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DBA 1703
STRATEGIC MANAGEMENT
III SEMESTER
COURSE MATERIAL
Author
Mr.R.Magesh
Senior Lecturer
Department of Managment Studies
Anna University Chennai
Chennai - 600 025
Reviewer
Ms.Yasmeen Haider
Senior Lecturer
Department of Managment Studies
BSA Cresent Engineering College, Vandallur
Chennai - 600 048
Editorial Board
Dr.T.V.Geetha
Dr.H.Peeru Mohamed
Professor
Department of Computer Science and Engineering
Anna University Chennai
Chennai - 600 025
Professor
Department of Management Studies
Anna University Chennai
Chennai - 600 025
Dr.C. Chellappan
Dr.A.Kannan
Professor
Department of Computer Science and Engineering
Anna University Chennai
Chennai - 600 025
Professor
Department of Computer Science and Engineering
Anna University Chennai
Chennai - 600 025
Copyrights Reserved
(For Private Circulation only)
ii
iiii
ACKNOWLEDGEMENT
The author has drawn inputs from several sources for the preparation of this course material, to meet the
requirements of the syllabus. The author gratefully acknowledges the following sources:
Charles W.l.Hill & Gareth R.Jones Strategic Management Theory, An integrated approach Houghton
Miflin Company, Princeton New Jersey, All India Publisher and Distributors, Chennai, 1998.
Thomas l. Wheelen, J.David Hunger Strategic Management Addison Wesley Longman Singapore
Pvt. Ltd., 6th edition, 2000.
Arnoldo C.Hax, Nicholas S.Majluf The strategy concept and process A Pragmatic Approach
Pearson Education Publishing Company, Second Edition, 2005.
Azhar kazmi Business Policy & Strategic Management Tata McGraw Hill Publishing company Ltd.,
New Delhi- Second Edition, 1998.
Harvard Business Review Business Policy parts I & II Harvard Business School.
Saloner, Shepard, Podolny Strategic Management John Wiley 2001.
Lawrence G.Hrebiniak,Making strategy work, Person Publishing Company, 2005.
Gupta, Gollakota & Srinivasan business Policy and strategic Management Concepts and Application
Prentice Hall of India, 2005.
Inspite of at most care taken to prepare the list of references any omission in the list is only accidental and
not purposeful.
Mr.R.Magesh
Author
REFERENCES
1. Charles W.l.Hill & Gareth R.Jones Strategic Management Theory, An integrated approach Houghton
Miflin Company, Princeton New Jersey, All India Publisher and Distributors, Chennai, 1998.
2. Thomas l. Wheelen, J.David Hunger Strategic Management Addison Wesley Longman Singapore
Pvt. Ltd., 6th edition, 2000.
3. Arnoldo C.Hax, Nicholas S.Majluf The strategy concept and process A Pragmatic Approach
Pearson Education Publishing Company, Second Edition, 2005.
4. Azhar kazmi Business Policy & Strategic Management Tata McGraw Hill Publishing company Ltd.,
New Delhi- Second Edition, 1998.
5. Harvard Business Review Business Policy parts I & II Harvard Business School.
6. Saloner, Shepard, Podolny Strategic Management John Wiley 2001.
7. Lawrence G.Hrebiniak,Making strategy work, Person Publishing Company, 2005.
8. Gupta, Gollakota & Srinivasan business Policy and strategic Management Concepts and Application
Prentice Hall of India, 2005.
vii
CONTENTS
UNIT I
STRATEGY AND PROCESS
1.1
1.2
1
2
1.3
1.4
STRATEGIC ANALYSIS
1.5
1.6
1.7
11
11
12
12
14
14
1.9
18
1.10
18
19
20
22
24
25
27
28
1.8
ix
31
35
37
UNIT II
COMPETITIVE ADVANTAGE
2.1
2.2
EXTERNAL ENVIRONMENT
MICHAEL PORTER FIVE FORCES MODEL
42
44
2.3
54
54
2.4
57
2.5
60
2.6
70
70
71
72
73
73
74
2.8
77
2.9
78
2.7
UNIT III
STRATEGIES
3.1
84
84
3.2
BUSINESS-LEVEL STRATEGIES
88
3.3
92
3.4
3.5
3.6
3.7
3.8
94
CORPORATE-LEVEL STRATEGY
97
99
103
105
105
106
STRATEGIC CHOICE
106
106
108
109
110
111
112
113
114
114
115
117
117
119
120
121
UNIT IV
STRATEGY IMPLEMENTATION
& EVALUATION
4.1
131
135
xi
4.2
142
145
4.3
146
4.4
STRATEGY IMPLEMENTATIONS
149
150
150
4.5
4.6
152
168
168
177
178
UNIT V
OTHER STRATEGIC ISSUES
5.1
5.2
184
184
185
186
189
190
194
5.2.1 Entrepreneurship
194
200
5.3
206
5.4
213
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NOTES
UNIT I
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NOTES
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new technology, new competitors, a new economic environment., or a new social, financial,
or political environment. (Lamb, 1984:ix)
NOTES
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NOTES
were many but two are most important. Firstly, he stressed the importance of objectives.
An organization without clear objectives is like a ship without a rudder. As early as 1954
he was developing a theory of management based on objectives. This evolved into his
theory of management by objectives (MBO). According to Drucker, the procedure of
setting objectives and monitoring your progress towards them should permeate the entire
organization, top to bottom. His other seminal contribution was in predicting the importance
of what today we would call intellectual capital. He predicted the rise of what he called the
knowledge worker and explained the consequences of this for management. He said
that knowledge work is non-hierarchical. Work would be carried out in teams with the
person most knowledgeable in the task at hand being the temporary leader.
In1985, Ellen-Earle Chaffee summarized what she thought were the main
elements of strategic management theory by the 1970s:
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NOTES
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NOTES
Strategic management need not always be a formal process. It can begin with answering a
few simple questions:
1. Where are we now?
2. In no changes are made, where will we be in the next one year? Next two years?
Next three years? Next five years?
Are the answers acceptable, if the answers are not acceptable, what actions should
the top management take with what results and payoffs. Today, as you know that business
is becoming more complex due to rapid changes in environment. It is becoming increasingly
difficult to predict the environment accurately. The internal and external environments of
organizations are now driven by multitudes of forces that were hitherto nonexistent. Earlier
the changes in technology were not so rapid but today the information from all over the
globe is pouring in through the computers. The world in fact has shrunk. This has created
fierce competition as the customers and stakeholders have become more aware of their
rights. Think of yourself as a consumer who has got several alternatives to choose from
you as a customer look for real value for your money. You have become aware of quality
and cost ratios and then diligently select the products. You are now more demanding for
better service in the least possible time. This has brought in new rules of business that
companies all over the world are evolving through their experience. The obsolence has
become so rapid that the time when you are in the process of buying a computer it might
STRATEGIC MANAGEMENT
have already become obsolete in some part of the globe. The number of events that affect
domestic and world market are now far too many and too often.
NOTES
Over reliance on experience in such situations may really work out to be very
costly for companies. (e.g) Reliance has shifted to more creativity, innovation and new
ways of looking at business and doing it in novel ways. The earlier concept of having highly
functionalized departments and developing specialization of labour is losing its credibility.
Organizations are becoming more responsive, flexible, and adaptable to changing business
situations. In such environments that are charged with high level of competition, developing
competitive edge for survival and growth has become imperative for companies. What do
you think will business strategy concepts and techniques benefit foreign businesses as
much as domestic firms? Fig1.1 The role of core values, purpose and visionary goals in a
strategy formation process
The need is now to distinguish between long-range planning and strategic planning.
The importance of strategic management in setting the directions for growth of organizations
is being increasingly realized these days. The evolution of objectives after setting directions
for growth of organisations has become necessary. The technique of strategic management
is used as a major vehicle for planning and implementing major changes in organisation.
The implementation of the strategic plans needs good teamwork and understanding of the
concept at grass root Have a look at the difference between the two:
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NOTES
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NOTES
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NOTES
The change over is not clear and boundaries of phases overlap. My purpose to depict this
diagram is to assist you in remembering and recalling it with ease Exhibit Phases of Strategic
Management Process
Strategic management process that could be followed in a typical organization is
presented in .The process takes place in the following stages:
1. The Strategic Planner has to define what is intended to be accomplished (not just
desired). This will help in defining the objectives, strategies and policies.
2. In the light of stage I, the results of the current performance of the organization are
documented.
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3. The Board of Directors and the top management will have to review the current
performance of the documented.
4. In view of the review, the organization will have to scan the internal environment
for strengths and weaknesses and the external environment for opportunities and
threats.
5. The internal and external scan helps in selecting the strategic factors.
6. These have to be reviewed and redefined in relation to the Mission and Objectives.
7. At this stage a set of strategic alternatives and generated.
8. The best strategic alternative is selected and implemented through programmed
budgets and procedures.
9. Monitoring, evaluation and review of the strategic alternative chosen is undertaken
in this mode. This can provide a feedback on the changes in the implementation if
required. As can be seen, this provides a rational approach to strategic decision
making and it can be successfully practiced by Indian organizations, which now
have to operate in a competitive environment.
NOTES
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NOTES
known in certain markets, products, or technologies or the decisions may adversely affect
the previous progress. In todays business world, where changes are by leaps and bounds,
some organisations may decide for radical changes through reengineering of their business
processes to gain strategically better position
Strategic Directions are Futuristic
Strategies are essentially for the future. Strategic decisions are taken based o
forecasts that are in turn based on available data on trends. The managers involved in
strategic planning concentrate on developing projections that would take the company to
better strategic position. The companies thus become proactive rather than being reactive
to business situations. Strategies have Multi Functional and Multi Business Effects Every
company has several business units. Strategic decisions are coordinative in nature among
all the business units of the company. Many strategic decisions on product mix, competitive
edge, organisational structure etc. affect various departments and functions that may be
classified as strategic business units (SBUs). Each of these units get affected by the decision
taken at the top level, regarding allocation of resources and deployment of personnel etc.
So, Business Strategy as a discipline focuses at the organization as one single unit. Strategies
are Defined Based on Study of Environment The organisation culture internal to the
organisation and also the external environment must be thoroughly scanned and studied to
decide on strategies. The interaction between the organisations and the external environment
affects both of them. The organisation tends to change the environment and the same
environment makes an impact on the organisation. The firms have to define their strategic
position with regard to the environment and decide strategies that will take it to the desired
position. The firms are part of the system, where customers, stake holders, competitors
etc. exist and the firm cannot remain insulated from these determinants of the external
environment
1.8 STRATEGY PLANNING PROCESS
1.8.1 Strategic Planning Model
Elements In Strategic Management Process
Each phase of strategic management process can be viewed to be consisting of a
number of elements, which can be clearly defined with input and output relationships.
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The steps have logical connectivity and hence these are sequential. These steps
can be illustrated with the help of a flow diagram. The following discrete twelve steps can
be considered as comprehensive.
NOTES
13
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NOTES
14
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NOTES
1. Communicate with the people of the organisation and to those who are in some
way connected or concerned with the organisation about its very existence in
terms of corporate purpose, business scope, and the competitive leadership.
2. Cast a framework that would lead to development of interrelationships between
firm and stakeholders viz. employees, shareholders, suppliers, customers, and
various communities that may be directly or indirectly involved with the firm.
3. Define broad objective regarding performance of the firm and its growth in various
fields vital to the firm. So, lets talk about our own Rai University, find out what is
the vision statement and list down various purposes of our vision statement.
Vision is a theme which gives a focused view of a company. It is a unifying statement
and a vital challenge to all different units of an organisation that may be busy pursuing their
independent objectives. It consists of a sense of achievable ideals and is a fountain of
inspiration for performing the daily activities. It motivates people of an organisation to
behave in a way which would be congruent with the corporate ethics and values. Many
firms do not have clear vision statements. An indirect method of knowing whether a firm
has reached the stage of corporate strategic management is emergence of a vision statement.
Vision of a firm cannot be high jacked from a company; however, a firm may definitely get
inspired by the vision statement of another firm. It has to be evolved after a lot of
deliberations, brain storming, and thinking. It is pertinent that you as an individual working
in a firm should become an active participant and collaborator in accomplishing corporate
objectives. You must understand and share the vision of the firm because you would have
to contribute in transformation of vision into a reality through his or her actions. Total
behaviour of people of an organization should get conditioned by the basic framework of
vision. Personal objectives of individuals are very important to them and only to fulfill these
objectives people join organisations.
Vision of a company when translated into action programme must be able to meet
personal needs of people. This includes the need of achievement also. Vision of a firm thus
encompasses personal objectives of people which they try to achieve.
Step 1: Name of the company
Step 2: Practices that have made the company successful
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NOTES
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Objectives
NOTES
Profitability
Efficiency
Growth
Shareholder wealth
Utilization of resources
Reputation
Contribution to employees
Contribution to society through taxes paid etc..,
Market leadership
Technological leadership
Survival
Strategy
Strategy at Different Levels of a Business
Strategies exist at several levels in any organization - ranging from the overall
business (or group of businesses) through to individuals working in it.
Corporate Strategy - is concerned with the overall purpose and scope of the
business to meet stakeholder expectations. This is a crucial level since it is heavily
influenced by investors in the business and acts to guide strategic decision-making
throughout the business. Corporate strategy is often stated explicitly in a mission
statement.
Business Unit Strategy - is concerned more with how a business competes
successfully in a particular market. It concerns strategic decisions about choice of
products, meeting needs of customers, gaining advantage over competitors,
exploiting or creating new opportunities etc.
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NOTES
Policies
A Policy is a broad guideline for decision making that links the formulation of
strategy with its implementation
Programs
A program is a statement of the activities or steps needed to accomplish a single
use plan. It makes the strategy action oriented.
Budgets
A Budget is a statement of a corporations programs in term of dollars/money
Used in planning and control, a budget lists the detailed cost of each program.
Procedures
It is a system of sequential steps or techniques that describe in detail how a particular
task or job is to be done.
1.9 MINTZBERGS MODES OF STRATEGIC DECISION MAKING
Entrepreneurial Mode
Adaptive Mode
Planning Mode
Logical Incrementalism
STRATEGIC MANAGEMENT
governance also includes the relationship stakeholders among the many players involved
(the stakeholders) and the goals for which the corporation is governed. The principal
players are the shareholders, management and the board of directors. Other stakeholders
include employees, suppliers, customers, banks and other lenders, regulators, the
environment and the community at large.
NOTES
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NOTES
employees, customers and suppliers, and complying with the legal and regulatory
requirements, apart from meeting environmental and local community needs.
Report of SEBI committee (India) on Corporate Governance defines corporate
governance as the acceptance by management of the inalienable rights of shareholders as
the true owners of the corporation and of their own role as trustees on behalf of the
shareholders. It is about commitment to values, about ethical business conduct and about
making a distinction between personal & corporate funds in the management of a company.
The definition is drawn from Gandhian principle of Trusteeship and Directive
Principle of constitution. Corporate Governance is viewed as ethics and a moral duty.
1.10.2 History Of Corporate Governance
In the 19th century, state corporation law enhanced the rights of corporate boards
to govern without unanimous consent of shareholders in exchange for statutory benefits
like appraisal rights, to make corporate governance more efficient. Since that time, and
because most large publicly traded corporations in the US are incorporated under corporate
administration friendly Delaware law, and because the USs wealth has been increasingly
securitized into various corporate entities and institutions, the rights of individual owners
and shareholders have become increasingly derivative and dissipated. The concerns of
shareholders over administration pay and stock losses periodically has led to more frequent
calls for corporate governance reforms.
In the 20th century in the immediate aftermath of the Wall Street Crash of 1929
legal scholars such as Adolf Augustus Berle, Edwin Dodd, and Gardiner C. Means
pondered on the changing role of the modern corporation in society. Berle and Means
monograph The Modern Corporation and Private Property (1932, Macmillan) continues
to have a profound influence on the conception of corporate governance in scholarly debates
today.
From the Chicago school of economics, Ronald Coases Nature of the Firm
(1937) introduced the notion of transaction costs into the understanding of why firms are
founded and how they continue to behave. Fifty years later, Eugene Fama and Michael
Jensens The Separation of Ownership and Control (1983, Journal of Law and
Economics) firmly established agency theory as a way of understanding corporate
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governance: the firm is seen as a series of contracts. Agency theorys dominance was
highlighted in a 1989 article by Kathleen Eisenhardt (Academy of Management Review).
NOTES
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NOTES
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markets have become largely institutionalized: buyers and sellers are largely institutions
(e.g., pension funds, insurance companies, mutual funds, hedge funds, investor groups,
and banks).
NOTES
The rise of the institutional investor has brought with it some increase of professional
diligence which has tended to improve regulation of the stock market (but not necessarily
in the interest of the small investor or even of the nave institutions, of which there are
many). Note that this process occurred simultaneously with the direct growth of individuals
investing indirectly in the market (for example individuals have twice as much money in
mutual funds as they do in bank accounts). However this growth occurred primarily by
way of individuals turning over their funds to professionals to manage, such as in mutual
funds. In this way, the majority of investment now is described as institutional investment
even though the vast majority of the funds are for the benefit of individual investors.
Program trading, the hallmark of institutional trading, is averaging over 60% a day
in 2007. Unfortunately, there has been a concurrent lapse in the oversight of large
corporations, which are now almost all owned by large institutions. The Board of Directors
of large corporations used to be chosen by the principal shareholders, who usually had an
emotional as well as monetary investment in the company (think Ford), and the Board
diligently kept an eye on the company and its principal executives (they usually hired and
fired the President, or Chief Executive Officer CEO).
Nowadays, if the owning institutions dont like what the President/CEO is doing
and they feel that firing them will likely be costly (think golden handshake) and/or time
consuming, they will simply sell out their interest. The Board is now mostly chosen by the
President/CEO, and may be made up primarily of their friends and associates, such as
officers of the corporation or business colleagues. Since the (institutional) shareholders
rarely object, the President/CEO generally takes the Chair of the Board position for his/
herself (which makes it much more difficult for the institutional owners to fire him/her).
Occasionally, but rarely, institutional investors support shareholder resolutions on such
matters as executive pay and anti-takeover measures.
Finally, the largest pools of invested money (such as the mutual fund Vanguard
500, or the largest investment management firm for corporations, State Street Corp) are
designed simply to invest in a very large number of different companies with sufficient
liquidity, based on the idea that this strategy will largely eliminate individual company financial
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NOTES
or other risk and, therefore, these investors have even less interest in a particular companys
governance.
Since the marked rise in the use of Internet transactions from the 1990s, both
individual and professional stock investors around the world have emerged as a potential
new kind of major (short term) force in the direct or indirect ownership of corporations
and in the markets: the casual participant. Even as the purchase of individual shares in any
one corporation by individual investors diminishes, the sale of derivatives (e.g., exchange
traded funds (ETFs), Stock market index options, etc.) has soared. So, the interests of
most investors are now increasingly rarely tied to the fortunes of individual corporations.
But, the ownership of stocks in markets around the world varies; for example, the
majority of the shares in the Japanese market are held by financial companies and industrial
corporations (there is a large and deliberate amount of cross-holding among Japanese
keirestu corporations and within S. Korean chaebol groups), whereas stock in the USA
or the UK and Europe are much more broadly owned, often still by large individual investors.
1.10.4 Parties To Corporate Governance
Parties involved in corporate governance include the regulatory body (e.g. the
Chief Executive Officer, the board of directors, management and shareholders). Other
stakeholders who take part include suppliers, employees, creditors, customers and the
community at large.
In corporations, the shareholder delegates decision rights to the manager to act in
the principals best interests. This separation of ownership from control implies a loss of
effective control by shareholders over managerial decisions. Partly as a result of this
separation between the two parties, a system of corporate governance controls is
implemented to assist in aligning the incentives of managers with those of shareholders.
With the significant increase in equity holdings of investors, there has been an opportunity
for a reversal of the separation of ownership and control problems because ownership is
not so diffuse.
A board of directors often plays a key role in corporate governance. It is their
responsibility to endorse the organisations strategy, develop directional policy, appoint,
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supervise and remunerate senior executives and to ensure accountability of the organisation
to its owners and authorities.
NOTES
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NOTES
dividend policy
26
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NOTES
Monitoring by the board of directors: The board of directors, with its legal
authority to hire, fire and compensate top management, safeguards invested capital.
Regular board meetings allow potential problems to be identified, discussed and
avoided. Whilst non-executive directors are thought to be more independent, they
may not always result in more effective corporate governance and may not increase
performance. Different board structures are optimal for different firms. Moreover,
the ability of the board to monitor the firms executives is a function of its access to
information. Executive directors possess superior knowledge of the decisionmaking process and therefore evaluate top management on the basis of the quality
of its decisions that lead to financial performance outcomes, ex ante. It could be
argued, therefore, that executive directors look beyond the financial criteria.
Remuneration: Performance-based remuneration is designed to relate some
proportion of salary to individual performance. It may be in the form of cash or
non-cash payments such as shares and share options, superannuation or other
benefits. Such incentive schemes, however, are reactive in the sense that they
provide no mechanism for preventing mistakes or opportunistic behaviour, and
can elicit myopic behaviour.
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NOTES
debt covenants
government regulations
media pressure
takeovers
competition
managerial labour market
telephone tapping
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creative accounting) imposes extra information costs on users. In the extreme, it can involve
non-disclosure of information.
.
One area of concern is whether the accounting firm acts as both the independent
auditor and management consultant to the firm they are auditing. This may result in a conflict
of interest which places the integrity of financial reports in doubt due to client pressure to
appease management. The power of the corporate client to initiate and terminate
management consulting services and, more fundamentally, to select and dismiss accounting
firms contradicts the concept of an independent auditor. Changes enacted in the United
States in the form of the Sarbanes-Oxley Act (in response to the Enron situation as noted
below) prohibit accounting firms from providing both auditing and management consulting
services. Similar provisions are in place under clause 49 of SEBI Act in India.
NOTES
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NOTES
Principles on the other hand are a form of self regulation. It allows the sector to
determine what standards are acceptable or unacceptable. It also pre-empts over zealous
legislations that might not be practical.
Enforcement
Enforcement can affect the overall credibility of a regulatory system. They both
deter bad actors and level the competitive playing field. Nevertheless, greater enforcement
is not always better, for taken too far it can dampen valuable risk-taking. In practice,
however, this is largely a theoretical, as opposed to a real, risk.
Action Beyond Obligation
Enlightened boards regard their mission as helping management lead the company.
They are more likely to be supportive of the senior management team. Because enlightened
directors strongly believe that it is their duty to involve themselves in an intellectual analysis
of how the company should move forward into the future, most of the time, the enlightened
board is aligned on the critically important issues facing the company.
Unlike traditional boards, enlightened boards do not feel hampered by the rules
and regulations of the Sarbanes-Oxley Act. Unlike standard boards that aim to comply
with regulations, enlightened boards regard compliance with regulations as merely a baseline
for board performance. Enlightened directors go far beyond merely meeting the requirements
on a checklist. They do not need Sarbanes-Oxley to mandate that they protect values and
ethics or monitor CEO performance.
At the same time, enlightened directors recognize that it is not their role to be
involved in the day-to-day operations of the corporation. They lead by example. Overall,
what most distinguishes enlightened directors from traditional and standard directors is the
passionate obligation they feel to engage in the day-to-day challenges and strategizing of
the company. Enlightened boards can be found in very large, complex companies, as well
as smaller companies.
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NOTES
Anglo-American Model
There are many different models of corporate governance around the world. These
differ according to the variety of capitalism in which they are embedded. The liberal model
that is common in Anglo-American countries tends to give priority to the interests of
shareholders. The coordinated model that one finds in Continental Europe and Japan also
recognizes the interests of workers, managers, suppliers, customers, and the community.
Both models have distinct competitive advantages, but in different ways. The liberal model
of corporate governance encourages radical innovation and cost competition, whereas the
coordinated model of corporate governance facilitates incremental innovation and quality
competition. However, there are important differences between the U.S. recent approach
to governance issues and what has happened in the U.K..
In the United States, a corporation is governed by a board of directors, which has
the power to choose an executive officer, usually known as the chief executive officer. The
CEO has broad power to manage the corporation on a daily basis, but needs to get board
approval for certain major actions, such as hiring his/her immediate subordinates, raising
money, acquiring another company, major capital expansions, or other expensive projects.
Other duties of the board may include policy setting, decision making, monitoring
managements performance, or corporate control.
The board of directors is nominally selected by and responsible to the share holders,
but the bylaws of many companies make it difficult for all but the largest shareholders to
have any influence over the makeup of the board; normally, individual shareholders are not
offered a choice of board nominees among which to choose, but are merely asked to
rubberstamp the nominees of the sitting board. Perverse incentives have pervaded many
corporate boards in the developed world, with board members beholden to the chief
31
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NOTES
executive whose actions they are intended to oversee. Frequently, members of the boards
of directors are CEOs of other corporations, which some see as a conflict of interest.
The U.K. has pioneered a flexible model of regulation of corporate governance,
known as the comply or explain code of governance. This is a principle based code that
lists a dozen of recommended practices, such as the separation of CEO and Chairman of
the Board, the introduction of a time limit for CEOs contracts, the introduction of a minimum
number of non-executives Directors, of independent directors, the designation of a senior
non executive director, the formation and composition of remuneration, audit and nomination
committees. Publicly listed companies in the U.K. have to either apply those principles or,
if they choose not to, to explain in a designated part of their annual reports why they
decided not to do so. The monitoring of those explanations is left to shareholders themselves.
The tenet of the Code is that one size does not fit all in matters of corporate governance
and that instead of a statuary regime like the Sarbanes-Oxley Act in the U.S., it is best to
leave some flexibility to companies so that they can make choices most adapted to their
circumstances. If they have good reasons to deviate from the sound rule, they should be
able to convincingly explain those to their shareholders.
The code has been in place since 1993 and has had drastic effects on the way
firms are governed in the U.K. A study by Arcot, Bruno and Faure-Grimaud from the
Financial Markets Group at the London School of Economics shows that in 1993, about
10% of the UK companies member of the FTSE 350 were compliants on all dimensions
while they were more than 60% in 2003. The same success was not achieved when looking
at the explanation part for non compliant companies. Many deviations are simply not
explained and a large majority of explanations fail to identify specific circumstances justifying
those deviations. Still, the overall view is that the U.K.s system works fairly well and in
fact is often branded as a benchmark, followed by several countries.
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in Mexico, Italy, Spain, France (to a certain extent), Brazil, Argentina, and other countries
in South America.
NOTES
Europe and Asia exemplify the insider system: Shareholder and stakeholder a
small number of listed companies, an illiquid capital market where ownership and control
are not frequently traded high concentration of shareholding in the hands of corporations,
institutions, families or government. the insider model uses a system of interlocking
networks and committees.
At the same time that developing countries are undergoing a process of economic
growth and transformation, they are also experiencing a revolution in the business and
political relationships that characterize their private and public sectors. Establishing good
corporate governance practices is essential to sustaining long-term development and growth
as these countries move from closed, market-unfriendly, undemocratic systems towards
open, market-friendly, democratic systems. Good corporate governance systems will allow
organizations to realize their maximum productivity and efficiency, minimize corruption and
abuse of power, and provide a system of managerial accountability. These goals are equally
important for both private corporations and government bodies.
Because of the implicit relationship between private interests and the larger
government, good corporate governance practices are essential to establishing good
governance at the national level in developing countries. A number of ties the keep the
public and private sectors closely linked. On one hand, judiciary and regulatory bodies as
well as legislatures play a role in corporate management and oversight. At the same time
cartels and large corporate interests use their size to exert not only economic, but also
political power. These two sectors are so intertwined that a country cannot significantly
change one without simultaneously instituting changes in the other.
According to Nicolas Meisel, there are four priorities which developing countries
should concentrate on while experimenting with new forms of corporate and public
governance. The first is to focus on improving the quality of information and increasing the
speed at which it is created and distributed to the public. Good communication is important
to the functioning of any organization. The second is to allow individual actors more autonomy
while at the same time maintaining or increasing accountability. Thirdly, if a hierarchical
organization used to orient private activities toward the general interest, new countervailing
powers should be encouraged to fill this role. Finally, the part the state plays and how
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voluntary. For example, The GM Board Guidelines reflect the companys efforts to improve
its own governance capacity. Such documents, however, may have a wider multiplying
effect prompting other companies to adopt similar documents and standards of best practice.
NOTES
One of the most influential guidelines has been the 1999 OECD Principles of
Corporate Governance. This was revised in 2004. The OECD remains a proponent of
corporate governance principles throughout the world.
The World Business Council for Sustainable Development WBCSD has also done
substantial work on corporate governance, particularly on accountability and reporting,
and in 2004 created an Issue Management Tool: Strategic challenges for business in the
use of corporate responsibility codes, standards, and frame works. This document aims to
provide general information, a snap-shot of the landscape and a perspective from a
think-tank/professional association on a few key codes, standards and frameworks relevant
to the sustainability agenda.
1.10.9 Corporate Governance And Firm Performance
In its Global Investor Opinion Survey of over 200 institutional investors first
undertaken in 2000 and updated in 2002, McKinsey found that 80% of the respondents
would pay a premium for well-governed companies. They defined a well-governed company
as one that had mostly out-side directors, who had no management ties, undertook formal
evaluation of its directors, and was responsive to investors requests for information on
governance issues. The size of the premium varied by market, from 11% for Canadian
companies to around 40% for companies where the regulatory backdrop was least certain
(those in Morocco,Egypt and Russia).
Other studies have linked broad perceptions of the quality of companies to superior
share price performance. In a study of five year cumulative returns of Fortune Magazines
survey of most admired firms, Antunovich et al found that those most admired had an
average return of 125%, whilst the least admired firms returned 80%. In a separate study
Business Week enlisted institutional investors and experts to assist in differentiating between
boards with good and bad governance and found that companies with the highest rankings
had the highest financial returns.
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NOTES
On the other hand, research into the relationship between specific corporate
governance controls and firm performance has been mixed and often weak. The following
examples are illustrative.
Board composition
Some researchers have found support for the relationship between frequency of
meetings and profitability. Others have found a negative relationship between the proportion
of external directors and firm performance, while others found no relationship between
external board membership and performance. In a recent paper Bagahat and Black found
that companies with more independent boards do not perform better than other companies.
It is unlikely that board composition has a direct impact on firm performance.
Remuneration/Compensation
The results of previous research on the relationship between firm performance and
executive compensation have failed to find consistent and significant relationships between
executives remuneration and firm performance. Low average levels of pay-performance
alignment do not necessarily imply that this form of governance control is inefficient. Not all
firms experience the same levels of agency conflict, and external and internal monitoring
devices may be more effective for some than for others.
Some researchers have found that the largest CEO performance incentives came
from ownership of the firms shares, while other researchers found that the relationship
between share ownership and firm performance was dependent on the level of ownership.
The results suggest that increases in ownership above 20% cause management to become
more entrenched, and less interested in the welfare of their shareholders.
Some argue that firm performance is positively associated with share option plans
and that these plans direct managers energies and extend their decision horizons toward
the long-term, rather than the short-term, performance of the company. However, that
point of view came under substantial criticism circa in the wake of various security scandals
including mutual fund timing episodes and, in particular, the backdating of option grants as
documented by University of Iowa academic Erik Lie and reported by James Blander and
Charles Forelle of the Wall Street Journal.
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Even before the negative influence on public opinion caused by the 2006 backdating
scandal, use of options faced various criticisms. A particularly forceful and long running
argument concerned the interaction of executive options with corporate stock repurchase
programs. Numerous authorities (including U.S. Federal Reserve Board economist
Weisbenner) determined options may be employed in concert with stock buybacks in a
manner contrary to shareholder interests. These authors argued that, in part, corporate
stock buybacks for U.S. Standard & Poors 500 companies surged to a $500 billion
annual rate in late 2006 because of the impact of options. A compendium of academic
works on the option/buyback issue is included in the study Scanda by author M.Gumport
issued in 2006.
NOTES
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followed by the Industries especially among the Small and Medium Enterprises (SMEs)
and unlisted Companies.
In case you believe that your company has initiated some benchmark Corporate
Governance initiatives then we invite you to forward. A brief audio-visual presentation
highlighting the following:
SUMMARY
Strategic management is the art and science of formulating, implementing and
evaluating cross-functional decisions that will enable an organization to achieve its objectives.
It is the process of specifying the organizations objectives, developing policies and plans
to achieve these objectives, and allocating resources to implement the policies and plans to
achieve the organizations objectives. Strategic management as a discipline originated in
the 1950s and 60s. Although there were numerous early contributors to the literature, the
most influential pioneers were Alfred D. Chandler, Jr., Philip Selznick, Igor Ansoff, and
Peter Drucker.
The steps involved in strategic management process are:
1. Defining the vision, business mission, purpose, and broad objectives.2. Formulation
of strategies.3. Implementation of strategies. 4. Evaluation of strategies.
The four phases can be listed as below. 1. Defining the vision, business mission,
purpose, and broad objectives.2. Formulation of strategies.3. Implementation of strategies.4.
Evaluation of strategies.
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NOTES
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NOTES
UNIT II
COMPETITIVE ADVANTAGE
INTRODUCTION
The interaction of the four environmental dimensions creates further sub-dimensions
such as political and economic environments that act as a filter between the internal and
external environment and profoundly affect the performance of the corporation. Culture
here refers to transmitted patterns of behaviour shared by members of a group which
provide them with effective mechanisms for interaction (Krefting & Krefting, 1991). Culture
can be thought of as an overriding concept (eg. western cultures and indigenous cultures)
that directs the sociocultural specificity of group environments each with its own beliefs
and rituals that are used to determine behavioural norms.
Michael Porter provided a framework that models an industry as being influenced
by five forces. The strategic business manager seeking to develop an edge over rival firms
can use this model to better understand the industry context in which the firm operates.When
a rival acts in a way that elicits a counter-response by other firms, rivalry intensifies.The
intensity of rivalry commonly is referred to as being cutthroat, intense, moderate, or
weak,based on the firms aggressiveness in attempting to gain an advantage
Learning Objectives
After learning this unit you must be able to:
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Economical factors
Technological factors
Political factors
Socio-cultural factors
GDP trends
Interest rates
Money supply
Inflation rates
Unemployment levels
Wage/price controls
Devaluation/revaluation
Energy availability and cost
Disposable and discretionary income
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B Technological factors:
NOTES
Antitrust regulations
Environment protection laws
Tax laws
Special incentives
Foreign trade regulations
Attitude towards foreign companies
Laws on hiring and promotion
Stability of the government
D Socio-Cultural factors
The interaction of these four environmental dimensions creates further subdimensions such as political and economic environments that act as a filter between the
internal and external environment and profoundly affect the performance of the corporation.
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NOTES
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I. Rivalry
In the traditional economic model, competition among rival firms drives profits to
zero. But competition is not perfect and firms are not unsophisticated passive price takers.
Rather, firms strive for a competitive advantage over their rivals. The intensity of rivalry
among firms varies across industries, and strategic analysts are interested in these differences.
Economists measure rivalry by indicators of industry concentration. The
Concentration Ratio (CR) is one such measure. The Bureau of Census periodically reports
the CR for major Standard Industrial Classifications (SICs). The CR indicates the percent
of market share held by the four largest firms (CRs for the largest 8, 25, and 50 firms in an
industry also are available). A high concentration ratio indicates that a high concentration of
market share is held by the largest firms - the industry is concentrated. With only a few
firms holding a large market share, the competitive landscape is less competitive (closer to
a monopoly). A low concentration ratio indicates that the industry is characterized by many
rivals, none of which has a significant market share. These fragmented markets are said
to be competitive. The concentration ratio is not the only available measure; the trend is to
define industries in terms that convey more information than distribution of market share.
If rivalry among firms in an industry is low, the industry is considered to be
disciplined. This discipline may result from the industrys history of competition, the role of
a leading firm, or informal compliance with a generally understood code of conduct. Explicit
collusion generally is illegal and not an option; in low-rivalry industries competitive moves
must be constrained informally. However, a maverick firm seeking a competitive advantage
can displace the otherwise disciplined market.
When a rival acts in a way that elicits a counter-response by other firms, rivalry
intensifies. The intensity of rivalry commonly is referred to as being cutthroat, intense,
moderate, or weak, based on the firms aggressiveness in attempting to gain an advantage.
In pursuing an advantage over its rivals, a firm can choose from several competitive
moves:
STRATEGIC MANAGEMENT
NOTES
the same customers and resources. The rivalry intensifies if the firms have similar
market share, leading to a struggle for market leadership.
Slow market growth causes firms to fight for market share. In a growing market,
firms are able to improve revenues simply because of the expanding market.
High fixed costs result in an economy of scale effect that increases rivalry. When
total costs are mostly fixed costs, the firm must produce near capacity to attain the
lowest unit costs. Since the firm must sell this large quantity of product, high levels
of production lead to a fight for market share and results in increased rivalry.
High storage costs or highly perishable products cause a producer to sell
goods as soon as possible. If other producers are attempting to unload at the same
time, competition for customers intensifies.
Low switching costs increases rivalry. When a customer can freely switch from
one product to another there is a greater struggle to capture customers.
Low levels of product differentiation is associated with higher levels of rivalry.
Brand identification, on the other hand, tends to constrain rivalry.
Strategic stakes are high when a firm is losing market position or has potential
for great gains. This intensifies rivalry.
High exit barriers place a high cost on abandoning the product. The firm must
compete. High exit barriers cause a firm to remain in an industry, even when the
venture is not profitable. A common exit barrier is asset specificity. When the plant
and equipment required for manufacturing a product is highly specialized, these
assets cannot easily be sold to other buyers in another industry. Litton Industries
acquisition of Ingalls Shipbuilding facilities illustrates this concept. Litton was
successful in the 1960s with its contracts to build Navy ships. But when the Vietnam
war ended, defense spending declined and Litton saw a sudden decline in its
earnings. As the firm restructured, divesting from the shipbuilding plant was not
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feasible since such a large and highly specialized investment could not be sold
easily, and Litton was forced to stay in a declining shipbuilding market.
A diversity of rivals with different cultures, histories, and philosophies make an
industry unstable. There is greater possibility for mavericks and for misjudging
rivals moves. Rivalry is volatile and can be intense. The hospital industry, for
example, is populated by hospitals that historically are community or charitable
institutions, by hospitals that are associated with religious organizations or universities,
and by hospitals that are for-profit enterprises. This mix of philosophies about
mission has lead occasionally to fierce local struggles by hospitals over who will
get expensive diagnostic and therapeutic services. At other times, local hospitals
are highly cooperative with one another on issues such as community disaster
planning.
Industry Shakeout. A growing market and the potential for high profits induces
new firms to enter a market and incumbent firms to increase production. A point is reached
where the industry becomes crowded with competitors, and demand cannot support the
new entrants and the resulting increased supply. The industry may become crowded if its
growth rate slows and the market becomes saturated, creating a situation of excess capacity
with too many goods chasing too few buyers. A shakeout ensues, with intense competition.
BCG founder Bruce Henderson generalized this observation as the Rule of Three
and Four: a stable market will not have more than three significant competitors, and the
largest competitor will have no more than four times the market share of the smallest. If this
rule is true, it implies that:
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birth rates, and in the greeting card industry in which there are more predictable business
cycles.
NOTES
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one buyer. Under such market conditions, the buyer sets the price. In reality few pure
monopsonies exist, but frequently there is some asymmetry between a producing industry
and buyers. The following tables outline some factors that determine buyer power.
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NOTES
V.
It is not only incumbent rivals that pose a threat to firms in an industry; the possibility
that new firms may enter the industry also affects competition. In theory, any firm should be
able to enter and exit a market, and if free entry and exit exists, then profits always should
be nominal. In reality, however, industries possess characteristics that protect the high
profit levels of firms in the market and inhibit additional rivals from entering the market.
These are barriers to entry.
Barriers to entry are more than the normal equilibrium adjustments that markets
typically make. For example, when industry profits increase, we would expect additional
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firms to enter the market to take advantage of the high profit levels, over time driving down
profits for all firms in the industry. When profits decrease, we would expect some firms to
exit the market thus restoring a market equilibrium. Falling prices, or the expectation that
future prices will fall, deters rivals from entering a market. Firms also may be reluctant to
enter markets that are extremely uncertain, especially if entering involves expensive startup costs. These are normal accommodations to market conditions. But if firms individually
(collective action would be illegal collusion) keep prices artificially low as a strategy to
prevent potential entrants from entering the market, such entry-deterring pricing
establishes a barrier.
Barriers to entry are unique industry characteristics that define the industry. Barriers
reduce the rate of entry of new firms, thus maintaining a level of profits for those already in
the industry. From a strategic perspective, barriers can be created or exploited to enhance
a firms competitive advantage. Barriers to entry arise from several sources:
Government creates barriers. Although the principal role of the government in
a market is to preserve competition through anti-trust actions, government also restricts
competition through the granting of monopolies and through regulation. Industries such as
utilities are considered natural monopolies because it has been more efficient to have one
electric company provide power to a locality than to permit many electric companies to
compete in a local market. To restrain utilities from exploiting this advantage, government
permits a monopoly, but regulates the industry. Illustrative of this kind of barrier to entry is
the local cable company. The franchise to a cable provider may be granted by competitive
bidding, but once the franchise is awarded by a community a monopoly is created. Local
governments were not effective in monitoring price gouging by cable operators, so the
federal government has enacted legislation to review and restrict prices.
The regulatory authority of the government in restricting competition is historically
evident in the banking industry. Until the 1970s, the markets that banks could enter were
limited by state governments. As a result, most banks were local commercial and retail
banking facilities. Banks competed through strategies that emphasized simple marketing
devices such as awarding toasters to new customers for opening a checking account.
When banks were deregulated, banks were permitted to cross state boundaries and expand
their markets. Deregulation of banks intensified rivalry and created uncertainty for banks
as they attempted to maintain market share. In the late 1970s, the strategy of banks
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shifted from simple marketing tactics to mergers and geographic expansion as rivals
attempted to expand markets.
NOTES
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Barriers to exit work similarly to barriers to entry. Exit barriers limit the ability of a
firm to leave the market and can exacerbate rivalry - unable to leave the industry, a firm
must compete. Some of an industrys entry and exit barriers can be summarized as follows:
Easy to Enter if there is: Common technologyLittle brand franchiseAccess to distribution
channelsLow scale threshold
Difficult to Enter if there is: Patented or proprietary know-howDifficulty in brand
switchingRestricted distribution channelsHigh scale threshold
Easy to Exit if there are: Salable assetsLow exit costsIndependent businesses
Difficult to Exit if there are: Specialized assetsHigh exit costsInterrelated businesses
2.3 DYNAMIC NATURE OF INDUSTRY RIVALRY
Our descriptive and analytic models of industry tend to examine the industry at a
given state. The nature and fascination of business is that it is not static. While we are prone
to generalize, for example, list GM, Ford, and Chrysler as the Big 3 and assume their
dominance, we also have seen the automobile industry change. Currently, the entertainment
and communications industries are in flux. Phone companies, computer firms, and
entertainment are merging and forming strategic alliances that re-map the information terrain.
Schumpeter and, more recently, The existence of such an economy of scale creates a
barrier to entry. The greater the difference between industry MES and entry unit costs, the
greater the barrier to entry. So industries with high MES deter entry of small, start-up
businesses. To operate at less than MES there must be a consideration that permits the
firm to sell at a premium price - such as product differentiation or local monopoly.
In Schumpeters and Porters view the dynamism of markets is driven by innovation.
We can envision these forces at work as we examine the following changes:
2.3.1 A Combination Of Generic Strategies Stuck in the Middle?
These generic strategies are not necessarily compatible with one another. If a firm
attempts to achieve an advantage on all fronts, in this attempt it may achieve no advantage
at all. For example, if a firm differentiates itself by supplying very high quality products, it
risks undermining that quality if it seeks to become a cost leader. Even if the quality did not
suffer, the firm would risk projecting a confusing image. For this reason, Michael Porter
argued that to be successful over the long-term, a firm must select only one of these three
generic strategies. Otherwise, with more than one single generic strategy the firm will be
stuck in the middle and will not achieve a competitive advantage.
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Porter argued that firms that are able to succeed at multiple strategies often do so
by creating separate business units for each strategy. By separating the strategies into
different units having different policies and even different cultures, a corporation is less
likely to become stuck in the middle.
NOTES
However, there exists a viewpoint that a single generic strategy is not always best
because within the same product customers often seek multi-dimensional satisfactions such
as a combination of quality, style, convenience, and price. There have been cases in which
high quality producers faithfully followed a single strategy and then suffered greatly when
another firm entered the market with a lower-quality product that better met the overall
needs of the customers.
2.3.2.1 Generic Strategies And Industry Forces
These generic strategies each have attributes that can serve to defend against
competitive forces. The following table compares some characteristics of the generic
strategies in the context of the Porters five forces.
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Examples of Characteristics
NOTES
Helps identify who the most direct competitors are and on what basis they compete.
Raises the question of how likely or possible it is for another organization to move
from one strategic group to another.
Strategic Group mapping might also be used to identify opportunities.
Can also help identify strategic problems.
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on global economy, globalization has two components: finance and production. Globalization
of these factors appears in the form of the increased international mobility of capital and
the growing incidence of mergers and acquisitions and strategic alliances. And for both
finance and production, markets have facilitated the globalization process, while markets
themselves also became globalized.
The level of globalization in those various aspects, however, differs significantly
depending on industrial sectors; Strange (1997) emphasized that globalization is not a
universal phenomenon, but it differs depending on sectors and firms rather than on states.
Among various industries, only a few are practicing globalism in all aspects of sales,
production, personnel, research and development, and financing. Individual firms often
seek for localization of their activities along with their global strategies. Only a handful of
multinational corporations specifically target the global market instead of focusing on several
local markets, and operate their production globally rather than having local production
independent and separate from production in other areas. In this sense, globalization has
not permeated as thoroughly as the popularity of the word suggest
Despite the unevenness of the development, globalization has brought changes in
commitment-rules that have caused systemic transition, though not yet complete, of crossborder economic transactions. Globalization was preceded by internationalization, which
differs from globalization in that the nation-state system itself was not in question at the
time. Internationalization is still based on a comparatively stable system of sovereign states,
each with an internal hierarchy of more or less subservient local governments, whereas
globalization is based on a system characterized by emerging and still primitive governance
structures... The current trend aggrandizes a situation that is better described as globalization,
in which national economies are evolving from a condition in which they are less like
billiard balls in holistic interaction than they are permeable entities in various states of
amalgamation with one another. Therefore, The term globalization suggests a quantum
leap beyond previous internationalization stage.
Globalization in relation to India has been a two way process. Global forces have
had a considerable impact on India at all levels of its life. They are penetrating its economy
and reshaping its structure and mode of operation. They are forcing India to redefine its
place in the world and its relation to its neighbors and the west. Indias educational and
cultural life, TV and print media, and its perception of itself and the world are also undergoing
profound changes. Not surprisingly, India today is quite different from what it was barely
ten years ago, and it is not easy to predict how it will progress during the next few years.
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India has not been a passive recipient of global impact. Both directly and through
its diasporas, it has increasingly become a significant global presence. Indias literature,
arts, films, religions, food, textiles, fashions and music are now an integral part of life in the
west. Its doctors, IT specialists, computer scientists, small and large industrialists, managers
and engineers are present in the west in large numbers and have made a very considerable
impact. Indeed, they are admired for their skills and hard work and are much sought after.
NOTES
Consider Globalization and Indian industry. In the seventies, India was just emerging
from the first stage. After 30 years from then, it has crossed second stage and going into
the third one. Year 2003 was pivotal as it saw manifestation of Indias global aspiration.
The number as well as size of the foreign targets showed steep rise. Close to 50 overseas
acquisitions, amounting $1.8 billion took place last year, which was only $0.21 billion in
2002. The increase in average deal size is from $7.5 million in 2002 to $36.5 million in
2003. India has adopted domestic policies and institutions that have enabled people to
take advantage of global markets and have thus sharply increased the share of trade in
their GDP. India has been catching up with the rich ones our annual growth rates increased
from 1 percent in the 1960s to 5 percent in the 1990s. Now it is above 8%. Indians saw
their wages rise, and the number of people in poverty declined.
Industry wise, the software and services sector lead the mergers and acquisitions
charge overseas but now this list includes both old and new economy industries like auto
ancillaries, pharmaceuticals, telecom, agro-chemicals and steel. There are thus no
stereotypes that only new economy companies are invited to the mergers and acquisitions
ball or that only the blue chip companies are partaking of the action. It is more democratic
as smaller auto ancillary companies are also in the fray.
Globalization has changed the face of business all over the world. Those countries
who opened their doors for liberalization and globalization have recorded a tremendous
economic growth. India is one among those countries who enjoyed these benefits. Though
India opened its door very lately to these, currently she is in a better position. Globalization
has never been a remote experience. It affected industries directly and common man both
directly or indirectly. There is lot of industries or sectors, in India, which showed a tremendous
growth after the liberalization and globalization struck India. Like wise MNCs over the
world showed an exceptional growth as the globalization spread. In days to come its sure
that the face and nature of business will change dramatically and globalization will have a
key role to play. Here we have made an attempt to study the Impact of Globalization on
MNCs and we have succeeded in a better way.
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NOTES
This generic strategy calls for being the low cost producer in an industry for a
given level of quality. The firm sells its products either at average industry prices to earn a
profit higher than that of rivals, or below the average industry prices to gain market share.
In the event of a price war, the firm can maintain some profitability while the competition
suffers losses. Even without a price war, as the industry matures and prices decline, the
firms that can produce more cheaply will remain profitable for a longer period of time. The
cost leadership strategy usually targets a broad market.
Some of the ways that firms acquire cost advantages are by improving process
efficiencies, gaining unique access to a large source of lower cost materials, making optimal
outsourcing and vertical integration decisions, or avoiding some costs altogether. If
competing firms are unable to lower their costs by a similar amount, the firm may be able
to sustain a competitive advantage based on cost leadership.
Firms that succeed in cost leadership often have the following internal strengths:
Each generic strategy has its risks, including the low-cost strategy. For example,
other firms may be able to lower their costs as well. As technology improves, the competition
may be able to leapfrog the production capabilities, thus eliminating the competitive
advantage. Additionally, several firms following a focus strategy and targeting various narrow
markets may be able to achieve an even lower cost within their segments and as a group
gain significant market share.
Differentiation Strategy
A differentiation strategy calls for the development of a product or service that
offers unique attributes that are valued by customers and that customers perceive to be
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better than or different from the products of the competition. The value added by the
uniqueness of the product may allow the firm to charge a premium price for it. The firm
hopes that the higher price will more than cover the extra costs incurred in offering the
unique product. Because of the products unique attributes, if suppliers increase their prices
the firm may be able to pass along the costs to its customers who cannot find substitute
products easily.
Firms that succeed in a differentiation strategy often have the following internal strengths:
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Some risks of focus strategies include imitation and changes in the target segments.
Furthermore, it may be fairly easy for a broad-market cost leader to adapt its product in
order to compete directly. Finally, other focusers may be able to carve out sub-segments
that they can serve even better.
NOTES
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The above Figure shows the competitive advantage firms may achieve through
cost leadership. C is the original cost of production. C is the new cost of production. SP is
the original selling price. SP is the new selling price. P is the original profit margin. P is the
new profit margin.
If we assume our firm and the other competitors are producing the product for a
cost of C and selling it at SP, we are all receiving a profit of P. As cost leader, we are able
to lower our cost to C while the competitors remain at C. We now have two choices as to
how to take advantage of our reduced costs.
Department stores and other high-margin firms often leave their selling price as SP,
the original selling price. This allows the low-cost leader to obtain a higher profit margin
than they received before the reduction in costs. Since the competition was unable to
lower their costs, they are receiving the original, smaller profit margin. The cost leader
gains competitive advantage over the competition by earning more profit for each unit
sold.
Discount stores such as Wal-Mart are more likely to pass the savings from the
lower costs on to customers in the form of lower prices. These discounters retain the
original profit margin, which is the same margin as their competitors. However, they are
able to lower their selling price due to their lower costs (C). They gain competitive advantage
by being able to under-price the competition while maintaining the same profit margin.
Overall cost leadership is not without potential problems. Two or more firms
competing for cost leadership may engage in price wars that drive profits to very low
levels. Ideally, a firm using a cost leader strategy will develop an advantage that is not
easily copied by others. Cost leaders also must maintain their investment in state-of-theart equipment or face the possible entry of more cost-effective competitors. Major changes
in technology may drastically change production processes so that previous investments in
production technology are no longer advantageous. Finally, firms may become so concerned
with maintaining low costs that needed changes in production or marketing are overlooked.
The strategy may be more difficult in a dynamic environment because some of the expenses
that firms may seek to minimize are research and development costs or marketing research
costs, yet these are expenses the firm may need to incur in order to remain competitive.
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Differentiation Strategy
NOTES
The second generic strategy, differentiating the product or service, requires a firm
to create something about its product or service that is perceived as unique throughout the
industry. Whether the features are real or just in the mind of the customer, customers must
perceive the product as having desirable features not commonly found in competing products.
The customers also must be relatively price-insensitive. Adding product features means
that the production or distribution costs of a differentiated product may be somewhat
higher than the price of a generic, non-differentiated product. Customers must be willing to
pay more than the marginal cost of adding the differentiating feature if a differentiation
strategy is to succeed.
Differentiation may be attained through many features that make the product or
service appear unique. Possible strategies for achieving differentiation may include:
Differentiation does not allow a firm to ignore costs; it makes a firms products less
susceptible to cost pressures from competitors because customers see the product as
unique and are willing to pay extra to have the product with the desirable features.
Differentiation can be achieved through real product features or through advertising that
causes the customer to perceive that the product is unique.
Differentiation may lead to customer brand loyalty and result in reduced price
elasticity. Differentiation may also lead to higher profit margins and reduce the need to be
a low-cost producer. Since customers see the product as different from competing products
and they like the product features, customers are willing to pay a premium for these features.
As long as the firm can increase the selling price by more than the marginal cost of adding
the features, the profit margin is increased. Firms must be able to charge more for their
differentiated product than it costs them to make it distinct, or else they may be better off
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making generic, undifferentiated products. Firms must remain sensitive to cost differences.
They must carefully monitor the incremental costs of differentiating their product and make
certain the difference is reflected in the price.
Firms pursuing a differentiation strategy are vulnerable to different competitive
threats than firms pursuing a cost leader strategy. Customers may sacrifice features, service,
or image for cost savings. Customers who are price sensitive may be willing to forgo
desirable features in favor of a less costly alternative. This can be seen in the growth in
popularity of store brands and private labels. Often, the same firms that produce namebrand products produce the private label products. The two products may be physically
identical, but stores are able to sell the private label products for a lower price because
very little money was put into advertising in an effort to differentiate the private label product.
Imitation may also reduce the perceived differences between products when
competitors copy product features. Thus, for firms to be able to recover the cost of marketing
research or R&D, they may need to add a product feature that is not easily copied by a
competitor.
A final risk for firms pursuing a differentiation strategy is changing consumer tastes.
The feature that customers like and find attractive about a product this year may not make
the product popular next year. Changes in customer tastes are especially obvious in the
apparel industry. Polo Ralph Lauren has been a very successful brand in the fashion industry.
However, some younger consumers have shifted to Tommy Hilfiger and other youth-oriented
brands.
Ralph Lauren, founder and CEO, has been the guiding light behind his companys
success. Part of the firms success has been the publics association of Lauren with the
brand. Ralph Lauren leads a high-profile lifestyle of preppy elegance. His appearance in
his own commercials, his Manhattan duplex, his Colorado ranch, his vintage car collection,
and private jet have all contributed to the publics fascination with the man and his brand
name. This image has allowed the firm to market everything from suits and ties to golf balls.
Through licensing of the name, the Lauren name also appears on sofas, soccer balls, towels,
table-ware, and much more.
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Combination Strategies
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Some industry environments may actually call for combination strategies. Trends
suggest that executives operating in highly complex environments such as health care do
not have the luxury of choosing exclusively one strategy over the other. The hospital industry
may represent such an environment, as hospitals must compete on a variety of fronts.
Combination (i.e., more complicated) strategies are both feasible and necessary to compete
successfully. For instance, DRG-based reimbursement (diagnosis related groups) and the
continual lowering of reimbursement ceilings have forced hospitals to compete on the basis
of cost. At the same time, many of them jockey for position with differentiation based on
such features as technology and birthing rooms. Thus, many hospitals may need to adopt
some form of hybrid strategy in order to compete successfully, according to Walters and
Bhuian.
Focus Strategy
The generic strategies of cost leadership and differentiation are oriented toward
industry-wide recognition. The final generic strategy, focusing (also called niche or
segmentation strategy), involves concentrating on a particular customer, product line,
geographical area, channel of distribution, stage in the production process, or market niche.
The underlying premise of the focus strategy is that a firm is better able to serve a limited
segment more efficiently than competitors can serve a broader range of customers. Firms
using a focus strategy simply apply a cost leader or differentiation strategy to a segment of
the larger market. Firms may thus be able to differentiate themselves based on meeting
customer needs, or they may be able to achieve lower costs within limited markets. Focus
strategies are most effective when customers have distinctive preferences or specialized
needs.
A focus strategy is often appropriate for small, aggressive businesses that do not
have the ability or resources to engage in a nationwide marketing effort. Such a strategy
may also be appropriate if the target market is too small to support a large-scale operation.
Many firms start small and expand into a national organization. For instance, Wal-Mart
started in small towns in the South and Midwest. As the firm gained in market knowledge
and acceptance, it expanded through-out the South, then nationally, and now internationally.
Wal-Mart started with a focused cost leader strategy in its limited market, and later was
able to expand beyond its initial market segment.
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A firm following the focus strategy concentrates on meeting the specialized needs
of its customers. Products and services can be designed to meet the needs of buyers. One
approach to focusing is to service either industrial buyers or consumers, but not both.
Martin-Brower, the third-largest food distributor in the United States, serves only the eight
leading fast-food chains. With its limited customer list, Martin-Brower need only stock a
limited product line; its ordering procedures are adjusted to match those of its customers;
and its warehouses are located so as to be convenient to customers.
NOTES
Firms utilizing a focus strategy may also be better able to tailor advertising and
promotional efforts to a particular market niche. Many automobile dealers advertise that
they are the largest volume dealer for a specific geographic area. Other car dealers advertise
that they have the highest customer satisfaction scores within their defined market or the
most awards for their service department.
Firms may be able to design products specifically for a customer. Customization
may range from individually designing a product for a customer to allowing customer input
into the finished product. Tailor-made clothing and custom-built houses include the customer
in all aspects of production, from product design to final acceptance. Key decisions are
made with customer input. However, providing such individualized attention to customers
may not be feasible for firms with an industry-wide orientation.
Other forms of customization simply allow the customer to select from a menu of
predetermined options. Burger King advertises that its burgers are made your way,
meaning that the customer gets to select from the predetermined options of pickles, lettuce,
and so on. Similarly, customers are allowed to design their own automobiles within the
constraints of predetermined colors, engine sizes, interior options, and so forth.
Potential difficulties associated with a focus strategy include a narrowing of
differences between the limited market and the entire industry. National firms routinely
monitor the strategies of competing firms in their various submarkets. They may then copy
the strategies that appear particularly successful. The national firm, in effect, allows the
focused firm to develop the concept, then the national firm may emulate the strategy of the
smaller firm or acquire it as a means of gaining access to its technology or processes.
Emulation increases the ability of other firms to enter the market niche while reducing the
cost advantages of serving the narrower market.
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Market size is always a problem for firms pursing a focus strategy. The targeted
market segment must be large enough to provide an acceptable return so that the business
can survive. For instance, ethnic restaurants are often unsuccessful in small U.S. towns,
since the population base that enjoys Japanese or Greek cuisine is too small to allow the
restaurant operator to make a profit. Likewise, the demand for an expensive, upscale
restaurant is usually not sufficient in a small town to make its operation economically feasible.
Another potential danger for firms pursuing a focus strategy is that competitors
may find submarkets within the target market. In the past, United Parcel Service (UPS)
solely dominated the package delivery segment of the delivery business. Newer competitors
such as Federal Express and Roadway Package Service (RPS) have entered the package
delivery business and have taken customers away from UPS. RPS contracts with
independent drivers in a territory to pick up and deliver packages, while UPS pays unionized
wages and benefits to its drivers. RPS started operations in 1985 with 36 package terminals.
By 1999 it was a $1 billion company with 339 facilities.
2.6 CAPABILITIES AND COMPETENCIES
Definition of capability
Capability represents the identity of your firm as perceived by both your employees
and your customers. It is your ability to perform better than competitors using a distinctive
and difficult to replicate set of business attributes. Capability is a capacity for a set of
resources to integrative performs a stretch task.
2.6.1 Capabilities The Basis Of Your Competitive Advantage
Through continued use, capabilities become stronger and more difficult for
competitors to understand and imitate. As a source of competitive advantage, a capability
should be neither so simple that it is highly imitable, nor so complex that it defies internal
steering and control.4 Capabilities grow through use, and how fast they grow is critical to
your success.
According to the new resource based view of the company, sustainable competitive
advantage is achieved by continuously developing existing and creating new resources and
capabilities in response to rapidly changing market conditions. Among these resources and
capabilities, in the new economy, knowledge represents the most important value-creating
asset.
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3.
4.
5.
6.
7.
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The intersection of market opportunities with core competencies forms the basis
for launching new businesses. By combining a set of core competencies in different ways
and matching them to market opportunities, a corporation can launch a vast array of
businesses.
Without core competencies, a large corporation is just a collection of discrete
businesses. Core competencies serve as the glue that bonds the business units together
into a coherent portfolio.
2.7.2 Developing Core Competencies
According to Prahalad and Hamel, core competencies arise from the integration
of multiple technologies and the coordination of diverse production skills. Some examples
include Philips expertise in optical media and Sonys ability to miniaturize electronics.
There are three tests useful for identifying a core competence. A core competence should:
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NOTES
While the building of core competencies may be facilitated by some of these actions,
by themselves they are insufficient.
The Loss of Core Competencies
Cost-cutting moves sometimes destroy the ability to build core competencies. For
example, decentralization makes it more difficult to build core competencies because
autonomous groups rely on outsourcing of critical tasks, and this outsourcing prevents the
firm from developing core competencies in those tasks since it no longer consolidates the
know-how that is spread throughout the company.
Failure to recognize core competencies may lead to decisions that result in their
loss. For example, in the 1970s many U.S. manufacturers divested themselves of their
television manufacturing businesses, reasoning that the industry was mature and that high
quality, low cost models were available from Far East manufacturers. In the process, they
lost their core competence in video, and this loss resulted in a handicap in the newer digital
television industry.
Similarly, Motorola divested itself of its semiconductor DRAM business at 256Kb
level, and then was unable to enter the 1Mb market on its own. By recognizing its core
competencies and understanding the time required building them or regaining them, a
company can make better divestment decisions.
Core Products
Core competencies manifest themselves in core products that serve as a link
between the competencies and end products. Core products enable value creation in the
end products. Examples of firms and some of their core products include:
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The core products are used to launch a variety of end products. For example,
Honda uses its engines in automobiles, motorcycles, lawn mowers, and portable generators.
Because firms may sell their core products to other firms that use them as the basis
for end user products, traditional measures of brand market share are insufficient for
evaluating the success of core competencies. Prahalad and Hamel suggest that core product
share is the appropriate metric. While a company may have a low brand share, it may
have high core product share and it is this share that is important from a core competency
standpoint.
Once a firm has successful core products, it can expand the number of uses in
order to gain a cost advantage via economies of scale and economies of scope.
Implications for Corporate Management
Prahalad and Hamel suggest that a corporation should be organized into a portfolio
of core competencies rather than a portfolio of independent business units. Business unit
managers tend to focus on getting immediate end-products to market rapidly and usually
do not feel responsible for developing company-wide core competencies. Consequently,
without the incentive and direction from corporate management to do otherwise, strategic
business units are inclined to under invest in the building of core competencies.
If a business unit does manage to develop its own core competencies over time,
due to its autonomy it may not share them with other business units. As a solution to this
problem, Prahalad and Hamel suggest that corporate managers should have the ability to
allocate not only cash but also core competencies among business units. Business units
that lose key employees for the sake of a corporate core competency should be recognized
for their contribution.
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NOTES
Porter asserts that these generic competitive strategies were not only relevant for
the old economy, but are just as vital today. Indeed, he goes on to say that terms such as
old economy and new economy may be misguided, and the concept of a firms Internet
operation as a stand-alone entity preclude the firm from garnering important synergies.
Furthermore, the Internet may enhance a firms opportunities for achieving or strengthening
a distinctive strategic positioning. Therefore, effective strategy formulation at the business
level should pay off, not in spite of the Internet, but in concert with it.
Porter describes how companies can set themselves apart in at least two ways:
operational effectiveness (doing the same activities as competitors but doing them better)
and strategic positioning (doing things differently and delivering unique value for customers).
The Internet affects operational effectiveness and strategic positioning in very different
ways. It makes it harder for companies to sustain operational advantages, but it opens new
opportunities for achieving or strengthening a distinctive strategic positioning. Although
the Internet is a powerful tool for enhancing operational effectiveness, these enhancements
alone are not likely to be sustained because of copying by rivals. This state of affairs
elevates the importance of defining for the firm a unique value proposition. Internet technology
can be a complement to successful strategy, but it is not sufficient. Frequently, in fact,
Internet applications address activities that, while necessary, are not decisive in competition,
such as informing customers, processing transactions, and procuring inputs. Critical
corporate assetsskilled personnel, proprietary product technology, efficient logistical
systemsremain intact, and they are often strong enough to preserve existing competitive
advantages.
Consistent with the earlier discussion regarding combination strategies, Kim, Nam,
and Stimpert found in their study of e-businesses that firms pursuing a hybrid strategy of
cost leadership and differentiation exhibited the highest performance. These authors
concluded that cost leadership and differentiation must often be combined to be successful
in e-business.
Porters generic business strategies provide a set of methods that can be used
singly or in combination to create a defendable business strategy. They also allow firms
that use them successfully to gain a competitive advantage over other firms in the industry.
Firms either strive to obtain lower costs than their competitors or to create a perceived
difference between their product and the products of competitors. Firms can pursue their
strategy on a national level or on a more focused, regional basis.
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Clearly, Michael Porters work has had a remarkable impact on strategy research
and practice. The annual Porter Prize, akin to the Deming Prize, was established in 2001
in Japan to recognize that nations leading companies in terms of strategy. Porters ideas
have stood the test of time and appear to be relevant both for profit-seeking enterprises
and not-for-profit institutes in a variety of international settings. Torgovicky, Goldberg,
Shvarts, and Bar Dayan have found a relationship between business strategy and
performance measures in an ambulatory health care system in Israel, strengthening Porters
original theory about the non-viability of the stuck-in-the-middle strategy, and suggesting
the applicability of Porters generic strategies to not-for-profit institutes.
When a firm sustains profits that exceed the average for its industry, the firm is said
to possess a competitive advantage over its rivals. The goal of much of business strategy
is to achieve a sustainable competitive advantage.
2.9 MICHAEL PORTER COMPETITIVE ADVANTAGE
Competitive Advantage have identified two basic types of competitive advantage:
cost advantage
differentiation advantage
A competitive advantage exists when the firm is able to deliver the same benefits
as competitors but at a lower cost (cost advantage), or deliver benefits that exceed those
of competing products (differentiation advantage). Thus, a competitive advantage enables
the firm to create superior value for its customers and superior profits for itself.
Cost and differentiation advantages are known as positional advantages since
they describe the firms position in the industry as a leader in either cost or differentiation.
A resource-based view emphasizes that a firm utilizes its resources and capabilities
to create a competitive advantage that ultimately results in superior value creation. The
following diagram combines the resource-based and positioning views to illustrate the
concept of competitive advantage:
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NOTES
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Capabilities refer to the firms ability to utilize its resources effectively. An example
of a capability is the ability to bring a product to market faster than competitors. Such
capabilities are embedded in the routines of the organization and are not easily documented
as procedures and thus are difficult for competitors to replicate.
The firms resources and capabilities together form its distinctive competencies.
These competencies enable innovation, efficiency, quality, and customer responsiveness,
all of which can be leveraged to create a cost advantage or a differentiation advantage.
Cost Advantage and Differentiation Advantage
Competitive advantage is created by using resources and capabilities to achieve
either a lower cost structure or a differentiated product. A firm positions itself in its industry
through its choice of low cost or differentiation. This decision is a central component of the
firms competitive strategy.
Another important decision is how broad or narrow a market segment to target.
Porter formed a matrix using cost advantage, differentiation advantage, and a broad or
narrow focus to identify a set of generic strategies that the firm can pursue to create and
sustain a competitive advantage.
Value Creation
The firm creates value by performing a series of activities that Porter identified as
the value chain. In addition to the firms own value-creating activities, the firm operates in
a value system of vertical activities including those of upstream suppliers and downstream
channel members.
To achieve a competitive advantage, the firm must perform one or more value
creating activities in a way that creates more overall value than do competitors. Superior
value is created through lower costs or superior benefits to the consumer (differentiation).
In Competitive Advantage, Michael Porter analyzes the basis of competitive
advantage and presents the value chain as a framework for diagnosing and enhancing it.
This landmark work covers:
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NOTES
Summary
Any organization before they begin the work of strategy formulations,it must scan
the external environment to identify possible opportunities and threats and its internal
environment for strengths and weaknesses. Environmental scanning is the monitoring,
evaluating, and disseminating of information from the external and internal environment to
key people within the corporation. Michael Porter provided a framework that models an
industry as being influenced by five forces. The strategic business manager seeking to
develop an edge over rival firms can use this model to better understand the industry
context in which the firm operates. The existence of such an economy of scale creates a
barrier to entry. The greater the difference between industry MES and entry unit costs, the
greater the barrier to entry. So industries with high MES deter entry of small, start-up
businesses. To operate at less than MES there must be a consideration that permits the
firm to sell at a premium price - such as product differentiation or local monopoly.
The existence of such an economy of scale creates a barrier to entry. The greater
the difference between industry MES and entry unit costs, the greater the barrier to entry.
So industries with high MES deter entry of small, start-up businesses. To operate at less
than MES there must be a consideration that permits the firm to sell at a premium price such as product differentiation or local monopoly. Strategists often use a two dimensional
grid to display the position of each company along to the two most important dimensions.
Strategy is the Direction and scope of an organization over the long term which achieves
advantages for the organization.
A firm positions itself by leveraging its strengths. Michael Porter has argued that a
firms strengths ultimately fall into one of two headings: cost advantage and differentiation.
By applying these strengths in either a broad or narrow scope, three generic strategies
result: cost leadership, differentiation, and focus. These strategies are applied at the
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business unit level. They are called generic strategies because they are not firm or industry
dependent To achieve a competitive advantage, the firm must perform one or more value
creating activities in a way that creates more overall value than do competitors. Superior
value is created through lower costs or superior benefits to the consumer (differentiation).
Short Questions
1.
2.
3.
4.
5.
6.
Review Questions
7 Explain the porters five forces model.
8 Discuss the role of resources and capabilities in the competitive world.
9 Discuss the porters generic model of strategy to meet the industry analysis.
10 Explain the porters Gaining Competitive Advantage Model.
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NOTES
UNIT III
STRATEGIES
INTRODUCTION
Strategies for an organization may be categorized by the level of the organization
addressed by the strategy. Corporate-level strategies involve top management and address
issues of concern to the entire organization. Business-level strategies deal with major business
units or divisions of the corporate portfolio. Business-level strategies are generally developed
by upper and middle-level managers and are intended to help the organization achieve its
corporate strategies. Functional strategies address problems commonly faced by lowerlevel managers and deal with strategies for the major organizational functions (e.g., marketing,
finance, and production) considered relevant for achieving the business strategies and
supporting the corporate-level strategy. Market definition is thus the domain of corporatelevel strategy, market navigation the domain of business-level strategy, and support of
business and corporate-level strategy by individual, but integrated, functional level strategies.
Business-level strategies thus support corporate-level strategies. Corporate-level
strategies attempt to maximize the wealth of shareholders through profitability of the overall
corporate portfolio, but business-level strategies are concerned with (1) matching their
activities with the overall goals of corporate-level strategy while simultaneously (2) navigating
the markets in which they compete in such a way that they have a financial or market edgea competitive advantage-relative to the other businesses in their industry. A competitive
strength assessment is superior to a BCG matrix because it adds more variables to the mix.
In addition, these variables are weighted in importance in contrast to the BCG matrixs
equal weighting of market share and market growth. Regardless of these advantages,
competitive strength assessments are still limited by the type of data they provide. A
diversification strategy entails moving into different markets or adding different products to
its mix. If the products or markets are related to existing product or service offerings, the
strategy is called concentric diversification. If expansion is into products or services unrelated
to the firms existing business, the diversification is called conglomerate diversification.
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The balanced scorecard has evolved from its early use as a simple performance
measurement framework to a full strategic planning and management system. The new
balanced scorecard transforms an organizations strategic plan from an attractive but passive
document into the marching orders for the organization on a daily basis. It provides a
framework that not only provides performance measurements, but helps planners identify
what should be done and measured. It enables executives to truly execute their strategies.
3.1 BUILDING COMPETITIVE ADVANTAGE THROUGH FUNCTIONAL
LEVEL STRATEGIES
3.1.1 Functional level strategies.
Functional-level strategies are concerned with coordinating the functional areas of
the organization (marketing, finance, human resources, production, research and
development, etc.) so that each functional area upholds and contributes to individual
business-level strategies and the overall corporate-level strategy. This involves coordinating
the various functions and operations needed to design, manufacturer, deliver, and support
the product or service of each business within the corporate portfolio. Functional strategies
are primarily concerned with:
Efficiently utilizing specialists within the functional area.
Integrating activities within the functional area (e.g., coordinating advertising,
promotion, and marketing research in marketing; or purchasing, inventory control, and
shipping in production/operations).
Assuring that functional strategies mesh with business-level strategies and the
overall corporate-level strategy.
Functional strategies are frequently concerned with appropriate timing. For
example, advertising for a new product could be expected to begin sixty days prior to
shipment of the first product. Production could then start thirty days before shipping begins.
Raw materials, for instance, may require that orders are placed at least two weeks before
production is to start. Thus, functional strategies have a shorter time orientation than either
business-level or corporate-level strategies. Accountability is also easiest to establish with
functional strategies because results of actions occur sooner and are more easily attributed
to the function than is possible at other levels of strategy. Lower-level managers are most
directly involved with the implementation of functional strategies.
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This chapter focuses on the four ways to achieve competitive advantage at the
functional level: Increasing efficiency, improving quality, sustaining innovation, and improving
customer responsiveness.
Some of the modern strategic approaches in functional level strategies:
Uncertainty:
Poor commercialization:
Poor positioning:
Technological myopia:
Slowness to market:
Think of examples for each of these reasons for failure. What can be done to
improve the innovation process?
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NOTES
Think of a positive and negative experience youve had with customer service or
after sales product support. How can companies make customer satisfaction important to
all employees?
III- Achieving superior quality: TQM
This section focuses solely on total quality management (TQM) for improving
quality. TQM is most often associated with W. Edwards Deming. The central idea,
continuous evaluation and improvement of production processes was embraced more
quickly and widely by the Japanese, but have gained notoriety in the U. S. in the last two
decades. Deming writes that TQM is based on five integrated steps:
Improved quality leads to decreased costs through less rework, fewer mistakes,
fewer delays, and more efficient use of time and materials. This in turn leads to increased
productivity. Higher quality brings greater market share through increased customer
satisfaction and opens the possibility for differentiation based on quality. Such differentiation
is associated with higher prices. The combination of higher prices and lower costs increases
profitability. Finally, this allows the company to hire more employees. In the final analysis,
everybody wins! By the following ways:
Implementing TQM
Build an organizational commitment to quality:
Focus on the customer:
Measure quality:
Set goals and create incentives:
Solicit input employees:
Identify defects and find the source:
Build relationships with suppliers:
Design with production in mind:
Break down cross-functional barriers:
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organizations, business-unit strategies are designed to support corporate strategies. Businesslevel strategies look at the products life cycle, competitive environment, and competitive
advantage much like corporate-level strategies, except the focus for business-level strategies
is on the product or service, not on the corporate portfolio.
NOTES
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distribution costs. The low-cost leader gains competitive advantage by getting its costs of
production or distribution lower than the costs of the other firms in its relevant market. This
strategy is especially important for firms selling unbranded products viewed as commodities,
such as beef or steel.
Cost leadership provides firms above-average returns even with strong competitive
pressures. Lower costs allow the firm to earn profits after competitors have reduced their
profit margin to zero. Low-cost production further limits pressures from customers to
lower price, as the customers are unable to purchase cheaper from a competitor. Cost
leadership may be attained via a number of techniques. Products can be designed to simplify
manufacturing. A large market share combined with concentrating selling efforts on large
customers may contribute to reduced costs. Extensive investment in state-of-the-art facilities
may also lead to long run cost reductions. Companies that successfully use this strategy
tend to be highly centralized in their structure. They place heavy emphasis on quantitative
standards and measuring performance toward goal accomplishment.
Efficiencies that allow a firm to be the cost leader also allow it to compete effectively
with both existing competitors and potential new entrants. Finally, low costs reduce the
likely impact of substitutes. Substitutes are more likely to replace products of the more
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expensive producers first, before significantly harming sales of the cost leader unless
producers of substitutes can simultaneously develop a substitute product or service at a
lower cost than competitors. In many instances, the necessity to climb up the experience
curve inhibits a new entrants ability to pursue this tactic.
NOTES
Differentiation strategies require a firm to create something about its product that
is perceived as unique within its market. Whether the features are real, or just in the mind
of the customer, customers must perceive the product as having desirable features not
commonly found in competing products. The customers also must be relatively priceinsensitive. Adding product features means that the production or distribution costs of a
differentiated product will be somewhat higher than the price of a generic, non-differentiated
product. Customers must be willing to pay more than the marginal cost of adding the
differentiating feature if a differentiation strategy is to succeed.
Differentiation Strategies.
Differentiation may be attained through many features that make the product or
service appear unique. Possible strategies for achieving differentiation may include warranty
(Sears tools have lifetime guarantee against breakage), brand image (Coach hand bags,
Tommy Hilfiger sportswear), technology (Hewlett-Packard laser printers), features (JennAir ranges, Whirlpool appliances), service (Makita hand tools), and dealer network
(Caterpillar construction equipment), among other dimensions. Differentiation does not
allow a firm to ignore costs; it makes a firms products less susceptible to cost pressures
from competitors because customers see the product as unique and are willing to pay
extra to have the product with the desirable features.
Differentiation often forces a firm to accept higher costs in order to make a product
or service appear unique. The uniqueness can be achieved through real product features
or advertising that causes the customer to perceive that the product is unique. Whether the
difference is achieved through adding more vegetables to the soup or effective advertising,
costs for the differentiated product will be higher than for non-differentiated products.
Thus, firms must remain sensitive to cost differences. They must carefully monitor the
incremental costs of differentiating their product and make certain the difference is reflected
in the price.
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NOTES
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An SBU with a relative market share greater than 1.0 is assumed to be farther
down the experience curve and therefore to have a significant cost advantage over its
rivals
.
By similar logic, an SBU with a relative market share smaller than 1.0 is assumed
to lack the scale economies and low-cost position of the market leader.
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NOTES
industry, and the competitive position of the SBU relative to its rivals. In deriving a measure
of competitive position, Ciba looks at relative market-share, but unlike the original BCG
growth-share matrix, the company also considers arrange of other competitive factors,
such as cost structure, product quality, core competencies, and relative profitability.
Using these data, Ciba classifies its SBUs into one of five categories: development,
growth, pillar, niche, and core. Development businesses are in the early stage of their life
cycle and usually require substantial R&D investments. Growth businesses are competitive
SBUs based in large and/or growing markets. Ciba will commit substantial funds in order
to build the competitive position of such a business. Pillar businesses are market leaders
that are based in attractive industries, such as Cibas pharmaceutical businesses. They
typically receive a high priority in R&D funding and resource allocation in order to maintain
their pillar status. Niche businesses are market leaders that are constrained because they
serve a relatively small market (Cibas animal health business, for example, was defined as
a niche business). Core businesses are large SBUs that compete in mature industries (Cibas
dyes, polymers, and pigments SBUs are all classified as core). Core businesses are seen
as generating excess cash that can be used to fund investments elsewhere within the
company.
What is interesting about Cibas approach is that these classifications are not taken
as gospel. The company is quite willing to violate the investment rules associated with the
different categories if that seems appropriate. For example, in 1994Ciba committed itself
to major new investments in its pigments SBU to upgrade its U.S. production facilities,
even though its portfolio planning categories suggest that this was a mature low-growth
core business that should be used to generate funds for investment elsewhere within the
company. Cibas view appears to be that the utility of portfolio planning lies not so much in
its role as a guide to resource allocation, as it does in helping top managers set reasonable
strategic expectations and objectives for the different SBUs within the company.
Thus, Cibas corporate managers will assign very different strategic and financial
objectives to SBUs classified as growth businesses compared with those classified as
pillars. Pillars would be expected to earu a higher return on assets, generate greater cash
flow, and contribute more of their earnings to the corporate bottom line than businesses
would be expected to grow their revenues and earnings at a faster rate than pillars. The
performance of managers running these SBUs is then compared against these different
expectations.4
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The matrix is divided into four cells. SBUs in cell 1 are defined as stars, in cell 2 as
question marks, in cell 3 as cash cows, and in cell 4 as dogs. BCG argues that these
different types of SBUs have different long-term prospects and different implications for
cash flows.
NOTES
Stars. The leading SBUs in a companys portfolios are the stars. Stars have a high relative
market share and are based in high-growth industries. Accordingly, they offer attractive
long-term profit and growth opportunities.
3.4 CORPORATE-LEVEL STRATEGY
Corporate-level strategies address the entire strategic scope of the enterprise.
This is the big picture view of the organization and includes deciding in which product or
service markets to compete and in which geographic regions to operate. For multi-business
firms, the resource allocation processhow cash, staffing, equipment and other resources
are distributedis typically established at the corporate level. In addition, because market
definition is the domain of corporate-level strategists, the responsibility for diversification,
or the addition of new products or services to the existing product/service line-up, also
falls within the realm of corporate-level strategy. Similarly, whether to compete directly
with other firms or to selectively establish cooperative relationshipsstrategic alliances
falls within the purview corporate-level strategy, while requiring ongoing input from
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What should be the scope of operations; i.e.; what businesses should the firm be
in?
How should the firm allocate its resources among existing businesses?
What level of diversification should the firm pursue; i.e., which businesses represent
the companys future? Are there additional businesses the firm should enter or are
there businesses that should be targeted for termination or divestment?
How diversified should the corporations business be? Should we pursue related
diversification; i.e., similar products and service markets, or is unrelated
diversification; i.e., dissimilar product and service markets, a more suitable approach
given current and projected industry conditions? If we pursue related diversification,
how will the firm leverage potential cross-business synergies? In other words,
how will adding new product or service businesses benefit the existing product/
service line-up?
How should the firm be structured? Where should the boundaries of the firm be
drawn and how will these boundaries affect relationships across businesses, with
suppliers, customers and other constituents? Do the organizational components
such as research and development, finance, marketing, customer service, etc. fit
together? Are the responsibilities or each business unit clearly identified and is
accountability established?
Should the firm enter into strategic alliancescooperative, mutually-beneficial
relationships with other firms? If so, for what reasons? If not, what impact might
this have on future profitability?
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NOTES
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NOTES
Figure 3.2
BCG Model of Portfolio Analysis
I-Question Mark (Market growth is high and Market share is low)
Products and their respective strategies fall into one of four quadrants. The typical
starting point for a new business is as a question mark. If the product is new, it has no
market share, but the predicted growth rate is good. What typically happens in an
organization is that management is faced with a number of these types of products but with
too few resources to develop all of them. Thus, the strategic decision-maker must determine
which of the products to attempt to develop into commercially viable products and which
ones to drop from consideration. Question marks are cash users in the organization. Early
in their life, they contribute no revenues and require expenditures for market research, test
marketing, and advertising to build consumer awareness.
II-Stars (Market growth is high and Market share is high)
If the correct decision is made and the product selected achieves a high market
share, it becomes a BCG matrix star. Stars have high market share in high-growth markets.
Stars generate large cash flows for the business, but also require large infusions of money
to sustain their growth. Stars are often the targets of large expenditures for advertising and
research and development to improve the product and to enable it to establish a dominant
position in the industry.
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III-Cash Cows (Market growth rate is low and market share is low)
NOTES
Cash cows are business units that have high market share in a low-growth market.
These are often products in the maturity stage of the product life cycle. They are usually
well-established products with wide consumer acceptance, so sales revenues are usually
high. The strategy for such products is to invest little money into maintaining the product
and divert the large profits generated into products with more long-term earnings potential,
i.e., question marks and stars.
IV-Dogs (Market growth rate is low and Market share is low)
Dogs are businesses with low market share in low-growth markets. These are
often cash cows that have lost their market share or question marks the company has
elected not to develop. The recommended strategy for these businesses is to dispose of
them for whatever revenue they will generate and reinvest the money in more attractive
businesses (question marks or stars).
Despite its simplicity, the BCG matrix suffers from limited variables on which to
base resource allocation decisions among the business making up the corporate portfolio.
Notice that the only two variables composing the matrix are relative market share and the
rate of market growth. Now consider how many other factors contribute to business success
or failure. Management talent, employee commitment, industry forces such as buyer and
supplier power and the introduction of strategically-equivalent substitute products or services,
changes in consumer preferences, and a host of others determine ultimate business viability.
The BCG matrix is best used, then, as a beginning point, but certainly not as the final
determination for resource allocation decisions as it was originally intended. Consider, for
instance, Apple Computer. With a market share for its Macintosh-based computers below
ten percent in a market notoriously saturated with a number of low-cost competitors and
growth rates well-below that of other technology pursuits such as biotechnology and medical
device products, the BCG matrix would suggest Apple divest its computer business and
focus instead on the rapidly growing iPod business (its music download business). Clearly,
though, there are both technological and market synergies between Apples Macintosh
computers and its fast-growing iPod business. Divesting the computer business would
likely be tantamount to destroying the iPod business.
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NOTES
Identifying key success factors. This step allows managers to select the most
appropriate variables for its situation. There is no limit to the number of variables
managers may select; the idea, however, is to use those that are key in determining
competitive strength.
Weighing the importance of key success factors. Weighting can be on a scale
of 1 to 5, 1 to 7, or 1 to 10, or whatever scale managers believe is appropriate.
The main thing is to maintain consistency across organizations. This step brings an
element of realism to the analysis by recognizing that not all critical success factors
are equally important. Depending on industry conditions, successful advertising
campaigns may, for example, be weighted more heavily than after-sale product
support.
Identifying main industry rivals. This step helps managers focus on one of the
most common external threats; competitors who want the organizations market
share.
Managers rating their organization against competitors.
Multiplying the weighted importance by the key success factor rating.
Adding the values. The sum of the values for a managers organization versus
competitors gives a rough idea if the managers firm is ahead or behind the
competition on weighted key success factors that are critical for market success.
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to it. This number is compared against other firms to determine which is competitively the
strongest. One weakness is that these data are ordinal: they can be ranked, but the
differences among them are not meaningful. A firm with a score of four is not twice as good
as one with a score of two, but it is better. The degree of betterness, however, is not
known.
NOTES
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NOTES
services unrelated to the firms existing business, the diversification is called conglomerate
diversification.
II-Stability Strategies
When firms are satisfied with their current rate of growth and profits, they may
decide to use a stability strategy. This strategy is essentially a continuation of existing
strategies. Such strategies are typically found in industries having relatively stable
environments. The firm is often making a comfortable income operating a business that
they know, and see no need to make the psychological and financial investment that would
be required to undertake a growth strategy.
III-Retrenchment Strategies
Retrenchment strategies involve a reduction in the scope of a corporations activities,
which also generally necessitates a reduction in number of employees, sale of assets
associated with discontinued product or service lines, possible restructuring of debt through
bankruptcy proceedings, and in the most extreme cases, liquidation of the firm.
Firms pursue a turnaround strategy by undertaking a temporary reduction in
operations in an effort to make the business stronger and more viable in the future. These
moves are popularly called downsizing or rightsizing. The hope is that going through a
temporary belt-tightening will allow the firm to pursue a growth strategy at some future
point.
A divestment decision occurs when a firm elects to sell one or more of the businesses
in its corporate portfolio. Typically, a poorly performing unit is sold to another company
and the money is reinvested in another business within the portfolio that has greater potential.
Bankruptcy involves legal protection against creditors or others allowing the firm
to restructure its debt obligations or other payments, typically in a way that temporarily
increases cash flow. Such restructuring allows the firm time to attempt a turnaround strategy.
For example, since the airline hijackings and the subsequent tragic events of September
11, 2001, many of the airlines based in the U.S. have filed for bankruptcy to avoid liquidation
as a result of stymied demand for air travel and rising fuel prices. At least one airline has
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asked the courts to allow it to permanently suspend payments to its employee pension plan
to free up positive cash flow.
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There is a long history of research into how successful diversification has been.
Diversification was a particularly popular strategy in the 1960s when there were a number
of very well-known and apparently successful conglomerates. Porter, for example, studied
the 195086 diversifications of thirty-three leading US companies and concluded (Porter
1987) that the track record of diversification was poor and that in many cases acquisitions
were subsequently divested. More generally, it seems that diversified businesses grow
faster and growth tends to be greatest if the diversification is unrelated. However, related
diversification tends to be more profitable. In general, there is less fit than anticipated so
that the benefits expected are often not fully realized. While research may measure how
successful different forms of market or product development are in general, the management
choice has to focus on the relative attractiveness of available options. If the present position
is bad enough, even relatively risky alternatives may be preferable to doing nothing.
3.5.2 Strategic alliances and partnerships
Strategic alliances and partnerships have come into vogue over the last ten years.
While there may be contracts between the parties, there is a wider intention to cooperate
at a strategic level, to share information, and to work together in a way that goes beyond
a clear contractual arrangement. It is argued that in a rapidly changing world, strategic
alliances are the only way in which the necessary speed of response and global spread can
be achieved. There are dangers in strategic alliances in that the objectives of the two
parties may drift apart over time and the arrangement is hard to terminate neatly because
of the lack of firm contracts. The RoverHonda alliance is an example of an arrangement
that seemed to work well for a time but ended messily when Rover was acquired by
BMW.
3.6 STRATEGIC CHOICE
3.6.1 Importance Of Choice In The Strategy Formulation Process
Strategic choice is the third logical element of the strategy formulation process.
Choice is at the centre of strategy formulation. If there are no choices to be made, there
can be little value in thinking about strategy at all. On the other hand, there will always, in
practice, be limits on the range of possible choices. In general, small enterprises tend to be
limited by their resources, whereas large enterprises find it difficult to change quickly and
so tend to be constrained by their past. In large corporations, managers may find their
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range of choice limited because some choices are made at a higher level or in another
country. In the public sector, the genuine strategic choices may be made by politicians so
that the role of the manager is limited to devising how best to implement strategies rather
than to ponder fundamental choices of future direction for themselves.
NOTES
Even when managers are apparently free to make strategic choices, results may
eventually depend as much on chance and opportunity as on the deliberate choices of
those managers. When considering future strategies, it may seem that there are clear choices
to be made. When reflecting on outcomes in retrospect, it is often clear that events, and
particularly unexpected events, played a major role in determining results. When considering
choice, it is necessary to take a prescriptive view. Descriptive ways of thinking may help to
explain the outcomes after the event.
In a tidy logical world, any process of choice could be rationally divided into four
stepsidentify options, evaluate the options against preference criteria, select the best
option, and then take action. This suggests that identifying and choosing options can be
done purely analytically. In practice, it may be difficult to identify all possible options with
equal clarity or at the same time. Unexpected events can create new opportunities, destroy
foreseen opportunities, or alter the balance of advantage between opportunities. Identifying
and evaluating options is a useful approach but it has limitations. It is necessary to remember
that the future may evolve differently from any of the options.
Good strategic choices have to be challenging enough to keep ahead of competitors
but also have to be achievable. Analysis has an important role in making strategic choice
but judgement and skill are also critical. For instance, sometimes it may be better to delay
making a decision whereas at other times a wrong decision may be better than no decision.
Strategic choices that keep options open may be preferable in an uncertain future to defined
strategies that depend for their success on uncertain events happening. Such judgements
require wisdom as much as analytical skill.
These words of caution lay the ground for this chapter that might otherwise seem
to make the process of strategic choice sound too mechanistic.
Since strategic choice tends to be so fuzzy, it is useful to define the words being
used. We shall adopt the following definitions.
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NOTES
3.6.2 Choice and strategic choice-Refer to the process of selecting one option for
implementation. An option is a course of action that it appears possible to take. The
simplest form of choice is therefore between taking an option and not taking itdoing it or
not doing it. Most choices have more shades of possibility than this.
A strategic option is a set of related options (typically combining options for product/
markets and resources) that form a potential strategy. For instance, it might be an option to
enter a new market in a new country. The entry to that market with a chosen method of
distribution and known way of acquiring necessary distribution resourcesin fact, a
complete business plan of how to enter the new market successfullywould become a
strategic option._ Chosen Strategy is the strategic option that has been chosen. The
nature of this forms the content of strategy and is addressed in Part IV.
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illustrate the significance of the overlaps. The common ground between any two circles is
of some interest but it is only where all three circles overlap that logically viable options
exist. The chosen strategy emerges as the chosen viable option. It is where the differing
requirements of intent and assessment are most fully metthat is, where the three logical
elements overlap.
NOTES
The areas where any two circles overlap are also of interest. The criteria for choice
derive from intent and assessment. Feasible options may exist which are not aligned to
strategic intent. This, of course, may raise the question of whether the strategic intent
should be changed. Infeasible options may seem highly attractive and may have powerful
supporters, so the reasons why they are infeasible may need to be carefully argued with
clear evidence in support. Choices of what not to do may sometimes be as important as
choosing what to do. In practice, the process for choosing a strategy may be structured
something like in Figure although the reality is likely to be much messier. The structure of
this chapter is also based on this figure.
The process of choice starts by identifying available options. The chosen strategy
will have to answer the questions what, how, why, who, and when, so each option
will provide provisional answers to each of these questions. There are likely to be different
kinds of options. Figure shows three typesproducts/services/markets, resources/
capabilities, and method of progressthat are typical but not necessarily exhaustive.
3.6.3 Options For Markets And Products/Services
The most obvious type of option relates to which products or services to offer in
which markets. Igor Ansoff was the first to suggest for structuring this decision. The axes
of the diagram are product (including services and any form of offering), market need
(which can be any group of potential customers whether defined by their needs, inclinations,
or income bracket), and market geography (geographical location). The model defines
four cells for the present market geography. The top-left of these cells represents the
present status of the business. The possible future choices about products and markets
can be represented as movements within or away from this cell. One set of choices is
possible within the existing product/market set.
Do nothingthat is, continue present strategies. This strategy is important as it is
usual to compare any proposed change with the do nothing option as a baseline. The do
nothing option is rarely viable for the long term as it is likely that competitors will gradually
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NOTES
take the market by improving their products, their processes, or their relationships.
Withdrawleave the market by closing down or selling out. This appears to be a negative
option but may be necessary to focus available resources into areas of greater strength. It
is common in declining markets to see some of the competitors selling out to others who
can operate the combined operation more cheaply.
Consolidateattempt to hold market share in existing markets. Ford announced
the agreed acquisition of Kwik Fit. Ford had therefore made a strategic choice. Ford has
a strategic intent to move into automotive services. A strategic assessment of Ford should
show that its existing resources of large plants and skills in design, marketing, finance, and
assembly of new cars are inadequate to support a service business. The decision to acquire
Kwik fit would then be made from options about:
1. _ what types of services to offer and in which markets;
2. _ what resources and capabilities are needed to support these services;
3. _ how to acquire or build these resources.
Clearly there are multiple options in response to each question and there are links
between the questions. A strategic option for Ford would be a set of options that seem to
make sense together.
With out any detailed knowledge of the deliberations within Ford, it would seem
that could be used to illustrate the structure of the decision. It is important to notice that in
practice the decision will also have been influenced by irrational elements. For instance, it
happens that Alex Trotman, the recently retired Chairman of Ford, and Tom Farmer, the
Chairman and majority shareholder of Kwik Fit, are both natives of Edinburgh. It is likely
that they have known each other for some time.
We have no evidence that this had any relevance to Fords decision in this case.
The point is that people and events often influence strategic choices. Structured diagrams
only show part of the truth. Positive option which usually involves cutting costs and perhaps
prices. It is more common in markets that are mature or beginning to decline.
3.6.4 Options For Building Resources, Capabilities, And Competence
Just as strategic assessment was necessarily concerned with both the internal and
external perspectives, so strategic choice has to consider options about resources,
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capabilities, and competencies as well as those for markets and products. It may well be,
therefore, that the strategic assessment has identified strengths and weaknesses in existing
resources and capabilities in comparison with competitors. This may lead to identifying the
improvements needed either to shore up weakness or to build on existing strengths. It is
also likely that potential market/product options will require supporting changes in resources
and capabilities..
NOTES
The time-scales for developing resources and capabilities may be very long and
may be longer than the time-scale for market entry. For instance, people are a major
resource, but changing the overall mix of people in a company is likely to take years or
decades. Strategic options about building skills and experience may therefore have to
precede choices to enter new markets or to develop individual products. Similarly, computer
systems usually take several years to develop and install and then may be in place for a
decade or more. Information technology investments may therefore have to be seen as
much as a strategic building of future capability as being justified on immediate cost-benefit
grounds.
It may be, of course, that the thinking should be about capability options first and
market options second, so that we are looking for ways to build unique competencies and
then to seek markets and products to demonstrate them.
There are likely to be multiple links between market/product options and resource/
capability options. Entry into new markets is likely to require acquiring access to new
distribution channels and product support. New products may require a fundamental rethink
of development resources and field staff skills. While the resource needs are the most
obvious, the capabilities needed to succeed may be much more subtle. For instance, the
resources may need to be world-class and all the pieces may have to fit into a working
whole.
3.6.5 Options In Methods Of Implementation
There are likely to be options in methods of implementation. There are four main
methods by which companies can grow their capabilitiesinternal development, acquisition,
contractual arrangements and strategic alliances.
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NOTES
I-Internal development
Internal development is perhaps the most obvious approach to growth. It involves
developing the necessary skills among existing staff and acquiring the necessary production
capacity piecemeal. The main disadvantage of internal development is that it takes time
during which competitors may move faster or opportunities may be lost. On the other
hand, the risks may be lower than for other methods.
II-Acquisition
Acquisition is a very common implementation option, particularly in countries such
as the UK and USA where the structure of financial markets and equity ownership makes
take-overs relatively easy to achieve. Take-overs and mergers have sometimes been so
dominant as the means of implementing strategies that M&A has sometimes become
almost a synonym for strategy. There can be real advantages to acquisition, particularly
if there is a good fit with what is acquired. Synergy (by which the whole is greater than the
sum of the parts) can occur, although less often than expected. The disadvantages of
mergers are that they can cause deep operational and psychological turmoil which can
distract the people who have to make them work. Competitors can take advantage of this
turmoil, as they are free to concentrate on customers rather than on internal changes. One
real problem is that the thinking about mergers and acquisitions is often less than objective.
Senior managers and professional advisers tend to benefit from mergers in the short term
whatever the long-term outcome. There is also a tendency for the strategic rationale for the
merger to be lost in the excitement of the chase. Often, too, pressure from competing
acquirers can cause the price to rise to too high a level. Many acquisitions may be beneficial
at the right price but may destroy shareholder value at too high a price.
3.6.6 Contractual Arrangements
Contractual arrangements come in many different forms. Consortia are groups of
companies that form a joint entity for a specific purposesuch as building the channel
tunnel. When the project is finished, the consortium breaks up and the separate partners
may find themselves competing, possibly in different consortia, for the next project. This
form is common in the civil engineering and defence industries. Franchising is another
form of contractual arrangement and is commonest in retailing. Well known
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High Street names such as the Body Shop and McDonalds are franchises. The
franchisee pays the franchiser a fee for services and royalties, typically for use of the
company name, business approaches, and central advertising. The franchisee is halfway
between an employee and an independent entrepreneur with his risk limited by the success
of the brand name and by the support and advice provided by the franchiser.
NOTES
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NOTES
Ultimately it is likely that a strategic choice will need approval by the board but this
may well be the formal confirmation of a decision that has been made before the actual
meeting. For a clear and realistic exposition of how to influence committees, see Parkinson
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(1960). His advice, in summary, is to focus attention on the members of the committee
who are undecided or even perhaps fail to understand the issues.
NOTES
Formal approval is necessary but no strategy will be effective unless it also has the
active support of a far wider range of people who both understand the proposals and are
prepared to work to make the necessary changes happen. This issue will be addressed but
one way of achieving this support is to involve these people in the process of making the
decision. Both the logic and politics of the choice may be heavily dependent on the context.
In some cases, strategy is driven solely by competitive advantage. In other cases,
there may be a strategic intent or vision that determines long-term direction so that the
strategic choices are about means rather than direction.
3.7.3 Theoretical Frameworks For Assisting Strategic Choice
Several attempts have been made to provide theoretical frameworks for making
strategic choices. One that was highly influential when first devised was the concept of
Generic Strategies (Porter 1985). Porter suggested that the most fundamental choices
facing any business are the scope of the markets that it attempts to serve and how it
attempts to compete in these chosen markets. The scope can either be broadtackling
the whole marketor narrowtackling only a particular part of the market. He also
suggested that there were only two effective ways of competing in a market.
Companies achieve competitive advantage either by having the lowest product
cost (note: this is not the same as having the lowest price) or by having products which are
different in ways which are valued by customers. Therefore the scope of the chosen market
and the chosen basis of competition.
The four quadrants of four possible generic strategies. If the scope is narrow, the
distinction between cost and differentiation becomes unimportant so Porter defined just
three generic strategiescost leadership, differentiation, and focus (which combined the
two lower squares in the diagram). Note that differentiation implies a difference in the
perception by clients of the product, whereas focus implies a difference in target market.
In the Porter view of generic strategy, the worst crime (weakest strategy) is being stuck in
the middle, that is, being muddled in either of the two dimensions.
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NOTES
Practicing managers were initially enthusiastic about generic strategies when first
published and the ideas were used extensively. Gradually, however, it became clear that
reality was less black and white in its distinction between differentiation and cost. There
are very few companies that can ignore cost however different their product. Equally,
there are very few who will admit that their product is the same as all the others. David
Sainsbury, in a public discussion with Michael Porter, pointed out that the Sainsburys
slogan Good food costs less at Sainsburys was a clear statement of being stuck in the
middle but had also proved a successful strategy for Sainsburys over a long period of
time.
Porter used the car industry as an example of generic strategies in practice. Toyota
is (or was at the time) the low cost producer in the industry. Toyota achieves its cost
leadership strategy by adopting lean production, careful choice and control of suppliers,
efficient distribution, and low servicing costs from a quality product. Note how the cost
leadership must be in all aspects of the business (or value chain).
BMW is an example of a differentiation strategy. BMW still serves a relatively
wide range of the total market but its cars are differentiated in the eyes of the customer
who is prepared to pay a higher price for a BMW than for a Toyota, for instance, of similar
specification..
Morgan is an example of a Focus strategy. It only addresses a very small part of
the market(i.e. those who enjoy getting wet and like the sound of an engine more than
conversation!). Each of these three companies has been successful by pushing a particularly
generic strategy successfully.
B
The important addition is the hybrid strategy that is an optimal balance between
price and the added value perceived by the customer. This coincides with experience
when purchasing household goods. The offerings may often fall into three broad categories.
There are cheap offerings which give minimal facilities and appeal to customers
to whom price is the most important issue. At the other end of the scale are the luxury
offerings that have demonstrably high quality or numerous features and appeal to customers
who want the best and the most differentiated. In the middle are the good-value offerings
that compromise between the two extremes by offering a good trade-off between price
and value. This category often accounts for a sizeable percentage of the total market. The
Sainsburys slogan Good food costs less at Sainsburys can be seen as an attempt to
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capture this middle segment. Sainsburys was the leading food retailer in southern England
for many years. If it has lost this position this would seem to be because its original strategy
has been successfully imitated rather than because it was a poor strategy.
NOTES
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NOTES
The balanced scorecard has evolved from its early use as a simple performance
measurement framework to a full strategic planning and management system. The new
balanced scorecard transforms an organizations strategic plan from an attractive but passive
document into the marching orders for the organization on a daily basis. It provides a
framework that not only provides performance measurements, but helps planners identify
what should be done and measured. It enables executives to truly execute their strategies.
This new approach to strategic management was first detailed in a series
of articles and books by Drs. Kaplan and Norton. Recognizing some of the weaknesses
and vagueness of previous management approaches, the balanced scorecard approach
provides a clear prescription as to what companies should measure in order to balance
the financial perspective. The balanced scorecard is a management system (not only a
measurement system) that enables organizations to clarify their vision and strategy and
translate them into action. It provides feedback around both the internal business processes
and external outcomes in order to continuously improve strategic performance and results.
When fully deployed, the balanced scorecard transforms strategic planning from an academic
exercise into the nerve center of an enterprise.
Kaplan and Norton describe the innovation of the balanced scorecard as follows:
The balanced scorecard retains traditional financial measures. But financial measures
tell the story of past events, an adequate story for industrial age companies for which
investments in long-term capabilities and customer relationships were not critical for success.
These financial measures are inadequate, however, for guiding and evaluating the journey
that information age companies must make to create future value through investment in
customers, suppliers, employees, processes, technology, and innovation.
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The balanced scorecard suggests that we view the organization from four
perspectives, and to develop metrics, collect data and analyze it relative to each of these
perspectives:
NOTES
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NOTES
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never be identified, and there would always be inefficiencies due to the rejection of defects.
What Deming saw was that variation is created at every step in a production process, and
the causes of variation need to be identified and fixed. If this can be done, then there is a
way to reduce the defects and improve product quality indefinitely. To establish such a
process, Deming emphasized that all business processes should be part of a system with
feedback loops. The feedback data should be examined by managers to determine the
causes of variation, what are the processes with significant problems, and then they can
focus attention on fixing that subset of processes.
NOTES
Strategic feedback to show the present status of the organization from many
perspectives for decision makers
Diagnostic feedback into various processes to guide improvements on a continuous
basis
Trends in performance over time as the metrics are tracked
Feedback around the measurement methods themselves, and which metrics should
be tracked
Quantitative inputs to forecasting methods and models for decision support systems
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The balanced scorecard is a strategic planning and management system that helps
everyone in an organization understand and work towards a shared vision. A completed
scorecard system aligns the organizations picture of the future (shared vision), with business
strategy, desired employee behaviors, and day-to-day operations. Strategic performance
measures are used to better inform decision-making and show progress toward desired
results. The organization can then focus on the most important things that are needed to
achieve its Vision and satisfy customers, stakeholders, and employees. Other benefits
include measuring what matters, identifying more efficient processes focused on customer
needs, improving prioritization of initiatives, improving internal and external communications,
improving alignment of strategy and day-to-day operations, and linking budgeting and cost
control processes to strategy.
NOTES
The components of the management system are shown in the figure above. Starting
at high altitude, Mission, Vision, and Core Values are translated into desired Strategic
Results. The organizations Pillars of Excellence, or Strategic Themes, are selected to
focus effort on the strategies that matter the most to success. Strategic Objectives are used
to decompose strategy into actionable components that can be monitored using Performance
Measures. Measures allow the organization to track results against targets, and to celebrate
success and identify potential problems early enough to fix them. Finally, Strategic Initiatives
translate strategy into a set of high-priority projects that need to be implemented to ensure
the success of strategy. Engaged leadership and interactive, two-way communication are
the cornerstones of a successful management system. Once the strategic thinking and
necessary actions are determined, annual program plans, projects and service level
agreements can be developed and translated into budget requests.
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NOTES
Step One of the scorecard building process starts with an assessment of the
organizations Mission and Vision, challenges (pains), enablers, and values. Step One also
includes preparing a change management plan for the organization, and conducting a focused
communications workshop to identify key messages, media outlets, timing, and messengers.
In Step Two, elements of the organizations strategy, including Strategic Results,
Strategic Themes, and Perspectives, are developed by workshop participants to focus
attention on customer needs and the organizations value proposition.
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In Step Three, the strategic elements developed in Steps One and Two are
decomposed into Strategic Objectives, which are the basic building blocks of strategy and
define the organizations strategic intent. Objectives are first initiated and categorized on
the Strategic Theme level, categorized by Perspective, linked in cause-effect linkages
(Strategy Maps) for each Strategic Theme, and then later merged together to produce one
set of Strategic Objectives for the entire organization.
NOTES
In Step Four, the cause and effect linkages between the enterprise-wide Strategic
Objectives are formalized in an enterprise-wide Strategy Map. The previously constructed
theme Strategy Maps are merged into an overall enterprise-wide Strategy Map that shows
how the organization creates value for its customers and stakeholders.
In Step Five, Performance Measures are developed for each of the enterprisewide Strategic Objectives. Leading and lagging measures are identified, expected targets
and thresholds are established, and baseline and benchmarking data is developed.
In Step Six, Strategic Initiatives are developed that support the Strategic Objectives.
To build accountability throughout the organization, ownership of Performance Measures
and Strategic Initiatives is assigned to the appropriate staff and documented in data definition
tables.
In Step Seven, the implementation process begins by applying performance
measurement software to get the right performance information to the right people at the
right time. Automation adds structure and discipline to implementing the Balanced Scorecard
system, helps transform disparate corporate data into information and knowledge, and
helps communicate performance information. In short, automation helps people make better
decisions because it offers quick access to actual performance data.
In Step Eight, the enterprise-level scorecard is cascaded down into business and
support unit scorecards, meaning the organizational level scorecard (the first Tier) is
translated into business unit or support unit scorecards (the second Tier) and then later to
team and individual scorecards (the third Tier). Cascading translates high-level strategy
into lower-level objectives, measures, and operational details. Cascading is the key to
organization alignment around strategy. Team and individual scorecards link day-to-day
work with department goals and corporate vision. Cascading is the key to organization
alignment around strategy. Performance measures are developed for all objectives at all
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organization levels. As the scorecard management system is cascaded down through the
organization, objectives become more operational and tactical, as do the performance
measures. Accountability follows the objectives and measures, as ownership is defined at
each level. An emphasis on results and the strategies needed to produce results is
communicated throughout the organization.
In Step Nine, an Evaluation of the completed scorecard is done. During this
evaluation, the organization tries to answer questions such as, Are our strategies working?,
Are we measuring the right things?, Has our environment changed? and Are we
budgeting our money strategically?
Summary
Functional-level strategies are concerned with coordinating the functional areas of
the organization (marketing, finance, human resources, production, research and
development, etc.) so that each functional area upholds and contributes to individual
business-level strategies and the overall corporate-level strategy.
Strategic choice is the third logical element of the strategy process and has a central
role. The process of choice can only be described as deciding between different options
but this makes the process neater and tidier than it really is. This chapter focuses on the
four ways to achieve competitive advantage at the functional level: Increasing efficiency,
improving quality, sustaining innovation, and improving customer responsiveness.
Business-level strategies are similar to corporate-strategies in that they focus on
overall performance. In contrast to corporate-level strategy, however, they focus on only
one rather than a portfolio of businesses. There are likely to be possible options about
product and services and about market segments defined by both customer need and
geography. There will also be options on what resources and capabilities are needed and
how to build theseimplementation options. Indicators of what is possible and what is
required may well follow from the results of a strategic assessment.
One way to deal with this complexity is through categorization; one categorization
scheme is to classify corporate-level strategy decisions into three different types, or grand
strategies. These grand strategies involve efforts to expand business operations (growth
strategies), decrease the scope of business operations (retrenchment strategies), or maintain
the status quo (stability strategies).
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The process of choice starts by identifying available options. The chosen strategy
will have to answer the questions what, how, why, who, and when, so each option
will provide provisional answers to each of these questions. There are likely to be different
kinds of options. Figure shows three typesproducts/services/markets, resources/
capabilities, and method of progressthat are typical but not necessarily exhaustive
NOTES
Review Question
7. Explain the functional level strategies.
8. Discuss the types of business level strategies.
9. Describe the nature and scope of corporate level strategies.
10. Explain the functions and scope of balance score card.
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NOTES
UNIT IV
STRATEGY IMPLEMENTATION
& EVALUATION
Introduction
The reorganisation often has as objective to improve the effectiveness and/or
efficiency. It also may be initiated to enhance the ability of the organisation to adapt itself to
changing environments, to become more flexible. Reorganisations are often initiated to
enhance the capacity of the organisation to sustain its activities.
The structure of the organisation describes the functions, tasks and authorities of
the departments, divisions and individual employees and the relationships between them
(line of command, communication and procedures). It also describes the number of
employees in each division, unit and department.
On the one hand the structure divides departments, divisions and individuals on
basis of tasks, functions and authorities. On the other hand the structure coordinates these
units through lines of communication and command. Only when the different units work in
conjunction, the organisation is able to function as a whole. The organisation structure has
to facilitate the different processes in the organisation. A general rule of the thumb is that
the organisation structure should enhance the progress of the processes. It is not
recommendable to breakdown processes unnecessarily because of the structure of the
organisation. The structure has to provide coordination mechanism if the process is divided
over more units.
This document provides descriptions of typical structures and some guidelines for
designing structures.
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This chapter will not by itself change your view or way of acquiring power and
effectively exercising influence. It does provide an opportunity to think differently about
power, politics and influence, and it can refocus your attention on organizational issues and
problems. For strategic leaders in most organizations the key to successfully implementing
organizational change and improving long term performance rests with the leaders skill in
knowing how to make power dynamics work for the organization, instead of against it.
Advances in management thinking have observed that managers in organisations
carry out two types of activity that are intended to control the performance and behaviour
of an organisation; Strategic Control and Operational Control (sometimes referred to as
Management Control). Each type of activity introduces particular requirements of an
organisation and its associated measurement and feedback systems.
Financial performance control, or simply referred to as financial control, is relevant
for those aspects of business operations whose outcomes are expressed in monetary terms.
Financial control is exercised at operative level as well as at overall organisation level
though techniques involved are different.
Social responsibility is a part of overall business objectives of an organisation.
Most of the organisations set their social objectives either explicitly or implicitly depending
on organisational practices.
Learning Objectives
On completion of this chapter you should be able to:
1.
2.
3.
4.
5.
6.
7.
8.
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NOTES
Evolving Organizations
Organisation structures are seldom designed from scratch. An organisation usually
starts small and hopefully becomes more successful and grows. Because it grows, it needs
to structure itself. Most organisations do not grow from a one-person operation to a
hundred-person operation overnight. They evolve and so does the
organisation structure. The larger organisations are able to take larger expansionsteps. These steps may have more impact on the organisation structure. However after
some time most organisations conclude that something went seriously wrong with its structure
and decides to reorganise it. Because reorganisations are often associated with staff
reductions they are very sensitive processes. A part of the sensitivity can be overcome to
reorganise during years with low unemployment rates and to work actively to find job
prospects elsewhere. Why reorganizations
The reorganisation often has as objective to improve the effectiveness and/or
efficiency. It also may be initiated to enhance the ability of the organisation to adapt itself to
changing environments, to become more flexible. Reorganisations are often initiated to
enhance the capacity of the organisation to sustain its activities.
Basic functions of organisations
Besides earlier given considerations the structure should reserve place for all the
organisation functions. Henry Mintzbergs identified 5 main functions that each organisation
has to fulfill. The so-called Basic Parts are:
Mintzbergs Basic Parts
1.
2.
3.
4.
5.
Core Operations
Support Operations
Technostructure
Strategic Apex;
Middle Line Management
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Typical Structures
Organisations can be structured in different ways. Usually the structure is based
on splitting and grouping of tasks. The grouping of tasks can be done on basis of 6 different
criteria and the final structure is often a combination of these six criteria:
1.
2.
3.
4.
5.
6.
Outputs (goods/services)
Functions
Target groups
Skills
Geographical areas
Work shifts
Grouping criteria
The method of grouping depends on a number of issues. First of all the grouping
should facilitate the processes in the organisation and not disturb them. The faster the
processes progress and the cheaper the organisation can produce the better. Progress
may stagnate and result in cost overruns due to inappropriate coordination of activities.
The structure should facilitate coordination to reduce problems between officers who needs
each others work. Ideally the structure would fully utilise every officer and piece of
equipment. The structure influences the motivation of the staff. If the staffs feel that their
work is monotonous or they have to carry out to many tasks below their level, they may
become dissatisfied with their work. The nature and level of activities should match as
close as possible with the capacities of the employees. Furthermore the span of control of
the managers is not unlimited. In other words the span of control affects the number of
units. The output and function grouping are the most common form of grouping forms.
Output, target group and geographical area structure primarily groups tasks on basis of the
connections between activities. All activities are combined in one group that produces the
output, or related to meet the demands of the target group or take place at a specific
location. A typical example of grouping on output is presented below.
The university is organised in faculties. Each faculty representing a group of outputs
(study programs). Grouping on function has the major advantage that it standardises the
processes. The officers are grouped on basis of similarity in activities.
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The production process is split up in sub processes. Each sub process produces a
semi-finished product and requires a group of people and equipment with specific skills,
education and personal characteristics that are of little use to the other groups. Each group
tends to operate more or less independently of each other. A typical example of functional
grouping is the provincial road agency. These agencies are often organised in five
departments, each with their specific functions. Standardisation of the process can also be
achieved through grouping on skills. In a way grouping of skills is variation of functional
grouping. Each unit provide specialised skills and work on a specific process. For example:
Structuring the organisation on basis of functions or skills/knowledge has a number of
advantages and disadvantages: Because of the economics of scale, it is more likely that the
utilisation degree of staff and equipment of function and skill oriented groups is high. This
means that these forms of structures are more conducive to investments in expensive
specialists, up-to-date skill development programs and the latest technology. Furthermore
the officers become more efficient in their operation, as they develop routines and do not
have start and ending difficulties. However the officers may perceive the tasks as
monotonous.
NOTES
Disadvantages of grouping
The main disadvantage of the functional structures is that because of the independent
character of each unit, the units tend to operate as independent companies with little
interaction with the other units. This may result in mismatches between the expectations of
the semi-finished product producing and receiving unit. The utilisation degree of equipment
or personnel in output based structures like universities are usually lower, but these structures
have also a number of advantages:
o Faster progression of production due to optimal location of equipment and persons
o Less problems due to easier communication between the different individuals of
different backgrounds
I-Coordination
Organisations structures not just group tasks and functions in units, divisions or
department, but also regulate the coordination between them. There are basically three
ways of coordination:
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1.
2.
3.
Mutual adjustment
Supervision
Standardisation
Mutual adjustment
Supervision
Supervision achieves coordination by having one person take responsibility for the
work of others. The manager thinks how to use the hands of others, give the
workers instructions and monitor their performance. The vertical lines of command
present supervision.
Standardisation
What are the structural building blocks that managers use to design organizations?
Division of labour
Process of dividing work into separate jobs
Assigning tasks to workers
Departmentalization
Managerial hierarchy
Levels of management within the organization
Managerial span of control
STRATEGIC MANAGEMENT
1.
2.
3.
4.
5.
Division of Labor
Departmentalization
Managerial Hierarchy
Span of Control
Centralization of Decision-Making
NOTES
I- Division of labour: the process of dividing work into separate jobs and assigning
tasks to workers
II-Departmentalization: the process of grouping jobs together so that similar or associated
tasks and activities can be coordinated
What are the five types of departmentalization?
Functional based on primary functions performed within an organizational unit
Product based on the goods or services produced or sold by the organizational unit
Process based on the production process used by the organizational unit
Customer based on the primary type of customer served by the organizational unit
Geographic based on geographic segmentation of organizational units
4.1.1 The Essentials Checklists Of Organization Structure Design
Before entering into the control system brush up the hierarchy level of the management
I-Managerial Hierarchy: the levels of management within an organization; typically
includes top, middle, and supervisory levels
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Fig:
Managerial
Pyramid
1.
2.
3.
4.
5.
Top Management
Middle Management
Supervisory Management
Power
Number of Employees
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NOTES
Centralization- the process of grouping jobs together so that similar or associated tasks
and activities can be coordinated
Decentralization Pushing decision-making authority down the organizational hierarchy,
giving lower-level workers more responsibility
How can the degree of centralization/decentralization be altered to make an organization
more successful?
IV-Types of Organization
I-Mechanistic Organization
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II-Organic organization.
Production
Marketing
Finance
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II-Staff Organization
NOTES
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III-Functional Organization
A more complex structure is the functional organisation. Where the advisory unit in
the staff organisation is only able to advice in the functional organisation these specialists
have a limited, clearly defined scope of authority and are able to give directions. In 1999
the International Labour Organisation worked with this structure. Technical backstoppers
at headquarters or in the so-called Multi-Disciplinary Teams had to direct technical activities
of all operational offices.
This structure is often misunderstood and result in power conflicts between the
traditional line-managed units and these specialists.
IV- Project and matrix organisations
One of the characteristics of a project is the limited duration in which a particular
output has to be created or problem has to be solved. Large projects, like donor-funded
projects may last several years before it is completed. Such projects may set up a full-time
project team for the duration of the project. The members of the project team may be
permanently employed and seconded to the project from the department or division or
may be specially recruited for the project and given a fixed term contract.
There are also organisations that continuously carry out a range of smaller projects.
The composition of the project team may vary during the duration of the projects and often
the team members tend to work on several projects at the time. These organisations often
adopt a matrix structure. The specialist sections become resource pools and the project
manager and the head of the resource pool make agreements about the resource allocation
to specific projects. The specialist section may also have sanction authority over the project
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result. However this authority often leads to conflicts with the project managers. The
manager of the specialist section usually has to develop the capacities of his/her staff.
Charts and descriptions It is seldom enough to present the organisation on a chart. The
chart does not provide information about the contents of the function of each unit, the tasks
that have to be carried out, the authorities of the unit and a description of the relationships
with other units. If the unit is not an individual, it also needs description about the number
and composition of its staff members and a description of its intra structure.
NOTES
Goal of reengineering
Redesign business processes to achieve improvements in:
Cost control
Product quality
Customer service
Speed
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NOTES
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A complex system
NOTES
Operational Control systems are management processes used to track and respond
to progress towards targets at for defined situations, typically at lower levels of the
organisation. The context for what needs to be managed has often been made explicit by
decisions higher in the organisation, and often the corrective action for poor performance
has already been specified. However, they are only one part of the management toolkit
required to manage an organisation effectively. While they are effective mechanisms for
controlling defined situations they do not often consider the big strategic picture concerning
the context of why organisations are moving in a particular direction, what they need to do
to get there and controlling progress and responses toward delivering strategic goals.
This is the role of the Strategic Control system.
Strategic Control systems deal with complex often loosely defined issues and have
to consider not only simple performance feedback (Did we do what we said we were
going to do?) but also the why elements (Why are we doing this in the first place? Is this
still the correct course of action?). To illustrate this issue consider this simple non-business
situation:
Manchester United is a well-known UK football (soccer) team. During the season
they play at least one football matches every week (and sometimes two). To assess their
performance in each game they will undoubtedly use performance metrics and will have
targets for the team and maybe each individual player. The system might look something
like this:
A simple operational system they might use would involve looking at several key
indicator used to assess performance based on key things that Manchester United would
generally want to see on the pitch for example:
Possession
Shots on goal
Opposition shots on goal
Tackles made
Tackles won etc
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NOTES
On an operational level if the % Possession is low then the team will try to work
together to hold onto the ball longer as practiced in training. The players will know that
they have a particular strategy to employ (through instructions from the manager / coach)
and will work to execute that game plan. This type of control relates to operational control:
Although some football fans may argue, even with this simple example where options
for changing strategy are limited, both processes (strategic and operational control) have
to work effectively if the desired result is to be achieved (and even then it might not!). But,
it is hopefully clear from this example that the two processes have quite different
characteristics and that very often it is the ability of management to make and effect change
quickly that dictates success.
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NOTES
Strategic Control systems are primarily concerned with monitoring and managing
strategy implementation, part of which will be determining and calibrating the focus of
related operational control systems. One main characteristic differentiates Strategic Control
from other forms of control exercised by managers (e.g. the management of operational
processes). Managers exercise strategic control when they work with an organisation to
ensure that it achieves the strategic aims they have set for it But to be able to do this the
managers must have some discretion either to decide what needs to be achieved, or how
to achieve it: such discretion is not necessarily a characteristic of other management
processes. This difference becomes significant when looking at the design of strategic
management processes and support systems.
Applying Strategic Control ideas in organizations Strategic control processes should
ensure that strategic aims are translated into action plans designed to achieve these aims,
and that the effectiveness of these plans is monitored. An effective strategic control process
should ensure that an organisation is setting out to achieve the right things, and that the
methods being used to achieve these things are working. Within this arena, traditionally
there has been emphasis on strategic planning activities (ensuring we have the right aims,
and the right action plans) but control systems have reduced the need for strategic planning;
indeed it has been long argued by some that distinct planning activities are not required at
all. e.g.: The function of control now becomes closely linked with planning, and it
serves little purpose to conceive them as separate functions. (Arthur E. Mills in
The Dynamics of Management Control Systems, London Business Publications
Ltd.; 1966).
This implies that a strategic control process should instead set the agenda / goals
for management processes, and monitor if the operational activities chosen to do this are
delivering what is required.
Accordingly, an effective strategic control process needs to both communicate
information about what outcomes need to be achieved, and be able to monitor how well
these activities are working to achieve the strategic aims of the organisation. One way of
doing this is to introduce management processes built around the deployment of 3rd
Generation Balanced Scorecard.
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NOTES
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The Strategic Apex formulates and controls strategies for the whole organisation.
Typical examples of the strategic apex are board of directors, president, and executive
committees.
NOTES
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NOTES
Procedures of organisation
Previous investments in equipment and buildings
Available technology on the market
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Locating Authority
NOTES
An important question is who receives the authority to take decisions and about
which issues? To answer the question the organisation has to answer the following subquestions:
Who has the information to take the decision and who can obtain such information
quickly?
Who has the skills and knowledge to take the decision?
Does the issue relate to an emergency and is the decision urgent?
Is coordination with other locations or other units, divisions or departments
required?
What is the impact of the decision?
What is workload of the qualified officers?
Is it possible to motivate employees by giving them decision authority?
Hierarchical problems
If the authorities are not well divided it may result in a number of problems. For example:
Creating fits between way things are done & what it takes for effective strategy
execution
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NOTES
Managers must
Constantly evaluate performance
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NOTES
Need to perform tasks never goes away because changes occur regularly
Boundaries among tasks are blurry
Doing the 5 tasks is not isolated from other managerial activities
Time required to do tasks comes in lumps & spurts
Pushing to get best strategy-supportive performance from each employee,
perfecting current strategy, & improving strategy execution
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Planners know less about situation, placing them in weaker position than line
managers to devise workable action plan
Separates responsibility & accountability for strategy-making from implementing
Allows managers to toss decisions to planners & avoid doing own strategic thinking
Implementers have no buy in to strategy
STRATEGIC MANAGEMENT
parochial politics and destructive power struggles, which greatly retard organizational
initiative, innovation, morale and performance (Kotter 1985)
NOTES
DBA 1703
NOTES
social actors in which one actor A, can get another social actor B, to do something that B
would not otherwise have done. Hence, power is recognized as the ability of those who
possess power to bring about the outcomes they desire (Salancik and Pfeffer 1977).
The concept of organizational politics can be linked to Harold Lasswells (1936)
definition of politics as who gets what, when and how. If power involves the employment
of stored influence by which events, actions and behaviors are affected, then politics involves
the exercise of power to get something done, as well as to enhance and protect the vested
interests of individuals or groups. Thus, the use of organizational politics suggests that
political activity is used to overcome resistance and implies a conscious effort to organize
activity to challenge opposition in a priority decision situation. The preceding discussion
indicates that the concepts of power and organizational politics are related.
The political frame - Bolman and Deal describe four frames for viewing the
world: structural, human resources, political, and symbolic. The political frame is an excellent
tool for examining the concept of organizational politics and makes a number of assumptions
about organizations and what motivates both their actions and the actions of their decision
makers.
Organizations are coalitions of individuals and interest groups, which form because
the members need each others support. Through a negotiation process, members combine
forces to produce common objectives and agreed upon ways to utilize resources thus
aggregating their power. Power bases are developed that can accomplish more than
individual forces alone.
There are enduring differences among individuals and groups in values, preferences,
beliefs, information, and perception of reality. Such differences change slowly, if at all.
Most of the important decisions in organizations involve allocation of scarce
resources: they are decisions about who gets what. Scarcity exacerbates political behavior.
In government at present, the competition is for personnel spaces and funding. Mission is
the means to gain both, because resources tend to follow mission. For this reason, the
Services compete for strategic mission (e.g., the omnipresent roles and missions debate),
and thus make the job of the Chairman of the Joint Chiefs more challenging. In the
government as a whole, agencies compete for significance in the national/international picture,
because significance means public approval and that means resources. (The two dominant
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political parties also attempt to present the American public with different views of what is
significant.)
NOTES
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STRATEGIC MANAGEMENT
individual or group. In that case, performance becomes the basis for determining who
accumulates power. The process is still political, but it is also constructive because the
organization as a whole benefits.
NOTES
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NOTES
While our focus has been on establishing a legitimate context for understanding
organizational politics, a countervailing view to the political frame is the rational frame of
organizational decision making
The rational frame. By definition, rational processes are different from political
processes. Rational decisions rest heavily on analytic process. An analytic process can be
defined as one in which there are agreed-upon methods for generating alternative solutions
to problems, and for assigning values to the benefits and costs expected from each of the
alternatives. And sophisticated computational methods are readily available for calculating
benefits/costs ratios once these values are assigned. The essence of rational process is the
belief that, All good persons, given the same information, will come to the same
conclusion. Those seeking to employ the rational process to the exclusion of political
process thus seek open communication, perhaps through more than just formal (vertical)
organizational channels.
The rapid expansion of electronic mail systems that permits anyone in an organization
to address anyone else probably rests on a rationality premise-that transcending
organizational channels by allowing all members to address directly even the highest official
will give that official more complete information and thus enable higher quality decisions.
This is very difficult for some people to understand especially those with narcissistic power
needs and maturity issues. There is also a trust assumption: that members can be trusted
not to abuse the privilege and that high officials will not misuse the information. A political
process would view valuable information as a commodity to be traded for influence
(Jacobs).
There is another important difference between rational and political views of
appropriate operations both within and between organizations. The political frame does
not depend on trust between persons. In the preceding example, both trust assumptions
would be discounted as unrealistic. Trust in the probable future actions of coalition members
is based on perception of gain to be expected from not violating agreements on which a
coalition is based, for example. The intrinsic morality of being trustworthy is not particularly
useful as a concept.
Trust probably is not particularly a part of the rational frame, either, except that a
strong rationalist believes in and trusts the logic of the process by which information is
converted into decision outcomes. So a strong rationalist will trust others to be similarly
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logical. This leads to important postulates about rational communication within a system.
For a rationalist, systems are information-consuming engines. Particularly at the strategic
level, the unimpeded flow of information is crucial to the health of the system as a whole.
However, politics and power dynamics strongly influence communication processes. To
the extent organizations and the people in them are motivated by political gain and power
dynamics, rational processes are inevitably shortchanged.
NOTES
Power dynamics and the rational frame. -The National Security Strategy
apparatus exists to support the formulation of policy and implementing strategy and thus
presidential decision making. George writes insightfully about both the demands of these
processes, and obstacles to their effective operation-particularly those attributable to
bureaucratic politics. He comments that political scientists of an earlier generation were
intrigued by the possibility that an overburdened executive might be able to divide his
overall responsibilities into a set of more manageable subtasks to be assigned to specialized
units of the organization. It was hoped and expected that division of labor and specialization
within the organization, coupled with central direction and coordination, would enable the
modern executive to achieve the ideal of rationality in policy making.
Nature of strategic leader power
A number of authors writing in Strivastvas Executive Power (1992) argue that
power at the strategic organization level is manifested and executed through three
fundamental elements: consensus, cooperation, and culture.
An organization is high in consensus potential when it has the capacity to synthesize
the commitment of multiple constituencies and stakeholders in response to specific challenges
and aspirations. In this area, strategic leader power is derived from the management of
ideas, the management of agreement, and the management of group and team decision
making processes.
Cooperative potential refers to an organizations capacity to catalyze cooperative
interaction among individuals and groups. Power is employed by a strategic leader in the
management of organization structures, task designs, resource allocation, and reward systems
that support and encourage this behavior.
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High energy and physical endurance is the ability and motivation to work long
and often times grueling hours. Absent this attribute other skills and characteristics
may not be of much value.
Directing energy is the ability and skill to focus on a clear objective and to
subordinate other interests to that objective. Attention to small details embedded
in the objective is critical for getting things done.
Successfully reading the behavior of others is the ability and skill to understand
who are the key players, their positions and what strategy to follow in communicating
with and influencing them. Equally essential in using this skill is correctly assessing
their willingness or resistance to following the Strategic Leaders direction.
Adaptability and flexibility is the ability and skill to modify ones behavior. This
skill requires the capacity to re-direct energy, abandon a course of action that is
not working, and manage emotional or ego concerns in the situation.
Motivation to engage and confront conflict is the ability and skill to deal with
conflict in order to get done what you want accomplished. The willingness to take
on the tough issues and challenges and execute a successful strategic decision is a
source of power in any organization.
Subordinating ones ego is the ability and skill to submerge ones ego for the
collective good of the team or organization. Possessing this attribute is related to
the characteristics of adaptability and flexibility. Depending on the situation and
players, by exercising discipline and restraint an opportunity may be present to
generate greater power and resources in a future scenario.
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develop meaningful roles for subordinates and then to encourage initiative in the execution
of these roles.
Team Performance Facilitation includes selecting good people in assembling a team,
getting team members the resources to do a job, providing coordination to get tasks done
and moving quickly to confront problem individuals.
Objectivity is the ability to keep ones cool and maintain composure under conditions
that might otherwise be personally threatening.
Initiative/Commitment is the ability to stay involved and committed to ones work, get
things done, be part of a team effort and take charge in situations as required.
Understanding the character of strategic leader power and the requisite personal
attributes and skills sets the stage for employing power effectively. We need to know more
than the conceptual elements that constitute power in organizations at the strategic level.
III-Leading with power
The acquisition and use of strategic leader power involves managing a sequential process
that is described below:
1. The first task is to decide what it is the leader is trying to achieve that necessitates
the use of power.
2.With the goal in mind, the leader must assess the patterns of dependence and
interdependence among the key players and determine to what extent he or
she will be successful in influencing their behavior. It is critical that the leader
develop power and influence when the key players have expressed a differing point of
view. It is important to remember there is more interdependence at the strategic level
of the organization where task accomplishment is more complex.
3.Getting things done means the leader should draw a political map of the terrain
that shows the relative power of the various players to fully understand the
patterns of dependence and interdependence. This involves mapping the critical
organization units and sub-units and assessing their power bases. This step is very
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persuasion. Effective use of these tactics include the following behaviors: persuading others
by emphasizing the strengths and advantages of their ideas, developing more than one
reason to support ones position, using systems thinking to demonstrate the advantages of
their approach, and preparing arguments to support their case.
NOTES
Bargaining tactics involve leader behaviors that attempt to gain influence by offering
to exchange favors or resources, by making concessions, or by negotiating a decision that
mutually advances the interests of all participants. These influence tactics are typically
effective in a political environment involving opposing or resisting forces; when a leader is
in a position to do something for another individual or group; or when the collective interests
of all can be served.
Organizational mapping tactics focus the leaders sight on possible power-dependent
and interdependent relationships. The critical task is to identify and secure the support of
important people who can influence others in the organization. Leaders using these tactics
will employ behaviors that include: determining which actors are likely to influence a decision,
getting things done by identifying existing coalitions and working through them, garnering
support by bringing together individuals from different areas of the organization, isolating
key individuals to build support for a decision, linking the reputations of important players
to the decision context and working outside formal organization channels to get the support
of key decision makers.
Impact leadership tactics include thinking carefully about the most profound, interesting
or dramatic means to structure a decision situation to gain the support of others. Behaviors
include: presenting ideas that create an emotional bond with others, using innovative and
creative ways to present information or ideas, finding and presenting examples that are
embedded in the political and cultural frames such as language, ceremonies and propitious
events, and lastly, consistently demonstrating high energy and physical stamina in getting
the job done.
Visioning tactics demonstrate how a leaders ideas and values support the organizations
strategic goals, beliefs and values. Leader behaviors in executing these tactics include:
articulating ideas that connect the organizations membership to an inspiring vision of what
the organization can become, appealing to organization core values or principles, linking
the work of the organization to the leaders vision and broader goals, creating and using
cultural symbols to develop both individual pride and team identity.
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Information and analysis tactics suggest that leaders in control of the facts and analysis
can exercise substantial influence. Leaders will use unobtrusive behaviors to disguise
their true intention, which is to effectively employ influence tactics that seemingly appear
rational and analytical. Facts and data are manipulated and presented to appear rational
and help to make the use of power and influence less obvious. Another ploy used by
leaders is to mobilize power by bringing in credible outside experts who can be relied on to
support a given strategy and provide the answers they are expected to give. Lastly, under
conditions of VUCA which characterizes strategic decision making, leaders will selectively
advocate decision criteria that support their own interests and organizations. In these cases,
leaders typically do what works best and make decisions based on criteria that are most
familiar to them.
Coercive tactics are the least effective in influencing strategic decisions. These tactics
involve employing threats, punishment, or pressure to get others to do what a leader wants
done. Typical leader behaviors include: using position power to demand obedient compliance
or blind loyalty, making perfectly clear the costs and consequences of not playing the
game, publicly abusing and reprimanding people for not performing, and punishing
individuals who do not implement the leaders requests, orders or instructions.
This chapter has addressed what strategies and tactics are required for leading
with power at the highest organizational level. In a micro context, it is about managing
power, which translates as being personally effective in knowing how to get things done
and having the political will to do so. At a macro level, it means coping effectively with the
strategic environment and dealing with innovation and organizational change.
How power is lost?
In a general sense power is lost because organizations change and leaders dont.
Organizational dynamics create complex conditions and different decision situations that
require innovative and creative approaches, new skill sets and new dependent and
interdependent relationships. Leaders who have learned to do things a specific way become
committed to predictable choices and decision actions. They remain bonded and loyal to
highly developed social networks and friendships, failing to recognize the need for change,
let alone allocating the political will to accomplish it. Ultimately, power may be lost because
of negative personal attributes that diminish a leaders capacity to lead with power effectively.
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The SLDI identifies a number of negative attributes that when linked to certain organizational
dynamics will generate potential loss of power:
NOTES
Technically Incompetent describes leaders who lack the conceptual skills needed to
develop vision and be proactive in managing organizational change.
Self-Serving/Unethical leaders abuse power and use it for their own self aggrandizement,
take special privileges, and exploit peers and subordinates by taking credit for contributions
done by others. Self-serving leaders contaminate the ethical climate by modeling poweroriented behavior that influence others to replicate their behavior. Over the long run, these
leaders engender divisiveness and are not trusted.
Micromangement of subordinates destroys individual and team motivation. Leaders who
over-supervise their subordinates have strong control needs, are generally risk averse and
lack conceptual understanding of power sharing and subordinate development.
Arrogant leaders are impressed with their own self-importance, and talk down to both
peers and subordinates thereby alienating them. If empowering others is about releasing
purposeful and creative energy, arrogance produces a negative leadership climate that
supresses the power needs of others. Arrogant leaders makes it almost impossible for
subordinates to acquire power as a means to improve their own performance as well as to
seek new ways to learn and grow.
Explosive and Abusive leaders are likely to be hot reactors who use profanity
excessively, have inadequate control of temper, and abuse subordinates. They may also
lack the self-control required to probe for in-depth understanding of complex problems
and so may consistently solve them at a superficial level. Explosive and abusive leaders
may self-destruct repeatedly in coalition building and negotiating situations.
Inaccessible leaders are out of touch with their subordinates particularly when they need
access for assistance. Peers typically write the individual off. Leaders are generally
inaccessible because they dont place great value on building interpersonal relationships,
they may have weak interpersonal skills or they may be self-centered.
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2.The system encourages exchange of information among various units of the organisation.
The preparation of specific functional budget inevitably needs the free flow of information
among the various departments of the organisation. This free flow of information helps in
achieving coordination. 3. The system promotes balanced activities in the organisation.
Volume of each activity depends upon the objectives of the organisation. Therefore,
each activity should be performed in proportion to other activities. Thus, estimates of
operations like sales, production, purchasing, etc., can be well checked against each
other and likewise, the activities can be programmed. Thus, budgetary control system is
a vital and important device for planning, controlling and coordinating the activities in an
organisation thereby contributes to attain higher standard of performance and efficiency.
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NOTES
Exhibit
Budgetary Control in Baroda Rayon Corporation
Baroda Rayon Corporation is located at Surat with its head office at Mumbai. It
produces rayon filament yarn, polyster filament yarn, and nylon tyre cord. It has adopted
a comprehensive budgetary control system. It prepares its budget on annual basis to coincide
with its financial year, April to March. There is a separate Budget Control and Cost Accounts
(BCCA) department which coordinates the activities of budgetary control.
Budget Preparation
The company prepares its master budget along with budgets for major important
functions like sales, production, cash, labour, etc. The budget is prepared by BCCA
department in consultation with the chief executive, departmental heads. After the initial
budget preparation, it is approved by budget committee and finally, it is sent for the approval
of Board of Directors at its head office at Mumbai. Normally the standards of last year are
used as the basis for budget preparation with suitable adjustment. For example, rates of
materials are adjusted according to the prevailing rates in the market. Similarly adjustment
is made in labour cost depending on the rate of dearness allowance payable to workers for
the budget period. Dearness is paid on the basis of All India Cost of Living Index. Overheads
are charged on percentage basis. When budgets are prepared and approved, these are
communicated to respective heads of departments/sections for implementation.
Budgetary Control
For control purposes, variance analysis is made. Factors for variance between
budgeted and actuals are identified. For taking further course of action, various factors
have been divided into two parts: controllable and non-controllable. Controllable factors
are like utilisation of plant capacity, unit consumption ratios of various raw materials, utilisation
of auxiliary materials, labour utilisation, etc. Uncontrollable factors are like price of raw
materials, price of the final products, etc. Budget deviations are calculated every month
and for some sections every day. Deviations due to controllable factors are communicated
to
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Leverage Ratios
NOTES
Leverage ratios indicate the relative amount of funds in the business supplied by
creditors/financiers and shareholders/owners. These ratios are in the form of debt-equity
ratio, debt total capital ratio, and interest coverage ratio. Debt-equity ratio indicates the
proportion of debt in relation to equity and indicates the financial strength of the organization.
Debt-total capital ratio shows the proportion of debt to total capital employed. This also
indicates the financial strength. Interest coverage ratio shows the interest burden being
borne by the organisation in relation to its profit.
Profitability Ratios
Profitability ratios show the ability of an organisation to earn profit in relation to its
sales and/or investment. Profitability ratios are expressed in terms of profit margin as well
as return on investment. Profit margin, net profit or gross profit, is expressed in the form of
relationship between profit and sales and indicates the degree of profitability of the business.
Return on investment is measured by relating profit to investment. Return on investment is
the most comprehensive technique for controlling overall performance. Therefore, somewhat
more elaborate discussion is presented.
Return on Investment
The efficiency of an organisation is judged by the amount of profit it earns in relation
to the size of its investment, popularly known as return on investment (ROI). This approach
has been an important part of the control system of Du Pont Company, U.S.A., since
1919, though it was actually devised by Donaldson Brown in 1914. Since its successful
operation in DuPont, a larger number of companies have adopted it as their key measure
of overall performance.
This technique does not emphasise absolute profit for judging the efficiency of an
organisation as a whole or a division thereof, rather the amount of profit is related with the
amount of facilities or capital invested in the organisation or the division.
The goal of a business, accordingly, is not to optimise profit, but to optimise returns
on capital invested for business purposes. This standard recognises the fundamental fact
that capital is a critical factor in almost any business and its scarcity puts limit on progress.
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The system of control through return on investment can be seen from Figure as
operating in DuPont Company. Figure: Relationship of factors affecting return on
investment The rate of return is calculated by dividing the profit by total investment. It can
be computed in respect of historical data so s to reveal the rate of return realised or it may
be applied to budgeted data to give a projected rate of return. In the DuPont system, the
investment includes total fixed and current assets without reducing liabilities or reserves.
The basis is that such a reduction would result in fluctuations in operating investments as
liabilities or reserves fluctuate, which would distort the rate of investment and render it
meaningless. On the other hand, many business organisations adopt a different view of
investment. Accordingly, the amount of the investment should be taken by deducting
depreciation from the assets. The argument is simple. Depreciation reserves represent a
write-off of initial investment and that funds made available
through such charges are reinvested in other fixed assets or used as working capital.
The argument seems to be realistic as it puts heavier burden on return on new assets, as
compared to old and obsolete assets. Moreover, the amount of investment thus calculated
is further reduced by the amount of current liabilities.
Advantages
The return on investment is an integral part of the productivity and efficiency
accounting. It gives following advantages:
1.The technique offers a sound basis for inter-organisation comparison. Such comparison
can be made among the different divisions, departments, or products of the same
organisation. It places high values on the effective and efficient use of organisational
resources. It is a mirror which reflects the entire image of the operating activity. As
such, suitable action can be taken for removing inefficiency.
2.It provides success to budgetary planning and control by putting restraint on the
managers demand for higher allocation of resources for their departments even if
these are not actually needed. Thus, the resource allocation in an organisation is made
on more rational basis.
3.This system is helpful in authority decentralisation. Each manager, in-charge of a
department or section, is responsible for earning certain rate of return, but enjoys
complete freedom in running his department. Such autonomy gives additional incentive
to managers for higher efficiency.
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4.It can be treated as a total control system in the sense that rate of return reflects the
objective of the organisation. If this rate is satisfactory, other control systems like
budgetary, costing, ratios, reports may be taken as satisfactory.
NOTES
Limitations
There are some limitations of the rate of return as a control tool:
1.The use of rate of return is associated with the fixation of a standard rate of return
against which the actual is compared. What should be this standard return is often
questionable. Comparisons of rates of return are hardly enough because they do not
tell what the optimum rate of return should be.
2.Another problem comes in the way of valuation of investment. The question is at what
cost the assets should be valued: at original cost, depreciated cost, or replacement
cost. In an inflationary economy, the problem of price adjustment becomes more acute,
whatever basis of valuation is adopted.
3.The rate of return on investment sometimes hampers diversification if it has no flexibility.
This is because of the fact that the rate of return is determined by the amount of risk;
higher the risk, higher the desirable rate of return.
4.Many times, the return on investment is followed so rigorously that expenditure such
as research and development which can contribute to the profitability in the long run
are curtailed to show impressive results in terms of rate of return. This practice, however,
is detrimental to the organisation in the long run.
5.As is the case with any system of control based on financial data, return on investment
can lead to excessive emphasis on financial factors. This emphasises that capital is the
only scarce resource in the organisation leaving aside the role and availability of competent
managers, good industrial relations and good public relations.
4.6.2 Social Performance Control
Social responsibility is a part of overall business objectives of an organisation.
Most of the organisations set their social objectives either explicitly or implicitly depending
on organisational practices. Social performance control deals with assessing the extent to
which an organisation is achieving its social objectives. This requires defining the basis on
which social performance should be evaluated and identifying the degree to which social
performance is effective. Thus, social performance control involves two aspects:
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NOTES
Social Indicators
Social indicators approach of social performance measurement consists of
developing social indicators and measuring an organisations performance on these
indicators. Brumet has prescribed five broad indicators in which the contribution of an
organisation should be measured. These are as follows:
1.Net income contribution-earning enough to provide for the present and future costs of
the organisations continued existence but limited to legitimate socially desirable profit;
2.Human resource contribution-development of system of human resource accounting
to measure the impact of the organisational decisions on human asset value.
3.Creation of jobs and providing employment opportunities to backward and socially
handicapped population,contributing towards educational development, relief of people
in distress caused by natural calamities, rural upliftment, etc.
4.Environmental contribution-environmental improvement through pollution abatement,
conservation of scarce natural resources, maintenance of ecological balance, and so
on.
5.Product or service contribution-ensuring quality, durability, safety and serviceability of
products; customer satisfaction, truthfulness in advertising, etc.
Social indicators approach measures social performance of an organisation in the
context of various factors. Many organisations follow this approach because it indicates
the areas in which they have to work. However, one basic problem in this approach is the
determination of expectations of various indicators and the way it can be fulfilled.
Summary
The larger organisations are able to take larger expansion-steps. These steps may
have more impact on the organisation structure. However after some time most organisations
conclude that something went seriously wrong with its structure and decides to reorganise
it. Because reorganisations are often associated with staff reductions they are very sensitive
processes
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What are the key learning points in this chapter and what are the practical
implications for strategic leaders and decision makers. Pfeffer has described learning about
power most succinctly: it is one thing to understand powerhow to diagnose it, what are
its sources, what are the strategies and tactics for its use, and how it is lost. It is quite
another thing to use that knowledge in the world at large...In corporations, public agencies,
universities, and government, the problem is how to get things done, how to move forward,
how to solve the many problems facing organizations of all sizes and types. Developing
and exercising power require having both will and skill. It is the will that often seems to be
missing.
Operational Control systems are management processes used to track and respond
to progress towards targets at for defined situations, typically at lower levels of the
organisation. The context for what needs to be managed has often been made explicit by
decisions higher in the organisation, and often the corrective action for poor performance
has already been specified.
Financial performance control, or simply referred to as financial control, is relevant
for those aspects of business operations whose outcomes are expressed in monetary terms.
Financial control is exercised at operative level as well as at overall organisation level
though techniques involved are different
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NOTES
UNIT V
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Typically, strategic alliances are an attractive option when a large firm has identified
a significant opportunity in one of its existing markets. In general, the large firm has most of
the capacity needed to address the opportunity but lacks one critical element: technology.
By teaming with a world-class small partner, the large firm hopes to participate quickly in
the emerging market and gain a competitive advantage.(1)
The large company does not seek the small companys technology, nor does it
want to involve itself in the operations of the small firm. At most, the large company will
place someone on the Board of Directors to protect its investment. What is absent is an
agreement to jointly exploit the success of the small companys research and development
and the interaction of operating personnel in both firms.
If a corporate decision is made to pursue the strategic alliance option, exploratory
discussions begin. The interests of the two parties are both complementary and conflicting.(2)
They both want the technology, which brought them together, to succeed and become a
marketable commercial product or process. Generally, each recognizes its own strength
and weakness and the benefits of a synergistic relationship. On the other hand, there are
clearly interests that are different. The small company wants various types of financial and
non-financial assistance, yet wants to retain maximum independence. The large company
wants to cautiously dole out funding and maintain close monitoring if not control of the
effort it is supporting. These issues must be discussed and resolved or they will threaten the
alliance.
A number of other issues are important as well. A thorough understanding and
agreement by key management people of both companies on the objectives and ground
rules for the alliance is a necessary prerequisite for success.(3) These discussions must
deal with hard issues such as who will be in charge of R&D, production, marketing, and
other functions; which decisions are to be made by each company; which decisions must
be approved by both companies; and how disputes should be resolved. If there are either
basic differences or too many minor differences, the whole question of whether to proceed
with the alliance needs to be re-examined.
It is worthwhile to review the evolution of strategic alliances. Not too many years
ago when an established large company wanted to enter a new product line quickly or
rapidly acquire a new technology it would buy into that technology by acquiring a small
company that had successfully developed it. The process was standard and simple. The
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founders of the small company, who were also the key employes and owners, were made
offers they couldnt refuse. They sold their companies and became rich employees of the
large company. Within a short time the former entrepreneurs became frustrated with the
bureaucracy of the large company and left. In too many cases the objective of the acquisition
was not realized, primarily because the entrepreneurial spirit and incentives of the small
company were incompatible with the culture of the large firm.
NOTES
The desire of large companies to get into new fields quickly remains and strategic
partnering provides an alternative to the acquisition approach. This alternative is particularly
attractive when the large entity is interested in only a subset of the skills and resources of
the small firm.
In a strategic alliance, the small company remains independent. The entrepreneurs
work in their own culture, driven by their own incentive system. However, by teaming up
with a large company the small firm has access to capital and organizational resources that
are unavailable in the marketplace, such as an in-place manufacturing and/or marketing
organization, distribution channels, and regulatory groups with years of governmental
experience.(4) To be sure, entrepreneurs must give up some rights and opportunities.
These may include the loss of marketing rights in select industry sectors or in certain parts
of the world. Alternatively, they may share the production responsibilities or even give up
production rights completely. However, the trade-off may be unavoidable because many
of the needed resources cannot be acquired elsewhere. Each case is unique and each case
is a trade-off. In the best situation the relationship is truly symbiotic; what each gives up is
small compared to what each hopes to gain.
This thinking and its conclusion are not universally accepted. Many large companies
reject the option of teaming with a small startup company and prefer to build their own inhouse technical capability, particularly if the small firm is a new venture organized around a
small group of technical experts. The in-house attitude is usually presented as give us the
R&D dollars and we can build as strong or stronger a technical capability as that handful of
experts. This form of not-invented-here-syndrome is quickly giving way to multicompany cooperative arrangements as the cost of technology rises and the lead time to
gain a competitive advantage shrinks.(5)
Another alternative to partnering is licensing a small firms technology. While
licensing has many advantages, it has one major shortcoming; it is an after-the-fact activity.
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Simply stated, a firm can only license existing technology. Licensing precludes large firm
involvement in the direction of development or the technical characteristics emphasized.
More important, it is often difficult to transfer the technology between the scientists of
small firms and large firms. Partnering overcomes these obstacles by allowing the large
firm to actively participate in all phases of the research.
Learning Objectives
After learning this unit you must be able to:
5.1
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NOTES
The basic foundation of a good relationship is the choice of the right partner. But
what are the characteristics of the right partner? First, the partner selection process should
identify organizations whose needs, skills, and resources are completely complementary
to those of the large firm. This point cannot be over-emphasized. All too often, what seems
like a perfect fit turns out to be a mismatch. In one case, a small firm with a promising
medical device entered into a relationship with a large pharmaceutical firm. The large
companies in-hospital sales force was thought to be an excellent marketing outlet for the
device. However, once the relationship was under way, it became obvious that a mismatch
had occurred. While the sales force had a tremendous ability to contact individual doctors
and sell drugs on a one-on-one basis, the medical device needed a marketing group that
could influence department heads and hospital administrators to commit a substantial amount
of funds and back the introduction of the new equipment. The mismatch resulted in lackluster
sales, and the relationship terminated.
A second selection criterion is the choice of a partner that is financially stable and
well managed. It can be a source of frustration when large-firm executives become involved
in a combination alliance and turnaround situation. All too often, large-firm executives
working with poorly capitalized partners are drawn into non-partnership related issues
such as venture capital funding and negotiations with suppliers. These problems draw
energy away from the common goal and divert attention from the activities of the alliance.
In addition to these obvious criteria, some of the more subtle small-firm
characteristics also require attention. Relationships as complex as these benefit from
experience. A small firm that has been engaged in previous alliances has moved up the
learning curve at the expense of an earlier partner. One president of a small electronics
company freely admits that his initial alliances could have been more effective if he and his
partner had been more experienced in cooperative management. Fortunately, many
entrepreneurial firms have a great deal of experience in this area. One biotechnology
company with 130 employees is currently engaged in 13 alliances. That firm considers
cooperative management the norm not the exception, and views partnering as a core
competency of the firm.
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parent corporation had considerable biotechnology experience but lacked the specialized
talent to perform R&D in genetic-based diagnostics. After evaluating and rejecting a number
of alternatives, including developing an in-house capability, it was decided to seek a small
but highly competent R&D-oriented biotechnology firm for a partnering arrangement.
NOTES
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NOTES
based on a number of factors including patent rights, sales volume, and elapsed
time.
6. The agreement included the conditions under which each company could give
notice of termination.
7. A final and important provision defined the process for resolving disagreements.
This included mediation and arbitration procedures that would minimize any cost
and stress of litigation. Once the final agreement had been reviewed and properly
signed, the cooperative venture proceeded with only normal start-up clarifications.
In the second example, a start-up company initiated alliance discussions with a
large established firm. The founders of the entrepreneurial firm were highly experienced
technologists who had built a worldwide reputation in a special but important niche and
had been granted scores of patents. They established their company to develop state-ofthe-art equipment for semiconductors, and they made two basic decisions when creating
the firm. First, they did not want to seek traditional venture capital funding as their primary
financing. Second, they did not want to become a production company. The founders had
been engaged in R&D all their lives and were confident of their abilities in this area; they
were less sure of their manufacturing and marketing skills. Consequently, they decided to
transfer the know-how of any new product or process to a major electronics corporation
that had appropriate production and marketing capabilities. Furthermore, they would assist
the latter to become self sufficient and exploit the full potential of the research in the
marketplace. With this strategy, they searched for partners who could manufacture and
effectively market advanced semiconductor devices. The start-up is currently in the initial
stages of negotiating with a major international firm whose strengths in manufacturing and
marketing complement its technical expertise
The arrangement being discussed calls for the small firm to initiate the necessary
development and design effort and achieve specific technical objectives. Once this has
been accomplished, the small firm will transfer all documentation, equipment and knowhow to the partner. In addition, adequate training will be provided to assure efficient
operation by the recipient company. In return, the large international corporation agrees 1)
to contract and fund the development and design effort for at least two years; 2) to negotiate
a licensing agreement for royalty payments to the small company for all products it
manufactures with the advanced technology; 3) and to invest in the start-up company, the
dollar value and equity position to be determined during negotiations. It is understood,
however, that the equity position will be relatively small (less than 20%).
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These are the key elements in a management document of about six pages currently
being reviewed. Even though the outcome is unknown at this time, the important point is
that the relationship is being structured to be mutually beneficial as well as to protect both
sides.
NOTES
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there also exists a corresponding business model. Henry Chesbrough used the Xerox Palo
Alto Research Center (PARC) as an example. The research from PARC spawned many
successful products, but the shareholders of Xerox did not benefit as much as others did.
Employees who worked on promising technologies departed to form start-up companies,
many of which, such as 3Com and Adobe, acheived much success. In fact, the market
capitalization of Xeroxs spin-offs exceeded that of Xerox itself.
NOTES
The Xerox PARC example raises questions about the viability of the closed
innovation model going forward in the 21st century. According to Chesbrough, the closed
innovation paradigm has eroded due to the following factors:
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information can be more useful than more hypothetical marketing research. Some large
firms have taken the open innovation model further by forming alliances with start-ups or
even acquiring them. The more progressive firms have formed their own internal venture
groups to power their own innovation process.
Operating an internal new ventures group provides the firm with the following benefits:
Given the complexities of products, markets, and the environment in which the
firm operates, very few individuals, if any, fully understand the organizations tasks in their
entirety. The business model serves to connect the entrepreneurial inputs to the economic
outputs.
Intellectual Property and Open Innovation
In the historical model of vertically integrated research, new technologies were
used in the firms core business. Other potential uses of the technology did not unfold.
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Under the model of open innovation, the same intellectual property can be applied
to different markets. The firm creating the IP may license it to one firm for use in one
market, and other firms for use in their respected markets.
NOTES
the potential value of the intellectual property would not be unlocked since it would
be confined to the market of the pharmaceutical firm paying for the services, and
the growth of such a pay-per-service firm is somewhat limited since there are few
economies of scale.
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NOTES
new products
new production methods
new markets
new forms of organization
Wealth is created when such innovation results in new demand. From this viewpoint,
one can define the function of the entrepreneur as one of combining various input factors in
an innovative manner to generate value to the customer with the hope that this value will
exceed the cost of the input factors, thus generating superior returns that result in the
creation of wealth.
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NOTES
By creating utility
By pricing
By adaptation to the customers social and economic reality
By delivering what represents true value to the customer
Utility
Pricing
Customers
Innovation
Entrepreneurship
Social & economic impact
Value
Demand side
Wealth creation
Innovation
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NOTES
Arun Jain, Chairman & CEO of Polaris Software Lab Limited, emphasizes that it
is quality consciousness which has made him one of the most highly successful first
generation entrepreneurs.
Madhuri Mathur, made the life of ladies in kitchen easier by bringing out the idea of
a kitchen machine that would blend, chop, mince and grind that culminated into
sumeet mixer.
Shahnaz Husain introduced herbal cosmetics to the world. Her creams and lotions
have found their way into salons in different parts of the globe. She has 650 salons
at 104 countries.
As the inventor of Hotmail, Sabeer Bhatia strengthened Indias IT revolution.
Hotmail went from strength to strength as the Web email address of choice for an
estimated 200 million users worldwide.
The Chandraprabhu Raingun is an innovation of Shri Anna Saheb Udgave, a 70year old sugarcane farmer in Chandraprabhu, India.
By studying commonly available sprinkler systems, he developed his own design
to suit the irrigation requirements of sugarcane.
While it was developed with sugarcane in mind, the Rain gun can also be used to
a number of other crops such as groundnut, tapioca, onion, and potato.
Entrepreneurship Highlights
Myths of Entrepreneurship
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Entrepreneurial Strengths
NOTES
Economic Relevance
Entrepreneurial ventures are essential to the economy.
Entrepreneurial Environment
Inflexible schedule
No Supervisory evaluation
Flexible business policy
Flexible business solution
Corporate & Entrepreneurial Demands
Customer demands
Government taxes an
Need for long hours, hard work
Employee expectations
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NOTES
Customer focus These firms can achieve greater customer satisfaction and
loyalty by their flexibility.
Quality performance - These firms can outperform large scale operations of
large undertakings by closely managing operations.
Integrity and responsibility These firms can foster a reputation for honesty
and reliability in their dealings and thereby win business.
Innovation Entrepreneurs are innovators, and this mindset is more likely to
surface in the activities of the firm.
Low cost production - These firms can sometimes be more efficient than large
firms, especially in small markets.
Customer Focus
Integrity
Few Managerial
Quality
Customer
Responsibility
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Satisfaction
Honesty
Reliability
Productivity
Low-Cost Production
Cost efficient
Few Operations
Tasks
Focus on
Customer Loyalty
Innovation
Innovative Operation
Innovative Business
Tools
NOTES
Successful entrepreneurs seem to have a feel for the effectiveness of the idea.
Hard word is much more pertinent than dreams to turn an innovative idea into a
successful business enterprise.
Self assessment helps in identifying the business idea that can help entrepreneurs
achieve their desired result.
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NOTES
Entrepreneurship Highlights
Entrepreneurial Nature
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Speed of wealth creation - while a successful small business can generate several million
dollars of profit over a lifetime, entrepreneurial wealth creation often is rapid; for example,
within 5 years.
NOTES
Risk - the risk of an entrepreneurial venture must be high; otherwise, with the incentive of
sure profits many entrepreneurs would be pursuing the idea and the opportunity no longer
would exist.
Innovation - entrepreneurship often involves substantial innovation beyond what a small
business might exhibit. This innovation gives the venture the competitive advantage that
results in wealth creation. The innovation may be in the product or service itself, or in the
business processes used to deliver it.
The Business Model
To extract value from an innovation, a start-up (or any firm for that matter) needs
an appropriate business model. Business models convert new technology to economic
value.
For some start-ups, familiar business models cannot be applied, so a new model
must be devised. Not only is the business model important, in some cases the innovation
rests not in the product or service but in the business model itself.
In their paper, The Role of the Business Model in Capturing Value from
Innovation, Henry Chesbrough and Richard S. Rosenbloom present a basic framework
describing the elements of a business model.
Given the complexities of products, markets, and the environment in which the
firm operates, very few individuals, if any, fully understand the organizations tasks in their
entirety. The technical experts know their domain and the business experts know theirs.
The business model serves to connect these two domains as shown in the following diagram:
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NOTES
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NOTES
Xerox then decided to market the new product itself and developed a new business
model to do so. The new model leased the equipment to the customer at a relatively low
cost and then charged a per copy fee for copies in excess of 2000 copies per month. At
that time, the average business copier produced an average of only 15-20 copies per day.
For this model to be profitable to Xerox, the use of copies would have to increase
substantially.
Fortunately for Xerox, the quality and convenience of the new copy technology
proved itself and companies began to make thousands of copies per day. As a result,
Xerox sustained a compound annual growth rate of 41% over a 12 year period. Without
this business model, Xerox might not have been successful in commercializing the innovation.
The Entrepreneurial Advantage
Chesbrough and Rosenbloom observe that a successful business model such as
that of Xerox tends to build momentum and the company becomes confined to its successful
model. However, new technologies often require new business models.
Because start-up companies are free to choose or develop a new business model,
in this regard start-ups have an advantage over more established firms. In addition to the
risk incurred in the technological and the economic domains, an unproven business model
adds additional risk, and entrepreneurial ventures usually are more prepared to accept this
risk than would be a large, well-entrenched firm.
In fact, many venture capitalists see themselves as investing in a business model.
Consequently, it often is the VC that pushes for a change in the business model when it
becomes apparent that the original model is not working.
Attracting Stakeholders
A new business requires resources such as funds for R&D, equipment, marketing,
and inventory. These funds are obtained by attracting stakeholders. Financial stakeholders
are most at risk - these include banks, bond holders, investors, and venture capital firms.
However, employees, customers, and suppliers of a business also are at risk. Employees
may not receive some of their pay if the business fails, and they may have given up lucrative
positions to which they no longer can return. Customers may find that they are stuck with
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a non-supported product, and suppliers may lose the opportunity to recoup their
development costs or to receive their accounts receivable. Because of the risk of failure,
attracting stakeholders is more difficult for a new venture than for an established, successful
company.
NOTES
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NOTES
STRATEGIC MANAGEMENT
challenge facing NPOs the need to move from amateur administration to professional
management. This challenge of management to NPOs is of particular
NOTES
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NOTES
giving rise to agency costs which are in fact welfare losses resulting from the differences
in objectives pursued by principals and agents.
Appropriate instrument to implement a sound corporate governance policy,
balancing all relevant stakes and objectives, and imposing them as purely as possible to
NPO management. Also in this domain, an extensive literature exists as far as profit oriented
firms are concerned, but much less is known about governance in nonprofit corporations
Strategic Planning As far as NPO strategic management is concerned; it comes
as no surprise, given the situation described with respect to NPO corporate governance,
that there is no body of economic theory underpinning NPO strategic choices. Theoretical
contributions are scarce, and deal with specific aspects of NPO strategy, such as the
difference between NPO strategy and a competing profit firm strategy when exposed to a
common exogenous shock (Banks et al., 1997), strategy differences between NPOs and
profit oriented firms following mergers.
Accounting and Auditing
Because of an ideological rejection of commercial values and practices in NPOs
accounting and auditing have been not very popular in NPO circles, let alone as a research
topic for NPO scholars. Even now about one third of a sample of large and medium sized
NPOs in the United States does not employ staff with an accounting education. An important
study by demonstrates how an NPO can operate effectively in a situation in which accounting
is virtually invisible in the mainstream operations of the NPO.
A first attempt towards a comprehensive, principal-agent based theory for
accounting and auditing in NPOs, who explains the absence or presence of accounting
and auditing in NPOs in the context of mitigating agency cost between the NPO board and
its management. The problem of compliance with accounting rules by NPOs. Accounting
choices, a popular topic in the for profit accounting and economics literature because of
their potential effects on managerial remuneration, is shown by Chase and Coffman (1994)
to have a potential influence on the level of subsidies obtained, which is nothing else than
another example of how agents try to exploit their contractual relations with their principals
(here the subsidizing authorities).
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Financial Management
NOTES
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NOTES
repeated over time and are assigned similar meanings by self and others as institutionalization.
These ideas are developed further by Meyer and Rowan (1977) in their seminal article
which analyses the roles of formal structures in organizations, particularly the deployment
of rational models, tools, and techniques as myths and in particular they stress the relationship
of the organization to its external environment in understanding organizational behavior.
Meyer and Rowan (1977) and DiMaggio and Powell (1983) identified the existence
of institutional isomorphism, in which organizations seek to mimic each other, as key strands
of institutional theory. This perspective has been employed in studies of NPOs.
Thus, Arnaboldi and Lapsley (2004) studied the adoption of activity-based costing
in a health care NPO. Despite the fact that activity-based costing was not required by any
government mandate (the key influencing factor in the adoption of accounting techniques in
health care [Jackson and Lapsley, 2003]), this NPO had chosen to adopt activity-based
costing. However, on closer examination, this NPO had adopted, but not implemented,
activity-based costing. This study demonstrated the manner in which techniques for rational
management, such as activity-based costing, had been adopted, not for use, but so this
NPO could present itself as up -to-date and modern to its external controlling environment
by the mimicry of the practices of private sector businesses. The institutional theory
perspective was also adopted by Covaleski and Dirsmith (1988a, 1988b), in their classic
study of a major NPO a university. This research revealed the significance of language
specifically the accounting language of budgeting could be deployed in the power and
politics of an organization experiencing a period of decline to shape expectations within
and beyond the entity being studied. This interplay of organizational and societal explanations
and expectations was played out with the apparently neutral accounting members being
used to articulate budgeting alternatives.
This relationship of the organization to its environment has also been studied in
other research into NPOs. Another notable example of this is the Christensen and Molin
(1995) study of the Danish Red Cross. At first sight, the findings of this study appear to
contradict the institutional theorys view that organizations reflect their external environments
(Meyer and Rowan, 1977; Scott, 1992). However, on closer inspection, Christensen and
Molin depict an organization that retains its form over its lengthy life. However, according
to Christensen and Molin, the resilience of the Danish Red Cross is attributable to the
manner in which this organization has conformed closely to wider institutional requirements
from the outset of its existence, thereby increasing their legitimacy and increasing their
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resources and survival capabilities (Meyer and Rowan, 1977). Institutional theory continues
to be used in research into NPOs. However, there are unanswered questions within this
framework about the actions of agents in these socially constructed spaces organizations.
This matter is addressed in structuration theory, to which we turn, next. Structuration
Theory
NOTES
Structuration theory was first formulated by Giddens (1979, 1984). It has been
used widely to investigate social phenomena across the entire spectrum of life and daily
living. It has similarities to institutional theory in its focus on the social and its use of key
concepts such as legitimation although Giddens uses this differently from, e.g., Meyer
and Rowan (1977). Giddens structuration theory emphasizes the importance of time and
space in understanding organizations. In his view, similar social practices are reproduced
over large spans of time and space. While institutional theorists such as Meyer and Rowan
(1977) stress the relationship of organizations to their external environment, Giddens has
identified the key role played by individuals (agents), who Giddens represents as
knowledgeable, intelligent, and resourceful in organizational life. In structuration theory,
institutional forms are upheld by three structural properties: signification, domination, and
legitimation. These three structural properties are interdependent and provide mechanisms
which shape social systems. Signification is concerned with language and communication.
Domination is power. Legitimation is the manner in which sanctions operate in social relations.
All three of these properties are interdependent and all interactions are through language,
power, and sanction. Giddens structuration theory has proved to be a very popular
framework for researchers in a wide variety of disciplines, although it has also been criticized
as being an oversimplified statement of agencystructure relationships. This model has
been used in the study of NPOs. Mouritsen and Skaerbek (1995) studied a national
theatre using structuration theory. This study reflected on the different contributions of
accounting and art to modern life, concluding that both legitimated theatre as a part of
modern civilization. In this study, legitimating of the theatre was bound up with concerns
for rationality in the management of this NPO. Art and accounting are, prima facie, mutually
contradictory, but, in this study, were shown to be co-producers of theatre and integral
elements of the legitimating of mechanisms of reproduction of theatre. The structuration
approach is also used by van de Pijl and Sminia (2004) in an interesting study of strategic
management in an NPO in this issue of Voluntas. Resource Dependency Resource
dependency also focuses on the relationship of institutions and their environment. Resource
dependency theorists argue that orga nizations are limited by a variety of external pressures
(Pfeiffer and Salancik, 1978; Pfeiffer, 1981). Resource dependency theorists also point to
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NOTES
the interconnections between the environment and organizations. In this theory, organizations
must be responsive to external demands and expectations to survive. This theory differs
from the institutional theory perspective in its use of ideas of power and control in the
pursuit of stability and legitimacy. In this way, formal control systems are not merely technical
or neutral in nature, but instead constitute power. Agents within organizations can deploy
such mechanisms to suit their own ends.
This issue of resource dependency is of obvious interest to NPOs which are so
dependent on donors and do not have recourse to capital markets for funding. Studies of
NPOs from this perspective include Boland and Pondys (1986) study of resource allocation
in a university. These investigations showed the dependency of the university on its principal
sponsor (the state) for resources, and the deployment of power within the organization to
shift assigned priorities. The university was allocated resources according to the priorities
of the state. However, this resource dependency was undermined by the flexibility used at
the micro-organizational level to shift funds from one program to another, regardless of the
wishes of the sponsor on which the university was dependent for resources. However, for
NPOs, another dimension of resource dependency which has attracted the attention of
sociologists is the nature of the gift relationship between donors and charities. This may
involve reciprocity as well as altruism (Berking, 1999). Another interesting example of this
perspective is Jonssons (1998) study of a religious organization. This study is of particular
interest because of the manner in which it seeks to integrate the ideas of institutional theorists,
structuration theory, and resource dependence. This approach a holistic, combined and
integrated approach is of increasing relevance as researchers seek to explain the
complexities of NPO activities.
Marketing and the NPO as the new commercial entity
The use of marketing in NPOs began in the late 1960s but this has accelerated in
recent years and has in the meantime been widely accepted and practiced (Kotler and
Andreasen, 1991; Helmig, 2004a). There are various ways in which NPO marketing
differs from marketing in for-profit organizations (e.g., Helmig, 2004b). One of the main
aspects of NPO marketing is the need to market products and services to a wide range of
target groups. Marketing strategies help to attract resources (e.g., time from volunteers,
money from government and the public) as well as to allocate resources (e.g., running a
campaign to persuade people to stop smoking) (Helmig, 2004c). In the for-profit sector,
which faces multiple markets as well, this is usually a minor problem because success in
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marketing to customers serves the interests of most of these publics. Another problem of
NPO marketing is that marketing activities are still perceived as undesirable, too expensive,
and a waste of stakeholders money. This attitude still persists in the NPO area (Tscheulin
and Helmig, 1998). Against this background the following section aims to analyze: whet
her marketing as a managerial function beside others (e.g., accounting and auditing,
financial management) plays an important role in the NPO specific research literature;
and which marketing-topics are frequently discussed in the NPO specific marketing research
literature.
NOTES
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NOTES
STRATEGIC MANAGEMENT
NOTES
Core principles
ITCs Corporate Governance initiative is based on two core principles. These are:
(i) Management must have the executive freedom to drive the enterprise forward
without undue restraints;
(ii) This freedom of management should be exercised within a framework of effective
accountability.
ITC believes that any meaningful policy on Corporate Governance must provide
empowerment to the executive management of the Company, and simultaneously create a
mechanism of checks and balances which ensures that the decision making powers vested
in the executive management is not only not misused, but is used with care and responsibility
to meet stakeholder aspirations and societal expectations.
Cornerstones
From the above definition and core principles of Corporate Governance emerge
the cornerstones of ITCs governance philosophy, namely trusteeship, transparency,
empowerment and accountability, control and ethical corporate citizenship. ITC believes
that the practice of each of these leads to the creation of the right corporate culture in
which the company is managed in a manner that fulfills the purpose of Corporate Governance.
Trusteeship:
ITC believes that large corporations like itself have both a social and economic
purpose. They represent a coalition of interests, namely those of the shareholders, other
providers of capital, business associates and employees. This belief therefore casts a
responsibility of trusteeship on the Companys Board of Directors. They are to act as
trustees to protect and enhance shareholder value, as well as to ensure that the Company
fulfils its obligations and responsibilities to its other stakeholders. Inherent in the concept of
trusteeship is the responsibility to ensure equity, namely, that the rights of all shareholders,
large or small, are protected.
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NOTES
Transparency:
ITC believes that transparency means explaining Companys policies and actions
to those to whom it has responsibilities. Therefore transparency must lead to maximum
appropriate disclosures without jeopardising the Companys strategic interests. Internally,
transparency means openness in Companys relationship with its employees, as well as the
conduct of its business in a manner that will bear scrutiny. We believe transparency enhances
accountability.
Empowerment and Accountability:
Empowerment is an essential concomitant of ITCs first core principle of governance
that management must have the freedom to drive the enterprise forward. ITC believes that
empowerment is a process of actualising the potential of its employees. Empowerment
unleashes creativity and innovation throughout the organisation by truly vesting decisionmaking powers at the most appropriate levels in the orgaganizational hierarchy.
ITC believes that the Board of Directors are accountable to the shareholders, and
the management is accountable to the Board of Directors. We believe that empowerment,
combined with accountability, provides an impetus to performance and improves
effectiveness, thereby enhancing shareholder value.
Control:
ITC believes that control is a necessary concomitant of its second core principle
of governance that the freedom of management should be exercised within a framework of
appropriate checks and balances. Control should prevent misuse of power, facilitate timely
management response to change, and ensure that business risks are pre-emptively and
effectively managed.
Ethical Corporate Citizenship :
ITC believes that corporations like itself have a responsibility to set exemplary
standards of ethical behaviour, both internally within the organisation, as well as in their
external relationships. We believe that unethical behaviour corrupts organisational culture
and undermines stakeholder value.
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Question
Critically evaluate the above case and present your view
NOTES
Case-2
AMD-Strategic Management Competitiveness and Globalization
Abstract
Hector Ruiz, Chief Executive Officer of Advanced Micro Devices (AMD) has
strong reason to believe that AMD will give Intel a run for its money in the 64-bit
microprocessor market. Itanium I, Intels first 64-bit microprocessor has failed. Itanium II
has also elicited a lukewarm response from the market. But Opteron, AMDs 64-bit
microprocessor, released in mid-2003 is receiving strong performance reviews. Many
companies that shied away from AMDs products in the past such as Hewlett Packard,
Sun, IBM have started using Opteron. AMD has grabbed 7% of the low-end server
market, up from almost nothing a few years back. Is AMD finally ready to catch up with
Intel? The case covers the leadership of Ruiz, market response and features of Opteron
and the battle between AMD and Intel
Introduction
In 2004, Hector Ruiz (Ruiz), CEO of Advanced Micro Devices (AMD), was
reflecting on how his company was faring in its battle with Intel in the 64-bit microprocessor
market. Itanium I, Intels first 64-bit microprocessor had failed. Itanium II had also elicited
a lukewarm response from the market. But Opteron, AMDs 64-bit microprocessor,
released in mid-2003 was still receiving strong performance reviews. By 2004, many
companies such as Microsoft, IBM and HP, which had been staunch supporters of Intel,
had started using Opteron.
Even Sun Microsystems (Sun), a company that traditionally used its own SPARC
chips, had started using Opteron. These companies saw AMD as a means to increase their
market share by offering high-quality but low-priced products. As a result, by 2004, AMD
had become a major supplier of microprocessors in the server market. Historically, AMD
had ranked a distant second in PC microprocessors with a market share of about 15%,
compared to Intel, which had about 80%. In the past, AMD had made inroads into Intels
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NOTES
market share only to see Intel strike back with steep price cuts and faster introduction of
new models. As 2004 got underway, analysts wondered whether AMD was finally ready
to come out of Intels shadow.
Opteron
Designed to run existing 32-bit applications and offer customers a smooth transition
to 64-bit computing, Opteron promised a dramatic improvement in performance. It also
reduced the total cost of ownership (TCO) . Opteron came in three versions: the 100
series (1-way), the 200 series (1 to 2-way), and the 800 series (up to 8-way).AMD had
positioned Opteron as a microprocessor with a scalable architecture designed to meet
current and future business needs. Opteron was designed to scale from one to eight
processors. This aided system designers by reducing the cost and complexity of building
servers and workstations. It also reduced cost and increased server scalability.
One of the most important features of Opteron was HyperTransport Technology,
which aimed at removing I/O bottlenecks , increased bandwidth/speed, and reduced latency
. For workstation users, this meant increased graphics throughput (up to 8x AGP), quicker
loading of applications and large data sets, better multi-tasking, and smoother transition
across applications. Hyper Transport technology was useful for any application where
high speed, low latency and scalability were necessary. This technology reduced the number
of buses while providing a high-performance link for PCs, workstation and servers, as
well as numerous embedded applications and highly scalable multiprocessing systems
AMD had designed the new microprocessor to allow customers to migrate to 64bit computing without any significant sacrifice of the existing code base. The technology
aimed at providing full speed support for x 86 code bases, offering high performance
levels for existing 32-bit applications. It provided a large memory, which was useful for
computationally intensive applications, such as databases, ERP, decision support, scientific
and technical modeling, etc. It also helped lower TCO and network management complexity
through a unified architecture for desktop, notebook, workstation and server, and platform
flexibility. Opterons target segments included companies that required faster database
transactions, customers needing quick graphics response such as in the CAD industry,
which had computationally intensive tasks for modeling and scientific applications.
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Though Opteron was designed for high-end servers it could also run like 32-bit
(Pentium and Athlon) processors in most PCs. A PC version of Opteron was also expected
to be available unlike Intels Itanium 2. Opteron prices ranged from $283 to $794, compared
to Itanium 2s $1,338 to $4,226.
NOTES
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NOTES
the appetite of consumers and businesses for microprocessors. But this time, Intel had
finalized plans to make a paradigm shift in its architecture by tying-up with HP to make the
Itanium series of microprocessors.
Question
Analyze the case
Case-3
Sony - Exploring Corporate Strategy
Abstract:
The case discusses the organizational restructuring carried out by the Japanese
electronics and communication giant, Sony Corporation (Sony) between 1994 and 2003.
Sonys business operations were restructured five times within nine years. The
case describes each of the five restructuring exercises in detail and examines their implications
for
Sony.It also discusses the impact of these structural changes on the financial
performance of Sony
Introduction
For the first quarter ending June 30, 2003, Japan-based Sony Corporation (Sony)2
stunned the corporate world by reporting a decline in net profit of 98%. Sony reported a
net profit of 9.3 million (mn)3 compared to 1.1 billion (bn) for the same quarter in 2002.
Sonys revenues fell by 6.9% to 1.6 trillion for the corresponding period. Analysts
were of the opinion that Sonys expenditure on its restructuring initiatives had caused a
significant dent in its profitability. In the financial year 2002-03, Sony had spent a massive
100 bn on restructuring. Moreover, the company had already announced in April 2003
about its plans to spend another 1 trillion on a major restructuring initiative in the next
three years. Analysts criticized Sonys management for spending a huge amount on frequent
restructuring of its consumer electronics business, which accounted for nearly two-thirds
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of Sonys revenues. In 2003, the sales of the consumer electronics division fell by 6.5%.
Notably, Sonys business operations were restructured five times in the past nine years.
NOTES
Analysts opined that Sonys excessive focus on the maturing consumer electronics
business (profit margin below 1% in 2002-03), coupled with increasing competition in the
consumer electronics industry was severely affecting its profitability. However, Sonys
officials felt that the restructuring measures were delivering the desired results. According
to them, the company had shown a significant jump in its profitability in the financial year
2002-03.
Sony reported a net income of 115.52 bn in the fiscal 2002-03 compared to
15.31 bn in 2001-02 (Refer Table I for Sonys key financials in past 13 years). A statement
issued by Sony said, The improvement in the results was partly due to the restructuring of
its electronics business, especially in the components units. At the beginning of the new
millennium, Sony faced increased competition from domestic and foreign players (Korean
companies like Samsung and LG) in its electronics and entertainment businesses. The
domestic rivals Matsushita and NEC were able to capture a substantial market share in the
Internet-ready cell phones market. Analysts felt that the US based software giants like
Microsoft & Sun Microsystems and the networking major Cisco Systems posed a serious
threat to Sonys home entertainment business
By 1994, Sonys businesses were organized into three broad divisions - Electronics,
Entertainment and Insurance and Finance (Refer Table II). Each business division was in
turn split into product groups.
The electronics business division was split into four product groups, which produced
a wide variety of products. The entertainment division, which consisted of the music group
and the pictures group, made music videos and motion pictures.The finance division consisted
of Sonys life insurance and finance business. The companys growth was propelled by the
launch of innovative products and by its foray into the music and films business.
Restructuring of Electronics Business (1994)
Under Ohgas leadership, Sony witnessed negligible growth in sales during 1990
and 1994. Sales and operating revenues improved by only 2% during that period.
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NOTES
However, the net income and operating income registered a drastic fall of 87%
and 67% respectively. Analysts felt that the stagnation in the electronics industry coupled
with factors such as the recession in the Japanese economy and the appreciation of the yen
against the dollar led to the deterioration in the companys performance. It was noticed
that in the electronics business (Refer Table III), the revenues of the video and audio
equipment businesses were coming down or were at best stagnant, while the television and
Others group were showing signs of improvement. The Others group, which consisted
of technology intensive products such as computer products, video games, semiconductors
and telecom equipments, was performing very well and had a growth rate of nearly 40%...
The Ten-Company Structure (1996)
In January 1996, a new ten-company structure was announced, replacing the previous
eight company structure (Refer Table V).
Under the new structure, the previous Consumer Audio & Video (A&V) company
was split into three new companies - The Display Company, the Home AV Company and
the Personal AV Company. A new company, the Information Technology Company, was
created to focus on Sonys business interests in the PC and IT industry. The Infocom
Products Company and the Mobile Electronics Company were merged to create the
Personal & Mobile Communications Company. The other companies formed were the
Components & Computer Peripherals Company (formerly called the Components
Company), the Recording Media & Energy Company, the Broadcast Products Company,
the Image & Sound Communications Company (formerly called the Business & Industrial
Systems Company) and the Semiconductor Company...
The Implications
From 1995 to 1999, Sonys electronics business (on which the restructuring efforts
were focused) grew at a compounded annual growth rate (CAGR) of 8.55% (Refer Table
VI).
The music business had a CAGR of 10.5% while the pictures business had a
CAGR of 17%. Significant gains were, however, recorded by the games and insurance
business. The games business registered a CAGR of 215%, while the insurance business
registered a CAGR of 31%. In the late 1990s, Sonys financial performance deteriorated.
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For the financial year 1998-99, its net income dropped by 19.4%. During that period,
Sony was banking heavily on its PlayStation computer game machines. It was estimated
that the PlayStation (Games business) accounted for nearly 42% of Sonys operating profits
and 15% of total sales for the quarter-ended October-December 1998. In the late 1990s,
many companies across the world were attempting to cash in on the Internet boom...
NOTES
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NOTES
Case.4
Uni-lever -Global Strategic Management
Abstract:
The case discusses a five-year long organisational restructuring exercise undertaken
by Unilever, a leading global fast moving consumer goods (FMCG) company. It examines
in detail the important elements of the restructuring programme named the Path to Growth
Strategy.
The case focuses on the changes made with respect to the organisational structure,
various Unilever businesses, branding strategies, operational processes and the supply
chain management practices. Finally, it discusses the results of the restructuring exercise
and examines the companys future prospects in the light of its falling share price and the
sluggish growth of many of its leading brands.
Issues:
Gain an insight into the internal and external factors which force a large multi-product
multi-national company to restructure its operations
A Troubled Giant
In September 1999, Unilever, one of the largest consumer goods companies in the
world, announced plans to restructure its brand portfolio by end of 2004.
The plan involved cutting down on its unwieldy portfolio of 1,600 brands and
focusing on the top 400 brands. This move was read by the market as an indication that
the company was unable to manage its brands and so was scaling back growth plans. This
development, coupled with the fact that the growing popularity of Internet and telecom
stocks was luring investors away from old economy stocks, resulted in Unilever finding
itself in deep trouble - its stock price plummeted rapidly during 1999. According to reports,
Unilevers market capitalization of about 51 billion ($82 billion) in June 1999 shrank by
almost 20 billion by January 2000. As a result, the company lagged far behind its
competitors like Nestle and Procter & Gamble (P&G) in market capitalization.
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The fact that Unilever had failed to meet its performance expectations for 1999
added to its problems. Analysts attributed this failure to the sluggish growth of its top line
brands. They said that the companys existing brand strategy framework had lost its focus.
They also criticized Unilever for investing less in strengthening its leading brands during the
1990s (as a majority of its investments went into business restructuring and acquisitions).
NOTES
Meanwhile, the competitors had begun eating into Unilevers market share in a
major way. Unilever realized that it had to restructure its brand portfolio and operations to
meet the challenges brought about by the changing market conditions. In February 2000,
the company announced a 5 billion five-year growth strategy, aimed at bringing about a
significant improvement in its performance. The initiative was named the Path to Growth
Strategy (PGS). The exercise involved a comprehensive restructuring of operations and
businesses. While many industry observers welcomed the move, some were skeptical
about the slow-moving old economy giants ability to regain its momentum in time to meet
the intensifying competition.
Background Note
Unilever (called the Unilever Group) functioned as the operational arm of Unilever
NV (Netherlands), and Unilever Plc., (UK), its two parent companies.
Though the parent companies operated as separate legal entities (with separate
stock exchange listings), they functioned as a single business, with a single set of financials
and a common board of directors (See Exhibit I for the groups structure). Unilever was
formed in 1930 when a Dutch margarine company, Margarine Unie, and a British soap
company, Lever Brothers merged (See Exhibit II for a brief timeline of Unilever).While,
Margarine Unie had been formed by merging many margarine companies during the 1920s
and was a leading global player in the business, Lever Brothers was a name worth reckoning
with in the worldwide soap market and had soap factories across the world
Lever Brothers, diversified into many other businesses (primarily related to foods).
At the time of the merger, Margarine Unie and Lever Brothers, together, had operations in
over 40 countries. In the 1930s and 1940s, Unilever strengthened its presence in the US
by acquiring Thomas J. Lipton (1937) and Pepsodent (1944).While the companys
competitive position was adversely hit when its arch rival P&G launched Tide, a synthetic
detergent, in 1946, it continued to prosper in Europe.
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NOTES
This was because of the post-war boom in the demand for consumer goods, the
growing popularity of margarine and personal care products, and the new detergent
technologies. During the 1960s and 1970s, Unilever rapidly expanded its operations through
vertical and horizontal integration, emerging as a diversified conglomerate by the early
1980s.Diversification into different businesses was prompted in one way or the other by
the existing business lines. For instance, oilseeds crushed for use in the margarine and soap
businesses, yielded a by-product called cattle cake, and this led the company into the
animal feeds business.
Likewise, by-products such as glycerine and fatty acids, formed from processing
oil for use in margarine and soap production, prompted its entry into the chemicals business.
The company operated 24 packaging plants (for its consumer products) in six European
countries, from where goods were distributed worldwide. This activity made the company
one of the largest truckers in Britain and one of the largest shipping company owners...
EXCERPTS
What PGS is all About
To achieve the objectives of the PGS, Unilever decided to concentrate on the
following areas - modify the existing organizational structure, focus on leading brands,
support these leading brands with strong innovation and focused marketing strategies;
rationalize the supply chain; simplify business processes; and restructure or weed-out underperforming businesses and brands (See Exhibit III for the key drivers of value creation in
the PGS).
Unilever expected the PGS to result in annual cost savings of 1.5 billion by 2004.
An additional 1.6 billion in savings was to come from global procurement by the end of
2002.
Apart from this, the PGS was to involve laying off over 25,000 employees
(approximately 10% of the employee base) by 2004, on account of divestments or site
closures, and restructuring and simplification of processes.
The company announced that though the restructuring would be worldwide, it
would mainly focus on the US and Europe...
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STRATEGIC MANAGEMENT
NOTES
In 2000, the company witnessed a dramatic increase in its turnover with sales
increasing by 16% to 47.6 billion. This was mainly attributed to the acquisition of the
Bestfoods, Slim-fast, Ben & Jerrys and Amora Maille businesses.Since the announcement
of the PGS, Unilevers share price had recovered by 30% to $59 in August 2001, and this
seemed to highlight the positive results of its restructuring exercise.
By July 2002, Unilevers 400 leading brands accounted for 88% of the sales, up
from 75% in 1999.
By then, over 30,000 employees had been laid-off. Commenting on the positive
results of the PGS in mid-2002, FitzGerald said, We have now reached the mid-point in
the PGS and we continue to be confident about delivering our program
Brand focus continues apace with 88% of our turnover now attributable to leading
brands. These brands are showing great resilience in a tough economic environment and
will drive accelerating top line growth...
Unilevers Future Prospects
In August 2003, Unilever announced its half-yearly results for the year - sales
dropped by 15% and profits fell by 13%. During this time, the company reduced its growth
forecasts to 4% from the 5%-6%, it had promised its investors in the early 2003, stating
that it was struggling with a more challenging business environment - poor sales in the
dietary and food service markets, and the sluggish growth in the retail market on account
of slower economic growth, worldwide
In October 2003, Unilevers share price fell by 7% (to 487 pence) on the London
Stock Exchange, immediately after it announced that it was lowering its growth forecasts
for its leading brands to below 3% for 2003.
In August 2003, Unilever announced its half-yearly results for the year - sales
dropped by 15% and profits fell by 13%. During this time, the company reduced its growth
forecasts to 4% from the 5%-6%, it had promised its investors in the early 2003, stating
that it was struggling with a more challenging business environment - poor sales in the
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NOTES
dietary and food service markets, and the sluggish growth in the retail market on account
of slower economic growth, worldwide
In October 2003, Unilevers share price fell by 7% (to 487 pence) on the London
Stock Exchange, immediately after it announced that it was lowering its growth forecasts
for its leading brands to below 3% for 2003.
In August 2003, Unilever announced its half-yearly results for the year - sales
dropped by 15% and profits fell by 13%. During this time, the company reduced its growth
forecasts to 4% from the 5%-6%, it had promised its investors in the early 2003, stating
that it was struggling with a more challenging business environment - poor sales in the
dietary and food service markets, and the sluggish growth in the retail market on account
of slower economic growth, worldwide
In October 2003, Unilevers share price fell by 7% (to 487 pence) on the London
Stock Exchange, immediately after it announced that it was lowering its growth forecasts
for its leading brands to below 3% for 2003.
The company attributed this move to the waning popularity of its famous fragrance
and dieting products (including Calvin Klein, Eternity, Prestige and Slim-Fast), and the
poor performance of its other health and wellness products. This was the second time in
2003, that the company had reduced its growth forecasts for its leading brands. FitzGerald
blamed himself for the fall in the companys share price, after the announcement of reduced
growth rates. According to him, the market had misunderstood Unilevers growth forecasts
previously as the company had failed to communicate them clearly to its investors...
Case 5
e-Bay -Entrepreneurship - Successfully launching new ventures,
Abstract:
The case examines the managerial and leadership skills of Meg Whitman, the CEO
of eBay, the leading US-based online auction site. EBays business model and its growth
since its inception in 1995 upto the entry of Whitman in 1998 are discussed. The case also
traces Whitmans rapid rise up the corporate ladder and examines the circumstances that
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STRATEGIC MANAGEMENT
led her to join eBay. Whitmans managerial and leadership capabilities are also discussed
in detail. The case also examines the reasons for Whitmans emphasis on customers and
describes the various strategies she formulated to make eBay a global online company.
The case also examines the criticism leveled against Whitman and explores the future
prospects of Whitman and eBay.
NOTES
Issues:
How the eBay business model was leveraged by Whitman to make the company the
undisputed leader in the online auction market.
At The Helm of Success
In October 2002, Fortune Magazine ranked Meg Whitman (Whitman), CEO of
online auction major eBay, as the worlds third most powerful women in business, after
Carly Fiorina and Oprah Winfrey. According to Fortune, Whitman ruled the Internet,
and under her leadership, eBays revenues and profits doubled every year. Reportedly,
eBays stock grew by 30% during 2001, even as the technology sector across the world
experienced a severe downturn.
Such recognition was nothing new for Whitman; she received many accolades for
her contribution to eBay and for her managerial abilities. Whitman was ranked number one
on the Worth Magazines list of the Best CEOs in 2002.
Since 2000, she had been continuously named as one of the 25 most powerful
business managers in the world by BusinessWeek magazine. eBay also won many awards
under her leadership (Refer Exhibit I for a list of awards received by Whitman and eBay).
Reportedly, Whitman was an old-fashioned, low-key manager, who did not possess the
star-quality of Carly Fiorina, CEO of Hewlett-Packard, or the electric energy and charisma
of Jeff Bezos, the founder of Amazon.com. But still, Whitman had succeeded where many
had failed. While many dotcom businesses crashed in the late 1990s and early 2000s,
Whitman steered eBay towards success. According to analysts, eBay was the only Internet
company that had registered continuous growth and profits since its inception in 1995.
Industry observers felt that Whitmans trust in eBays business model and her business
acumen were the major reasons for the companys growing revenues.
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NOTES
Revenues increased from $4 million in early 1998 (when she joined eBay) to $1
billion by late 2002 (See Exhibit II for eBays Income Statement). This was attributed to
her strong belief in eBays business model and its customers. In fact, such was her belief in
this model that in September 2000, at the depths of the dot-com depression, she set a
target of earning $3 billion in revenues by 2005.
Commenting on this in early 2003, Whitman said, I think people thought we were
nuts because we set that in the middle of 2000 when we did $425 million in revenues.
Now it seems very reasonable and we are absolutely standing by it.
eBay
In September 1995, Pierre Omidyar (Omidyar), a software programmer in his
early 20s, founded eBay as Auction Web (the sites domain name was ebay.com). The
idea reportedly originated from the difficulty that Omidyars fiancee faced when trying to
collect Pez dispensers2 from the San Francisco Bay area. Auction Web enabled people to
trade through auctions on Internet.
Omidyar aimed at leveraging the vast potential of the Internet by developing an
online marketplace that allowed person-to-person trading in the auction format.
He created a simple business model which allowed buyers and sellers to decide
the value of items and connect with others, for a small commission for every item placed
and sold on the site.3 Using this model, Auction Web soon became one of the leading
online sites in the world. Omidyar wanted the power of the market to stay with individuals
and not with companies. He felt that it was important to let users take responsibility for
building the eBay community. Omidyar encouraged users to communicate directly with
him through email so that he could incorporate their suggestions and fix the problems they
faced on the site. This type of customer focus reportedly gave users a sense of ownership
and participation.
In 1996, Omidyar introduced the Feedback Forum, a sort of credit reporting
system, to eliminate the problems caused by anonymity and the physical distance between
buyers and sellers, viz, fraud and cheating. Under this system, buyers and sellers were
encouraged to rate each transaction positive, negative or neutral, thus offering their perception
of the credibility of the buyer or seller. These ratings helped users determine whether a
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buyer or seller was trustworthy. Commenting on this, Peter Kollock, sociology professor,
University of California, Los Angeles (UCLA) said, As high tech as eBay is, the closest
analogue to what they have created is the original small-town market. It is a market that
relies on identity and reputation for risk management4...
NOTES
Excerpts
Meg Whitman
Born in August 1956, Margaret C. Whitman, popularly known as Meg Whitman, was the
youngest child of a Wall Street executive. Whitman, who grew up in Long Island, New
York, was a studious and clever student.
An exceptionally academically oriented person, she graduated in Economics from
Princeton University.
She had The Wall Street Journal delivered to her dormitory at Princeton University,
which was unusual during the disco era of the 1970s...
Whitman - An Exceptional Manager
Whitman found eBay akin to a den of geeks who were handpicked by Omidyar.
She knew that she was brought into the company to build the eBay brand and to bring
some professionalism into the company, which was soon to be listed on the stock exchange.
Her first job was to prepare eBay for its first IPO. However, before she made any changes
at eBay, she focused on gaining a comprehensive understanding of eBays business
model.Whitman said, I came in and I said Pierre has created something incredibly important
here that is growing very rapidly and has clearly struck the consumer nerve. My objective
is to find out as much as I possibly can about what he has created and what is wonderful
about what he has created....
Whitman & Customer Focus
The eBay community was always Whitmans first priority as she credited it with
the companys success. Commenting on the communitys role, she said, We provide the
marketplace, but it is the users who build the company. They bring the product to the site,
they merchandise the product and they distribute it once sold.
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NOTES
The lessons she learned from her experience at leading consumer companies such
as P&G and Hasbro also made her focus strongly on consumers...
Whitman - Leading eBay
In the early 21st century, Whitman emerged as one of the most popular leaders in
dotcom world on account of eBays phenomenal success.
Commenting on her journey from a novice to a leader in the dotcom world, Whitman
said, In the beginning, I was certainly not an entrepreneur who came up with the idea, but
I think I was fairly entrepreneurial in trying to figure out how to bring that idea to life and
build a backbone for the company that could take it to the next level....
Criticism of Whitman
Despite Whitmans focus on eBays community, she received criticism from the
community on account of her focus on high priced products and big companies.Many of
eBays old customers complained that doing business on eBay had become an unhappy
experience in the early 21st century and that eBay was ignoring small customers for bigger
ones...
Problems Facing Whitman
Many customers remained loyal to eBay despite the above problems since it allowed
them to get the highest prices for their auctions. However, the increasing number of customers
registering with other auction sites was a worrying trend for eBay.
Analysts felt that if this trend picked up momentum, eBay might soon become just
one of the many choices for customers. They observed by alienating the customers, Whitman
was placing eBay at risk...
Marching Ahead
By early 2003, eBay was offering more product categories than ever before. Some
of its new categories were computers, books, CDs, electronic goods and
automobiles.According to reports, eBay accounted for nearly 1% of total used car sales in
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STRATEGIC MANAGEMENT
the US. Commenting on the growth of the eBay community, Whitman said that if eBay
were a country, it would have been the fifteenth largest nation in the world since it had 75.3
million registered users (in mid- 2003)...
NOTES
Case-6
Strategic Marketing: Creating Competitive Advantage
Abstract
The case explores Samsungs brand building initiatives for transforming itself into a
global brand. The companys product initiatives and advertising campaigns for boosting its
brand image worldwide are described in detail. The case also explains the steps taken by
Samsung to consolidate its presence in global markets. The case concludes with an analysis
of Samsungs position in the consumer electronics market vis--vis Sony
EMERGING GIANT?
.
In 1998, South Koreas leading consumer electronics major, Samsung Electronics
Corporation (Samsung), entered into an agreement with the International Olympic
Association to sponsor the 1998 Seoul Olympics. According to company sources, Samsung
wanted to sponsor Olympics to establish itself as a global brand. Analysts felt that by
associating itself with the Olympics, Samsung would increase its brand visibility and brand
recall among its consumers worldwide. They also pointed out that to become the next
Sony (Refer Exhibit I) of the consumer electronics market, Samsung would have to invest
heavily in marketing.
In the late 1990s, Samsung entered into various marketing alliances with companies
worldwide and sponsored events to enhance its brand awareness. Due to its marketing
efforts, its brand value appreciated by 200% from $3.1 billion in 1999 to $8.3 billion in
2002. Consequently, in 2002, Samsung emerged as the only non-Japanese brand from
Asia to be listed in the global top 100 brands valued by Interbrand Inc (Refer Table I).
The company was ranked 34th in Interbrands list of the worlds top 100 brands.
In spite of the worldwide downturn in 2002, Samsung posted a net profit of 1.7 trillion
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DBA 1703
NOTES
won for the third quarter of 2002-03, which was much higher than its net profit of 425
million won in 2001 for the same period.
In 2002-03, Samsung emerged as the number three player in the global cell phone
market after Motorola and Nokia. It also emerged as the world leader in the $24.9 billion
memory chip market. According to industry sources, Samsungs innovative advertising
strategies, improvements in product design and focus on global markets helped it achieve
an increase in earnings over the years.
BACKGROUND NOTE
Samsung was established in 1969 as the flagship company of Samsung Corporation
(Refer Exhibit II). It was the third largest player in the Korean electronics market after
Lucky Goldstar (LG) and Daewoo. Samsung achieved fast growth through exports, which
constituted around 70% of its total production. Most of the exports were to the USA on
Original Equipment Manufacturer (OEM) basis. It supplied components for high tech
industries in the USA. In the early 1970s, Samsung decided to venture into the television
market, and in 1972 it started production of black & white television sets for the local
market. After its success in the television market, Samsung set up its home appliances
plant in 1973. By 1974 it started manufacturing refrigerators and washing machines.
By the mid 1970s, Samsung started production of color TVs (CTVs) and energy
efficient high cold refrigerators.
By the late 1970s, the companys exports to the US markets exceeded US $100
million. During the same period, it established a marketing subsidiary in the USA. In the
1980s, it started manufacturing microwave ovens and air conditioners. In 1980, it acquired
Korea Telecommunications Corp, which was renamed Samsung Semiconductor &
Telecommunications Co in 1982.
In the same year, Samsung established a sales subsidiary in Germany and its first
overseas plant in Portugal to cater to European markets. In 1986, research labs were
established in Santa Clara (California) and Tokyo to improve the product line. In 1988,
the Samsung Semiconductor business was merged with Samsung. By the end of 1989,
Samsung was ranked 13th in semiconductor sales worldwide.
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Though Samsung was able to establish its brand image in the Korean market, it
was regarded as an OEM in global markets. Since Samsung had a poor brand image in
global markets and its products had a high defect rate, many consumers associated
Samsungs products with poor quality.
NOTES
DBA 1703
NOTES
Introduction
The Coca-Cola Company (Coke) re-entered China in 1979. Today it is recognized
as one of Chinas most trusted brands according to Interbrand.3 It was voted number 5 of
the top 10 multinational companies doing business in Asia in the 2003 Review 200,4 a
survey conducted by Far Eastern Economic Review (FEER).5
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Since 1990 it has been making profits in China and according to AC Nielsen6 it
had a market share of over 50 percent share of the Chinese beverages market in 2002.
How did Coke achieve this success in China? Cokes top managers and industry observers
too believe that it is the companys winning approach of Think local, act local that has
enabled it to capture markets outside of the United States. This is particularly true of the
Asian markets where the diversity of cultures and income levels makes for a rather diverse
consumer base. Coke encourages local managers to develop strategies that are best suited
for their areas, and regional offices have the freedom to approve local initiatives. From the
very beginning, Cokes strategy for re-entry into the Chinese market has been based on
localization of the entire Coca-Cola system.
NOTES
In order to achieve this, Coke had to work closely with Chinese state-owned
enterprises and develop strong relationships with the Chinese government. Since China
had just opened up to foreign investment at the time of its re-entry, Coke had to deal with
its restrictive policies.
It brought its technology and equipment to China and built bottling plants, which it
then handed over to the Chinese government. Later it formed joint ventures with stateowned enterprises to set up more bottling plants. Coke formed joint ventures with local
Chinese companies as well. Even though initially it had to import certain inputs for the
production process, Coke eventually sourced them from Chinese companies. Coke
developed its own infrastructure for distribution but gradually came to mainly rely upon
state-owned distribution companies and local Chinese distribution companies. This strategy
of localization of the Coca-Cola system in China proved to be a success and China grew
to be its second largest market in Asia in 2003 (in terms of volume).
Background Note
In the early 1920s, Coke made its entry into China with bottles imported from its
plant in the Philippines. In an effort to localize production, two bottling plants were opened
in 1927. These plants were located in Shanghai and Tianjin, and in 1930 another was
opened in Qingdao.
Coke faced setbacks during the World War II when the Japanese occupied China
and took over its plants. However, in 1946, after the war ended Coke opened a bottling
plant in Guangzhou. The Shanghai plant had the distinction of being the most up-to-date
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NOTES
and fastest bottling line in China, and in 1948 became the first overseas plant to make
annual sales of more than 1 million cases. This was great progress for Coke, even though
the customers in Shanghai were mostly expatriates. When the Peoples Republic of China
(PRC) was formed in 1949, all foreign companies were asked to cease operations and
leave the country. Coke shut down operations in China and its bottling plants were
nationalized by the government.
State owned companies were formed to produce beverages and some of these
companies used the former Coke plants to produce soft drinks. In case of the Shanghai
plant, the equipment was shipped to Beijing to be re-installed in a factory there.
For almost 30 years after the PRC was formed, foreign direct investment and
direct production activity by a foreign company were not allowed. Only the state-owned
foreign trade corporations were allowed to have contact with foreign businesses and to
carry out exporting and importing of goods.
Cokes Re-Entry in ChinaIn December 1978, Deng Xiaoping (Deng)7
announced the open door policy. This policy was part of Dengs larger plan for economic
reforms in China. An open door policy meant that China would allow foreign trade and
investment...
Localisation Strategies
Long before Coke was given permission to sell its products to the Chinese people,
it began developing production capabilities through various joint ventures with the Chinese
government.
In sharp contrast to its strategies in the past (in China and other countries as well),
initially Coke did not own any bottling plants in China. It imported the concentrate and
sold it to bottling plants. The bottling plants (that it sold the concentrate to) had been built
by Coke and handed over to the Chinese government. The first of these plants was built in
Beijing and was operational in 1981. According to an agreement between Coke and the
state-owned China National Cereals, Oils, and Foodstuffs Import and Export Corporation
(COFCO) in 1980, Coke agreed to build a plant and hand it over to the government in
exchange for approval to expand distribution and sales in China. The second bottling plant
was built in Guangzhou and was also handed over to the Chinese government in 1982...
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NOTES
Coke has enjoyed great success in China and in the Asian markets on the whole. According
to the 2003 Annual report, Cokes Asian operating segments boosted its revenues when
growth in its US market was slowing down.
In terms of volume, China was Cokes second largest market in Asia in 2003
(Refer to Exhibit II) and Coke estimates that China will beat Japan to the top position in
2004. Encouraged by its success in big cities and towns, Coke wants to reach more
customers in rural areas. Wed grown well by reaching the top 100 cities, but how many
people were we reaching? Rather than continuing to focus solely on those highly competitive
urban areas, Coke must push aggressively into the rest of China and India, said Patrick
Siewert, Cokes East and South Asia group president. In early 2004, Coke announced
plans to build two new bottling plants in Chinas western provinces to tap the market
potential of Chinas rural areas...
Change Management Concepts and Applications
The case examines the global delivery model (GDM) of the leading India based
software company - Infosys Technologies. Infosys used GDM as a strategic outsourcing
tool; using it, the company could take the work to the place where it could be best performed
at lowest cost with minimum risk.
By using GDM, Infosys delivered the highest process and quality standards, while
leveraging differences in cost, quality and skill sets of manpower in different global locations.
The case presents an in-depth information on the operational aspects of GDM and its
benefits to Infosys.
It also discusses the challenges faced by the company from foreign and Indian
software companies like Accenture, IBM Global Services, EDS, TCS and Wipro who
had already adopted or were in the process of adopting a similar model like Infosys
GDM.
Issues:
Study and analyze the operational aspects of the Global Delivery Model of Infosys
Analyze how GDM emerged as a source of competitive advantage to Infosys
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DBA 1703
NOTES
The Leader
In February 2006, Gartner3, a research firm focused on technology industries,
published its Magic Quadrant for Offshore Application Services, 2006.
This report assessed 30 leading offshore application service providers. For its
magic quadrant, Gartner evaluated service providers on the basis of parameters such as
completeness of vision and their ability to execute4.
India-based Infosys Technologies (Infosys) was placed in the leaders quadrant,
signifying clear vision of the market direction and building competencies to sustain its
leadership position in the market
(Refer Exhibit I for the criteria used in the Magic Quadrant, and Exhibit II for traits of the
companies placed in the Leaders quadrant).
Gartners magic quadrant analyzed the competencies of the service providers based
on their Global Delivery Model (GDM). Gartner said that Infosys strong management
capability relative to the other pure-play offshore providers was one of the key
demonstrated capabilities of the company.
S. Gopalakrishnan (Gopalakrishnan), Chief Operating Officer and Deputy
Managing Director of Infosys, said, I am happy to see Infosys being recognized as a
leader in this Offshore Application Services Magic Quadrant, the first time that Gartner
has published one to focus on this area. This is an important indicator for the mainstream
acceptance of GDM by clients.5
GDM provided a superior value proposition at higher quality and lower cost. The
companies adopting this model leveraged their own global resources and strengths to
achieve higher profitability.
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NOTES
Infosys used GDM as a strategic outsourcing tool; using it, the company could
take the work to the place where it could be best performed at lowest cost with minimum
risk. For a GDM to be efficient, the work had to be broken into logical components and
distributed to locations where they could generate maximum value. By using GDM, Infosys
delivered the highest process and quality standards, while leveraging differences in cost,
quality and skill sets of manpower in different locations. The ultimate objective was to pass
on these benefits to its clients.
The major part of Infosys revenues was derived from GDM based application
services.
The company had decided to enhance its GDM capabilities by applying it to new
services and adding in new global delivery locations. Commenting on the GDM, Manjari
Raman, a Boston based management writer said, What made Infosys GDM disruptive
was its framework for distributed project management - the ability to deploy multi-location,
multi-time-zone teams to execute projects efficiently and at low cost.6
Background Note
Infosys was incorporated as Infosys Consultants Private Limited7 on July 02, 1981
by a group of seven professionals8. From the beginning, Infosys relied heavily on overseas
projects. One of the founders, Narayana Murthy, stayed in India, while the others went to
the US to carry out onsite programming for corporate clients. One of Infosys first clients
was the US-based sports shoe manufacturer Reebok. Infosys hired its first set of employees
in 1982 from the Indian Institute of Technology, Chennai. These employees were provided
training and were sent abroad for onsite projects.
The Global Delivery Model
In the GDM, large scale software development projects were divided into different
categories. Falling under the first category were the tasks that were to be carried out at the
location of the client. Under the second category were the tasks, which needed to be
carried out closer to the client. The third category consisted of tasks that could be done in
remote locations, where process-driven technology centers with highly skilled manpower
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were easily available (Refer Exhibit IV for details of the tasks carried out onsite, near-site
and at offshore locations). The work on projects was carried out 24 hours a day, with
teams located at different locations across the world, working round-the-clock on the
project.
Nandan Nilekani, President, CEO and Managing Director of Infosys, commented,
The work can be moved anywhere. This allows for a degree of freedom in the way a
business is conducted. The work can be moved depending on where it would be cheaper
to do so, or to a place that has unutilized capacity, or special skills. This is the kind of
innovation (GDM) for which we are taking credit for....
GDM - Making the Model Work
For an offshore development project, a team from Infosys visited the client in
order to determine the requirements of the project. After obtaining the required
specifications, some of the team members stayed back with the client to coordinate and
determine any changes that the client demanded in the project, while the project managers
returned to the GDCs.
At the clients location, there was an on-site coordinator who communicated with
the PDCs and ODCs regularly...
Expanding GDM
In 2003, Infosys launched GDM Plus, an enhanced service delivery model, a
combination of more services and excellence in execution. Infosys defined GDM Plus as
an integrated delivery model that encompassed vertical solutions, expanded vertical footprint
and execution excellence. According to Infosys, GDM Plus was its strategic response to
changing market conditions and the competitive landscape to deliver high volumes to
customers. Execution excellence was to be achieved through business solutions, technology,
domain expertise, quality, operational efficiency and people development...
The Benefits
According to analysts, GDM was cited as one of the key factors behind the rapid
growth of Infosys revenues. In a span of 25 years, the company grew to generate revenues
of US$ 2 billion in 2005-06. Infosys revenues grew almost four-fold in the past four years
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(Refer Exhibit VII for five year revenues of Infosys). The company continued attracting a
talented workforce in India and other countries. The number of employees of Infosys grew
to 52,700 as of March 2006 against 10,700 in 2002. In the fiscal year 2005-06, Infosys
derived more than 40% of its revenues through new GDM based services like package
implementation, independent validation, business process management, infrastructure
management and systems integration...
NOTES
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Large companies with an existing market position have a great deal to gain from
these relationships. Benefits may take the form of product line extensions or the improvement
of existing products. Another type of large firm that finds these relationships effective is the
company seeking to develop new sources of raw materials using the small firms technology.
Many of our biotechnology alliances are devoted to the creation of new sources of highquality raw materials for the large firms production processes.
Other uses of alliances may be less successful. Large firms who enter alliances
primarily for equity investment or as a window on technology may find them disappointing.
This may be particularly true when the small firm sees the relationship as a commercialization
opportunity. Simply stated, the goals of the small firm may be very different from the goals
of the large firm. When the partners are working toward different goals, the likelihood of
success is small.
After weighing the costs and benefits of alliances, a decision to proceed should be
tempered by what we argue are the best tactics for managing these cooperative relations.
In summary, partner selection methods should maximize compatibility and complementarity.
Tailor-made contracts negotiated specifically for the alliance should provide milestones
that establish clear objectives even though they are likely to be modified or possibly
abandoned. Developing conflict resolution techniques that can help managers resolve
problems while they are small and still solvable is an important collaborative step. Finally,
the managerial process must be a collaboration in which the large corporation is neither a
dictator nor a silent partner but rather an active participant in most if not all areas of the
venture. Implementing such design rules for managing alliances is likely to improve their
chance for success, especially in high technology areas.
Visualizing a business proposition also includes looking at its practicability and
conducting a preliminary investigation. If the results are satisfactory, an investigation has to
be conducted and the objectives of the business are decided.
The topic of NPO management has been well researched from a variety of
disciplinary perspectives over the years. The existence of NPOs can be explained by their
deviations from the standard economic model of the firm NPOs do not have access to
equity capital, they do not distribute resources to owners, their presence is often attributed
to individuals or groups who perceive market or government failure in specific services.
However, given that this is so, there remain substantive issues of how economic
modeling can assist the management of NPOs. Here we advance the case that for internal
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functioning, economic theorists, and those disciplines which are heavily influenced by
economic thought, have failed to explain the micro-economic internal functioning of NPOs.
We also suggest that sociological theories which suggest NPOs may indulge in mimicry of
public or private sector bodies in the pursuit of legitimacy may have validity.
NOTES
However, the actual issue of agents within NPOs is critical to our understanding of
effective NPO management. To date, most sociological contributions have focused on the
interface of the organization and its environment.
While the above perspectives continue to be deployed in scholarly works to explore
further the complexities of NPOs, we detect a strong recent trend to focus on management,
and, in particular, marketing, as a tool of management as the major focus of NPO research.
This observation is substantiated not only by the volume of publication of research effort in
this area, but also by the needs of NPOs as they seek to raise additional funds in the face
of increased competition from other NPOs principally for the quantum of funds which
donors are willing to give for charitable efforts. This new focus is not without its difficulties.
This paper sets the scene for a continuing research effort aimed at improving the professional
management of NPOs, given their distinctive nature and complex setting. There is also
scope for further research adopting the different perspectives set out above. However, we
also raise the prospect of holistic, inter- and multi-disciplinary studies as the most rewarding
way forward in the study of NPOs. An example of this is the Jonsson 1998 study which
draws on institutional theory, resource dependency and structuration theory.
Short Questions
1.
2.
3.
4.
5.
Define technology.
Define innovation.
Who is a entrepreneur?
Identify the goals of small business.
What are the objectives of non-profit organization?
Review Questions
6
7
8
9
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