategy is a principal plan of action casing the numerous

functions performed by diverse SBUs. The plan deals with, allocation of resources

and organization of the SBUs for ideal performance the objectives of the company.

Providing objectives for SBUs, allocation of resources among functional areas,

and organization between them for making an ideal influence to the achievement

of corporate level objectives, SBU level (or business) strategy is a complete plan.

A relatively restricted plan providing objectives for a specific function,

allocation of resources among different operations within that functional area,

and organization between them for optimal contribution to the achievement of

SBU and corporate level objectives is what functional strategy deals with.

Occasionally companies plan at some other levels too, apart from the three levels

at which strategic plans are made. The corporate level firms often set strategies

at a level higher. These are called the societal strategies. A societal strategy is a

widespread opinion of how the corporation relates itself to society in terms of a

NOTES



SBU

STRUCTURE STRATEGYCORPORATE-LEVEL

LEVELSCORPORATE

CorporateOffice

CorporateOffice

CorporateOffice

BUSINESS-LEVEL

FUNCTIONAL

Finance Marketing Options Personnel Information

FUNCTIONAL-LEVEL

CorporateOffice

specific need or a set of needs that it strives to fulfill based on a mission statement.

Based on the latest available technology, suppose a corporation decides to provide

alternative sources of energy for society at an optimum price. The corporation

has a number of alternatives with regard to the businesses it can take up on the

base of its societal strategy. It can either be a manufacturer of nuclear power

reactors, a maker of equipments used for tapping solar energy, or a builder of

windmills, among other alternatives. Being in one of these diverse fields would

still keep the corporation within the limits set by its societal strategy as the choice

is widespread. From the societal strategy, Corporate- and business-level strategies

derive their rationale.

At lower levels also some strategies are also required to be set. A company

could set its operations-level strategies one step down the functional level. Each

functional area could have a number of operational strategies. A highly specific

and narrowly defined area these would deal with. For example, at the marketing

level, a functional strategy could be split into sales, distribution, pricing, product

and advertising strategies. Activities in each of the operational areas of marketing,

whether sales or advertising, could be performed in such a way that they contribute

the functional strategy of marketing is interlinked with those of the finance,

production and personnel departments. Under the SBU-level all these functional

strategies work. Under the corporate-level strategy different SBU-level strategies

are put into act which, in turn, is derived from the societal-level strategy of a

corporation. Ideally, a perfect match is imagined among all strategies at different

levels so that a corporation, its constituent companies, their different SBUs, the

functions in each SBU, and various operational areas in every functional area are

synchronized. An organisation moves ahead towards its aims and task like a well-

oiled piece of machinery if perceived in this manner. Such a perfect, though

tremendously problematic – if not impossible of accomplish – is the determination

of strategic management.


According to Hill and Jones (2004) the various forms of strategies, counting

the strategies as identified and discussed below:

3.7.1 Corporate Strategy

To carry out standards and presentation purposes of a company these

strategies are plans formulated. The lesser the organizational level these plans

become more precise and detailed.

To reduce the goals defined by the organization with minimum risk corporate

strategy is the art of using organisational resources.

Corporate strategy also involves arranging the available resources for definite

missions and planning alternative strategies in anticipation of changing contingencies

and creating flexible conditions in structure and employee attitudes favourable

towards achieving the corporate goal.

Check Your Progress

Explain the various Levelsof Strategy.



NOTES

In the broad economy the corporate strategy defined a company’s general posture.

Within the domestic movie exhibition industry the business strategy drew the

competitive posture of its operations. More specific guidelines are needed for the

business’s operating components to increase the probability that these strategies

will be successful.

3.7.2 Business Strategy:

The combined strategies of a single business firm are referred as business

strategy. Business strategy is a strategy designed to position the strategic business

unit in a diversified corporation in other words. In order to achieve a sustainable

competitive advantage each firm formulates a business strategy.

3.7.3 Operational Strategy:

Peter Drucker (1954) in his theory of management by objectives popularized

and encouraged the concept of operational strategy. In the organization this is

needed for the everyday operational activities. It cannot create a budget but must

operate within the budget. A business level strategy informs operational level

strategies which, in turn, are informed by corporate level strategies.

3.7.4 Functional Strategy

For a key functional area within a company a functional strategy is the

short-term game plan. How key functional areas are to be managed in the near

future such strategies clarify grand strategy by providing more specific details.

Thus, giving specific, short-term guidance to operating managers functional

strategies clarify the business strategy.

In the key areas of marketing, finance, production, operations, research

and development, and personnel functional strategies must be developed. With

long-term objectives and grand strategy they must be dependable. By organizing

and activating specific subunits of the company (e.g., marketing, finance, production,

etc.) functional strategies help in implementation of grand strategy to pursue the

business strategy in daily activities.

3.7.5 Grand Strategy

Grand strategies are envisioned to provide basic direction for strategic actions

which are also known and called master business strategies. Directed toward

achieving long term business objectives they are seen as the basis of coordinated

and sustained - efforts. Grand strategies indicate how long-range objectives will

be achieved more often than not. Thus, a grand strategy can be defined as a

complete general method that guides major actions.

For achieving major long-term objectives such as solo business concentration,

market development, product growth, innovation, horizontal integration, vertical

integration, joint venture, concentric diversification, conglomerate diversification,

retrenchment/turnaround, divestiture and liquidation principal grand strategy could

NOTES



serve as the foundation. Several grand strategies are used by a company which is

involved with numerous industries, businesses, product lines, or customer groups.

To indicate some of their relative strengths and weaknesses such grand strategies

are discussed underneath with examples

3.8 Importance of Strategic Management

We have seen that strategic management is the means to achieve the

objectives of the organization. The process of strategic management involves

ascertaining the objectives, analyzing the environmental opportunities and threats,

appraising the strength and weaknesses of the firm to tap the opportunities or to

combat threats. It further involves formulating strategies to achieve objectives on

the basis of SWOT analysis and choosing the most appropriate strategy and

implementing it and if required, reformulating the objectives or the strategies. This

leads to several advantages which explain its importance.

The major advantages of strategic management are as follows:

• A higher profit is the major advantage of an effective strategic management

process. Majority of the studies conducted have concluded that strategic

management systems does have a positive influence on profitability of the

firm although some studies in the past have concluded that strategic

management does not always rise profits.

• The organization gets direction for working is ensured by strategic

management. Objectives, act as a scope for all the departments to work

towards achieving them which are a significant component of the strategic

management process.

• Keeping in mind the environment in which the organization is working

strategic management leads to the development of a proactive management

which is able to analyse and take suitable choices. It encourages a habit of

thinking about the future.

• Organization is able to classify and develop its essential capabilities and

build a competitive advantage that helps in survival and growth in a

competitive business environment is ensured by strategic management.

• In the decision making process strategic management helps in building a

participative management style by trying to include as many organizational

members as possible. In the organization thus any changes which are brought

about are a result of agreement and thus face little resistance.

• With the use of strategic management tools the capacity of the organisation

to prevent and deal with any problem progresses.

Check Your Progress

Explain the forms ofOrganizational Strategy.

Check Your Progress

State the Importance ofStrategic Management.



NOTES

3.9 Summary

• Strategic management can be defined as the procedure of preparation of

vision, defining objectives, strategy building, application and accomplishment

of the strategy and occasionally checking whether any alterations are needed

to achieve predefined goals.

• Strategic management is a constant and a monotonous process, the resolution

of which is to keep the organisation completely in tune with the current

environment.

• Any strategy is always an outcome of the teamwork of all the departments

and they have to work collected to make a plan and then to implement it.

• In a single line of business generally, SBUs are involved. Strategic business

area (SBA) is a balancing idea to the SBU, valid for the external environment

of a company.

• Corporate level strategy is a principal plan of action covering the numerous

purposes performed by different SBUs.

• For a specific function, functional strategy deals with a comparatively limited

plan providing objects, allocation of resources between different operations

within that functional area, and coordination between them for optimal

contribution to the achievement of SBU and corporate level objectives.

• To carry out values and performance objectives of a company corporate

strategies are plans.

• Aggregated strategies of a single business firm are referred as Business

strategy.

• Within a company a functional strategy is the short-term game plan for a

key functional area. By providing more specific details about how key

functional areas are to be managed in the near future such strategies clarify

grand strategy.

• To provide basic direction for strategic actions, Grand strategies which are

also recognized and named master business strategies are envisioned.

3.10 Key Terms

1. Corporate Strategy: defines the markets and the businesses in which an

organisation chooses to operate.

2. Business Strategy: is the means by which it sets out to achieve its desired

ends (objectives). It can simply be described as a long-

term business planning.

3. Operational Strategy: refers to the methods companies use to reach their

NOTES



objectives.

4. Functional Strategy: is customized to a specific industry and is used to

back up other corporate and business strategies.

5. Grand Strategy: Grand strategy is a phrase that evokes instant and easy

associations. The term immediately evokes a cast of historical actors and

events


1. Explain the connotation of strategic management.

2. Mention and discuss the various procedures of organizational strategy

3. Clarify the various Stages of Strategy with instances?

4. Explain the Levels at which Strategy Operates?

5. Discuss the past of strategic management.


1. Which is not the level of strategy?

A) Corporate level

B) Business level

C) Functional level

D) Operational level

2. Strategic management is a continuous and a repetitive process.

A) True

B) False

3. Strategic management is not the process of …

A) Formulation of vision

B) Defining objectives

C) Strategy building

D) Rechecking process

Ans. - (1 – D), (2 – A), (3 – D).



NOTES


Dilworth, J. (1983). Production and Operations Management: Manufacturing and

Non- Manufacturing, 2nd ed., New York: Random House, Inc.

Gupta, C.B. (1995). Corporate Planning and Policy, New Delhi: Sultan Chand

and Sons. Hill, C.

W. L. and Jones, G. R. (2004). Strategic Management; an Integrated Approach,

Sixth Edition,

Indian Adaptation, New Delhi: Biztantra, an Imprint of Dreamtech Press.


Delhi: Tata

McGraw-Hill Publishing Company Limited), ISBN: 0-07-044470-6, pp. 1 – 23.

NOTES



Unit 4 Strategic Management 2

Structure

4.0 Introduction

4.1 Objectives

4.2 Strategists and their Role in Strategic Management

4.2.1 Role of Board of Directors

4.2.2 Role of Chief Executive Officer (CEO)

4.2.3 Role of Entrepreneurs

4.2.4 Role of Senior Management

4.2.5 Role of SBU-Level Executives

4.2.6 Role of Corporate Planning Staff

4.2.7 Role of Consultants

4.2.8 Role of Middle-level Managers

4.2.9 Role of Executive Assistant

4.3 Strategic Management process

4.4 Strategic decision making

4.5 Social & Ethical Issues in Business

4.6 Types of business ethics issues

4.7 Ethical problems occur in business

4.8 Summary

4.9 Key Terms



4.0 Introduction

In unit 3 the definition and nature of strategy; issues in strategic management;

and the evolution of strategic managementhave been discussed.

Now in this unit further aspects in strategic management, which is a fresher

and wider concept ofmanaging organizations strategically,will be discussed. All

the features of managerialproblems, the procedures of solving them, and the many

variables that operate in a problemsolvingenvironmentwill also be discussed.

NOTES



4.1 Objectives


· Enlighten the term “Strategists” and their Roles in Strategic Management.

· List and explain the stages in Strategic Management

· Explain communal and moral issues in business

· Explain the idea of strategic decision making

4.2 Strategists and their Role in StrategicManagement

In the formulation, implementation, and evaluation of strategy, strategists

are individuals or groups who are chiefly involved. All managers are strategists in

a limited sense. Who are also involved in various aspects of strategic management

are persons outside the organization. They too are referred to as strategists. As

individuals or in groups we can identify nine strategists who, are worried with and

play a role in strategic management. We shall describe the roles of these strategists

in this section.

4.2.1 Role of Board of Directors

In the board of directors the ultimate legal authority of an organization vests.

The owners of the organization elect and appoint the directs on the board –

shareholders, controlling agencies, the government, financial institutions, the holding

company or the parent company. For the governance of the organization the board

is accountable to them. The members of the board are accountable for providing

guidance and establishing the directives according to which the managers of the

organization can operate, as directors.According to the memorandum of association

and articles of association of that company the board exercises authority. Legally,

they have to conform to the various provisions of the Companies and Allied Matters

Act 1990.The board has to act according to the policies, rules, procedures, and

conventions of the organization apart from the legal framework.

However, there is a wide change between the roles played by the board in

various types of organizations in practice. Due to the ownership patterns in public

and private sector companies these changes may arise.There might be differences

even within these sectors. Private sector companies vary from multinationals which

are family-owned. Further, family-owned concerns may differ from professionally-

managed companies.

The board is only required to direct by definition. But many operational

matters of vital significance may also be referred to the board like technology

partnerships, new product development, senior management appointments, and

so on.The board has certain formal and informal components of the directing

functions. Formally, in reviewing and screening executive decisions in the light of



NOTES

their environmental, business, and organizational implications the board is

involved.So that they are in concordance with the prevailing social, economic, and

political setting informally, the board seeks to direct the organization’sactivities.It

usually does not concern itself with operational decision-making because the board

is considered a vital link between the environment and the organization.

The role of the board is to guide the senior management in setting and

achieving objectives, reviewing and assessing organizational performance, and

employing senior executives in strategic management. In terms of setting the

strategic direction the function of the board is usually seen, which includes creating

objectives and strategy, and then monitoring and go over achieving. Regarding the

exact role that the board should play in managing the affairs of an organization

there is no transparency. In terms of the control exercised by the board and the

chief executive much depends on the relative strength. The association between

the board and the chief executive is cordial where there is a high level of clarity

regarding their respective roles, and the functioning of the board is smooth. Problems

do occur where such clarity is low.

In recent times the role of the board of directors has come under intense

inspection leading to the appearance of the issue of corporate governance, a system

by which corporate objects are directed and controlled. This means the board of

directors is supremacy of a company. It relates the conducting of the business

internally and externally and functioning of the board of a company.

Globally, adopted by publicly-held companies there has been much concern

about the biased and, sometimes total immoral practices. Specially the financial

matters, in the UK, the Cadbury Committee (1992) and the Hampel Committee

(1995) have gone into various aspects , related to the governance of the companies

by its board. A lot of attention have generated worldwide by the reports prepared

by these committees.

4.2.2 Role of Chief Executive Officer (CEO)

The CEO who is responsible for all features of strategic management, from,

the formulation to the evaluation of strategy is the most important strategist. In

business organizations the CEO is variously elected as the managing director,

executive director, president or general manager. The CEO plays a most important

role in strategic decision-making as the chief strategist. Many authors and

researchers have tried to describe his/her roles, functions, and responsibilities due

to the position accorded to the CEO. In determining whether an organization is

successful or not this is understandable since the CEO of an organization plays

the most crucial role. “Associated with almost every excellent company was a

strong leader (or two) who seemed to have had a lot to do with making the company

excellent in the first place” (Ansoff, 1965) is said by Peters and Waterman.

Among the roles played by different strategists the role of CEO in strategic

management is the most important. For the execution of those functions which

are of strategic importance to the organization He/she is the person who is chiefly

responsible. In other words, a CEO performs the strategic tasks – actions which

NOTES



are necessary to provide a direction to the organization so that it achieves its

purpose. In setting the mission of the organization, deciding the purposes and

goals, framing and applying the strategy and, in general, seeing to it that the

organization does not deviate from its predetermined path designed to move it

from the position it is in to where it wants to be He/she plays a pivotal role. For the

strategic management of the organization in short, a CEO is primarily responsible.

Defining roles theoretically many authors, researchers and practitioners

have attempted to study their roles owing to the primacy attached to the chief

executives. To study the roles of CEO the different approaches that have been

adopted may be broadly classified into two categories: the role-modeling approaches

and the other approaches.

4.2.3 Role of Entrepreneurs

“The entrepreneur always searches for change, responds to it and exploits

it as an opportunity” (Glueck, 1976) according to Drucker. The person, who starts

a new business, is a venture capitalist, has a high level of achievement & motivation,

and is naturally endowed with the qualities of enthusiasm, idealism, sense of purpose,

and independence of thought and action is usually considered as entrepreneur.

However, neither are these found uniformly, nor all of these qualities are present

in all entrepreneurs. In different measures at different stages of life an entrepreneur

may also demonstrate these qualities. Entrepreneurs are not to be found only in

small businesses or new ventures contrary to the generally accepted view of

entrepreneurship. In established and large businesses, in service institutions, and

also in the bureaucracy and government they are present Entrepreneurs play a

active role in strategic management by their very nature. They provide a sense of

direction to the organization, and set objectives and formulate strategies to achieve

them as inventors. They are major implementers and evaluators of strategies.

Usually they play all strategic roles simultaneously; the strategic management

process adopted by entrepreneurs is generally not based on a formal system. The

entrepreneurs generate a sense of purpose among their subordinates and strategic

decision-making is fast. The illustrations given below shall provide a glimpse of

the entrepreneurs’ role as strategists.

• K. C. Raghunathan, managing director of SIP Resins Limited, and K C Sukumar,

joint managing director are brothers who moved from their traditional family

businesses of construction, transport, money lending, and so on to the

manufacture of PVC resins. They set up a small-scale PVC resin compounding

unit after winding up their family business; quick to react to a business opportunity

(they got the idea while on a visit to an exhibition).These two entrepreneurs

finally succeeded in creating a 25 percent share in a market dominated by a

multinational, Hindustan Ciba-Giegy Limited by 1986 – 87 overcoming many

hurdles in production and marketing. They decided to go public in order to

finance their future expansion plans when the turnover crossed Rs 6 crores.

• K.V Kamath was the head of a small team engaged in the formulation and

implementation of a long-range strategic plan at the ICICI, K. V. Kamath,

CEO of ICICI, who had earlier worked as a leasing specialist with the Asian

Check Your Progress

1. Define the Role of Boardof Directors

2. Explain the role of boardof directors in strategicdecision making.



NOTES

Development Bank (ADB). Kamath played an active role by taking a number

of strategic initiatives and identifying new businesses in his position as the

Deputy General Manager for corporate planning and policy.

• As a part of the new directions provided by N. Vaghul, chairman and managing

director of ICICI, In the traditional field of banking where there is little scope

for innovation and entrepreneurship, S. Kumarasundaram, as the chairman of

the Bank of Madura Limited,, and after his death in 1986, the new chairman,

S.V. Shanmugavadivelu, provide an excellent example of the role of entrepreneur

as strategists. These persons headed a bank which had been set up in 1943 as

there were not entrepreneurs in the generally accepted sense. They were

responsible for providing a sense of direction, setting long-term strategies,

improving systems and customer service, consolidation of position, organizational

restructuring, and demarcating decision-making authority at various levels.

• A young entrepreneur, Kiran Mazumdar, set up an export-oriented unit

manufacturing a range of enzymes. Mazumdur entered the field of biotechnology

after experiencing problems in getting a job as an expert in brewing technology.

By her own research and development (R&D) department later, she set up

another plant for manufacturing two new enzymes. Mazumdar was keenly

involved in all parts of policy formulation and implementation for her companies

as managing director.

4.2.4 Role of Senior Management

The highest level of the managerial hierarchy consists of the senior (or top)

management. These managers are involved in various aspects of strategic

management starting from the chief executive to the level of functional or profit-

center heads. Usually on a rotational basis some of the members of the senior

management act as directors on the board. Set up by the board to look after

matters of strategic importance all of them serve on different top-level committees

and other policy issues such as: policy formulation, policy application, policy

calculation, and new product development. In the formulation, implementation,

and evaluation of strategy on the whole, senior managers perform a variety of

roles by assisting the board and the chief executive. In the form of different types

of committees, task forces, work groups, think tanks, management teams, and so

forth, to play a very important role in strategic management occasionally, they

come together. One may observe how senior managers act as strategists for the

examples given below.

• By dividing them into five groups dealing with products and markets,

environment, technology, resources, and manpower strategic planning at MRF

Limited used senior management expertise. To prepare position papers for

presentation to the board each group had a leader. The executive directors in

the company were actively involved in SWOT analysis. The implementation of

strategies and plans at Voltas was done through a corporate executive committee

controlled by the president and containing of senior vice-presidents and vice

presidents from different functional areas.

Check Your Progress

Define the Role ofEntrepreneurs.

NOTES



• The manner in which senior managers are involved in strategic management

varies in family-owned concerns. They constitute an informal family council,

where these managers are family members as in Lohia Machines of the

Singhania group. As in the case of Arvind Mills of the Lalbhai group the

professional bosses at senior levels may be involved in the implementation of

strategies. In all aspects of strategic management the Mahindra group has

provided a great deal of autonomy to their senior executives.

• Under the chairmanship of R.K. Talwar, in the early 1970s the State Bank of

India (SBI) realized the significance of decentralized planning. Strategic control

and generated broad policy guidelines was exercised by the bank’s central

office at Bombay. The general managers of planning department at 13 local

head offices had development managers in charge of different market

segments. Development officers were in charge of business planning for industry

and agriculture, lower down in the hierarchy, at the regional office levels.

4.2.5 Role of SBU-Level Executives

According to SBUs the rationale for organizing the structure is to be able to

manage a diversified company as a portfolio of businesses, each business having

a clearly defined product-market segment and a unique strategy.In strategic

management the role that the SBU-level executives play is, therefore, important.

For the purpose of strategic management SBU-level executives, also known as

either profit-centre heads or divisional heads are considered the chief executives

of a defined business unit. In practice, however, the concept of an SBU is adapted

to suit traditions, shared facilities and distribution channels, and manpower

constraints. While maintaining coordination with the other SBUs in the organization,

an SBU-level executive wields considerable authority within the SBU.

4.2.6 Role of Corporate Planning Staff

The many and diverse principal responsibilities of corporate planners (Hessey,

1974) has been enlisted by David Hussey. Essentially, a supporting role is played

by the corporate-planning staff plays in strategic management. In all aspects it

assists the management of strategy preparation, application and assessment.

Besides this, they are responsible for the preparation and communication of strategic

plans, and for conducting special studies and research pertaining to strategic

management. The corporate planning department is not responsible for strategic

management it is important to note that and usually does not initiate the process on

its own. It achieves its functions of assisting the introduction, working, and

maintenance of the strategic management system by providing administrative

support.

4.2.7 Role of Consultants

Help of external consultants in strategic management is taken by many

organizations which do not have a corporate planning department due to reasons

like small size, infrequent requirements, financial constraints, and so on. Specializing

Check Your Progress

1. Define the Role of SeniorManagement.



NOTES

in strategic management activities these consultants may be individuals,

academicians or consultancy companies.

4.2.8 Role of Middle-level Managers

The major functions of middle-level managers relate to operational matters

and, therefore, they rarely play an active role in strategic management. They may,

at best, be involved as ‘sounding boards’ for departmental plans, as implementers

of the decisions taken above, followers of policy guidelines, and passive receivers

of communication about functional strategic plans. The middle-level managers

are hardly employed for any other purpose in strategic management as they are

basically involved in the implementation of functional strategies. This does not,

however, prevent the possibility of using their expertise. Managers and assistant

managers can also contribute to the generation of ideas, the growth of strategic

alternatives, the modification of business, functional and development plans, target-

setting at departmental levels, and for various other purposes many of the examples

that we have provided in the previous sub-sections show that. The significance of

the middle management squads lies in the element that they form the catchment

areas for developing future strategists for the organization.

4.2.9 Role of Executive Assistant

In the managerial hierarchy the emergence of executive assistants is a

comparatively fresh phenomenon. A person who assists the chief executive in the

performance of his duties in various ways is an executive assistant. These could

be: in data collection and analysis to assist the chief executive, where decisions

are required suggesting alternatives, preparing briefs of various proposals, projects

and reports, helping in public relations and liaison functions, with the internal staff

and outsiders coordinating activities, and for the information coming from different

sources acting as a filter. This function is not assigned to the executive assistants

in companies where a corporate planning department exists. Since chief executive

is assist the executive assistants they help to enhance their time utilization. The

necessities for an executive assistant include a generalist’s orientation, a few

years’ line experience, and exposure to different functional areas, outstanding

written and oral communication ability, and a pleasing personality in terms of skills

and attitudes. The position of an executive assistant offers a unique advantage to

young managers as nowhere else can he or she gain a comprehensive view of the

organization, which can help in career planning and development, and rapid

advancement to the senior levels of management.

Check Your Progress

1. Define the Role ofCorporate Planning Staff.

2. Explain the role ofcorporate planning staff instrategic decision making.

Check Your Progress

1. Define the Role ofExecutive Assistant.

NOTES



4.3 Strategic Management Process

The process of strategic management can be divided into the following

stages (figure 1):

1. Defining business vision and mission

2. Setting of objectives

3. Environmental study

4. Describing strategy

5. Application of Strategy

6. Assessment of performance

Figure 1: Strategic Management Process

Defining business vision and mission : In any strategic management process

the first step is clear identification of the organization’s mission and vision. As it

drives the culture and value systems of any organization this step is very important.

As they are the motivating force behind any strategic choice that the company

makes, it is important to clearly lay down these two before any work on strategy

formulation is done.

Setting of objectives : Defining the outcomes that the organization wants to

achieve objectives are the performance targets of the organization. To achieve

their mission and vision they help the firm. Through the setting up of measurable



NOTES

Definingbusiness vision

and mission

Setting ofobjectives

Assessment ofperformance

Describingstrategy

Environmentalstudy

Application ofStrategy

targets against which it can evaluate the efficiency of its performance they provide

direction to the organization. Without objectives any strategy is not going to yield

any benefits for the organization as it will become unbearable to assess whether

the direction in which it is moving is suitable for the firm or not.

Environmental study : Factors which are beyond the control of individual firms

are included in business environment. Perusing the business environment to identify

and study the effect of environmental factors on the operations of the firm is

comprised in environmental study. Either these factors may be a source of

opportunities for the business organization or a cause of danger for the firm. The

business organization can take benefit of occasions and deal successfully with

pressures thus strategy making process needs to incorporate these factors.

Describing Strategy : On the basis of visualization, objectives, environmental

and structural analysis strategy of the firm is described. To create wealth for its

shareholders and stakeholders the strategy of the firm should concentrate on building

and supporting competitive advantage.

Application of Strategy : Application of strategy is the fifth step in the strategic

management process. Unless it is executed effectively a strategy, howsoever

well defined and crafted, is of no use. It is vital that the organization personnel

involved in putting strategy into action are well aware of the organization’s vision

and mission, culture of the organization, its strengths and weaknesses and the

external environment for effective application of the strategy. It is also important

for the top management to see that the people who have been assigned the task of

implementing strategy are trained and capable in both process as well as people

management.

Assessment of Performance : To ensure that it is moving forward in the right

direction, this step requires that there is a constant monitoring of application of the

strategy. A timely interference will help in readjusting the strategy to meet

organization’s goals and objectives in case it is found that the strategic direction is

not in line with what was visualized.

4.4 Strategic Decision Making

There is constant decision making which is going on at one level or another

in any organization. For the future of the company these decisions may be of

steady nature related to day to day functioning of the organization or one that may

have long term suggestions. Strategic decision is the decisions dealing with long

term growth and existence of the firm. Some of the important features of strategic

decisions are as follows:

• As they concern the whole of the firm they are usually multi-departmental in

nature. Through these decisions different sections of the organization might be

affected differently, but there is a fixed influence on each of the departments.

Therefore, executing these decisions involve close partnership among the several

departments if the strategy has to succeed. To ensure that all the sections

Check Your Progress

1. Explain the StrategicManagement process.

NOTES



coordinate with each other a mechanism has to be designed.

• On the long term growth & prosperity of the firm by their very nature, strategic

decisions have an influence on. Therefore, their consequences should also be

estimated on long term basis and any negative influence on the company in the

short term should not be considered as a reason to justify roll back of the

decision that has been taken. However, what is essential is an analysis &

review of the influence on the firm so that in case it is a major issue, timely

action can be taken.

• Involvement of top management in these decisions is required. There is lot of

risk involved this is because of the fact that these decisions need the support of

the whole organization. These two concerns can be dealt with efficiently its

only when the top management gets involved in the decision making process.

• Putting in large amount of financial and human resources is required by strategic

decision making. As a lot of such investment done in implementing the decision

cannot be recovered therefore these decisions have to be taken carefully.

• To meet the challenges of the external environment this involves a close

examination of the external environment and orientation of the internal

environment.

4.5 Social & Ethical Issues in Business

Business Ethics means application of general principals of ethical behavior

to business. From the similar values that everybody follows any organization, if it

wants to be considered as ethical, need to draw its conduct of proper behavior

and should not make an attempt to create its own explanation of right and wrong.

Whether in business or otherwise the same set of ethical principles applies to

anybody. Ethical and socially responsible behavior:

• From business organizations is expected by the general public and law makers.

Those found disrespecting the principles will be sooner or later identified and

punished.

• From any harm protects the general public, society and all the stakeholders.

• It also protects the organization itself from unethical behavior by its employees

and competitors but is also beneficial for the society as a whole. In the

organization saves employees from any unethical practice being forced to carry

out.

• In case of clash between organizational and personal values it helps employees

avoid the dilemma of which set of beliefs to follow.

Check Your Progress

1. Explain the Strategicdecision making.

Check Your Progress

1. State the Social &EthicalIssues in Business.



NOTES

4.6 Types of Business Ethics Issues

Three main types of business ethics issue have been identified by Frederick,

Post and Davis. These are as follows:

Face to face ethics – In an organization these arise from the everyday interactions

and connections that take place. When their personal morals differ from the

demands of the organizational ethics employees face ethical dilemmas. For

example- bribery to secure a business contract.

Corporate policy ethics – These ethics have an impact on the operations of the

whole company. These are usually motivated by the top management of the

company.

Functional area ethics – Each functional area in the organization face their

own ethical issues. For example:

• Accounting – accounts not prepared as per accounting standards; incorrect

reporting of accounting numbers.

• Sales and marketing – discriminating pricing tactics; false or false claims

• Purchasing and supply – unfair pressure on suppliers to attain low prices;

allotting purchase orders only to those who pay bribe

4.7 Ethical Problems Occur in Business

Ethical problems occur for a variety of reasons. These include:

Personal gain –Before anybody else individual places his greed including other

people or the organization. He is not concerned about the harm that his actions

might cause.

Pressure on profits due to competition - In order to be able to protect their

margins, there might be a tendency to engage in unethical practices when

companies face tough competition. Also, firms which have a monomaniacal focus

on profits at the cost of everything else may lead to creation of a culture within

the organization in which even unethical activities are acceptable provided they

lead to higher profits this can also happen.

Clash between business goals and personal values – When the goals pursued

by the organization clash with the personal values of the employees various ethical

conflicts arise in an organization. When the employee is forced to follows orders

which are against his own value systems and may either harm him or others an

ethical dilemma arises. With the risk that if he refuses, he may even lose his job he

thus gets trapped between following the orders and refusing.

Cross-cultural differences – There are chances of ethical problems arising

when businesses operate in multiple geographies, due to change in ethical practices

and values between the home and the host country.

Check Your Progress

1. Explain the types ofbusiness ethics issues.

Check Your Progress

1. Why ethical problemsoccur in business?

NOTES



4.8 Summary

• Primarily strategists – individuals or groups are involved in the formulation,

implementation, and evaluation of strategy.

• The procedure of strategic management can be separated into the following

stages: 1. Defining business vision and mission 2. Setting of purposes 3.

Environmental analysis 4. Defining strategy 5. Application of Strategy 6.

Assessment of performance

• Strategic decision making is usually multi-departmental in nature as they

concern the whole of the firm.

• Strategic decisions have an influence on the long term growth &wealth of

the firm. Therefore, their results should also be assessed on long term basis.

• Business Ethics means application of general principles of ethical behavior

to business.

4.9 Key Terms

1. Strategic Management process: is defined as the way an

organization defines its strategy.

2. Business ethics: is a form of applied ethics or professional ethics that

examines ethical principles and moral or ethical problems that arise in a

business environment.

3. Environmental analysis: is a strategic tool. It is a process to identify all

the external and internal elements, which can affect the organization’s

performance. Role of Chief Executive Officer (CEO).

4. Role of Chief Executive Officer (CEO): The CEO’s leadership role also

entails being ultimately responsible for all day-to-day management decisions

and for implementing the Company’s long and short term plans.

5. Role of Consultants: The consultant’s primary role is to assist your

organization with certain areas of your inclusiveness work.


1. Why ethical problems occur in business give some explanations?

2. Define some features of strategic decision making.

3. Why moral problems occur in business?

4. Explain the types of business ethics issues?

5. In strategic decision making explain the role of board of directors.



NOTES

6. State the Role of Chief Executive Officer (CEO)


1. All managers are strategists.

A) True

B) False

2. The strategic management process is

A) a set of activities that will assure a temporary advantage and average

returns for the firm.

B) A decision-making activity concerned with a firm’s internal resources,

capabilities, and competencies, independent of the conditions in its external

environment.

C) A process directed by top-management with input from other

stakeholders that seeks to achieve above-average returns for investors

through effective use of the organization’s resources.

D) The full set of commitments, decisions, and actions required for the

firm to achieve above-average returns and strategic competitiveness.

3. A firm’s mission

A) Is a statement of a firm’s business in which it intends to compete and

the customers who it intends to serve.

B) Is an internally-focused affirmation of the organization’s financial, social,

and ethical goals?

C) Is mainly intended to emotionally inspire employees and other

stakeholders.

D) Is developed by a firm before the firm develops its vision.

4. Internal analysis enables a firm to determine what the firm

A) can do.

B) Should do.

C) Will do.

D) Might do.

5. An external analysis enables a firm to determine what the firm

A) can do.

B) Should do.

C) Will do.

NOTES



D) Might do.

6. Strategic mission

A) is a statement of a firm’s unique purpose and scope of operations.

B) Is an internally-focused affirmation of the organization’s societal and

ethical goals.

C) Does not limit the firm by specifying the industry in which the firm

intends to compete.

D) Is developed by a firm before the firm develops its strategic intent.

7. Who elect and appoints the Board of Directors.

A) Suppliers

B) Owners of the organisation

C) Customers

D) Government

8. Who is more responsible for all aspects of strategic management?

A)Strategist

B) CEO

C) President of organization

D) Secretary of organization

Ans. - (1 – A), (2 – D), (3 – A), (4 – A), (5 – D), (6 – A), (7 – B), (8 – B).


Pearce and David (1987). Strategic Planning and Policy, New York: Reinhold

Pearce II and Robinson Jr. (1998). Strategic Management: Strategy Formulation

and Implementation, Third Edition, Krishan Nagar, Delhi: All India Traveller

Booksellers.

Whittington, R. (1993). What is Strategy and does it matter? (New York: Rout

ledge).



NOTES

Unit 5 Strategy Formulation

Structure

5.0 Introduction

5.1 Objectives

5.2 Formulating Strategy

5.2.1 Steps of Strategy formulation

5.3 Formulating objectives

5.3.1 Understanding Vision

5.3.2 Defining Vision

5.3.3 Benefits of Having a Vision

5.3.4 The Process of Envisioning

5.4 Mission

5.4.1 Understanding Mission

5.4.2 Defining Mission

5.4.3 How is Mission Statements Formulated?

5.4.4 Characteristics of a Mission Statement

5.5 Goals and Objectives

5.5.1 Roles of Objectives

5.5.2 Characteristics of Objectives

5.5.3 Issues in Objective-Setting

5.5.4 What Objectives are Set?

5.5.5 How is Objectives Formulated?

5.6 Summary

5.7 Key Terms



NOTES

Strategic Formulation


5.0 Introduction

The strategic management has three main phases –

1. Strategy Formulation

2. Strategy implementation

3. Strategy Evaluation & Control.

In this unit we shall focus on strategy formulation whether small or big

every organization has certain objectives to be achieved. For achieving those

objectives each of them has to prepare a wide plan. Strategy is a plan of action

prepared to achieve the organizational goals. It is a wide long term plan formulated

to direct the business activities. Defining the strategy in very clear and simple

words means strategy formulation. So also so, stating the summary and the features

of a strategy means strategy formulation. It simply means preparing the action

plan.

Strategy is a pattern or plan that participates an organization’s values, major

goals, policies and action sequences into a unified whole. Awell expressed strategy

helps to arrange and allocate an organization’s resources based on its relative

internal competencies and shortcomings, anticipated changes in the environment,

and depending moves by intelligent rivals.

5.1 Objectives


• Define and signify the concept of vision and mission;

• Assess quality of vision and mission statements

• Define the role and features of objectives;

• Describe the procedure of objective setting;

• Differentiate between well-formulated and badly-formulated objectives.

5.2 Formulating Strategy

To do action is both an art that individual managers must develop and a

process that a well-managed firm must implement.

5.2.1 Steps of Strategy formulation

The process of strategy formulation broadly involves the following steps:

1. Developing Vision, Mission and Establishing objectives

The first step of strategy formulation is having a clear vision, mission and goals.

Check Your Progress

Define the term Strategyformulation.



NOTES

Unless, the intent is clear, it is difficult to progress with generation of options. The

objectives of the firm are the main elements of corporate strategy. Objectives of

the firm act as a foundation or base on which the strategy is based.Hence objectives

should properly be defined.But objectives should be genuine in nature and attainable.

E.g. firm has to pursue a growth strategy if the firm’s aim is to expand the business.

2. Analyzing the Environment

In this stage from different angles general environment is analyzed.This

involves assessment of internal and external business environment.To identify the

major strengths and weaknesses of their competitors this will also help the firm to

appraise its strengths and weaknesses.

3. Fixing quantitative targets

For some of its objectives in this state a firm may set quantitative target. So

as to assess the contribution that may be made by different product areas or

operating divisions at this stage, the purpose is not to set targets for comparison

with future outcomes, but to set global targets for the firm as a whole.

4. Relating targets to divisional plans

Within the corporation this step of strategy formulation identifies the

contribution that can be made by each division or product group and for this

purpose; a provisional strategic plan must be developed for each sub-unit. These

plans should be based upon the analysis of macro-economic trends and the

competitive environment specific to the sub-unit. Better chance of their attainment

is ensured when corporate targets are related to divisional plans.

5. Gap Analysis

Gap between planned or desired performance is the identification and

analysis of a gap Analysis. Its earlier performance, its current condition and the

anticipated future conditions is what must be critically analyzed by the organization.

Such an analysis helps to reveal the extent of gap that exists between the present

reality and future aspirations of the organizations.If the present trends and activities

continue the organization also tries to estimate its likely future state.

5.3 Vision

They would just be castles in the air if aspirations, expressed as strategic

intent, didn’t lead to an end. That end is the vision of an organisation or an individual.

It is what the firm or person would ultimately like to become. For instance, some

of you would like to become general managers managing an SBU in a large,

expanded Multinational Corporation say in 10 years, or may be even earlier. Or

some others among you would like to trust that you will be an entrepreneur in 10

– 15 years keeping your own company trading with IT services and hiring cutting-

edge technology to serve a global clientele. A firm thinks like that to Witness what

Tata Steel says about its vision: “Tata Steel enters the new millennium with the

confidence of learning, knowledge-based and happy organization. By delighting

NOTES



Check Your Progress

1. Describe the Steps ofStrategy formulation.

2. What do you mean byStrategy formulation?

our customers with our service and our products we will establish ourselves as a

supplier of choice. We will become the most cost competitive steel plant in the

upcoming decade and so serve the community and the nation”.The position that a

firm would like to accomplish in the distant future is therefore a vision. The vision

encapsulates the basic strategic intent seen from this perspective.

5.3.1 Understanding Vision

A vision is more fantasized of than it is spoken. It is difficult to say whatvision

an organization has because of this reason.Sometimes who usually thinks of the

vision is not even evident to the entrepreneur.By its nature, it could be as hazy and

unclear as a dream that one is not able to recall perfectly in broad daylight

experienced the previous night. Yet it is a powerful motivator to action. And a

vision could often be derived is from the actions (Azhar, 2002). Henry Ford wished

to democratize the automobile when he visualized that an affordablevehicle could

be available for the masses. To make people happy is probably what Walt Disney

wanted.

5.3.2 Defining Vision

In several different ways vision has been defined. Kottre (1990) defines it

as “in the future description of something (an organization, corporate culture, a

business, a technology, an activity)”. El-Namaki (1992) considers it as a “for the

actualization of this perception mental awareness of the kind of environment an

individual, or an organization, aims to create within a broad time horizon and the

underlying conditions”. It is viewed by Miller and Dess (1966) as the “category of

intentions that are wide-ranging, comprehensive, and forward thinking”. The

common strand of thought evident in these definitions and several others available

in strategic management literature relates to ‘vision’ being future aspirations that

lead to an inspiration to be the best in one’s field of activity.

5.3.3 Benefits of Having a Vision

The several benefits growing to an organization having avision are pointed

out by Parikh and Neubauer (1993). Here is what they say: Good visions

• are encouraging and exhilarating;

• represent a break, a step function and a jump ahead so that the company

knowswhat it is to be;

• help in the formation of a common identity and a shared sense of purpose;

• Make sense in the marketplace as they are practical; are competitive, innovative

and exclusive.

• foster risk-taking and experimentation;

• foster long-term thinking;

• Characterize honesty, they are truly honest and can be used for the benefit of

people.



NOTES

5.3.4 The Process of Envisioning

As we see from what Collins and Porras (1996) have to say about it the

process of envisioning is a difficult one. A well-conceived vision consists of two

major components according to them: core ideology and envisioned future. The

core ideology describes the continuing character of an organization that remains

fixed as it passes through the changes of courses, such as, technology, competition,

or management crazes. The core ideology rests on the core values (the important

and lasting tenets of an organisation) and core determinations (an organization’s

reason for being). The envisioned future too consists of two components: a vivid

description of what it will be like to achieve that goal and a 10 – 30 years audacious

goal.

5.4 Mission

Mission is what an organization is and why it exists while the essence of

vision is a forward-looking view of what an organization wishes to become. Though

simply worded several years ago, Peter F. Drucker raised important philosophical

questions, are in reality the most important questions that any organization can put

to itself. The responses are based on the study of the underlying wants of the

society that any organisation helps to fulfill. The business of the organization then

is the satisfaction of that need.

5.4.1 Understanding Mission

To satisfying a particular need of the society organizations relate their

existence. In terms of their mission they do this. Mission is a statement which

defines the role that an organization playsin a society. It refers to the particular

needs of that society, for example, its information needs. Through different means

a book publisher and a magazine editor are both involved in filling the information

needs of society.Magazine editor may try to present news analysis in a stable and

unbiased manner while a book publisher may intent at producing outstanding reading

material. Both have different objectives but an a like mission.

5.4.2 Defining Mission

As the scope of the business activities a firm pursues was earlier considered

a mission. The definition of mission has progressively extended to signify a concept

that exemplifies the purpose behind the existence of an organization. The “important

purpose of the organization, concerning particularly why it is in existence, the

nature of the business it is in, and the customers it seeks to serve and satisfy” is

what is defined as mission by Thompson (1997).Mission is the “purpose or reason

for the organization’s existence” is said by Hunger and Wheelen (1999).There is

not much difference of opinion about the definition of mission. Yet, with mission

and objectives one finds instances of organizations confusing mission. In strategic

management as a part of strategic intent, literature, mission occupies a definite

place.

Check Your Progress

1. What do you understand bythe term vision?

NOTES



5.4.3 How is Mission Statement Formulated ?

In the light of their individual, national or global priorities most

organizationsoriginate their mission statements from a particular set to tasks they

are calledupon to perform. Severalorganizations, set up, owe their existence to

their prime movers.Whetherderived from set priorities or not, Mission statements

could be formulated either formally or informally. Usually, in strategic and

operational activities entrepreneurs lay down the corporate philosophy which an

organization follows. Due to the entrepreneur’s actions such a philosophy may

not be consciously and formally stated but may gradually evolve. Generally, an

entrepreneur has an observation of the type of organisation that he wants his

company to be. In the early stages of an organization’s growth mission statements

could be formulated on the basis of the vision that an entrepreneur decides.

To the development of a mission statement major strategists could also

contribute. By lending a hand in the creation of a particular corporate identity or

formally through discussions and the writing down of a mission statement they do

this informally. Both formally and informally chief executives pan a major role in

formulating a mission statement. On a mission statement they may set up executive

committees to formally discuss and agree or for strategic management enunciate

a corporate philosophy to be followed. To recommend a suitable mission statement

consultants may also be called upon to make an in-depth analysis of the organization.

In deciding his company’s mission and purpose B.N.Sinha, (managing director of

the Scientific Instrument Company Limited) who took the help of a management

consultant, describes the process of formulating a mission: “….as a starting point,

we (i.e., the company managers, consultant and the chief executive) spent quite a

bit of time on identifying our ‘mission’ of business… After a lot of discussion, we

identified our mission as follows: to be a vibrant organization set on contributing to

the scientific and technical progress of the country; in terms of service and work

reward keeping its customers and employees satisfied; giving satisfactory return

on investment to the shareholders”.

Once formulated, a mission statement, should serve an organization for

many years. But as the organization grows and increases new products, markets

and technologies to its activities a mission may become unclear. Then the mission

has to be reassessed and reexamined to either change or discard it, and evolve a

fresh statement of organizational mission.

5.4.4 Characteristics of a Mission Statement

By performing some functions which are valued by society organizations

legitimize themselves. The basic reason for the existence of that organization is

defined by mission statement. Such a statement reflects the corporate philosophy,

individuality, character, and image of an organisation. It may be defined

unambiguously or could be inferred from the management’s actions, choices, or

the chief executive’s press statements. When unambiguously defined it provides

enlightenment to the insiders and outsiders on what the organisation stands for. In

order to be effective, a mission statement should possess the following seven

characteristics:



NOTES

1. It should be feasible. It should not be an impossible statement but a mission

should always aim high. It should be genuine and attainable – its supporters must

find it to be trust worthy. But feasibility depends on the resources available to

work towards a mission.

2. It should be precise. A mission statement should neither be too broad to make

it meaningless nor should not be so narrow as to restrict the organization’s activities.

For example, ‘mobility business’ is too broad a term as it does not define the

reasonable contour within which the organization could operate while

‘Manufacturing bicycles’ is a narrow mission statement since it severely limits the

organization’s activities.

3. It should be clear. To lead to action a mission should be clear enough. It should

not be a high-sounding set of platitudes meant for publicity purposes. For

emphasizing their identity and character many organizations do adopt such

statements. A mission statement should be a clear enough to lead to action, to be

useful.

4. It should be motivating. They should feel it worthwhile working for such an

organization or being its customers a mission statement should be motivating for

members of the organization and of society. To serve its customers well and to

attract clients a bank which lays great emphasis on customer service is likely to

motivate its employees. For banking institution, customer service, therefore, is an

important purpose.

5. It should be distinctive. A mission statement which is indiscriminate is likely to

have little impact. There would not be much of a difference among them if all

textile manufacturers defined their mission in a similar fashion. It will generate an

important difference in the public mind if one defines it as providing textiles that

would provide ‘value for money, for years’.

6. It should indicate major components of strategy. A mission statement, along

with the organizational purpose should indicate the major components of the strategy

to be adopted. In the future the mission statement should indicate a amalgamation

of stability, GROWTH and diversification strategies.

7. It should indicate how objectives are to be accomplished. A mission

statement should also provide clues regarding the manner in which the objectives

are to be accomplished besides indicating the broad strategies to be adopted.

Within a given time period the mission statement should deal with the objectives to

be achieved.

In day-to-day decision-making, managers do not actively think about their

organization’s mission for society as they are not concerned about survival. Thus,

a mission statement becomes an ideology that can be used occasionally for

legitimization. But, in each phase of the strategic management process for strategic

decision-making it is important to consider the mission. A helpful approach to

defining as well as refining a mission statement is to define the business itself.

NOTES



5.5 Goals and Objectives

In a future period of time goals signify what an organisation hopes to

accomplish. They signify a future state or a result of the determination put in now.

The goals that a firm sets for itself are addressed by a broad category of financial

and non-financial issues. Objectives are the ends that state specifically how the

goals shall be achieved. They are real and precise in contrast to goals which are

generalized. Objectives make the goals operational in this manner. Objectives

tend to be mainly quantitative in specification while goals may be qualitative. In

this way they are quantifiable and similar.

In strategic management literature, there has been misperception with

respect to the usage of these terms: goals and objectives. The meaning assigned

to these terms is sometimes in contrast to what we have adopted here. Also, often

they are used interchangeably. The broader sense of the term objectives is indicated

by goals. To denote both however, we would wish to use only the term objective.

Whether quantified and specifically stated or not it must be remembered that

objectives are the manifestations of goals. Besides when one refers to a future

state or the outcome of an effort, it is more suitable to use one term rather than

both every time. Any organization shall always have a potential set of goals. From

among these goals it has to exercise a choice. In terms of operational and

measurable objectives this choice must be further expanded and expressed.

5.5.1 Role of Objectives

Objectives play an important role in strategic management. We could identify

the various facets

Of such a role as shown below:

· Objectives define the organization’s relationship with its environment.

What it has to achieve for its employees, customers and society at large an

organization obligates itself to, by stating its objectives.

· Objectives help an organisation to pursue its vision and mission.

Objectives help an organization in following its vision and mission by defining the

long-term position that an organization wishes to attain and the short-term targets

to be achieved.

· Objectives provide the basis for strategic decision-making. Objectives

lead to desirable standards of behavior and, in this manner, help to coordinate

strategic decision making by directing the attention of strategists to those areas

where strategic decisions need to be taken.

· Objectives provide the standard for performance appraisal. Objectives

lay down the standards against which organizational as well as well individual

performance could be judged by stating the targets to be achieved in a given time

period and the measures to be adopted to achieve them in the absence of objectives,

an organisation would have no clear and definite basis for evaluating its

performance.

Check Your Progress

1. Describe ‘mission’ in yourown words.

2. Mention the characteristicsof a good missionstatement.



NOTES

Managers who set objectives for themselves and their organizations are most

likely to achieve them than those who do not specify their performance targets. In

strategic management the importance of the role that objectives play could be

appropriately summed up in the truism: if one does not know where one has to go,

any path will take one there.

5.5.2 Characteristics of Objectives

In order to be effective objectives, as measures of organizational behavior

and performance, should possess certain desirable characteristics. Given below

are seven such features.

1. Objectives should be understandable. Since objectives play a significant

role in strategic management and are put to use in a variety of ways, they

should be understandable to those who have to attain them. A chief executive

who says that ‘something ought to be done to set things right’ is not likely to be

understood by his managers. Subsequently, even a wrong action might be taken

or no action will be taken.

2. Objectives should be concrete and specific. It is better to say that our

company seeks to increase its sales’ rather say that our company plans to

achieve a 12percent increase its sales’. The first statement suggests a real and

precise objective and is more likely to lead and inspire the managers.

3. Objectives should be related to a timeframe. If the first statement given

above restated a sour company plans to increase its sales by 12 percent by the

end of two years’, it improves the specificity of the objective. The managers

know the duration within which they have to be achieved if objectives are

related to a timeframe.

4. Objectives should be measurable and controllable. Many organizations

observe themselves as companies which are attractive to work for. If measures

like the amount and excellence of job applications received, average

remunerations offered, or staff turnover per year could be planned, it would be

possible to measure and control the accomplishment of this objective with

respect to analogous companies in a particular industry, and in general.

5. Objectives should be challenging. Objectives that are too high or too low are

both discouraging and, so, should be set at challenging but not impractical levels.

To set high sales targets in a decreasing market does not lead to victory. Equally

a low sales target in a growing market is easily attainable and, therefore, leads

to a sub optimal performance.

6. Different objectives should correlate with each other. In different areas

organizations set many objectives. Such an action is likely to lead to problems

if objectives are set in one area ignoring the other areas. A classic problem in

organizations, and a source of interdepartmental fights, is setting sales and

production objectives. In order to have economies of scale marketing

departments typically insist on a broader variety of products to provide to a

variety of market segments while production departments generally wish to

have greater product consistency. Apparently, compromises are essential to be

NOTES



made so that different objectives associate with each other, are mutually

supportive, and result in synergistic advantages. This is particularly factual for

organizations which are organized on a profit-center basis.

7. Objectives should be set within constraints. In objective-setting there are

many constraints – internal as well as external – which have to be considered.

For example, resource availability is an internal constraint which disturbs

objective-setting. For best resource utilization different objectives compete for

rare resources and compromises are essential. Many external constraints like

legal requirements, consumer activism and environmental protection are faced

by organizations. All these limit the organization’s ability to set and achieve

objectives.

5.5.3 Issues in Objective-Setting

There are many issues which have a bearing on different aspects of

objective-setting. Here we shall deal with six such issues (Azhar, 2002).

1. Specificity. Objectives may be specified at different levels of specificity. At

one extreme, they might be very largely stated as goals while at the other they

might be precisely stated as targets. Many organizations state corporate as

well as general, specific, functional, and operational objectives. Note that

specificity is related to the organizational levels for which a set of objectives

has been stated. The subject of specificity is decided through stating objectives

at different levels, and prefacing terms, such as, corporate, general and particular

so that they serve the needs for performance and its calculation.

2. Multiplicity., A variety of them has to be framed to cover all aspects of the

functioning of an organization since objectives deal with a number of

performance areas. On the basis of single or a few objectives no organization

functions. With different types of objectives the issue of multiplicity deals with

respect to organizational levels (e.g. higher or lower levels), importance (e.g.

primary or secondary), ends (e.g. survival or growth),functions (e.g. marketing

or finance), and nature (e.g. organizational or personal). Another issue, related

to multiplicity, is the number and type of objectives to be set. Too few or too

many objectives are both impractical. So as to cover all the major performance

areas organizations need to set satisfactory and appropriate objectives.

3. Periodicity. For different time periods objectives are framed. It is likely to set

long term, medium-term and short-term objectives. Usually, organizations

regulate objectives for the long-and short-term. Objectives for different time

periods have to be combined with each other whenever this is complete. By

nature, long-term objectives are, less certain, and are thus specified in general

terms. On the other hand, short term objectives are moderately more certain,

specific, and comprehensive. One long-term objective may result in numerous

short-term objectives; many short-term objectives meet to form a long-term

objective. For instance, a long-term objective may be repeated profitability.

Calculated on annual basis short-term objectives which support repeated

profitability may be the return on investment, profit margin, return on net worth,



NOTES

and so on.

4. Verifiability. On the basis of its verifiability each objective has to be tested. In

other words, it should be possible for a manager to state the basis on which to

decide whether an objective has been met or not. In strategic management

only verifiable objectives can be profoundly used. The question of quantification

is related to verifiability. A certain way to measure any objective is to measure

it. To measure each and every objective it may be neither possible nor needed.

In such cases, qualitative objectives have to be set. These objectives could

also be proved but not to the degree of exactness likely for quantitative

objectives. For instance, a qualitative objective may be stated as – within the

factory to create a congenial working environment. The value judgment of

informed experts – both insiders and outsiders – could be used in order to

make such an objective verifiable. Of a congenial working environment a few

quantitative measures could also be planned which can serve as indicators.

Some of these could be staff income, nonappearance, accident rates, productivity

figures, and so forth. In general, it can be said that through a judicious use of a

combination of quantitative and qualitative objectives the issue of verifiability

could be resolved.

5. Reality. It is a common observation that organizations tend to have to sets of

objectives – official and operative. Objectives which organizations admit to

attain are official objectives while operative objectives are those which they

pursue to attain in reality. Than a harried client of a public sector bank on being

assaulted by an arrogant bank employee, looks up to find a poster of a smiling

and beautiful girl with folded hands looking down at him, probably no one

would be in a better position to appreciate the difference between these two

objectives. The poster carries the caption: Customer service with a smile!’

Many organizations state one of their official objects as the growth of human

resource.

6. Quality. Objectives may be both good and bad. On the basis of its capability to

provide a specific direction and a tangible basis for evaluating performance the

quality of an objective can be judged. An example of a bad objective is: ‘To be

the market leader in our industry’. It is inadequate with respect to its

measurability. To restate the same objective as: ‘To increase market share to a

minimum of 40 percent of the total with respect to Product A over the period of

the next two years and to maintain it thereafter’ turns it into a good objective

since it is precise, narrates to performance, is quantifiable, and provides a

definite direction.

5.5.4 What Objectives are Set ?

To put it straight, aims have to be set in all those presentation areas which

are of strategic importance to an organization. In general, according to Drucker,

objectives need to be set in the eight important areas of market standing,

innovation, productivity, physical and financial resources, profitability,

NOTES



Check Your Progress

1. State the Issues inObjective-Setting.

manager performance and development, worker performance and attitude,

and public responsibility. A narrow approach, such as the one recommended by

Drucker, is based on those strategic factors which are allegedly vital for all types

of organizations. But in practice organizations vary widely with respect to the

objectives that they choose to set.

Research studies, grounded on a survey of a large number of companies,

too lead to a set of objectives that the companies regulate for themselves. But

even here, rather than a true reflection of the objectives that the companies actually

set for themselves the list of objectives is more of a least common denominator.To

illustrate this point, we shall consider one such study in the Indian context. B.R.

Singh, who has studied 28 large companies, each having a turnover of more than

Rs 50 crore at the time of the study, reports that the objectives were set in areas

like:

• profit (profit on investment, profit on shareholder’s capital, net profits as a

percentage of sales);

• marketing (growth in sales volume, market development for present products,

new product growth, decrease in marketing cost, improving customer

service);

• growth (output, sales turnover, investment);

• employees (industrial relations, welfare and growth);

• Social responsibility (community service, rural growth, secondary industry

development, family welfare).

By different types of organizations consider the following examples of

objective-setting. We are not containing the usual financial parameters used to

judge performance to provide you with an idea of how the context could dictate

the criteria for objective-setting.

• Measures of performance can be used by two wheeler companies can use

such as the number of vehicles manufactured per year, market share in

percent, level of indigenization achieved in percent, usual cost per vehicle

and fuel efficiency achieved in kilometers per liter.

• Advertising agencies set purposes in terms of billings achieve din naira per

year.

• A basic measure is the quantity of saleable steel, both in terms of installed

capacity and actual production leading to capacity utilization in percent for

steel manufacturing companies. Another operational measure is energy spent

per ton of saleable steel.

• In terms of the number of policies executed, sum assured, and expense-

income ratio insurance companies may set objectives. Social objectives

could be measured in terms of the percentage of insurable population

protected and an investment mix consisting of government securities, social

schemes, and corporate securities.



NOTES

• Railways are basically worried with aims in the area of passenger traffic

and goods handling. Passenger traffic is designated by the volume of traffic

controlled in terms of the number of passengers and the number of seats

and berths vacant. Freight traffic is in terms of the volume of traffic controlled,

expressed in weight and utilization percent of carriages and locomotives.

• Hotels may set aims in terms of the number of rooms’ vacant, occupancy

rate, and cost per room. Subjective measures are preserving the quality of

hotel belongings and the quality of customer service provided.

5.5.5 How are Objectives Formulated?

From the previous discussion, it is clear that organizations need to set

objectives at different levels, of various types and for different time periods, and

that such objectives should possess certain necessary characteristics and should

resolve certain issues before being used. The question that we now face is: how

are objectives framed? For an answer, for the formulation of objectives we shall

consider the factors that have to be taken into account. For objective-setting

Glueck identifies four factors that should be considered. These factors are: the

forces in the environment, truths of an enterprise’s resources and internal

power relationships, the value system of top executives, and awareness by

management of the past objectives of the firm. Here is a description of each of

these factors.

1. The forces in the environment. Sometimes coinciding but often conflicting –

these take into account all the interests –of the different shareholders in an

organisation. In setting objectives each group of shareholders, whether they

are company employees, customers, or the government, put forward a set

of rights or have expectations that have to be considered. Necessitating a

corresponding shift in the importance attached to different objectives it is

important to note that the interests of various shareholders may change

from time to time.

2. Realities of enterprise’s resources and internal power relationships. This

means that objective are reliant on the resource ability of a company as

well as the relative decisional power that different groups of strategists use

with respect to each other in distributing those resources. In order to set

realistic objectives resources, both material and human, place limitations on

the objective-achieving capability of the organisation and these have to be

considered. In different ways internal power relationships have an impact

on objectives. With their respective views a leading group of strategists

such as the board of directors, or an individual strategist, such as, a chief

executive, may exercise significant power to set objectives inconsonance.

Again, the relative importance attached to different objectives may also

vary over a period of time, since power configurations within a firm are

frequently changing.

3. The value system of the top executives. With regard to strategic management

in general and objectives in particular this has an impact on the corporate

NOTES



Check Your Progress

1. Explain the objectiveswhich are set.

philosophy that organizations adopt. Values, as a continuing set of beliefs,

shape opinions about what is good or bad, desirable or undesirable. This

relates to the choice of objectives too. For example, entrepreneurial values

may result in importance being given to profit objectives while a charitable

attitude and values of social responsibility may lead to the setting of socially

oriented objectives.

4. Awareness by management. Due to different reasons awareness of the past

objectives and development of a firm leads to a choice of objectives that

had been highlighted in the past. For example, a leading chief executive

lays down a set of objectives and the organization lingers to follow it, or

diverges slightly from it in the future. This happens since organizations do

not leave fundamentally from the paths that they had been following in the

recent past. Whatever changes occur in their choice of objectives take

place incrementally in an adaptive manner.

Keeping in view the four factors termed above, we perceive that objective-

setting is a difficult task which is based on consensus-building and has no exact

commencement or end. By providing a specific direction along which an

organization can move vision and mission provide a ‘common thread’ to bind

together the different aspects of the objective-setting process.

5.6 Summary

• Formulation of strategy involves following steps –

1. Developing Vision, Mission and Establishing goals.

2. Analysing Environment.

3. Fixing Quantitative targets.

4. Relating targets to divisions and Plans.

5. Gap analysis.

Understanding vision is very important – vision is defined as future

description of something (an organisation, corporate culture, a business

technology, an activity.) – El Nanaki (1992) – benefits of vision

• The “important purpose of the organization, concerning particularly why it

is in existence, the nature of the business it is in, and the customers it seeks

to serve and satisfy” is what is defined as mission by Thompson (1997

• Most organizationsdevelop their mission statements from a particular set to

tasks they are calledupon to perform in the light of their individual, national

or global priorities.

• Major strategists could also contribute to the development of a mission

statement. They do this informally by offering a hand in the creation of a

particular corporate identity or formally through negotiations and the writing



NOTES

Check Your Progress

1. Evaluate how are theObjectives Formulated?

down of a mission statement.

• In a future period of time goals denote what an organisation hopes to

accomplish. They represent a future state or an outcome of the effort put

in now.

• Objectives are the ends that state specifically how the goals shall be achieved.

They are concrete and specific in contrast to goals which are generalized.

In this manner, objectives make the goals

• Operational.Objectives tend to be mainly quantitative in specification; while

goals may be qualitative.

5.7 Key Terms

1. Strategy formulation: is the process by which an organization chooses

the most appropriate courses of action to achieve its defined goals.

2. Vision: is a declaration of an organization’s objectives, ideally based on

economic foresight, intended to guide its internal decision-making.

3. Mission: A written declaration of an organization’s core purpose and focus

that normally remains unchanged over time.


1. While formulating objectives what are the factors that should be kept in

mind?

2. Explain the features of a mission statement.

3. Explain the Steps of Strategy formulation

4. Describe the term Vision?

5. State the Procedure of Envisioning.

6. Describe the Mission Statement?

7. State the Issues in Objective-Setting.

8. Describe in what way are the Objectives Formulated?

9. Explain the role and Features of Objectives?

NOTES




1. Strategy is a

A) Plan

B) decision

C) motivation

D) appraisal

2. Gap Analysis is the

A) Only Identification of gap

B) Identification and analysis of a gap approximately

C) Identification and analysis of a gap between planned or desired

performance

D) Only analysis of a gap

3. Vision has been not defined

A) Description of something

B) mental perception of the kind of environment an individual

C) Category of intentions that is broad, all-inclusive

D) Future aspirations that lead to an inspiration to be the best in one’s field

of activity

4. A well-conceived vision consists which is major components.

A) Core ideology and envisioned future

B) Only envisioned future

C) Only Core ideology

D) Future roadmaps and ideology

5. Who not define the concept vision?

A) Kottre (1990)

B) El-Namaki (1992)

C) Miller and Dess (1966)

D) Henry fayol (1952)

Ans. - (1 – A), (2 – C), (3 – A), (4 – A), (5 – D).



NOTES


El-Namaki, M.S.S. “Creating a corporate vision”, Long Range Planning (25) 6:

25-29.

Parikh, J. and F. Neubauer (1993). “Corporate Visioning”, International Review

of Strategic

Management (ed.), Vol. 4, D.E. Hussey (West Sussex, England: John Wiley &

Sons), pp. 109 - 11.

Collins, J.C. and J.I. Porras. “Building your company’s vision”, Harvard Business

Review (72)

5: 65 – 77.

NOTES



Unit 6 Environmental Scanning

Structure

6.0 Introduction

6.1 Objectives

6.2 Characteristics of Environment

6.3 General and Relevant Environment

6.4 Environmental Scanning

6.4.1 Factors affecting Environmental Scanning

6.4.2 Identifying the Environmental Factors

6.4.3 Structuring Environmental Appraisal

6.4.4 Approaches to Environmental Scanning

6.4.5 Sources of Information for Environmental Scanning

6.4.6 Methods and Techniques Used for Environmental Scanning

6.4.7 Pitfalls in Environmental Scanning

6.5 Summary

6.6 Key Terms



6.0 Introduction

The aspects of the surroundings, external objects, influences or circumstances

literally means environment. The environment of any organization is “the aggregate

of all conditions, events and influences that surround and affect it”. It is of crucial

importance to understand it since the environment influences an organization in

innumerable ways. In this unit, we will look at the concept of environmental

scanning and how best can it be done so as to maximize its benefits for an

organization.

Environmental Scanning

NOTES

79

Check Your Progress

1. Describe the termEnvironment.


6.1 Objectives


• Relate the concept environment to business organisation;

• Distinguish between general and relevant environment;

• Discuss environmental scanning and appraisal of the environment.

6.2 Characteristics of Environment

Business environment (or simply environment) displays many characteristics.

Some of the significant, and obvious, characteristics are briefly described here.

1. Environment is complex. Arising from different sources the environment

consists of a number of factors, events, conditions, and inspirations. To create

entirely new sets of influences all these do not exist in isolation but interact with

each other. It is difficult to understand at once what factors create a given

environment. All in all, environment is a complex phenomenon comparatively easier

to understand in parts but hard to grasp in its totality.

2. Environment is dynamic. The environment is continually changing in nature.

There is dynamism in the environment due to the many and varied influences

operating; causing it to change its shape and character continuously.

3. Environment is multi-faceted. On the perception of the observer depends

what shape and character an environment will assume. A particular change in the

environment, or anew development, may be seen differently by different observers.

This is seen regularly when the same development is welcomed as an opportunity

by one company while another company observes it as a threat.

4. Environment has a far-reaching impact. On organizations the environment

has a far-reaching impact. On the environment in which it exists the growth and

profitability of an organization critically depends on that. In several different ways

any environmental change has an impact on the organization.

6.3 General and Relevant Environment

As stated earlier, all those factors which provide opportunities or pose threats

to an organization are included in the external environment. The external

environment includes a variety of factors in a wider sense, like: international,

national and local economy; social changes; demographic variables; political

systems; technology; attitude towards business; energy sources; raw materials

and other resources; and many other macro-level factors. As the general

environment we could designate such a wider perception of the environment.

In some way or the other all organizations, are concerned about the general

environment. But theinstant worries of any organization are limited to just a part


NOTES

80

Check Your Progress

1. Describe the characteristicsof environment.


of the general environment which is of high strategic relevance to the organization.

A conscious identification of the relevant environment enables an organization

to focus its attention on those factors which are closely related to its mission,

purpose, objectives, and strategies. An organization takes into account those

influences in its surrounding which have an immediate impact on its strategic

managementprocess by depending on its perception of the relevant environment.

In strategic planning having identified its relevant environment, an organization

can thoroughly appraise it and incorporate the results of such an appraisal.

It is feasible to divide it into different components or sectors in order to

cope with the complexity of the environment.

6.4 Environmental Scanning

We have seen how organization consists of a confusing variety of factors in

the two previous sections. These factors (may also be termed as influences) are

events, trends, issues, and expectations of different interested groups. These factors

are explained below:

• Events are important and in different environmental sectors specific

occurrences taking place;

• Trends are the general tendencies or the courses of action along which

events take place;

• In response to events and trends issues are the present concerns that

arise;

• In the light of their concern for issues expectations are the demands made

by interested groups.

Environmental effects are a difficult mixture of the events, trends, issues

and expectations thatfrequently shape the business environment of an organization.

On its strategic management process by observingthe environment through

environmental scanning, Anorganization can consider the effect of the different

events, trends, issues and expectations on its strategic management process by

observing environment through environmental scanning. With the process of

environmental scanning sincethe environment facing any organization is complex

and dismissing it is absolutely essential, strategists have to deal cautiously. It has

to be done in a manner that important factors are not ignored while unnecessary

time and effort are not used. For this to take place, it is important to develop an

approach, or a mixture of different approaches, to environmental scanning.

6.4.1 Factors affecting Environmental Scanning

In a similar fashion given the same environmental conditions, no two

strategists or two organizations would appraise the environment. This is due to the

many factors that affect the process of environmental appraisal. We could recognize

these factors by classifying them into three categories: the strategist-related,

NOTES

81

Check Your Progress

1. What is externalenvironment?



organization-related and environment-related factors.

1. Strategist-related factors. There are many factors related to the strategist,

which affect the process of environmental appraisal. Their characteristics such

as age, education, experience, motivation level, cognitive styles, ability to withstand

time pressures and strain of responsibility have an influence on the extent to which

they are able to appraise their organization’s environment and how well they are

able to do it since strategists play a central role in the formulation of strategies.

Apart from these factors that are related to the strategists as individuals,

groupcharacteristics could be the interpersonal relations between the different

strategists involved in appraisal, team spirit and the power equations operating

between them. Informationawareness is yet another variable meaning the attitude

of top managers towards environmental scanning and the communication patterns

established among managers with the organization.

2. Organization-related factors. Like those of strategists, many characteristics

of the organization also have an impact on the environmental appraisal process.

These features are the nature of business the organization is in, its age, size and

difficulty, the nature of its markets and the product or services that it delivers.

Another variable recognized is of information climate, which as measured through

the information infrastructure implemented, i.e. the processes, technologies and

people used in information achievement and handling.

3. Environment-related factors. The nature of environment facing an organization

determines how its appraisal could be done. The nature of the environment depends

on its difficulty, instability or confusion, aggression and diversity. Information

processing perspectives recommend that scanning activity will rise in response to

increasing environmental uncertainty. Social cognition perspectives recommend

that scanning decreases at high and low levels of uncertainty since useful

information is either unachievable or is already known.

6.4.2 Identifying the Environmental Factors

In a form of information related to different sectors of the environment

results in environmental scanning. A strategist would be at a loss to understand

and analyze the environmental influences without a technique to deal with this

information. These effects, as we have seen, are the events, trends, issues and

expectations of different interested groups. A possible approach to recognizing

the important environmental factors is to test each factor with respect to its effecton

the business of the organization and the possibility of such an impact.

The identification of many issues that affect the organization is led by

environmental scanning.

On the basis of the intensity of their impact on the business of the organization

and the relative probability of such an impact these issues could be judged. In

such a manner, among the nine cells of the matrix environmental issues (and all

the factors) could be distributed. The issues which are most likely to have a high

level of impact on the organizations are the serious issues and need instant care of

the strategists. Thosecurrently having a high level of impact but a low probability

NOTES

82

Check Your Progress

1. Evaluate the factorsaffecting EnvironmentalScanning.



of occurrence need to be kept under watch while high priority issues are those

which have a medium to a high probability of impact. As conditions may change

later all other issues could be considered as being of low priority but still requiring

continuous monitoring.

In this way, strategists could slender the range of environmental issues they

have to focus their attention upon. When divided into opportunities and threats

and allocated to different sectors of the environment these issues help in structuring

of the environmental review.

6.4.3 Structuring Environmental Appraisal

The identification of environmental issues is supportive in structuring the

environmental appraisal so that the strategists have a good idea of where the

environmental opportunities and fears lie. As environmental issues do not lend

themselves to a straightforward classification into neat categories structuring the

environmental appraisal is a difficult process. From more than one sector of the

environment an issue may arise simultaneously. Strategists have to use their

experience and judgment to place the different environmental issues where they

mainly belong. There are many techniques available to structure the environmental

appraisal.

One such technique, suggested by Glueck, is for an organization preparing

an environmental threat and opportunity profile (ETOP).

Dividing the environment into different sectors and then analyzing the impact

of each sector on the organization is involved in the preparation of an ETOP. A

complete ETOP needs subdividing each environmental sector into sub factors and

then the effect of each sub factor on the organization is described in the form of

a statement. For the sake of simplicity a summary ETOP may only show the

major factors.

The table below shows an example of an ETOP prepared for an established

company which is in the bicycle industry. For the domestic and exports market the

main business of the company is in sports cycle manufacturing. This example

relates to an imaginary company but the illustration is realistic and based on the

current Indian business environment.

Table 1: Environment threat and opportunity profile (ETOP) for a

bicycle company

Environmental Nature of Impact of each sector

Sectors impact

Economic Rising wealth among urban consumers;

growing disposable incomes and living

standards.

Market Organized sector a virtual oligopoly with four

mainmanufacturers, buyers serious and better

informed; Overall industry growth rate not

NOTES

83



hopeful; Growth rate for niche segments like

sports, trekking, racing and fancy city cycles

is great; mostly unsaturated demand in niche

segments; slender margins; traditional

distribution systems.

International Global imports growing but India’s share

lessening;India second globally as

manufacturer; consumer and exporter after

China; major importers are the US and EUbut

India exports mainly to Africa; danger of

cheapChinese imports.

Political Bicycle principal mode of transport for low

and lower middle income; industry too small

for any major political courtesy.

Regulatory Parts and components kept for small-scale

industry, bicycle industry a push area for

exports; regulatory limitations heavy; duty

drawback rates dropped.

Social Environment- and health-friendly transport

choice; extensive usage like commuting to

work or school and asRecreation and physical

fitness equipment; easier discussing traffic

congestions; customer preference for sports

cycles which are easy to ride and tough.

Supplier Mostly ancillaries and associated companies

in small-scaleSector supply parts and

components; increasing steel prices;

increasing use of aluminum; industrial

concentration in Punjab and Tamilnadu.

Technological Technological up-gradation of industry in

progress; import of machinery simple; product

innovationsOngoing such as battery-operated

and lightweight foldable cycles.

Source: Adapted from William R. Boulton, Business Policy: The Art of Strategic

Management, New York, Macmillan Publishing Co., 1984, p. 120.

Up arrows indicate favorable effect; down arrows indicate unfavorable

effect, while horizontal arrows indicate a neutral effect.

As observed from the above table, due to the many opportunities operating

in the environment sports cycle manufacturing is an attractive proposition. Prospects

in the economic, social and technological sectors are positive. Market environment

can throw up opportunities in the niche segment that the company operates in. By

taking advantage of the various government policies and concessions that still

NOTES

84



exist despite the low attention value of the industry the company can capitalize on

the growing demand. It can also take advantage of the high exports potential that

previously exists and has not been sufficiently capitalized upon. It has a favorable

supplier environment with traditional ties binding it to its vendors since the company

is an established manufacturer of bicycles. But different are the consequences of

this ETOP for a new manufacturer, who is planning to enter this industry. Though

the economic, social and technological environment sectors would still be satisfactory,

much would depend on the extent to which the company is able to guarantee the

supply of raw materials and components, have contact to the latest technology

and also have the amenities to use it.

The preparation of an ETOP offers a clear picture to the strategists about

which sectors and the different factors in each sector have a positive impact on

the organization. With respect to its environment by the means of an ETOP, the

organization knows where it stands. In formulating appropriate strategies to take

advantage of the opportunities and counter the threats in its environment obviously,

such an understanding can be of great help to an organization. Strategists have to

access whether the organization has the required strengths or whether it has

weaknesses which can affect its capability of taking advantage of the opportunities

before the formulation of strategies can be accepted. This assessment is done

through an analysis of the strengths and weaknesses of the organization and forms

a part of the SWOT analysis. The strengths and weaknesses can be examined

through an organizational judgment, which is the subject matter of the next unit.

6.4.4 Approaches to Environmental Scanning

For sorting out information for environmental scanningKubr has suggested

three approaches which could be adopted. We could call these approaches as

systematic, ad-hoc and processed form approaches.

1. Systematic Approach. Information for environmental scanning is collected

systematically under this approach. Information related to markets and customers,

changes in legislation and regulations that have a direct impact on an organization’s

activities, government policy statements pertaining to the organization’s business

and industry, etc. could be collected continuously to monitor changes and take the

relevant factors into account. Not only for strategic management but also for

operational activities continuously updating such information is necessary.

2. Ad-hoc Approach. The organization uses information in a processed form,

available from different sources both inside and outside the organization for adopting

this approach. It uses secondary sources of data and the information is available

in a processed form when an organization uses information supplied by government

agencies or private institutions. To monitor their relevant environments since

environmental scanning is absolutely necessary for strategy formulation,

organizations use different practical combinations or approaches. From an informal

assessment of the environmental factors these approaches may range to a highly

systematic and formal procedure. Ad-hoc studies may be undertaken occasionally

and informal assessment may be adopted as a reactive measure to a crisis. A

highly systematic and formal procedure may be used as a proactive measure in

NOTES

85

Check Your Progress

1. Discuss the factorsaffecting environmentalscanning.



anticipation of changes in environmental factors and structured data collection

and processing system may be used constantly.

3. Processed-form Approach. Depending on varying degrees of concern for the

environment between the two extremes of the informal and formal approaches,

different stances adopted by organizations might exist. Such stances are situational.

For instance, a periodic monitoring of the environment may be done when an

issue related decision has to be taken. Systematic and ad-hoc approaches can be

used for the relevant environment of the organization while the processed-form

approach could be used to appraise both the relevant as well as the general

environment. Data collection is necessary for deriving information about

environmental factors whatever approach is adopted for environmental scanning.

6.4.5 Sources of Information for Environmental Scanning

The various sources of information selected for collecting data for

environmental scanning could be classified in different ways. There could be formal

and informal sources. Then there could be written as well as verbal sources. In

terms of origin, data sources could be external and internal.

Given below are some of the important types of sources of information.

1. Documentary or secondary sources of information like different types of

publications. These could be newspapers, magazines, journals, books, trade and

industry association newsletters, government publications, annual reports of

competitor companies, commercial databases, etc.

2. Mass media such as radio, television and Internet.

3. Internal sources like company files and brochures, internal reports and memos,

management information system, databases, company employees, sales staff, etc.

4. External agencies like customers, marketing mediators, suppliers, trade

associations, government agencies, etc.

5. Formal studies done by workers, market research agencies, advisers and

educational foundations.

6. Spying and surveillance through ex-employees of rivals, industrial espionage

agencies, or by planting ‘moles’ in rival companies. The ethicality of these sources

is doubtful but yet, these are used and so need a mention.

Depending on their needs for environmental scanning strategists use different

information sources. After a considerable time lag Government publications –

though a rich and comprehensive source of information – usually are available.

Private sources, though applicable and timely, are quite costly to tap. Therefore,

whenever a particular information source is used, it should be checked for its

reliability, timeframe, methods of data collection and analysis used, form of

presentation, etc.

NOTES

86



6.4.6 Methods and Techniques Used for EnvironmentalScanning

The range of methods and techniques available for environmental scanning

is widespread. There are formal and systematic techniques as well as instinctive

methods available. Strategists may choose fromamong these methods and

techniques, those which suit their needs in terms of the quantity, quality, accessibility,

timeliness, relevance and cost of environmental information.

For environmental scanning various authors have mentioned the methods

and techniques used. LeBell and Krasner outline nine groups of techniques: single-

variable extrapolation, theoretical limit environments, dynamic modes, mapping,

multivariable interaction analysis, unstructured expert opinion, structured expert

opinion, structured inexpert opinion and unstructured inexpert speculation.

In their survey of environmental scanning and forecasting in strategic

planning Fahey, King and Narayanan have included ten techniques. These are:

scenario-writing, simulation, morphological analysis, project-program-budget system

(PPBS), game theory, cross-impact analysis, field anomaly-relation, multi-echelon

coordination and other forecasting techniques.

To deal with the dynamic nature of real-world problems of particular interest

the emerging set of techniques based on the complexity theory that is a group of

mathematical techniques is designed. Among the techniques are the applications

of the mathematical concepts of fractals, fuzzy logic, genetic algorithms, swarm

stimulation, Monte Carlo method and the more popular of them, the chaos theory.

Inevitably there have been attempts to utilize the emerging information

technologies in assisting strategic planners in environmental scanning owing to the

increasing complexity of the external environment. Techniques based on artificial

intelligence, neural networks, data mining and a knowledge-based system have

been proposed. An example for continuous environmental surveillance is that of a

software agent-based system. Another is Futures, for designing and simulating

future scenarios a business solutions-software by Satyam Computer Services.

While many of the environmental techniques are created on statistical

methods and gradually, the use of sophisticated software in computer-assisted

environmental scanning and forecasting, some of them, like scenario-writing, may

not use statistical information but hire informed judgment and intuition to forecast

what the future is most likely to be, expressed in the form of an expressive statement

or report.

From time to time process based techniques for environmental scanning

have been proposed. For instance, by a team of strategists a four-step technique

called QUEST (quick environmental scanning technique), proposed by B. Nanus

uses scenario writing. For developing peripheral vision that vigilant organizations

should develop Day and Shoemaker have proposed a seven-step process, based

on the supposition that opportunities and threats often begin as weak signals from

the outside of the external environment.

Strategists have to be aware of the drawbacks of the environmental scanning

NOTES

87



process so as to use it carefully.

6.4.7 Drawbacks in Environmental Scanning

Environmental scanning has its soft underbelly just like any other strategic

planning technique. We could enumerate at least five drawbacks faced while

using environmental scanning. Sometimes, strategic planners may focus excessively

on the influences in the relevant environment that they miss out on the trends and

issues in the general environment that really matter.

• There is a danger of ‘paralysis by analyses, meaning that environmental

scanning can make such an excess of information that it may prevent well-

timed action. Environmental scanning should not become a number-crunching

routine.

• The purpose of environmental scanning is to uncover influences that matter

for the future of theorganizational strategic decision-making. This purpose

should not be vanishedand environmental scanning should not be used for

purposes other than this. For example, scanning results cannot be used for

political direction by strategists to favor their own viewpoint, functional

interests or departmental aims.

• With the operational and functional activities of the organization the

environmental scanning function should not be integrated too closely. This

means that it should not become a line function, thus supporting it too closely

with the interests of those activities.

• Likewise, environmental scanning should not be too far from the realities of

the organization, making it an anonymous, staff function.

The strategists are faced with the question of how to structure the mass of

information available to them after environmental scanning process is complete.

The problem boils down to sifting the information in such a manner that a clear

picture emerge of what opportunities and threats operating in different sectors of

the environment facing the organization.

6.5 Summary

• Under which someone or something exists means the surroundings, external

objects, influences or circumstances literally means environment.

• All those factors which provide opportunities or pose threats to an organization

are included in external environment.

• But the instant worries of any organization are limited to just a part of the

general environment which is of high strategic relevance to the organization.

Immediately relevant environment or simply, the relevant environment this

part of the environment could be termed as.

• A conscious identification of the relevant environment allows an organization

NOTES

88

Check Your Progress

1. Explain the Drawbacks inEnvironmental Scanning?

Check Your Progress

1. State the Methods andTechniques Used forEnvironmental Scanning.



to focus its attention on those factors which are closely related to its mission,

purpose, objectives, and strategies

• On its strategic management process by observing the environment through

environmental scanning, an organization can consider the effect of the

different events, trends, issues and expectations.

• The identification of many issues that affect the organization is led by

environmental scanning.

• These issues could be judged on the basis of the intensity of their impact on

the business of the Organization and the relative probability of such an

impact.

• There are many methods available to structure the environmental

assessment. One such technique, suggested by Glueck, is that of preparing

an environmental threat and opportunity profile (ETOP) for an organization.

6.6 Key Terms

1. Environment: the physical and biological factors along with their chemical

interactions that affect an organism or a group of organisms.

2. Environmental Scanning: is one of the essential components of the global

environmental analysis. Environmental monitoring, environmental

forecasting and environmental assessment complete the global environmental

analysis.

3. Environmental Appraisal: is the process by which strategists monitor

the environmental factors to determine opportunities for & threats to their

firms.

4. Techniques of Environmental Scanning: SWOT analysis, PEST analysis,

etc.


1. Explain the pitfalls in environmental scanning.

2. Explain the various approaches to environmental scanning.

3. State the Methods and Techniques Used for Environmental Scanning?

4. Discuss the factors affecting environmental scanning.

5. Explain the characteristics of environment.

6. Evaluate the Structure of Environmental Appraisal?

NOTES

89




1. Which are not the Characteristics of Environment?

A) Environment is complex

B) Environment is dynamic

C) Environment is multi-faceted

D) Environment is simple

2. Which factor is not Factors affecting Environmental Scanning?

A) Environment-related factors

B) Organization-related factors

C) Strategist-related factors

D) Politics-related factors

3. Which is not the Approach to Environmental Scanning?

A) Systematic Approach

B) Ad-hoc Approach

C) Processed-form Approach

D) Historical Approach

4. Environment literally means the only surroundings of organization.

A) True

B) False

Ans. : (1 – D), (2 – D), (3 – D), (4 – B).


Aguilar, F.J. (1967). Scanning the business environment, New York, NY: Macmillan

Company.

Keegan, W.J. (1967). Scanning the international business environment: A study of

the Information acquisition process, Unpublished Ph.D. Dissertation, Harvard

Business School.

NOTES

90



Unit 7 Internal and External Environment

Structure

7.0 Introduction

7.1 Objectives

7.2 Factors of External Environment

7.3 Internal Environment

7.4 SWOT Analysis

7.4.1 Role and Importance of SWO Analysis

7.5 Resource Audit

7.6 Core Competence

7.7 Strategic and Competitive Advantage

7.8 Value Chain Analysis

7.8.1 Analysis

7.8.2 Usefulness of the Value Chain Analysis

7.9 Summary

7.10 Key Terms



7.0 Introduction

The classification of the general environment into subdivisions helps an

organization to handle with its difficulty, to understand the difference influences

operating in the environment, and to relate the environmental changes to its strategic

management process. By different authors different bases for organization have

been adopted but the basis itself is not as important as the fact that all the relevant

factors in the environment have to be considered. An organisation may divide its

environment into sectors depending on a variety of factors, such as, the size of the

organization, the level and scope of activities, the geographical spread of markets,

the nature of the product, the type of technology used, and managerial philosophy.

NOTES

91

Internal & ExternalEnvironment


7.1 Objectives


• Describe the manner in which strategic and competitive advantage is

developed.

• Describe and exemplify the internal and external environment.

• Explain the concept of core competence.

• Describe the idea of value chain analysis.

• Define the concept of SWOT analysis.

7.2 Factors of External Environment

Market Environment

The market environment contains the factors related to the groups and

other organizations thatcompete with and has an influence on an organization’s

markets and business. Some of the important factors and influences operating in

the market environment are as follows:

1. Customer or client factors, such as, the wants, preferences, opinions,

approaches, values, negotiating power, buying behavior and fulfillment of

customers.

2. Product factors, such as the demand, appearance, types, utility, function, plan,

lifecycle, price, promotion, supply, diversity, and the obtain ability of substitutes

of products or services.

3. Marketing intermediary factors, such as, levels and superiority of customer

service, intermediaries, supply channels, logistics, costs, distribution systems,

and monetary intermediaries.

4. Competitor-related factors, such as, the different types of competitors, entrance

and exit of major competitors, nature of competition, and the comparative

strategic position of major competitors.

On the type of the industrial structure the market environment depends

largely. The concern for the market environment is lesser than what it is in the

face of pure competition in monopolies and oligopolies. Public utilities like electricity

boards and most public sector companies such as petrol and cooking gas companies

operated in a protected environment in a controlled economy, like that of India.

Here are numerous examples to show how the market environment affects,

and is taken into deliberation by the companies.

• To produce a dynamic market environment increasing international trade, huge

investment in infrastructure, increasing levels of disposable income and robust

manufacturing and retail sectors have combined. In several industries customers

NOTES

92



and their needs have been containingmore prominently in the business strategies.

Investments in retail networks, growingopportunities for customer interactions,

improving customer service, customer-focused advertising, representing a more

visible presence and improving the overall customer experience are other

marketing-related actions.

• Sales promotion, advertising, and market study, all of which had not engaged

significant position in the marketing policies of companies have now expected

a greater importance. So that customers are not put to inconvenience distribution

has been strengthened. Especially for consumer durables, after-sales services

have become an important element of the marketing strategies of many

companies.

Technological Environment

The technological environment comprises of those factors that are linked to

the knowledge applied and the materials and machines used in the manufacture of

goods and services which have an influence on the business of an organization.

Some of the significant factors and influences operating in the technological

environment are as follows:

1. Sources of technology, like corporation sources, external sources, and foreign

sources; charge of technology purchase; association in and transfer of

technology.

2. Technology development, steps of development, change and rate of change of

technology, and research and development.

3. Influence of technology on human beings, the man-machine system, and the

environmental effects of technology.

4. Communication and infrastructural technology in environment.

Strategists can ill afford to overlook the technological environment, as

technology, moreover customer groups and customer functions, defines the business

of their organizations. There are three strategic implications of technological change

according to Boris Petrov: within a business it can change relative competitive

cost position, it can create new markets and new business segments, and by

reducing or eliminating their segment cost barriers it can collapse or merge

previously independent businesses.

Supplier Environment

The supplier environment comprises of factors connected to the cost,

reliability, and availability of the factors of production or service that have an

influence on the business of an organization. Some of the significant factors and

inspirations operating in the supplier environment are as follows:

1. Cost, availability and continuity of supply of raw materials, subassemblies, parts

and machineries.

2. Cost and availability of money for executing plans and projects.

NOTES

93



3. Cost, reliability and availability of energy used in production.

4. Cost, availability and reliability of human resources.

5. Cost, availability and presence of sources and means for the supply of plants

and machinery, spare parts and after-sales facility.

6. Infrastructural support and simplicity of availability of the different factors of

production, the negotiating power of suppliers, and the presence of substitutes.

Economic Environment

The economic environment comprises of macro-level factors related to the

means of production and distribution of wealth which have an influence on the

business of an organization. Some of the significant factors and inspirations operating

in the economic environment are:

1. At a given point of time the economic stage at which a country exists.

2. The economic structure adopted, such as, a capitalistic, socialistic or mixed

economy.

3. Economic policies, such as, industrial, monetary and fiscal policies.

4. Economic planning, such as, five-year plans, yearly budgets, and so on.

5. Economic indices like national income, distribution of income, rate and growth

of gross national product (GNP), per capita income, disposable personal income,

rate of savings and investments, value of exports and imports, the balance of

payments, etc. and so on.

6. Infrastructural factors, such as, monetary institutions, banks, methods of

transportation, communication facilities, and so on.

Strategists are intensely alert of the significance and impact of the economic

environment on their organizations. Almost all yearly company reports presented

by the chairman give attention to the general economic environment prevailing in

the country and an assessment of its impact on their companies.

Regulatory Environment

The regulatory environment refers to planning, promotion, and regulation of

economic activities by the government that has an influence on the business of an

organization. Some of the important factors and influences operating in the regulatory

environment are as follows:

1. The constitutional structure, directive principles, necessary rights, and separation

of legislative powers among central and state governments;

2. Policies connected to licensing, monopolies, foreign investment, and supporting

of industries;

3. Policies connected to distribution and pricing, and their control;

4. Policies related to imports and exports;

NOTES

94

Check Your Progress

1. Describe marketenvironment as an externaldeterminant of strategy.



5. Other policies connected to the public sector, small-scale industries, sick

industries, development of backward areas, control of environmental pollution,

and consumer protection.

Political Environment

The political environment comprises of factors related to the management

of public affairs and their impact on the business of an organization. Some of the

significant factors and influences operating in the political environment:

1. The political system and its features, like the nature of the political system,

moral forces, political parties and centers of power;

2. The administrative structure, its goals and stability;

3. Political procedures, like the operation of the party system, votes, capital of

elections, and legislation with respect to economic and industrial promotion,

and regulation;

4. Political thinking, government’s role in business, and its policies and involvements

in economic and business development.

Socio-cultural Environment

The socio-cultural environment comprises of factors related to human

relationships inside a society; the development, forms and functions of such a

relationship; and the learnt and shared behavior of groups of human beings which

have aneffect on the business of an organization. Some of the significant factors

and influences operating in the social environment are:

1. Demographic characteristics, such as, population, its density and distribution,

variations in population and age composition, inter-state immigration and rural-

urban flexibility, and income distribution;

2. Socio-cultural worries such as environmental effluence, bribery, use of mass

media, the role of business in society, and consumerism;

3. Socio-cultural attitudes and morals, such as, hope of society from business,

social duties, principles, rituals and practices, varying lifestyle patterns, and

materialism;

4. Family structure and variations in it, attitude towards and within the family, and

family values;

5. The role and position of men, women, children, teenagers, and the aged in

family and society;

6. Educational stages, attentiveness and consciousness of rights, the work principle

of the members of society, and the attitude towards minority and underprivileged

groups.

The socio-cultural environment chiefly disturbs the strategic management

process within the organization in the areas of mission and objective-setting, and

decisions related to products and markets. Strategists do not seem to be fully

NOTES

95

Check Your Progress

1. What is meant by politicalenvironment?

2. Explain the regulatoryenvironment.



aware of the effect of the socio-cultural environment on business or they are so

inattentive with other environment effects that they do not give a high importance

to socio-cultural factors. One reason for such a lack of interest could be the

nature of socio-cultural influences. Socio-cultural changes take place very gradually

and do not seem to have an instant and direct influence on short-term strategic

decisions.

International Environment

The international (or global) environment contains of all those factors that

function at the transnational, cross-cultural, and across-the-border level which

have an influence on the business of an organization. Some of the significant

factors and influences operating in the international environment are as below:

1. Globalization, its procedure, content, and direction;

2. Global economic forces, organizations, alliances, and opportunities;

3. Global trade and commerce, its procedure and developments;

4. Global financial system, bases of financing, and accounting standards;

5. Geopolitical situation, comparisons, associations, and strategic interests of

nations;

6. Global demographic designs and shifts;

7. Global human resource – institutions, obtain ability, nature and superiority of

skills and expertise, flexibility of labor and other skilled personnel;

8. Global information systems, communication networks, and media;

9. Global technological and excellence systems and standards;

10. Global markets and competitiveness;

11. Global legal system, settlement and negotiation mechanisms;

12. Globalization of management and related disciplines, and the dispersal of

management techniques in industry.

The international environment establishes a special class of the environmental

sector. While the previous seven sectors are largely limited and exclusive in nature,

the international environment encompasses all the sectors, although in the global

context. What we mean to say is that while for example, the political environment

within a country could contain of certain factors connected to national politics; the

global environment would also have a geopolitical section comprising the political

factors and inspirations at the global level.

NOTES

96

Check Your Progress

1. Explain the socio-culturalenvironment.

Check Your Progress

What do you mean byi n t e r n a t i o n a lenvironment?



7.3 Internal Environment

1. Management Philosophy

The working of business firm is greatly influenced by the management

philosophy. The management may adopt a traditional philosophy or a professional

philosophy. Nowa day’s businessprofessional approach should be adopted by

business firms. A proper study of internal environment will disclose theweaknesses

of the traditional approach and force the management to accept a professional

approach.

2. Mission and Objectives

It is always sensible to frame a mission statement and then to list out the

many objectives. An analysis of internal environment will allow the firm to find out

whether the objectives are in line with the mission statement and whether the

objectives are accomplished or not.

3. Human Resources

On the quality of human resources the survival and success of the firm

largely depends. An analysis of internal environment in respect of human resources

would reveal the inadequacies of human resources and as such measures can be

taken to correct such flaws.

4. Physical Resources

Machines, equipment’s, building, furniture etc. are included in physical

resources. A firm needs satisfactory and quality physical resources. An analysis

of the internal environment may disclose the flaws of the physical resources and

company can take suitable measures to correct such flaws.

5. Financial Resources

A firm needs sufficient working capital as well as fixed capital. There is a

necessity to have proper management of working capital and fixed capital. An

analysis of the internal environment will help to make best use of available funds

as well as to raise extra funds.

6. Corporate Image

A firm should develop, maintain and improve a good image in the minds of

the staffs, investors, customers and others. Poor corporate image is a flaw. An

analysis of the internal environment allows the firm to build good public image.

7. Research and Development facilities

If the organization has satisfactory research and development facilities, it is

in a position to invent, introduce new products and services continuously. This

allows the firm to remain ahead of the competition.

8. Internal Relationship

There should be a proper flow of vertical and horizontal communication i.e.

NOTES

97



between superiors and subordinates and between colleagues at the same level. A

free flow of ideas permits a healthy relationship amongst colleagues.

7.4 SWOT Analysis

SWOT analysis is a very popular strategic planning technique having

applications in many areas containing management. To understand their internal

and external environmentsorganizations perform a SWOT analysis. SWOT, which

is the abbreviation for strengths, weaknesses, opportunities and threats, is also

known as WOTS-UP or TOWS analysis. Through such an analysis, the strengths

and weaknesses existing within an organization can be matched with the

opportunities and threats operating in the environment So that effective strategies

can be formulated. An effective organizational strategy, thus, is one that capitalizes

on the opportunities through the use of strengths and nullifies the threats by reducing

the impact on weaknesses, to achieve prearranged objectives.

Strengths

Strength is a source, ability, or other advantage in relation to the competition

and the needs of markets a firm serves or expects serving. In the market place

strength is a distinctive competencethat affords the firm a comparative advantage.

Financial resources, image, market leadership and buyer-supplier relations are

illustrations.

Weaknesses

A weakness is a restraint or absence in resources, skills, and capabilities

that seriously obstructs effective performance. Facilities, financial resources,

management capabilities, marketing skills, and brand image could be bases of

weakness.

Strengths and weaknesses can be identified by careful study of the firm’s

activities.

A few examples follow:

a. Source of profit

i. If the majority of the profit comes from a solo product that in itself is an

indicationof weakness deserving further analysis:

What is its position in the life cycle? What is the position of competition?

What is the position of industry sale? Product quality? Is the market share

currently enjoyed equal with quality, competition, price status? Is there

possibility for further growth in sales through product development?

ii. What is the possibility for development of other profit-yielding products?

iii. is the technology remaining to be up-to-date or is there a danger, of

improvedtechnology appearing in the market place in the near future? What

is the risk of substitution?

Check Your Progress

1. Explain the term internalenvironment.

NOTES

98 Strategic Management - I


iv. Is the product itself in any risk of becoming outdated or out of style in the

near future?

b. Risks

The study of the source of profits always exposes the risks approaching ahead.

These may be:

i. The dangers of obsolescence for the product.

ii. The danger of being priced out because of quality, price, and backdated

technology;

iii. The danger of replacement.

iv. For the market, the style and attractiveness changing; the risk of new rivalry

coming in; the market itself attaining maturity or its decaying stale, etc.

Opportunities

In the firm’s environment an opportunity is a major favorable situation.

Key trends characterize one source of opportunity. The identification of an earlier

ignored marketsegment, changes in competitive or regulatory conditions,

technological alterations, andbetter buyer and/or supplier relationships could

represent opportunities for the firm.

Threats

In the firm’s environment a threat is a major unfavorable situation. It is a

key impairment to the firm’s current and/or desired upcoming position. The entrance

of a new competitor, slow market growth, increased bargaining power of key

buyers or suppliers, major technological change, and changing regulations could

signify major pressures to the firm’s future success.

Opportunity for one firm could be a strategic threat to another. Thus

regulation in India keeping some product ranges for the small-scale sector would

signifyachancefor the small-scale industries in that sector and a danger to large

industries in it also;the same factor can be seen as both a potential chance and a

potential risk. There was a threat to Komatsu whose products were then distinctly

poorer in quality by comparison whenthe entry of Caterpillar through a joint venture

with Mitsubishi in the Japanese market was made. It was also anchance for

Komatsu to hire its R&D efforts to match Caterpillar superiority and thus not only

positively face Caterpillar in the domestic market, but also expand to become a

competitor to Caterpillar globally. This is a classic example of a threat being

transformed into an opportunity.

Understanding the key opportunities and threats fastening a firm helps

managersclassify realistic options from which to choose an appropriate strategy.

Such understanding simplifies the identification of the most effective position of

the firm.

NOTES

99

Check Your Progress

1. Explain the term SWOT.



7.4.1 Role and Importance of SWOT Analysis

1. Identify strengths – The study of the internal environment helps to identify

the strengths of the firm. The internal environment mentions to plans and policies

of the firm, its resources-physical, monetary and human resources e.g., the

strength of the company can be recognized through the workers loyalty and

commitment on the part of workers if company has good relations with workers.

2. Identify weaknesses – A firm may be weak in certain areas, whereas it may

be strong in some other areas. So as to correct those as early as possible

thefirm should identify such weaknesses through SWOT analysis e.g. Lack of

investment may be a weakness of the company, but company should try to

raise additional funds to correct the weaknesses.

3. Identify Opportunities – An analysis of the external environment in the market

helps the business firms to identify the opportunities. As and when the

opportunities come the business firm should make every possible effort to grab

the opportunities.

4. Identify threats –From competitors and others business may be subject to

threats. Identification of threats at before date is always helpful to the firm as

it helps to resolve the same. For example, a competitor may come up with

innovative product. This not only endangers its survival but also affects the

firm’s business, so business firm should take needed steps to counter the strategy

of the competitors.

5. Effective Planning –To plan its activities properly a proper study of environment

helps a business firm. It is very much necessary before planning to analyse the

internal as well as external environment. After SWOT analysis, the firm can

list out well-defined and time-bound objectives, which in turn help to frame

proper plans.

6. Facilitates Organizing Resources – Environment study not only helps in

organizing the resources of correct type and quantity. A proper study of

environment allows a firm to know the demand potential in the market. To

handle the activities of the organization accordingly, the firm can plan and organize

the right amount of resources.

7. Face Competition – A study of business environment allows a firm to study

the competitor’s strengths and weaknesses. This would permit the firm to

incorporate the competitor’s strengths in its working. The firm may also try to

exploit the competitor’s weaknesses in its favor.

8. Flexibility in Operationsbusiness firm finds it difficult to influence the

surrounding of its choice and the environmental factors are uncontrollable.

Depending upon the changing environmental situation a study of environment

will allow a firm to adjust its operations.

Check Your Progress

1. State the Importance ofSWOT analysis.

2. Explain the role of SWOTanalysis.

NOTES

100



7.5 Resource Audit

The strategic ability of the organization is built largely around those activities

that addworth to a product. Other activities are also valuable and essential but

they are not the ones through which the organization sustains its distinct production/

service values.

In this context, the relative roles of primary activities and sustenance

activities of the organization need to be respected. Amongst various primary

activities it will be obvious that resources contributing to the value system of the

organization will be distributed. The role of support activities would be to organize

them and use them effectively and efficiently.

It will be noticed that within an activity different types of resources are

identified:

Physical resources : Physical resource assessment should go way outside mere

listing. It should specify the nature of these resources, their age, condition, capability,

location, and, where significant, specialty.

Human resources : A number of relevant questions must examine analysis of

human resources. Evaluation of the number and types of different skills within the

organization is certainlyimportant.However, questions suchas adaptability (to

different external circumstances) is equally important. There is also the question

of retrenchment, retraining, and relocation under conditions of economic distress

and flexibility, as also of location, often for skilled operatives in high wage countries

in multinational companies.

Thus consider the case of Japanese corporations. In the background of the

constantly rising value of the yen, it would soon become mandatory for many

such Japanese companies to move their manufacturing facilities to lower wage

countries to maintain effectiveness. Particularly in the initial stages some of their

skilled operators would also have to go along. In human relations the ready

acceptance by employees of such relocation is an important consideration.

In resource analysis, the importance of intangibles should never be ignored.

In some businesses, particularly services such as lawyers, retail shops, and the

catering industry, goodwill could signify the major asset of the company and may

stem from brand names, good contacts, company image, and many other sources.

It is still significant even in others, where it may not constitute a major asset. Thus

where a company adopts the strategy of differentiation to gain competitive

advantage, a substantial portion of the value related with differentiation is observed

difference, such perception being mainly subjective and somewhat imperceptible

in nature. Similarly, where quality is a main plank of the strategy accepted, one of

its major components is perceived quality, once again based on intangibles.

Check Your Progress

1. Define the term resourceaudit.

NOTES

101



7.6 Core Competence

An organization develops certain strengths and weaknesses which when

combined leads to synergistic effects on the basis of its resources and behavior.

Such effects manifest themselves in terms of organizational competencies.

Competencies are special qualities controlled by an organization that make them

survive the pressures of competition in the marketplace. In other words, the net

results of the strategic rewards and difficulties that exist for an organization

determines its capability to contest with its competitors. Other terms frequently

used as being synonymous to competencies are unique resources, core capabilities,

invisible assets, embedded knowledge, etc.

When an organization develops its capabilities over a period of time and

improves them into a fine art of competing with its rivals, it tends to use these

competencies exceptionally well. The capability to use the competencies

exceedingly well turns them into core competencies. Distinctive competence

means when a specific ability is possessed by a particular organization exclusively

or relatively in large measure. By building distinctive competencies around the

critical success factors many organizations achieve strategic success. Recall that

critical success factorsare those which are critical for organizational success. It

is not necessary, of course, for allorganizations to possess a distinct competence.

Neither do all organizations, which possess certain distinct competencies, use

them for strategic purposes. Nevertheless, the concept of distinct competence is

beneficial for the purpose of strategy formulation. You may think that a hairline

distinction is being made among the three terms: competencies, core competencies

and distinctive competencies. The change, as you must have noted, lies in the

degree of individuality associated with the net synergistic effects occurring within

an organization. You could think of them as being identical so long as you are able

to make a difference among them when required. Among the three, it is the term

‘core competence’ that has gained greater currency and popularity. The term

‘core competence’ has been popularized by Prahalad and Hamel as an idea around

which strategies could be formulated by an organization.

Aimed at developing and then exploiting distinctive competencies by an

organization that are difficult to replicate by their rivals C.K. Prahalad and Gary

Hamel are mainly credited for the dynamic capabilities approach that consider

strategic management as a collective learning process. This idea rests on the

thinking that strategy depends on learning, and learning depends on the capabilities

of an organization. According to them, the competitive (or strategic, as we call it

here) advantage can be found to the core competencies of an organization. They

take the similarity of a tree in describing core competence. ‘The diversified

corporation is a large tree. The trunk and major limbs is essential products, the

smaller branches are business units; the leaves, flowers, and fruit are end products.

The root system that provides nourishment, sustenance, and stability is the core

competence’. To identify a core competence, they prescribe three tests:

• To a wide variety of markets it should be able to provide potential access;

• It should make a important contribution to the perceived customer benefits of

NOTES

102



the end products; and

• It should be tough for the competitors to copy.

The idea of core competence, presented overhead, seems to be a bright

way to focus upon the hidden strength of an organization. Yet there are drawbacks

of which an organization has to be aware of. Core competencies can be developed

but so also, misplaced. They cannot be taken for granted. The capability of a core

competence to provide strategic advantage can reduce over time as they do not

existcontinually. For this sad turn of events external environment is responsible.

Causing the existing company to lose its strategic advantage new competitors

may figure out a way to serve customers better or new technologies may emerge.

Over-reliance on core competencies to the degree of becoming prisoners of one’s

own excellence may result in strategic myopia.

The idea of a single core competence as the base for strategy formulation

has not gone unchallenged. When fresh opportunities in the business environment

lure it towards a new direction critics feel that a core competence, narrowly

defined, may restrict an organization’s freedom to act. In a situation where organized

retail is just taking off, the country still remains under-insured, agriculture has not

yet been exploited as an organized industry and the infrastructure sector needs

repairing, it would be foolish for organizations to stick to a single core competence

and deny itself of taking advantage of the opportunities. There might benumerous

different core competencies required. Core or distinctive competencies serve a

useful purpose if they are used to develop a sustained strategic advantage through

building up of organizational capability.

Several Indian companies have taken to the idea of core competence in

right earnest. Examples flourish of companies flaking businesses that are not in

line with their perceived core competencies and concentrating upon those that

are. Kumar Mangalam Birla, of the A V Birla group, sees the group’s core

competencies in a wide collectionof skills related to process industries, project

management, operations, raw material sourcing, distribution and logistics, setting

up dealer networks commodity branding, and raising finance at a competitive

cost. S Kumar sees its core competence in textile processing, Nanda’s of Escorts

in light engineering, and Reliance Industries in skillful project management and

execution.

7.7 Strategic and Competitive Advantage

Strategic advantages are the consequences of organizational capabilities.

They are the results of organizational activities leading to rewards in terms of

financial parameters, such as profit or shareholder value and/or non-financial

parameters, such as market share or standing. In compare, strategic disadvantages

are fines in the form of financial loss or damage to market share. Clearly, such

advantages or disadvantages are the results of the presence or absence of

organizational capabilities. Strategic advantages are quantifiable in absolute terms

using the parameters in which they are conveyed. So, profitability could be used

Check Your Progress

1. Explain the concept CoreCompetence

NOTES

103



to measure strategic advantage: the higher the profitability, the better is the strategic

advantage. They are equal in terms of the historical performance of an organization

over a period of time or its presentperformance with respect to its competitors in

the industry.

Competitive advantage is a special case of strategic advantage where there is

one or morerecognized competitors against whom the rewards or fines could be

measured. So, overtaking rivals in success or market standing could be a

competitive advantage for an organization.

With respect to other rivals in an industry competitive advantage is relative rather

than absolute and it is to be measured and compared.

With rising competitiveness in industry, mainly owing to the liberalization and reform

process, the usage of the term ‘competitive advantage’ has become more noticeable.

The term ‘competitive advantage’ is more widespread since it has been used as a

significant concept by the supporters of the positioning school of thought in strategy.

For example, Michael Porter uses competitive advantage as one of the important

concepts in his seminal contributions to the area of competitive strategy. Here,

we take the position as described above. Strategic advantage is a concept while

competitive advantage is one of its subsections. The clear purpose of gaining

strategic advantage is to authorize organizations to realize their strategic intent.

7.8 Value Chain Analysis

To develop the value of the business every organization consists of a chain

of activities that link together. They are mostly buying of raw materials,

manufacturing, distribution, and marketing of goods and services. These activities

taken together form its value chain. The value chain classifies where the value is

added in the process and associates it with the main functional parts of the

organization. It is used for evolving competitive advantage since such chains tend

to be exclusive to an organization. It then attempts to make an assessment of the

contribution that each part makes to the overall added value of the business.

Essentially, Porter linked two areas together:

1. The added value that each part of the organization contributes to the whole

organization; and

2. The contribution that each part makes to the competitive advantage of the

whole organization.

In a company with more than one product area, the study should be

conducted at the level of product groups, not at corporate strategy level.

Value Chain thus sights the organization as a chain of value-creating activities.

For what a product provides them value is the amount that buyers are willing to

pay. To the extent the value it receives exceeds the total cost involved in creating

its products a firm is profitable. Creating value for buyers that exceeds the cost of

production (i.e. margin) is a key concept used in examining a firm’s competitive

Check Your Progress

1. Explain the terms Strategicand CompetitiveAdvantage.

NOTES



position.

According to Porter, customer value is derived from three basic sources.

1. Activities that distinguish the product

2. Activities that lesser its costs

3. Activities that meet the customer’s need rapidly.

Competitive advantage, argues Michael Porter (1985), can be assumed

only by looking at a firm as a whole, and cost advantages and successful difference

are found in the chain of activities that a firm implements to convey value to its

customers.

7.8.1 Analysis

According to Porter, value chain activities are divided into two broad

categories, as shown in the figure.

1. Primary activities

2. Support activities

Primary activities pay to the physical establishment of the product or service, its

sale and transfer to the buyer and its service after the sale.

Support activities contain such activities as obtaining, HR etc. which either add

value by themselves or add value through primary activities and other support

activities.

Advantage or disadvantage can occur at any one of the five primary and

four secondary activities, which together form the value chain for every firm.

Primary Activities

Inbound Logistics

These activities concentrate on inputs. They include material handling,

warehousing, inventory control, vehicle scheduling, and revenues to suppliers of

inputs and raw materials.

Operations

These contain all activities related with converting inputs into the final product,

such as production, machining, packaging, assembly, testing, equipment

maintenance etc.

Outbound Logistics

These activities are connected with gathering, storing, physically allotting

the finished products to the customers. They include finished goods warehousing,

material handling and transport, vehicle operation, order processing and

arrangement.

Check Your Progress

1. Explain the value chainanalysis.

NOTES

105



Marketing and Sales

These activities are associated with purchase of finished goods by the

customers and the encouragements used to get them buy the products of the

company. They include advertising, promotion, sales force, channel selection, channel

relations and valuing.

Services

This includes all activities linked with increasing and conserving the value of

the product. Installation, repair, training, parts supply and product adjustment are

some of the activities that come under services.

Support Activities

Procurement

Activities related with purchasing and providing raw materials, supplies and

other consumable items as well as machinery, laboratory equipment, office

equipment etc.

Porter refers to procurement as a secondary activity, though many buying

gurus would argue that it is (at least partly) a primary activity. Involved are such

activities as buying raw materials, repairing, supplies, and discussing contracts

with suppliers, safeguarding building leases and so on.

Technology Development

Activities involving to product R&D, process R&D, process design

improvements, equipment design, computer software development etc.

Human Resource Management

Activities connected with employing, hiring, training, development,

compensation, labor relations, development of knowledge-based skills etc.

Firm Infrastructure

Activities connecting to general management, organizational structure,

strategic planning, financial and quality control systems, management information

systems etc.

Johnson and Sholes (2002) witness that few organizations undertake all

activities from production of raw materials to the point–of–sale of finished products

themselves. But, the value chain exercise must incorporate the entire process, that

is, the entire value system. This means, for example, that even if an organization

does not produce its own raw materials, it must yet seek to identify the role and

impact of its supply sources on the concluding product. Likewise, even if it is not

answerable for after-sales service, it must consider how the performances of

those who deliver the service donate to overall product/service cost and quality.

NOTES



7.8.2 Usefulness of the Value Chain Analysis

The value chain analysis is useful to identifythat individual activity in the complete

production process play a significant role in describing the cost, quality and image

of the end-product or service. That is, each activity in the value chain can donate

to a firm’s relative cost position and make a basis for differentiation, which are the

two main sources of competitive advantage. Management needs to identify the

core competences that the organization has or needs to have to compete effectively

while a basic level of competence is necessary in all value chain activities.

Studying the separate activities in the value chain benefits management to address

the following issues:

1. Which activities are the most serious in decreasing cost or adding value?

Ensuring quality of supplies would be a critical success factor if quality is a

key consumer value.

2. What are the key cost or value drivers in the value chain?

3. What connections help to reduce cost, improve value or disappoint imitation?

4. How do these connections relate to the cost and value drivers?

7.9 Summary

• To understand their internal and external environments Organizations perform

a SWOT analysis.

• SWOT is an abbreviation for strengths, weaknesses, opportunities and

threats.

• Those activities that add value to a product the strategic capability of the

organization is built mainly around those activities. Other activities are also

beneficial and essential but they are not the ones through which the

organization withstands its distinctive production/service values.

• C.K. Prahalad and Gary Hamel are mainly credited for the dynamic

capabilities method that consider strategic management as a collective

learning process intended at developing and then exploiting distinctive

competencies by an organization that are difficult to replicate by their

competitors.

• Strategic advantages are the results of organizational capabilities. Such as

market share or reputation they are the results of organizational activities

leading to rewards in terms of financial parameters, such as profit or

shareholder value and/or non-financial parameters.

• Competitive advantage is a special case of strategic advantage where there

is one or more identified rivals against whom the rewards or penalties could

be measured.

Check Your Progress

1. State the usefulness ofvalue chain analysis.

NOTES

107



7.10 Key Terms

1. External Environment: is composed of all the outside factors or influences

that impact the operation of business. The business must act or react to

keep up its flow of operations. The external environment can be broken

down into two types: the micro environment and the macro environment.

2. Market Environment: is a marketing term and refers to factors and forces

that affect a firm’s ability to build and maintain successful relationships

with customers.

3. Internal Environment: is composed of the elements within the organization,

including current employees, management, and especially corporate culture,

which defines employee behavior.

4. SWOT Analysis:is an acronym for strengths, weaknesses, opportunities,

and threats—and is a structured planning method that evaluates those four

elements of a project or business venture.

5. Resource Audit:resources audit is a comprehensive method (ormeans)

to review current human resources policies, procedures, documentation and

systems to identify needs for improvement and enhancement of the hr

function as well as to assess compliance with ever-changing rules and

regulations.


1. What do you understand by Value chain analysis?

2. Explain the concept of resource audit.

1. State the term External Environment with example.

2. Explain the term Market Environment with example.

3. State the term SWOT Analysis with case study.

4. Explain the term Resource Audit

5. Evaluate the term Core Competence with suitable example?

6. State the term Value Chain Analysis.


1. Which is not the internal factor of environment?

A) Suppliers

B) Consumers

C) Vision of organization

NOTES



D) Legal

2. Which is not the external factor of environment?

A) Vales

B) Economical

C) Political

D) Regulatory

3. Which factor is not includes in SWOT Analysis mean….

A) Strengths

B) Weaknesses

C) Optimistic

D) Threats

4. Organizations perform a SWOT analysis to understand their internal and

external environments.

A) True

B) False

Ans. - (1 – D), (2 – A), (3 – C), (4 - A).


Mark Jenkins & Veronique Ambrosmi: Strategic Management - a multi-perspective

approach, Palgrave Publication

Thomas L. Wheelers & J. David Hunger: Strategic Management, Addison —

Wesley Publishers

NOTES

109



Unit 8 Strategic Planning – Concept, Process,Forms, Merits and Limitations

Structure

8.0 Introduction

8.1 Objectives

8.2 Concept and Features of Strategic Planning

8.3 The Need for Planningand Significance of Planning

8.4 Merits of Strategic Planning

8.5 Strategic planning process

8.6 Strategic Alternatives

8.6.1 Top Down or Planning Down

8.6.2 Bottom Up or Planning Up

8.6.3 Negotiative or Negotiated

8.7 Planning style, structure, and style of management

8.8 Non- Strategic Planning

8.9 Summary

8.10 Key Terms



8.0 Introduction

In this chapter attempt is made to analyse the process of strategic planning.

Strategic planning is a way of anticipating the future and of managing time.Strategic

plan are constructed by looking into, studying and analyzing the future period of

two to five years. Thebroad strategic purpose (or “strategic intent”) of the

organization is used to implement and attain by strategic plans.

NOTES

111

Strategic Planning -Concept, Process, Forms,Merits & Limitations


8.1 Objectives


• Describe the idea of strategic planning

• State the need for business planning

• Define the qualities of strategic planning

• Define the steps of strategic planning

• Explain the numerous strategic alternatives

8.2 Concept and Features of Strategic Planning

Strategic planning is the procedure by which leaders of an organization

decide what an organisationaims to be in the future and how it will get there. To

put it another way, to achieve that vision, they develop a vision for the organization’s

future and determine the necessary priorities, procedures, and operations

(strategies). Strategic planning comprises of measurable aims which are accurate

and achievable and are also challenging. In its importance is for long term goals

and strategies rather than short term objectives. By the organization strategic

planning assumes that certain aspects of the future can be created or influenced.

Strategic planning is continuing; it is “the method of self-examination, the clash of

difficult choices, and the formation of priorities”. It involves “following a course

that you believe is clever, then correcting that course as you gain more information

and experience”.

Robert Anthony describes the strategic planning as “the process of deciding

on the objectives of the organisation, on changes in these objectives, on resources

used to attain objectives and on the policies that will govern the acquisition, use

and disposition of these resources.”

Strategic planning provides the firm with long range direction. Management

can plan Company’s future and shape it successfully in the face of turbulent

environment.

The characteristic feature of strategic planning can be described as follows:

I. The strategic planning emphasizes the mission and the goals of the

organisation. Similarly, the nature of business and nature of customers are

clearly mentioned.

II. Strategic planning is a top management activity. It decides the basic policies

and programs of the organisation and also provides a framework for

operational planning and day to day decision making.

III. Strategic planning is usually for long term period (i.e. it is long term in

nature).

IV. In strategic planning opportunities and threats/ challenges are forecasted


NOTES


and while doing this, uncertain environment is dealt with.

V. It is a comprehensive plan prepared for deploying the scares resources of

the organisation.

VI. Strategic plan sets the direction for the activities of the organisation and

thereby facilitates the attainment of organizational objectives.

8.3 The Need for Planning and Significance ofPlanning

Remaining responsive only to its present environment it is inadequate (and

dangerous) for the enterprise. Whetherbusiness, public sector, or not-for-profit,

any enterprise needs to plan for the future. Enterprise management needs to

attempt to anticipate the future environments within which the organization will

operate. As making decisions for today, planning for tomorrow is as important.

There are two reasons for this.

Firstly, the making of plans and forecasts, and their eventual review, forces

managers to think ahead. The organization should know what are some of the

likely consequences of both its existing commitments and the future plans it is

implementing. Over the next few years it should to be able to describe some of

the most likely scenariosthat it is likely to face. A “scenario” is an expectation of

what is more or less likely to happen in the future. There is no reason why the

enterprise should not limit the risk and uncertainty implicit in the future to those

most unpredictable events that are almost always impossible to forecast.

Secondly, systematic thought and analysis are involved in the making of

plans and forecasts. Such an intellectual process may be of value in itself, particularly

in organizations that have a tendency to ‘be long on action but short on thought’.

Every business should have a strategy (i.e. overall plan of action) to meet

the challenge of environment in future. Strategic planning clarifies the objectives

of the organisation towards which its resources are directed. All decisions and

activities are guided by organizational objectives.

Strategy facilitates the implementation policy and long term plans for

achieving organizational goals. Strategicplanning is very useful to fight competition

in the market and to have control over the market. Strategic planning makes it

possible to have environmental scanning and helps in reducing uncertainties by

identifying key factors for the success of the business.

8.4 Merits of Strategic Planning

• For decision-making a need for better information may be recognized.

• Growth can be speeded up and improved.

• Poor performing areas can be recognized and removed

NOTES

113

Check Your Progress

1. What do you mean bystrategic planning?

Check Your Progress

1. State the need of planning.



• Increased control of operational problems would be possible.

• Improve better communications with those both confidential and outdoor of

the company.

• Provides a road map to show where the company is going and how to get

there.

• Internal coordination of activities can be improved

• Improvesanedge of reference for budgets and short – range operating plans.

• Provides a sense of security between employees that come from better

understanding of the changing environment and the company’s capability to

adapt.

Limitations/ Demerits of Strategic Planning:

Strategic planning suffers from the following limitations/ Demerits:

1. It requires considerable investment in time, money and manpower/ human

resources. It may, in some organisation take years to function smoothly.

Sometimes important decisions are differed because of shortage of

resources. This may result in loosing important business opportunities.

2. Small size organisation can not afford the costs of implementing/ Carrying

out strategic planning.

3. Strategic planning requires trained persons to make use of opportunities. If

such persons are not available in the organisation strategic planning will not

be effective. If outside persons/ Experts are used, strategic planning would

prove to be very costly.

4. Strategic planning may sometimes restrict the organisation to comparatively

risk free operations. The organisation will be deprived of encashing/ exploiting

attractive opportunities. Thus, it will defeat the purpose of strategic planning.

8.5 Strategic Planning Process

The broad steps in strategic planning can be described as follows:

1. Determining Mission/ Purpose (Objective, Goal)

The strategic planning process begins with spelling out/ determining the

business mission. The mission helps the firm to identify the functions it performs

for the society and also understand its basic character and philosophy.

Mission is often stated in abstract terms for example, (i) “our business is

to render service, (ii) to provide dependable and standard medicines to the

people at low prices.”

The top management of the organisation determines the major objectives

and goals so as to be able to achieve the mission. In management literature the

NOTES

114

Check Your Progress

1. Explain the merits ofstrategic planning.



term ‘objective’ and ‘goals’are used interchangeably. However, some experts

make distinction between two terms. RusselAckoff makes distinction as follows:

“objectives are desired outcomes. Goals are objectives which are scheduled

for the attainment during the planned period.”

Thus objectives are open ended and have no time frame. They are stated

in broad and general terms. On the other hand goals are much more specific

and they are stated in terms of results to be attained.

2. Environmental Scanning :

Analysis of environment is the diagnostic phase of strategic planning.

External environment of a firm consists of economic, technological, social,

legal, political, market and other forces which have their influence (impact) on

functioning of the firm. External environment of a firm is dynamic as well as

uncertain. The management of a firm has to make all efforts to systematically

monitor it so that threats and opportunities for the firm in future are properly

understood. For example, emerging strong competition in the market in the

near future may be a threat. Similarly, availability of new technology may help

the firm to reduce the cost and improve the quality of its product. This may be

an opportunity for the firm. The management of a firm can develop an

Environment Threat Opportunity Profile (ETOP). This will enable the firm to

assess the impact of various environmental forces on the business of the firm.

External environment appraisal will enable a firm to know present and

future opportunities, threats, limitations, crises which it can exploit or will have

to tackle as the case may be.

3. Organizational analysis :

Along with environmental analysis, a firm also must undertake analysis of

organizational strengths and weaknesses. This includes (i) the number and

types of products and servicesprovided by the firm (ii) what is the geographical

coverage of the firm – whether its operations are local, national or international.

(iii) Special competitive strengths (if any) of the firm.

The present status of ongoing operations, performance trends,

organizational resources (including physical resources, productive assets, market

position, marketing facilities, product range, technological competence, public

image etc.) financial resources and manpower skills – all these have to be

carefully assessed. This gives clear idea about the strength and weaknesses of

the organisation compare to present and future competitors.

4. Developing Strategic Alternatives :

Taking into account strength and weaknesses of the organisation and the

environmental opportunities and threats the strategic alternatives are developed.

There may be several alternatives available for the organisation. For example,

(i) continuing with the same business, getting out of it fully or partially. (ii)

Achieving growth by expanding the existing units or by establishing new units

or by acquiring/ taking over other units. (iii) Diversifying (i.e. entering new/

different business field) into related or entirely new (i.e. unrelated) areas of

NOTES

115



business (iv) combining with other firms (Mergers)

5. Evaluating the strategic alternatives :

Each strategic alternative has its own merits and limitations/ Demerits.

The management of a company must examining various alternatives in the

light of environmental opportunities and threats as well as its own strengths

and weaknesses. For selecting the best alternative management may use the

tools of quantitative analysis. For example, PERT, CPM, Linear Programming,

Ratio analysis.

While evaluating the alternatives, it is necessary (rather essential) to focus

on a particular product or service and also on those competitors who are offering

it (who are direct rivals). A strategy which does not use the particular advantage

of the organisation over its rivals must be rejected/ dropped.

6. Selecting appropriate strategy – Formulating Strategy

In strategic planning, this is the most crucial stage. Out of the various

(Strategic alternatives) the most appropriate strategy which enables the

organisation to attain the specified objectives must be selected. The alternative

(Strategy) which is best suited to the capabilities of the organisation should be

selected. A strategy which utilizes the existing strengths (All Resources) of the

organisation to the maximum extent is the best strategy. A strategic plan based

on capabilities (Resources, Skills) yet to be acquired may fail. Degree of risk

which management is ready to accept, the timing of the decision, attitude od

top management, expectations of owners – are the other factors which affect

the choice of alternative strategy.

7. Execution of plan :

Once the strategy is finalized i.e., strategic alternative is finally selected,

it must be translated (Converted) into suitable, operational and tactical plans,

programs, budgets etc. and thus it could be implemented/ executed. After the

strategy is actually executed i.e. put into practice, its effectiveness should be

reviewed carefully so as to know whether it has been able to achieve its

expected results.

In addition to the above broad steps, following considerations are also

made in the process of strategic planning:

i. The Key issues, questions and choices to be paid attention to and setting

priorities are carefully considered.

ii. Values, Vision& Mission are classified are taken into account.

iii. Once the long term elements of a strategic plan have been developed then

the specific work plan to begin implementation is prepared – annual programs

or annual action plans are also required.

iv. Procedures are built in for monitoring, and modifying strategies which are

based on changes in the external environment or in the organisation.

NOTES

116

Check Your Progress

1. State the Strategic planningprocess.




The strategic alternatives have been discussed in full in unit no. 9. Hence,

we discuss in this unit the approach and planning style by which enterprise

management may formulate objectives and strategies. They can take any of the

following three forms:

• “Top down” or “planning down”.

• “Bottom up” or “planning up”.

• “Negotiated” or “negotiative”.

8.6.1 Top Down or Planning Down

In a Centralized approach to strategy formulation the corporate center or

head office is major top down or planning down. As a whole the corporate center

controls mission, strategic intent, objectives and strategies for the organization,

and for all of its parts. Irrespective of whether or not they are theoretically

recognized as companies or divisions it formulates strategy for operating units.

Unit manager’sare seen as implementers of pre-specified corporate strategies.

Of a rationalistic form of strategy formulation planning down corresponds

to the description by Mintzberg and Waters (1985) and Mintzberg (1987).In the

process of strategic management this can be described as being a planned,

systematic, and centralized approach in which the chief executive officer and his

or her colleagues are dominant forces. In the strategy process self-imposed

restrictions on the distribution of sensitive information or confidential planning

requirements prevent subordinate staff from participation. Instead, for

implementation strategic and business plans may be “handed down” (or “thrown

over the wall”) to subordinates.

Planning down also corresponds to Mintzbergetall’s description of a

deliberate approach to strategy formulation in which there is an attempt to realize

strategies exactly as intended because it is perceived by the people at the corporate

centre that:

• They are proficient of formulating exact and unmistakable objectives and

strategies; and

• The staff and resources of the organization can then be made to “fit” the

understanding of these objectives (that is, their correspondence is a function

of the management process and therefore of management expertise).

Example one - where a shareholder corporation is powerfully oriented to

financial performance and the need to provide constant returns to shareholders,

the corporate centre may execute on its operating units the requiredstrategies

and tool by relating financial and operations management techniques to its companies

such that they are mandatory to meet (and then improve on) performance targets

specified by the centre.

117



Example two - where the corporate centre instead views the enterprise as a

portfolio of activities, the sum total of the organization’s activities planning down

may be used to attempt to “optimize”. By Buzzell, Gale and Sultan (1975) the

portfolio approach to strategic management was described. The Corporate center

designates enterprise activities or divisions as “business units” or “strategic business

units” (SBUs). Each is defined as a separate activity in which resources may be

applied or withdrawn, especially where the corporate centre holds and controls

the disbursement of all cash within the organization. A “balance” between cash

earnings andcash using SBUs is sought within the portfolio, such that:-

• An appropriate return is made to shareholders, banks, or stakeholders over

time sufficient funds are generated across the portfolio as a whole.

• Great risk in any one activity or location is balanced by low risk activity in

another.

• positive cash flows may be assigned to develop any or all of (i) what are

called as product-market “stars” and “question marks”; or (ii) the ongoing

procedures of invention, new product development, and business development

described in later chapters; or (iii) the “core competencies”

The worry by the corporate centre to enhance the presentation of the business

as a whole will mean that the process of strategy formulation will be coordinated

and combined. The individual likings of any one subsidiary or division are of

subordinateimportance. In order to achieve what it considers being this best

performance of the enterprise as a whole. Eventually, the corporate center may

(for instance on grounds of opportunity cost) intentionally sub-optimize or deprive

the activities of particular business units.

8.6.2 Bottom Up or Planning Up

Planning up is distinguishing of “federal” structures including autonomous

or semi-autonomous divisions or subsidiary companies in which the corporate

centre does not conceptualize its strategic role as being straight answerable for

determining the mission, objective, or strategies of its operational activities. Inkeeping

things reasonably simple and confining it may prefer instead to act as a catalyst,

organizer and referee, to:

• Founding perspectivefor the enterprise as a whole.

• Creating the broad guidelines of the organization’s strategic intent.

• Starting and distributing core values and culture throughout the organization.

• Emerging competencies, and developing leaders and managers throughout

the organization.

• Creating systematic strategic planning, strategy preparation, and strategic

management procedures for the enterprise.

• Guaranteeing consistency and co-ordination across the federation

NOTES

118



• Establishing the minimum or necessary performance criteria to be applied

all through the enterprise.

• In its external environment using power and undertaking political

behavioron behalf of the enterprise.

Using them to start and attain their own objectives and strategies individual

subsidiaries and divisions are responsible for interpreting corporate intent and

guidelines. They are responsible for decisions on the specific perspective and

patterntowards which they are working.

Both within and outside of the enterprise, they may also be given the authority

for the necessary use of power, such that they can look after their own interests.

Typically, for the planning period being used each subsidiary or division establishes

its own strategic and business plans, which quantify performance forecasts and

resource requirements. These unit plans may also contain bids for additional funds

to finance capital and competence development, business development, innovation

and new product or process development (etc) where the corporate center acts

as a “referee” and banker. The corporate centre may then attempt to question,

reconcile, and aggregate the various unit plans by:

• The actual and forecast financial returns and cash flow negotiating with

individual units, such that the corporate centre is able to satisfy itself that

the company will be able to meet shareholder, bank, or stakeholder

expectations of the performance of the business as a whole.

• Dealing with requirements for capital investment funding or development

duties, for example assigning resources from the capital budget on the base

of the investment assessment methods, return targets and thresholds.

• Negotiating with, or facilitating amongst the benefits of the various

managements of the companies and divisions.

Ultimately, planning up treats divisions and subsidiaries as independent units

largely answerable for their own destiny, required only to meet definite targets for

operational integrity, devotion to corporate values, financial performance, cash

reduction or residual income, perhaps taking one year with the next.

8.6.3 Negotiative or Negotiated

Formation of objectives and the formulation of strategies results in this

case from interactions between the parties. By any number of variables the

results of the negotiation may be determined, whether these be the main power

dependences, leadership capability and method, entrance (or otherwise) of the

parties to the needed information, the urgency and significance of the situation, or

the negotiating skills being brought into play.

To strategy formulation anegotiative style of planning may favor the use of

a logically incremental approach. From each new set of negotiations the character

of each step in the evolving process will result. As circumstances permit at the

same time, however, powerful or high status groups with highly developed

NOTES

119

Check Your Progress

1. Explain the top downapproach of strategicplanning.



negotiating competencies may be able to take advantage of this style of planning

to achieve outcomes favorable to them on an opportunistic basis. In the public,

state, education or healthcare sectors, this syndrome is common, where powerful

interests are often able to further their own interests at the expense of the weaker,

the less skilled, or the disadvantaged.

With local, regional, provincial, federal, national or international government

agencies which typically contain multiple interests and multiple stakeholders a

negotiate planning style is in particular characteristic of public sector policy bodies

associated.

8.7 Planning style, structure, and style ofmanagement

As means of implementing strategy the analysis of planning style is reliant

on, and relates with features of organization structure and style of management.

These features are summarized below.

Planning Down

Organization structure - planning down may be associated with the following:

Entrepreneurial structures and family businesses - typically with personalized

decision-making power focused on the entrepreneur or family members which

tend to be strongly centralized.

Public service administrative organizations - which are described by duty to

responsible individuals who hold official positions as designated officers, mayors,

government ministers, provincial governors, and so on. Their management

behavior is likely to be driven by the need for control of, and accountability for

(i) the quality and dependability of operational activity and (ii) the distribution

of public funds that is understood in attaining objectives.

To a high degree of centralization planning down in this case is strongly

linked. Mintzberg (1983, 1989) comments that, the more centralized and

formalized (rationalistic and deliberate) will be its management process and

behavior the greater the degree of external control of an organization. External

(and maybe politicized) authority will:-

• Be accountable for the strategic management procedure of objective setting,

strategy formulation, strategy implementation, and the achievement of results

hold the chief executive officer personally.

• Enforce necessary essential values and standards which must support

strategy formulation, implementation, and performance evaluation.

• Within the organization establish a strong control culture and mentality

between decision makers and managers.

Classical hierarchical mechanistic structure-embodying the scalar chainwhich

are characterized by a hierarchy of management roles and offices. Morden

NOTES

120

Check Your Progress

1. Define the termnegotiation.



(2004) notes that ‘the scalar chain is used to establish a”top-down” unity of

command in which instructions flow down and feedback on results achieved

flows back up the hierarchy. Communication and control processes are

perpendicular. Decision-making will be integrated, that is carried out at the

“top” or “apex” of the organization’.

It may also be expected by decision-makers that adequately healthy and

complete rationalistic, thoughtful, and universalistic processes of strategic

planning can be put in place by the corporate centre (or by its functionally

specialized corporate or strategic planners and advisers) such that extraordinary,

unpredictable, novel, high risk, or confusing events and eventualities (for instance

associated with conditions of external change and uncertainty) can in the main

be legislated for in advance.

Divisionalised structures - which may be characterized by “controlled” or

“coordinated “reorganization in which there is strong way from the corporate

centre.

Management style - planning down may be associated with any of:

• Theory X (McGregor, 1960).

• Little trust (Fukuyama, 1995).

• Great power distance (Hofstede, 1980, 1991).

• Great ambiguity avoidance (Hofstede), linked with concentration and a strong

control mentality.

• Tough “universalism”, which is defined by Hampden-Turner and

Trompenaars (1994) as a trust in centralized prescription, codification,

formalization, standardization, and instruction. In order to standardize

decision-making, rules are to be universally applied; individual discretion is

to be denied; and subordinates are seen by their super ordinate (bosses) as

implementers.

• Atoughconfidence in management by role explanation, formal hierarchy,

and “mechanistic” (regulated, programmed, or prescribed) interaction.

Planning Up

Organization structure - planning up may be associated with the following:

Divisionalized structures -between the numerous divisions there is full divisional

or delegated independence, authorization, and responsibility; and where the

corporate centre acts as a holding company, banker, mediator or “honest broker”.

On a federal basis the corporate center signifies the enterprise externally to

shareholders, investors, and the external environment.

Innovative, organic, adhocracy or network structures - which as fluid and

adaptive mechanisms may pursue strategy on an opportunistic basis? This

will call for a high degree of localized planning independence and flexibility.

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Management style - planning up may be associated with any of:

• Theory Y (McGregor) or Theory Z (Ouchi, 1981).

• Great trust (Fukuyama).

• Short power distance (Hofstede).

• Short insecurity avoidance (Hofstede), possibly connected with high risk

tolerance.

• A confidence in a degree of impartiality between the operating unit and the

corporate center.

• The use of task cultures which are mainly focused on achievement. Attitudes

to issues of leadership, direction, consultant, role, expertise, and the attention

of decision-making are all shaped by the over-riding need “to get the job

done”.

• A counseling, organizer, or allowing style of leadership.

Negotiative

Organization structure - a negotiate planning style may be associated with the

following:

Divisionalized structures - as measured by divisional performance assessment

procedures and responsibility criteria in which there is a classic tension among

leadership, direction, core values, and control from the corporate centre

(centralization); and the demand for divisional autonomy (decentralization)

Matrix structures - between two equally empowered axes of the matrix making

up the structure in which strategic outcomes may be dependent on negotiative

interaction.

Innovative, organic, adhocracy, or network structures - in which strategy

formulation results from a tension between the direction and core values of the

corporate centre, and the local need of the unit to respond flexibly and quickly

on a logically incremental or opportunistic basis to changing external,

technological, or market conditions.

Management style - a negotiative planning style may be associated with any of:

• Theory Y or Theory Z.

• Short power distance.

• Low hesitancy avoidance, may be connected with high level of risk tolerance

and working flexibility.

• An emphasis on particularize -on its merits each case may need arguing.

Rules may be seen “to get in the way”. Everything “may be negotiable”.

• A faith in impartiality amongst the working unit and the corporate centre

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Check Your Progress

1. Explain the planning style.



8.8 What is not Strategic Planning?

1. Decision can be made only in present; Strategic Planning does not try to make

future decision.

2. With respect to such things as material purchases, facilities, manpower etc.

strategic Planning is not forecasting product Sales & then determining what

should be done to assume the fulfillment of the forecasts. Strategic Planning

goes outside present forecasts of much more basics such as:

• Are we in the correct business?

• What are our basic goals?

• When will our current become outdated?

• Are our markets hurrying or corroding? Gap Analysis from present to future.

3. Not necessarily the preparation of gigantic, detailed, connected sets of plans is

Strategic Planning.

4. Strategic Planning is not an effort to substitute decision-making instinct &

judgment.

5. Strategic Planning is not a simple aggregation of functional plans or an

extrapolation of current budgets. Through the uncertain waters of its changing

environment prescribed aims it is a systems approach to guiding an enterprise

over time.

8.9 Summary

• Strategic planning is the method by which leaders of an organization regulate

what they intend to be in the future and how they will get there.

• Making decisions for today is as important as planning for tomorrow.

• The approach or planning style by which enterprise management may

formulate objectives and strategies can take any of the three following

forms: (i) “top down” or “planning down” (ii) “bottom up” or “planning up”

(iii) “negotiated” or “negotiative”.

8.10 Key Terms

1. Strategic Planning: is an organization’s process of defining its strategy, or

direction, and making decisions on allocating its resources to pursue

this strategy.

2. Top Down or Planning Down: controlled, directed, or instituted from the

top level. Is essentially the breaking down of a system to gain insight into its

compositional sub-systems in a reverse engineering fashion. In a top-down

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123

Check Your Progress

1. What do you mean by nonstrategic planning ?



approach an overview of the system is formulated, specifying but not detailing

any first-level subsystems.

3. Bottom Up or Planning Up: is a type of information processing based on

incoming data from the environment to form a perception.

4. Negotiation: It is a process by which compromise or agreement is reached

while avoiding argument and dispute.


1. Explain the process of strategic planning.

2. What are the merits of strategic planning?

3. Evaluate the Top Down or Planning Down process of management.

4. Explain the Bottom Up or Planning Up process of management.

5. Explain the Planning style of management.

6. Explain the Planning structure of management.


1. Planning for tomorrow is as important as making decisionsfor today.

A) True

B) False

2. A negotiative planning style may not be associated with the…..

A) Organization structure

B) Divisionalized structures

C) Matrix structures

D) Human structure

3. Which forms of strategies are not used?

A) “Top down” or “planning down”

B) “Bottom up” or “planning up”.

C) Negotiated” or “negotiative”.

D) Accepted “or “agreed’’

4. Whichapproach describes by Top down or planning down to strategy

formulation?

A) Centralized approach

NOTES

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NOTES

125



B) Rationalist approach

C) Informative approach

D) Deliberate approach

Ans. - (1 – A), (2 – D), (3 – D), (4 – A).


McGregor, D. (1960) the Human Side of Enterprise, McGraw-Hill, London.

Mintzberg, H. (1983) Power In and Around Organizations, Prentice-Hall,

Englewood Cliffs, New Jersey.

Mintzberg, H. (1987) “Crafting strategy”, Harvard Business Review, July-August.

Mintzberg, H. (1989) Mintzberg on Management, Free Press, New York.

Mintzberg, H. and J.A. Waters (1985) “Of strategies, deliberate and emergent”,

Strategic Management Journal, July-September.

Unit 9 Strategic Choices and Alternatives

Structure

9.0 Introduction

9.1 Objectives


9.3 Generating strategic alternatives

9.4 Classifying strategic alternatives

9.5 Classification based on the desired rate of growth

9.6 Strategic Choice

9.6.1 International Strategy

9.6.2 Multidomestic Strategy

9.6.3 Global strategy

9.6.4 Transnational Strategy

9.7 Cultural Aspects of Strategic Choice

9.8 Summary

9.9 Key Terms



9.0 Introduction

Identification of alternative strategies for an enterprise is an important aspect

of strategic planning with the strategy of an organization business models have a

close relationship. Strategies result in choices; a business model can be used to

help analyze and communicate these strategic choices. As a matter of strategic

choice companies in the same industry, opposing with each other can rely on

different models. Depending on the nature of specific situation and environmental

conditions, there are number of variations in the competitive strategies that a

company can employee. In this unit we will discuss some of the strategic

alternatives available to business firms.

NOTES

127

Strategic Choices& Alternatives


9.1 Objectives

At the end of this unit, you should be able to :

• Describe the concept of strategic alternatives

• Explain the procedure of creating strategic alternatives;

• Define how strategic alternatives are categorized;

• State the strategic choices available to businesses


“Strategic Alternatives revolve around the question of whether to continue

or change the business of the enterprise in which it is currently in or to improve

the efficiency and effectiveness with which the firm achieves its corporate

objectives in chosen business sector.”

- Glueck&Jauch.

At a point in time strategic alternatives refer to different courses of action

which an organization may follow. These alternatives are important to the success

of the organization. More often than not, these are influenced by factors external

to the organization and over which -the organization has limited control. For instance

consider a situation where a firm is suffering increased rivalry of its products.

How should the organization react? Should it decrease price? Should it develop

the quality of the product! Should it use a mix of the two? Should it develop the

supply network? Should it expand promotional effort?Substitutes external to the

organization such as unions, achievements and joint ventures may also be well-

thought-out. The list of substitutes will be unfinished without the substitute of

disinvestment. There are circumstances when removal from a current business

is the most appropriate course of action. In fact, it may be incorrect to consider

that continuing to produce a particular product or service is a must.

If the present value of the expected stream of earnings from that business

is less than its currentvalue a firm may consider extraction from a business. Thus,

the organization should withdraw from the textile business if the present value of

the stream is of earnings from the textile unit of a corporate group is less than the

net worth of the textile business. If the organization wishes to withdraw sometimes

there may be complications. To protect workers likely to be rendered unemployed

the most serious opposition may come from the Government in its anxiety. DCM

Limited, a highly diversified group this kind of a situation is being faced by them.

Any organization planning to withdraw from a specific business should try to

forecast the restrictions and develop ways to overcome them. Some obvious

alternatives include: i) in other units proposing substitute jobs to workers; ii) so

that they would not easily turn down the offer providing smart retrenchment

terms to workers (the golden handshake).

NOTES

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Check Your Progress

1. Define the term StrategicAlternatives.

9.3 Generating strategic alternatives

For its survival and growth how does an organization identify substitute

courses of action? Depending upon its size, style of management, work attitude

and industry characteristics the procedure may differ from organization to

organization.

Small Organizations All decisions are made by the owner himself or by

the chief executive in a small organization. Under alternative situations these

choices deal with what an organization should do. Upon the experience and

technical competence of the chief executive, what new businesses should be

added or what existing businesses should be done away with the success or

failure of the organization depends. Thus, by the owner-manager in small

organizations strategic alternatives are identified. Of course his decision may be

influenced by some bureaucrats, industrialists, etc. with whom he interacts. Rather

than based on a well-defined procedure the procedure used for identifying

alternatives may be instinctive. The method of implementing alternatives in small

business is however reasonably fast.

Large Organizations In organizations of medium to large size, the following

mechanisms may be employed for identifying strategic alternatives.

• brain-storming sessions;

• special conferences for the purpose;

• facilities of external consultant;

• Combined meetings of the consultant and the senior employees of the

organization.

Brain Storming Session During the brain-storming sessions in most

organizations strategic alternatives are identified. In such meetings participants

are encouraged to come out with any course of action which they feel is possible.

To relative merits and demerits of the alternatives at this stage no importance is

attached. In the next stage each alternative is reviewed and subjected to a close

inspection. Consider the case of power shortage in an organization which produces

energy -intensive product such as aluminum. What must the organization do?

Since the decision is, guaranteed to disturb the organization crucially, the alternatives

are of critical, importance. These may include:

i) purchase a generator,

ii) which are not very energy intensive start producing those products,

iii) for meeting part of the, requirements have a stand-by generator;

iv) Introduce a change in, the product-mix, with an importance on; those

products which, have a higher involvement per unit of investment.

The few alternatives listed above have their own: suggestions in, terms of

monetary, physical amenities, manpower requirements, etc. The chief executive

NOTES

129



has to select the substitute which is the most suitable in his opinion. In this decision

the current resource position of the organization will be a major influencing factor

Special conferences for the purpose : In a hotel or a holiday resort,

large organizations, identifying the importance of generating strategic alternatives,

hold special meetings away from the place of their work. This is to ensure that

during the course of deliberations the process of thinking, is, not disturbed by

interruptions. Along with their recommended courses of action the participants

present alternative scenarios. Alternative scenarios- may be based upon:

assumptions regarding.

i. rate of growth of the economy

ii. Position, regarding foreign exchange

iii. Rate of inflation

iv. Degree of unemployment

v. philosophy of the political party in power

vi. Degree of change in technology

vii. socio-cultural factor having a conduct on the profitability of the organization.

Depending on the assumptions, alternative courses of action are often

recommended regarding the values and future trends of the above parameters.

To arrive at a consensus an attempt is made through the discussions. The

turnaround, strategy of a leading pharmaceutical company Burroughs Well come

was conceived in a series of meetings the Chief Executive had with his senior

managers.

Facilities of external consultant;

This process of identifying strategic alternatives is based on the principle

that an outsider can observe the phenomenon in an objective manner. It is known

that the executives, who have been keenly related with, a particular project, are

frequently so involved with it that they tend to, be subjective and overlook its

weaknesses. Others, from inside the organization may also be incapable to see its

boundaries. Under such conditions, on an objective basis, engaging outside

consultant may be a more effective way to generate, strategic alternatives. The

outside viewpoint is likely to, being new and fresh, and thus, can show, up many

new openings, to the organization.

Combined meetings of the consultant and the senior employees of the

organization

Another preferred way of generating alternatives is to hire the services of

a, consultant but also subordinate some internal members in the process. From

within the organization this method is able to combine the advantages of the new

ideas contributed by outsiders being blended with workable solutions. In, any

case, an, outside consultant may like to seek the opinion of the internal members

on his proposals.

NOTES

130



Check Your Progress

1. Explain the role ofconsultants in generatingstrategic alternatives.

9.4 Classifying strategic alternatives

From the point of view of an organization, strategic alternatives may be

classified on the basis of degree of risk involved. Thus we have:

There may be a number of specific courses of action within this broad

classification. The above classification provides the following strategic options in

that order of risk:

• Niche

• Vertical integration-backward and forward

• Horizontal expansion

• Diversification

Niche Strategy : Concentrating around a product and market means Niche. It is

a strategy that represents the typical behavior of the small companies involving

very low degree of risk. In general, such organizations are scared of growing big

as it could involve them into legal, labor and management problems. They are

happy with their present position and wish to capitalize on their larger knowledge

of local conditions and choose a very thin segment of market. ‘NIRMA’ until

lately followed this alternative with great success.

In India, small scale units has always favored by the Government policy. In

the matter of licensing, credit and supply of raw material such units have been

accorded a favorable treatment. Thus, the factors internal to the organization and

government policies have contributed to the growth of small companies in India.

Vertical Integration : This can assume two forms: backward and forward.

Backward integration means in-house production of critical inputs for the main

business or going in for marketing of products by opening retail outlets. By taking

up the production of intermediate goods the company may also add to the present

products/processes. The companies try to reach customers through their own

distributional network in the case of forward integration. To ensure a control over

retail price of their products organizations follow forward integration to take

advantage of the closer contact with the customers. Reliance Company has

followed this strategy very efficiently. Integration is a reasonable risk substitute.

NOTES

131



High risk strategic alternatives

Moderate risk strategic alternatives

Low risk strategic alternatives

Horizontal expansion and Diversification

When a firm adds new products or enters into new marketsit results

Horizontal expansion. This strategy is followed by most pharmaceutical

companies. An enterprise takes up new products or business which may be related

or unrelated to its current business in diversification. In particular, diversification

contains high degree of risk as it amounts to manufacturing new products or

entering into new-markets, unaware to the organization. There are two broad

categories of organizations that follow diversification. The first category includes

those in the traditional lines which are not doing too well and are discovering the

possibility of other products or markets. The second category would include

organizations which enjoy substantial resource strength and would like to grow

operation by looking at new businesses. Both vertical integration and diversifications

have been followed by companies in India. For example, mainly large construction

projects, heavy engineering, specialized automobiles, Sugar, concrete pipes,

confectionary, machine tools castings, and fabrication etc. are covered by Walchand

Groups. For soaps and toiletry business Hindustan Lever has pursued a strategy

of vertical integration. In basic chemicals it has also followed diversification.

Some business houses have gone in for large scale diversification i.e., DCM,

Tata’s Group, Birla Group, Thapar Group, ITC, etc. By entering into cement and

shipping industry Larsen and Toubro have had major diversifications in recent

times.

9.5 Classification based on the desired rate of growth(Growth Strategies)

The various alternatives provided are:

a) Internal expansion (adding more capacity)

b) Internal stability (by supplementing resources)

c) Internal retrenchment (manpower or assets)

d) External retrenchment (by placing company-owned outlets)

e) External expansion through mergers (linking with other business units)

f) A combination of the above strategies

Some of these alternatives are explained as follows:

Internal Retrenchment(Defensive Strategies) : This is also known as

‘turnaround’ in which the Organization starts making profit after suffering losses

for a number of years. This may be brought about through restructuring of capital,

changes in management personnel and better control in functional areas. In the

Indian context, a good case of turnaround strategy is presented by Hindustan

Photo films.

External Retrenchment (Divestment) : This expression is used as

substitute for divesture. Thus incurring a loss over a period of time, an organization

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Check Your Progress

1. What do you mean byNiche Strategy?

2. Define the term VerticalIntegration.

may like to withdraw from a business. Obviously, the method is the contradictory

of mergers. Subject of the clearance of the environment, the DCM wishes to

separate out of its textiles business. About a year back, ITDC decided to close

Akbar Hotel. Divesture is encouraged by factors such as insufficient market,

lesser profits and accessibility of better alternatives, technological changes requiring

investment which the management is incapable to undertake. Divesture may

include the following:

• As an independent unit a part of the unit may be floated

• It may be sold to employees

• It may be traded to an independent buyer

• It may be settled and its assets sold.

Liquidation: This strategy is generally used when a company (a business

firm) has become sick and can not be revived. It is used last resort. The strategy

involves the sale of entire business of the company to avoid bankruptcy/ insolvency.

Glueck 2 has classified strategic alternatives into the following categories:

i) constant growth strategies

ii) profit strategies

iii) constant growth as pause strategies

iv) sustainable growth strategies

The first substitute is useful when the focus of its main strategic decision is on the

incremental improvement of functional performance or a firm pursues its original

objective or objectives similar to the original one. In this case, achievement level

is permanent on the basis of past performance modified for identified rate of

inflation. The underlying premises in this case are:

• reasonably constant environment and

• since its inception, has followed a stable growth strategy in India

Management not being in favor of undertaking high degree of risk though it

is not risk averse Mode Xerox. It has focused on a fine range of products

and quality aspect of after-sales service.

When the main aim of the strategic business unit is to generate surplus the

second alternative is followed. In the process other objectives may be lost. During

the phase of recession this aspect may get considerable importance.

In those situations where a firm deliberately slows down to improve

efficiency in these situations the stable growth alternative applies. Among

organizations who find it difficult to manage growth such a behavior is observed.

Organizationsof small to medium size usually experience this difficulty. But,by

large organizations too unmanageable growth has been experienced. Inspite of

large market opportunities that exist before them a very large number of television

manufacturers in India are forced to control their growth. They follow a stable

NOTES

133



growth strategy by focusing their efforts in certain geographical markets and

around few products since most of the TV manufacturers are small or medium

sized firms lacking substantial resources.

The sustainable growth alternative includes a modified incremental growth

to take one of the unfavorable external conditions. These include:

a) Internal growth strategies consisting of :

-concentric change, and

-corporation change

b) External growth strategies containing of -unions, -joint ventures

c) Insolvency

Concentric growth is a substitute where the firm goes into businesses

which are related to the current ones, say from manufacture of spare parts for

passenger cars to the manufacture of spare parts for tractors. This no doubt is an

example of the product related concentric growth. When a firm producing farm

equipment decides to enter the business of chemicals and fertilizers is an example

of customer related concentric growth.

Under the growth alternative of corporation change, even though there

may be nothing in common with the existing business a firm may acquire another

firm which has surplus cash. The RPG Enterprises have pursued this substitute

within the possibility of its inadequate resources. Merger is all substitutes where

two firms join. There are different objectives of mergers including the need-to

tide over the economic crisis. The objectives of mergers and the procedures

followed in negotiating a merger are discussed in detail in another unit in this

block.

Joint venture is a substitute which can meet a number of needs such as

quick rate of growth anticipated by the firm, preserving the risk insensible limit,

and to tide over the restraint of resources. Thus a firm having restriction of

production capacity can have a joint venture with a firm having surplus production

capacity. In the area of agro industries Pepsi Cola (a US multi-national company),

Voltas and Punjab Agro have recently joined hands to promote a joint venture.

Insolvency indicates a situation where the firm -finds the business

unappealing. There may be a lack of people who have curiosity in the proposal.

Neither the employees nor do outside parties find it an attractive proposal to be

revived. Outdated equipment is the usual cause. When the present worth of

expected earnings is less than its present worth disinvestment may be considered

attractive.

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Basic Features of some strategies*

Strategy Basic Feature

1. Stability Strategy The firm stays/ continues with its current

business and product – markets; maintains the

existing level of effort; it is satisfied with

incremental growth.

2. Expansion The firm seeks significant growth – this may be

within the current/ existing business or it may be

entering into new business which is related to

existing business or new business which is

unrelated to existing business.

3. Divestment Here the business firm (or Company) retrenches

(i.e. reduces) some of the activities from its

given business or drops the entire business as

such by sell-out or liquidation.

4. Combination The firm (or Company) combines the above

mentioned strategic alternatives in some

permutation/ combination so as to suite the

specific requirement of the firm (or Company).

*Source – Table 6.3 Page No. 136 Strategic Management by SarojDatta – Jayco

Publishing House, Mumbai.

9.6 Strategic Choice

Companies use four basic strategies to enter and compete in the international

environment which is discussed below.

International Strategy

Companies create value by transferring valuable skills and products to

foreign markets where local competitors lack those skills and products that pursue

an international strategy. By transferring differentiated product offerings developed

at home to new markets overseas most international companies have created

value. Consequently, in their home country they tend to centralize product

development functions. However, in each major country in which they do business

they also tend to establish manufacturing and marketing functions. This tends to

be limited in scope although they may undertake some local customization of

product offering and marketing strategy. Over marketing and product strategy

ultimately, in most international companies the headquarters retains tight control.

If a company has valuable unique competencies an international strategy

makes sense that local competitors in foreign market slack and if the company

faces relatively weak pressures for local responsiveness and cost reductions. An

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135



Check Your Progress

1. What are the variousstrategic alternativesavailable with the firm withreference to the risk thatthey take?

international strategy can be very profitable in such situations. However, when

pressures for local responsiveness are high, companies pursuing this strategy

lose out to companies that place a greater emphasis on customizing the product

offering and market strategy to local conditions. Moreover, because of the repetition

of manufacturing facilities, companies that follow an international strategy tend

to experience high operating costs. Therefore, this strategy is often inappropriate

for industries in which cost pressures are high.

9.6.2 Multidomestic Strategy

Toward achieving maximum local responsiveness companies pursuing a

multi domestic strategy orient themselves. They tend to transfer skills and products

developed at home to foreign markets as with companies pursuing an international

strategy. However, to different national environments unlike international

companies, multi domestic companies extensively customize both their product

offering and their marketing strategy. They also tend to establish a complete set

of activities consistent with this approach - including production, marketing, and

R&D in each major national market in which they do business. As a result, they

generally do not realize value from experience-curve effects and location

advantages and, therefore, often has a high cost structure.

When there are high pressures for local responsiveness and low pressures

for cost reductions a multi domestic, strategy makes most sense. In industries in

which cost pressures are intense the high cost structure associated with the

replication of production facilities makes this strategy inappropriate.

Anotherrestriction of this strategy is that many multi domestic companies have

established into distributed groupings in which each national subsidiary functions

in a mainly independent manner. As a result, after some time they begin to lose

the capability to handover the skills and products resulting from distinctive

competencies to their various national, companies around the world.

9.6.3 Global strategy

Companies that follow a universalstrategy, concentrate on increasing

productivity bygaining the benefits of cost reductions that come from experience-

curve effects and location economics. That is, they are following a low-cost

strategy. The several activities such as production, marketing, and R&D of

companies following a global strategy are focused in a few favorable places. To

local conditions, global companies do not tend to modify their product offering

and marketing strategy. This is because customization increases costs since it

contains shorter production runs and the repetition of functions. Instead, global

companies desire to market a consistent product universally so that they can gain

the maximum benefits from the economies of scale that lie behind the experience

curve. In which there are strong pressures for cost reductions and where demands

for local responsiveness are minimal this strategy makes sense in those cases.

These conditions occur in numerous industries manufacturing industrial goods.

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Check Your Progress

1. Define the termInternational Strategy.

Check Your Progress

1. State the term Multidomestic Strategy.

Check Your Progress

1. Define the term Globalstrategy.

9.6.4 Transnational Strategy

Transnational company’s means companies whose operations are spread

across numerous locations universally and are not limited to any country or a

region and which follow low cost and product differentiation at the same time. In

essence, while maintaining a high level of local responsiveness transnational

companies operate on a global level. When a company faces high pressures for

cost reductions and high pressures for local responsiveness a transnational strategy

makes intellect. Companies that follow a transnational strategy mostly try to achieve

low-cost and differentiation advantages all together. In practice it is a difficult

strategy to pursue although this strategy looks attractive. Pressures for local

responsiveness and cost reductions place contradictory demands on a company.

Local responsiveness increases costs, which clearly makes cost reductions hard

to accomplish. It should be remembered that applying it raises difficult

organizational issues although a transnational strategy apparently offers the most

advantages. The suitability of each strategy depends on the comparative strength

of burdens for cost reductions and for local responsiveness.

9.7 Cultural Aspects of Strategic Choice

Corporate culture is the gathering of principles, expectations, and morals

learned and shared by a corporation’s members and conveyed from one generation

of employees to another. The corporate culture usually reflects the morals of the

founder(s) and the assignment of the firm. It gives a company a sense of identity:

This is who we are. This is what we do. This is what we stand for. The culture

includes the leading location of the company, such as research and development

at Hewlett-Packard, client service at Xerox Corp, or product quality at TVS

Group. It often contains a number of casual work rules (forming the “company

way”) that employees follow without query. These work practices over time

become part of a company’s unquestioned tradition. Corporate culture has two

different qualities, intensity and integration. Associated with the unit cultural

intensity is the degree to which members of a unit accept the standards, morals,

or other culture content. This shows the culture’s depth. Organizations with strong

standards endorsing a specific value, such as quality at TVS, have intensive

cultures, whereas new firms (or those in transition) have weaker, less concentrated

cultures. Employees in an intensive culture tend to display steady behavior, that

is, they tend to act similarly over time. Cultural integration is the range to which

units through an organization share a mutual culture. This is the culture’s extent.

Organizations with a universal leading culture may be hierarchically organized

and power oriented, such as a military unit, and has extremely combined values.

All employees tend to embrace the similar cultural values and standards. In contrast,

a company that is organized into varied units by purposes or divisions usually

displays some tough subcultures (for example, R&D versus manufacturing) and

a less combined corporate culture. Corporate culture fulfills several important

functions in an organization :

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Check Your Progress

1. What do you mean byTransnational Strategy?

1. Delivers a sense of identity for workers

2. To something superiortothem helps make employee commitment

3. Adds to the constancy of the organization as a social system

4. Functions as a frame of orientation for employees to use to make logic out

of organizational activities and to use as a guide for suitable conduct.

In the corporation, corporate culture forms the behavior of people. They

can strongly affect a corporation’s ability to shift its strategic direction because

these cultures have a powerful effect on the behavior of people at all levels. A

strong culture should not only encourage -survival, but it should also generate the

basis for a superior competitive position. For instance, a philosophy highlighting

continuous renewal may help a company adapt to a varying, hypercompetitive

environment. To the degree that a corporation’s characteristic capability is fixed

in an organizations culture, it will be a form of unspoken knowledge and very hard

for a competitor to copy.

If it is in opposition to the acknowledged culture of the firm a change in

mission, purposes, strategies, or guidelines is not likely to be successful. Foot-

dragging and even damage may result as employees fight to attack a radical

change in corporate philosophy. It is an internal strength, if an organization’s

culture is compatible with a new strategy likestructure. It is a serious weakness if

the corporate culture is not compatible with the proposed strategy.

9.8 Summary

• A different course of action which an organization may pursue at a point in

time is referred to as strategic alternatives.

• Depending upon its size, style of management, work ethos and industry

characteristics the procedure for generating strategic alternatives may differ

from organization to organization.

• On the basis of degree of risk involved from the point of view of an

organization, strategic alternatives may be classified i.e. High risk, Moderate

risk and Low risk.

• The strategies which an organization may adopt are the following: (i) Niche

(ii) Vertical integration (iii) Horizontal expansion (iv) Diversification

• The group of beliefs, expectations, and values learned and shared by a

corporation’s members and transmitted from one generation of employees

to another is corporate culture.

• Intensity and integration are two distinct attributes of corporate culture.

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Check Your Progress

1. State the cultural aspects ofstrategic choice.

9.9 Key Terms

1. Strategic Alternatives: strategic alternatives that enable their companies

to maintain a competitive edge over rivals.

2. Strategic Choice: is a part of the strategic process and involves elements

like the identification and evaluation of alternatives which then leads to

a choice.

3. Multidomestic Strategy: A company that follows a multi domestic

strategy fits its products to each country in which it does business.

4. International Strategy: is a global plan specific to a company or conglomerate

where a model for global expansion and commerce is the ultimate goal.

5. Global strategy: in business terms is an organization’s strategic guide

to globalization.

6. Transnational Strategy : An international business structure where a

company’s global business activities are coordinated via cooperation

and interdependence between its head office, operational divisions and

internationally located subsidiaries or retail outlets.

7. Niche Strategy:A marketing approach for a good or service with features

that appeal to a particular minority market subgroup.


1. Explain the cultural aspects of strategic choice

2. Explain the strategies that companies use to compete in international market

3. State the Multidomestic Strategy with example.

4. Explain International Strategy with examples.

5. State the Global strategy with suitable example.

6. Explain Transnational Strategy with example.

7. How to generate the strategic alternatives?


1. Strategic alternatives are crucial to the success of the organization.

A) True

B) False

2. Niche Strategy involving …. Risk of the small companies.

A) Very low degree

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B) Very large degree

C) Average degree

D) Normal degree

3. On the basis of which degrees of risk involved Strategic alternatives may

be classified?

A) High risk,

B) High risk, Moderate risk

C) Moderate risk and Low risk

D) High risk, Moderate risk and Low risk.

Ans. - (1 – A), (2 – A), (3 – D).


Glueck, W.F. and L.R. Jauch, (1984), Business Policy and Strategic Management,

4th edn, (New York: McGraw-Hill, pp. 4-5.

Thompson, A., Jr. and A.J. Strickland III, Strategic Management – Concepts and

Cases, 3rd edn, (Plano, Texas: Business Publication, 1984)

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NOTES

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Strategy Implementation -Concept, Issues, Steps &Problems


Unit 10 Strategy Implementation – Concept,Issues, Steps and Problems

Structure

10.0 Introduction

10.1 Objectives

10.2 Concept of Strategy Implementation

10.3 Issues involved in strategy implementation

10.4 Stages in implementing strategy

10.5 Resource allocation

10.6 Steps involved in Resource Allocation

10.7 Factors affecting Resource Allocation

10.8 Problems in resource allocation

10.9 Summary

10.10 Key Terms



10.0 Introduction

When the firm chooses what strategy or strategies to pursue the, strategic-

management process does not end. Into strategic action, there must be a translation

of strategic thought. If managers and employees of the firm understand the

business, feel a part of the company, and through involvement in strategy

formulation activities have become dedicated to helping the organization succeed,

this translation is much easier. Strategy implementation efforts face major problems

without understanding and commitment.

Implementation strategy disturbs an organization from top to bottom; it

disturbs all the functional and divisional areas of business. If it is not implemented

even the most technically perfect strategic plan will serve little purpose.

Ondeveloping the strategic plan, treating the means and circumstances under

which it will be implemented as additions many organizations tend to spend an

excessive amount of time, money, and effort. Change comes through application

and calculation, not through plan. A theoretically imperfect plan that is, executed

well will accomplish more than the perfect plan that never gets off the paper on

which it is typed.

Check Your Progress

1. Define the term strategyimplementation.

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10.1 Objectives


• Describe the concept of strategy implementation

• Enlist the problems involved in strategy implementation;

• Explainthe stages in executing strategy

• Describe the concept of resource allocation

• Define the stages and difficulties involved in Resource Allocation

10.2 Concept of Strategy Implementation

Strategy formulation is not in itself adequate for an organization. It is

significant to confirm that the strategy is executedeffectively;in strategic

management strategy implementation is an important aspect.

For the execution of a strategic plan strategic implementation is the sum total of

all the activities and choices required. Through the development of programs,

budgets and procedures it is the process by which strategies and policies are put

into action.

“Strategy implementation may be said to consist of securing resources, organizing

these resources and directing the use of these resources within and outside the

organization.”– This is how Daniel McCarthy Robert Minichiello and Joseph Curran

have definedstrategy implementation in their book ‘ Business Policy and Strategy’.

10.3 Issues involved in Strategy Implementation

Strategy implementation involves numerous issues. Some of the important

issues are:

1. Annual Objectives

Creating annual objectives is a decentralized activity that openly includes

all managers in an organization. In establishing annual objectives active participation

can lead to acceptance and commitment. Annual objectives are vital for strategy

implementation since they (1) for allocating resources represent the base; (2) for

evaluating managers are a primary mechanism (3) toward achieving long-term

objectives are the major instrument for monitoring progress; and (4) start

organizational, divisional and departmental priorities. Substantial time and effort

should be devoted to safeguarding that annual objectives are well considered,

steady with long -term objective, and helpful of strategies to be implemented.

2. Policies

On a day-to-day basis, policies are needed to make a strategy work,

Check Your Progress

1. State the Concept ofStrategy Implementation.

changes in a firm’s strategic direction do not occur automatically. Policies are

resolving frequent problem and guide the implementation of strategy. Established

to support and inspire work toward stated goals policy refers to specific guidelines,

methods, procedures, rules, forms and administrative practices. For strategy

implementation policies are instruments. Policies set limitations, restrictions and

bounds on the kinds of administrative actions that can be taken to reward and

sanction the behavior; in pursuit of an organization’s objectives they clarify what

can and cannot be done.

3. Resource allocation

A central management activity that allows for strategy execution is resource

allocation. In organization that does not use a strategic management method to

decision making, resource allocation is frequently based on political or personal

factors. Established by annual objectives strategic management allows resources

to be allocated accordingly to priorities.

Effective resource allocation does not promisepositive strategy implementation

because programs. Personnel, controls and commitment must breathe life into the

resources provided. Strategic management itself is occasionally mentioned to as

a’ resource allocation process.

4. Managing conflict

Interdependency of objectives and race for limited resources often leads to

conflict. A disagreement between two or more parties on one or more issues is

defined as conflict. Establishing annual objectives can lead to conflict since

individuals have different hopes and opinions, schedule create pressure,

personalities are irreconcilable, and confusion between line managers and staff

managers occur. For Instance, a collection manager’s objective of reducing bad

debts by 50 percent in a given year may conflict with a divisional objective to

increase sale by 20 percent. Conflict is inevitable in organizations, so it is important

before it effects strategy implementation and organizational performance conflict

is managed and resolved.

Various approaches for managing and resolving conflict can be classified

into three categories avoidance, dispersal, and confrontation. Avoidance includes

such actions as ignoring the problem in faiths that the conflict will resolve itself or

actually splitting the conflicting individuals (or groups).Dispersal can contain playing

down differences amongst conflicting parties while highlighting similarities and

common interest, cooperating so that there is neither a clear winner nor loser.

Confrontation is represented by switching members of conflicting parties so that

each can gain ingratitude of the other’s point of view.

5. Matching structure with strategy

Change in strategy often requires a change in the way an organization is

structured for two main reasons. First structure largely dictates how objectives

and policies will be recognized. For example, in geographic terms objectives and

policies established under geographic organizational structure are understood. The

structural format for developing objectives and policies can meaningfully influence

NOTES

143



all other strategy application activities and structures dictates how resources will

be assigned. Determining what types of structural changes are needed to implement

new strategies and how these changes can best be accomplished is a more important

concern.

6. Managing resistance to change

No organization or individual can escape change. But the thought of change

raises worries since people feat of economic loss, problem, insecurity, and a break

in normal social pattern. On individuals and processes, strategic management

process itself can execute major changes. To successful strategy implementation

resistance to change can be considered the single greatest threat. People often

resist strategy implementation as they do not realize what is happening or why

changes are taking place. In that case, employees may justrequireexact information.

Successful strategy implementation hinges upon manager’s ability to develop an

organizational climate conducive to change. Rather than as a threat by managers

and employees change must be viewed as an opportunity.

7. Creating a Strategy-Supportive Culture

Strategists should struggle to pressure, highlight and build upon aspects of

an existing culture that support proposed new strategies. Features of a current

culture that are aggressive to a planned strategy should be recognized and

transformed, New strategies are often market-driven and dictated by competitive

forces is indicated in substantial research. For this reason, changing a firm’s culture

to fit a new strategy is usually more effective than changing a strategy to fit an

existing culture. Plentiful methods are accessible to alter an organization’s culture,

including recruitment, training, transfer, and promotion, restructure of an

organization’s design, role modeling, and positive reinforcement.

8. Production / Operations Concerns

Production / operations capabilities, limitations, and policies can meaningfully

improve or constrain the accomplishment of objectives. At production site a major

part of the strategy implementation process takes place. On the success or failure

of strategy implementation efforts production -related decisions on plant size, plant

location, product design, choice of equipment, kind of tooling, inventory control,

quality control, cost control, use of standards, job specialization , employee training,

equipment and resource utilization, shipping and packaging, and technological

innovation can have a dramatic impact.

9. Human Resource Concerns

As companies continue to downsize and reorganize thejob of human resource

manager is changing rapidly. Strategic responsibilities of the human resource

manager include considering the staffing needs and cost for strategies planned

during strategy formulation and emerging a staffing plan for effectively

implementing strategies.

If insufficient attention is given to the human resource dimension a well-

designed strategic management system can fail. Human resource problems that

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144



arise when business implement strategies can usually be traced to one of three

causes: (1) disturbance of social and political structures, (2) failure to match

individual’s abilities with applying tasks, and (3) insufficient top management support

for application activities. The procedure of empowering managers and employees

through their participation in strategic management activities yields the highest

benefits when all organizational members realize clearly how they will benefit

personally if the firm does well.

10.4 Stages in implementing strategy

Activating strategy is a process of putting strategy into action. In actual

application of strategy following steps are followed.

1. Institutionalization of strategy

This is the first step involved in activating the strategy. It involves two

aspects

(a) Communication of Strategy-It must be communicated to those people who

would implement it once the strategy is formulated. From the formulators to

the implementer’s strategy communication is a process of transferring the

strategy information. The communication is normally in writing. The purpose

of the strategy, and the activities required to implement the strategy should be

included in communication.

(b) Securing acceptance of strategy - It is not sufficient to communicate the

strategy to the members of organizations, but it is similarly significant to secure

their acceptance of the strategy, so that they implement the strategy efficiently.

Normally, a main problem in strategy acceptance is that the organizational

members often attack a strategy, mainly when it needs special efforts on the

part of those who are going to apply it. Therefore, it is advisable to make a

preliminary draft of strategy, and it is spread among all those who are expected

to apply it. Management may ask for their recommendations, if required

necessary changes are made in the strategy and after that final strategy is

prepared.

2. Formulation of Action plans and programs-

Once the strategy is established through its communication and acceptance,

the management proceeds to express action plans and programs.

(a) Action Plans –To implement a strategy the management has to frame actions

plans in respect of several activities required. The action plan may be in respect

of purchasing new machinery, appointing additional personnel, developing a

new process, etc. Upon nature of strategy the type of action plans depends.

The manager must consider the following factors while framing action plan.

• The purpose of action plan

• The activities essential to perform the action plan

Check Your Progress

1. Explain the issues instrategy implementation.

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145



• The person(s) who would be executing the activities

• To perform the various activities the resources required.

(b) Programs-In respect -of the strategy the manager must also decide about the

programs. A program is a single use plan intended to achieve a precise objective.

It clearly designates the steps to be taken, the resources to be used, and the

time period within which the task is to be accomplished.

3. Translating General Objectives into Specific Objectives -

The top management frame the general objectives. Functional managers

must set specific objectives within the framework of the general objectives in

order to make these objective operative. Most of the exact objectives are of

short-term in nature, with a certain time period for their achievement. Translation

of general objectives into specific objectives must fulfill two important criteria:

(a) The specific objectives must be truthful, attainable and time bound. The

particular objectives must be set in such a way that the presentation can be

easily measured and assessed. Setting generalized purposes does not lead to

effective action. For example it has no meaning in stating objectives like to

increase sales” but it should be “to increase sales by 10 % “ which is more

specific.

(b) To the achievement of general objectives the specific objective should donate.

So all the functional section like production, marketing, finance etc., should set

such specific aims which are in line with the general objects of the organization.

Further, every individual employee should have his own set of objectives in line

with his departmental objectives.

4. Resource allocation -

There must be proper resource allocation to various units and activities for

successful implementation of strategy. The resources can be broadly classified

into 3 groups

• Monetary resources

• Physical resources

• Human resources

The management needs to answer several questions in resource allocation,

such as

• What are the sources for obtaining resources?

• What aspects affect resource allocation?

• What are the earnings for resource allocation?

• What are the difficulties in resource allocation?

So that there can be effective implementation of strategy proper answer to

the above questions will help to obtain the resources from the right sources,

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146



overcome the problem in resource allocation, and allocate the resources properly.

5. Procedural Requirements -

To implement the strategy an organization must follow various procedural

requirements. The various procedural requirements may include the following, if

applicable:

• Certifying necessities

• Import and export necessities

• Foreign exchange Management Act, 2000 necessities

• Monopolies and Restrictive Trade Practices Act, 1969.

• Labor regulations

• Securities and Exchange Board of India necessities

• Foreign Collaborations requirements etc.

10.5 Resource Allocation

In strategy implementation resource allocation is an important activity. For

the achievement of objectives, resource allocation requires attainment and

commitment of financial, human and physical resources to the various activities

required. Upon the quality and quantity of resources and their utilization the success

of the organization depends.

For strategy execution resource allocation is a central management activity.

Inorganization that does not use a strategic-management method to decision

making, resource allocation is often based on political or personal factors. Strategic

management allows resources to be assigned consequently to priorities established

by annual objectives.

To achieve desired objectives all organizations have at least 4 types of

resources that can be used: monetary, physical, human and technological resources.

Assigning resources to specific divisions and sections does not mean that strategies

will be positively applied. A number of factors commonly forbid effective resource

allocation, including an overprotection of resources, too great an emphasis on

short-run financial criteria, organizational politics, unclear strategy targets, a

unwillingness to take risks, and a absence of adequate knowledge.

In the resulting accomplishment of an organization’s objectives lies the real

value of any resource allocation program. Effective resource allocation does not

promise positive strategy implementation since programs, personnel, controls, and

commitment must breathe life into the resources provided. Strategic management

itself is occasionally mentioned to as a resource allocation process.

Check Your Progress

1. Define the term Resourceallocation.

NOTES

147



10.6 Steps involved in Resource Allocation

The following are the significant steps involved in resource allocation

1. Determining the type and the amount of resources

The first step involved in resource allocation is to determine the type and

amount of resources required to implement the strategy.

A firm may require various types of resources such as human, monetary,

physical and informational or technological resources. As human and informational

resources are already available with the firm, at times, a firm may require only

the monetary resources, and that the physical resources such as machinery or

equipment’s can be acquired with the financial resources. A firm should also

choose the quantity of resources required. For example than the integration

strategy, modernization strategy would require more resources.

2. Determining the sources of resources

The next step is to find out the sources of resources. Upon the type of

resources the sources of resources depend. From both internal and external

sources the human resources can be obtained. For example for the purpose of

strategy implementation mangers can be promoted from within the organization

or can be selected from external sources. Financial resources can be obtained

from internal or external sources. For example to finance strategy implementation

retained earnings can be used or to finance strategy implementation additional

loan can be taken or capital can be issued.

3. Mobilization of resources

The next step is to make arrangement to obtain the resources after

determining the amount and the type of resources. To obtain the resources

necessaryprocedure is required to be followed. Forinstance, if financial resources

are to be obtained by way of issue of shares, the following steps have to be

followed:

• Preparation of draft Prospectus

• Selection of Prospectus

• Selection of Intermediaries - Bankers Underwriters, Brokers, Advertising

Agency etc.

• Filing of Prospectus with Registrar of Companies

• Printing and Dispatch of Prospectus and Application forms

• Filing of Initial Listing Application

• Establishing the liability of Underwriters

• Allocation of shares

• Register of the Issue

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4. Resource Allocation

For the purpose of strategy implementation after obtaining the resources,

the resources must be properly allocated. With the help of financial resources

therequired physical resources can be obtained. For the purpose of strategy

implementation if required, additional human resources can be selected. In any

case, there must be proper allocation of all the resources.

5. Utilization of Resources

In respect of various activities the allocated resources need to be utilized.

For example, the funds allocated for market development strategy need to be

utilized for various activities in connection with market development activities

such as marketing research, advertising, sales promotion, dealers incentives, etc.

The funds must be used for productive activities, and care must be taken to see to

it that the funds are not misused or poorly utilized.

6. Monitoring the Resources Allocation

The management should monitor the resource distribution to find out whether

or not the allocated are correctly used. The management should also find out

whether the resources assigned are adequate enough to commence the various

activities efficiently and effectively. If mandatory, management may make essential

changes in resource allocation, i.e. depending upon the importance of activities

additional funds may be mobilized, if required or the resource allocation-mix can

be modified.

10.7 Factors affecting Resource Allocation

There are several factors which affect resource allocation, they are as

follow.

1. Objectives of the organization-

The goals and objectives of the organization affects resource allocation.

An organization has numerous aims to be accomplished- some are very significant,

some are least important to the organization. For example than other objectives

increasing market share is given more importance. So accordingly, resources

have to be allocated. Normally resources are allocated to achieve significant

objectives.

2. The nature of strategies -

There are various types of strategies of a firm. Some strategies may need

huge capital or some may require less capital. Some may need extra human

resources or some may require fewer human resources. Therefore the strategies

which require more capital or extra human resources are assigned with more

resources than other strategies. So modernization strategy is allocated with extra

resources than product introduction strategy.

Check Your Progress

1. Explain the concept ofresource allocation

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149



3. Availability of Resources –

The availability of funds disturbs resources allocation. It can adequately

allocate funds for various resources when a firm has adequate funds or when a

firm is in a position to obtain funds easily. But if the firm has a difficulty of gaining

additional funds, the certain activities may be released out or there may be

distribution of resources according to the importance of activities.

4. Internal Politics –

Sometimes, resource allocation can be affected because of internal politics

in an organization. Some departmental heads for their departments are in a position

to get more funds. This may be due to their power or influence they have over top

management. For instance, if HRD manager has good terms with the top

management, his department may be allocated with more funds.

5. External factors -

There are various external factors which effect resource allocation for

instance, monetary institutions, local community, shareholders, government policies

and others etc. For example, the monetary institutions , which have provided long

term loans may limit distribution of resources in form of bonus to shareholder,

organizational expenditure etc. Occasionally due to government policies, firm may

have to assign to employees welfare fund, environment protection fund etc.

10.8 Problems in Resource Allocation

There are numerous difficulties faced in resources allocation. Some

problems cannot be avoided. With the efforts on the part of management some

problems can be avoided.

1. Scarcity of Resources –

Due to scarcity of resources major problem arises. It would be difficult for

the management to obtain right type and right amount of resources due to scarcity

of resources. Sometimes, management may have to pay high price to obtain

required resources due to scarcity.

2. Over-estimation of Resource need –

Due to over-estimation of resource needs the resource allocation problem

may arise. Normally each department may try to obtain maximum amount of

resources. This may be to avoid lack of resources in future. Higher the demand

of resources from the whole department makes it problematic to allocate resources

appropriately. Sometimes department gets used to overemphasizing resource

requirements.

3. Organization’s past allocation of resources –

In the past as their activities were more important than other activities

some units may be allocated with more resources. Even though now their activities

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150



are not so important sometimes same allocation is followed in the present situations.

On the other hand other due to past allocation, department’s activities may be

more important at present, but they do not get required amount of resources. So

top management should consider relative importance of the activities and the

allocation of the resources.

4. Problem of internal politics –

Some manager may involve the internal politics. To get more funds than

other departments they may try to influence top management. As a result those

departments who actually deserve more funds do not get required amount of

resources.

5. Poor financial climate -

Many investors do not invest in the shares issued by the company due to

financial climate. So to raise additional finance company finds it difficult. For

strategy implementation this affects the resource allocation. Sometimes company

may have to go for additional loans from financial institutions at higher cost.

6. Conflicts of interest –

Between management and various other parties there may be problem of

conflict of interest for example, shareholders, trader unions, employees,

government, society etc. For example trade union may insist to assign resources

to employee’s welfare; management may like to assign resources for

transformation. Withproper conversation between management and various parties

and proper planning of resource allocation this conflict can be solved

7. Problem of Resistance to Change -

Sometimes management may resist changing its own resource distribution

strategy. For instance there may be some loss-making products in the company,

but management may continue to assign more resources to that loss-making

product than the other promising products of the company. So management should

try to analyze market success of each product and try to allot the resources.

10.9 Summary

• When the firm chooses what strategy or strategies to pursue, the strategic-

management process does not end. Into strategic action there must be a

translation of strategic thought

• Implementation strategy disturbs an organization from top to bottom; it

disturbs all the functional and divisional areas of business

• Strategy implementation may be said to consist of securing resources,

organizing these resources and directing the use of these resources within

and outside the organization.

• Change in strategy often requires a change in the way an organization is

Check Your Progress

1. State the Problems inresource allocation.

NOTES

151



structured.

• Resource allocation needs procurement and promise of fiscal, human and

physical resources to the various activities vital for the achievement of

objectives.

10.10 Key Terms

1. Strategy Implementation: is a term used to describe the activities within

an organization to manage the execution of a strategic plan.

2. Resource Allocation: is the scheduling of activities and the resources

required by those activities while taking into consideration both the resource

availability and the project time.

3. Policies: is a deliberate system of principles to guide decisions and achieve

rational outcomes.

4. Internal Politics: It is the use of power and social networking within an

organization to achieve changes that benefit the organization or individuals

within it.


1. Describe the problems in resource allocation.

2. Explain the factors affecting resource allocation.

3. Explain the Stages in implementing strategy.

4. Explain the Steps involved in Resource Allocation.

5. Explain the Issues involved in strategy implementation.

6. State the Procedural Requirements.


1. Implementation strategy affects an organization.

A) From middle to bottom

B) From middle to top

C) From bottom to top

D) From top to bottom

2. Which activity is not required for the accomplishment of objectives?

A) Financial resources

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152



B) Human resources

C) Physical resources

D) Natural resources

3. Which factor is not considered in the classification of Resource allocation?

A)Financial resources

B)Physical resources

C)Human resources

D) Natural resources

4. Implementation strategy affects an organization from top to bottom

A) True

B) False

Ans. - (1 – D), (2 – D), (3 – A), (4 – A).


Rogers, D.C.D. (1973). Corporate Strategy and Long Range Planning, Ann Arbor

Mich, The Landis Press

Hill, C. W. L. and Jones, G. R. (2004). Strategic Management; an Integrated

Approach

NOTES

153



Unit 11 Functional Implementation

Structure

11.0 Introduction

11.1 Objectives

11.2 Nature of Functional Strategies

11.3 Functional Plans and Policies

11.4 Financial Planning

11.5 Manpower Planning

11.6 Summary

11.7 Key Terms



11.0 Introduction

A functional strategy is the short-term game plan. Such strategies clarify

grand strategy by providing more specific details and explain how functional areas

are to be managed in the near future.

In the key areas of marketing, finance, production/ operations, R&D, and

personnel functional strategies must be developed. They must be consistent with

the long-term objectives and grand strategy. To pursue the business strategy in

daily activities functional strategies help in implementation of grand strategy by

organizing and activating specific subunits of the company (marketing, finance,

production, etc.). In a sense, functional strategies translate thought (grand strategy)

into action as they are design to accomplish specific annual objectives. Functional

strategies identify and coordinate actions that support the grand strategy and

improve the likelihood of accomplishing annual objectives for every major subunit

of a company.

11.1 Objectives


• Describe the nature of functional strategies

• Describe the idea of functional plans and policies

• Explain the opportunity of financial planning

• Explain the scope of manpower planning

Check Your Progress

1. Define the term functionalstrategy.

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155

Functional Implementation


11.2 Nature of Functional Strategies

Within the strategic management process to better understand the role of

functional strategies, they must be distinguished from grand strategies. Three

basic features distinguish functional and grand strategies:

1. Time horizon covered.

2. Specificity.

3. Participation in the development

Time Horizon

Usually comparatively short is the time horizon of a functional strategy.

Usually undertaken in a year or less functional strategies identify and coordinate

short-term actions. Sears, for example, to reduce excess appliance inventory

over the next year might implement a marketing strategy of increasing price

discounts and sales bonuses in its appliance division. That ultimately contributes

to the goal of Sears this functional strategy would be designed to achieve a short-

range (annual) objective. Grand strategy in its retail division over the next five

years. To successfully implementing a grand strategy this shorter time horizon is

critical for two reasons. First, it focuses functional managers. To make the grand

strategy work attention on what needs to be done now. Second, in developing

functional strategies the short-time horizon allows functional managers to recognize

current conditions and adjusts changing conditions.

Specificity

A functional strategy is more specific than a grand strategy. To implement

grand strategy functional strategies guide functional actions taken in key parts of

the company. General direction is provided by the grand strategy. Functional

strategies give specific guidance to managers responsible for accomplishing annual

objectives. Such strategies are meant to guarantee that managers know how to

meet annual objectives. At the business level it is not enough to identify a general

grand strategy. If the annual (and ultimately long term) objectives of the company

are to be achieved there must also be strategies outlining what should be done in

each functional area. To implement strategic decisions specific functional strategies

improve the willingness (and ability) of operating managers, particularly when

those decisions represent major changes in the current strategy of the firm.

For several reasons specificity in functional strategies contributes to

successful implementation. First, it adds substance, completeness, and sense to

what a specific subunit of the business must do. The presence of numerous

functional strategies support confirms that managers know what needs to be

done and can focus on accomplishing results.

Second, specific functional strategies clarify for top management how

functional managers intend to accomplish the grand strategy. This increases top

management’s confidence in and sense of control over the grand strategy.

Third, specific functional strategies enable coordination amongst operating

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156



units within the company by illuminating areas of interdependence and possible

conflict.

Participants

At the functional and business levels different people participate in strategy

development. Business strategy is the responsibility of the general manager of a

business unit. With running the operating areas of the business development of

functional strategy is typically delegated by the business-level manager to principal

subordinates. The business manager must start long-term objectives and a strategy

that corporate management feels contributes to corporate-level goals. Key

operating managers likewise start annual objectives and operating strategies that

help achieve business objectives and strategies. The business managers typically

ratifies the annual objectives and functional strategies developed by operating

managers just as business strategies and objectives are approved through

negotiation between corporate managers and business managers.

Understanding of what needs to be done to achieve annual objectives is

thereby improved because the involvement of operating managers in developing

functional strategies contributes to successful implementation. And perhaps to

the strategies developed most critical, active involvement increase commitment.

Across functional areas it is difficult to generalize about the development

of strategies. For instance, key variables in marketing, finance, and production

are different. Moreover, the importance of key variables varies across business

situations within each functional area.

A key task of strategy implementation is to support or fit the activities and

capabilities of an organization with its strategies. There has to be similarity and

coordination among these strategies as these strategies operate at different levels.

Such similarity is the vertical fit. Then, there has to be similarity and coordination

among the different activities taking place at the same level. This is the horizontal

fit.

A vertical fit takes place when a lower-level strategy, such as a functional

strategy, is aligned with a higher level strategy or in this case the business strategy.

To integrate the strategic network the vertical fit alone is not sufficient. At the

level of individual functional strategies it is also essential to create to horizontal

fit. What this means is that the different functional areas of marketing, finance,

operations, personnel, and information management and all the operation activities

performed in these areas should not work at cross-purpose. There has to be an

alignment among them which is the horizontal fit.

The horizontal fit leads to operational implementation and in this manner

the vertical fit leads to functional strategies and their implementation.

In terms of their capability to contribute to the creation of a strategic

advantage for the organization the consideration of vertical fit leads us to define

functional strategies. Observed at this way, we have primarily been a function of

the R & D department, but an organization may structure it in such a way, we

have the following types of functional strategies.

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Strategic marketing management means to gain a strategic advantage

focusing on the alignment of marketing management within an organization with

its corporate and business strategies.

Strategic financial management means to a gain a strategic advantage

focusing on the alignments of financial management within an organization with


Strategic operations management implies to gain a strategic advantage

focusing on the alignment of operations management within organization with its

corporate and business strategies.

Strategic human resource management means to gain a strategic

advantage focusing on the alignment of human resource management within an

organization with its corporate and business strategies.

Strategic information management means to gain a strategic advantage

focusing on the alignment of information management within an organization with


11.3 Functional Plans and Policies

Regarding the plans and policies to be adopted for effective implementation,

strategists have to provide directions to functional managers. In fact, the efficiency

of strategic management depends critically on the manner in which strategies are

implemented. In this section, we look at the nature of functional plans and policies,

why they are needed, and how they are developed.

As we already know that on a level below the business strategies functional

strategies operate. Within functional strategies there might be several sub functional

areas. For example, among its several business areas a company might have a

textile division. Within the textile division there might be functional areas, such as,

marketing, operations& D, and so on. Functional area of marketing may have

subfunctionssuch as, product development, advertising and sales promotion, market

research and soon.

Functional strategies are made within the guidelines which have been set

at higher levels defined in terms of functional plans and policies-plans or tactics to

implement business strategies. Policies are required to act as guidelines to those

actions while plans are formulated to select a course of action. Functional plans

and policies are so, in the nature of the tactics which make a strategy work.

In order to make decisions functional managers need guidance from the

corporate and business strategies. In simple terms, functional plans tell the

functional managers what has to be done, while functional policies state how the

plans are to be executed.

Glueck has suggested five reasons to show why functional plans and policies

are needed.

Check Your Progress

1. State the Nature ofFunctional Strategies.

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158



Functional plans and policies are developed to confirm that:

1. By all the parts of an organization the strategic decisions are implemented.

2. In the different functional areas of a business there is a basis available for

controlling activities.

3. The time spent by functional managers on decision-making may be reduced

as the plans lay down clearly what has to be done and the policies provide

the decision framework within which decisions need to be taken.

4. In a consistent manner similar situations occurring in different functional

areas are handled by the functional mangers.

5. Coordination across the different functions takes place where necessary.

The development of functional plans and policies is expected at making the

strategies formulated at the top management level almost possible at the functional

level.

Thereby augmenting the horizontal fit strategies need to be segregated into

viable functional plans and policies that are compatible with each other. In this

way, by the functional managers strategies can be implemented.

From the formal to the informal the process of development of functional

plans and policies may range. Related to every major aspect larger and more

complex organizations may have several hundred policies. Many of these policies

could have been expressed through a formal process and printed in many manuals

and documents. Smaller organizations with simpler businesses may function with

less policies, most of which could be informal and understood rather than written

down.

To that of strategy formulation the process of developing functional plans

and policies-formal or informal is similar. Environmental factors relevant to each

functional area will have an impact on the choice of plans and policies.

Organizational plans and policies shall affect the choice of functional plans and

policies. Finally, by objective as well as subjective factors the actual process of

choice will be influenced. Then functional plans and policies will affect, and are

affected by, the resource allocation decisions.

11.4 Financial Planning

Strategies in this area direct the use of financial resource in support of the

business strategy, long-term goals, and annual objectives while most operating

strategies guide implementation in the immediate future, the timeframe for financial

functional strategies varies. Financial operating strategies with longer time

perceptions guide financial managers in long-term capital, Investment, use of

debt financing, dividend allocation, and the firm’s leveraging posture. Operating

strategies intended to manage working capital and short-term assets have a more

immediate focus. In the sense that priorities change infrequently over time long-

Check Your Progress

1. State the Functional Plansand Policies.

NOTES

159



term financial strategies usually guide capital acquisition. In capital acquisition

strategy the desired level of debt versus equity versus internal long-term financing

of business activities is a common issue.

For example, in proportion to equity and internal funding of capital needs

Delta Airline has a long standing operating strategy that seeks to minimize the

level of debt. To expand its theatre and soft-drink bottling facilities General Cinema

Corporation has a long-standing strategy of long-term leasing. The debt-to-equity

ratios for these two firms are approximately 0.50 to 2.0, respectively. Over the

last 20 years both have similar records of steady profitable growth and represent

two different yet equally effective operating strategies for capital acquisition.

Capital allocation is another financial strategy of major importance is. In

facilities, projects, acquisitions, and/or people, growth-oriented grand strategies

generally require numerous major investments. These investments cannot generally

be made immediately, nor are they desired to be. Rather, for these investments a

capital allocation strategy sets priorities and timing. This also helps manage

conflicting priorities among operating managers competing for capital resources.

Retrenchment or stability often need a financial strategy that focuses on

the reallocation of existing capital resources. This could require trimming product

lines, production facilities, or personnel to be transferred elsewhere in the firm.

The overlapping careers and ambitions of key operating managers clearly generate

an emotional situation. Even with reduction of expenditure (perhaps even more

so!), a clear operating strategy that defines capital allocation priorities is important

for effective implementation in a politically charged organizational setting.

Delegated to operating managers capital allocation strategy frequently

includes one additional dimension-level of capital expenditure. To an evolving

market if a business is pursuing rapid growth, flexibility in making capital

expenditures at the operating level may enable timely resources. On the other

hand, if retrenchment is the strategy capital expenditures may be carefully

controlled.

Dividend management is an essential part of a firm’s internal financing.

Because dividends are paid on earnings, lower dividends increase the internal

funds available for growth, and internal financing reduces the need for external,

often debt, financing. However, to the market price of a firm’s stock stability of

earnings and dividends often makes a positive contribution. Therefore, toward

equity markets a strategy guiding dividend management must support the business’s

posture.

Working capital is dangerous to the daily operation of the firm, and capital

requirements are straight influenced by seasonal and cyclical variations, firm size,

and the pattern of receipts and disbursements. The working capital constituent of

financial strategy is built on an exact projection of cash flow and must deliver

cash management guidelines for preserving and transforming the cash balances

required for daily operation.

Sources of capital are related to uses of capital. A major example is leasing

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160



versus buying fixed assets. A policy to lease classes of assets will change the

nature of the need for funds over time and the nature of the balance sheet. Thus

possessing a building (say, the Pan Am building in Manhattan) against leasing

such space has an influenceon working capital needs and the capability to finance

other types of activities. Therefore a strategy of rapid expansion, through leasing

rather than buying if funds are limited in the short term, might be accomplished.

Because of the favorable tax benefits associated with such policies sale- and-

leaseback arrangements became quite popular in the early 1980s. For investing in

certain projects other financial policies concern the evaluation of proposals. For

instance, before some strategic option will be considered a hurdle rate of return

may be specified as a policy guide. Depending on how risk is assessed hurdle

rates may differ. Another method for assessing potential investment alternatives

includes in the net present value approach a risk-adjusted discount rate. A policy

of a mix of investment risks is as useful as marketing-mix policies or planning a

maxi of basic and applied research. Of course if expansion is the desired strategy

the investment risk mix is related to strategic choice;, greater risks are acceptable.

A mix of low-risk projects only may be an indication that economizing is on the

horizon. Corporate treasures made increasing use of swap transactions which

allowed firms to trade interest rate payments and limit some exposure to risk of

interest rate fluctuation in the mid-1980s .In addition, as part of their financial

plans more and more firms sought to hedge foreign currencies.

In the area of insurance is the other area in which risk plans are needed. In

the mid-1980s corporate liability insurance was becoming very expensive, and in

some cases difficult to get at all. As they did not believe they could expose

themselves to the risk of doing business without insurance some firms were forced

out of business. Other firms chose a plan of in-house protection, but such plans

require a large resource base. As an alternative to traditional insurers still others

joined groups to pool resources. Another option is to change the nature of coverage

for disastrous risks and at the same time decrease or remove coverage for more

common risks. Choices here can affect the strategy in terms of costs of doing

business, or even lead to ultimate retrenchment (liquidation or sale).

For items such as inventories (finished goods and raw materials) and

accounts receivable and payable specific targets for current assets and cash

flows are also needed. Based on historical or inflation-related reporting policies

for the desired proportion of funds tied up in these accounts and the accounting

treatment (e.g., LIFO or FIFO, or book or market value) are relevant here, as are

rules for financial disclosure. Some of these policies are mandated by SEC or

other government bodies, but managers should decide which approach provides

them with the most useful information for decision making (as opposed to which

treatment makes the books .look better.). Upon which managers base their

decisions substitute treatments of accounting data can lead to significant

differences in the data.

Policies governing asset use have a direct impact on other components of

strategy and cannot be made in separation. For instance, a policy with respect to

maintaining a particular financial value of safety stock of finished goods relates to

marketing policy concerning customer relations and the ability to deliver outputs,

NOTES

161



as well as to production policy regarding lead times and the size of production

runs. Or, extending the time for accounts receivable on the payment for tickets

may be an important decision affecting marketing and finance if an airline is

trying to enhance relations with travel agents in a new territory.

Such as mergers or liquidations or bankruptcies financial plans also become

important in particular strategic actions. Legal factors restrain choices in some

cases. How to best implement the strategy there are usually several options which

require a financial decision. Such an option would require a policy decision or

would be made in relation to other plans associated with the desired financial

structure of the business.

Financial policies as well as other plans will need to be specified if a firm is

divesting or liquidating. For instance: How urgent is it? What will the cash flow

look like? What will creditors get? Who are the potential purchasers? What will

be the price? How will we layoffs people? Many firms began to change their

plans to focus on debt reduction and increasing the cash flow due to stability

strategies taken in response to disinflation in the early 1980s.

Finally, through the executive compensation system some financial policies

can have an indirect effect on strategy. For example, firms which use stock

options as a form of opposition may eventually change the nature of control of the

business or impact risk choices made by the executives involved. As these plans

and policies are established the implications could be positive or negative, and so

such outcomes should be considered.

Hence, some of the crucial financial questions needing implementation

include:

• Either internally or externally where will we get additional funds to expand?

• If external expansion is anticipated, how and where will it be achieved?

• To our cash flow what will be strategy do?

• What accounting systems and policies do we use (for example, LIFO and

FIFO)?

• What capital structure policy do we follow? No debt or a heavily leveraged

structure?

• In dividends how much should we pay out?

• How much cash and how many other assets do we keep on hand?

• Should we hedge our foreign currency exchange risk?

It is vital that financial plans and policies are such that the funds wanted

are obtainable at the right time and at the lowest cost.

Check Your Progress

1. Define the term FinancialPlanning.

NOTES

162



11.5 Manpower Planning

In recent years the strategic importance of functional strategies in the

personnel area has become more widely accepted. By ensuring the development

of managerial talent, the presence of systemsto manages compensation and

regulatory concerns, and the development of competent, well-motivated employee’s

personnel management aids in achieving grand strategy. To achieve both the

annual objectives of the firm and the satisfaction and development of employee’s

functional strategies in personnel should guide the effective utilization of human

resources. These strategies involve the following areas:

Employee enrolment, selection, and orientation, Career growth and

counseling, Performance Evaluation, and training and development, Reward, Labor/

union relations and Equal Employment Opportunity Commission (EEPC)

requirement, Discipline; control, and evaluation, Operating strategy for recruitment,

selection, and orientation guides personnel management decisions for attracting

and retaining motivated, productive employees.

This involves such questions as: To support a chosen strategy what is the

key human resource needs? How do we recruit for these needs? How sophisticated

should the selection process be? How should new employees be familiarized to

the organization?

The recruitment, selection, and orientation component of personnel strategy

should provide basic parameters for answering these questions.

The development and training component should guide personnel actions

taken to meet future human resource needs of the grand strategy. Of becoming

a diversified financial service institution Merrill Lynch, a major brokerage firm,

has a long-term corporate strategy. Merrill Lynch is actively moving into such

areas as investment banking, consumer credit, and venture capital in addition to

handling stock transactions. Merrill Lynch has incorporated extensive early-career

training and ongoing career development programs to meet its expanding need

for personnel with multiple competencies, in support of these far-reaching, long-

term objectives.

Functional strategies in the personnel area are needed to guide decisions

regarding compensation, labor relations, EEOC requirements, discipline, and control

to enhance the productivity and motivation of the work force. Involved are such

concerns as;

What are the standards for raise? How should payment, incentive plans

assistances, and seniority policies be understood? Should there be hiring

preference? What are suitable disciplinary steps? These are specific personnel

decisions that operating managers frequently meet. Functional strategies in the

employee’s area should guide such decisions in a way that is harmonious with

business strategy, strategies for other functional areas, and the attainment of

annual objectives.

When a firm is pursuing a retrenchment strategy perhaps one of the most

difficult decisions regarding personnel occurs. At these times, questions usually

NOTES

163



include whether or not to lay off or dismiss employees, how many, and who.

Again, union contracts may establish some kind of policy here (resulting from

earlier negotiations where a previous policy was laid down). But a firm may also

try to safeguard labor and seek a reduced workweek or keep the level of production

for a time. In production and finance such policies relate to those. In the line and

staff functions a related matter is the relative proportion of managers and workers.

Several writers have recommended that the policies of many firms have worried

placing the brightest and best people in staff functions at the cost of the line,

which does the basic work. This has been blamed for decreasing productivity,

insufficient plant investment, minimal quality standards, and the similar. As a result,

by cutting the corporate level and other staff levels many firms have begun a

streamlining program. Their aim is to trim overhead costs and gain some control

over awkward, top-heavy structures. Of course, such trade-offs must be made

with other objectives and considerations in mind.

Some firms join a long-term human resource plan as an essential component

of the strategic plan. Human resources managers have become an essential factor

in the strategic management activity, mainly as firms engage in unions or major

cut backs needing important changes in the work force. This needs forecasts of

human resource needs (labor and management) in combination with other changes

going on in the planning effort.

Since nearly 50 million people in the United states are now part of two-

career families, Doug Hall and Judith Richter highlight that human resource

managers need to foster more effective balancing of professional and private

lives. A corporate objective to become more lean and mean must today include

deliberation for the fact that a good home life donates hugely to a good work life.

The work/family issue is no longer just a women’s problem. Some specific

measures that firms are taking to address this issue are providing spouse relocation

assistance as an employee benefit, providing company resources for family

recreational and educational use, establishing employee country clubs, such as

those at IBM and Bethlehem Steel, and creating family/work interaction

opportunities.

When family members are invited into the workplace, taken on plant or

office tours, dined by management, and given a chance to see exactly what other

family members do each day some organizations have developed family days.

Family days are cheap and increase the employee’s pride in working for the

organization. To balance work life and home life flexible working hours during

the week is another human resource response to the need for individuals. The

work/family topic is being made part of the agenda at meetings and thus is becoming

discussable in many organizations. Research shows that employees who are

dissatisfied with childcare arrangements are most likely to be inattentive or

unproductive. Lack of sufficient childcare in a community can be a preventive in

employing and retaining good managers and employees. Some benefits of on-site

childcare facilities are improved employee relations, reduced absenteeism and

turnover, increased productivity, enhanced recruitment, and improved community

relations.

Check Your Progress

1. What do you mean byManpower Planning?

NOTES

164



11.6 Summary

• For a key functional area within a company a functional strategy is the

short-term game plane.

• To pursue the business strategy in daily activities functional strategies help

in implementation of grand strategy by organizing and activating specific

subunits of the company (marketing, finance, production, etc.).

• Strategic marketing management means to gain a strategic advantage

focusing on the alignment of marketing management within an organization

with its corporate and business strategies

• Strategic financial management means to a gain a strategic advantage

focusing on the alignments of financial management within an organization

with its corporate and business strategies

• Strategic operations management implies to gain a strategic advantage

focusing on the alignment of operations management within organization

with its corporate and business strategies.

• Strategic human resource management means to gain a strategic advantage

focusing on the alignment of human resource management within an

organization with its corporate and business strategies.

• Strategic information management means to gain a strategic advantage

focusing on the alignment of information management within an organization

with its corporate and business strategies.

• Regarding the plans and policies to be adopted for effective implementation,

strategists have to provide directions to functional managers

11.7 Key Terms

1. Functional Strategies: usually a part of overall corporate strategy prepared

for various functional areas of its organizational structure (e.g., marketing

strategy, financial strategy, production strategy etc.).

2. Functional Plans: is typically any diagram or list of steps with timing and

resources, used to achieve an objective.

3. Financial Planning: is the task of determining how a business will afford

to achieve its strategic goals and objectives.

4. Manpower Planning: is a core function of human resource

management and it is related to the systematic identification and analysis

of what an organization is going to need in terms of the size, type, experience,

knowledge, skills and quality of workforce to achieve its objectives.

NOTES

165



5. Time Horizon: also known as a planning horizon is a fixed point of time

in the future at which point certain processes will be evaluated or assumed

to end.


1. Describe the concept of financial planning.

2. Explain the concept of manpower planning.

3. State the Nature of Functional Strategies.


1. A functional strategy is the……………. for a key functional area within a

company.

A) Short-term game plane

B) long -term game plane

C) medium-term game plane

D) average-term game plane

2. Business strategy is the responsibility of the of a business unit.

A) General Manager

B) CEO

C) Chairperson

D) Secretary

3. Which is not the basic characteristic differentiates functional and grand

strategies?

A) Time horizon covered

B) Specificity.

C) Participation in the development

D) Value based

4. Functional strategies identify and coordinate short-term actions, usually

undertaken in a year or less.

A) True

B) False

Ans. - (1 – A), (2 – A), (3 – D), (4 – A).

NOTES

166




Glueck, W. F. (1980). Business Policy and Strategic Management, New York:

McGraw-Hill.


Delhi: Tata McGraw-Hill Publishing Company Limited)

Pearce and David (1987). Strategic Planning and Policy, New York.

NOTES

167



Unit 12 Organizational Structure

Structure

12.0 Introduction

12.1 Objectives

12.2 Structural Mechanism to implement strategy

12.3 Matching organizational structure with business strategy

12.4 Stages of development of organizational structure

12.5 Summary

12.6 Key Terms



12.0 Introduction

The organization structure refers to established pattern of relationship. It is

through the structure that the various parts of an organization are interconnected

or interlinked. To accomplish organizational objectives organization structure

contains concerns such as separation of work among various units or departments,

and the coordination of activities. In this unit, we will look at the intersection of

organization structure and strategy.

12.1 Objectives


• Describe the connections between structure and strategy

• Describe the steps of development of organizational structure

• Explain various forms of organizational system

12.2 Structural Mechanism to implement strategy

According to the needs of the strategy implementation the organization has

to be designed. Any changes in corporate strategy may require some changes in

the organization structure and in the skills required in certain positions. In order to

decide what (if any), changes should be made in the way work is accomplished

managers must, therefore closely examine the way their company is structured.

NOTES

169

Organizational Structure


There is no agreement about an optimal structural design although it is agreed

that the organizational structure must change with environment conditions, which

in turn, affect an organizational strategy. What was suitable for DuPont and General

Motors in the 1920s might not be suitable today. Firms in the similar industry do,

however, tend to organize themselves similarly. For example, consumer good

firms tend to adopt the brand-management concept introduced by Proctor &

Gamble whereas automobile firms tend to emulate General Motor’s divisional

concept. Following similar strategies in similar industries tend to adopt similar

structures seemed to be the general conclusion.

Performance of tasks is required in the implementation of strategy. There

should be various structural mechanisms to perform tasks. The various activities

required to implement the strategy are undertaken with the help of the structural

mechanisms. The various structural mechanisms can be broadly divided into two

groups:

A. Organizational Structure

B. Organizational Systems

A. Organizational Structure

For the implementation of strategy, it becomes necessary to design the

suitable organization. It is through a well-knit and well-designed organizational

structure that the strategy can be effectively implemented. Following steps are to

be taken for the creation of structure of an organization:

• Classify the major tasks required Into departments or units ( thus group the

tasks)

• Make arrangement of necessary resources

• Allot the duties to employees

• Explain and delegate the authority and responsibility

• Create superior-subordinate relationship

• Offer a system of coordination and interlink the various tasks

The above process would lead to creation of a structure which is required

to implement a strategy. The structure may range from simple organization structure

to a most important complex one – matrix or network structure. The type of

structure depends upon:

• The size of the organization

• The quantity of product lines

• The amount of plants or factories

• The number of markets – local, national or international

A simple organization structure, i.e., line organization structure is appropriate

NOTES

170



for small business organization having focused on one or few products and is

limited to local market. A functional organizational structure is appropriate to

business organization that rises in size from the original entrepreneurial firm. The

organization may adopt the strategic business unit structure as the business expands

in diverse produce lines, where each division is functionally independent to manage

its performance. The matrix organization or the network organization may adopt

some complex organization with multi plans and multi products.

B. Organizational system

In the implementation of a strategy there are many types of organizational

systems each one playing its own role. In order to achieve the goals and objectives

an organization has to perform predetermined tasks. It is so very important to

change systems that will associate these divisions and departments in a well-

organized way. Communications amongst various sections are also specifically

placed down.

1. Information System

Communication channels are essential for any strategy to be properly

executed, so that information from one manager can be sent to another. The

information system is required to co-ordinate the responsibility that has been divided

sectional wise while the structure of the organization divides the total responsibility

of the whole organization. Information system is essential to allow the manager

to get the necessary information required and to perform his task effectively. It is

also known as Management Information System. It is a link between various

activities within the organization so that they can be effectively performed. On

the requirements of the information system, strategies should be aware of the

effects of the strategic changes because this information system provides the

base of the administration and design of the other organizational systems.

2. Motivation System

In getting the desired and required behavior of an individual or a group of

individuals the motivation system is essential as it plays a positive role. Towards

the achievement of the corporate goals this is required so that managers are

encouraged to work efficiently and effectively.

From all walks of life, from different backgrounds and cultures an organization

includes different types of individuals. With the objectives of the organization the

individual objectives of the organizational members may not be consistent. Thus

the system incentives therefore require a system of motivation. Strategists have

to deal with all the issues related to the design and administration of the motivation

system which encourage the desired positive behavior from an individual.

3. Control System

Enforcing a particular desired behavior is the main function of the control

system. Here the top management procedures the performance of each section

/ department and controls helpful action on those that are away from the duration.

Keeping in view the goals and objectives of the company this is done so that they

NOTES

171



can effectively accomplish. Against some pre-set standards the management

evaluates the performance. According to predetermined plans Controls thus allow

the implementation of the strategy to be adopted.

Only when the owner-manager cannot do all the work himself a control

system is required. To another individual hence he assigned the responsibility.

Controls are necessary in order to ensure that the other person does the work

properly. Controls are devices to impose strategic behavior so that the organization

can function as one individual towards a preset goal.

4. Appraisal System

The evaluation system is essential to assess the performance of an individual

/ section so that the required behavior can be made best use of. With respect to

the organizational objectives this system estimates an individual’s / sections /

management performance. It serves as an auditing system. It is through assessment

that personal salary, rewards, promotions are fixed. It is very significant to have

a proper mix of qualitative and quantitative factors so that the appraisal of an

individual / section can be observed as a whole.

The person who does the appraisal of someone else should not have close

contact with that other person. It is only then that he will be able to estimate the

performance of the other individual /section. Appraisal should be done at consistent

breaks and not yearly just before the yearly increments / upgrade. Appraisal is

done at the completion of that assignment in the case of committees appointed

for a specific assignment.

5. Planning Systems

For the formulation of the strategy only planning systems are necessary. In

some companies planning of strategies are done as a staff function and they

provide the strategies to the line personnel to be executed. Those managers who

are responsible for the achievement of the goals are also part of the formulation

of plans in other companies. This is vital as they alone will know which plan / goal

is achievable and will try their best to accomplish their targets. Thus the successful

application of these targets enhanced when these managers are consulted in the

formulation of targets and plan.

In the case of an entrepreneurial firm planning systems can work in a

centralized manner but a decentralized one will be more successful with the active

participation of all the divisional leads in case of a very large organization.

6. Development Systems

In today’s fast competitive world development of skills, knowledge of top

management is a necessity. Here the systematic improvement of the attitude,

abilities, information, presentation of top managers is done thoroughly through

class sessions, seminar and out stations trips. For future strategic tasks career

planning of managers is done to prepare them. This is required as if the managers

are unhappy, then their unhappiness can percolate to those in his section also.

With the latest development in the organization these managers should also

Check Your Progress

1. Explain the linkagebetween structure andstrategy.

NOTES

172



be updated. Through internal and external training program this is done through

training and education of managers.

12.3 Matching organizational structure with businessstrategy

A change in the way an organization is structured often requires changes

in strategy for two major reasons. First, organization’s structure largely dictates

how objectives and policies should be established. For instance, objectives and

policies recognized under a geographical organizational structure are understood

in geographic terms. In terms of products in an organization objectives and policies

are stated largely whose structure is based on product groups. All other strategy-

implementation activities can be considerably influenced by the structural format

for developing objectives and policies.

The second major reason why changes in structure often require changes

in strategy is that structure dictates how resources will be assigned. Resources

will be allocated in that manner if an organization structure is based on customer

groups. Similarly, resources are allocated for functional areas if an organization’s

structure is set up along functional business lines, then. Structural reorientation

commonly becomes a part of strategy implementation unless new or revised

strategies place stress in the same areas as old strategies.

Changes in strategy lead to changes in organizational structure. Structure

should be intended to enable the strategic pursuit of a firm and thus, follows

strategy. Companies find it difficult to design an effective structure without a

strategy or reasons for being (mission).

For a given strategy or type of organization there is no optimal organizational

design or structure. What is suitable for an organization may not be suitable for a

similar firm, although successful firm in a given industry do have a habit to organize

themselves in a similar way. For example, by product form of organization consumer

goods companies tend to emulate the divisional structure. Small firms tend to

functionally structured (centralized) Medium sized firms tend to be divisionally

structured (decentralized). Large firms tend to use a SBU (Strategic business

unit) or Matrix structure. As a result of concatenation, or the linking together of

several basic strategies of organization grow, their structures generally change

from simple to complex. Many external and internal forces disturb an organization;

no firm could change its structure in reply to every one of these forces, because

to do so would lead to confusion.Check Your Progress

1. How to matchorganizational structurewith business strategy?

NOTES

173



12.4 Stages of development of organizationalstructure

As they grow and expand successful companies tend to follow a pattern of

structural development. To manage different product lines beginning with the

simple structure used by entrepreneurial firm characterized decision making moves

on to divisional structure. The following are the different stages in organizational

development and strategy structure:

Stage I : Simple Structure

Managed by the founder Stage I firms are small enterprises. The

entrepreneur makes all the essential choices and is involved in every detail and

stage of the organization. The strategies adopted may be of expansion type.

Flexibility and dynamism are the greatest advantage of Stage I firm. Extreme

belief on the entrepreneur to decide general strategies as well as detailed procedures

is the greatest disadvantage. The problems of managing the organization all by

himself and therefore, he may go for functional structure.

Advantages of such firms are:

• The decisions are taken faster since there is only one decision maker.

• Depending on the environmental changes and competition quick and timely

on the spot decisions are taken.

• These firms are very simple in nature.

• These firms are very relaxed in nature.

Disadvantages of such firms are:

• Half time can be demanded by almost everyone since the owner has to do

nearly everything including taking decisions. Major expansion decisions

are left pending as he concentrates so much on day to day activities.

• Such firms operations usually fall due to lack of supervision when the owner

is on holiday. Excessive belief on the owner.

• On the owner’s ability to invest money future expansion only depends.

Stage II : Functional Structure

Stage II is the point when an entrepreneur is replaced by a team of managers

who have functional specialization. For chief executive the transition to this stage

requires a substantial managerial style change, especially if he was the Stage I

entrepreneur. Having a team of managers bring no benefit so he must learn to

delegate.

Divided into various departments such as finance, marketing, personnel

and production the organizational structure is functional type. Such as area wise,

process wise product wise, etc. there can be further departmentalization, depending

upon the size and business operations. The strategies adopted may range from

Check Your Progress

1. State the disadvantages ofSimple Structure.

NOTES

174



stability to expansion. The greatest advantage is that in one industry the firm can

effectively concentrate and specialize. However, concentration in one industry

may not help the firm, as it may no longer remain attractive. Therefore, in

diversified product lines firm may move.

Advantages of such firms are:

• The day to day routine work is given to people, therefore, the owner/chief

executive can think on strategic business decisions.

• Effective distribution of work can be done through specialization. Hence

work is done quicker.

Disadvantages of such firms are:

• Between different departments co-ordination is difficult. In watertight

compartments everyone wants to work.

• Line and staff departments usually clashes.

• This creates specialists which results in narrow specialization.

Stage III : Divisional Structure / Departmental Structure

In different markets as a small organization grow; it has more difficulty

managing different products and services. To motivate employees, control

operations and compete successfully in diverse locations some form of divisional

structure generally becomes necessary.

For large firms with diverse product lines the functional structure may not

work well. Than the top management is willing to provide to them managers

managing diversified product lines need more decision making powers. The

company needs to move to a different structure, i e. divisional structure.

Functionally independent each division is semi-autonomous and linked to the

headquarters.

To perform some organizational task, divisional structure is the result of

grouping of jobs, processes and resources into logical units. To achieve desired

objectives large organizations divide its organizational structure into units and

sub-units so as to effectively and efficiently plan, organize, direct and control its

activities.

In 1970s and 1980s to better reflect product marker considerations divisions

of large organizations have been developed into Strategic Business Units (SBU).

Each SBU may look after the production and marketing of a particular product /

brand or a group of products / brands. For their own performance units are held

responsible but the units are not tightly controlled. Almost unlimited resources are

the greatest advantages of a Stage III firm. It is usually so large and complex that

it tends to become relatively inflexible. This becomes its greatest weakness. General

Motors, Ford Motors, and DuPont are Stage III corporations. From stability and

expansion the strategies adopted may range.

Check Your Progress

1. State the advantages offunctional structure.

NOTES

175



Figure 1: Structure on the basis of functions

Figure 2: Structure on the basis of area

Figure 3: Structure on the basis of process

The advantages of such firms are:

• With respect to a particular division this structure encourages the grouping

of various functions which are required for the performance of activities.

• The day to day operations are conducted by those in the lower rung of the

ladder while the top management can concentrate on strategic business

policies and decisions.

• Affecting the businesses of different divisions this structure generates quick

response to environmental changes.

The Disadvantages are:

• In each unit there is an increase in duplication of work which leads to

company overheads.

• Policy irregularities between the different divisions.

• The divisional structure can be organized in one of 4 ways:

a. By Geographical Areas

b. By Customer

c. By Product or Service

d. By Procedure

NOTES

176



General Manager

ProductionManager

MarketingManager

FinanceManager

PersonnelManager

General Manager

Mumbai Kolkatta Madras Delhi

General Manager

Weaving Spinning Dyeing Finishing

a. Geographic area based structure Organizations whose strategies need to

be tailored to fit the particular needs and characteristics of customers of different

geographic area this type of structure is appropriate. Located in widely dispersed

areas, this type of structure can be most appropriate for organizations that have

similar branch facilities. It allows improved coordination within a region and local

participation in decision making.

b. Customer-based Structure In some organization according to the customers

serviced, divisions are made. Exclusive and more priority attention can be given

to top customers is the reason behind dividing according to customers.

Advantages

• Employing market orientation to serve customers better, use of specialized

skills specially in marketing and timely response to changing customer need

are customer based structure.

• Exclusive treatment and attention to top clients with big billing and service

them better.

Disadvantages

• Differentiate treatment to different customers of the company

c. Product – based structure

Followed by the organization the activities are grouped according to the

product lines. Such a requirement is needed when the strategy adopted needs

exclusive attention to a particular product (may be a new one) or one is the

decreasing stage.

Expansion and diversification strategies may need a product based structure

as it enables the addition of deletion of product divisions.

d. Process based structure

According to the way work is actually performed the activities are

organized. A manufacturing business organized into six divisions is an example of

a divisional structure by process: electrical work, glass cutting, welding, grinding,

painting and foundry work. In this case, all operations under the separate divisions

related to these specific processes would be grouped.

Stage IV : Strategic Business Unit (SBU) :

The SBU structure group’s similar divisions into strategic business units

and delegate’s authority and responsibility for each unit to a senior executive who

reports directly to the chief executive officer. This change in strategy can enable

strategy implementation by enlightening coordination between similar divisions

and channeling accountability to different business units.

An SBU has three characteristics:

• From the rest of the company it is a single business or collection of related

Check Your Progress

1. What you understand byFunctional structure?

NOTES

177



business that can be planned separately.

• It has its own set of competition.

• Who is responsible for strategic planning it has a manager and profit

performance and who controls most of the factors disturbing profit.

The advantages of SBU are:

• Divisions having common strategic interests establish co-ordination between

them.

• Enables strategic management and control of large, diverse organizations.

• Fixes accountability at very different business units.

The Disadvantages are :

• In large diverse organizations there are too many different SBU s to handle

affectively.

• Trouble in allocating responsibility and describing autonomy for SBU heads.

• It means it takes longer to take a corporate decision by adding another

layer of management.

Stage V : Matrix Structure

This type of organization structure was first developed in the United States

in the early 1960s to solve management problems emerging in the aerospace

industry. It uses two or more co-existing structures. With functional organization

structure it can combine project organization. In such a structure the project

managers work in near and co-operate with functional or departmental heads.

The authority of the project manager flows across, authority of departmental

heads flows downwards, and thereby forming a grid or rectangular array and is

called Matrix Structure.

Matrix Management is also known as product management/ market management

organization. Dilemma is faced by companies that produce many products flowing

into many markets. They could use a product management system which needs

product managers to be aware with highly different markets.

In a multi-product, multi-market company a matrix organization would seem

desirable. Such a type of structure is created by allocating functional specialists,

who generally work in a department in their area of specialization to work on a

special project or a new product or service. The specialists from different areas

form a group or team to report to the team leader for the duration of the project.

They also work in their respective parent departments at the same time. The

team members fully revert to their parent departments once the project is completed.

NOTES

178



Dept. Dept ‘A’ Dept ‘B’ Dept ‘C’ Dept ‘D’

Project Manager Manager Manager Manager

Project ‘A’

Manager

Project ‘B’

Manager

Project ‘C’

Manager

Project ‘D’

Manager

Project ‘E’

Manager

Advantages

• Where their talent is needed most individual specialists are allotted.

• Because of pooling of diverse talents fosters creativity.

• In general, management provides good exposure to specialists.

Disadvantage

• Dual accountability generates misunderstanding and therefore difficulty to

individual team members.

• Shared authority creates communication difficultly. There are questions

about where authority and responsibility should reside.

• Involves a high level of vertical and horizontal co-ordination.

12.5 Summary

• Among the components or parts of an organization the organization structure

refers to established.

• To accomplish organizational objectives organization structure contains

concerns such as separation of work among various units or departments,

and the coordination of activities, pattern of relationship.

• According to the needs of the strategy implementation the organization has

to be designed.

NOTES

179



• In order to decide what (if any), changes should be made in the way work

is accomplished managers must, therefore closely examine the way their

company is structured.

• Line organization structure is appropriate for small organization having

focused on one or few products and is limited to local market.

• Organization that grows in size from the original entrepreneurial firm is

suitable for a functional organizational structure.

• In the implementation of a strategy there are many types of organizational

systems each one playing its own role.

• For two major reasons changes in strategy often require changes in the

way an organization is structured.

12.6 Key Terms

1. Product – based structure: Product-based planning is intended to ensure

that all of the necessary products are identified and captured, and begins

by identifying a product breakdown structure which is then repeatedly

refined until all of the requisite products are identified.

2. Appraisal System: is a method by which the job performance of

an employee is documented and evaluated.

3. Information System: is any organized system for the collection,

organization, storage and communication of information.

4. Organizational Structure: defines how activities such as task allocation,

coordination and supervision are directed toward the achievement of

organizational aims.


1. Explain what do you understand by a SBU?

2. Explain the matrix form of organisational structure.

3. State the Structural Mechanism to implement strategy

4. Explain the Product – based structure.

5. State the advantages and disadvantages of functional structure.

6. Explain the Organizational Structure with examples.

7. State the Organizational Systems.

NOTES

180




1. The motivation system is plays a………. in getting the desired and required

behavior of an individual or a group of individuals.

A) Positive role

B) negative role

C) neutral role

D) action role

2. An organization has to perform an in order to achieve the goals and

objectives.

A) Present tasks

B) Future task

C) Past Task

D) Ideal task

3. The organization has to be designed according to the needs of the strategy

implementation.

A) True

B) False

Ans. - (1 – A), (2 – A), (3 – A).



Delhi: Tata

McGraw-Hill Publishing Company Limited)

Johnson, G, Scholes, K, Whittington, R Exploring Corporate Strategy, FT Prentice

Hall.

NOTES

181



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